Virtual gambling days may be numbered

By John W. Kennedy (March 23, 2003)

Economics and a new federal law soon could make computer pop-up video casino ads an irritation of the past. However, two of the nation’s largest land-based casino corporations are proceeding with plans to go online, and a leading Internet gambling law expert predicts that other forms of computer gambling aren’t far behind.

The industry started only eight years ago, but now there are an estimated 1,800 Web site casinos operating, frequently based in small island nations such as Antigua. The U.S. government maintains that online betting is illegal, based on a 1961 law designed to prohibit telephone sports bets. Nevertheless, the investment firm of Bear, Stearns and Co. estimates that overseas Internet gambling sites will generate $4.2 billion in revenues (nearly two-thirds from Americans) in 2003, three times as much as pornography profits on the Web.

U.S. Rep. Jim Leach of Iowa has been trying to persuade his colleagues for four years to enact tougher legislation. “There is no regulation of gambling on the Internet and no protection for the consumer,” Leach, 60, told PE Report. “The difficulties for families can be rapid and catastrophic.”

In January, Leach introduced a bill identical to legislation that he sponsored that passed the House last year. Although it languished in the Senate, Leach is more optimistic about passage this year because of the change in leadership.

To compete online, players generally must open a personal account and provide “front money,” a credit card being the easiest and fastest way. Because all these enterprises operate outside the country, U.S. laws don’t protect the transactions.

“As a basic rule, if you lose, the money is immediately deducted from your credit card,” says Leach, who has been in Congress since 1977. “If by chance you win, the casino will write you a check in 30 days.” Meanwhile, the casino issues an online “credit.” For those who gamble daily during the next month, odds of that credit remaining aren’t good, Leach says.

“With an unlicensed operator, players have to rely on the honesty of the operator to make sure that the games are run honestly, that they will be paid if they win and even that they can get their front money returned,” says I. Nelson Rose, Whittier Law School professor in Costa Mesa, Calif.

In addition to the economic fallout, Leach says, Internet gambling poses a threat to the family structure, especially for the 2 percent of the public that is addicted. Those people can lose their house and other assets in short order. “This is as large a family issue as any that faces the U.S. Congress,” Leach says.

David S. Robertson, a board member with the Washington, D.C.-based National Coalition Against Legalized Gambling, says while the problem may be modest today, if left unchecked it could result in swelling personal bankruptcy, divorce and suicide rates. He cites a University of Connecticut study published last year. Although it showed only 8 percent of the population gambles online, 64 percent of those who do are compulsive gamblers.

“Addicted gamblers like anonymity and to be in an environment where they are not bothered,” says Robertson, 54. “Internet gambling can be done from the home at any time. It’s the most dangerous kind of gambling that is available. If it goes unchecked it will have a devastating effect on our economy and our families.”

Robertson also sees a particular danger to video-savvy young people who are home alone with Web sites. Web site warnings customarily state nothing more than players must be at least 18 to participate. Betting on sporting events, such as the NCAA basketball tournament, is a way that many young people get hooked on video gambling, even though it usually is illegal.

Leach believes his bill, the Unlawful Internet Gambling Funding Prohibition Act, is the only practical way to end online betting, but he acknowledges credit card companies must cooperate if it is to succeed. The proposed legislation makes it illegal for banks, credit card companies and Internet payment systems to accept funds generated from gambling Web sites.

Credit card companies that had adamantly opposed regulation aren’t as resistant to the idea. PayPal, a leading Internet payment system, stopped processing such transactions in November. Most major credit card companies have halted acceptance of the charges as well. “It’s not in their interest to have a lot of people who can’t pay back their cards regularly,” Leach says.

“The lack of credit card availability is crippling the industry,” says Rose, 52. Creditors have a difficult time collecting on gambling losses outside the country without an expensive and lengthy legal tussle.

Initially, land-based casinos opposed Internet operators, which they saw as competitors. Many still do, but some such as MGM Mirage have jumped into the fray seeing the possibility of large profits with low overhead. Although it remains illegal to accept bets from the United States, the casino has set up shop on the Isle of Man just offshore from the United Kingdom. Harrah’s also is investing in online betting.

“Some of the casinos are now saying, ‘If it can’t be outlawed, then we want to run it,’ ” says Rose, whose book Internet Gambling and the Law will be published this year. Racetrack betting from home computers is already legal in a dozen states and Rose believes soon there will be state lottery tickets sold over the Internet.

The federal government has no role in regulating or prohibiting gambling, Rose contends. “Gambling is a matter for states to decide,” he says.

But Leach says Internet gambling has become a federal issue because of enforcement. “U.S. states have no jurisdiction in the Cayman Islands,” he says.

Another reason for regulation, according to Leach, is government security, particularly for illegal drug trade and terrorism. “There is no easier way to launder money than through gambling, and no easier methodology than Internet gambling,” he says.