The legalization of Internet gambling: why the clock is ticking on prohibition.

• Author: D'Addario, Shylene B.

1. INTRODUCTION II. DISCUSSION A. Internet Gambling Regulations 1. Federal Regulations i. Unlawful Internet Gambling Enforcement Act. ii. Travel and Wire Acts iii. Proposed Federal Legislation iv. Internet Gambling Regulation and Enforcement Act v. Internet Gambling Regulation and Tax Enforcement Act 2. State Regulations i. California ii. New Jersey B. Rationale for Legalization and Debunking Concerns Against it 1. Public Opinion 2. Taxation 3. Job Creation and Economic Growth 4. Protection from Fraud 5. Protection of Problem Gamblers 6. Protection of Minors 7. Protection of the Integrity of Sports III. CONCLUSION I. INTRODUCTION

   Americans can make a myriad of obscure bets including placing bets on: the next winner of "Dancing with the Stars," (1) where the President's popularity rating will be at the end of the year,2 who will win an academy award, (3) or whether the coach of the winning super bowl team will get a "Gatorade shower" at the end of the game. (4) Currently, Americans can wager a bet in an online casino with games like poker, blackjack and roulette, (5) or they can pull the bar down on virtual slot machines. (6) Americans can bet on nearly every sport imaginable, including placing bets on future events, like which team will win next year's World Series. The ease of making any of these online bets is as simple as entering the terms "Internet casino" in the computer search bar and selecting a preferred website. According to professional poker player Annie Duke, "any American with a broadband connection and a checking account can engage in any form of Internet gambling from any state." (7) It is safe to say that, regardless of the legality of Internet gambling in the United States, Americans can virtually bet on just about anything.

   With the rise of the Internet in the 1990s, came the advent of Internet gambling. Licenses to operate Internet casinos were initially, and still are, issued under the Free Trade and Processing Zone Act of 1994 out of Antigua-Barbuda. (8) After licensing advancements came software development, with companies like CryptoLogic and Microgaming quickly developing payment and gaming software. (9) By the mid-1990s, U.S. citizens were allowed to place real money wagers in Internet casinos. (10) Since the start of Internet gambling in the mid 1990s, the industry has grown exponentially.

   The global market for Internet gambling is currently estimated at approximately $30 billion a year. (11) Although Internet gambling currently makes up only 1% of all nationwide gambling, that 1% equivocates to billions of dollars in revenue every year. (12) H2 Gambling Capital, a U.K.-based company, expected the U.S. offshore Internet gambling market to grow from $5.4 billion in 2009 to $5.7 billion in 2010. (13) That amount, which excludes most types of sports betting, could grow to $24 billion over the next five years (2011-2015) if the United States legalizes Internet gambling. (14)

   There are thousands of websites available to U.S. citizens for gambling, almost all of which are located outside of U.S. borders. As of 2011, the largest offshore Internet gambling sites for U.S. players are "PokerStars, based in Isle of Man, and Full Tilt Poker, based in Ireland False" (15) Although the Justice Department considers their actions illegal, these companies dominate the international Internet poker scene with close to ten million players in the United States alone. (16) With millions of players in the United States, it is vital that proper regulation be in place to protect them.

   The current statutes prohibiting and regulating Internet gambling are wholly ineffective. Every year, the federal government seems to come closer to passing comprehensive legislation to legalize and regulate this industry. With the state of the economy in flux, Congress has once more begun to address this issue by seriously considering proposed legislation. (17) Although the economic woes of the United States have fostered somewhat bipartisan support for legalization and regulation, there are still a number of hurdles to overcome before the legalization of Internet gambling will become a reality.

   The problem is no longer, how to prevent Americans from gambling online, but how to make it safe, fair, and beneficial for the United States and all its citizens. Part II.A of this note will examine the current condition of federal and state regulations of Internet gambling, as well as examine recent proposals made by lawmakers. Part II.B will discuss the rationale behind legalizing Internet gambling, while debunking the concerns made by opponents. This note will conclude that it is only a matter of time until the government legalizes and regulates Internet gambling and will outline the next steps to be taken to make effective legalization a reality.

