Chapter 9
Internet Gambling

THE DEVELOPMENT OF INTERNET GAMBLING
ONLINE GAMES
ONLINE GAMBLERS
THE LEGAL ISSUES
THE EFFECTS OF ONLINE GAMBLING

Internet gambling is a relatively new phenomenon. The first gambling Web sites launched in the mid-1990s and soared in popularity, particularly in the United States. Millions of Americans have gambled online, even though the practice is illegal. Christiansen Capital Advisors (January 9, 2006,http://www.cca-i.com/Primary%20Navigation/Online%20Data%20Store/internet_gambling_data.htm), which provides gambling analysis and management services, estimates that Internet gambling generated $21 billion worldwide in 2008, up from just $3.1 billion in 2001.

Exact figures on Internet gambling revenue are not known because the sites are not permitted to operate within the United States and because most of the countries that do allow them to operate do not collect or report revenue statistics. According to David Stewart, in An Analysis of Internet Gambling and Its Policy Implications (2006,http://www.americangaming.org/assets/files/studies/wpaper_internet_0531.pdf), two-thirds of Internet gambling operations are located in small Caribbean and Central American countries that provide little or no government oversight of the industry.

Many Internet gambling sites either do not pay taxes to their home countries or pay lower taxes than land-based gambling establishments. For example, Stewart notes that in March 2005 the tiny island of Antigua in the Caribbean was the headquarters for 536 gambling sites, the most of any country. The sites were only required to pay 3% of their gambling revenues (winnings after payout to customers) to the government of Antigua with a ceiling of $50,000 per month. Other popular locations included Central and South America, Canadian Native American reservations, and the British Isles.

Unlike most land-based casinos, the vast majority of Internet gambling sites are operated by small, virtually unknown companies. A land-based casino costs several hundred million dollars to build and operate and requires hundreds of employees, whereas an online casino is set up and operated by a handful of people for an initial investment of a few million dollars. The relatively low setup and operating costs make the businesses extremely profitable and allow them to offer higher payoffs to winners than land-based casinos.

The future of Internet gambling in the United States remains uncertain. Under the Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006 banks and credit card companies are committing a crime if they transfer Americans' money to Internet gambling sites. Though serious Internet gamblers will likely find ways of transferring funds to online casinos and card rooms, lawmakers hope the law will turn casual gamblers away. As of late 2006, many of the larger, publicly traded Internet gambling companies, such as PartyPoker, had stopped accepting American customers altogether to avoid any conflicts with the U.S. government. However, the legality of Internet gaming remains somewhat uncertain. The law does not resolve whether the horseracing industry or Native American tribes are exempt from the ban on online gambling.

THE DEVELOPMENT OF INTERNET GAMBLING

No consensus exists on when the first Internet casino began operating and who started it. However, it is generally agreed that the first online casinos began operating sometime in 1995 or 1996. Among the first was Intercasino, based in Antigua, which has positioned itself as one of the leaders in Internet gambling. In 1996 the country legalized and licensed online gambling sites. The companies that operate these Web sites are trade-zone corporations— that is, foreign-owned corporations operating in specific areas of the country as if they were on foreign soil. In Antigua, trade-zone corporations cannot produce products for domestic consumption, so Antiguans are not allowed to participate in online gambling with any trade-zone companies located there.

Various agencies and private entities have attempted to estimate the extent of the online gambling industry, including the National Gambling Impact Study Commission (NGISC), the U.S. Department of Justice, and industry researchers such as Christiansen Capital Advisors and Bear Stearns & Co. Even though their estimates differ, these analysts agree that the growth of online gambling has been phenomenal. In 1997 there were fifty to sixty Internet casinos in operation, most based in the Caribbean, which earned approximately $300 million to $350 million. By 2000 an estimated six hundred to seven hundred sites were operating and revenues approached $2 billion. By 2007 the American Gaming Association (AGA) estimates in the fact sheet “Internet Gambling” (2007, http://www.americangaming.org/Industry/factsheets/issues_detail.cfv?id=17) that about two thousand online casinos were estimated to exist.

ONLINE GAMES

Stewart indicates that sports book betting constituted roughly one-third (35%) of all Internet gambling in 2005, totaling $4 billion. Casino games made up about 25% of the online gambling market. Online poker accounted for 18% of all online gambling revenue in 2005. Poker is growing in popularity at a faster rate than any other type of online gambling. In 2000 online poker sites, such as PartyPoker, racked up $82 million in revenue. By 2005 poker sites worldwide were thought to have revenues of $2 billion. The rest of online gaming revenue came from the sale of lottery tickets, pari-mutuel race betting (in which those who bet on the top competitors share the total amount bet and the house gets a percentage), and other games.

