US Illegal and Unregulated Market Continues to Grow, Costs Over $13 Billion in Tax Revenue to State Governments in 2022

Currently, the legal gambling sector is one of the most highly-regulated industries in the US, with gambling operators that offer their services legally being forced to comply with a large number of laws and regulations aimed at ensuring the best customer protection through know-your-customer (KYC) and anti-money laundering (AML) regulations, financial solvency and other licensing requirements.

As the American Gaming Association (AGA) have noted on multiple occasions, unregulated gambling operators, which offer their services illegally on the territory of the country, do not follow any of the aforementioned rules and standards, which exposes local customers to significant risk, not to mention that it undermines the trust in the legal gaming industry.

In November 2022, the AGA commissioned a report that measured the potential size of the unregulated and illegal gambling market in the country for the first time. The research takes into account three verticals – sports betting, online casinos (also referred to as online casinos) and grey market slots, including the games that are also known as skill machines.

The report data was based on a survey that was held among more than 5,000 US citizens and took into account their gambling habits, the existing gambling participation rates, as well as the known size of the legal gambling sector in the US. The research found that Americans bet over $510 billion on an annual basis on unregulated operators that offer their services illegally in the US. Researchers reported that this spending costs revenue of more than $44 billion to the legal gambling industry, as well as lost tax revenue of over $13 billion to state governments.

Furthermore, the amount of tax revenue lost by state and federal governments seems to be growing. Only a year ago, AGA data showed that illegal and regulated gambling operations cost $11.7 billion in state gaming taxes. These losses grew to $13.3 billion in 2022.

About One-Third of Overall Gaming Revenue in the US Going to Unregulated and Unlicensed Operators

The American Gaming Association has been targeting the illegal market as one of its paramount priorities, with the organization’s latest report highlighting the scope of this challenging job.

According to data provided by the AGA, the legal and regulated gambling sector in the US generated combined commercial and tribal revenue of $92 billion, which basically means that about one-third of the overall gaming revenue in the country is going to illegal or unregulated operators every year. The organization also shared that the black market can take many shapes and forms but, in all instances, unregulated operators take advantage of vulnerable customers because there is nothing that can make them commit to responsible gaming or force them to prevent terrorist financing and money laundering.

Reportedly, US residents spend almost $64 billion on illegal online sports betting operators every year, and almost $338 billion on unregulated online casinos. Such operators often lure vulnerable consumers with highly attractive odds, but they do not pay federal and state taxes and, logically, are not forced to comply with the legal requirements that apply to the regulated gambling sector.

The last few years have seen an increasing number of illegal offshore gambling sites successfully attract Americans. The law, however, is clear, participation in illegal gambling businesses is constituted as a criminal activity, with a number of statutes and pieces of legislation aimed at preventing this from happening, including the Wire Act, the Unlawful Internet Gambling Enforcement Act, the Travel Act, and the Illegal Gambling Business Act.

Unregulated Gaming Machines Constitute about 40% of the Overall Number of EGT Devices in the US

The American Gaming Association has also warned that unregulated gaming machines are still proliferating in the US. According to the latest estimates provided in the organization’s November 2022 report, there are currently over 580,000 unregulated gaming machines in the country, with local residents spending over $109 billion on them on an annual basis.

Considering the fact that there are currently 870,000 regulated slot machines across casinos and slot parlors in the US, about 40% of the overall number of gambling machines in the country are operating without the necessary licenses. What is even worse, players are often losing money at much bigger rates than the ones available on licensed electronic gambling terminals (EGTs).

The AGA warned that unregulated slot machines are often unrecognizable because they look and act exactly like the ones that operate in casinos, convenience stores, bars, taverns, and gas stations, under a permit issued by the competent authorities. Unfortunately, the lack of regulation increases the risks associated with various forms of criminal activity, such as violent crime, drug trafficking and money laundering. Such machines can be described as gambling devices and, according to the American Gaming Association, state lawmakers and regulatory bodies need to take action to enhance existing laws and enforce new rules aimed at protecting consumers from the negative impact of the machines.

As mentioned above, gaming machines that offer their services under a license issued by competent authorities are subject to federal laws. One of these pieces of legislation is the Johnson Act, which makes it illegal to trade in gambling devices that are unregulated, transfer betting paraphernalia by using interstate channels if not specifically permitted under the provisions of state law, or operate a gambling business outside the legally permitted boundaries by state law.

More Than 5,200 Adult Americans Questioned about Their Gambling Habits as Part of the AGA Survey

The research, commissioned by the AGA and carried out by The Innovation Group, was aimed at providing an independent evaluation of the size of the unregulated and illegal markets for sports betting, online casino games, online slots, and gaming machines in brick-and-mortar locations in the US.

