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Old 04-21-2011, 10:58 AM   #1
fslexcduck
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Case for Regulation of Online Poker (2009 law school paper)

So I wrote this paper about 2 years ago for school. Never wound up publishing it, and doubt many people have read it. Thought it couldn't hurt to post, for anyone who cares. It gives some insight into the legal landscape surrounding the UIGEA and international law especially. But yeah, WAY TLDR!!! Also, the footnotes don't copy on the forum, but anyone who wants to see a copy with the footnotes can do so at my old blog (fslexcducktales).


THE CASE FOR REGULATION OF ONLINE GAMBLING

INTRODUCTION


Gambling is and has for a long time been a massive industry in the United States. In 2007, gross revenues for traditional forms of gambling totaled $92.3B, a figure almost ten times that of the movie industry, whose 2007 revenues totaled $9.6B. In many states, the industry is heavily regulated, which leads to billions of dollars in government revenue, coming in the form of taxes and licensing fees. In 1995, a new form of gambling emerged which would revolutionize the industry. When a company based out of Grenada began accepting online wagers, Americans could now place bets with a few clicks of the mouse, regardless of the laws of their home jurisdiction.
Online gambling posed new challenges for the U.S. government. If the federal government failed to do anything, the laws of each state would rule, as is the case with traditional forms of gambling. Because of the impracticability of the “do nothing” approach, the debate on this issue has centered around the other two possible options. Either the federal government could prohibit online gambling altogether, or it could develop a structure for the regulation and taxation of all online gambling companies.
The U.S. government has unwittingly chosen the prohibition route, passing the Unlawful Internet Gambling Enforcement Act (UIGEA) in 2006. This law is both ineffective, as Americans continue to gamble, and costly, as money flows out of American pockets and directly into the wallets of foreign companies. In addition, the law constitutes a violation of the U.S. international obligations under the General Agreement of Trade in Services (GATS) of the World Trade Organization (WTO).
The UIGEA was quite controversial when passed, and many members of Congress spoke out in opposition to the legislation, as well as to the regulations passed two years later. Much of the current opposition prefers a system of strict regulations for gambling companies to ensure age verification and security mechanisms as well as to generate government revenue through taxation, which countries such as the United Kingdom and France have recently developed. In 2007 and 2008, Congressmen Frank and McDermott introduced legislation opposing the UIGEA, which sought to regulate and tax online gambling in the United States. In May 2009, Congressman Frank introduced H.R. 2267, which would establish a licensing program and grant the federal government regulatory and enforcement jurisdiction. As of October 2009, that bill is awaiting consideration by the House Financial Services, House Energy and Commerce, and House Judiciary committees. In addition, Congressman McDermott introduced H.R. 2268, which would amend the Internal Revenue Code of 1986 to regulate and tax online gambling. As of October 2009, that bill is awaiting consideration by the House Ways and Means committee.
The major proponents of prohibition argue that the increased proximity of the internet results in increased risks to American citizens. Among the increased threats most often cited are a predicted rise in levels of use and therefore addiction due to proximity; the accessibility to minors, who are more susceptible to addiction, due to the lack of age-verification capabilities on the internet; and the lack of credibility of online websites who might use fraudulent software and steal money from unsuspecting users. The validity of these different arguments is highly controversial, but for the purposes of this paper, I reject the age-verification software argument but do not contest the increased proximity and fraudulent website concerns. Additionally, I do not address the substantial debate over the normative question of whether it should be within the role of the federal government to regulate online gambling or whether anti-paternalism or federalism concerns should prevent it from doing so. I argue that from a policy perspective, in spite of valid concerns about potential harms of online gambling, the United States should abandon its attempts to prohibit online gambling and move toward a system of regulation.
This note contributes to the existing literature in several important ways. First, it advances the extremely controversial existing debate in the most crucial moments surrounding the new area of policy, as Congress has considered several bills proposing different regulatory frameworks or provisions thereof in only three years since the UIGEA was passed. Second, due to the years that have passed since the UIGEA’s enactment, this note is able to provide substantial evidence of the impact of law in its initial stages. Lastly, unlike much of the literature which addresses either domestic or international considerations, this note provides a comprehensive analysis of all of the issues at play.
Part I of this note provides a brief history of gambling in the United States. Part II addresses the inevitability of online gambling in the United States. Part III discusses the flaws of the UIGEA, namely that it is ambiguous, overly burdensome, and likely based on disingenuous premises. Part IV explains how the UIGEA violates U.S. obligations under the GATS and details the case history confirming those violations. It also briefly addresses implications for continued violation of these international obligations. Part V discusses the substantial opportunity cost of failure to regulate, whereby the U.S. is foregoing billions of dollars of tax revenue in a time when the economy is in severe recession and the government cannot afford to pass up such an opportunity. Part VI makes the case for a federal regulatory system. Part VII concludes.

