Some Bets Are Off

The strangely selective and self-defeating crackdown on Internet gambling.

Jacob Sullum from the June 2008 issue

(Page 2 of 4)

“In one fell swoop, Congress destroyed both of those defenses,” says Dayanim. “As far as the locus [of the violation] goes, they’re saying it doesn’t matter for the purposes of UIGEA where the wager is occurring or where the business is located. And by referencing laws of a state in the definition of unlawful Internet gambling, Congress has said it’s deferring to state law on this.” It’s less clear, he adds, whether the UIGEA changed anyone’s liability under other federal laws, such as the Illegal Gambling Business Act or the Racketeer Influenced and Corrupt Organizations Act.

Nelson Rose disagrees with Dayanim’s reading of the UIGEA, saying “the only thing this statute did is it created a new federal crime of being in a gambling business and accepting money for an unlawful Internet gambling transaction.” Until the Justice Department tries to prosecute someone with no involvement in sports betting for violating the UIGEA, it won’t be clear who’s right. So far there have been no prosecutions under the new law.

Assuming that foreign operators of gambling websites avoid layovers in the U.S., the biggest problem the UIGEA created for them is its chilling effect on the processing of online bets. Under UIGEA regulations proposed by the Treasury Department, U.S. financial institutions will have to adopt “policies and procedures” that are “reasonably designed” to block transactions associated with unlawful Internet gambling. But neither the UIGEA nor the Treasury Department will say precisely which transactions those are. Given the uncertainty, the safest course for banks is to avoid any sort of online gambling, whether clearly illegal, arguably illegal, or clearly legal.

Even before the UIGEA, most U.S. credit card issuers had stopped processing online gambling transactions under pressure from state and federal prosecutors. PayPal, the online payment processor, picked up much of the slack, but in 2002 it reached deals with New York Attorney General Eliot Spitzer and the U.S. Justice Department under which it promised to eschew online gamblers. Spitzer, who got into some trouble of his own involving payments for illegal recreational activities after he was elected governor, said “this case shows that we intend to stop any company who facilitates illegal gambling transactions.” PayPal paid New York $200,000 in “disgorged profits, costs of investigation, and penalties,” a pittance compared to the $10 million the company shelled out to settle federal charges that it had violated the PATRIOT Act by transmitting funds derived from criminal activity.

Neteller, a payment processor based in the Isle of Man, stepped into the breach left by PayPal until January 2007, when company founders Stephen Lawrence and John Lefebvre, both Canadians, were arrested in the U.S. on charges of conspiracy and money laundering. Like Carruthers, they faced prison sentences of up to 20 years for helping Americans place bets via the Internet, a line of work the FBI called “a colossal criminal enterprise masquerading as legitimate business.” Last June, Lawrence pleaded guilty to one count of conspiracy, which carries a maximum sentence of five years; Lefebvre is still awaiting trial. After the arrests, Neteller abruptly abandoned the U.S. market.

Money Wandering
Despite the UIGEA and the Justice Department’s threats, several options remain for Americans who are determined to brave Bob Goodlatte’s disapproval by playing poker or placing sports bets online. “Overseas banks, because they’re not covered by the statute or the proposed regs, are going to look at this as a great opportunity to sell credit cards to Americans,” says Rose. Other methods include foreign-based e-wallets, e-checks, cashier’s checks, money orders, faux phone cards, foreign bank accounts, and payments to overseas intermediaries that do not sound like gambling operations.

“People have been setting up payment processors in all sorts of weird locations, including Russia, specifically to process gambling transactions,” says Jim Murphy, a professional sports bettor. “They’re basically just names to get money to the sports book, but instead of sending it to, say, 5Dimes Sportsbook in Costa Rica, you’re sending it to ABC Investment Consultants or ABC Shipping International in Costa Rica.”

Even an ordinary paper check in the mail will do in a pinch, since the Treasury Department has decided it would be too onerous to demand that banks scrutinize every handwritten payee’s name for gambling connections. “I don’t know of anybody who’s had serious difficulty in actually providing payment to an online operator,” says Joseph Kelly, a professor of business law at SUNY-Buffalo and co-editor of the journal Gaming Law Review.

