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One of the primary aims of legislation is customer protection, an objective that can be achieved only by channeling players from offshore poker rooms to licensed online sites. One factor that can be used to help in this is to promote the message that player deposits are safer in the regulated market.
But are they? Despite political protestations of consumer protection, with the notable exception of Nevada, most state legislation pays little more than lip service to player fund protection.
In this article, OPR takes a deep look at the issue as a whole, and then examines each state’s legislation or regulation to see what protections are in place.
The issue doesn’t just affect players; it affects the proportion of the market that is channeled to the regulated operators. In France and Italy, they have had to struggle to get more than 60 percent of players to play at regulated poker rooms. In Denmark the less intrusive regulatory regime manages to attract 73 percent of online poker players (paywall) to the regulated sector.
Going by the text of the laws proposed in California, the state will be lucky to get much over 50 percent of the market to the regulated licensees, and that’s a lot of lost revenue for the state and the operators.
When the UK Gambling Commission (UKGC) launched a consultation on player fund protection in September 2013, it made a remarkable statement:
“… the loss of funds held with a gambling operator is not directly comparable to the severe financial hardship which might be the result of lost pensions for example. Gamblers may have more appetite for risk.”
For tens of thousands of U.S. players with accounts at Full Tilt, Absolute Poker and Ultimate Bet, the lack of player fund protection caused real hardship. Unlike in other gambling games, a significant proportion of online poker players hold relatively large sums of money in their poker accounts.
New players are quickly introduced to the concept of bankroll management. A cash game player at $0.25/$0.50 stakes soon learns to feel uncomfortable unless he has at least $2,000 online and tournament players can hold between 200 and 500 times their average buy-in.
A second statement in the UKGC consultation was equally worrying:
“… there is a significant gap between the level of protection that customers and commentators assume they might receive (and which they assume regulators would have required) and the actual level of protection afforded.”
There is a disconnect between the level of fund protection that players believe regulators offer and the protection that actually exists.
The bankruptcy of an operator is the usual way in which players discover quite how weak their ownership of online accounts is. Just like a bank account, when a deposit is made at an online poker site, the ownership of the money transfers to the company.
The depositor becomes someone the company or bank owes money to, and in the event of bankruptcy proceedings is an unsecured creditor very low down the pecking list when it comes to sharing out what assets remain.
If the bank goes bust, there is normally some form of deposit guarantee scheme. When online gaming operators go bankrupt, the federal government doesn’t step in to help out.
The most responsible operators solve the problem by using trusts. Bet365 uses a form of trust called a Quistclose, where customer deposits are protected from insolvency. Amaya’s financial statements for 2015 include the legal text explaining how player funds are held at PokerStars:
“Customer deposit liabilities relate to customer deposits which are held in multiple bank accounts that are segregated from those holding operational funds. Amaya holds customer deposits, along with winnings and any bonuses in trust accounts from which money may not be removed if it would result in a shortfall of such deposits.”
In its 2012 annual report, the French regulator ARJEL said that “unless players’ money is held in trust, then it is vulnerable when companies get into financial difficulties.”
ARJEL instigated measures to ensure that all future licensees are obliged to keep player funds in trusts. However, the stable door was locked after the horse had bolted. Europoker went bust in 2014 and two years later, player fund balances are still being disputed in the bankruptcy court.
Will the situation be the same in the U.S. states which legalize online poker or will American players get the protection they think they deserve?
The New Jersey regulations state that:
“A casino licensee shall maintain a New Jersey bank account separate from all other operating accounts to ensure the security of funds held in patron Internet gaming accounts. The balance maintained in this account shall be greater than or equal to the sum of the daily ending cashable balance of all patron Internet gaming accounts, funds on game, and pending withdrawals.…The casino controller or above shall file a monthly attestation with the Division that the funds have been safeguarded pursuant to this subsection.”
Funds are held separate from the company’s operating accounts which means that managers can’t shuffle money from player accounts to pay other creditors without breaking the law.
However, player funds are at risk from both fraud and insolvency. Forecasts that three or four Atlantic City casinos could close if the proposed North Jersey casino expansion goes ahead, plus the fact that a large part of Caesars is already in bankruptcy proceedings, suggest that insolvency may be no stranger to the New Jersey gambling business.
