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Online gaming has become big money on the Internet — and a big concern for government. Both Congress and the Department of Justice are moving to crack down, but enforcement efforts are likely to encounter significant obstacles. The Web now has more than 1,400 gambling (or “gaming”) sites. Internet gaming has about about 14.5 million patrons. Estimated global revenues in 2003 were about $4.2 billion. Christiansen Capital Advisors, a consulting firm, believes the industry’s revenues will hit $24.5 billion worldwide by 2010. Noticing this demand, some of the major casino corporations also have been quietly positioning themselves to enter the Internet market if possible.
See also: The legality of online betting is at the center of the DOJ’s attempt to seize $7 million.
Despite its prevalence, Internet gambling is illegal in all 50 states and the District of Columbia. Several foreign nations, however, either sanction Internet gaming or do not enforce laws against it. That has made Internet gaming corporations a very hot investment on foreign stock markets, where their shares are freely traded. July, however, was a bad month for the industry. The value of the gambling sector on the London market plunged by more than $1 billion, and executives at gambling businesses started canceling trips to America for fear of arrest. This even led to the cancellation of a high-profile industry conference that was scheduled to be held in Las Vegas. BANS AND PROSECUTIONS The first hit to the industry in July came when the U.S. House of Representatives agreed to ban most online gambling, including sports betting and online poker, and to prohibit credit cards and other payment methods from being used to pay Internet gambling debts. The second hit came when David Carruthers, the chief executive of BetOnSports, a major online sports-betting operation that was publicly traded in the United Kingdom, was arrested at Dallas/Fort Worth International Airport as he waited to board a flight to Costa Rica, where the company has a major operation. Carruthers, a British citizen, was indicted along with 10 others on racketeering and conspiracy charges in a 22-count indictment unsealed by federal prosecutors in St. Louis. The government says BetOnSports fraudulently took bets from U.S. residents by phone and the Internet and failed to pay excise taxes. According to news reports, Clive Hawkswood, the chief executive of the Remote Gambling Association, said, “If the U.S. is engaged in a clampdown then it’s very serious because it’s half the world’s market.” John Kelly, the chairman of Gala Coral Group, said, “This is the single most important challenge to the Internet-gambling industry since it started.” Gambling, of course, has traditionally been seen as a vice, and in the United States it has a history associated with organized crime. As states have moved toward legalization of casino-style gambling, they have also instituted strict regulatory schemes designed to keep the games fair and the ownership honest. With Internet gaming, however, this has been very difficult. Internet operations are usually located outside of U.S. jurisdictions, and the gamblers are minor actors in the process. One can only imagine the difficulty of getting a jury to convict someone for placing a bet on the Internet in a state that runs a lottery. The Department of Justice has long taken the position that Internet gambling is illegal under at least four federal statutes: the Interstate and Foreign Travel or Transportation in Aid of Racketeering Enterprises Act (otherwise known as the Travel Act), the Professional and Amateur Sports Protection Act, the Interstate Transportation of Wagering Paraphernalia Act, and the Wire Act. It has been unclear, however, whether these acts, which apply to betting over phone lines, also apply to betting on the Internet. PASSING A NEW LAW The act passed by the House in July would modify the 1961 Wire Act to make clear that it applies to all types of gambling and communication facilities. It would also prohibit the use of credit cards, checks from U.S. banks, and money-transfer services to send and receive money from offshore gambling sites. If the bill becomes law, operators of online gambling sites would be subject to fines of up to $20,000 and incarceration for up to four years. Gamblers would be subject to fines of $2,500 and up to six months in jail. Moreover, local authorities would be able to seek injunctions against gambling sites as well as against Internet service providers and telephone companies that continue to allow gamblers to access prohibited sites through their systems. The next question is whether the Senate will go along with the House. Sen. Jon Kyl (R-Ariz.) has long pushed for an Internet Gambling Prohibition Act. Like the House bill, the Kyl bill focuses on credit card companies and on Internet service providers. ISPs provide a direct connection from a company’s networks to the Internet. They may also provide related services such as virtual hosting, leased T-1 or T-3 lines, and Web development. Because no Web page can operate without being located on a server, ISPs make logical targets for law enforcement. Among the largest national and regional ISPs are AT&T WorldNet and IBM Global Services. The proposed laws would make it illegal for any person engaged in a gambling business to use the Internet to place, receive, or otherwise transmit