At the same time, driving online gambling transactions underground increases the potential for fraud and money laundering, two problems Goodlatte and his allies claimed to be concerned about. “It forces people who want to play to find alternative means of funding their accounts rather than just using the most transparent system of all, the U.S. banking system,” says John Pappas, executive director of the pro-legalization Poker Players Alliance. “What we’d like to see is a regulated system that provides consumer protections.”

Passage of the UIGEA, combined with the BetOnSports and Neteller arrests, scared publicly traded gambling companies such as PartyGaming and 888.com out of the U.S. market. But scores of privately held operations, including Bodog, Poker Stars, Full Tilt, and Ultimate Bet, remained. “There still are a number of very reputable sites serving the U.S. market,” says Pappas, and “the people who were playing on the publicly traded sites have simply migrated to these other sites.”

There don’t seem to be any firm numbers on how online gambling revenue—estimated at $12 billion worldwide in 2006, about half of it from the U.S.—has been affected by the new crackdown. In February 2007, right after the UIGEA took effect, the Associated Press cited “industry observers” who estimated that online betting was “down by as much as 50 percent” worldwide. Since that would mean American betting had been completely eliminated, it seems implausible. In any case, business seems to have bounced back. “Every anecdotal response I’ve gotten is that there was a [downward] blip at first but that things are pretty much back to normal,” Kelly says.

For companies driven out of the American market, of course, the number of U.S. customers has fallen to zero. Some, such as PartyGaming, have entered into negotiations with the U.S. Justice Department to avoid civil and criminal charges based on their pre-UIGEA actions. By admitting wrongdoing, paying fines, and agreeing to asset forfeitures, they can eliminate the threat of lawsuits and prosecution while positioning themselves to re-enter the U.S. market should the legal environment become more hospitable.

The Mouse That Gambled
Not all of the foreign-based companies banished by the Justice Department’s threats have taken it lying down. The most conspicuous act of resistance was a World Trade Organization (WTO) complaint filed in 2003 by the tiny Caribbean nation of Antigua and Barbuda, home to 69,000 people and dozens of online gambling companies. Antigua argued that the United States was violating its WTO commitments by allowing some forms of domestic online gambling, including bets on horse races, while trying to stop foreign companies from serving American gamblers. Although the complaint seemed quixotic at first, in 2004 an arbitration panel agreed that America’s gambling policies amounted to a discriminatory trade barrier, a finding that was upheld on appeal a year later. Showing a comical lack of self-awareness, Goodlatte called the ruling “appalling,” saying, “It cannot be allowed to stand that another nation can impose its values on the U.S.”

The WTO said Antigua was entitled to compensatory sanctions, and Antigua asked for $3.4 billion a year, an estimate of the revenue businesses there would lose as a result of being excluded from the American market. It also suggested that, given the relative sizes of the two countries, the sanctions take the form of permission to disregard U.S. intellectual property rights, which would allow it to recoup its losses in the gambling market by selling unlicensed CDs, DVDs, and software. Last December a WTO arbitration panel agreed but limited the proceeds to $21 million a year, 42 times the $500,000 proposed by the U.S. but less than one-hundredth the figure suggested by Antigua. Mark Mendel, Antigua’s lawyer, called the award “absurdly low.”

But Antigua isn’t done. To comply with its trade agreements, the U.S. government could open its online gambling market to foreign companies, the option preferred by Antigua. Alternatively, it could impose a blanket ban on all forms of online gambling, which would eliminate the discriminatory treatment of foreign companies. Instead it has announced its intention to withdraw its trade commitment covering remote gambling. In other words, rather than changing its gambling laws so they comport with its trade commitments, the U.S. has said it will change its trade commitments so they comport with its gambling laws. Rep. Shelley Berkley (D-Nev.), who wants to study the feasibility of legalizing and regulating online gambling, calls this move “the trade equivalent of taking our ball and going home.”