2. DISCUSSION

   1. Internet Gambling Regulations

      Internet gambling is subject to both federal and state regulations. Due to the boundless nature of the Internet, many issues arise in regulating American's conduct in using it. Under the Commerce Clause of the United States Constitution, the federal government has the authority to regulate interstate commerce. (18) This effectively means that any website run out of one state, that does business outside of that state, is engaging in interstate commerce and will be subject to federal laws. In addition, Congress maintains the authority to regulate illegal gambling operations conducted between the U.S. and any foreign location through its plenary power. (19) These rules help facilitate federal law being able to reach Internet gambling operations that conduct business with Americans, both locally and abroad.

      Federal law prohibits Internet gambling under several statutes, including the Unlawful Internet Gambling Enforcement Act, (20) the Travel Act, (21) and the Wire Act. (22) Furthermore, Internet gambling is also regulated in every state under state statutes. (23) However, with the economy in a downward state over the past few years, lawmakers, at both the federal and state levels, have been moving toward legalizing, regulating, and taxing specific types of Internet gambling with the proposal of several new bills.

      1. Federal Regulations

         i. Unlawful Internet Gambling Enforcement Act

         The Unlawful Internet Gambling Enforcement Act (UIGEA) is the most recent law enacted to prohibit and regulate Internet gambling. (24) The law, which effectively bars U.S. citizens from using credit cards, electronic fund transfers, and checks to wagers on gambling websites worldwide, was enacted in 2006. (25) Under the UIGEA, no person who engages in betting or wagering operations can knowingly accept credit, fund transfers, checks, or other proceeds, "in connection with the participation of another person in unlawful Internet gambling." (26) Additionally, financial transaction service providers are required to comply with policies and procedures that "identify and block restricted transactions; or otherwise prevent or prohibit the acceptance of the products or services of the payment system, member, or participant in connection with restricted transactions." (27) The law holds credit card companies and banks responsible for enforcement, by prohibiting wire transfers to gambling websites or the website operators' banking institutions. (28)

         In creating the UIGEA, after being advised by the Gambling Impact Study Commission, Congress made several important determinations. (29) First, it determined that the primary funding of Internet gambling was through personal payment system instruments, including wire transfers and credit cards. (30) Second, it found that the social impact of debt collection was an increasing concern due to Internet gambling. (31) Lastly, it concluded that current laws were ineffective in preventing Internet gambling because of the cross-border nature of the Interact. (32) Congress then tailored the UIGEA to specifically address these concerns and determinations.

         Although the UIGEA sets out a rigid standard, very few people have been prosecuted under the law. (33) One recent case involved a man who was indicted on 36-counts alleging that he illegally collected close to $22 million as the primary agent for Sports Offshore, a gambling website licensed in Antigua. (34) The operation involved using a phone number registered in Antigua, while the operation was really being run out of the United States. (35) The scheme appeared to be an effort to circumvent tax and gaming laws. (36) While it is legal to have an Internet gambling operation in Antigua, running the business from the United States is not. (37) To avoid United States federal jurisdiction and the UIGEA, many gambling websites are run out of countries where internet gambling is legal, such as Antigua.

         ii. Travel and Wire Acts

         The UIGEA was enacted to specifically address the growing issue of illegal Internet gambling, but it is not the only law in place to curb the problem. The Travel and Wire Acts have both been used to prosecute people engaged in Internet gambling operations. The Travel Act proscribes interstate gambling activity by fining up to $10,000, or imprisoning a person for up to five years, or both, if that person uses "any facility in interstate or foreign commerce, including the mail, with intent to--distribute the proceeds of any unlawful activity; ... or otherwise promote, manage, establish, carry on, or facilitate the promotion, management, establishment, or carrying on, of any unlawful activity." (38)

         Under the Wire Act, gambling website operators are prohibited from using interstate or foreign wires to knowingly send or receive certain types of wagers, or any information that may be used to facilitate placing bets. (39) Although it has been successfully used in prosecuting Internet gambling operations, there are limits to its applicability, including the types of Internet gambling it covers. (40) For example, the Department of Justice does not consider the Wire Act to...