America Boldly Outlaws (and Quietly Legalizes) Internet Gambling

Governments around the world are responding in different ways to the explosion of gambling on the Internet:

• Some jurisdictions are setting up strict regulatory systems, complete with licenses, background checks, controls and, of course, taxes. The Australian states and territories are setting the standards for the rest of the world.
• Other countries are not as picky. One publicly held corporation told the U.S. Securities and Exchange Commission that it bought the right to issue licenses from the government of Grenada. An official from Grenada has reportedly denied this.
• Some countries are running the games themselves: Liechtenstein has a lottery open to almost any adult in the world with a modem. Although proclaiming this is legal, the small duchy had the political smarts to close its games to its much more powerful neighbors, Switzerland and Austria.
• Some jurisdictions are passing new laws explicitly prohibiting Internet gambling. Or so they say.

The federal and state governments of the United States are the best examples of how lawmakers can proclaim publicly that they are outlawing betting on the Internet, while they actually are taking steps to make it legal.

Nevada was the first state to both outlaw and legalize Internet gaming. In July 1997 Gov. Bob Miller signed SB 318, creating the misdemeanor of making or accepting a bet over the Internet from a player located in Nevada. SB 318 is a significant step toward the regulation of the Internet, because it is the first statute to explicitly make Internet gambling a crime in a state, even if the operator is not within that state's territory.

But SB 318 is also important for the exceptions it carves out of its new prohibitions. Making and accepting bets on the Internet are legal if the wagers are accepted in Nevada by Nevada-licensed race and sports books and casinos.

Nevada companies are gearing up to accept bets by computers. But the State Gaming Control Board is limiting operators to closed-loop systems: players can bet from their home personal computers ("PCs"), but their modems will be connecting the players' PCs directly to the operators' computers. Bettors cannot use this system to jump to a site on the Internet.

The Board has not issued regulations allowing true Internet gaming. In fact, it is requiring that the bettor be in Nevada and that the closed-loop system be able to confirm that no bets are taken from outside the state.

Nevada is ready to go, to allow its licensees to take bets on the Internet, as soon as Congress lifts the federal restrictions on interstate wagers.

Louisiana and Illinois were the next states to act. Although the Louisiana law is poorly written, they both appear to prohibit all gambling on the Internet.

The most recent state to act, Michigan, is following Nevada in a big way. In December 1999 Gov. John Engler signed SB 562 into law. SB 562 looks like it is merely extending parts of the state's criminal law to the Internet: Computers cannot be used for stalking, making bomb threats or gambling.

But a careful reading finds that only forms of gambling that are already illegal are barred from the Internet. Michigan law now clearly allows its state lottery, racetracks, casinos and bingo halls to accept bets online.

The most interesting proposal is the Kyl bill, now working its way through the political maze in Congress. Three years ago, the "Internet Gambling Prohibition Act," authored by Sen. Jon Kyl (R.-Az), would have outlawed everything, including online magazines and casino advertisements.

Its major weakness, besides violating the First Amendment, was that it would also have made it a federal crime to merely place a bet. The U.S. Department of Justice, which does not have fond memories of Prohibition, made it clear that it did not support a law that would require knocking on bedroom doors to go after $5 bettors. So the Kyl bill had to be amended.

As this is being written, a much revised Kyl bill has passed the Senate and is pending in the House. In its present form, it outlaws all Internet gambling ... except:

• Securities and commodities, as if day-trading was not gambling;
• Closed-loop systems for placing bets on horse and dog races, including from a home PC in one state to an Off Track Betting operator in another.
• Pari-mutuel pooling of bets between tracks.
• State lotteries, including multi-state lotteries, so long as the betting PC is in a facility open to the general public.
• Some forms of Indian gaming.
• Bets made for a fantasy sports league game or contest.

Politicians may talk Prohibition, but the future clearly is partial legalization.