Drawing dead: recognizing problems with Congress' attempt to regulate the online gambling industry and the negative repercussions to international trade.

• Author: Carlson, Eric J.

1. INTRODUCTION

   The moment you realize you are playing a hand that cannot win, you are drawing dead. (1) Gamblers are trained to read specific situations and make moves when the odds are in their favor. (2) Professional gamblers realize when the house is stacked against them and they have not left themselves any outs. (3) Their ability to recognize these moments and act accordingly separates professional gamblers from the rest of us. (4) While casinos prefer the common gambler, in the card game of life, online gamblers would prefer Congress play like a rounder, rather than a sucker. (5)

   Congress should survey the global legal landscape of online gambling, recognize that their attempted approach at prohibition is a losing hand, muck the Unlawful Internet Gambling Enforcement Act of 2006, and begin working towards an informed process of regulation that will not offend trade regulations. (6) This note begins with a brief history of the online gambling industry, Congress' attempts at regulation, and an outline of the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA). (7) This note transitions into a discussion of the international trade guidelines set forth by the World Trade Organization (WTO) and corresponding U.S. obligations. (8) Part IV of this note analyzes the impact of UIGEA on the online gambling industry and international trade, while comparing its provisions to online gambling legislation in the United Kingdom and France. (9) Finally, this note proposes a revised attempt to regulate an industry in dire need of positive direction. (10)

2. FACTS

   1. Gambling Industry

   1. Industry Growth and Statistics

      The gambling industry has a long history of games of chance and skill, which date back as early as 2300 B.C. (11) Individual games and the industry evolved significantly in the last 4000 years as the American Gaming Association (AGA) reports gross revenue totals from 2005 of $84.65 billion. (12) Gaming revenue growth has been considerable over the past ten years and has nearly doubled since 1995. (13)

      Online gambling is a relative new-comer to the gambling industry in that the first website designed to take wagers launched in August 1995. (14) The AGA estimated that the number of online gambling websites swelled to over 2000 during 2005 and 2006. (15) Online gambling enjoyed revenues of over $12 billion in 2005 and the AGA anticipated continued growth in 2006 to reach $15 billion. (16) The United States is a major market force in online gambling because U.S. gamblers account for nearly one-third of the online gambling market. (17) An estimated 23 million players gambled online during 2005, and 8 million of those players lived in the United States. (18)

   2. Previous Attempts at Regulating Players and Operators

      U.S. law allows individual states to regulate gambling operations within its borders. (19) The commerce clause of the U.S. Constitution grants the federal government the authority to regulate interstate gambling in light of the flow of commerce across state borders. (20) Congress used the Wire Act, Travel Act, and Illegal Gambling Business Act to regulate, prohibit, and prosecute online gambling. (21)

      The Wire Act criminalizes the use of a wire communication to engage in the business of betting or wagering. (22) Despite this broad scope, courts do not agree that the Wire Act universally applies to all forms of online gambling. (23) The United States Court of Appeals for the Second Circuit held that the Wire Act applied to sports betting, but did not consider whether the act also applied to casino games or other games of chance. (24) The Fifth Circuit held that the impact of the Wire Act is limited to sporting events or contests. (25) At the other extreme, the Department of Justice views the Wire Act as applying to all forms of gambling, including online gambling. (26)

      The Travel Act and Illegal Gambling Business Act are the other federal laws that apply to online gambling. (27) The Travel Act criminalizes the distribution of proceeds of any unlawful activity through interstate or foreign commerce. (28) The Illegal Gambling Business Act, as its name indicates, criminalizes the operation of an illegal gambling business. (29) These federal laws focus on the operator of the gambling service rather than the individuals placing wagers. (30)

   3. Unlawful Internet Gambling Enforcement Act of 2006

      The Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA) is the most recent attempt by the federal government to control online gambling. (31) Congress wrapped UIGEA into Title VIII of the Safe Port Act, primarily dealing with port security. (32) The federal government designed UIGEA to prevent the transfer of funds from financial institutions in the United States to online gambling operations, thereby eliminating the primary source of funding for online gambling. (33) UIGEA requires designated payment systems affected by its provisions to identify and block all restricted monetary transfers. (34)

