Has Internet Gambling Folded for Good?

by Henry Hensley

Many are citing the recently passed Unlawful Internet Gambling Enforcement Act as the death knell for online gambling. While American-based casinos and bookmaking operations have long been prohibited from operating online, the law serves as an enforcement tool against overseas operations. The Act prohibits financial institutions from processing transactions between U.S. customers and gaming Web sites. As a result, a number of legitimate international companies have stopped taking business from their U.S. customers.

The bill was originally introduced five years ago by Sen. Jon Kyl (R-AZ) and passed in a version introduced by Rep. James Leach (R-IA) that was tacked onto a port security measure. Leach told Bloomberg News, “Basically we are shutting down the payment system for Internet gambling. It has an enormous effect.” The stock market reacted by pummeling the shares of companies listed on the international exchanges. Shares of Party Gaming and 888 Holdings dropped 58 percent and 26 percent respectively in the first day of trading after the law was passed.

However, help may be on the way for online gamblers that could actually make it safer and more reliable. While the new statute does appear to place these companies in financial jeopardy, there is a concurrent push to examine the feasibility of permitting lawful, well-regulated online wagering opportunities offered by companies based in the United States. Nevada Rep. Jon Porter (R-NV) introduced legislation this past May that would fund a study on the legalization and regulation of Internet betting.

Porter’s office did not return calls for comment, but in a July press release he stated, “The impact of Internet gambling reaches far and wide, which is why we need to have a comprehensive understanding of its effects, both socially and economically, before making any rash decisions about its future. Unfortunately, a majority of my colleagues from both sides of the aisle chose to move forward with an online gaming ban despite having limited information on this evolving technology.”

The Internet Gambling Study Commission Act garnered the bipartisan support of 47 co-sponsors. Porter is expected to reintroduce the bill in the next session of Congress. The bill stalled in the House Judiciary Committee in the prior session.

In April, the board of the American Gaming Association (AGA) voted in favor of Porter’s legislation to explore whether the technology is available to allow for the regulation of Internet gaming. The AGA adopted a neutral stance toward the Unlawful Internet Gambling Enforcement Act.

Holly Thomsen, Director of Communications for the AGA, said that the association includes companies, such as Harrah’s Entertainment and MGM, which are very much in support of the study commission legislation, while some other members are more wary, fearing that online gambling cuts into the revenue of traditional casinos.

The AGA, however, conducted a 2006 survey of online gamblers that they believe shows online gambling is not a threat to established brick and mortar gaming interests but a supplement. According to the survey, the majority of people who gamble online also gamble in casinos.

Gregory Wierzynski, chief of staff for Leach, said that the congressman has no position on a study of the regulation of Internet gambling. According to Wierzynski, there has to be a “realistic proposal,” before they could consider supporting such legislation. He maintains that Leach’s current bill simply provides an enforcement mechanism for existing law.

According to Porter, the Internet Gambling Study Commission Act, originally co-sponsored by Reps. Jim Gibbons (R-NV) and Shelley Berkley (D-NV), would establish a bipartisan Internet Gambling Study Commission, which consists of nine appointed members.  The commission would conduct a comprehensive study of Internet gambling, including the existing legal framework that governs activities and transactions.  Within 18 months, the commission would submit a report on their findings and conclusions to the president and Congress, which would contain recommendations, if any, for legislative or administrative action.

The revenue generated through legalized online wagers is a potential windfall for government. Internet gambling revenue in 2005 was estimated at $11.9 billion and is projected to double by 2010, according to Christiansen Capital Advisors (CCA). Nigel Payne of British online gaming company Sportingbet recently told CBS News’ 60 Minutes that “were America to have regulated the industry in 2004, the American states would have earned $1.2 billion in taxes.”

The eventual legalization of online gambling was predicted in a 1999 policy analysis by Tom Bell, an adjunct scholar at the libertarian Cato Institute, entitled “Internet Gambling: Popular, Inexorable, and (Eventually) Legal,” Bell states, “Consumer demand and lost tax revenue will create enormous political pressure for legalization, which we should welcome if only for its beneficial policy impacts on network development and its consumer benefits. We should also welcome it for a more basic reason: as the Founders recognized, our rights to peaceably dispose of our property include the right to gamble, online or off.”

Opponents of online gaming cite the negative social impact of compulsive gambling. In a September statement Leach said, “The reason the religious community – from Baptists and Methodists to Muslims – has rallied to this cause is because it is concerned for the unity of the American family … religious leaders of all denominations and faiths are seeing gambling problems erode family values.”

Leach added, “Unlike brick-and-mortar casinos in the United States, where legal protections for bettors exist and where there are some compensatory social benefit in jobs and tax revenues, Internet gambling sites principally yield only liabilities to America and to Americans. Some have suggested that there is no call to rein in the activities of individual choice. But misjudgments affect society as a whole. There is nothing in Internet gambling that adds to the GDP or makes America more competitive in the world.”

Leach’s last statements foreshadow the arguments behind Porter’s study commission and the eventual legalization of regulated online gambling. If American companies could take bets online, legal protections could be established for bettors, jobs and tax revenue would be created, and the GDP would grow. With the never-ending search for new forms of revenue, it is unlikely that the government will continue to ban a form of an already legalized activity simply because it is transacted online. If the study reveals that the technology is available to enable regulation, it will be difficult to envision the government continuing this ban.

Email Henry Hensley at hvh@georgetown.edu



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