MEDILL NEWS SERVICE
Cyberspace Gambling Difficult to Regulate
By MICHAEL BURNHAM
MEDILL NEWS SERVICE

WASHINGTON - Gambling in the borderless world of cyberspace is much like playing cards in the old West. Every island on the modern map seems to operate an online casino, much like 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 Washington the job of policing Internet gambling. Yet, even the federal government concedes that shooting down all illegal e-gambling is virtually impossible.

Consider the quandary: States can set age limits to control who buys a lotto ticket in a gas station, bets in a casino or buys a pull-tab in a bar. Internet blackjack dealers, however, can deal cards in half of America's homes.

"This is a casino in your kid's bedroom, and it's totally unregulated," said state Rep. Spencer Bachus, R-Ala., 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, concluded: "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."

Courts generally have agreed that the 1961 Wire Communications Act, which prohibited the use of interstate or international telecommunications wires to transmit bets, applies to the Internet, effectively making online gambling illegal.

In response, about 1,800 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. About half of that revenue will come from 5.3 million American e-gamblers, analysts estimate.

While the government has stepped up prosecution of middlemen who allow e-gambling sites to 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)," conceded 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."

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.

Another area difficult to enforce is aggregators-businesses that allow consumers to 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. The government has sought large settlements with violators of the Wire Act.

PayPal Inc., a large aggregator owned by eBay Inc., recently entered into a $10 million agreement with the U.S. Attorney General for the Eastern District of Missouri to settle allegations that it aided in illegal offshore and online gambling. The settlement, filed July 24, concedes that the San Jose-based company illegally transmitted millions of dollars in 2001 and 2002, a violation of the Wire Act and several states' 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 said he sponsored the bill as a way to starve to death Internet gambling, an activity he calls "organized crime." Internet gambling has been particularly vulnerable to money laundering and other criminal activities, the Justice Department contends.

"I'm not crusading against gambling; this is a crusade against crime,"

Bachus added. "The way to stop it is to cut off the money."

The legislation comes four years after the National Gambling Impact Study

Commission recommended that the federal government prohibit any e-gambling and encourage other nations to not harbor such businesses. The commission also recommended that Congress pass legislation that would prohibit the collection of credit card debt for online gambling.

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 would set criminal penalties for online gambling, as well as modify the federal criminal code to include satellite, microwave and other communications from fixed or mobile sources.

Sen. Jon Kyl, R-Ariz., the bill's sponsor, said 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 nongambling states.

Recognizing concerns for 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 that is conducted on a closed-loop subscriber system. Such a closed system must be designed to verify where the bet takes place.

Sen. Jon Corzine, D-N.J., has said that he will likely ask the full Senate to approve a state Internet lotto amendment as well.

If the Senate passes the bill, representatives of the two chambers will have to reconcile the differences in the bills.

Kyl, noting the Justice Department's concern for the state racing and lotto exemptions, said, "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."

Critics of the legislation dismiss the promises of "enhancement," contending that efforts by the credit card industry to block Internet gambling transactions have been largely effective and negate the need for federal legislation that would require banks to do the same task.

"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," said Frank Fahrenkopf, president of American Gaming Association.

The Interactive Gaming Council, the world's largest e-gaming trade association, called the House and Senate bills "misdirected."

Instead, the Canada-based trade group is urging Congress to regulate Internet gambling in ways similar to the way Australia and the United Kingdom do.

By 2005, the United Kingdom 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," the council Chairwoman Sue Schneider said of the British plan. "If there is a problem with a particular site, a player has some recourse."

Return to America: Taking a Chance on Gambling