The Public Policy

The Risks of Gambling Regulation

Odds are the EU isn't bluffing when it voices disapproval of U.S. laws restricting Internet gambling.

By 7.14.08

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When trade emissaries from the European Union arrive in Washington later this month to talk to officials in Congress, the Justice Department, and other executive branch agencies, they'll have some difficult questions to ask. In particular, they'll ask about some gambling laws that rank among some the worst written sections of the United States Code. If things go poorly a trade conflict with vast implications for the United States banking sector could ensue.

Some background first: three federal laws -- only one of them particularly clear -- govern Internet gambling in the United States. One, the 1961 Wire Act, limits nearly all gambling by telephone and telegraph but, for obvious reasons, says nothing about the Internet. Another, the 1992 Professional and Amateur Sports Protection Act (the only clear law), essentially bans all non-Nevada betting on sports other than animal racing and jai alai. Finally, the 2006 Unlawful Internet Gaming Enforcement Act (UIGEA) deputizes banks, credit card companies, and credit unions to enforce all state laws -- including many that date to the 19th century -- that might bar transactions relating to Internet gambling.

The EU is interested in the laws and their application because some European and Caribbean Internet gaming operators have already faced Wire Act prosecution for engaging in Internet gambling transactions before UIGEA went into effect in 2006. On the other hand, U.S.-based horse betting websites operate freely. In other words, the Department of Justice appears to have selectively prosecuted non-U.S. operators in violation of World Trade Organization rules that bar discriminatory treatment. Even more interestingly, several of the Internet gaming operators under investigation -- 888.com and partygaming.com -- actually pulled out of the U.S. market as soon as UIGEA went into force. Already, the EU has begun the process of creating a formal Trade Barriers Regulation complaint against the U.S. government. (U.S. Trade Representative Susan Schwab has, so far, brushed off the investigation.)

A series of "interrogatories" -- formal questions directed at American officials -- appears to show what will come. The questions cover topics ranging from the way the United States has enforced laws to the size of the U.S. gambling industry. Running almost 5,000 words, the list of questions reads more like the outline of a legal brief rather than a simple set of inquiries. It asks for every detail of the operations of the U.S. gaming industry and asks U.S. regulators to justify nearly every action they've taken with regard to Internet gambling.

No certainty exists that the EU will ever decide to turn the dispute into a formal case before the WTO. That said, even the possibility has serious consequences: Since enforcement of the gambling laws falls almost entirely on the banking sector, it appears likely that the EU could well respond with banking sanctions directed at getting the U.S. to change its behavior. (Other than the horseracing sites -- which serve an almost exclusively American clientele -- there are no American gambling sites to sanction.) Given the enormous volume of trade between the U.S. and Europe, almost $700 billion in 2007, even a tiny series of retaliatory measures would have severe implications for the U.S. economy.

Even if the EU decides to stay quiet and never complains about UIGEA, it's pretty obvious that America's effort to regulate gambling at the federal level needs to end. Thirty years ago, when casinos existed in only one state, federal laws cracking down on gambling represented the public will. Today, with gambling legal in 48 states, America's debate over gambling has ended with the side that favors legalization as the clear winner. The positive and negative consequences of widespread legal gambling have already touched every corner of American society. The risk of a serious trade dispute offers a new reason why the U.S. should do away with its federal gambling laws and let state legislatures and consumer preferences decide where -- and if -- Internet gambling needs government regulation.

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