One of the major misconceptions in the wake of the Supreme Court's ruling that struck down the 1992 federal law banning sports wagering back in May is that the elimination of the law could spell the end for sportsbooks based outside of the United States -- many of which are located in the Caribbean.
Congress set out to halt an expansion of sports betting in the United States in 1992 with the Professional and Amateur Sports Protection Act (PASPA), but accomplished the opposite. It helped foster a billion-dollar sportsbook black market of sorts, as scores of offshore bookmakers cropped up in the ensuing two decades -- happy and willing to accept U.S. patrons wanting to place a sports wager. For sports bettors, when there's a desire, there's always a way -- and there's been an appetite for sports betting in the United States since at least the 19th century.
Americans wager $150 billion annually in the black market, as estimated by the American Gaming Association, and it will largely remain in the dark for the foreseeable future. Beyond offshore books, that black market also includes "local bookies" violating state laws and, in some cases, federal laws like the Wire Act.
The offshore market is large and deeply ingrained -- so much so that offshore lines are routinely referenced in mainstream publications and on television, drawn in by either the familiarity of the name or the deceiving ".lv" domain name attached to the website. When U.S. sports bettors search Google for "best online sportsbooks," they find a menu of options to wager offshore -- and wager they do. Some bettors make trips to Las Vegas for March Madness or before the football season to place bets, while others send funds to friends or associates based in Vegas (which itself falls into a legally gray area) to "get down" in a more accessible way.
Those offshore books have been the only options for U.S. bettors over the past quarter century; engaging with them has become habit. It seems as though times are changing, as these offshore books are now faced with competition from well-financed companies running new and legal sports-betting operations in the United States, along with other legal sportsbooks on the way as more states pass legislation.
The offshore and local bookies aren't going to fold and go quietly into the night, though. Some of their company executives believe that business from U.S.-based patrons will actually increase. But that doesn't change the fact that times are certainly changing. Quickly.
The door is now open for states to legalize and regulate sports wagering. Since May, casinos in Delaware, Mississippi, New Jersey, Pennsylvania, West Virginia and Rhode Island have joined Nevada in offering full-fledged sports wagering menus; as the calendar turns to 2019, the number of states offering legal sports wagering will continue to grow. New Mexico also joined the fray in 2018, albeit at a single location operated under tribal compact just outside of Albuquerque
While the pace of new states legalizing and considering legislation has reached two dozen and progresses more rapidly than the legal marijuana movement, legislation takes time.
"As sports betting has become less and less taboo, offshore sportsbooks have seen their player bases steadily grow over the last decade," said one executive at a major offshore sportsbook who wished to remain anonymous. "The repeal of PASPA will drive more curiosity towards sports wagering, and even if new players start out betting sports at the local horse track, we expect to eventually find them betting online and offshore."
Scott Cooley, a spokesperson for the offshore sportsbook BetDSI, echoed that prediction with similar sentiments.
"We expect [an] influx of new customers based on an eagerness to begin betting right away," he said. "The government has basically said it is legal to gamble on sports now, and if your state isn't equipped to take wagers yet, a respected and long-tenured sportsbook such as ours will [be] available anywhere you are. In the next year, we project to gain 15 to 20 percent of our current clientele base."
The legality of offshore sportsbooks
Most of the popular offshore sportsbooks are legal in the parts of the world where they're based. There are U.S. laws aimed at stopping bettors located in the States from depositing and withdrawing from these sportsbooks, which require U.S. banks to flag transactions between patrons and operators.
One such law, known as the UIGEA (Unlawful Internet Gambling Enforcement Act) does not, however, expressly prohibit Americans from depositing and engaging in sports wagering. Congress could have crafted such a prohibition, but did not do so. UIGEA has made life more difficult for bettors and offshore sportsbooks alike, but the offshore sportsbooks still have some key advantages -- pricing, mobile/web-based platforms and more expansive betting options chief among them.
The pricing advantage is connected to taxation. The pie-slicing of revenue generated by legal sports betting begins with state taxes. As states construct legislation to generate as much tax revenue as possible, a big question looms: Where's the sweet spot for giving the state a meaningful cut, while allowing sportsbook operators the ability to make a profit, attract new customers and retain them?
