09 October 2006

October 6, 2006
Risky Business:
Congress stupidly outlawed Internet gambling and only terrorists were helped

By Robert X. Cringely

Last Saturday the United States Congress passed a port security bill that carried an amendment banning Internet gambling. This was a huge mistake, not because Internet gambling is a good thing (it was already illegal, in fact), but because the new law is either unenforceable or — if it can be enforced — will tear away the last shreds of financial privacy enjoyed by U.S. citizens. The stocks of Internet gambling companies, primarily traded in the UK, went into free-fall as their largest market was effectively taken away. I don’t own any of those shares, but I guarantee you they will fully recover, which is part of what makes this situation so pathetically stupid.

Ironically, many of the senators who voted for this legislation may not have even known the gambling bill was attached, since it didn’t appear in the officially published version of the port bill. But such ignorance is common in Congress, along with a smug confidence that people and institutions can be compelled to comply with laws, no matter how complex and arcane. The amendment was a surprise late addition, pushed by Senate Majority Leader Bill Frist, who has presidential ambitions and reportedly sees this battle against Internet gambling as part of his eventual campaign platform.
Only the new law isn’t really against Internet gambling at all, since it specifically authorizes intrastate Internet gambling, imposing on the net the artificial constraint of state boundaries. So the law that is supposed to end Internet gambling for good will actually make the practice more common, though evidently out of the hands of foreigners, which in this case includes not just operators from the UK but, if you live in South Carolina as I do, it also includes people from Florida and New York. Let a million local poker hands be dealt.

What the new law actually tries to control is the payment of gambling debts through the U.S. banking system, making such practices illegal (except, of course, for intrastate gambling, which probably means your state lottery). Once President Bush signs the bill, your bank and credit card companies will have 270 days to come up with a way to prohibit you from using your own money to pay for gambling debts or — though far less likely– to keep you from receiving your gambling profits. The law covers not just credit card payments but also checks and electronic funds transfers.

The most optimistic view of this law from the U.S. banking industry says that controlling payment by checks and electronic transfers is simply impossible and won’t be enforced. Only credit card payments are seen by the banks as being practical to limit. But what if Congress doesn’t want to take “no” for an answer? What if they are serious? Then the banks will have to put systems in place to examine every payment transaction, no matter how small, and determine if it is gambling related. And because there will inevitably be attempts to get around the law, such examination would go beyond simply identifying the payee to following the money further upstream and downstream and examining it in the total context of your financial activity: Is there a suspicious trend in these payments, which appear to follow every NFL football game, for example?

If you bother to read U.S. currency, the notes say they are good for paying “all debts, public and private,” which is why Tony Soprano and the Cali cocaine cartel liked $100 bills so much. Ironically, if the banks are effective in controlling other gambling payment schemes, it may all come back to paper money, which is almost impossible to trace.

Is the end here really worth the effort? The United States already has strict, even draconian, controls over fund transfers that might potentially be used to pay for terrorist activity. Buy a house or open a brokerage account and see how deep an interest the bank takes in where the heck your money is coming from. Now it is proposed that they apply the same diligence to transactions as small as one dollar.

This is ridiculous, not just because it is an unwarranted invasion of privacy, not just because we as consumers will ultimately have to pay for the cost of snitching on ourselves, but because the system of regulation ultimately won’t work. With an Internet gambling market approaching $20 billion per year, there is a huge incentive for new enterprises to spring into being specifically to get around this law. Frankly, it ought to be easy.

Just off the top of my head I can think of several possible approaches to subverting this new law. Working within the banking system it might be possible to aggregate payments to make their individual origins less obvious, especially if the aggregation involves some non-gambling money. Remember, these restrictions are being placed on the U.S. banks, not their foreign counterparts, so any bank in the Caymans or on the Isle of Man ought to be able to chug through such aggregated payments without violating any local laws. Another option, since intrastate gambling is authorized, is to make interstate and international gambling debts effectively local by creating thousands of local virtual bookies. All of these are old school ideas that don’t even need technology to implement. What if we bring to bear the capabilities of Web 2.0 and create payment mashups by the dozen Ð little PayPals that rise and set like the Sun?

Any random group of 535 nerds is smarter than the 535 members of the U.S. Congress and able to circumvent ANY regulation if there is enough profit incentive to do so. Well the U.S. Congress has just created such an incentive where there was none before. And once these various payment schemes start appearing, what’s to say some of them can’t be equally used to finance terrorism? Of course they can be used for that purpose. Thanks a lot Senator Frist.

Here’s a law that purports to end Internet gambling but will instead enable it, a law that is intended to make certain types of financial transactions harder to do but will ultimately make them easier, a law that says nothing about terrorism but will ultimately abet it, making us all less secure in the process.

There is, to my knowledge, no center for Al-Qaida hacking, nor is terrorism as an industry big enough to attract much third-party software development. But ally the interests of terrorists and Internet gamblers who all want to be paid, that’s a $20 billion incentive to corrupt the world financial system — an incentive that didn’t exist before last week.

And what will be our institutional response to these obvious flaws when they come to light? More regulation of course! More scrutiny of financial transactions, not less. But as we’ve seen in recent years, this greater scrutiny often comes with lax or unequal enforcement, depending on your campaign contributions.

Once again, Congress is proposing to regulate something it ought not to — something that in any practical sense is probably beyond its power. And the result will be only bad, not good. And Congress’s response will probably be even more regulation, not less. And all this to push one man’s presidential ambitions?

There ought to be a law against THAT.


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