Daryl Crone

Gambling on the Internet is projected to reach five to ten billion dollars annually by the year 2000. ¹ The potential for far greater wagering on the Internet is staggering – real space gambling of differing varieties exceeds $500 billion per year in the United States alone. ² While the emerging consensus among policymakers is that both purveyors and individuals who partake in Internet gambling ought to be criminally prosecuted, this essay will argue that prohibition may be futile or dangerous. Even if the government is able to prevent a wave of Internet gambling through a revision of existing statutes, it will only do so through unheard of intrusions on to individual privacy and massive consumption of prosecutorial and investigative resources. Instead, this essay will call for a more pragmatic policy on Internet gambling. Rather than making the practice illegal, the government should regulate Internet gambling through readily available means or legalize it so that the government can influence its growth. Although some commentators have called for a more deliberate approach to the regulation of Internet gambling, a rational policy must be quickly put in place in order to have the utmost influence on the development of this new industry. ³

Cyber-casinos offer a potentially dizzying array of opportunities and challenges for government regulators. They can operate twenty-four hours a day, never closing on holidays. They could (at least theoretically) advertise their services with impunity on web sites throughout the world. They may have no protection for minors, habitual gamblers, or drunks, save those limits or advisory statements that would be self-imposed. While real space offers the tangible sensation of decreasing amounts of gambling chips, cyber-casinos offer no physical disincentives to loss beyond one’s means. Fraudulent operators could steal a gambler’s money or rig the games, while criminal hackers could steal credit card information or access a gambler’s account. Finally, and perhaps most importantly from a regulatory standpoint, Internet gambling offers a highly accessible venue for money laundering and tax evasion, depriving states of needed revenue.

The National Association of Attorney’s General, in addition to other advocacy groups and governmental organizations, has called for a federal regulatory response to Internet gambling, a problem states seem powerless to confront. ⁴ Indeed, states are ill-equipped to handle Internet transactions that are potentially international in scope. State attorney’s general seem to believe that resolution of Internet gambling must be resolved at the national, if not the international level. A favorable legislative result might be possible in Washington, D.C., for instance, where gambling site operators seem to have no effective lobbying voice, and traditional real space operators back restrictive proposals.

Some believe, state attorney’s general included, that gambling on the Internet is already illegal either under state law or 18 U.S.C. §1084 ⁵ , the federal statute that prohibits wire transmission of wagering information. ⁶ Nevertheless, one of the biggest difficulties facing state prosecution remains a problem that is inherent to the Internet – that of jurisdiction over Internet acts. While this essay does not seek to become mired in the jurisdictional debates that continue to be waged, it is clear that Internet gambling is one of the first serious tests of how and where the prosecution of online criminal activity will take place. Needless to say, the results of this will have great impact on the ability of states to manage activities in cyberspace that affect citizens within their borders. ⁷ At the very least, state attempts to prosecute Internet gambling may have the effect of chilling the desire for operators to establish operations within United States borders, where jurisdiction and enforcement are more readily available. Some fear, however, that state action will hinder other areas of Internet commerce that remain in nascent stages and that would be adversely affected by fifty sets of regulations. ⁸ Already, states have begun to prosecute domestic Internet gambling sites. ⁹

The United States Congress either disagrees that existing state and federal law will be effective in halting the progress of Internet gambling, or it wishes to ensure that courts will understand this to be a clear statutory goal. ¹⁰ The aforementioned federal statute, 18 U.S.C. §1084 ¹¹ , was originally meant to criminalize the use of wire communications in the placement of sports wagers between states or between states and a foreign nation. It remains controversial whether this provision is applicable to gambling in cyberspace. ¹² In order to rectify this uncertainty, and at the behest of established gambling interests that feared competition and the potential for anti-gambling sentiment caused by fraudulent operators, the Senate passed the so-called Kyl bill by a vote of 90-10 on July 23, 1998. ¹³ That the Senate has acted is significant; however, the counterpart legislation to the Kyl bill remained stuck in the House judiciary committee at the end of the 1998 session.