Casino sites offer many of the same games available in land-based casinos, such as poker, blackjack, roulette, and slot machines. Bet denominations range from pennies to thousands of dollars. Poker Web sites have card rooms where players compete against each other rather than against the house. This is an example of person-to-person betting. To make a profit on these sites, the casino operators take a small percentage of the winning hand.

Online casino games operate in much the same way as the electronic games found in actual casinos. Both depend on random number generators: real slot machines have a computer chip built in; online games have random number generators written into their programming. Even though slot machine payoff percentages at actual casinos are dictated by the state in which they are located, online payoffs are not. However, online providers who never have winners would not have return customers, so their programs are designed to pay out a particular percentage. Online games are particularly appealing to people who enjoy card games because the betting limits are much lower than they are in actual casinos. For example, an online gambler can play blackjack for $1 per hand, whereas many land-based casinos set a $10- or $25-per-hand minimum.

Some sites require players to download software onto their personal computer. The software still runs through a program at the Web site, so the user must be online to play. Other games are played right at the Web site. Many use high-technology software that allows players to gamble in virtual reality: they can “look” around the table or around the casino room. Players can even “chat” with each other via online messaging during a game. Both of these effects make online gambling more interactive for the user.

Many sites offer free play to introduce visitors to the types of games offered and to give them a chance to practice. Visitors who decide to play for money must register, open an account, and deposit money into that account. This requires input of personal information, including name and address. The user usually sets up a user name and password for future access. Money is transferred to the gambling site via credit or debit card, through an account with an online bank or payment service, or via electronic check or wire transfer.

Most online sites offer bonuses of 5% to 20% of the amount of the initial deposit. These bonuses usually require that the gambler wager an amount two to three times the size of the bonus. Other sites offer prizes, such as trips, for repeat business. Winnings are typically deposited into the user's online account or paid via a certified check mailed to the winner.

ONLINE GAMBLERS

Paul Taylor, Cary Funk, and Peyton Craighill of the Pew Research Center note in Gambling: As the Take Rises, So Does Public Concern (May 23, 2006,http://pewresearch.org/assets/social/pdf/Gambling.pdf) that few American adults have gambled for money on the Internet: only 2% of adults polled had participated in online gambling in the previous twelve months. Though this number is small, Taylor, Funk, and Craighill explain that the number of people who gambled online doubled from 1996, when a Gallup poll reported that only 1% of Americans gambled online. Perhaps more significantly, in One in Six Americans Gamble on Sports (February 1, 2008,http://www.gallup.com/poll/104086/One-Six-Americans-Gamble-Sports.aspx), Jeffrey M. Jones of the Gallup Organization reports that the percentage of Americans who gambled on the Internet in 2007, after the UIGEA went into effect, remained steady at 2%.

In “Small Percentages of U.S. and British Online Adults Admit to Gambling Online” (February 22, 2006,http://www.harrisinteractive.com/harris_poll/index.asp?PID=641), Harris Interactive notes that in 2006 it inter

viewed 2,985 adults in the United States and 2,074 adults in Great Britain and asked them about their online gambling habits. The Harris poll reveals that most people who gambled online did it frequently. Some 2% of those surveyed in the United States played online poker once a month, as opposed to 1% who played online poker once a year. In addition, 1% gambled at an online casino once a month. Fewer than 0.5% reported gambling at an online casino only once a year.

Peter D. Hart Research Associates and Luntz Maslansky Strategic Research conducted a more extensive poll of online gaming habits in the United States in 2005, which was presented by the AGA in 2006 State of the States: The AGA Survey of Casino Entertainment (2006, http://wwwamericangamingorg/assets/files/2006_Survey_for_Webpdf). The poll found that nearly 4% of Americans gambled online in 2005, which was twice the percentage of those who had gambled online in 2004. Online gamblers were much more likely than the average casino customer to be male, under the age of thirty, and have a college degree. (See Figure 9.1, Figure 9.2, and Figure 9.3.) Of casino gamblers, 53% were male. Only 9% were twenty-one to twenty-nine, and 28% had four-year college degrees. Of online gamblers, 68% were male, 43% were between the ages of twenty-one and twenty-nine, and 35% had four-year college degrees. In addition, 24% had an income of between $75,000 and $99,999 and 17% had an income of more than $100,000. (See Figure 9.4.)

The AGA indicates that 38% of those who gambled online in 2005 had started betting online a year before, and 32% said they had started one to two years before. The largest number of online gamblers (80%) reported playing poker against other people in the previous year. Nearly as many online gamblers (78%) played casino games for money, and far fewer people (56%) placed bets on sports online. Out of those people who played poker online, nearly two-thirds (65%) said that Texas Hold 'Em was their favorite game, followed by seven-card stud (13%), five-card draw (13%), and Omaha (8%). For online casino gamblers, people reported playing blackjack (78%) most often, followed by video poker (65%), slot machines (60%), roulette (37%), and craps (29%).

