USA - Internet Gambling

As many traders on the exchanges are doubtless aware, for a little over three years Betfair has not accepted bets from the USA. For those who would like a little more liquidity in their US sports markets, that ban may soon be coming to an end.

The following is a recent article from the Los Angeles Times by Michael Hiltzik which exposes just how ridiculous this ban really is.

http://www.latimes.com/business/la-fi-hiltzik19-2009oct19,0,1924643.column

The U.S. approach to Internet gambling, which is legal in much of the rest of the world, is absurd. The activity is unstoppable, so let's regulate it.
By Michael Hiltzik

October 19, 2009

No issue brings out America's talent for self-deception like gambling.

To persuade ourselves that we can keep this particular sin under control, we sequestered casinos in isolated places like Las Vegas and Atlantic City reachable only by superhighways, and isolated them on riverboats where not a single card could be dealt or slot lever pulled until the vessel left the dock.

In Mississippi, the law used to say you couldn't have a casino unless it floated on water. After Hurricane Katrina forcibly relocated a few of these sin barges onto land, the Legislature, reading the disaster as a sign from God, revised the law to let them stay put. (The riverboat states, similarly, eventually allowed their floating casinos to remain dockside.)

Then there are the Indian tribes that have fewer members on their rolls than slot machines in their multimillion-dollar casinos.

Which brings us to Internet gambling.

Rep. Barney Frank (D-Mass.) and Sen. Robert Menendez (D-N.J.) have both introduced bills in Congress to lift a federal ban on much online play and clarify the law, which is even murkier than it is for physical casinos, if that's possible. Their goals include taking a piece of the action for the U.S. Treasury, on the political principle that sins always seem less deadly when there's money to be squeezed from them. The consulting firm PricewaterhouseCoopers estimated in 2007 that legalization could yield as much as $43 billion in tax revenue over 10 years if it includes sports betting, $34 billion even if it doesn't.

Another impetus is that new Federal Reserve and Treasury Department rules requiring banks and other financial institutions to block gambling transfers will go into effect Dec. 1, and the banks are screaming bloody murder about the added regulatory burden.

Internet gambling is one of those issues that shines a light on the distribution of juice in Washington.

The repeal bills delight casino companies such as Harrah’s Entertainment, which is hankering to expand its thriving poker business online and has spent about $1 million this year alone to lobby Congress for legalization. But they also leave intact a ban on Internet sports betting, which pleases outfits like the National Football League, no slouch in the Washington lobbying game.

It's fair to say that the American approach to Internet gambling, which is legal in much of the rest of the world, is absurd. (Indeed, the federal ban placed the U.S. in Dutch with international trading partners that host online gambling companies, which have complained to the World Trade Organization that it violates trade treaties the U.S. signed.) State laws are wildly inconsistent and sometimes hypocritically excessive.

"Martians might have a difficult time understanding that if you play poker online for money in the state of Washington, you're committing a class C felony," Joseph M. Kelly, a gambling-law expert at Buffalo State University in New York, told me. "That's the same as rape."

The Government Accountability Office, surveying the legal landscape in 2002, found that five states specifically outlawed Internet gambling: Illinois, Oregon, South Dakota, Nevada and Louisiana. (Washington enacted its ban in 2006.) Gambling in physical casinos was legal in every one.

On the federal level, conservatives in Congress slipped an Internet gambling ban onto the books in 2006 by quietly attaching it to an antiterrorism bill no sane lawmaker could oppose.

That federal law, the Unlawful Internet Gambling Enforcement Act, has numerous flaws. It saddles financial institutions with the duty of enforcement by barring them from "knowingly accepting payments" derived from "unlawful Internet gambling." But it doesn't define what is unlawful.

It exempts fantasy sports and "skill" games, for example. But where does that leave the most popular online game, poker? The new regulations seem to outlaw the game, although its aficionados contend that it's a game of skill pitting player against player. They contend it's been swept into the gambling ban by lax regulation-drafting.

"This law and these regulations are simply a fraud," says Howard Lederer, a world-class poker player on the board of the Poker Players Alliance, a Washington group that claims 1.2 million members. "People who had a moral agenda wrote laws and regulations that were vague. And banks, which have the sword of Damocles hanging over their heads and no clarity, are probably going to block poker transactions."

As for other games, the Justice Department bases its position that all Internet gambling is illegal on the 1961 Wire Act, which outlaws the use of telecommunication services to place bets. But federal courts have upheld Wire Act prosecutions for sports betting alone, leaving unclear whether other online gambling is actually illegal under federal law.

Banks and credit card issuers aren't happy about having to screen billions of financial transactions for signs they're gambling-related starting a few weeks from now. An officer of the American Bankers Assn. told Congress last year that the proposed rules have "no prospect of practical success" in fulfilling the explicit rationale for the 2006 law, which was to combat money laundering.

Kelly thinks it might have the opposite effect. "You diminish reputable payment processors and replace them with those who don't leave a paper trail," he says.

It's not as though the federal ban can wipe out online play any more than Prohibition wiped out drinking. It just deprives players of the protection of a U.S.-regulated environment. Gambling sites are generally regulated by their home countries -- Britain, Ireland and Caribbean states such as Antigua among them -- but that's far to go for redress.

"If a player feels cheated, he'll stop playing on the site," says John Pappas, executive director of the Poker Players Alliance, "but without U.S. oversight, he can't file a claim in an American court." The Frank and Menendez bills would require sites serving U.S. players to accept U.S. legal jurisdiction in return for licensing.

Certainly Internet gambling has its hazards, including the prospect of addictive playing and the enticement of minors. But banning the pastime forces these problems into the shadows where they're harder to address and makes it impossible to enlist the industry in helping to fight them.

It's doubtful that Congress will act in time to put off the new regulations, especially given the more pressing issues on its plate. But next year isn't too soon for it to relearn the lesson of every attempt to enforce a morality that most people don't share. If you can't eradicate, regulate -- and take a big chunk out of the wages of sin while you're at it.