I. A BRIEF HISTORY OF GAMBLING IN THE UNITED STATES

Gambling has existed since ancient times, with societies across every continent engaging in a wide variety of games of luck, wagering money, jewels, or even power. Wagering on games of chance has been popular in the United States since long before the republic’s inception, and that popularity has only grown as new forms and institutions of gambling forms have been developed. The first laws against gambling were developed by the Puritans in the eighteenth century and since then, governments at local, state, and the federal level have all sought to control gambling. The governments’ control has taken many different forms, including prohibition, legalization, and regulation and taxation. Throughout this country’s history, three clear waves of legalized gambling have emerged – the first during the colonial period, the next one during Reconstruction (as the devastated South turned to lotteries for quick revenues), and the last beginning in 1964 in New Hampshire and continuing until today, with a system of government-operated state lotteries.
Throughout the 1950s and 1960s, the gambling economy was plagued with fraudulent activity and governed by a rigid system of organized crime. In order to fight the dangerous market, Congress passed the Wire Act in 1961, intending to federally restrict access to gambling. This bill, eventually signed into law on September 13, 1961, makes it a crime to use interstate wire communications facilities to transmit bets or information that assisted in the placing of bets. Despite the motivations for passing the law, the predominant impact of the Wire Act was not to decrease gambling in the country, but rather to shift control from organized criminals to the government. Since the passage of the Wire Act, the government has legalized many forms of gambling and become increasingly dependent on the revenue it earns from those activities, which include licensed and taxed casinos, government-sponsored lotteries, and taxed pari-mutuel wagering.
Internet gambling started in 1995, when the Interactive Gaming and Communications Corporation, operating out of Grenada, began accepting online wagers. In 1997, there were already two hundred websites taking bets. In 2001, the Second Circuit decided U.S. v. Cohen, ruling that the Wire Act of 1961 applied to internet sports betting, and that it was illegal to accept a wager in one jurisdiction if the bettor was located in a different jurisdiction, regardless of the laws of the two jurisdictions. Despite that ruling, online gambling flourished. By 2004, annual revenue from online casinos and sportsbooks was estimated at five to seven billion dollars, with about fifty percent coming from Americans.
After a decade of unsuccessful attempts to curb internet gambling, Congress passed the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA), which President Bush signed into law on October 13, 2006. The bill, which was added to the Security and Accountability For Every Port Act of 2006 in the waning moments of the 2006 congressional session, was passed to end online gambling in the United States. The UIGEA does not actually prohibit participation in online gambling directly – instead, it prohibits financial institutions from funding online gambling websites. The UIGEA includes exceptions for certain forms of internet gambling, namely online state lotteries, horse racing, and fantasy sports betting. When Congress enacted the law in 2006, it provided a 270 day window for financial institutions to come into compliance with the law. Still, online gambling has persisted in the United States for the three years subsequent to the passage of the UIGEA. While some major sites like PartyGaming and 888 withdrew from the United States market, ostensibly due to risk associated with the uncertainty of the status of the laws, many smaller sites have emerged since 2006. In response to the lack of effectiveness and the ambiguous nature of the regulation requirements, the lame duck Bush administration pushed a more specific and narrow set of regulations through Congress at the end of 2008, which took effect on January 19th, 2009.

II. AMERICANS WILL GAMBLE REGARDLESS OF THE LAW

The gambling industry in the United States is huge and growing rapidly. In 2007, gross revenues for traditional forms of gambling totaled $92.3B. In 1997, the total revenue from the industry was $50.9B, or $65.8B in 2007 dollars. That represents industry growth of 40% in the last ten years. The figures are especially striking when compared to those of the movie industry. Domestic box-office gross revenue was $9.6B in 2007, or slightly over 10% of the total gambling revenue in that same year.
Given the popularity of the gambling industry, there is a strong argument that even if the United States continues to prohibit online gambling, people will find ways around the law and continue to participate in the activity. Anecdotally, the law reeks of the Prohibition era, which resulted in more expensive and risky drinking and a lack of revenue for the United States government, rather than an end to the activity. Indeed, many House representatives made that analogy in their arguments in opposition to the law. In fact, despite that the government has held that online gambling has been illegal since its creation, Americans numbering between twelve and twenty million were gambling online as recently as three years ago. According to Representative Leach, the sponsor of the UIGEA, Americans accounted for just over $6B, or approximately half of the $12B spent on online gambling in 2006.
The UIGEA prohibits financial institutions from funding online gambling websites. When the bill was passed, two of the biggest transaction sites, NETeller and Firepay, ceased to provide services to Americans. However, there are still many companies that continue to fund online gambling in spite of the law. One webpage, called NETeller Alternatives, lists twenty-six financial institutions that currently fund online gambling within the United States. Even ordinary checks in the mail can fund online gambling institutions, since the Treasury Department has decided it would be too difficult to demand that banks scrutinize every single handwritten check to determine if it is funding online gambling. Indeed, Americans who have chosen to gamble have had great success funding their online accounts, even since the legislation. Joseph Kelly, professor of business law at SUNY Buffalo and co-editor of the journal Gaming Law Review, said, “I don’t know of anybody who’s had serious difficulty in actually providing payment to an online operator.”
As an alternative to using U.S. institutions, Americans can set up offshore bank accounts. Mark Blandford, CEO of Sportingbet.com, mentioned this possibility and predicted the inevitability of the industry’s success: “You’re going to see players setting up non-American bank accounts. The genuine prohibitionists are going to create a money-laundering environment. It’s a huge industry. You can’t turn back the clock.” Blandford’s prediction has proven accurate. Since the legislation, Americans have been setting up payment processors in many other countries, including Costa Rica and Russia. Methods used have included 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. In addition to setting up off-shore accounts, Americans may choose to employ friends to deposit money online for them. As the world becomes more globalized and people establish connections with people in other countries, this becomes more of a real possibility.
The reality is that there are still many methods to deposit money onto online gambling sites, and Americans have continued to do so. A few months after the UIGEA’s enactment, the Associated Press reported that online betting had significantly decreased, but there is substantial evidence supporting the conclusion that the industry has only continued to grow within the United States. According to a report from Global Betting and Gaming Consultants (GBGC) in the beginning of 2009, the U.S. surpassed $20 billion in gross online gambling yield in 2008, a figure far greater than the $6 billion estimated to have been spent by Americans on online gambling in 2006. Anecdotal evidence from the industry’s experts further supports this conclusion. In 2008, two years after the UIGEA was enacted, Kelly said, “[e]very anecdotal response I’ve gotten is that there was a [downward] blip at first but that things are pretty much back to normal.” The GBGC report confirms the conclusion that online gambling will continue to grow in spite of regulation, stating “[w]ith the events surrounding [the] UIGEA in the United States in 2006, the online gambling industry has shown too that it has both the flexibility and the innovation to react quickly.”