New Jersey levies a reasonable 8.5 percent tax on in-person wagers and 13 percent for online wagers. West Virginia applies a 10 percent tax across the board. Rhode Island is set to keep a whopping 51 percent of net revenue for the state in a profit-sharing arrangement. Other states are considering anywhere from 7.66 percent in Iowa to 36 percent in Pennsylvania. For context, Nevada operators pay 6.75 percent to the state and 0.25 percent off the top to the federal government (a federal excise tax, which every state implementing legal sports betting frameworks will also have to send Uncle Sam).
"It's not going to be a great advantage to go into a market where you're going to be potentially taxed out of it," Jennifer Roberts, associate director of the International Center for Gaming Regulation, a gaming lawyer and adjunct professor at the University of Nevada Las Vegas, told ESPN. "What you might see is less-experienced operators trying to come in that are willing to take that risk. I think that having high tax rates and high license fees can disincentivize reputable, solid operators from coming into the market."
State-licensed operators will also face licensure fees. In Pennsylvania, sports-betting operators have to pay $10 million just to obtain a sports-wagering license. After initial resistance, six of a possible 13 licensees have applied for a license, and five have been approved.
And then there's the "integrity fee" or "royalty" that Major League Baseball, the National Basketball Association and the PGA Tour have sought, and continue to seek, in every state and may seek at the federal level in 2019. Those leagues began by asking for a 1 percent off-the-top cut of all wagers, which would amount to roughly 20 percent of a typical sportsbook operator revenue, but the leagues appear to have lowered the bar to 0.25 percent. Still, no state has granted such a fee or a royalty, although New York came close, and a key lawmaker in Michigan has indicated he's receptive to the idea.
Meanwhile, NBA executive Dan Spillane has said that the league will operate on "parallel tracks" come 2019 -- on one track engaging with state lawmakers to help shape policy the leagues prefer, the other "a commercial track where we're engaging with the gaming industry," Spillane told industry trade publication Gambling Compliance.
Some fruits of the commercial track have already arrived. In July, NBA commissioner Adam Silver announced a reported 3-year, $25 million deal with MGM Resorts International, designating the hospitality and gaming giant as an official gaming partner. The NHL followed suit and went a step further in October, announcing a deal making MGM the league's official sports-betting partner. In late November, MLB announced their own agreement with MGM along similar lines.
"What offshore books don't allow is what happens with a patron dispute process. If you have a dispute over whether you should be paid, or whether you made a bet and there's an error with the ticket. There's a process [in Nevada] through regulation that oversees that. How do you do that in an offshore book located in Costa Rica? You don't know if your offshore book is going to be shut down by some government tomorrow. You never know, there's never that guarantee, though many have been operating for years, but that's a risk you take with your money." Jennifer Roberts, associate director of the International Center for Gaming Regulation
All three deals afford MGM the ability to use the respective leagues' "official data" and trademarks in connection with their sports-betting products.
In addition, individual NHL teams such as the New Jersey Devils have forged deals bringing the league even closer to sports betting; the Devils' arena, the Prudential Center, is now home to the "William Hill Sports Lounge."
But the other track, as Spillane put it, has proven rockier. State lawmakers have strongly resisted an "integrity fee," and offshore sportsbooks view such a fee as another disadvantage a state-licensed sportsbook may have to overcome.
"Any idea of an 'integrity fee' has to be a non-starter for any sportsbook that will have to deal with the above-mentioned taxes and still try and compete with offshore sportsbooks," the offshore executive explained.
Taken as a whole, there are a lot of taxes and fees (with potential for more fees to come) for legal operators to face before paying a single employee or the electric bill.
In the offshore world, sportsbooks face no such state or federal taxes, and certainly not fees from the sports leagues. U.S. casinos and gaming stakeholders have exhorted lawmakers throughout dozens of state-level hearings to refrain from levying onerous tax rates.
"Imposing any taxes or fees will detract from their product, so doing so will certainly handicap their level of competitiveness," Cooley said.
"If you're looking at an integrity fee on handle, that cuts into a significant amount of your margin. I've done analysis on even just the Super Bowl," Roberts said. "The last Super Bowl, if you look at Nevada, if there was a 1 percent integrity fee on handle, they would have already lost money even before paying other taxes and revenues and rent and salaries."
The trickle-down result is that legal sportsbooks may be forced to pass along the costs of taxation, licensure and compliance to customers in the form of inferior pricing. For example, it could lead to a moneyline of -115 on Team A to win at a local sportsbook versus an available -108 line with an offshore sportsbook. Savvy sports bettors attuned to margins may not be willing to part with superior prices.
