An old sin and a bad new law

[johnny1212]

Terence Corcoran
Financial Post

Few politicians can resist waging war on sin. Sex, drugs, rock 'n' roll, alcohol, tobacco, gambling, gasoline consumption, lawn pesticides -- all of these have been the target of great moralizing winds from power-seekers looking for votes. The latest vice on the list is Internet gambling. In a shoddy bit of lawmaking over the weekend, the U.S. Congress rushed through a bill that would make it illegal for U.S. banks to process payments to illegal offshore Internet gambling operations.

By most accounts, it's a bumbling collection of unenforceable prohibitions. "The statute," says Professor Nelson Rose of Whittier Law School in California, "is very poorly written because it was rammed through the legislature without letting the members of Congress even read it. It's really repulsive the way this was done."

Whatever its flaws, the Unlawful Internet Gambling Enforcement Act nonetheless wiped billions in value off the shares of high-flying international gambling firms. Gaming companies, at home and in countries where Internet gambling firms operate believe the law will act as some kind of a deterrent to U.S. citizens. How much nobody knows, but the market certainly sees a significant impact.

The Congressional move is being played by conservative politicians as a major moral initiative. Arizona Senator Jon Kyl, who has been on this campaign for at least a decade, compares online gambling with crack cocaine addiction. Representative Jim Leach, from Iowa, sees Internet gambling as a source of bankruptcy and crime, with 25% of male college students allegedly placing online wagers. "Never has it been so easy to lose so much money so quickly at such a young age. The casino is in effect brought to the home, office and college dorm."

All of which is probably true. The problem, however, is less moral than it is practical and legal. The U.S. Internet gambling issue is similar to the great Canadian foreign satellite issue. For more than a decade the RCMP hunted down Canadians who had installed U.S. satellite dishes. Canada tried to make it illegal for Canadians to receive U.S. satellite services directly from U.S. distributors. If Canadians wanted to view U.S. programming, it had to be passed through Canadian-owned facilities. For the most part, the Canadian government succeeded in enforcing its rules.

Technically, Internet gambling is illegal in the United States -- and in Canada. Gambling can only be enjoyed through government-regulated operations and, in many cases, government-owned operations. While tens of thousands of Canadians gamble through Internet facilities, it is illegal and contrary to the Criminal Code. That would change, of course, if the provinces or Ottawa were to set up their own government-run Internet gaming operations.

So far, Ottawa apparently has no plans to crack down on Internet gaming operators. Since Internet gaming firms all appear to be based in Europe or elsewhere, Canadian and U.S. law-enforcement agencies have no way to enforce their national laws abroad. The alternative would be to try to hunt down the actual gamblers. That would mean, absurdly, police raids on college dorms and home computer rooms where people are actually playing online poker.

Since bursting into the homes of every American and Canadian who gambles online is impractical, what's to be done? Canada, so far, has decided to do nothing. Enforcement looks to be impossible, so federal and provincial officials are sitting on the sidelines while operators in London and Hong Kong collect millions in revenues, unregulated and untaxed, in competition with casinos owned by government or native groups.

While Canada has opted to ignore the problem, the United States has moved toward enforcement. Individual executives of foreign Internet gaming companies have been arrested. So far, the effectiveness of that strategy has been limited. It is also not clear whether the state laws against Internet gambling will hold up in court.

The next stage, short of going after individual gamblers, is to cut off the middle man. With this week's move, the U.S. government is stopping short of going after individual gamblers and instead will try to shut down the money flow from gamblers to operators. If students in a college dorm run up $1,000 in poker losses, it will be illegal for financial institutions and other transfer agents to move the money to the gaming operator. How this is to be done, nobody yet knows. Regulations will have to be drafted over the next nine months.

Would this bill run afoul of World Trade Organization rules? Trade officials have said the U.S. government's attempt to stop Internet gambling from offshore firms is a form of trade protectionism. But that charge seems unlikely to stick. It would be a trade issue if the U.S. were to allow U.S. players to operate Internet gambling while banning foreign Internet gambling, but that's not the effect of this plan.

So this is not a moral issue or a trade issue, really. There's no new sinning going on. It's just another case of technology overtaking lawmakers and the law.