Follow the Leaders: a Constructive Examination of Existing Regulatory Tools That Could Be Applied to Internet Gambling

• Publication year: 2003

Ronnie D. Crisco, Jr.⁰

I. Introduction

Many articles have explored the explosive growth of Internet gambling. As of August 2000, over forty percent of American homes has access to the Internet, and an estimated 4.5 million Americans had already gambled online at least once.¹ Some ambitious forecasts predict that by the year 2006, Internet gambling will become a $100 billion a year industry.²

Not surprisingly, the appropriate stance on online gambling has been a frequent topic of scholarly debate. A popular trend in existing literature is to compare the two most likely policy responses to Internet gambling in the United States: should it be prohibited, or should we attempt to regulate it in some way? This article begins with the assumption that in either case an effective enforcement scheme will be vital to the policy's success.

To that end, this Comment examines two existing regulatory systems in an attempt to extrapolate possible characteristics of a comprehensive plan to deal with Internet gambling. The first model is the regulation of online securities trading by the Securities and Exchange Commission ("SEC"). The analysis then shifts to the enforcement of consumer protection laws in cyberspace by the Federal Trade Commission's Bureau of Consumer Protection ("BCP"). The intent of this article is not to educate the reader about the substantive law underlying either securities regulation or consumer protection. The intent is to identify techniques that regulators have employed to meet the unique cha/llenges of regulation and law enforcement on the Internet. Finally, the article determines which, if any, of those techniques could be adapted to the context of online gambling. Ultimately, the regulatory scheme of the SEC proves the more attractive model. A permissive regulatory environment encourages cooperation from website operators, provides incentives for operators to locate within the United States, and narrows the range of police duties shouldered by regulators.

II. Background

The comment begins with a summary of the status of Internet gambling under current federal law. Then, the basis for choosing each analytical model is established. Both models are replete with lessons that policymakers can adapt looking for a comprehensive legislative response to Internet gambling.

A. Current State of the Law

As of November 2003, no law has been enacted which restricts or prohibits Internet gambling, despite the fact that gambling websites numbered in the thousands.³

Since 1995, Congress has repeatedly considered legislation that would criminalize all Internet gambling in the United States, but without success.⁴ The most notable legislative initiatives were the Internet Gambling Prohibition Acts ("IGPA") of 1998 and 1999, both introduced by Sen. John Kyl.⁵ The 1998 IGPA easily passed the Senate, but the House Judiciary Committee failed to approve the IGPA before the end of the 105th Congress.⁶ The IGPA of 1999 left out criminal penalties for individual bettors, but was otherwise identical to its predecessor. It also passed the Senate, only to die in the House.⁷

Despite Congress's inaction, there have been a number of successful state and federal prosecutions of Internet gambling outfits since the mid 1990s.⁸ Prosecutors have pursued most cases under the Interstate Wire Wager Act ("Wire Act").⁹ The Wire Act provides that anyone

engaged in the business of betting or wagering knowingly [using] a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers or information assisting in the placing of bets or wagers on any sporting event or contest . . . shall be fined under this title or imprisoned.¹⁰

As the statutory language suggests, the Wire Act has been interpreted to apply only to sports wagering. This reading, however, is not universal; at least one state court has construed the Wire Act to prohibit virtual casino gambling sites as well.¹¹ The Fifth Circuit Court of Appeals, on the other hand, announced in In re MasterCard International, Inc., that the scope of the Wire Act excludes virtual casinos by the plain language of the statute.¹² Exactly how the Wire Act should be read in light of technological advances not contemplated by its drafters is still open for debate.