In June, even the NFL joined the chorus opposing prohibitive tax rates, becoming an unlikely, albeit qualified, ally for the gaming industry.
In a letter to the Pennsylvania Gaming Control Board, Jocelyn Moore, NFL senior vice president of public policy and government affairs, explained the danger of levying $10 million and a 34 percent state tax rate, plus a 2 percent local tax on gaming revenue. Moore writes that that these costs in Pennsylvania may "render legal market participants unable to effectively compete with the illegal market" and suggests the state "reconsider laws and regulations that could have unintended consequences of advancing illegal sports betting."
Other offshore advantages
There's also the matter of mobile sports wagering and the breadth of sports-betting menus. Handle has steadily increased in Nevada through mobile and online wagering. Some state lawmakers have expressed that such functionality is essential to compete with offshore operations.
In addition to ease of access with offshore books, there are also far fewer limitations for what sportsbooks can offer, for Super Bowl props or otherwise. While Las Vegas sportsbooks can post odds on Bryce Harper's landing spot via free agency, other novelties such as Academy Awards odds remain off-limits, according to Nevada regulations.
For the first time in 2017, Nevada regulators allowed sportsbooks to offer prop bets on the NFL draft, such as, "Will Josh Allen or Saquon Barkley get drafted first?" Regulators have viewed certain props with skepticism because such wagers theoretically could be ripe for abuse by individuals with inside information. With the offshore books, the ability to offer such wagers are not subject to scrutiny or regulation.
Establishing accounts is another matter. New Jersey's young market currently has eight sportsbooks offering mobile and web-based options. Laws in each of these states allow patrons to sign up for accounts remotely using verifications through digital platforms and wager as long as they are located within a state's boundaries. As currently constructed, Pennsylvania and West Virginia regulations will allow similar functionality.
But some states may require customers to register in person for sports-wagering accounts, or limit online wagering so that it can only happen on licensee properties. This has long been the process in Nevada, and it's also the case now in Mississippi and the newly launched Rhode Island books -- all patrons must be on casino premises to make a wager.
"The total football handle is on pace to surpass last season by the end of next month. Despite online sports betting being available in some states, the majority of players are still standing on the outside looking in. The average sports fan in Texas wants to place a bet on the Cowboys now because sports betting is legal, but she can't because the state isn't ready. So she goes online and finds a U.S.-facing book that meets her needs." Scott Cooley, spokesperson for offshore sportsbook BetDSI
No such limitations exists for offshore operators, and like most options that tend to win out in life, it's a simple matter of convenience. Deposits, registrations, verifications and withdrawal requests all occur online. While lawmakers have the understandable goal of wanting to drive more foot traffic into brick-and-mortar locations, there is a reason why brick-and-mortar stores like Borders and many Barnes & Noble locations have gone out of business with a similar mentality.
In New Jersey, for example, betting handle online has surpassed brick-and-mortar betting, and the divide is widening. We live in a digital age.
Meanwhile, some pieces of legislation may create a mechanism for leagues to control or restrict such wagering that leagues deem "riskier" than others, such as live-in-game wagering. The leagues have submitted, scant on evidence, that such wagers would pose greater integrity risks to their game. It's yet another potential hurdle for licensed sportsbooks to reach maximum competitiveness.
Another limitation? Both New Jersey and Delaware laws prohibit wagering on college teams located within the state. Mississippi bucked this trend, but other states may impose similar local restrictions.
And let's consider the "plight" of the winning bettor: In the United States, he'll pay taxes on those winnings. Profits offshore? It won't be reported by the offshore books, and in many cases taxes could go into the wind unpaid -- a point driving many lawmakers' efforts to legalize.
It's easy to read everything preceding this section and think that this new wave of licensed sportsbooks in the United States can't hold a candle to offshore operators. But there are likely to be millions of potential customers -- people who have only ever wagered among friends, if at all -- who will (or already have) sign up for a legal U.S. sportsbook account when their state gets around to passing legislation.
In Nevada, appetite for sports betting has never been higher, with state sportsbooks setting a new September record for betting handle ($571 million) and hold ($56.3 million).
"The results were positive out of the gate, but it's been a fistfight over the last six weeks," said Jay Kornegay, vice president race & sports operations at the Westgate Las Vegas SuperBook. "Lately, it's been either a really positive day or a very tough day. The public really dictates our results, and when the popular teams [college or pro] fare well, it's a red day for us. Overall, I would categorize the season [as] just below expectations, but we have a long way to go."