III. THE PROHIBITION ON ONLINE GAMBLING WILL SUBSTANTIALLY IMPEDE THE SECURITY OF THE ACTIVITY

Both of these funding methods the UIGEA necessitates (using the services of smaller companies and moving business offshore) will cause substantial harm for Americans. Smaller companies do not have extensive security mechanisms in place because they are expensive – thus, Americans are routinely engaging in less secure transactions to fund online gambling. In fact, e-Passporte was one of many companies to experience a surge in business once NETeller and Firepay left the market, despite many concerned reports of security breaches and unapproved fund transfers out of e-Passporte accounts. Using bank accounts in other countries further sends money from the United States economy and generates revenue elsewhere. Ironically, these two concerns – security and American GDP considerations, were two of the main arguments presented in support of the UIGEA.
Security and safety concerns are not limited to the transactions between citizens and their financial institutions. As regulations under the UIGEA become more stringent and/or widely enforced, the risk will be higher for gambling sites to operate, and as a result, the bigger companies will shut down operations. In a letter to the National Conference of Legislators of Gaming States, the Interactive Gaming Council wrote, “The fear is that current policies are pushing the Internet gaming industry farther underground, where there is less control, no revenue generation for states and no monies available to assist with player protection.” Because potential profit is so high, more rogue sites with unreliable security have emerged to cater to U.S. players, with the safest sites denying Americans business. GamblingPlanet.org is one website that rates online casinos based on “overall service and reliability,” which includes security and customer support. According to rankings updated May 6, 2009, no casino in the top five allowed U.S. players, and only four of the top twenty did. A similar site, FairBet.org, paints an even bleaker picture. This site’s top seven online casinos are not open to U.S. players, and only three of its top twenty are. Furthermore, even the sites that do claim to provide customer service and reliable security for U.S. players have no legal obligation to uphold that claim. While a business’s success would ostensibly suffer if word escaped about customer maltreatment, such a result would provide little consolation for an American citizen who had lost money, either as the result of an error or having been cheated by the company.
The fact that the online gambling revenue generated from U.S. consumers has more than tripled in the past three years, despite the safest sites shutting their doors, can only mean that Americans are putting their money, in increasingly bigger numbers, in the hands of these unsafe websites. The existence of and reliance on these sites has and will continue to create a much larger potential of dishonest operations, which could result in many millions of dollars being unfairly siphoned from American pockets.
The online poker world has actually already seen two such scandals emerge. In the last two years, Absolute Poker and Ultimate Bet Poker, both run by Tokwiro Enterprises, were discovered to have “superuser” accounts, which allowed the users to view their opponents’ hole cards, thereby enabling them to play perfectly and steal millions of dollars. The “superuser” accounts were created by Excapsa, the company that created the technology for the websites, whose employees and former employees were perpetrators of the theft. In addition to other sanctions, the Kahnawake Gaming Commission imposed fines totaling $2M against the two companies for failure to take adequate security precautions. The total amount stolen was some amount higher than the $21M Tokwiro Enterprises repaid its players in 2008. Tokwiro eventually paid the fines as well as its affected players, because the company was worth much more than the $23 million. For smaller sites worth far less than they could potentially steal, the upside to a similar scandal would be huge while the risks would be almost non-existent, so it is quite reasonable to think that similar cheating would frequently occur, albeit on a smaller (and therefore less easily detectable) scale.

IV. THE UIGEA IS AMBIGUOUS, OVERLY BURDENSOME, AND DISINGENUOUS

A. OVERLY BURDENSOME AND AMBIGUOUS

When Congress passed the UIGEA in 2006, it allotted a 270 day period for financial institutions to change their online payment systems to come into compliance with the law, but granting them the authority to decide how that would be done. Despite the fact that institutions would have the freedom to choose their own procedures, small bank owners argued that they would be unfairly expensive and burdensome. By the end of 2008, many institutions had not come into compliance with the law in ways the government approved, and so the freedom to make those choices was taken away. On November 12, 2008, the Treasury Department and the Federal Reserve Bank issued new regulations in the form of a 120 page document, which spelled out specific procedures for how those financial institutions must comply with the UIGEA. At a hearing discussing these regulations on April 2, 2008, seven months before they were passed, experts from various online gambling organizations, banks, and financial institutions testified that the rules were hastily crafted and overly burdensome. Wayne Abernathy, American Bankers Association Executive Vice President of Financial Institutions Policy and Regulatory Affairs, said:
The UIGEA and the Proposed Rule do not provide a rational path towards halting unlawful Internet gambling. The path leads to an increased cost and administrative burden to the banks and an erosion in the performance of the payments system, but it will not result in stopping illegal Internet gambling transactions. Imposing this enormous unfunded law enforcement mandate on banks in place of the government’s law enforcement agencies is not likely to be a successful public policy.

