Internet Gambling

• Publication year: 2000
• Citation: Vol. 2 No. 2000

Beau Thompson

Introduction To The Gambling Industry

The gambling industry is one of the most lucrative forms of entertainment in America today. Revenues from gambling in 1998 were greater than those earned from recorded music, theme parks, video games, spectator sports, and movie tickets combined.⁰ There appears to be no end in sight to the popularity of gambling in America, as gaming revenues have grown every year for the past twenty years at a ten percent rate, with 1999 revenues totaling $58.2 billion.¹ This revenue growth has coincided with the relaxation of state laws forbidding gambling. As early as 1985, casinos were legal only in Nevada and Atlantic City, New Jersey, but today at least twenty-eight states have legalized casino gambling.² Additionally, forty states have a state lottery.³ In all, every state except Hawaii and Utah now has some form of legalized gambling.⁴

While the traditional forms of gambling, brick-and-mortar casinos and state-run lotteries, continue to comprise the largest share of industry revenues, a new medium for gambling has emerged with the advent of the Internet: the on-line casino. People with access to a computer are now able to log on at literally anytime and enter the world of the virtual casino. This burgeoning sector of the gambling industry is expected to bring in over three billion dollars in revenue by the year 2002.⁵ There are currently more than 250 casinos, 139 sports books, 20 bingo games, and 64 lotteries operating on the Internet.⁶ However, the future of these casinos is in doubt as the federal government contemplates whether or not to legalize and regulate them or to ban their operation altogether.

This note will mention the policies both for and against gambling generally, and focus on the policies specific to Internet gambling. It will then examine the state and federal laws that pertain to this field and how the public policies have affected the laws in the past and how they should affect them in the future. Next, it will discuss the jurisdictional issues associated with the implementation of Internet gambling laws, which is of primary importance in regards to the enforcement of anti-gambling legislation. Finally, some suggestions will be made about the future of Internet gambling regulation, both for and against its legalization.

Opening An Account

Setting up an on-line gambling account requires only a few simple steps. The user simply has to log on to an Internet casino, enter his name and mailing address, and provide funds for his account. This is done either by submitting a credit card number so that play can begin immediately, or by sending a certified check or money order. Once the money is received by the website operator, the player is allowed to begin gambling in the virtual casino and/or sports book. Losses are simply deducted from one's account, while any money won can either be added to the player's account, or be sent to the player via check from the operator. This ease of access has its positives and negatives, which will be discussed in further detail later in this note.⁷

Pros And Cons Of Gambling Prohibition

The propriety of gambling has been a heavily debated topic in America for quite some time. There are a number of societal ills caused by gambling, but at the same time, communities can benefit greatly from having a casino or lottery in their area.

The first objection to gambling is that the introduction of gambling to a community inevitably leads to an increase in the number of gambling addicts in the area. For example, after riverboat casinos were introduced in Iowa, the percentage of adults in that state addicted to gambling increased from 1.7 percent to 5.4 percent.⁸ Currently, there are "approximately 2.5 million pathological gamblers, 3 million problem gamblers, and another 15 million people at risk to become problem or pathological gamblers" in the United States.⁹

With the increase in the number of addicts comes a concomitant increase in crime. In a study conducted by U.S. News and World Report, it was discovered that crime rates in casino communities were 84% higher than the national average.¹⁰ These crimes are the result of two things: 1) problem and pathological gamblers having to "feed" their addiction, forcing them to steal or embezzle to support their habit; and 2) losing gamblers taking out their frustrations on the public and on loved ones. A study by the Attorney General of Maryland found that gambling leads to increases in violent crime, crimes against property, insurance fraud, white-collar crime, juvenile crime, drug and alcohol-related crime and domestic violence and child abuse.¹¹ This study shows that the effects of problem gambling are sweeping, creating problems in both the public and private sphere of these problem gamblers.

Finally, critics assert that gambling, primarily state lotteries, target the poor who are more susceptible to the notion of getting rich quick that these high reward games of chance offer. The poor see a lottery ticket or a slot machine as their way out of their dire financial situation, and the gaming operators exploit this fact by specifically advertising to this demographic group. As a result, "the poorest citizens spend the largest percentage of their incomes on gambling."¹²

Although there are many problems associated with gambling, there are also valid arguments supporting the legalization and regulation of the gambling industry. The first of these arguments is that gambling is simply a form of entertainment, and American consumers are free to spend their entertainment dollar on a product from which they derive the most utility. Our free-market economic system has shown that American consumers find casinos to offer a valid and worthwhile product, and these consumers should not be prohibited from participating in a clearly desired activity. The market is often the best indicator of consumer choice, and the choice in favor of legalizing gambling has been made overwhelmingly apparent from the construction of two $700 million hotel/casinos and one $1 billion dollar hotel/casino in America in the last year.¹³ The capital necessary to fund these massive construction projects would not be available if consumers did not demand the product that they offer. Proponents contend that the government has no right to assert their legislative morality into the marketplace in the face of such strong consumer testimony to the contrary.

The second argument made by supporters of the legalization of gambling is that the presence of casinos and lotteries generates substantial revenues and job opportunities that are of great benefit to local communities. A study by the American Gaming Association found that, "for every $1 million in revenue generated by the casino industry, 13 jobs are created, and the average casino industry wage is $26,000."¹⁴ Not only do these new jobs benefit those who actually receive the jobs, but local non-gambling related businesses also receive a boost as overall disposable income in the community increases.

The major benefit to the communities, however, is the increased tax revenues received from gaming operations. Casinos generate millions of dollars of revenue each year that are used to subsidize government programs that benefit the community as a whole. ¹⁵ For example, in the first five years that riverboat casinos operated in Illinois, a total of $955 million were generated in state and local tax revenues.¹⁶ Not only is there is a substantial increase in tax revenues, there is also evidence that government spending for public-assistance programs decreases, thereby increasing the net fiscal benefits to the government even more.¹⁷ Due to the number of jobs created, people who were previously on welfare no longer have to rely upon this public source of income to subsist.¹⁸

Internet Gambling Policy

While these same arguments are relevant to the discussion of on-line gambling, there are some additional concerns and benefits that are created because of the unique characteristics of the Internet. The first problem that many critics point out with Internet gambling is the potential for children to access gaming sites and set up an account of their own, either under false pretenses or through the use of a parent's credit card. Because of the difficulty webmasters have of verifying a user's age, children can easily slip in under the radar and begin playing illegally. Furthering this problem is the fact that gambling is now the "fastest-growing teenage addiction, with the rate of pathological gambling among high school and college-age youth about twice that of adults."¹⁹ This propensity for gaming by minors is a major concern of lawmakers who feel that the legalization of Internet gambling would only create more gambling addicts because of the ease with which a minor can participate in the virtual gaming experience.

Another significant issue in regards to on-line gaming sites is the legitimacy of the website operator, both in terms of fairness of the game and the payment of winnings to customers. The integrity of the game is easily manipulated on the Internet, as software can be designed to make the odds of winning disproportionately unfair to the unsuspecting consumer. An article by Adam Snyder highlights the importance of maintaining the integrity of these internet casino games, saying, "The issue of trust is paramount in on-line gambling-both for the player, who cannot see a dealer or croupier handling the cards or chips, and for the casino or sports book that stands to lose all if its reputation is tarnished."²⁰

Not only must players worry about the deck being stacked against them from the outset, they have to consider the possibility that they will never receive their winnings from the website proprietor. Because of the uncertainty surrounding the legality of Internet gaming sites, disreputable site operators have been known to refuse payment because there are no uniform legal...