All Bets Are Off (Online Gambling 3 of 8)

On to blog number three! In the first blog, we looked at the landmark legislation of the Unlawful Internet Gambling Enforcement Act or UIGEA. Then, we took a look back even further to delve into America’s past attempts to legislate electronic forms of gambling. In today’s blog, we will look at how online gambling has changed in the three years since the UIGEA regulations were laid out, blocking money transfers to online gambling websites. Interestingly, not much changed in the beginning in regulation, but there was a financial consequence.

After the UIGEA passed, stocks for several of the world’s largest online gaming corporations dropped dramatically. It was estimated that over $7 billion was lost in stock worth in the days following the passage of the UIGEA. For example, the gaming corporation PartyGaming saw their stock drop an astounding 58% in the day following the passage of the UIGEA. To curb the plunge, many gaming servers quickly decided to restrict their servers from people residing in the United States. They hoped this would limit their liability to U.S. penalties and sanctions. This restriction steered many American online gamblers to more risky and privately held gambling servers that were willing to take their chances with the United States government. Therefore despite the passage of the UIGEA, American online gambling diminished slightly. The year after the passage of the UIGEA still saw $5 billion in online betting in the United States. [FN 1]

One of the reasons for the UIGEA’s initial lack of enforcement was due to the efforts of Representative Barney Frank of Massachusetts of the Democratic Party. In early 2007, Rep. Frank tried to circumvent the UIGEA before the regulations had even bet set out. In what he named the Internet Gambling Regulation, Consumer Protection, and Enforcement Act, Rep. Frank looked to allow online gambling provided the Director of Financial Enforcement Network had approved the server. This bill would not get out of committee or see a floor vote.

Also in 2007, two separate Democratic House Representatives would take their turn at legalizing forms of online gambling. First, Representative Robert Wexler of Florida promoted the Skill Game Protection Act. As its names implies, this Act tried to differentiate between games of “skill” and games of “luck”.  Specifically, it stated that gambling online in poker, chess and bridge would be legal (a similar bill would be introduced in the Senate a year later and also did not receive support) [FN 2]. If you have been reading my past blogs, you can see this is a constant debate about games of luck versus games of skill. When this failed, Democratic Representative Jim McDemott tried to curry favor for online poker by outlining a plan to tax it and create revenue. This Act failed as well.

Trying to alleviate the concerns of critics, Rep. Frank chaired a committee in the House Financial Services Committee in June of 2007. During the committee meetings, experts testified that online gambling could be properly regulated to ensure that minors do not gamble and that money laundering would not occur. They also again stressed how much revenue taxing online gambling could raise. Despite the testimony, efforts to repeal the UIGEA were not successful. At this point, the UIGEA finally went into effect. [FN 3]

Undeterred, Rep. Frank was at it again in May of 2009 sponsoring two separate bills to fight off the UIGEA. Rep. Frank stated he was against the UIGEA because he felt, “The government should not interfere with people’s liberty unless there is a good reason.” The first bill he introduced was actually re-introducing The Internet Gambling Regulation, Consumer Protection, and Enforcement Act. This time he had bipartisan support as he fleshed out the means in which the Act would protect youth, gambling addicts and protect the public from fraud, money laundering and fraud. The Act also stated that sports betting online would still be illegal. And in one last attempt to gain favor, they proposed this Act would make online gambling a state issue with each state deciding if more protection was needed. The second bill focused on taxes on a corporate level that could be gathered by allowing online gambling.  A study showed that taxes on online gambling allowed under the bills would generate $42 billion over a ten-year span. [FN 4] Frank worked hard with the Poker Player’s Alliance, a poker lobbyist group with one million members, in fashioning these bills. [FN 5] The Poker Player’s Alliance has donated over $3 million in an effort to repeal the UIGEA [FN 6] Still not enough support was gained to repeal the UIGEA. Nationally, one poll has stated that close to two-thirds of Americans favor repealing the UIGEA and allowing some forms of online gambling. Of course, this statistic can be skewed based on how you phrase the question. [FN 7]

All of this legislation was proposed, despite the fact the UIGEA had really been put into practice. This all changed on what poker players call “Black Friday”, April 15, 2011. On this day, the United States government indicted the three biggest poker servers in the world, PokerStars, Full Tilt Poker and Absolute Poker. The case is called U.S. v Scheinberg et al. The U.S. attorney on the case, Preet Bharara, did not hold back in his public statements about his feelings about these servers and their breaking of the UIGEA. Bharara stated “Foreign firms that choose to operate in the United States are not free to flout the laws they don’t like simply because they cant bear to be parted from their profits.”  The indictment accused the servers of money laundering, bribing banks, fraud and, of course, operating a business that engaged in online gambling. On this same day, the American Department of Justice shut down the servers’ main website and brought a civil suit asking for $3 billion in sanctions and penalties. [FN 8]

That about wraps up blog number three. On deck, are foreign countries’ laws concerning online gambling and some of the actions they have taken against the United States since the passage of the UIGEA. Questions to think about from this blog,: If we can find a way to protect children and online gambling addicts, why should the government be regulating online gambling? And in these tough economic times, does it make sense to look to online gambling as a source of revenue? If yes, what does this say about the public policy argument that we are banning it for moral reasons?

