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The Internet Wagering Conundrum

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June 01, 2010
Gaming | Technology
Bill Geoghegan - Bill@LGTConsulting.com

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In 1961, long before the advent of the Internet, the United States Congress passed the Interstate Wire Act, which prohibited wagering using any means of electronic communication.

Whoever being engaged in the business of betting or wagering knowingly uses 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, or for the transmission of a wire communication which entitles the recipient to receive money or credit as a result of bets or wagers, or for information assisting in the placing of bets or wagers, shall be fined?under this title or imprisoned not more than two years, or both.

At the time, the law was intended to inhibit bookmakers from taking wagers by phone or telegraph.  To many, the term “in the business” implies that the law could only be enforced against businesses, not individuals wagering.

While this law has been interpreted by the Department of Justice to mean all online gambling is illegal, the U.S. Courts have ruled that the so called Wire Act applies only to sports betting and not to other types of online gambling.   There have been a number of court decisions which have not upheld the DOJ view.  In 2002, the 5th U.S. Circuit Court of Appeals upheld a ruling in Louisiana that dismissed a lawsuit brought by two Internet gamblers against credit card companies after running up debts by placing bets on casino games. In the dismissal, the court ruled the Wire Act was only pertinent to sporting events.

In a ruling that favored the Justice Department view, a 2004 case brought by a Website portal to gambling sites against the DOJ, the 5th Circuit U.S.  Court of Appeals stated that “The government’s interest is specifically directed towards the advertising of illegal activity, namely Internet gambling...”

Just before taking recess in 2006, Congress passed the SAFE Port Act, written to increase the security of U.S. Ports, but attached to it the Unlawful Internet Gambling Enforcement Act, which prohibits an American from using a credit card, electronic funds transfer or check to finance Internet gambling activity.  While this act did nothing to define or restrict gambling activity, it did define the role of banks in the funding of accounts.  After passage of the Unlawful Internet Gambling Enforcement Act, Lawrence Walters, an Internet gambling law attorney, appeared on PBS’ NewsHour show and stated, “The bill has no impact on the individual player’s activity. The bill is centered on restricting certain financial transactions, requiring that banks identify and block transactions going through their servers and their systems, and requiring that the actual sites, the Internet gambling sites, stop and block these transactions.”

During this legal wrangling, the government of the island nation of Antigua and Barbuda made a complaint to the World Trade Organization about the U.S. government’s actions to impede legal online gaming throughout the rest of the world. The WTO ruled in the favor of Antigua and Barbuda, stating that the Wire act and two other federal statutes prohibiting the use of gambling services from Antigua to the U.S. violated the WTO’s General Agreement on Trade in Services (known as GATS).  The U.S. argued that the laws were necessary to “protect public health and morals”, but the appeal was unsuccessful, largely because the laws relating to remote wagering on horse racing were not applied equally to foreign and domestic getting companies, so the U.S. could not establish that its laws were not discriminatory. The WTO confirmed the verdict. 

Sports wagering is illegal in most states, the primary exceptions being Nevada and Oregon and some Native American jurisdictions. In Oregon, sports wagering is limited to results that become part of the Oregon Lottery.  In Nevada, or course, sports wagering is completely legal, and is offered in virtually every casino.  Wagers can be placed on almost any contest, much to the chagrin of the NCAA, and exotic wagers (who will score first in a football game, will the point total be over or under the stated line, even who will win the coin toss) are offered for many games. 

Nevada casinos are permitted to set up phone and Internet wagering accounts. To open and fund an account, the player must physically visit the sports book location, sign up and place a cash deposit in his or her account.  All wagers must be placed from within Nevada state boundaries.  Specific hard wire connections, such as a phone line or a DSL or cable Internet connection to known termination points are considered sufficient to confirm the location of the bettor. Some new cell phone location techniques now allow pinpoint location of the cell phone, using either GPS or cell tower location determination.  This now permits wagers to be placed via cell phone from locations within Nevada. 

Outside of Nevada, in most states, pari-mutuel wagering on sporting events is completely legal, with horse racing being the primary beneficiary.   In this betting method, all of the wagers for a particular result are pooled, with the track and its affiliates taking a predetermined percentage of the pool.  Each race might have multiple pools, such as the standard win, place, show and daily double pools, each of which distributes a fixed percentage of that pool back to the successful bettors.   The track’s percentage of those pools is used to pay race purses and other expenses.  Until 1970, race wagers could only be placed at a race track or in Nevada’s sports books, but that changed when New York City opened its Off Track Betting (or OTB) parlors.  All of the wagers made at OTB parlors were accumulated into the track’s pari-mutual pool, in theory enlarging the purses and allowing the track more money to cover operating expenses. 

Over the years, and with the growth of the Internet, wagering on both horse and dog racing has been made available through a number of Websites, both within the U.S. and overseas.  Although these sites are completely legal and adhere tightly to the restrictions of individual jurisdictions, they are severely inhibited by the Unlawful Internet Gambling Enforcement Act, which prohibits banks from funding these accounts using credit cards, checks or electronic funds transfers.  These wagering sites expand the reach of all tracks as all wagers made through the sites become part of the track’s pari-mutual pools.  Payouts are exactly the same as if the player had been at the track, and the companies that run these sites share in the track’s percentage of those pools.

Unfortunately, in its attempt to protect its citizens from illegal bookmakers, the U.S. government has created a large cloud over the legal gambling business.

In 2007, Representative James McDermott announced that an independent accounting firm had estimated that the U.S. could achieve between $8.7 billion and $42.8 billion in the first 10 years of regulated and taxed on line wagering.

And then there is poker….
Bill Geoghegan is a consultant in Las Vegas. He can be reached for comment at Bill@LGTConsulting.com.

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