a bet or wager, or to send, receive, or attract information aiding in wagering or betting. The logical problem with targeting ISPs, however, is in demonstrating that an ISP knows the character of the activity offered on each of the millions of Web sites it serves. (Remember, the prohibition applies only to knowing acts in violation of the statute.) To get around this problem, the proposed laws allow any local, state, or federal law enforcement agency to notify an ISP of a problem Web site and to request that the ISP terminate its service. The legislation would shield ISPs from civil liability if they voluntarily terminate service to the offending Web page. On the other hand, if the ISP fails to terminate service, a law enforcement agency could seek an injunction to require it to do so, and criminal sanctions could follow. PERSISTENT DIFFICULTIES Despite the thought that went into these bills, they still suffer from the problem of being unable to affect ISPs hosted in foreign nations where Internet gaming is legal. In fact, mere interference with businesses that are legal in other nations can create problems. In 2004, a panel of the World Trade Organization ruled that a U.S. ban on Internet gambling was a violation of global trade rules. The panel held that the United States was violating its commitments under the General Agreement on Trade Services by not providing market access and favorable treatment under GATS to Internet gambling services provided by operators licensed by Antigua and Barbuda. In 2005, the WTO’s Appellate Body reversed that panel, but in late July, the WTO set up another panel to determine if the U.S. gambling restrictions violate trade rules. Issues such as these remain serious concerns. As for the restrictions on credit-card companies, these also present difficulties. Pressuring these companies is not a new idea. In 2002, the New York attorney general took action against online casinos by suing Citibank and the money-transfer service PayPal for facilitating Internet gambling. Citibank ultimately paid $100,000 in costs and $400,000 to groups providing counseling to recovering problem gamblers. It also agreed, consistent with its rules for posting to U.S. bank-card accounts, to block and decline authorizations for bank-card transactions for online gambling. The New York attorney general also reached a settlement with PayPal. This agreement provided that PayPal would stop “processing any payments for online gambling merchants, where such payments involved New York members.” PayPal paid $200,000 in costs, penalties, and “disgorgement” of online-gaming profits. There have also been attempts by losing gamblers to avoid payments to credit-card companies for gambling debts, though these have been met with mixed success. Because of legal actions such as these, many leading credit card companies, including Bank of America, Wells Fargo, and MBNA, already attempt to block Internet-gaming transactions. It can be difficult, however, for financial institutions or government regulators to identify particular businesses as being in the casino industry. This is particularly true if a business seeks to disguise itself by handling transactions through an ancillary ghost firm that shows up as a legitimate, nongambling business. Because of dodges such as this, 85 percent of online casinos are able to report that they accept Visa and MasterCard, and about two-thirds report that they accept PayPal. If past enforcement efforts against the credit-card companies have proved this ineffective, it’s unclear why these new efforts would be much better. So the results of the July actions will be mixed. They probably won’t do much to stop offshore companies or to reduce domestic demand. But they will deter U.S. casinos from entering the online gambling market, at least anytime soon. CAPTURING THE MARKET That may be an unfortunate result. Because Internet gambling cannot be stopped as long as it is legal in other nations, American lawmakers might do better by focusing on a certification process for domestic online casinos. Those corporations that are already operating traditional gambling establishments within the United States should be permitted to develop online casinos that would be accessible through a regulatory gateway page. Regulators (and tax authorities) would have substantial control over these online casinos because they would be run by the brick-and-mortar casinos already under control. Reasonable regulations could be put in place to ensure fair games, verify the age of gamblers, collect taxes, and minimize the risk to problem gamblers (to the extent that is possible). Unregulated online gaming would still exist, but if regulation were done correctly, the officially sanctioned operations should be able to capture a significant portion of the market. Consumers would have the choice of betting with online casinos that are regulated and fair, or they could take their risks with other entities that are less secure. In the end, the free market could play a significant role in bringing online gaming under control. That makes a lot more sense than the current efforts, which are unlikely either to stop gambling or to make it less dangerous.
Ronald J. Rychlak teaches gaming law at the University of Mississippi School of Law. He is a member of the editorial board of The Gaming Law Review and a co-author of a casebook on gaming law.

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