Online Gambling May Hinge on Moves to Make U.S. Competitive Internationally

Conspicuously absent from the hearing were Treasury Department and Federal Reserve officials, who testified more than a year ago that they were having trouble writing regulations to carry out the Unlawful Internet Gambling Enforcement Act (UIGEA), which relies on payment-system policing (WID April 3/08 p1). The agencies recently put off the deadline for implementation -- Tuesday of this week -- for another six months, a sore point to Ranking Member Spencer Bachus, R-Ala.

Unlike the subprime mortgage mess, Internet gambling involves no “systemic risk” for the government to minimize through severe restrictions, Frank said. One colleague told Frank that Internet gambling didn’t contribute to gross domestic product and so could be outlawed -- a “chilling” idea, he said. Frank’s bills to delay implementation of UIGEA for a year (HR-2266) and regulate Internet gambling with an opt-out for states (HR-2267) have the support of House Homeland Security Committee Ranking Member Peter King, R-N.Y., whose expertise in money laundering will be used in markup, Frank said. King dropped by briefly but said he had to return to a hearing on the so-called White House party crashers.

Internet gambling is a “substantial threat to our youth” that “actually wires the brain” for addiction and outweighs any economic benefit, Bachus said. The danger is amplified by a gambling application for the iPhone whose maker is waiting for legalization, he said. Bachus said the FBI recently told him that current technology can’t validate the trustworthiness of online poker, identify a player’s age and location or prevent fraudulent transfers. “I think it’s time for you, the Treasury and the Fed to stop delaying the will of a great majority of this Congress” with “foot-dragging,” he told Frank. Bachus said his staff had asked Frank’s office “repeatedly over the past week or two” for federal officials to appear and explain the delay. After consulting with staff, Frank said his office got a single e-mail sent late Tuesday requesting that the officials be summoned to appear. The fault lies more with the Bush administration for releasing a “midnight regulation” more than two years after the law was signed, Frank said.

Frank’s legislation will aid “foreign illegal operators” and harm U.S. jobs, said Robert Martin, tribal chairman of the Morongo Band of Mission Indians. Tribes will be at a competitive disadvantage if they must continue abiding by regulations targeted at reservation gambling, he said. UIGEA is a “constructive pathway” for operators to offer Internet gambling on a state-by-state basis, and it needs time to be effective, Martin said, complaining that tribes weren’t consulted by the agencies on the implementation delay -- violating a recent memo on tribal relations by President Barack Obama.

“There was certainly nothing conscious” in Frank’s legislation to “discriminate” against tribes, which would be eligible to run Internet gambling operations, Frank told Martin. The problem is that tribal affairs aren’t under the committee’s jurisdiction, Frank said, but he'll work with other lawmakers to ensure tribes are treated fairly. Rep. Brad Sherman, D-Calif., who called himself “skeptical” about the legislation because historically localities have dealt with regulation of vice, asked what tribes’ “fixed costs” were for gambling. Tribes pay about $3 million a month in certain gambling taxes regardless of how much business they get, Martin said.

‘Multilayer Approach’ Works Better than Ban

UIGEA’s central concept, that banks should police transactions for illegal gambling, harms small institutions in particular, said Samuel Vallandingham, the chief information officer of First State Bank, speaking for the Independent Community Bankers of America. “Payment systems were not designed for this function,” and with few resources, banks’ compliance with anti-terrorism and money laundering regulations would be hampered under UIGEA rules, he said. But consultant Jim Dowling, a former IRS undercover agent who investigated money laundering, said the traditional gambling industry was already hard enough to regulate. The “sophisticated” electronic systems to monitor gambling activity in casinos, “foot surveillance” and “transactional monitoring” aren’t possible for gambling online, Dowling said.

“If we don’t legalize it, we can’t regulate it,” said Parry Aftab, the executive director of WiredSafety and a member of the NTIA’s Online Safety and Technology Working Group. Regulating financial systems should be an “important piece of an entire puzzle” that includes parental education, Internet security and verification software, and transparency rules for brick-and-mortar gambling operations, she said. The “multilayer approach” is spelled out in a Harvard University report commissioned by WiredSafety and sponsored by Harrah’s and the Poker Players Alliance. “Nothing’s perfect, but whatever we do is better than what we have now,” Aftab said.

U.S. residents already spend $6 billion a year gambling online, including on sites based in jurisdictions with weak consumer protections such as Antigua, said Prof. Malcolm Sparrow of Harvard, who led the study. It found “social harms” were greater in an unregulated environment concerning gambling by minors, defrauding of players by operators or each other, organized crime involvement and money laundering. Most U.S. Internet gamblers would move to “reputable domestic providers” if gambling were fully legalized, and licensing would become a “core business imperative” for any operation, Sparrow said.

Those gambling online are also heavy gamblers in traditional venues, said Keith Whyte, executive director of the National Council on Problem Gambling. The group didn’t see a decrease in problem gambling after UIGEA was signed into law in 2006, he said: Its help-line calls are around the same volume now. Whyte asked lawmakers to amend Frank’s bill to require operators to de-identify gambling activity so researchers could study it and develop public-health strategies for problem gamblers. Internet gambling now is a “Wild West affair” with no consumer protections, said Youbet.com Executive Chairman Michael Brodsky, whose company provides mostly interstate horse-race betting. That betting is legal under a law on the subject, but the Justice Department has long claimed unsuccessfully in court that the older Wire Act prohibits it. “We are first and foremost technology people” with experience in e-commerce and fraud- prevention strategies there, and are “clean, regulated and scrupulous” about paying taxes and locking out problem gamblers “forever,” Brodsky said. Operators have a “tremendous incentive” to fight fraud and keep consumer confidence.

Regulatory Delay Responsible for Problem Gambling?

Bachus and Whyte disagreed on what effect UIGEA has had the past three years as a deterrent. Internet gambling caused a 200 percent increase in addicted gamblers, according to a collaboration involving researchers at several universities who wrote Bachus this week, he said. Addiction leveled off after the law was signed, Bachus added. Problem rates actually held steady at around one percent of gamblers, and 5 percent of 12-17 year olds, with a brief dip following UIGEA, Whyte said. Bachus said if that was the case, it was Treasury’s fault for not carrying out the law sooner.

The U.K. has a model regulatory environment for the U.S. to consider, Whyte told Reps. Dennis Moore, D-Kan., and Chris Lee, R-N.Y., who said they favor a regulatory system. Problem rates in the U.K. haven’t much increased with the arrival of Internet gambling despite “heavy usage among young males,” Whyte said. The Harvard study lists technology systems used in various jurisdictions to protect players, 50 approved by the European Union alone, said Sparrow, a former chief inspector of the British Police Service. The Swiss government also requires that operators make data available to researchers, he said. “When you comb through billions and billions of records, you will find predictive patterns.”

Lee suggested an alternative set-up for regulated Internet gambling: no credit cards allowed. Card accounts serve as “unsecured loans” that get gamblers into more trouble than they would if they used debit cards, he said. None of the witnesses could estimate for Lee how much of gambling volume online is done with credit cards. Frank asked them to check and get back to the committee. “We will be returning to this subject next year.”