Robert T. Wood, Robert J. Williams, and Paul K. Lawton examine in “Why Do Internet Gamblers Prefer Online versus Land-Based Venues? Some Preliminary Findings and Implications” (Journal of Gambling Issues, no. 20, June 2007) why gamblers patronize Internet gambling sites. The researchers find that gamblers' top reasons for betting on the Internet rather than at a casino involved convenience (12.9%), ease (12.2%), and comfort (11.7%). (See Table 9.1.) One out of ten (10%) gamblers surveyed said they gambled online because of their distance from a casino or because they wanted privacy (9.8%). Other rea-Male 68%

sons given included dislike of casino clientele, crowds, noise, or cigarette smoke.

THE LEGAL ISSUES

Regulating any activity on the Internet has turned out to be a political and legal headache for authorities. Every country wants jurisdiction (the authority to enforce its own laws) over content that its citizens can access over the Internet. This has proved to be difficult, however, because the Internet has no boundaries. A business based on a host computer might be legal in the country in which it is physically located but illegal in other countries where it can be accessed over the Internet.

Most countries restrict gambling activity much less than the United States does, but in the United States the individual states and not the federal government regulate gambling. Even though there are federal antigambling laws, they defer to the Tenth Amendment of the U.S. Constitution, which guarantees the rights of the states to govern their own affairs. Every state allows or disallows different forms of gambling. For example, Utah and Hawaii prohibit all types of gambling. Commercial casino gambling is legal in eleven states. Pari-mutuel wagering on horse or dog races is legal in more than forty states. Gambling on sporting events through a book

maker is legal only in Nevada. Internet gambling, however, is not subject to state boundaries. A user in any state can access online gambling sites operated from countries around the world where gambling is legal.

Determining jurisdiction is a major problem for authorities. Does online gambling occur at the location where the Web site is hosted or at the location where the gambler is located? The Department of Justice states that gambling occurs in both places. The problem grows even more complicated when one or the other is not on U.S. soil. Even though an international treaty with extradition rights could

settle such matters, it is unlikely that one would be written and signed.

Various forms of gambling are legal in many parts of Europe, Central and South America, the Caribbean, Australia, and New Zealand. Most of those areas have set up regulatory measures that are similar to the laws regulating land-based casinos in the United States. For example, in June 2001 the Australian senate passed the Interactive Gambling Act, which prohibits online casinos in the country from taking bets from Australians. The law has provisions allowing interactive sports gambling and wagering services. Foreign residents can gamble at the Australian-based online casinos unless their governments sign up to be excluded from the program. In 2005 the parliament of the United Kingdom passed the Gaming Act, which set up regulations and licensing procedures for online casinos. Though online casinos in Britain were required to pay higher taxes than such companies pay in Caribbean countries, many analysts believe Internet casino operations will flock to Great Britain because of the advanced communications infrastructure, the stable political environment, and the educated workforce.

The Interstate Wire Act

In 1961 President John F. Kennedy (1917–1963) signed the Interstate Wire Act—widely known as the Wire Act—which makes it a crime to use telephone lines (wire communication) in interstate or foreign commerce for the placement of sports bets or even to transmit information assisting in the placement of bets on sporting events. The act applies only to the gambling business, not to gamblers themselves.

The article “Gambling on the Internet: Crossing the Interstate Wire” (The Wager, vol. 6, no. 6, February 7, 2001) examines the legal issues involved in Internet gambling, particularly criticisms of the Wire Act. It finds that many legal experts say the law does not directly apply or is too ambiguous to apply to offshore Internet gambling sites because:

• The Internet did not exist when the act was made law.
• Gambling Web sites maintained on offshore computers are not under U.S. jurisdiction.
• Internet service providers do not fall under the definition of wire communications facilities (particularly those associated with satellite and mobile-phone transmissions).
• The law specifically mentions only sports betting, not casino games.
• Prosecutors cannot prove that online gambling sites “knowingly” transmit bets from U.S. citizens, because the physical location of online gamblers cannot be determined.

The states have interpreted the Wire Act to mean that online wagering is illegal if it occurs in any state in which gambling is illegal. In 1999 the issue was addressed by the New York Supreme Court in People v. World Interactive Gaming Corporation (No. 404428/98 [1999]). The state of New York brought suit against the World Interactive Gaming Corporation (WIGC) and the Golden Chips Casino for offering online gambling to New York residents. The Golden Chips Casino operated a legal land-based casino in Antigua. The company was wholly owned by the WIGC, a Delaware-based corporation with corporate offices in New York. The suit alleged that the casino had installed interactive software on its computer servers in Antigua that allowed Internet users around the world to gamble. The online casino was advertised on various Internet sites and in U.S. gambling magazines, both of which were accessible to New York residents.

