Why The New Federal Law Banning Payments for Online Gambling:Is The Wrong Choice

10 October 2006


Tuesday, Oct. 10, 2006

Recently, Congress passed a bill — the Unlawful Internet Gambling Act (UIGA) — that attempts to make existing anti-gambling laws easier to enforce against Internet gambling. This week, President Bush is expected to sign UIGA into law.

As UIGA’s preamble accurately notes, “traditional law enforcement mechanisms are often inadequate” in this area. The Internet gambling industry is headquartered almost entirely outside the United States, although about half of its patrons live in the U.S. Accordingly, getting direct jurisdiction over Internet gambling companies can be difficult. UIGA explores several alternative approaches.

UIGA was tacked onto the end of the SAFE Port Act – legislation focused on the separate, important subject of port security in an age of terrorism. Accordingly, it’s possible that some legislators voted for the bill simply because of a wish to ensure port security, rather than any special dislike for Internet gambling.

In this column, I’ll argue that UIGA’s approach is misguided: Regulating online gambling would be a far better solution than selectively banning it. And as I will explain, the ban is selective indeed.

What the Legislation Would Do

UIGA would prohibit both individuals and institutions – such as banks, credit card companies, and other payment providers — from knowingly accepting credit card payments, funds transfers, checks, and the proceeds of any other types of financial transactions made in connection with Internet gambling.

The Federal Trade Commission and other federal financial regulators would be responsible for enforcing this prohibition. There are also civil and criminal penalty provisions.

Separately, UIGA would also allow law enforcement officials to work with Internet providers to block access to gambling websites.

The Legislation’s Exemptions: Undermining Its Justification

Supporters of UIGA argue that the Internet’s widespread availability makes it too easy to gamble in one’s own home or workplace — and that this ease can create betting addictions and subsequent financial pressures on individuals and their loved ones. They also argue that it is far too easy for minors to gamble online than offline, and that fraud by gambling operators, too, is easier online than offline.

These arguments might, at first, lead legislators to favor of a wholesale ban on Internet gambling. But significantly, UIGA would not impose such a ban.

Instead, UIGA would exempt state-run lotteries, online fantasy sports games, intrastate gambling, gambling on Native American territories, and interstate horse racing. (Under the provision concerning horse racing, betting websites would not be prohibited from any activity permitted by the Interstate Horseracing Act. That law was enacted in the 1970s to set up rules for interstate betting on horse racing. The industry also lobbied for supplemental legislation several years ago to clarify that online betting on horse racing is legal.)

As a result, problem gamblers will still find numerous online outlets eager to indulge their addictions – and with respect to these outlets, they will have no problem wagering via their credit cards, bank accounts, and the like.

Meanwhile, those gamblers who do insist on sticking with their previously favored forms of gambling may suffer an even worse fate. Barred from using their credit cards, bank accounts, or PayPal to deal with more legitimate sites, they may simply be conned into dealing with disreputable and illegal offshore entities, using unlicensed prepaid payment services, or routing their funds through questionable entities.

Does the Law Violate U.S. Free Trade Obligations?

Not only is UIGA likely to be ineffective, it may also violate the U.S.’s free trade obligations – in particular, the General Agreement on Trade in Services (GATS), which covers, among other services, “recreational services.”

Back in 2003, the small Caribbean islands of Antigua and Barbuda, which host offshore online casinos, complained to the World Trade Organization (WTO) that the U.S. was violating GATS in that it both allowed its own casinos to offer Internet gambling services in the U.S., and prohibited other companies to offer the same services from abroad.

In 2004, a WTO panel ruled that the U.S. has to bring its laws into conformity with GATS. But UIGA seems to do just the opposite – making it all the harder to gamble with companies abroad, and easier to gamble domestically. (Meanwhile, U.S. authorities have arrested officials of UK-based online gaming companies, in another illustration of the double standard.)

Even if the U.S. continues to ignore the Caribbean nations and the WTO on this matter, it may not be able to ignore the European Union — which is liberalizing its own markets for Internet gambling, and may seek to hold the U.S. to GATS.

Why Regulation Is Far Preferable to UIGA

There’s no question that Internet gambling raises serious issues. But they are far better addressed through regulation, than though an unfair and ineffective partial ban like the one UIGA imposes.

There are far more effective measures to deal with the problems of underage gambling and gambling addiction. Proper age verification could be mandated. Disclosures regarding the odds and risks of gambling could be required. Online casinos could be required to be licensed — ensuring that legitimate operators abide by the rules. And casinos could even be required, at some point, to turn away customers who patronize them too often and too disastrously – at the point where it is plain addiction, not choice, is fueling the wagers.


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