Confusion over statutory interpretation is not the only difficulty courts encounter when dealing with Internet gambling. Jurisdictional issues are also a paramount concern. As of 1999, 80% of all Internet gamblers resided in the United States.¹³ Yet, the majority of Internet gambling businesses are located in tax-havens like Antigua and Belize that impose virtually no formal restrictions on these enterprises.¹⁴ Reasons for this trend include the United States' long history of criminalizing gambling and the opportunity to circumvent strict financial disclosure requirements in more business-friendly nations.¹⁵

The Minnesota Court of Appeals succinctly stated the general problem of policing the Internet in one of the earliest online gambling cases. In Minnesota v. Granite Gate Resorts, Inc.,¹⁶ the court stated:

We are mindful that the Internet is a communication medium that lacks historical parallel in the potential extent of its reach and that regulation across jurisdictions may implicate fundamental First Amendment concerns. It will undoubtedly take some time to determine the precise balance between the rights of those who use the Internet to disseminate information and the powers of the jurisdictions in which the receiving computers are located to regulate for the general welfare.¹⁷

The problem for courts is not determining that jurisdiction is proper. on the contrary, courts have routinely held that marketing strategies targeting potential gamblers within the United States constitute sufficient contacts for purposes of personal jurisdiction.¹⁸ The problem is actually asserting jurisdiction. Website operators who hold no assets in the United States and never visit the United States can, in effect, avoid prosecution indefinitely.¹⁹ Moreover, the effective application of transnational jurisdictional principles is dependent on the "respect and cooperation among sovereigns and parties."²⁰ However, American courts have not always made fostering comity with foreign judiciaries a top priority.²¹

B. Basis for Selection of Models

This article examines two analytical models that might be applied to Internet gambling. SEC regulation of securities markets will serve as the model for a legal scheme that permits but controls Internet gambling. Although securities traders and gaming site operators rely on very different business models, they share many incentives for cooperation with regulators. Next, this Comment analyzes the FTC's Bureau of Consumer Protection as a model for enforcement of an outright ban on Internet gambling. As it happens, hunting down Internet scams has a lot in common with shutting down gaming websites.

1. Securities and Exchange Commission

In the late 1990s, online brokerage firms took America by storm though their advertising blitz. Between 1994 and 2000, the number of online brokerage accounts in this country jumped from zero to over 13 million.²² Estimates say that by 2004, that number could balloon to almost 40 million, accounting for half of all individual investment portfolios in the United States.²³

Online gambling is experiencing similar growth. Between 1997 and 2000, worldwide profits from online gambling grew from $300 million to an estimated $2.2 billion dollars.²⁴ In one year alone, from 1997 to 1998, the number of online gamblers increased from 6.9 million to 14.5 million.²⁵ The Internet has revolutionized both securities trading and gambling, allowing millions of new consumers to participate in the market. The only difference between those two markets is that the SEC was present to witness and respond to the Internet revolution, whereas no governmental agency existed to oversee the rise of online gambling.

To see the parallels more clearly, consider what the leading treatise on the law of E-Commerce says about securities regulation:

Financial markets were among the first to systematically incorporate computer networks into their operations and, as a result, are globally integrated electronic markets today. U.S. securities-market regulators have tried to balance the benefits of greater access and the lower costs made possible through the use of new electronic communications systems with the risks created by fraudsters exploiting those very technologies . . . . Companies using the Internet as a communications medium need to subject the content of their Web site to the same scrutiny for possible securities-law liability as any other [medium].²⁶

The SEC is responsible for striking that delicate balance between the benefits of Internet communication and the risks of fraud in the United States. The SEC's primary mission is to protect investors and regulate securities markets.²⁷ Investor protection is achieved when investors have access to certain basic information about any security they consider buying, so the SEC strives to maintain a comprehensive, public body of knowledge about all publicly-traded companies.²⁸ The Internet, while greatly enhancing consumers' access to information, has taxed the SEC's ability to make sure that the information available to consumers is genuine.²⁹

Instituting a regulatory framework to control online gambling would entail facing many of the same problems that the SEC confronts online. For example, the global nature of the Internet requires extensive cooperation between nations. It also leads to complex jurisdictional squabbles. As noted above, controlling content on the Web is the primary goal of regulation; it would also be crucial to prevent fraud in the gambling context. The SEC has to balance its duty to protect consumers with its need to maintain a spirit of cooperation with the companies operating under its supervision. This is the...