Users had to wire money to a bank account in Antigua and type in their permanent address before play. Only users who entered addresses within states that permitted land-based gambling, such as Nevada, were allowed to play, so a user who entered a New York address was not granted permission. However, the suit alleged that the barrier was easily overcome by typing in an out-of-state address, because the software had no way of checking the physical location of the user. The state did not consider this a “good faith effort” to keep New Yorkers from gambling, as required by law.

The WIGC argued that the federal and state laws in question did not apply to an offshore casino operated in full compliance with the law in the country in which it was located. The court ruled in favor of the state, saying that the act of entering the bet and transmitting the betting information originated in New York and constituted illegal gambling activity. The legality of gambling in Antigua was not an issue.

Furthermore, the court said the gambling activity violated three federal laws: the Wire Act; the Foreign Travel or Transportation in Aid of Racketeering Enterprising Act (U.S. Code §1952), known as “the Travel Act”; and the Interstate Transportation of Wagering Paraphernalia Act (U.S. Code §1953), known as “the Paraphernalia Act.” According to the court, “the Travel Act prohibits the use of ‘any facility in interstate or foreign commerce' with intent to promote any unlawful activity.” The Paraphernalia Act is specific to gambling activity, prohibiting the interstate or foreign transmission of any item for use “in (a) bookmaking; or (b) wagering pools with respect to a sporting event or (c) in a numbers, policy, bolita, or similar game.” The court ruled the WIGC violated this law because it had used the U.S. mail to send literature to potential investors and to send computers to the Antigua operations.

One issue was still not settled yet: Which types of gambling sites were covered by the Wire Act? The Wire Act only states that people cannot make sports bets over communication lines. In 2002 the Appeals Court for the Fifth Circuit ruled in In regarding MasterCard International, Inc. (313 F.3d 257) that the Wire Act applies specifically to online sports gambling (also known as sports books) and not to online casinos or poker sites.

During the late 1990s federal prosecutors went after the operators of offshore sports books that had taken bets from U.S. citizens via the Internet and telephone. In March 1998 they charged twenty-one people with conspiring to violate the Wire Act. Ten pleaded guilty to that charge, and three pleaded guilty to related misdemeanor charges. Seven could not be apprehended and are considered fugitives. The last defendant, a U.S. citizen named Jay Cohen (1968–), decided to stand trial. Cohen operated a sports book called World Sports Exchange in Antigua. The prosecution in the case argued that Cohen solicited U.S. customers through U.S. newspaper and magazine advertisements, encouraging them to contact World Sports Exchange via a toll-free telephone number and Internet site to place sports bets. On February 28, 2000, Cohen was convicted of conspiracy to violate the Wire Act and seven substantive violations of the Wire Act. He was sentenced to twenty-one months in prison and assessed a $5,000 fine.

In 2001 U.S. agents arrested Jeff D'Ambrosia (1959–) and Duane Pede (1949–), who were the principle owners of Gold Medal Sports, a sports book Web site that operated out of Curaçao. Both pleaded guilty to violating the Wire Act by accepting bets online from people on U.S. soil. They were sentenced to five years in jail and were forced to pay $1.4 million in back taxes.

Despite these arrests, many online sports books operating outside the United States continued to openly market their Web sites to Americans and allow Americans to place bets. In 2006 the Department of Justice cracked down once again on the owners of Internet sports book sites when it arrested David Carruthers (1957–), who was the chief executive officer of the Costa Rican–based BetOnSports. Federal agents arrested Carruthers when he changed planes in Dallas. He was charged with violating the Wire Act, committing mail fraud, and a host of other felonies. Carruthers, who is a British citizen, was awaiting trial as of October 2008. After the arrest, BetOn-Sports shut down the division of its operations that took bets from U.S. gamblers and fired Carruthers. Other arrests were made of BetOnSports executives, but Carruthers was the most high profile. He remains an out-spoken opponent of U.S. federal legislation designed to eliminate online gambling.