Leigh Williams, president of the technology division of the Financial Services Roundtable, expressed concerns that enforcement of the new rules "could impose significant compliance burdens on financial institutions by increasing their role in policing illegal activities, determining whether a transaction is illegal, or by imposing ambiguous compliance requirements that could be subject to wide variations in interpretation by regulators and law enforcement agencies.” In fact, over two hundred similar comments were submitted to the Department of the Treasury and Federal Reserve System, arguing that the regulations are unnecessarily burdensome. Furthermore, these comments argue that as a result of the Bush Administration’s rush to approve the rules before Obama’s inauguration, they leave U.S. financial service companies to interpret ambiguous State and Federal gambling laws, which do not clearly differentiate between legal and illegal gambling activities or transactions.


B. DISINGENUOUS

The stated reasons for the passage of the UIGEA were to prevent the dramatic rise in gambling generally, to prevent an unsafe mechanism of gambling from operating, and to protect minors who have easy access to online gambling websites. But the actual law that was passed has many exceptions which run counter to those objectives. The UIGEA, which defines a “bet or wager” as “the staking or risking by any person of something of value upon the outcome of a contest of others, a sporting event, or a game subject to chance, upon an agreement or understanding that the person or another person will receive something of value in the event of a certain outcome,” explicitly excludes many activities, most notably fantasy sports or simulation sports wagers , intrastate wagers where the laws of that state permit the activity, and interstate horseracing wagers that would be permitted under the Interstate Horseracing Act of 1978. Fantasy sports and horseracing are in no way less accessible to children, or have software that is inherently safer, than other forms of gambling. The fact that these exceptions are present in the law despite running counter to the stated objections reflect the disingenuousness of the prohibition, the disconcerting presence of special interests in shaping the prohibition which ultimately results in a curbing of civil liberties, and perhaps most significantly, the likelihood that economic motivations (primarily the concern that when Americans gamble online in international companies, money leaves the domestic economy), rather than moral ones, are the actual cause for the legislation.

V. THE UIGEA VIOLATES INTERNATIONAL LAW

A. HISTORY OF WTO DISPUTE

In the last decade, Antigua has become a base for the operation of many online gambling businesses, which have provided the source of revenue for much of the small country’s GDP. Since the passage of the UIGEA, Antiguan revenues from online gambling have plummeted to just over one-third of they were before the law took effect. In 2003, following United States v. Cohen, 260 F.3d 68 (2d Cir. 2001) (holding that the Wire Act does apply to online gambling), the government of Antigua and Barbuda filed suit with the World Trade Organization (WTO), challenging the U.S. prohibition of online gambling services as a violation of its obligations under the General Agreement on Trade in Services (GATS). The GATS stipulates that WTO members must “extend immediately and unconditionally to services or services suppliers of all other Members ‘treatment no less favourable than that accorded to like services and services suppliers of any other country.’” Antigua’s written request for a WTO panel alleged that U.S. laws violated the GATS because they permitted U.S. companies to offer gambling and betting services while foreign operators were prohibited from doing so.
The United States alleged that it did not adopt any commitment to allowing gambling services when it adopted the GATS, and that if it did, its gambling laws were not in violation of the agreement. Furthermore, it invoked a moral defense to any violation of the GATS. Under Article XIV, a country can violate the terms of a free trade treaty if the violation is “necessary to protect public morals” or to “maintain the public order.”
In November 2004, the WTO panel issued its report. It held that in adopting the GATS, the U.S. had made a full commitment to allow gambling within its borders, and that by maintaining the Wire Act, and the Travel Act and the Illegal Gambling Business Act when read together with relevant state laws, the U.S. violated articles XVI:1 and XVI:2 of the GATS.
It further held that the “public morals” exception of Article XIV did not apply. In order to meet the Article XIV exception, the U.S. was required to prove that the laws presumed to be in violation of the GATS are necessary to protect public morals or maintain public order, and that the laws satisfy the legal balancing test known as the chapeau. The chapeau provides:
Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where like conditions prevail, or a disguised restriction on trade in services, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any Member of measures [of the type specified in the subsequent paragraphs of Article XIV] . . . .

The Panel held (1) that the U.S. had not proven that the UIGEA was “necessary” to protect the public morals and (2) that the defense was not merely a disguised restriction on trade.
After a subsequent U.S. appeal, the Appellate Body of the WTO issued its report on April 7th, 2005. The Appellate Body upheld the rulings that the three federal laws in question were consistent with GATS obligations and that the laws did violate Article XVI. The Body then reversed the decision of the panel with respect to the public morals exception. It ruled that the three federal anti-gambling laws in dispute, the Wire Act, Travel Act, and Illegal Gambling Business Act were necessary to protect public morals or maintain public order. It also modified the panel’s second finding, holding that the U.S. had met the burden of proof that this was not merely a disguised restriction on trade, but the U.S. did not meet the burden of the chapeau anyway. The Appellate Body held that by maintaining the Interstate Horseracing Act, which permits inter-state wagering on horseracing, the U.S. had not applied its gambling laws in a consistent manner, and therefore failed to satisfy the chapeau.
After the compliance period, the U.S. submitted a status report to the WTO, claiming that it was in compliance with the ruling. The U.S. had not amended any of the laws held to be in violation of the treaty, but the status report cited a statement by the Department of Justice that it “views the existing criminal statutes as prohibiting the interstate transmission of bets or wagers, including wagers on horse races.” In June 2006, Antigua alleged that the U.S. had failed to comply with the ruling of the Appellate Body, and requested consultations to reach an agreement over the compliance issue. No such agreement was reached when in October 2006, the U.S. enacted the UIGEA, which included the exemption for interstate horseracing. In March 2007, the WTO Compliance Panel responded to Antigua’s request, and examined the language of the new law. It held:
[S]ince the original proceeding the United States had an opportunity to remove the ambiguity and thereby comply with the recommendations and rulings of the [Appellate Body]. Instead, rather than take that opportunity, the United States enacted legislation that confirmed that the ambiguity at the heart of this dispute remains and therefore, [] the United States has not complied.