Comments

Naga Sadow|5.19.08 @ 12:07PM|#

As an employee of a brick and mortar casino, I wholeheartedly endorse gambling as a legitimate pasttime . . . if you go through my company that is, otherwise it should be illegal and you should be treated as a common criminal. j/k

TallDave|5.19.08 @ 12:07PM|#

I bet if they just started them "short-term hedge funds" the whole problem would go away.

TallDave|5.19.08 @ 12:07PM|#

started calling*

BakedPenguin|5.19.08 @ 12:32PM|#

I'm a little more fortunate than most, as I have friends in the UK who are willing to lend me their addresses so that I have a "UK" account. FOAD, Goodlatte.

Eliot Spitzer\'s Ghost|5.19.08 @ 12:35PM|#

Beware BakedPenguin! I WAS a *@!#ing steamroller once. I may be again . . .

|5.19.08 @ 12:53PM|#

Here's hoping that this will be a shiny thread in the coming "Democrats get everything they want" storm. The Clinton years were pretty good for gambling and porn, not so much for drugs and pop music lyrics.

|5.19.08 @ 12:55PM|#

Somebody, anybody, tell me again why the GOP is more "libertarian" than the Demorats. Please.

BakedPenguin|5.19.08 @ 12:58PM|#

If Obama pledged to legalize online gambling and (even just medical) marijuana, I'd vote for him in a heartbeat. I suspect he won't, so go LP stooge!

Eliot - it would be great if Goodlatte was busted for gambling on college football or something.

J|5.19.08 @ 1:40PM|#

Barney Frank is the man. I disagree with him on so many economic issues, but time and time again he shows himself to be one of the most rational, honest politicians.

I'm from his district, and while I wish he would lay off the socialist stuff, I still feel like he better represents me than 99% of congress would.

Paul|5.19.08 @ 2:24PM|#

Based on what I read in this article, it seems that the U.S. government is pretty successful at scaring the pants of anyone selling gambling or payment services. We can make fun of it all we want, but looks like some legit businessmen are looking at real prison time.

Never underestimate a governments ability to regulate or ban something by sheer force of will.

Lajaw|5.19.08 @ 2:50PM|#

as soon as the welfare system is dismantled, and my tax money will not go towards idiots, I will support gambling of every sort. But until the welfare "safety net" is gone, I cannot support gambling because of the idiots that do so and lose their shirts that I must then support through the welfare system. But until everyone is solely responsible fore themselves in all matters financial and otherwise, it is best to make gambling illegal.

|5.19.08 @ 3:45PM|#

I will trade a 2% reduction in my marginal income tax rate for personal and civil liberties anytime.

OK - I know that makes me a "socialist" - but goddamnit - I like my vices, freedom, and "sins" too much.

|5.19.08 @ 3:45PM|#

Lajaw wins the thread. You can't get any more insightful than that.

In fact, in the same spirit, since some people drive without car insurance and their accidents drive up my rates, let's ban driving until all those slackers are insured. It's the only fair way.

|5.19.08 @ 3:57PM|#

Welfare, HUD, and the food stamp program are less than 2% of the federal budget.

I want to see a "Libertarian" complain about the military taxes he pays sometime.

Granted - I don't support either - fuck welfare and fuck the military. They are both evil. One just costs a lot more than the other.

|5.19.08 @ 4:00PM|#

I want to see a "Libertarian" complain about the military taxes he pays sometime.

You're new here, aren't you, shrike?

|5.19.08 @ 4:11PM|#

Lajaw: Why ban gambling for the vast majority that is able to gamble responsibly, just because a small minority gets in trouble?

By the same logic, why shouldn't we reintroduce prohibition and ban alcohol?

Paul|5.19.08 @ 7:38PM|#

it is best to make gambling illegal.

Cool.

What does this article have to do with making gambling illegal?

Paul|5.19.08 @ 7:42PM|#

I will trade a 2% reduction in my marginal income tax rate for personal and civil liberties anytime.