Jacob Sullum reports in “Some Bets Are Off” (Reason, June 2008) that in 2003 Antigua and Barbuda claimed that the stance the United States took on online gambling was in violation of several free trade agreements laid down

by the World Trade Organization (WTO), a multinational trading organization with limited power that sets up and enforces trading agreements between its members. When they appealed to the WTO in an effort to end U.S. restrictions, Antigua and Barbuda maintained that thousands of jobs in their nation depended on online gambling and that the United States was harming their economy by attempting to restrict access by U.S. citizens. The WTO ruled against the United States in 2004, claiming that several U.S. laws regarding online gambling violated WTO free trade agreements. After two years of talks, the United States refused to change its position on online gambling. Antigua and Barbuda approached the WTO again, and in July 2006 the WTO convened a panel to further investigate U.S. laws regarding online gambling. On February 15, 2007, the panel found that the United States was in violation of international trade agreements. The judge presiding over Carruthers's case subsequently ruled that the WTO ruling could be used as part of his defense. As of 2008, the European Union was considering filing a complaint of its own with the WTO, arguing that the United States is treating foreign businesses like criminals.

The UIGEA

Politicians have long recognized the shortcomings of the Wire Act to address modern gambling technologies. In Final Report (June 1999,http://govinfo.library.unt.edu/ngisc/reports/fullrpt.html), the NGISC recommended that Congress enact federal legislation that prohibits wire transfers from U.S. banks to online gambling sites or their banks.

Some form of Internet gambling legislation has been circulating around Congress since 1995, when Senator JonL. Kyl (1942–; R-AZ) introduced a bill to amend the Wire Act to specifically prohibit online gambling via the Internet and satellite technologies. It would have allowed individual states to permit online forms of gambling already legal in their states (such as lotteries and casino games), while prohibiting forms that were not (chiefly sports gambling). Considered by many to be virtually impossible to enforce, it did not gain popular support. It failed to pass in 1997 and 1999 as well.

In following years other legislation was proposed in the U.S. House of Representatives by Jim Leach (1942–; R-IA), Robert W. Goodlatte (1952–; R-VA), Michael G. Oxley (1944–; R-OH), and John J. LaFalce (1939–; D-NY) and in the U.S. Senate by Richard C. Shelby (1934–; R-AL) and Dianne Feinstein (1933–; D-CA). In an effort to address the concerns raised by earlier attempts to regulate online gambling, most of the later bills' focus had shifted to outlawing the use of credit cards or electronic payment services to pay for online gambling. The UIGEA, which was signed into law in October 2006, did just that. Rather than regulate the behavior of individuals, it was intended to prohibit credit card companies from making transactions with online gambling establishments and to authorize the U.S. secretary of the treasury to prohibit any future, unforeseen payment methods that might be used for online gambling.

Michael Blankenship notes in “The Unlawful Internet Gambling Enforcement Act: A Bad Gambling Act? You Betcha!” (Rutgers Law Review, vol. 60, no. 2, 2008) that even after the UIGEA became law, many questions remained about how it would be enforced. It was clear that banks and credit card companies could no longer transfer money directly to online casinos or poker sites, such as PartyPoker—it would be a crime to do so. However, whether banks and credit card companies could transfer money for gambling to online payment processors, such as NETeller, was considerably murkier. Many online gamblers set up accounts with payment processors, which function as online banks, and then transfer money in and out of online casinos. Even though the new law would prohibit U.S. banks and credit card companies from sending money to payment processors that deal exclusively with casinos, the law is less clear about payment processors that cater to a wide array of businesses and to payment processors or casinos that are in other countries or are privately held: foreign businesses are not regulated by U.S. law, and privately held companies are not required by law to divulge publicly how they make money. According to Blankenship, many people believe that those who are determined to gamble online will find a way, probably by going to foreign, private payment processors and casinos.

In 2007 several bills were introduced in Congress that sought to regulate, rather than outlaw, Internet gambling. In April 2007 the Internet Gambling Regulation and Enforcement Act (H.R. 2046) was introduced in the House of Representatives. This act would license and regulate Internet gambling sites. The bill was referred to the Subcommittee on Commerce, Trade, and Consumer Protection. In June 2007 the Internet Gambling Regulation and Tax Enforcement Act was introduced to amend the Internal Revenue Code to establish licensing requirements and fees for Internet gambling sites. This bill was referred to the House Committee on Ways and Means. The bill was reintroduced in March 2008 and again referred to the House committee.