The unregulated market, often referred to as the “gray market”, is currently somewhere in the middle between the regulated “white” market and the illegal “black” market. In some cases, the unregulated gambling includes gambling on which the law remains pretty vague and ambiguous. For example, so-called skill games are part of the gray gambling market, except in states where they have already been regulated.

The illegal and unregulated gambling sector in the US currently takes several forms, including brick-and-mortar and online sportsbooks, online slots and casino table games, as well as unregulated physical devices, also known as “skill games”.

As mentioned above, in order to estimate the combined market size of the illegal and unregulated gambling sector, the American Gaming Association conducted research among 5,284 American adult residents, who were asked to answer detailed questions about their gambling habits in both brick-and-mortar and interactive gambling sites. Of the total sample, 4,982 were aged over 21.

The report has shown that the overall estimated handle of the unregulated market was $510.9 billion, with retail and online sports betting accounting for $63.8 billion, online slots and casino table games accounting for $337.9 billion, and unregulated slots machines accounting for a little over $109 billion. The estimated overall revenue of the three aforementioned segments of the unregulated gambling market in the US was estimated at $44.2 billion, with unregulated slots machines accounting for the largest part of the estimated revenue, $26.9 billion, online slots and casino games accounting for $13.5 billion, and retail and online sports betting accounting for $3.8 billion.

As mentioned above, the estimated gaming tax revenue loss for the state governments amounted to $13.3 billion. The biggest chunk was once again generated by the unregulated slots machines across the US – $8.7 billion – followed by the part generated by online slots and table games, $3.9 billion. Unregulated sports betting, both retail and online, accounted for $0.7 billion of that revenue.

Impact of the US Illegal Sports Betting Market Measured

Since the US Supreme Court struck down the federal ban on sports betting services in 2018, individual states have been provided with the chance to decide whether or not to legalize the new form of gambling. Logically, the regulated sports betting sector of the country has grown exponentially, with legal and regulated retail sportsbooks now being available in 31 states, while mobile sportsbooks being available in 22 states.

The rapid increase in legal sports betting in the US has raised questions about the long-term impact of the illegal sports betting sector.

The survey, which was held among respondents aged 21 and older, showed that 51% of the polled American adults chose to bet on legal sports betting channels only. A smaller number of respondents – 34% – revealed they bet in both legal and illegal channels, while the remaining 15% of the polled customers said they bet only in illegal channels.

As estimated by H2 Gambling Capital, the regulated sports betting handle was worth $85.5 billion, with overall revenues of $6.2 billion for the twelve months before the conclusion of the survey – from September 2021 to August 2022. These numbers have aligned with data that was acquired through the Commercial Gaming Revenue Tracker of the American Gaming Association.

Apart from that, H2 Gambling Capital also projected that the handle of the US retail regulated commercial sports betting market would reach $96 billion, with overall revenues of $7.2 billion.

Impact of the US Illegal Online Slots and Casino Table Games Sector

According to reports from the American Gaming Association, the reach of the legal market for online slots and casino table games in the country is relatively smaller in comparison to the one of legal sports betting. However, similar questions regarding the illegal online casino and gambling sector arise.

During the survey, the polled American adults were asked to indicate the frequency of their slots and table games play, their average spending, as well as other factors revealing further details about their gambling habits. They were also asked to select from the sites on which they played from a list containing 22 prominent online slots and casino table games, as well as the percentage rate of their play on each of these websites.

According to data gathered by the AGA, 52% of the survey respondents played only in legal online slots and casino table game channels, while 30% of the polled adult Americans said they played only in illegal channels. The remaining 18% of the survey respondents said they played in both legal and illegal online slots and casino table game channels.

Reportedly, the average of the estimated in-person slots and table games revenues for all US casinos over the last 12 months and full year of 2022 is $79.6 billion. H2 Gambling Capital reported that legal online casino revenue was estimated at $4.6 billion for the 12 months before the survey (from September 2021 to August 2022). The leading market data, intelligence and consulting firm also projected that the 2022 full-year revenue would reach $5 billion.

Impact of the Unregulated Slots Machines Market in the US

The AGA survey estimated the number of machines, revenue and handle in the unregulated slots machines market by leveraging the data gathered to estimate the sector’s size. The Association explained that it used a benchmark of states, including Nebraska, Georgia, Virginia, Kentucky and Pennsylvania.

The state of Pennsylvania currently has the largest number of electronic gaming machines – 67,000, followed by Georgia and Kentucky, which host 38,539 and 12,269 machines, respectively. Virginia and Nebraska are the benchmark states hosting the smallest number of slots machines – 8.194 and 3,752, respectively.

Based on the estimates, the organization classified models by regulatory status and then calculated not only the average number of machines but also the revenue and handle for each class.

The data gathered from the benchmark states was used for the calculation of the estimated unregulated gaming machine data. The AGA reported that the average number of unregulated slot machines in the benchmark states was 580,651. They generated an average revenue of $26.9 billion, with an overall average handle of $109.2 billion.

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