Patrons entering legal markets such as Nevada's will do so with the comfort of knowing they're not dealing in any gray area, that there's no doubt they will get paid their winning wagers, and that they will not have to receive a payout check routed through Canada or another foreign country.
In response to that payment-processing challenge -- one of the largest stumbling blocks to attracting new customers -- offshore operators have found one new way to circumvent laws restricting financial institutions from managing transactions: cryptocurrency, which does not flow through traditional financial institutions. Many, if not most, sportsbooks now transact in currency such as Bitcoin, with some operators working to integrate cryptos such as Litecoin and Ethereum.
Even that process can be more of a headache than it's worth for those just hoping to make the occasional bet. There are many customers who aren't married to their existing offshore sportsbook provider, who may migrate to a state sportsbook when that becomes an option, or simply use that account as a backup option as they play at a new state-licensed book.
"I think it's going to take time," Roberts explained. "Once you legalize sports betting, it's not like everyone's going to shut down their accounts in the offshore market and suddenly start betting in a legal sportsbook, especially if there's not the same level of access or the 10 cent lines.
"What offshore books don't allow is what happens with a patron dispute process," Roberts continued. "If you have a dispute over whether you should be paid, or whether you made a bet and there's an error with the ticket. There's a process [in Nevada] through regulation that oversees that. How do you do that in an offshore book located in Costa Rica? You don't know if your offshore book is going to be shut down by some government tomorrow. You never know, there's never that guarantee, though many have been operating for years, but that's a risk you take with your money."
One other thing offshore sportsbooks cannot offer to U.S. residents? A nice sportsbook lounge, free drinks and a quality in-person customer experience. It remains to be seen how much new state-licensed operators will invest in such spaces and amenities. It could certainly help, as long as states and leagues are not pulling too many dollars from their pockets.
Furthermore, state-based sportsbook operators are seeing a huge influx of investment into this nascent market. Large, publicly traded companies like MGM, Boyd Gaming, Penn National Gaming and Paddy Power Betfair are pouring money into new products, platforms and lounges aimed at appealing to U.S. sports bettors and winning their continued business. Such companies are ready to compete -- and each is armed with a considerable war chest.
State-licensed sportsbooks also have the backing of, well, each state, which has skin in the game in the form of tax revenue. New Jersey's top regulator, the director of the state's division of gaming enforcement, has made clear his desire to stamp out offshore websites that might take business from New Jersey. He has warned operators doing business with offshore entities, as well as sportsbook marketing affiliates, "You will not get licensed in NJ," and "I will fight you to get licensed in any state."
Other states are following New Jersey's lead in regulation and may take a similar tack to protect their licensees and state coffers.
Where we're headed
Delaware, Mississippi, New Jersey, Pennsylvania, West Virginia and Rhode Island are among the first wave of states to enter the market post-PASPA. In 2019, barring federal intervention, it's likely that as many as a dozen more states could follow, including Kentucky, Michigan and New York.
This will open up state-licensed sports-betting options to millions of new U.S. residents. Millions, to be sure, but that's still a far cry from a majority of Americans. California and Texas' combined 68 million residents may not see legal sports betting until 2020, at the earliest.
Who will service those customers in the meantime? The offshore sportsbooks, same as always, and the results seem to speak for themselves.
"The total football handle is on pace to surpass last season by the end of next month," Cooley said. "Despite online sports betting being available in some states, the majority of players are still standing on the outside looking in. The average sports fan in Texas wants to place a bet on the Cowboys now because sports betting is legal, but she can't because the state isn't ready. So she goes online and finds a U.S.-facing book that meets her needs."
We are likely going to see parallel markets operating side-by-side. Early on in this dual existence, mainstream publications and TV networks continue to reference lines originating offshore -- and many people in the U.S. don't know the difference.
In Central America and the Caribbean, sportsbooks have prepared for and expected this turn of events in the U.S. market. Offshore sportsbooks there, old and new, will not back down from a fight for new and existing clients -- and for the future of their businesses. In this new era, there's optimism both in the U.S. and outside.
"We've had to compete with offshore sportsbooks long before the PASPA repeal," the anonymous offshore executive said. "Additional and new competition will help drive innovation, and ultimately a better betting marketplace."
Brett Smiley is the editor-in-chief of Sports Handle, covering sports-betting legislation, the industry and culture.