To its credit, the New Jersey Division of Gaming Enforcement (DGE) has already overseen online operators pull out of the market without any loss of customer funds. When the Trump Plaza went bankrupt, its online casino partner Betfair was give a long grace period to find another partner so that it could continue to operate in the market.
The remaining online operators are all very large established companies with market capitalizations over a billion dollars. While they could theoretically go bust, their very size gives players some protection for their deposits.
The New Jersey regulations do contain one clause which could threaten player deposits directly. The terms and conditions offered by online operators must include a notification “that if the patron’s Internet gaming account remains dormant for a period of one year any funds remaining on deposit and any pending wagers shall be forfeited.”
Delaware is one of the smallest states, with online gambling provided by three racinos through a state contracted monopoly provider. In this case, 888 Holdings has the online poker software contract and players at all three racinos play in the same player pool.
The Delaware Lottery Rules and Regulations state simply that:
“The agency will maintain a separate bank account to hold funds deposited into registered player’s accounts.”
The agency in this case being the Delaware lottery. The direct control gives some reassurance that player funds are unlikely to be an issue in any insolvency case.
The Michigan SB 889 skates over the issue of player fund protection, delegating it entirely to the regulator.
“The division shall promulgate and enforce rules governing the administration and conduct of Internet gaming as it considers necessary to carry out this act. The division shall promulgate the rules pursuant to the administrative procedures act of 1969, 1969 PA 306, MCL 24.201 to 24.328. The rules may include all of the following:
Technical and financial standards for Internet wagering, Internet wagering accounts, and Internet gaming platforms, systems, and software or other electronic components for Internet gaming.”
The latest version of the AB 2863 bill includes some detailed text requiring player funds to be held in segregated accounts and forbidding any “commingling” of funds.
As far as it goes, the California text is not far off the standard measure adopted by most national regulators in Europe. Except for subparagraph (4) which allows player funds to be used to pay “tax proceeds due and owing from a registered player to the Franchise Tax Board.”
This is the kiss of death for channeling players away from offshore sites. If the government can take money directly from players’ accounts, then anyone with a debt will steer clear of putting their money where it can instantly be taken away without their permission.
“(j) A licensed operator shall segregate funds it holds in all registered player accounts from all of its other assets.
(k) A licensed operator shall not commingle funds in the segregated account containing funds paid by registered players with any other funds held by the licensed operator, including, but not limited to, operating funds of the licensed operator. Both the accounts of the licensed operator and its segregated registered player accounts shall be held in financial institutions located in the state.
(l) Funds held in a registered player’s account shall be used only for the following purposes:
(1) To pay per hand or tournament charges owed by a registered player to the licensed operator for play of authorized Internet poker games.
(2) To transfer funds from one registered player’s account to the account of another registered player to reconcile the result of a loss in the play of an authorized Internet poker game.
(3) To transfer funds from a registered player’s account to a temporary account to be held by a licensed operator pending the outcome of an authorized Internet poker game.
(4) To remit tax proceeds due and owing from a registered player to the Franchise Tax Board.
(5) To transfer funds from a registered player’s account with the licensed operator to an account specified by that registered player upon that registered player’s request.”
Pennsylvania mirrors Michigan in leaving the issue of player fund protection up to the regulator.
HB 2150, gives the regulator the responsibility for:
“Establishing procedures for the protection, security and reliability of interactive gaming accounts, authorized interactive games, interactive gaming devices and associated equipment and mechanisms to prevent tampering or utilization by unauthorized persons.”
Pennsylvania is not so cavalier when it comes to money owed by gaming operators to the Commonwealth, that has to be held in trust.
“(3) all funds owed to the commonwealth under this section shall be held in trust for the commonwealth by the interactive gaming certificate holder until the funds are paid to the department. an interactive gaming certificate holder shall establish a separate bank account into which gross interactive gaming revenue from multi-use computing devices shall be deposited and maintained until such time as the funds are paid to the department under this section.”
New York goes beyond Michigan and Pennsylvania in specifying that the regulator must not only segregate player funds, but protect them from other risks too.
Assembly Bill A9049 states that the regulator must implement:
“Appropriate safeguards to ensure participants’ funds are held in accounts segregated from the funds of licensees and otherwise are protected from corporate insolvency, financial risk or criminal or civil actions against the licensee.”
Potentially New York could end up with the strongest player fund protection measures of all, but it will have to go a long way to better the regulations in Nevada.
Nevada considers itself to be the gold standard for U.S. gambling regulation and as far as player fund protection is concerned, it has lived up to the boast.