The Panel held that the U.S. had not taken any good faith efforts to comply with its ruling, and in fact reinforced its commitment to the very inconsistencies at the heart of the violation of the treaty, by passing the UIGEA.
Despite all these adverse rulings, the U.S. maintained that it erred in signing the GATS without exempting itself from the requirement and that any obligations pertaining to recognizing gambling services only exist “as a result of an oversight.” Using this explanation, the U.S. declared that it was going to withdraw the original commitment that had resulted in the adverse rulings in the first place. While there is a provision of the GATS that allows the withdrawal of such a commitment, but the use of the provision as a means to settle an adverse ruling is unprecedented. According to WTO rules, the U.S. must find means of compensating any affected WTO members as a result of the withdrawal on the commitment, and if the parties cannot reach an agreement of just compensation, an arbitration panel will settle the matter. In December 2007, the WTO arbitration panel awarded Antigua annual compensation of $21M per year against the U.S. government, far short of the $3.4B in annual sanctions Antigua had requested. The U.S. responded by requesting that Antigua delay implementing the sanctions until the formal process of withdrawal from the GATS obligations had been resolved. Negotiations on how to implement these sanctions continued throughout 2008 and by the final meeting of Antigua’s Finance Minister and the USTR representative under the Bush administration, an agreement still had not been reached.

B. RAMIFICATIONS AND IMPLICATIONS OF NONCOMPLIANCE

Many commentators have argued that Antigua has barely any clout in affecting U.S. policy and that the U.S. should maintain its stance and pay the Antiguan government what are inarguably minor reparations. However, if other countries pursue economic sanctions against the U.S., noncompliance could become much more expensive. Daniel Pimlott of the Financial Times said “[a] greater threat is that success at the WTO for Antigua could pave the way for the EU to pursue a fair trade case against the U.S. over online gambling, which the U.S. might have to take more seriously.”
Indeed, since the ruling for Antigua in 2007, the EU, Costa Rica, Japan, Canada, Macau, Canada, and Australia have all filed claims for compensation with the U.S., and continue negotiations today. In late 2007, the U.S. had negotiated settlements with the EU, Japan, Canada and Australia, providing compensation in the form of markets access to U.S. domestic postal services, warehousing, R&D, and technical testing sectors. The new arbitration requests by Costa Rica and Antigua could negate those settlements and invite much more serious consequences for the U.S. Lode Van Den Hende, a WTO expert and trade attorney with Herbert Smith in Brussels sad, “There is a real possibility that the arbitration body will find that unless the U.S. provides commercially meaningful compensation to Costa Rica and Antigua, it cannot withdraw its commitment on gambling, without risking trade sanctions from the affected parties.” EU-based gambling firms have urged the group of WTO members to seek as much as $100B in compensation for being shut out of the U.S. market, and EU Trade Commissioner Peter Mandelson reported that the magnitude of compensation requested, while not quite that high, would be substantial. The WTO has convened a new arbitration panel to settle the matter of sanctions for the affected members.
If the WTO arbitrator does rule that the U.S. may not withdraw from its gambling commitment without serious sanctions from affected parties, one option the U.S. might choose is complete withdrawal from the GATS. This would almost certainly provoke retaliation from all WTO Members affected by the arbitration, including the EU, Canada, and Japan. Additionally, other countries, including China and Singapore are currently seeking to statutorily permit online gambling activities. Trade sanctions from these countries, who export billions of dollars of goods to the United States annually, would be financially disastrous. Nao Matsukata, formerly Director of Policy Planning for USTR Robert Zoellick and now Senior Advisor for Alston and Bird LLP, opined, “Inviting sanctions at a time when both the U.S. Administration and Congress are both striving to stimulate an economy on the edge of recession seems foolhardy at best, especially when draft domestic legislation already exists that would create a renewed flow of both business and tax revenues throughout the nation’s gaming sectors.”
Apart from economic considerations, the United States should be concerned that withdrawal from certain obligations sets a very bad precedent for the responsibilities of nations in upholding their legal commitments. This decision to essentially ignore the ruling of the WTO is an all too common example of U.S. hypocrisy in expecting other countries to comply with international standards while acting in opposition to them. Furthermore, if the U.S. did choose to unilaterally withdraw from the GATS as a result of an adverse ruling of the arbitrator, it would be disastrous for international trade standard. Matsukata discussed this possibility: “If the U.S. finds the decision of the WTO arbitrator unacceptable, under procedures outlined in the GATS, it could unilaterally withdraw, creating an unprecedented crisis of confidence in the global trading system.”