      The UIGEA states that it does not change any existing state or federal law or tribal regulation. (35) The UIGEA also specifically exempts several forms of gambling or risk-taking that Congress declared are not actual gambling. (36) Similar to the other federal laws discussed, UIGEA restricts and prohibits fund transfers to gambling operations, not individual player activities, while also including a no-fault provision to protect financial institutions that block valid transfers. (37) UIGEA also represents a bold attempt at regulating an industry and entities that may not be within U.S. jurisdiction. (38)

      Financial markets, the global economy, and the online gambling industry were thrown into a state of flux and confusion by UIGEA's passage. (39) The stock prices of major online poker websites, PartyGaming and 888 Holdings, fell fifty-eight percent and twentysix percent, respectively, in UIGEA's wake. (40) Despite the financial impacts, many online gambling operators have taken opposing views of UIGEA's reach and practical application. (41) The financial impact was also felt down the supply chain of the online gambling industry in markets around the world. (42)

   4. Gambling Regulations in the United Kingdom and France

      The United Kingdom has a long history of tolerance towards gambling. (43) Although legislation has existed since the 1960s, it did not actively prohibit Britons from placing bets or wagers online. (44) In July 2001, the United Kingdom Department for Culture, Media, and Sport (UK DCMS) released a report recommending increased flexibility for the gambling industry. (45) As a result, Parliament enacted the Gambling Act of 2005 on April 7, 2005. (46) The legislation's focus was to modernize and update existing gambling laws while also establishing a new regulatory commission to monitor the industry's progress and development. (47)

      France also developed a gambling-tolerant culture and established a country-wide monopoly system to regulate the industry. (48) Although French law does not address online gambling, state monopoly organizations have operated online services since 2001. (49) The French government is highly supportive of the state monopoly system because of the revenue stream that gambling activities produce. (50) Despite the atmosphere of gambling tolerance in France, the European Union--which has similar free trade concerns as the WTO--has questioned the state monopoly system as a potential violation of free trade, leading the French government to enact WTO--friendly amendments to justify the monopoly system. (51)

3. HISTORY

   1. World Trade Organization (WTO) Guidelines & Commitments The WTO is the global regulatory body between nations dealing with trade rules in goods and services. (52) The WTO serves several purposes for global trade relations, including trade liberalization, trade agreement arbitration, and dispute settlement. (53) The primary goal of the WTO is to serve as a negotiating forum for member nations in relation to trade disputes. (54)

   The WTO operates on the basic principles of trade without discrimination, trade liberalization, predictability, fair competition, and economic development and reform. (55) Most-favored-nation (MFN) and national treatment are the primary elements of trade without discrimination. (56) WTO agreements generally prohibit discrimination between member nations. (57) Despite this policy, the WTO allows some exceptions in accordance with their standards. (58) The national treatment standard expands on the MFN concept by requiring WTO members to treat foreign members and local suppliers equally. (59) The WTO designed trade liberalization to lower restrictive entry barriers for goods and services through negotiation. (60) Predictability is an essential element in WTO agreements because they provide businesses and other commercial operations with a more stable market and reliable opportunity forecasts. (61) Finally, the WTO agreements promote fair competition and encourage continued economic development and reform. (62)

   The current system of trade regulations was a product of the Uruguay Round negotiations and the General Agreement on Tariffs and Trade (GATT). (63) While the WTO is a relatively young organization, the rules on international trade originated under the GATT in 1948. (64) GATT has evolved over the years and during the Uruguay Round negotiations, the largest and most significant session in its history, GATT members gave trade rules greater definition in the form of the General Agreement on Trade in Services (GATS). (65)

   1. General Agreement on Trade in Services

      The GATS contains the governing principles for international trade in services. (66) The cross-border supply of internet gambling services falls under the governance of GATS and the WTO. (67) Article XVI of GATS represents the commitment of all signatory members to allow other members full market access concerning the supply of these services. (68) The full market access...