The Regulations of the Nevada Gaming Commission and Nevada Gaming Control Board contain the most detailed specification for player fund protection of all U.S. states.
Player funds must be held as a reserve, in trust and be calculated daily. Monthly reports and strong controls by the NGCB ensure that player funds are safe from insolvency, and almost as safe from fraud or mismanagement.
“1. An operator shall maintain a reserve in the form of cash, cash equivalents, an irrevocable letter of credit, a bond, or a combination thereof for the benefit and protection of authorized players’ funds held in interactive gaming accounts.
2. The amount of the reserve shall be equal to the sum of all authorized players’ funds held in the interactive gaming accounts. Amounts available to authorized players for play that are not redeemable for cash may be excluded from the reserve requirement.”
The regulations go on to provide exhaustive protection for this “reserve.”
“The agreements described in subsection 3 must reasonably protect the reserve against claims of the operator’s creditors other than the authorized players for whose benefit and protection the reserve is established, and must provide that:
(a) The reserve is established and held in trust for the benefit and protection of authorized players to the extent the operator holds money in interactive gaming accounts for such authorized players;
(b) The reserve must not be released, in whole or in part, except to the board on the written demand of the chairman or to the operator on the written instruction of the chairman. The reserve must be available within 60 days of the written demand or written notice. The operator may receive income accruing on the reserve unless the chairman instructs otherwise pursuant to subsection 10;
(c) The operator has no interest in or title to the reserve or income accruing on the reserve except to the extent expressly allowed in this section;
(d) Nevada law and this section govern the agreements and the operator’s interest in the reserve and income accruing on the reserve;
(e) The agreements are not effective until the chairman’s approval has been obtained pursuant to subsection 5; and
(f) The agreements may be amended only with the prior, written approval of the chairman.
5. Each operator shall submit to the chairman all information and copies of all documents relating to its proposed reserve arrangement, including copies of the agreements described in subsections 3 and 4, and must obtain the chairman’s approval of the agreements and of the reserve arrangements generally. The chairman shall determine whether the agreements and arrangements satisfy the purposes and requirements of this section, may require appropriate changes or withhold approval if they do not, and shall notify the operator of the determination. Amendments to reserve agreements or arrangements must be approved in the same manner.
6. An operator must calculate its reserve requirements each day. In the event an operator determines that its reserve is not sufficient to cover the calculated requirement, the operator must, within 24 hours, notify the chairman of this fact in writing and must also indicate the steps the operator has taken to remedy the deficiency.
7. Each operator must engage an independent certified public accountant to examine the pertinent records relating to the reserve each month and determine the reserve amounts required by this section for each day of the previous month and the reserve amounts actually maintained by the operator on the corresponding days. The operator shall make available to the accountant whatever records are necessary to make this determination. The accountant shall report the findings with respect to each day of the month under review in writing to the board and the operator no later than the tenth day of the next month. The report shall include the operator’s statement addressing each day of noncompliance and the corrective measures taken. If approved in writing by the chairman, this report may be prepared by an employee of the operator or its affiliate, provided that the employee is independent of the operation of interactive gaming.
8. The chairman may demand that this reserve be increased to correct any deficiency or for good cause to protect authorized players.
9. If the reserve exceeds the requirements of this section, the chairman shall, upon the operator’s written request, authorize the release of the excess.
10. When an operator ceases operating and its license lapses, is surrendered, or is revoked, the chairman may demand payment of the reserve, any income accruing on the reserve after operations cease, and, if instructions from the chairman that income accruing on the reserve not be paid to the operator are in effect when operations cease, any income accruing since the instructions took effect. The board may interplead the funds in state district court for distribution to the authorized players for whose protection and benefit the reserve was established and to such other persons as the court determines are entitled thereto, or shall take such other steps as are necessary to effect the proper distribution of the funds, or may do both.
11. In addition to the reserve required pursuant to this section, and other requirements that may be imposed pursuant to Regulation 6.150, the operator shall maintain cash in the sum of the following:
(a) 25% of the total amount of authorized players’ funds held in interactive gaming accounts, excluding those funds that are not redeemable for cash; and
(b) The full amount of any progressive jackpots related to interactive gaming.
12. As used in this section, “month” means a calendar month unless the chairman requires or approves a different monthly period to be used for purposes of this section, in which case “month” means the monthly period so required or approved.