VI. THE CASE FOR REGULATION

On April 26, 2007, Rep. Barney Frank introduced the Internet Gambling Regulation and Enforcement Act, which established a federal regulatory and enforcement framework to license companies to accept bets and wagers, to the extent permitted by individual states, Indian tribes, and sports leagues. That bill was defeated in committee, and in the final weeks of the 110th Congress, Frank introduced the Payment Systems Protection Act of 2008, which was similar to the original act with added stipulations requiring the clarification of the precise definition of internet gambling. Under the proposed legislation, companies will have to meet certain requirements in order to receive a license. Those requirements include safeguards to ensure the individual placing the bet is eighteen or older, safeguards to combat fraud, money laundering, and compulsive gambling, mechanisms to ensure the collection of appropriate taxes and fees from both individuals and the licensees, and safeguards to ensure the physical location of the individual placing the wager within a legal jurisdiction. The House Financial Services Committee passed the bill on September 16, 2008, but time ran out before the bill was brought to the floor of the House. Still, the passage of the act through its committee represented a step toward repeal of the UIGEA, or at least the limitation of its application to sports betting, the only form of gambling the Supreme Court has held to be governed by the provisions of the Wire Act. The following section outlines the most relevant reasons why the proposed regulation should be passed.

A. REGULATION WOULD GENERATE REVENUE FOR THE U.S. GOVERNMENT

The online gambling industry is big, and it is growing. If the United States taxes online gambling companies at the same rate of 7.5% at which it taxes Las Vegas casinos, the upside is huge. A PricewaterhouseCoopers analysis estimated that the taxation of regulated Internet gambling is expect to generate between $8.7B and $42.8B in federal revenues over its first ten years. For comparison purposes, federal excises on tobacco products in 2005 totaled $2.2B. So online gambling taxes could potentially provide the federal government with twice the amount of revenue it currently receives from tobacco products.
If the U.S. adopted a regulatory framework, international companies would certainly pay the required taxes if it meant entering a regulated U.S. market. Mark Blandford, founder of the gambling website Sportingbet.com, estimated that if the U.S. taxed online sports betting at the same rate as Las Vegas casinos, in 2003 he would have owed the U.S. government $4.4M. “We’d happily pay it if we could come into a regulated market,” he explained. Payne, CEO of Sportingbet, has traveled from the UK to Washington many times to express the company’s interest in operating in a regulated environment. He explained that customers prefer regulated operators, which are much safer, over unregulated ones, but he believes that given a lack of options, they will still gamble with unsafe companies. Other countries that have recently adopted regulation have felt the overwhelming demand for licenses. France, for example, is expected to make gambling licenses available in the summer of 2009, and those licenses will take effect January 1, 2010. Online gambling companies from the United Kingdom are already vying for the licenses, which will tax poker at 2% and horseracing and general sports at 7.5%.
Beyond taxing company revenues for online gambling, regulation would mean increased income tax from gamblers within the United States. Currently, many people gamble online on websites that do not submit any records of the activities to the government – the proposed regulation would require the submission of all income information and would provide for audits of companies to ensure compliance with the law. In sum, regulation has the potential to generate substantial government revenue, both through taxation of companies and income taxation of individuals, who currently do not have as great an incentive to accurately report their online gambling income.
Furthermore, legalizing online gambling would allow for the creation of American gambling companies, which would contribute to the U.S. economy. One of the principle economic concerns Representative Leach emphasized in the House debates over the UIGEA was that online gambling siphons money out of American hands and into foreign economies. Regulation would allow for U.S. companies to participate in the market, and U.S. companies would receive some of the revenue currently being generated by the industry. If companies incorporated in the U.S., then citizens of other countries would also be able to gamble within the U.S., thereby generating even more potential revenue than is currently available.

B. REGULATION WOULD PROVIDE FOR A SAFER GAMBLING ENVIRONMENT

Aside from being economically beneficial for the government, regulation would provide substantial benefits in the form of safety and security. When one accepts the argument that people will gamble anyway, the question becomes one of how to best affect the safety and security of those who do choose to engage in the activity. Through regulation, the government can ensure the use of age-verification techniques and the prevention of fraudulent software. With respect to age-verification techniques, the PSPA requires that companies implement age-verification technology, which currently exists and has been tested by many reputable gambling companies, including the MGM Mirage, in an experiment where it operated an offshore gambling site before the UIGEA was passed. Since that experiment, the technology has progressed even further. Michael Colopy of Artistotle, Inc. testified before the House Committee on Financial Services about various new and effective age-verification technologies. So contrary to critics with old and faulty information, it is possible to screen for age. In fact, regulation would be the safest policy choice in this regard, as more accountability would force websites into adopting age-verification techniques, bringing them into compliance with already established regulations. As more websites came into compliance, it would become obvious which websites attracted customers with different demographics due to less-stringent procedures. Indeed, regulation, rather than prohibition, would be an effective measure of preventing minors from gambling.
Another concern expressed by U.S. officials, among others, has been the possibility of fraudulent websites. “Through slight alterations of the software, unscrupulous gambling operations can manipulate the odds in their favor, make unauthorized credit card charges to the accounts of unsuspecting gamblers, or alter their own accounts to skim money.” Through regulation, gamblers would be no less susceptible to fraudulent software of internet companies subject to audits than they are to fraudulent software in slot machines in Las Vegas casinos. Furthermore, the bigger companies would have greater incentive than smaller companies to conduct honest operations, given the much higher risk of being caught and the greater opportunity cost of being caught and having operations shut down. Once again, prohibition promotes the existence of smaller, underground companies who have little risk and little chance of being caught for faulty software. The scandals with UltimateBet and Absolute Poker were only discovered because the cheaters cheated a very large group of users in very obvious ways, and they were only incentivized to pay the money back because of the size of Tokwiro Enterprises. With smaller unregulated companies dominating the market, cheating and fraudulent software would be a much greater concern.

