Corralling Gamblers on the Net Frontier
Feds ponder how to lasso a largely unregulated online gaming industry.
Michael Burnham, Medill News Service
Gambling in the borderless world of cyberspace is much like playing cards in the old West. Virtually every island on the modern map seems to operate an online casino, much as almost every railroad stop in Nevada had a card table.
The comparison doesn't end there: Not only is cyberspace borderless, it's seemingly lawless.
States are finding ways to regulate gambling effectively in traditional brick-and-mortar casinos, leaving the job of policing Internet gambling to Washington lawmakers. Yet even the federal government concedes that shooting down all illegal e-gambling is virtually impossible.
Clearly, there's a regulatory abyss: States can set age limits to control who can buy a lotto ticket in a gas station, bet in a casino, or pull a tab ticket in a bar. Internet blackjack dealers, however, can freely deal cards in the half of America's homes that are wired.
Wild, Wild Web
"This is a casino in your kid's bedroom, and it's totally unregulated," says state Rep. Spencer Bachus, R-Alabama, a leading opponent of Internet gambling. "If you introduce a child to gambling at 13 or 14, it's addictive."
The National Gambling Impact Study Commission, in its 1999 report to Congress, concludes: "Online wagering promises to revolutionize the way Americans gamble because it opens up the possibility of immediate, individual, 24-hour access to the full range of gambling."
About 1800 e-gaming Web sites have cropped up offshore since the mid-1990s. Global revenues from Internet gambling are projected to reach $5 billion in 2003, or about 4.3 percent of the total $116 billion in business-to-consumer global e-commerce, according to a General Accounting Office report. Approximately half of that revenue will come from 5.3 million American e-gamblers, analysts estimate.
Courts generally have agreed that the 1961 Wire Communications Act, which prohibits the use of interstate or international telecommunications wires to transmit bets, applies to the Internet, effectively making online gambling illegal.
While the government has stepped up prosecutions of middlemen who let e-gambling sites do business with U.S. residents, Internet casinos continue to circumvent aggressive initiatives by the Justice Department and the credit card industry.
But federal lawmakers are on the verge of passing legislation that would both regulate the industry in gambling-friendly states and dry up its lifeblood--money.
"People are going to gamble (online)," concedes Bachus, sponsor of a House-passed e-gambling bill. "It's almost impossible for states to do anything, so the way to stop it is to cut off the money."
Cutting Off Credit
Online gambling is legal in more than 50 countries and jurisdictions, yet about 90 percent of the gambling is operated from the Caribbean, Europe, and along the Pacific Rim.
To combat illegal offshore-domestic transactions, most full-service credit card companies, such as American Express and Discover, prohibit cardholders from using their cards to gamble online. Additionally, card associations, such as MasterCard and Visa, have transaction codes that banks can use to block suspect payments. Such companies do not accept online gambling sites as merchants.
These efforts could reduce the projected growth of the e-gaming industry this year from 43 percent to 20 percent and cut projected 2003 revenue by $800 million to $4.2 billion, according to the GAO.
Feeling the dollar drain, online gambling sites are finding creative ways around the credit card industry. Some e-gaming sites disguise their transactions to prevent them from being blocked. Moreover, some card issuers--often in foreign countries that allow Internet gambling--are acquiring e-gaming businesses as legitimate merchants, according to the GAO.
Also difficult to regulate are aggregators, businesses that let consumers use credit cards to set up accounts with online merchants. Transaction codes can be obscured as they pass through aggregators, making it difficult for issuing banks to determine whether credit cards are being used for illegal online gambling.
Cracking Down
The government has sought large settlements with alleged violators of the Wire Act. PayPal, a large aggregator owned by EBay, recently settled with the U.S. Attorney General for the Eastern District of Missouri, for $10 million, allegations that PayPal aided in illegal offshore and online gambling. The deal, filed July 24, settles charges the company illegally transmitted millions of dollars in 2001 and 2002, violating the Wire Act and several state statutes.
Federal lawmakers are seeking additional remedies--albeit ones with controversial side effects. The House has overwhelmingly passed a bill that requires credit card companies and banks to block all card transactions for Internet gambling, including debit cards and other electronic means.
Bachus says he sponsored the bill to starve to death Internet gambling, which he calls "organized crime." Internet gambling has been particularly vulnerable to money laundering and other criminal activities, the Justice Department contends.
The legislation comes four years after the National Gambling Impact Study Commission recommended that the federal government prohibit any e-gambling and urge other nations to not harbor such businesses. The commission also recommended Congress pass legislation banning collection of credit card debt for online gambling.
Next Salvo from Senate
Following its August recess, the Senate could vote on a companion bill that also would prohibit businesses from accepting credit card and other payment methods from Internet gamblers. Unlike the House bill, the Senate legislation sets criminal penalties for online gambling and updates the federal criminal code to include satellite, microwave, and other communications from fixed or mobile sources.
Senator Jon Kyl, R-Arizona, the bill's sponsor, says he hopes the criminal provisions give U.S. law enforcement more power to go after offshore e-gaming sites that illegally offer their services to U.S. residents.
The House bill would allow a "business licensed or authorized by a state" to accept electronic payments for wagers on horse races, dog tracks, and state lotteries.
The provision spurred the Justice Department to warn that racing and lotto exemptions could unduly legalize bets placed over the Internet in states where gambling is illegal.
Recognizing concerns about the House bill's state exemptions, a Senate committee on July 31 amended its legislation to grandfather in state-sanctioned horse- and dog-racing wagering conducted on a closed-loop subscriber system. Such a closed system must be designed to verify where the bet takes place.
Senator Jon Corzine, D-New Jersey, says he will likely ask the full Senate to approve a state Internet lotto amendment as well.
If the Senate passes its bill, representatives of the two chambers must reconcile the differences in the measures.
Kyl, noting the Justice Department's concern for the state racing and lotto exemptions, says, "By the time we're done, it will be clear to all that we are not contracting or expanding gambling. We will end up with a bill that will enhance both state and federal enforcement of the bans."
Gaming Antes Up
Critics of the legislation dismiss the promises of "enhancement." They contend the credit card industry's efforts to block Internet gambling transactions are largely effective and negate the need for federal laws requiring banks to do the same.
"Even though the law has not yet been passed, for all intents and purposes, the use of credit cards to make Internet bets has been pretty much wiped out," says Frank Fahrenkopf, president of American Gaming Association.
The Interactive Gaming Council, the world's largest e-gaming trade association, calls the House and Senate bills "misdirected."
Instead, the Canada-based trade group is urging Congress to regulate Internet gambling in ways similar to the approach taken by the United Kingdom and Australia.
By 2005, the UK plans to license online casinos. The government will investigate operators' backgrounds and monitor gambling software to assure its fairness.
"From a player protection standpoint, it's going to be more effective," council chair Sue Schneider says of the British plan. "If there is a problem with a particular site, a player has some recourse."
Leonadis McKinney of the Medill News Service contributed to this report.