State Laws

Both Hawaii and Utah outlaw any acts of gambling within state borders, which by default includes Internet gambling. According to the AGA, in “Internet Gambling,” attorneys general in Florida, Kansas, Minnesota, Oklahoma, and Texas maintained the position in 2007 that online wagering is illegal in their states and in violation of existing laws. In New Jersey the courts ruled

that online gambling violates state laws. Massachusetts had a law on the books that specifically forbids gambling transactions over phone lines, which has been interpreted to include online gambling. Six states have enacted laws specifically prohibiting aspects of Internet gambling:

• Illinois prohibits anyone from establishing, maintaining, or operating an Internet gambling site and prohibits making a wager by means of the Internet.
• Louisiana prohibits the operation of an Internet gambling business and providing computer services to Web sites primarily engaged in gambling businesses.
• Oregon law forbids the collection of Internet gambling debts through credit card payments, checks, or electronic fund transfers. Credit card providers are not held liable for debts incurred by Internet gamblers.
• South Dakota prohibits anyone engaged in a gambling business from using the Internet to take bets and prohibits anyone from establishing an Internet gambling business in the state. The law does not apply to the state's licensed casinos.
• Indiana's law states that anyone who operates a gambling Web site or who assists in the operation of such a site commits a felony.
• Washington had the toughest state law against online gambling. Anyone caught gambling online in Washington can be convicted of committing a class C felony, which means that Internet gambling is legally as egregious an offense as possessing child pornography.

Credit Cards

In 1997 and 1998 a California woman named Cynthia Haines charged more than $70,000 in online gambling losses to her credit cards. Providian National Bank, which issued the cards, sued her for nonpayment. In June 1998 Haines countersued the bank, claiming that it had engaged in unfair business practices by making profits from illegal gambling activities. At that time all casino gambling was illegal in California. Haines's lawyers argued that her debt was void because it arose from an illegal contract. Providian ultimately settled out of court, forgave her debt, and paid $225,000 of her attorney's fees. The company decided to no longer accept online gambling transactions.

The settlement caught the attention of other major credit card issuers. Nonpayment of outstanding credit card charges results in serious losses, called charge-offs in the industry. Faced with the potential for massive charge-offs and legal uncertainties, many card issuers—including Bank of America, Capital One Bank, Chase Manhattan, Citibank, Direct Merchants, Fleet, and MBNA—stopped accepting financial transactions from online gambling sites. Issuers that do accept online gambling transactions generally delay payment of part or all the money to the online sites for several months in case the user decides to dispute the charges.

The U.S. Government Accounting Office (now the U.S. Government Accountability Office) explains in Internet Gambling: An Overview of the Issues (December 2002,http://www.gao.gov/new.items/d0389.pdf) that all the major credit card companies (Discover, American Express, Visa, and MasterCard) have enacted measures to restrict the use of their cards for Internet gambling. Discover and American Express do so primarily by preventing Internet gambling sites from becoming merchants in the first place. All potential merchants are screened, and existing merchants are spot-checked to make sure they are not engaged in online gambling. Visa and MasterCard are issued by a large network of financial institutions that have credit card associations, which set policies for member institutions and provide the computer systems used to process financial transactions. The associations have a coding system that merchants must use to distinguish the different types of transactions. It was refined in 1998 so that online gambling sites have to enter a special two-part code that tells the issuer the nature of their business and gives the issuer a chance to deny authorization. Figure 9.5 shows how an online gambling transaction can be blocked at various points.

However, the coding system does not distinguish between legal and illegal transactions. For example, Americans visiting countries in which online gambling is legal may find their credit cards rejected there when they try to gamble over the Internet. The coding system has also been tricked by unscrupulous merchants who entered the wrong code for their businesses, according to the credit card associations.

Because credit card transactions were blocked at online gambling sites, merchants and gamblers turned to alternative payment systems, called online payment providers. These services allow customers to transfer money from their credit cards into accounts that can then be debited to pay for a variety of online goods and services, including gambling. Money going to and from these intermediary accounts is not easily traced. Online payment providers include PayPal, Neteller, FirePay, and ECash. Some credit card associations are refusing to do business with online payment providers unless they receive assurances that money will not be transferred to Internet gambling sites.

In 2002 and 2003 the online payment network PayPal paid millions of dollars to settle allegations that the company violated the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (also called the Patriot Act) during 2001 and early 2002 by processing online gambling transactions from U.S. citizens. The Patriot Act forbids the electronic transmission of funds

known to be associated with criminal acts. PayPal stopped handling online gambling transactions in November 2002. Neteller processed these funds until January 2007, when its Canadian founders were arrested in the United States on charges of conspiracy and money laundering (the act of engaging in transactions designed to hide or obscure the origin of illegally obtained money).

In 2006 the UIGEA forbade banks and credit card companies from transferring money to both Internet gambling sites and online payment processors strongly associated with virtual casinos. However, identifying payment processors that deal primarily with casinos is not a simple task. This is especially true if the payment provider is a private corporation with no financial transparency. Even if all such payment providers are identified, large European banks could offer credit cards to Americans, opening Internet gambling services once again to people in the United States.

