IT Confidential: Online Gambling Needs Regulating, Not Electioneering

Legislators are bluffing with a flawed bill.
It's an election year. How do I know? Last week, the House of Representatives passed a bill intended to outlaw online gambling in the United States. It may come as a surprise to some people that online gambling isn't already illegal. Online gambling has existed for several years in a kind of legal limbo. But the Justice Department has always considered it illegal, which may come as a bigger surprise to even more people, namely those Americans who wager approximately $6 billion a year online.

There are problems with the legislation, officially known as H.R. 4411--Internet Gambling Prohibition and Enforcement Act, not the least of which is that the White House doesn't seem to back it in its current form. The Office of Management and Budget issued a terse statement of support, but said, without elaborating, that "the Administration has some concerns with the bill and looks forward to working with Congress to strengthen and improve the legislation."

The bill is intended to update the Interstate Wire Act of 1961, legislation that outlawed betting on sports across state lines over the telephone, by specifically including the Internet and any other form of electronic communication. It also ups the maximum penalty from two years in prison to five. It places the onus for enforcing the online gambling ban on Internet service providers and financial institutions that process online transactions by requiring them to "identify and block or otherwise prevent or prohibit restricted transactions."

Cute trick. The major credit card companies, MasterCard and Visa, stopped processing transactions related to online gambling a few years ago, as did eBay's transaction arm, PayPal. Offshore online-payment systems, such as Neteller, handle the transactions now, and you can bet they won't make them easy to spot. ISPs and financial institutions are being asked to monitor their Internet traffic for information potentially related to terrorist activity or child pornography. How much Internet monitoring should be required of these organizations? "You're going to [make them] the Internet cops?" says Frank Catania, president of Catania Consulting, a gambling consulting firm, and former director of New Jersey's Division of Gaming Enforcement. "It's an awful difficult thing to do."

The bill has a couple of glaring contradictions, known in the legislative biz as "carve outs," namely exceptions for state lotteries and horse racing. The problem is, it gets harder and harder to draw distinctions between legal and illegal forms of gambling, as anyone knows who has tried to explain to his or her 11-year-old why playing poker for lunch money is bad but betting on the lottery is OK.

It doesn't seem likely the bill will be voted on in the Senate this year, given the heavy legislative agenda between now and the November elections. Congress has better things to do than to consider flawed legislation related to online gambling. Rather than being outlawed, Internet gambling should be regulated and taxed; online poker alone could bring in more than $3 billion in new taxes, according to a recent industry-sponsored study. Online gambling isn't going away, despite legislators' best--if that's what they are--intentions.

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