C. REGULATION WOULD BRING THE UNITED STATES INTO COMPLIANCE WITH INTERNATIONAL LAW

As previously discussed, the U.S. is in violation of international law according to various WTO rulings. Regulation would bring the U.S. into compliance with that law, which the government has a legal obligation to do. It would also eliminate the possibility of several billions of dollars in trade sanctions, to which the country cannot afford to subject its citizens, especially in times of grave financial crisis.

VII. CONCLUSION

Gambling has been popular in America for centuries, and internet gambling has been increasing in popularity since its inception. The prohibition on gambling realistically means that Americans must use either offshore or insecure payment systems to gamble online, and that minors have the same access to these websites that adults have. Billions of dollars of potential revenue are being lost because the U.S. continues to enforce a law with unclear requirements, little beneficial effect, and dishonest motivations that resulted in exceptions that favor special interest groups. Meanwhile, in enforcing the law, the United States is violating its international free trade obligations it agreed to in signing the GATS, and risking billions of dollars in potential trade sanctions.
Jeffrey Sandman, spokesperson for the Safe and Secure Internet Gambling Initiative, summarizes the internet gambling situation well. “The reality is that the UIGEA is unclear, burdensome, and doomed to fail . . . It simply does not make sense to impose more costs and burdens on financial companies, while the activity they are expected to stop flourishes in an unregulated, uncontrolled, and underground marketplace. Congress should look to regulate Internet gambling in order to protect consumers and collect billions of dollars that are being lost to offshore Internet gambling operators.”
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Old 04-21-2011, 11:01 AM   #2
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Re: Case for Regulation of Online Poker (2009 law school paper)

TY for sharing
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Old 04-21-2011, 04:51 PM   #3
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Re: Case for Regulation of Online Poker (2009 law school paper)

wtl;dr
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Old 04-21-2011, 04:55 PM   #4
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Re: Case for Regulation of Online Poker (2009 law school paper)

thanks for posting.
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Old 04-21-2011, 04:59 PM   #5
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Re: Case for Regulation of Online Poker (2009 law school paper)

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wtl;dr
i also copied this into legislation forum where there might be people who are smart enough to read.
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Old 04-21-2011, 05:07 PM   #6
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Re: Case for Regulation of Online Poker (2009 law school paper)

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i also copied this into legislation forum where there might be people who are smart enough to read.
lol. unwilling to read through reams of legalese = NOT SMART ENOUGH TO READ
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Old 04-21-2011, 05:22 PM   #7
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Re: Case for Regulation of Online Poker (2009 law school paper)

"Gambling is and has for a long time been a massive industry in the United States."

Sounds like the opening line to a 13 year old's essay.
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Old 04-21-2011, 05:24 PM   #8
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Re: Case for Regulation of Online Poker (2009 law school paper)

what did you get on the paper?
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Old 04-21-2011, 05:30 PM   #9
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Re: Case for Regulation of Online Poker (2009 law school paper)

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wtl;dr
sigh... ban yourself imo

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FYP.
it's vanessa selbst you f-tard. stupid nvg that doesn't know anything about the actual poker world.

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"Gambling is and has for a long time been a massive industry in the United States."

Sounds like the opening line to a 13 year old's essay.
Keep calling out the people that are so far beyond you intelligently and monetarily. it bodes well for your future.
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Old 04-21-2011, 05:32 PM   #10
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Re: Case for Regulation of Online Poker (2009 law school paper)

You don't know anything about me, but thanks "Mr Mouthcrime".
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Old 04-21-2011, 05:45 PM   #11
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Re: Case for Regulation of Online Poker (2009 law school paper)

Thanks for posting this, I'm going to read it later (studying for my 1L exams, unfortunately). I don't know much about law review, but would this be appropriate to publish through that forum?
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Old 04-21-2011, 05:46 PM   #12
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Re: Case for Regulation of Online Poker (2009 law school paper)

how to be a nvgtard.

step 1.don't read OP

step 2.post comment anyway

step 3.get in fight with other nvgtard

repeat.

btw nice post duck
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Old 04-21-2011, 06:41 PM   #13
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Re: Case for Regulation of Online Poker (2009 law school paper)

Clearly journal-worthy with some cleaning up and updating. Highly relevant now, nice work. For those who think this is TLDR, don't go to law school.
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Old 04-21-2011, 07:53 PM   #14
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Re: Case for Regulation of Online Poker (2009 law school paper)

You make a good case for why the government should want to regulate online poker but your case for why it would be good for poker players or for the industry is less convincing. I would like to see the repeal of UIGEA but here are a few thoughts I have about why I would be opposed to regulation.

1) You mentioned several cheating scandals that have occurred.
• In light of the millions of players and billions of dollars involved, and the fact that the industry is less than 15 years old, it has matured quickly and there have been remarkably few scandals.
• The amount of money lost in the few scandals is much smaller than the many millions (billions?) that would be taken out of the poker economy through taxation and the cost of complying with regulations.
• Regulation does not guarantee that there would not be cheating scandals. It is entirely likely that these scandals would have occurred with or without regulation, and just as in brick and mortar casinos, it is likely there will be cheating scandals in the future whether there is regulation or not.
• Good audits can provide better protection than regulation.

