Editorial: (Not Quite) Time to Regulate

Barney Frank introduced a federal regulatory bill!

Did anybody see that coming? Not me.

All the rumors I had been hearing indicated that his legislation would undo parts of the UIGEA, and I was very skeptical of his efforts because he was telling reporters things like, "My committee only has jurisdiction over credit cards. I can't do more than repeal the ban on the use of credit cards. We don't have jurisdiction generally over the Internet or other aspects of this."

His legislation is actually quite a bit more ambitious than simply repealing the ban on credit cards. Hopefully it generates some long overdue discussion in Congress over the practicality of prohibition/regulation, but it needs a LOT of work if it's ever going to pass.

What It Would Do

If ratified, Frank's legislation would be inserted into the U.S. Code at Chapter 53 of Title 31--immediately after the UIGEA--as Subchapter V, the Internet Gambling Regulation and Enforcement Act. Essentially, the legislation would order the Director of the Financial Crimes Enforcement Network (FinCEN) to construct a regulatory framework for Internet gambling operators and to administer licenses to qualified applicants.

Licensees would only be permitted to offer gambling services in states, tribes or territories where the particular services are legal. They would be expected to verify that customers are 18 years of age and physically located in a jurisdiction where the activity is legal.

Licensees would no doubt be expected to contribute a portion of their revenue as taxes, but the legislation is silent on the rate or structure of a taxation scheme, except to say that licensees must deliver appropriate taxes to federal, state and tribal governments.

The legislation would also provide freedom from liability for investment banks, payment processors and financial institutions that perform activities on or behalf of licensed Internet gambling companies.

Sports leagues would be given the right to request that wagering on their games be prohibited, and it should be anticipated that America's four largest leagues--NFL, MLB, NBA and NHL--would do so.

When applying for licenses, operators would be required to provide FinCEN with detailed financial statements and documentation about the corporate structure of their businesses and any of their subsidiaries, affiliates or related companies.

FinCEN would run extensive background checks of applicants and evaluate applications based on factors such as the financial condition and business experience of applicants.

Persuasion

A major obstacle, of course, is persuading other lawmakers to support the plan. Upon introduction of the bill, Frank had only 11 co-sponsors, and he indicated, "The votes aren't there to change it right away."

Remember, Internet gambling prohibition has been an issue in Congress for more than 12 years, and when bills have come up for votes they have typically done quite well, despite their merits or lack thereof. In many ways, the UIGEA is the product of all these years or work. While prohibition bills in previous years were riddled with provisions and exemptions that disappointed various interest groups and industries, by 2006 prohibition legislation had evolved in such a way to appease most of these groups.

Indeed, less than one year ago prohibition bill H.R. 4411 was approved by the full House by an overwhelming vote of 317-93, and frankly it seems improbable that after finally passing a prohibition bill legislators would be willing to undo it before giving it an opportunity to work.

Furthermore, it is likely that a bill to regulate Internet gambling--or to expand legalized gambling, as opponents will say--could run into far more opposition from interest groups and industries than prohibition bills have. It would be quite a feat if regulatory legislation could overcome opposition in a matter of only one or two congresses.

Lack of Clarity

Several matters require further clarification. Frank's legislation does not refer at all to some of the systems established by the UIGEA, and it is not clear how the two contrasting bills could function together. For example, on one hand the UIGEA specifically exempts state-authorized Internet gambling activities on an intrastate basis from the definition of "unlawful Internet gambling," but Frank's legislation seems to approve of interstate wagering that is authorized by the federal government, as long as the activity is legal in the state where the gambler is located.

Frank's legislation also says nothing about where licensed operations may be located. Can foreign companies become licensed simply by agreeing to submit to the jurisdiction of the United States? Or must they establish operations in the United States? Or must they establish operations in every state in which they operate? The taxation scheme is also not yet developed.

And then there is the important matter of the Wire Act, for unless it is amended, the Department of Justice would probably continue to insist that all Internet gambling is illegal, including that which this legislation aims to regulate.

Overall, the regulatory system is extremely bare-bones in comparison to what other countries, such as the United Kingdom and South Africa, have put together after years of work. There is also far too little discussion about how it will mesh with other federal laws. But perhaps these are things that can be expanded through committee hearings and markups.

Bradley Vallerius is a freelance journalist and researcher with more than four years experience in the interactive gaming industry. He is author of US Policy Report - UIGEA and Beyond, a River City Group publication that examines US legislative history and policy with regard to Internet gambling.