You must mean an increase of your marginal tax rate?

Funny, 'cause what we got is an increase of our marginal tax rates in exchange for our civil liberties. They increased our taxes, we gave them our civil liberties.

|5.19.08 @ 7:51PM|#

Yes, you interpreted my error correctly, Paul.

I value what little freedom I have left and Big Government has no enemy in either major party,

|5.20.08 @ 12:22AM|#

Good article Mr. Sullum.

|5.20.08 @ 12:54AM|#

The Unlawful Internet Gambling Act was the last straw for me. I was a Republican for over forty years. The RP has lost my vote.

rechoboam|5.20.08 @ 8:12AM|#

"as soon as the welfare system is dismantled, and my tax money will not go towards idiots, I will support gambling of every sort. But until the welfare "safety net" is gone, I cannot support gambling because of the idiots that do so and lose their shirts that I must then support through the welfare system. But until everyone is solely responsible fore themselves in all matters financial and otherwise, it is best to make gambling illegal."

Well if gambling is taxed (extortionately, in most cases) the resulting tax influx should pay for the welfare. I assume the nation makes a profit on nicotine overall, to take another example.

z|5.20.08 @ 9:50AM|#

The Unlawful Internet Gambling Act was the last straw for me. I was a Republican for over forty years. The RP has lost my vote.

It should be noted that 1. UIGA was passed a month before the 2006 elections. 2. There was a LOT of publicity about it in the online poker world. 3. Republicans were slaughtered.

|5.20.08 @ 11:07AM|#

GABLING IS NOT ILLEGAL!

What, that's right, this debate over Poker is one of semantics.

Do not believe me, awes.

Go to YAHOO, MSN, LYCOS or most any other home page and click GAMES.

Then click SKILL, you will find anywhere from 25-100 'skill' games played for money at companies located IN the United States or owned by the same.

The games marketed on the SAME page as children's games include card games such as Hearts, Spades, Solitaire, Free Cell, Rummy, Poker Solitaire and a host of others.

The same company that owns Fox News, the bastion of the conservatives, owns the largest via MSN and AOL - World Winner.

WHERE IS THE OUTRAGE?

No, gambling is NOT ILLEGAL.

PokerKeep|5.20.08 @ 12:01PM|#

This is one of the first articles in a main stream media publication to address this issue from an unbiased point of view. Kudos to Reason Magazine and Jacob Sullum for a job well done.

U.S. regulation and taxation are going to happen probably within the next year or eighteen months. It's the only logical solution to this complete fiasco called UIGEA.

Support our right to gamble online. Join the Poker Players Alliance (http://pokerplayersalliance.org/) and support APCW (http://www.apcwinteractive.org/) in their efforts to legalize and protect the industry and it's players.

Skinski|5.20.08 @ 5:05PM|#

I agree, U.S. regulation and taxation will happen ! I pay my taxes , I've served my country , and will be a cold day in hell before my Government stops me from playing my cards in my own home.

As PokerKeep said , "Support our right to gamble online. Join the Poker Players Alliance (http://pokerplayersalliance.org/) and support APCW (http://www.apcwinteractive.org/) in their efforts to legalize and protect the industry and it's players."

|5.20.08 @ 9:37PM|#

Cast your vote for online gambling: http://www.parade.com/articles/editions/2008/edition_05-11-2008/Intelligence_Report

|5.21.08 @ 12:24AM|#

Jacob, excellent job capturing the entirity of the issue. Probably the best reporting I have seen in my time following the post UIGEA media.

Well done to you and the editors at Reason for publishing such a fine article.

|5.22.08 @ 9:33AM|#

Very, Very good article! It does a great job of explaining what a double standard the gov't has if it does not benefit them. Also on imposing the views of a few men in congress on the American public. (which elected them into office). It sounds to me like all hell is getting ready to break loose. Once again great article.

DG|5.23.08 @ 3:05AM|#

This is the best article I have read on the UIGEA. Thank you Jacob.