The Public Policy

No Dice

The national Internet gambling "ban" still allows online gambling but just might punish routine transactions.

By and 3.25.08

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Anybody who has spent time in Washington knows that Congress often passes bad laws. But even the most widely derided laws -- think of 2003's Medicare drug benefit -- end up doing roughly what their authors set out to do.

The misbegotten 2006 Unlawful Internet Gambling Enforcement Act (UIGEA), however, won't even get that far. It will fail at its intended purpose of ending most Internet gambling while simultaneously creating enormous headaches for banking institutions and account holders. It's a bad, bad law.

Despite its name, the Act has rather little to do with gambling. It doesn't actually outlaw any online game -- there's still no federal penalty for wagering $1,000 on the spin of a virtual roulette wheel -- and doesn't directly create any new federal penalties for running an online casino.

Instead, the Act imposes an obligation on banking institutions to block transactions "related" to illegal online gambling. At first blush, this looks like an elegant solution for those who dislike gaming. Rather than trying to force all online gambling sites out of business directly or penalize people who play a few hands of poker online, the law -- a brainchild of recently unseated Iowa Republican Jim Leach -- simply threatens to cut off the money that makes gambling possible.

In practice, the language of the law, the nature of the Internet, and the wide availability of gambling in the United States make the law both unenforceable and enormously burdensome.

LANGUAGE FIRST: The statute's definition of "gambling" contains dozens of loopholes. Some exceptions, like a safe harbor for stock and insurance transactions stem from common sense. Others, like loopholes for state lotteries and horse racing, are there because of the political power of existing industries.

Finally -- and here is real the doozy -- the government has decided not to create a particular list of "blocked" providers. Banks really don't have any clearly defined law to enforce. So they're most likely to simply leave it unenforced or, if threatened by regulators, over-enforce the law by blocking all sorts of perfectly legal transactions.

Even if banks could overcome these logistical hurdles -- and they probably can't -- online gambling would continue anyway. A quick Google search shows that blatant pyramid schemes calling themselves "high yield investment plans" flourish on the Internet even though they're exactly the sort of financial activity, fraud, that everyone wants outlawed.

While we're on the subject, it's worth asking, Does a near-total de facto national Internet gambling ban makes any sense at all? Today, 48 states have some form of legal gambling and no state regularly enforces a law against playing cards among friends. American society, for better or worse, has already decided in favor of legal gambling. The relevant public policy debates involve the nature and regulation of legal gambling, not its existence.

While outright repeal of the UIGEA would best serve the public interest, reforms in two bills seem to have the best hope for short term changes. Florida Rep. Robert Wexler "Skill Games Protection Act" would clearly exempt games of skill like chess and poker from federal penalties and the reach of Leach's legislative legacy.

Under Wexler's plan, Internet gaming sites would have to verify players' ages, cooperate with the IRS to collect taxes, and engage in programs to identify problem gamblers. Since the plain language of UIEGA already seems to allow skilled games (unless states specifically ban them), it's far better to figure out ways to regulate them than leave the matter to inevitable, costly litigation.

Another widely supported proposal from Nevada Representative Shelly Berkley would launch a much needed comprehensive study of Internet gambling. Given that nobody seems clear on what goals regulation ought to accomplish, it would probably be a good idea for the federal government to get a better handle on what it's doing before passing more burdensome, unworkable laws.

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