A winning hand: a proposal for an international regulatory schema with respect to the growing online gambling dilemma in the United States.

AuthorAndrle, John D.

Abstract

While a multitude of Internet enterprises folded in the 1990s, online gambling websites not only have held strong, but appear to be ready to increase the stakes. No business relating to the Internet currently generates more revenue than online gambling, and that trend does not look like it will change soon. While many Americans desire to participate in this form of cyber-gambling, the current legality of their ability to do so remains vague. For the most part, an American's ability to gamble currently resides under the purview of state law and a hodgepodge of antiquated federal wire acts. The nature of the Internet, however, mandates that any scheme, regulatory or prohibitory, be constructed in the international arena. For various reasons, there have been efforts by members of Congress to create strong prohibitory legislation specifically targeting Internet gambling. The Author analyzes not only whether a domestic prohibition schema is the best model to implement, but also whether such a model could even be truly effective. The Author further shows that an international regulatory model can provide a legitimate method of control while allowing individual countries to maintain discretion over the form of online gambling they allow to their citizens. At the same time, this international regulatory schema would still provide a valid international enforcement net against offenders. Under this regulatory schema, problem gamblers can be protected while still preserving the opportunity for other patrons to get lucky and hit it big.

TABLE OF CONTENTS I. INTRODUCTION II. BACKGROUND: THE CURRENT STATE OF ONLINE GAMBLING IN THE UNITED STATES A. Online Gaming and State Law B. Online Gaming and Federal Statutes C. Online Gaming and Proposed Legislation D. Online Gaming and the Credit Card Industry E. Relevant U.S. Case Law III. ANALYSIS A. The Need for Movement and a Solution B. Criteria and Policy Implications of a Solution (Factors and Guidelines) C. Regulation Versus Prohibition IV. ONLINE GAMBLING AND CURRENT INTERNATIONAL SCHEMAS A. The Caribbean Countries B. The Australian System C. The European Union D. Examples from Other Nations E. World Trade Organization V. CRITERIA OF THE PROPOSED INTERNATIONAL REGULATORY SCHEMA VI. JURISDICTIONAL CONCERNS INVOLVED WITH INTERNATIONAL SCHEMAS VIII. CONCLUSION I. INTRODUCTION

No business on the Internet earns more revenue than online gambling. (1) In 2002, two million players lost a collective $3.5 billion at nearly 2,000 "virtual casino" websites. (2) In 2003, online gambling sites took in more than $4.1 billion dollars. (3) In 2004, it is projected that revenues from online gambling activities could be $6 billion with potentially 15 million players. (4) Some estimates suggest that gamblers in the United States are responsible for sixty-five percent of this amount. (5) In describing the scope of online gambling's potential influence on the American populace, the Final Report issued by the National Gambling Impact Study Commission stated that "[o]nline wagering promises to revolutionize the way Americans gamble because it opens up the possibility of immediate, individual, 24 hour access to the full range of gambling in every home." (6)

As the popularity of online gambling continues to swell, the issues surrounding its legitimacy have yet to be resolved. It is too simplistic to say that online gambling is or is not per se illegal in the United States. For the most part, gambling legislation has largely been a matter of state law. (7) Not surprisingly, state responses to online gambling legislation have varied considerably, running from prohibition to regulation to taxation. (8) Historically, the federal response to the issue of online gambling has been to acquiesce to the various approaches taken by the states. (9) Instead of enacting law specifically targeting online gambling, Congress has consistently relied on antiquated "wire acts" to maintain the choices that have been made at the state level. (10)

Controlling online gambling, however, is not an issue confined to the United States. Online gambling can best be described as a global issue that affects virtually all countries. While many Americans participate in online gambling as users, almost all gambling websites and virtual casinos are located offshore with their primary base of operations in exotic locations such as Antigua (a Caribbean-island country), Belize, and Curacao. (11) As will be discussed in this Note, these countries have created a safe-haven for online gambling operations and have gone to great lengths to encourage such business. (12) Thus, analysis of online gambling requires analysis from this international, operational perspective as well.