[FN 1] See Michael Schmitt, Prohibition Reincarnated? The Uncertain Future of online Gambling Following the Unlawful Internet Gambling Enforcement Act of 2006, 17 S. Cal Interdisc.. L.J. 381, 395-396 (2007-2008).

[FN 2] See http://thomas.loc.gov/cgi-bin/query/F?c110:1:./temp/~c110811SdU:e323:)

[FN 3] See http://www.house.gov/apps/list/hearing/financialsvcs_dem/ht060807.shtml

[FN 4] See http://www.safeandsecureig.org/news/press_releases/09-10-29_TaxScore.html

[FN 5] See http://www.cardplayer.com/poker-news/6705-barney-frank-introduces-two-poker-related-bills

[FN 6] See “Poker Players Alliance Raise $3 million to overturn UIGEA”, Gambling Online Magazine

[FN 7] See http://publicmind.fdu.edu/casino/final.pdf

[FN 8] See “Poker Face Off: A crackdown on Internet poker may be a prelude to legislation”, The Economist, April 20, 2011

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~ by jramsey5213 on October 23, 2011.

3 Responses to “All Bets Are Off (Online Gambling 3 of 8)”

  1. I am interested by the issues raised in your Online Gambling Serial Blog, especially in relation to this week’s readings on Eve Online.

    To explore your discussion of luck v. skill gambling, and arguments for skill based gambling on games such as chess or poker, the activities described in EVE online sound very much like a skill-based gambling environment.

    You mention the ongoing debate about the differentiation of “luck v. skill” gambling in the interpretation of the UIGEA.

    “Differentiating between a game of chance versus a game of skill is something the Fifth Circuit specifically commented on and as discussed in my previous blog, they have ruled that games of chance, specifically poker and blackjack, are legal.”- “All Bets Are Off” Post 2

    “Other jurisdictions apply a “dominant factor” test to decide if a game is more luck or skill. If the court concludes the majority of the game (51%) is predicated on chance, then the game is considered to be luck based. People have used the same reasoning to legalize blackjack.”
    “All Bets Are Off” Post 1

    The concept of Online gambling initially returns an impression of online poker or slot machines or sports betting; basically just a virtual version of existing forms of gambling. Reading your posts and the articles about Eve, however, got me thinking that gambling itself is evolving with the development of virtual worlds.

    The strategy and trickery involved in playing poker around a table, with bluffing, provoking your opponents emotions, and attempts to count cards sound very similar to the skill-set employed in EVE online takedowns of large alliances. Let’s remember that poker is also a “game” that we “play.” Comparisons between EVE and Chess are also appropriate with the long term strategy and value placed on either various chess pieces or EVE ships.

    It would be interesting to see if regulation such as the UIGEA evolves to cover complex MMORPG’s in which players can “win” real world money.

  2. I think it’s interesting that there is such harsh treatment of online gambling communities, but in “regulated” settings, gambling is perfectly acceptable. I think that this is hypocritical, but of course our legislators are able to justify any decisions that have been made. Of course there is concern over money laundering online, I don’t disagree with that, but those with malicious intent are simply going to find another way. Shutting down poker servers does accomplish the goal of preventing many users from illegal activities, although those same criminals can instead use proxy servers to cloak their IP addresses to look international.

    Furthermore, the thousands of users who are NOT laundering money and simply want to play poker are barred from doing so. To comment more on the hypocrisy I spoke of earlier, I feel that our country’s method of determining when/where certain behaviors are acceptable is interesting. Specifically, areas like Atlantic City, NJ, and Nevada fall into exceptions, as well as native-American reservations. I think that there is too much restriction in terms of how/when gambling can occur, because most people would legitimately be just trying to gamble rather than running or participating in illegal business ventures. The commission that already regulates gambling activities could regulate online poker, casinos in different states, etc., and I think everything would work out mostly fine. Of course there would be some people who violate the rules, but there will always be those people, regardless of what rules are present.

  3. I have never played poker, and don’t particularly care to start, but I am certainly a member of the 2/3 of Americans who believe that online gambling should be legalized and the government should tax the heck out of it. Particularly in these economic times, the tax revenue that could be generated could have profound effects on our financial crisis. Our government is losing out on tons of tax money for something already occurs in certain “exception” physical locations. The government should bring online gambling back to the states to regulate it and tax it.

    As far as moral reasons for banning online gambling, I would consider myself very conservative on the moral scale, and I just think that compared to other activities that occur online, gambling is not the worst. This semester we have talked about pornography, child pornography, fraud, theft and other sundry online crimes and issues, and gambling does not seem to stack up against these. No one is being harmed, and the government benefits from the regulation of gambling.

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