Federal Crackdown on Advertising

Under the Wire Act, advertisements for online gaming are illegal in the United States. According to the Department

of Justice, media outlets that run advertisements for online gambling are aiding and abetting the gambling Web sites, yet online gambling companies have advertised extensively online, in magazines and newspapers, and on television. In 2003 the Department of Justice mounted an offense against the U.S. media to stop the proliferation of such advertisements. One salvo was a letter to the National Association of Broadcasters in which the department outlined its views on advertising for online gambling outfits.

Then in 2004 the Department of Justice intervened when Discovery Communications agreed to run $3.9 million in ads for Paradise Poker, mostly during World Poker Tour episodes on the Travel Channel. Discovery Communications aired $600,000 worth of ads and refused to air the rest. Before Paradise Poker could recover the remainder of the balance paid to Discovery for the ads (about $3.3 million), the Department of Justice seized the money. The obvious message was that online gambling sites that advertised in the United States could have their ads canceled and their assets seized.

In April 2004 major Internet search engines, including Yahoo and Google, announced that they would no longer display ads for online gambling sites that targeted U.S. citizens. The companies reportedly acted to head off plans by the Department of Justice to pursue legal action against them. Many other Web sites did not heed the department's warning. For example, in 2005 the parent company of The Sporting News was forced to surrender $4.2 million in advertising revenue after running ads for several online gambling sites. Furthermore, the company agreed to spend $3 million to create and run antigambling advertisements online. The Department of Justice also intervened in 2005 when Esquire ran ads for the Costa Rican poker site Bodog.com. Esquire agreed not to run any more online casino ads.

One way Internet gambling sites have subverted these prohibitions is to create dot-net sites that mirror the dotcom sites, except that users play with fake money. For example, PartyPoker.com created a site, PartyPoker.net, that bills itself as the “world's largest poker school.” Media outlets have accepted advertising for these dot-net sites.

THE EFFECTS OF ONLINE GAMBLING

Because the Internet gambling medium is relatively new, a limited number of studies have been conducted to determine its effects on people and their gambling habits. Economic factors are also difficult to assess because most online gambling sites operate in foreign countries with little government oversight.

Economics

Unlike traditional casinos, online gambling sites are not licensed or taxed by state governments. Therefore, they provide no revenue for social and educational programs. The primary financial beneficiaries are the online gambling companies themselves, the foreign countries in which they are located, and the companies that process their financial transactions.

Other businesses that benefit directly or indirectly from online gambling include Internet service providers, phone and cable companies, nongambling Web sites that feature advertisements for online gambling sites, and software companies. Major software providers to online gambling sites include WagerLogic, Boss Media, Micro-gaming Systems, and World Gaming.

Mobile phone companies expect cellular gambling to become commonplace in the future, particularly for phones with video streaming. Ladbrokes and William Hill are traditional British bookmakers that accept wagers via cellular phones using wireless application protocol. The company Eurobet launched wireless betting in 2000. Other companies, such as Slotland.com, allow people to play slots and win jackpots on their mobile phones. In the press release “Mobile Gambling Forecast to Top $16 Billion Globally by 2011, Despite Bleak Prospects for U.S. Market” (January 15, 2007, http://www.juniperresearch.com/shop/viewpressrelease.php?id=21&pr=42), industry analysts at Juniper Research predict that

gambling via cellular phone will grow from a $1.4 billion business in 2006 to a $16.6 billion business by 2011.

The economic effects of online gambling are discussed by Ryan D. Hammer in “Does Internet Gambling Strengthen the U.S. Economy? Don't Bet on It” (Federal Communications Law Journal, vol. 54, no. 1, December 2001). Hammer argues that people who do not gamble on the Internet suffer financially from online gambling. The high costs of litigation and unpaid bills, he notes, are passed on by credit card companies to other consumers in the form of higher interest rates and fees. Taxpayer money also funds federal and state lawsuits against online gambling sites. State governments receive no licensing fees or tax revenue from online gambling sites but must fund treatment programs for pathological gamblers, a growing number of whom are online gamblers. The federal government collects income taxes from the big winners of lotteries and traditional casino games, but no taxes are collected from online gambling winners.

Money Laundering

Law enforcement agencies are concerned about the possible use of online gambling businesses for money laundering. In his testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs Committee, the U.S. deputy assistant attorney general John G.Malcolm (March 18, 2003,http://banking.senate.gov/03_03hrg/031803/malcolm.htm) explained that once the money has been stashed with an online casino, criminals can use the games themselves to transfer money to their

associates. Some criminals set up private tables at online casino sites and then intentionally lose their money to business associates at the table. In other instances, the casino is part of the crime organization, so all the criminal has to do is lose money to the casino.

The factors that make online gambling susceptible to money laundering, officials say, include the speed and anonymity with which financial transactions take place and the offshore locations of the gambling companies. Many financial analysts believe the risk is low when credit cards are used, because credit card transactions are closely monitored and recorded. Now that credit card use is illegal in online gambling, other, less traceable payment methods may become popular.

