US Regulation of Online Gaming

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Internet Gambling: Who Holds, Who Folds?
By Joelle Tessler, CQ Staff

Gambling in the United States has until now been left to the states to regulate, except when it leaks across state lines. The surge in Internet gambling, however, has thrown open the casino doors and set off a mad scramble among states, federal agencies, Congress and even an international trade group for control of a lucrative business that might be beyond any control.

Online Wagering’s Rise

Legislatures in North Dakota and Nevada, for instance, have considered licensing (and then taxing) online gaming companies — moves that would have made those states hubs for the Internet gambling industry. But both shelved the idea after the Justice Department warned they would be violating a 44-year-old federal law barring interstate wagers using telephone lines. The department has used that law to try to prosecute online gaming companies, even though most operate from places such as the Caribbean and South America.

James Kasper, the legislator who wrote the bill to legalize online poker in North Dakota, is incensed by Washington’s position — a position backed by many conservatives in Congress. “The Department of Justice stuck their nose into a states’ rights issue,” Kasper says. “They have no business telling any state what to do.”

But states with a deep aversion to gambling, such as Utah, are having just as much trouble getting their way. It is virtually impossible to keep Internet gaming out of an entire state — or contain it within a state’s borders, for that matter. And the World Trade Organization ruled this spring that the United States is practicing trade discrimination by prohibiting on-line gambling in general while exempting Internet wagering on domestic horse races. The WTO says it should be all or nothing and wants foreign gaming companies to have open access to the U.S. market.

Those are fighting words in places like Utah, which has banned all forms of gambling. “This is a world body that no one in Utah voted for that could have dictated to us here in Utah a public morals issue,” says state Attorney General Mark Shurtleff. “The WTO should have no say in how we govern our state.”

State officials across the country, already frustrated by the difficulty of taxing electronic commerce, now worry they are losing the tug of war over Internet gambling. And as online games of chance proliferate across national and state borders, state officials fear they might eventually lose authority to regulate and tax gambling of all kinds.

“Before the Internet, gambling could be controlled inside jurisdictions,” says Eugene Christiansen, head of a consulting firm that advises the gaming industry. “But the Internet has created the first borderless global market. And it’s very, very hard to imagine a future in which this goes in reverse.”

Booming Business

Internet gambling is hot in the United States. Christiansen’s firm, Christiansen Capital Advisors, projects that Americans will spend $5.9 billion on Internet gambling this year, nearly quadruple its estimate for 2001. Though the total is but a small part of a $79 billion U.S. gambling industry, it is nearly half of the $12 billion international Internet gambling business.

This trend alarms many Republicans in Congress, who say online gambling feeds addictions and enables underage gambling, fraud and even money laundering. Conservative lawmakers have been trying to find a way to stop their constituents from gambling online for nearly a decade. Since most gaming sites are overseas, beyond the reach of U.S. law, they have tried to target accessible choke points in the system. Proposals have included requiring Internet service providers to block access to online gaming sites and, most recently, a bid by Republican Sen. Jon Kyl of Arizona to prevent banks and credit card companies from processing payments for online bets.

Various forms of these proposals have passed at least one chamber in recent years. But they have always been derailed by jurisdictional wrangling and battles over exemptions for powerful gambling interests, says Dan Walsh, a lobbyist for the Interactive Gaming Council, which represents online gaming companies.

Kyl is now revising his draft legislation to overcome objections from the horse racing industry that it did not exempt off-track betting. A 1978 law that legalized interstate off-track betting was amended over Justice Department objections in 2000 to clarify that horse racing wagers may be made online. The racing industry worried that Kyl’s bill might undercut that law, and without it, horse racing officials say, their industry would wither.
Using the Wire

The Justice Department has used a handful of federal laws to try to crack down on online gaming. The most important is the 1961 Wire Act which bars gambling businesses from using a “wire communication facility” to transmit “bets or wagers on any sporting event or contest” over state or international lines.