2) It is very difficult to beat online poker already given the current state of play. It seems likely that the sites would have to raise their rake to pay for taxes and the extra burden of complying with regulations, which would make online poker even more difficult to beat.

3) In order to prevent what they call money laundering, government will likely require online sites to gather much of the same type of information about you that banks are required to collect now. At least some people will find this objectionable, thus driving away some potential customers. Even if they don’t object, it increases the hassle factor and drives up transaction costs.

4) Government will have access to personal information about yet another area of your life. At least some people will object to this, which again will decrease the customer base.

5) Sites would likely have to start issuing 1099s. I know that you are legally required to account for gambling winnings already, but I suspect that not everyone does especially if the amount they won wasn’t large enough to raise any red flags.

6) Sites may not be able to do things to increase customer satisfaction such as offering new games without getting government approval. This approval could be denied, but even at best there would be delays and increased transaction costs.

7) In almost every industry there is the phenomenon of regulatory capture where the industry leaders have so much influence over the regulators that they form an incestuous relationship to the detriment of consumers and would-be competitors. There are many examples of this but an obvious one is the revolving door between pharmaceutical companies and the FDA, where officials go from being employed at FDA to the corporations and back again.

8) Because larger companies are better able to bear the costs of regulation than smaller start-ups, new entries into the market would be impeded so there would be less competition.

I’d be interested in hearing your thoughts on my comments.

- Greg
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Old 04-21-2011, 10:46 PM   #15
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Re: Case for Regulation of Online Poker (2009 law school paper)

This is really really good. How can we get more people to read it?
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Old 04-21-2011, 11:06 PM   #16
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Re: Case for Regulation of Online Poker (2009 law school paper)

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You don't care about anything about me, but thanks "Mr Mouthcrime".
fyp
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Old 04-21-2011, 11:35 PM   #17
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Re: Case for Regulation of Online Poker (2009 law school paper)

Excellent posts, OP and Black Arrow.

The latter warns that players should be wary of regulation. I think he's right, but it's too late. The genie's definitely out of the bottle.

I've been considering a regulated online environment. The FBI documents suggest that the sites take 33 cents of every wagered dollar with the current 5% rake. That requires dragging each dollar through the rake about eight times.

We have an existing plus-tax model, France at 7.69% rake. That would take 47 cents of each dollar (about what U.S. lotteries take ...), leaving the prize pool at 79% of its pre-regulation size.

A century ago, a lot of clever guys made a good living betting the horses. The states saw all of this money, and enforced parimutuel betting which in general shrinks the racing prize pool to about 85% of its straight-bet form. That was enough to really wipe out the professional horse picker as a career choice, though a few survived mostly as touts.

Whatever form a domestic legalization plan takes, it's probably going to make grinding a profit much more difficult. Perhaps impossible.
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Old 04-22-2011, 12:24 AM   #18
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Re: Case for Regulation of Online Poker (2009 law school paper)

Thank you for sharing. In my non-advanced education opinion, if this was presented to someone with political clout it could help our cause in a big, big way. Even though I don't have the resources to have a credible opinion, my instincts say that if the sites bond together they have a winnable defense. But my instincts have to be like that because of the time invested in the product. So a very biased kool-aid drinking opinion.
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Old 04-22-2011, 01:37 AM   #19
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Re: Case for Regulation of Online Poker (2009 law school paper)

The paper is well written and clear. It lays out a factual, indisputable case for why this industry needs to be legalized and regulated.

The problem is that too often our laws aren't made or changed based on common sense. For the most part to change the laws, there needs to be a lucrative cause behind the changes.

There is a lot of money in gambling, that's obvious. Our government already knows this.
But the politicians have the interest of big casino b&m corporations making that money, not Full Tilt and Pokerstars...with the government's fair share, of course.

Have you noticed how many casinos have been built around the country lately? I live in Maryland and now have 4 options within 100 miles. 5 years ago, I only had Atlantic City which is 250 miles away.

Internet poker will come around eventually. But for now, the poker football is being handed off to Harrahs and crew, with our government being their offensive line.

I'm sure there will be a Zynga.com or Harrahs.com poker at some point, but who knows how long that will take?

Cliffnotes: Get better at live poker. You have to wear pants now when you grind. Get used to the variance that comes with playing 1 table and getting 30 hands an hour. You might have to limp some hands preflop every once in a while, but when you hit anything that beats top pair, you're getting paid!



and nice job, fslexcduck, on your tournament accomplishments!

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Old 04-22-2011, 03:14 AM   #20
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Re: Case for Regulation of Online Poker (2009 law school paper)

thanks for posting
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Old 04-22-2011, 04:52 AM   #21
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Re: Case for Regulation of Online Poker (2009 law school paper)

Awesome post; very interesting read. I hope you look into updating/getting it published soon if you have time. It would likely be helpful to have more well structured proponent literature on legalizing and regulating.
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Old 04-22-2011, 04:54 AM   #22
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Re: Case for Regulation of Online Poker (2009 law school paper)

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thanks for posting
.
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Old 04-22-2011, 05:00 AM   #23
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Re: Case for Regulation of Online Poker (2009 law school paper)

good read Vanessa. lays out US gambling prohibition well.
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Old 04-22-2011, 06:12 AM   #24
Andrew Boccia
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Re: Case for Regulation of Online Poker (2009 law school paper)

nice post
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Old 04-22-2011, 06:39 AM   #25
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Re: Case for Regulation of Online Poker (2009 law school paper)

very interest, ty for posting
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