Compulsive Gambling

Experts suggest that the fast pace and instant gratification associated with online gambling make it more addictive than other types of gambling. Online gambling is quite different from traditional casino gambling, because it is a solitary and anonymous activity. By contrast, casino gambling is a social activity, usually conducted in the company of family or friends. The Council on Compulsive Gaming of New Jersey estimates that a large percentage of online gamblers gamble alone. Online gamblers who contact the organization for help are usually younger than traditional gamblers and have built up large amounts of debt in a shorter time than traditional gamblers.

George T. Ladd and Nancy M. Petry of the University of Connecticut conducted a study of Internet gamblers and published their results in “Disordered Gambling among University-Based Medical and Dental Patients: A Focus on Internet Gambling” (Psychology of Addictive Behaviors, vol. 16, no. 1, March 2002). Between August 1999 and September 2000 the researchers surveyed patients seeking free or reduced-cost services at the university's health and dental clinics. All the 389 patients who completed the questionnaires in full reported gambling at some point in their life. About 90% had gambled in the previous year and 42% had gambled in the previous week. Some 8.1% had gambled online during their lifetime and 4% gambled online weekly. The younger respondents were more likely to have Internet gambling experience than the older respondents: the median age of the online gamblers was 31.7 years, compared to 43.5 years for traditional gamblers. Ethnicity also made a difference. Non-whites made up only 15.8% of the total group surveyed but 38.7% of the Internet gamblers.

All participants were given the South Oaks Gambling Screen (SOGS), a standard series of questions used to determine the probability that a person has a gambling problem. Results showed that the mean SOGS score of online gamblers was 7.8, compared to 1.8 for those who had no online gambling experience. Researchers categorized all respondents into levels depending on their SOGS scores. Level 1 gamblers had SOGS scores of 0 to 2 and were considered not to have a gambling problem. Level 2 gamblers had SOGS scores of 3 to 4 and were considered probable problem gamblers. Level 3 gamblers had SOGS scores of 5 or greater and were considered probable pathological gamblers.

Internet gamblers were much more likely to have gambling problems than non-Internet gamblers. Slightly more than 74% of Internet gamblers were rated at Levels 2 or 3, compared to 21.6% of the traditional gamblers.

Nancy M. Petry reports the results of a follow-up study in “Internet Gambling: An Emerging Concern in Family Practice Medicine” (Family Practice,vol.23,no.4, August 2006). In this study, 1,414 adults in health clinic waiting areas were given the SOGS test. Some 6.9% of adults reported ever gambling on the Internet, and 2.8% said they gambled online frequently. Of those who gambled frequently, nearly two-thirds (65.9%) were categorized as problem gamblers, as compared to 29.8% of those who reported ever gambling on the Internet and7.6% of those who were classified as non-Internet gamblers. The researchers then retrieved the medical records for those who participated in the study, finding that Internet gamblers had poorer mental and physical health than those who did not.

In detailing their study, Ladd and Petry write that “the availability of Internet gambling may draw individuals who seek out isolated and anonymous contexts for their gambling behaviors.” Even though problem gamblers are able to resist traveling to another state to casinos, they find online gambling more difficult to avoid because Internet sites are always open and accessible.

Underage Gambling

In January 2001 the American Psychiatric Association was already warning the public about Internet gambling. In a public health advisory, it noted that because online sites are not regulated, no measures were being taken to prevent underage gamblers from participating. It considered children and teenagers, who already play non-gambling games on the Internet, at significant risk of being lured to gambling sites. It also noted that few safeguards were in place to ensure the fairness of the Internet games or to establish exactly who had responsibility for operating them.

In “FTC Warns Consumers about Online Gambling and Children” (June 26, 2002,http://www.ftc.gov/opa/2002/06/onlinegambling.shtm), the U.S. Federal Trade Commission (FTC) also warns parents about children and online gambling. The FTC states it is too easy for kids, particularly teenagers, to access online gambling sites. It complains that many nongambling game-playing sites popular with kids contain links to gambling sites. The agency

had examined one hundred Internet gambling sites and finds that 20% had no warnings at all to children and many lacked measures to block minors from gambling.

Each year the Annenberg Public Policy Center at the University of Pennsylvania releases the National Annenberg Risk Survey of Youth. In “More than 1 Million Young People Use Internet Gambling Sites Each Month” (October 2, 2006,http://www.annenbergpublicpolicycenter.org/NewsDetails.aspx?myId=242) that after the passage of the UIGEA, weekly use of the Internet for gambling had dropped to 1.5%.