There is plenty of controversy over exactly what that law — written a time when a bookie with a telephone was the facilitator of choice for cross-state wagers — means in today’s world. The Justice Department maintains the law covers all forms of Internet wagering and has used it to prosecute Web sites based in the United States and abroad. But many in the Internet gaming industry argue that the law applies only to online sports bets — a position upheld by the 5th U.S. Circuit Court of Appeals in 2002.

Justice’s interpretations of the 1961 wire law and the 1978 horse betting law brought the WTO into the dispute. In 2003, the Caribbean island nation of Antigua lodged a complaint charging that U.S. prohibitions on online gaming violate one of the international trade agreements that the WTO regulates.

The WTO ruled in April that while the U.S. gambling sector as a whole is subject to the open market requirements of international trade law, the federal government may prohibit online gambling to “protect public morals or maintain public order.” But it also concluded the horse racing law was a violation of global trade rules because it discriminates against offshore companies.

Now the United States has a choice: either ban all online gambling, including domestic horse race bets, or open the market to everyone.

The U.S. Trade Representative’s office is working with the Justice Department to address what it calls the “narrow issue” of online horse betting, which Justice maintains is illegal despite the 2000 law. And the trade representative insists the WTO ruling is a strong confirmation of existing U.S. policy.

But Tony Cabot, an Internet gaming lawyer in Las Vegas, doubts this is the end of the matter. Although the Antigua ruling itself probably won’t lead to a change in U.S. law — at worst, the United States risks Antiguan trade sanctions if it does not bring the horse racing rules into compliance — it offers a roadmap for another challenge to U.S. gaming laws, Cabot says. And the next challenge could come from a more powerful country, such as Britain, which is becoming a hub for online gaming companies. The threat of trade sanctions by such a major trading partner could force the United States to rethink its position on online gambling, Cabot believes.
Looking for Opportunity

State officials are not giving up control so easily. In North Dakota, Kasper hopes to put his proposal to a statewide vote in 2006 and predicts it will pass easily — setting the stage for his state to challenge the Justice Department position on online gaming.

As Kasper sees it, the federal government’s attempts at prohibition are unenforceable and misguided. “The fact of the matter is that Internet gambling is not going away, so it’s better to regulate it and control it to protect the population than to have no oversight at all,” he says.

Plus, he says, “the states are missing out on a huge tax revenue base.”

That is a point echoed by lawmakers in Illinois and Georgia, who want to sell state lottery tickets online and think they can sidestep federal prohibitions. Illinois state Sen. John Cullerton said that under his proposal, only residents of his state would be able to claim lottery winnings, so there would be no interstate commerce. And Georgia state Rep. Terry Barnard said his lottery measure, which would raise money for college scholarships, would not violate the Wire Act since he says that law applies to “for-profit gambling operations,” not charities.

But even if the Justice Department doesn’t stop lotteries from moving online, federal lawmakers still might. That would put lotteries at a major disadvantage since they are competing against so many offshore gaming sites for Americans’ gambling dollars, said Edward Stanek, chief executive of the Iowa Lottery.

“If state lottery directors go to jail for selling tickets in their own states yet nothing short of military action can stop the offshore Internet sales, Congress will have been very unfair to the states,” he says.

Some state attorneys generals, meanwhile, are worried about the future implications of the WTO action. Utah’s Shurtleff said the ruling could be used to challenge all types of state gaming policies, including laws granting Indians exclusive gaming rights, limiting the number of slot machines or even banning all gambling.

Working with the attorney general of Vermont, a state that operates a lottery but bans all other gambling, Shurtleff persuaded more than two dozen attorneys general to sign a letter to U.S. Trade Representative Rob Portman urging him to withdraw the gambling sector from U.S commitments to the WTO trade agreement and to consult more with state officials on trade issues.

Still, many argue that the battle over online gambling ultimately transcends states’ rights. For one thing, there’s no way to give a state such as North Dakota the right to permit online gambling without taking away the right of a state such as Utah to prohibit it.

More important, says Lawrence Walters, a Florida attorney for online gaming companies, it’s only a matter of time before the Internet and globalization force markets everywhere open. “Individual states are not going to be able to isolate themselves from what’s happening on the Internet,” he says. “No state is going to be able to keep the Internet out.”