The fact that online gaming operations are run outside of the United States does not resolve whether it is legal for Americans to gamble on these websites as users. (13) One line of thought is exemplified by the Department of Justice (DOJ) when it claims that it is illegal for American users to gamble in this fashion. (14) Specifically, in August 2002, the DOJ informed the Nevada Gaming Control Board that Internet gambling was prohibited under a series of federal laws. (15) The DOJ made it clear that it considered online gambling to have occurred in both the jurisdiction of the gambler and in the jurisdiction of the gambling website's operations (essentially, where the website's computer servers are physically located). (16) Thus, under the DOJ's view, users in a U.S. state can be held liable for their activities even if the virtual casino is located in a different country. (17)

While the legality of online gambling in the United States remains in a quagmire of confusion, the societal concerns from unchecked online gambling cannot be ignored. A great deal of literature discusses the maladies that can accompany gambling. Gambling has been associated with practically every conceivable domestic problem one can think of: divorce, bankruptcy, crime, domestic violence, child neglect, addictive gambling, and alcohol and drug offenses. (18) While the purpose of this Note is not to analyze the causation versus correlative aspects of gambling or to understand the exact extent of social damage it can inflict, commentary stating that "[t]he yearly cost to society (in, e.g., productivity reductions, spending on social services, and creditor losses) is approximately $5 billion" appears reasonable. (19)

In lieu of these policy concerns and the unremitting fact that online gambling does not appear to be a fad, there is a pertinent need for the United States to develop a comprehensive schema to deal with the situation. As this Note will show, the most viable solution should encourage regulation over prohibition. Further, for this regulatory solution to be effective, its reach must encompass an international coalition of countries. The end result would be an international regulatory schema that preserves each country's individual right to decide the specifics of its online gambling laws while still creating a legitimate method of enforcement.

The background of this Note (part II) will discuss the current state of online gambling in the United States. This background will discuss the interplay of online gambling with federal regulation, state regulation, and proposed federal regulation. The relationship with online gambling and the credit card industry is also briefly discussed. This relationship is significant because self-regulation of the credit card industry is an important consideration when analyzing whether prohibition or regulation of online gambling operations would be more effective. Finally, the background also will highlight an example of pertinent case law that has been adjudicated on the matter. The analysis (part III) will present the particulars of the online gambling issue, and the criteria involved in evaluating different solutions. Part III of this Note will also specifically discuss the merits and drawbacks of the two major solutions, regulation and prohibition. Part IV will analyze the regulation and prohibition solutions in the context of what other countries have done, specifically focusing on the Australian model. Part V will then summarize the findings of the analysis and propose the required elements for an effective international regulatory schema for online gambling.

  1. BACKGROUND: THE CURRENT STATE OF ONLINE GAMBLING IN THE UNITED STATES

    1. Online Gaming and State Law

      Historically, regulation of gambling has been a matter reserved for state legislation under the Tenth Amendment. (20) All states have some type of constitutional provision or statutory law that either (1) prohibits gambling, (2) places limitations on the type of gambling allowed, or (3) authorizes particular state-sponsored or licensed gambling. (21) While every state has made private lotteries unlawful, state-run lotteries have become commonplace. At last count, these state sponsored, revenue-generating enterprises are currently operating in thirty-eight states, the District of Columbia, and the United States territories of Puerto Rico, the Virgin Islands, and the North Mariana Islands. (22) Further, casino gambling in either conventional commercial casinos or Indian casinos is allowed in twenty-nine states. (23)

      Nevertheless, the states have had drastically different reactions to the perceived threats of online gambling. (24) Certain states have clearly prohibited online gaming. This is most easily seen in states such as Utah and Hawaii, where gambling in any form is prohibited. (25) Hawaii, for example, adamantly supports prohibition of online gaming activities from both the operational and user perspectives. (26) With respect to the user-perspective, a recent bill in the Hawaiian legislature urged "Congress to enact legislation which [would] ban United States citizens and resident aliens from engaging in gambling activity of any kind with any Internet or world-wide...

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