The Risks of Gambling Regulation

When trade emissaries from the European Union
arrive in Washington later this month to talk to officials in Congress, the
Justice Department, and other executive branch agencies, they’ll have some
difficult questions to ask. In particular, they’ll ask about some gambling laws
that rank among some the worst written sections of the United States Code. If
things go poorly a trade conflict with vast implications for the United States
banking sector could ensue.

Some background first: three federal laws — only one of them particularly
clear — govern Internet gambling in the United States. One, the 1961 Wire Act,
limits nearly all gambling by telephone and telegraph but, for obvious reasons,
says nothing about the Internet. Another, the 1992 Professional and Amateur
Sports Protection Act (the only clear law), essentially bans all non-Nevada
betting on sports other than animal racing and jai alai. Finally, the 2006
Unlawful Internet Gaming Enforcement Act (UIGEA) deputizes banks, credit card
companies, and credit unions to enforce all state laws — including many that
date to the 19th century — that might bar transactions relating to Internet

The EU is interested in the laws and their application because some European
and Caribbean Internet gaming operators have already faced Wire Act prosecution
for engaging in Internet gambling transactions before UIGEA went into effect in
2006. On the other hand, U.S.-based horse betting websites operate freely. In other
words, the Department of Justice appears to have selectively prosecuted
non-U.S. operators in violation of World Trade Organization rules that bar
discriminatory treatment. Even more interestingly, several of the Internet
gaming operators under investigation — and — actually
pulled out of the U.S. market as soon as UIGEA went into force. Already, the EU
has begun the process of creating a formal Trade Barriers Regulation complaint
against the U.S. government. (U.S. Trade Representative Susan Schwab has, so
far, brushed off the investigation.)

A series of "interrogatories" — formal questions directed at
American officials — appears to show what will come. The questions cover
topics ranging from the way the United States has enforced laws to the size of
the U.S. gambling industry. Running almost 5,000 words, the list of questions
reads more like the outline of a legal brief rather than a simple set of
inquiries. It asks for every detail of the operations of the U.S. gaming industry
and asks U.S. regulators to justify nearly every action they’ve taken with
regard to Internet gambling.

No certainty exists that the EU will ever decide to turn the dispute into a
formal case before the WTO. That said, even the possibility has serious consequences:
Since enforcement of the gambling laws falls almost entirely on the banking
sector, it appears likely that the EU could well respond with banking sanctions
directed at getting the U.S. to change its behavior. (Other than the
horseracing sites — which serve an almost exclusively American clientele —
there are no American gambling sites to sanction.) Given the enormous volume of
trade between the U.S. and Europe, almost $700 billion in 2007, even a tiny
series of retaliatory measures would have severe implications for the U.S.

Even if the EU decides to stay quiet and never complains about UIGEA, it’s
pretty obvious that America’s effort to regulate gambling at the federal level
needs to end. Thirty years ago, when casinos existed in only one state, federal
laws cracking down on gambling represented the public will. Today, with
gambling legal in 48 states, America’s debate over gambling has ended with the
side that favors legalization as the clear winner. The positive and negative consequences
of widespread legal gambling have already touched every corner of American
society. The risk of a serious trade dispute offers a new reason why the U.S.
should do away with its federal gambling laws and let state legislatures and
consumer preferences decide where — and if — Internet gambling needs
government regulation.