Battling illegal sports betting: A century of lessons to be pondered By Michael Pollock, Spectrum Gaming Group February 26, 2019 at 8:00 pm (Cue Walter Winchell’s sonorous voice). This is a true story about Al Capone and the repeal of Professional and Amateur Sports Protection Act. The names have not been changed to protect the innocent. By pure coincidence, the U.S. Supreme Court’s landmark decision in Murphy versus National Collegiate Athletic Association to overturn PASPA was handed down just seven months shy of the 100th anniversary of the ratification of the 18th Amendment to the U.S. Constitution. As history buffs (as well as fans of The Untouchables) can attest, that amendment ushered in Prohibition, a failed effort by the federal government to regulate human behavior through a constitutional fiat. It also ushered in the age of well-funded bootleggers such as Al Capone and his cutthroat counterparts across the country who viewed the prohibition on the manufacture, possession, sale, and distribution of alcoholic beverages as a fantastic opportunity to build a massively profitable, tax-free industry. The bootleggers of the early 20th century were simply adhering to the basic laws of economics: They offered a supply to meet a demand. Prohibition failed for several intertwined reasons, starting with the notion that government’s power to limit human behavior is itself severely limited. One of the most highly publicized prosecutions during Prohibition involved John McGraw, the famous baseball manager of the New York Giants. In September of 1920, McGraw found himself in a late night scuffle — a not uncommon event for the pugnacious McGraw — and indicted for the possession of bootleg alcohol when he mentioned during the resulting investigation that he had purchased a few pints of whiskey earlier in the evening. It took the jury just five minutes of deliberation to acquit baseball’s biggest celebrity. More important for purposes of this analysis, Prohibition made clear that governmental efforts to enforce such ill-conceived laws can have an effect that is quite the opposite of their intent. When Elliot Ness and other federal agents from Chicago to Chattanooga went after illicit distilleries, they did not weaken Al Capone. Indeed, they allowed these well-funded gangsters to gain outsized market share. Law enforcement, for the most part, went after the smaller, weaker bootleggers, those who could not afford to buy immunity from law enforcement or take other necessary steps to stay in business. As those weaker competitors were hauled off to jail, their distilleries were destroyed and Capone gained market share and grew stronger. For all practical purposes, the government became Capone’s ally because the government’s interest (prohibiting the liquor business) aligned perfectly and overlapped completely with Capone’s interest (prohibiting competition in the liquor business). As history (and The Untouchables) has taught us, Capone eventually was brought down for income-tax evasion, not for violating the Volstead Act (the law that enforced the 18th Amendment). Fast forward through the intervening decades, and you can see other examples where well-intended government efforts to control illicit behavior resulted in helping the stronger contenders by eliminating their weaker competitors. By way of example, efforts in the decades-long war on drugs did not eliminate the larger drug dealers. Such efforts made them stronger, once again, as the government’s enforcement power weeded out weaker competitors and consolidated revenue in the strongest and most dangerous operators like Capone. History has taught us another lesson: When certain industries are made legal and are effectively regulated, they can generate tax revenue. At the same time, they can free up public resources to be channeled into more productive pursuits. The notion that effective regulation can be an effective counterweight to crime has been proven through the repeal of Prohibition. And the same argument is being used effectively in statehouses in the debates on the legalization of cannabis, which rest on the notion that marijuana use can be regulated and taxed. When such actions prove effective, they can also put the bad guys out of business. Organized crime did not go away with the repeal of Prohibition, but it arguably abandoned bootlegging as a result. For purposes of this analysis, the legalization of gambling – which was once the province of organized-crime syndicates – is another example of a successful outcome. Gaming is now the province of public companies and other organizations that operate in the open, and that have affirmatively demonstrated their good character, honesty and integrity. Their revenues are taxed, and they have evolved into an integral element of the economy. Now, as we raise our champagne glasses to toast the centennial of Prohibition, we should think for a moment as to what this historic pattern means for sports betting. The estimates of the size of the illegal sports betting market have ranged from small, eyepopping numbers to large, eyepopping numbers, and the concept of making a dent in the illegal market has been a force in statehouses across the nation. The notion that history will repeat itself is rising to the fore. If legal alcoholic sales decimated the illegal bootlegging industry, and if legal marijuana can crowd out the illegal market, legal sports betting should fully meet the market demand for betting on sports and sound the death knell of illegal sports betting. It happened in land-based casinos, so why would it not occur in sports betting that occurs online? The answer is quite simple: It is not enough to legalize an illegal product. You must produce an effective legal option that is more attractive than its illegal counterpart so that the legal product does not merely compete with the illegal product, but rather the legal product dominates the illegal product and drives the illegal product out of business. We were not around during Prohibition, but we have to assume that much of the illicit hooch that was being consumed was not as tasty as the legal stuff, and that the speakeasies were no match for the legal bars and taverns that ultimately crowded them out. The legal alternative was not only better, it was a lot better and a consumer did not have to risk going to jail to possess and consume it. Similarly, it is absurd to conceive that an illegal casino could match the Venetian or Borgata or Hard Rock, or dozens of other attractive, legal gaming centers. Why then, is there hesitation – or resignation – about the notion that legal sports betting will be a dagger to the heart of illegal sports betting? Many experienced veterans of sports betting will argue, quite convincingly, that the illegal market has staying power for several reasons, starting with the notion that it operates tax free. Moreover, it has a history of paying winning bets, extending credit and other behaviors that comfort consumers. The tax rate on gaming is the single most important factor that can make legal sports betting an effective competitor. The tax rate governs the amount that bookmakers can pay on sports bets, which means that the tax governs the “price” of such wagers. Illegal operators can offer better odds because they operate at a lower cost. The prevailing notion is that the legal market will capture a huge share of the novice market, those adults who do not participate in the illegal market and who do not have much experience in sports betting. The well-heeled sports bettors – the “whales” – will be harder to capture. That is absolutely true. Any serious effort to coax larger players to abandon illegal sites will require a combination of factors: States need to make sure that their tax rates are reasonable (a debatable threshold, but certainly less than 15 percent). Additionally, such goals can be effectively advanced when sports-betting is linked to the land-based casino industry. Illegal sites, no matter how hard they try, cannot offer you a free weekend at Aria or Beau Rivage. A corollary to this notion, however, is the question of whether bad actors (illegal providers) should themselves be coaxed into abandoning their illicit activities and take the necessary steps to become good actors? That will prove to be one of the most vexing challenges that regulators will be required to address. And, if their illegal activities allowed them to develop databases of active players (a very tangible, valuable asset) should they be allowed to leverage such assets in the legal market? Those are policy decisions that lawmakers and regulators must address. The real lesson to be savored in this centennial year is that transforming illegal activities into legal, taxable activities is the first step, but not the last. The legally authorized and regulated sports betting product must not only be competitive, but dominant. Elliot Ness would surely concur. (Michael Pollock is Managing Director of Spectrum Gaming Group, who has been tracking trends in the gaming industry since 1978. This article was peer-reviewed and edited by Kevin P. Braig, a sports-betting expert and noted gaming lawyer at Shumaker, Loop & Kendrick, LLP in Columbus, Ohio.)