The federal law that made wire transmissions of wagering information illegal, 18 U.S.C. §1084, has several inadequacies when it is used to prosecute acts on the Internet. It is entirely plausible to construe the act as applying solely to sports-related gaming, because it refers to a "sporting event or contest" as its subject of application; sporting thus predicates both event and contest. ¹⁴ In addition, the legislative history of the statute suggests that it was meant to apply only to sports wagering. ¹⁵ Congress was well aware of the types of gambling that existed when it passed the statute. In contrast to 18 U.S.C. §1084, 18 U.S.C. §1955 makes it illegal to be financially or managerially involved in a gambling business, but defines gambling broadly to include "pool-selling, bookmaking, maintaining slot machines, roulette wheels, or dice tables, and conducting lotteries, policy, bolita or numbers games, or selling chances therein." ¹⁶ Since these terms were not included in §1084, it is possible to infer that the statute was not meant to apply outside of the sports wager context. Finally, no reported cases prior to recent history have applied or attempted to apply §1084 to wagering outside of the sports context, even if defendants have been charged with such activity.

The Kyl bill seeks to amend existing law in order to rectify apparent deficiencies. As a starting matter, the definitions section preceding §1084 would be amended to apply to lotteries, but not to Securities and Exchange Commission regulated transactions, contracts of indemnity or guarantee, or contracts for life, health, or accident insurance. ¹⁷ The biggest change is that whereas before only those "engaged in the business of betting or wagering" were prosecuted, now the statute would also hold that, "It shall be unlawful for a person to place, receive, or otherwise make a bet or wager, via the internet or any other interactive computer service in any state." ¹⁸ States remain free to regulate gambling within their borders. The statute holds the prospect of $2500 or the amount wagered in fines, in addition to a possible prison term of up to six months. Either a federal or state attorney general may obtain a temporary restraining order or injunction in the face of violations of the act. Finally, the Secretary of State is ordered to negotiate and conclude international agreements that would enable the United States to enforce the act on foreigners.

The Kyl bill seeks the inclusion of the Internet as a prohibited means of transmitting wagering activity in interstate or foreign commerce. More importantly for the future of regulatory enforcement, the bill enables the government to prosecute individuals for violations. This goal may be counterproductive, as it may produce a backlash against improper intrusion on to individual privacy and as attempts to prosecute foreigners prove in vain.

***

A prohibition on United States-based operators might merely chase domestic wagers to locations abroad. Perhaps the same forces of consumer desire and state tax collection that have lead to the widespread dispersion of casinos, lotteries, and riverboats will push for legalized and controlled Internet gambling as well. Assuming some governmental assertion of control, it remains to be seen how regulation might work in this area. The government proposal to prosecute citizens under the Kyl bill would probably require a vast expansion of wiretaps or the creation of detection technology that would monitor online activity. Either way, outright prohibition within the United States would have little effect as operators could simply move their servers offshore. Senator Kyl has displayed a naïve belief that all communications at the point of entry with the United States can be halted. He stated on Nightline that, "So the way that our legislation is enforced is to simply pull the plug at the point of entry into the United States." ¹⁹ This reveals a misunderstanding of packet-switching technology, as Internet traffic from a given country can enter the United States from any number of overseas sites, so in order to halt undesirable gambling in Belize, all international communications would have to be shut down. ²⁰

Americans already pay little heed to anti-gambling laws – it is estimated that Americans illegally wager one hundred billion dollars each year. ²¹ Attempting to find and prosecute individuals guilty of participating in gambling through the mail would itself be difficult. ²² The government would find it nearly impossible to locate the origin of solicitations, and operators could use easily changeable post office boxes to elude detection. Meanwhile, individuals would grow to resent the increased and opprobrious snooping necessary to detect wrongdoers. The Internet adds encryption, anonymous messaging, and addresses that are easily manipulated and changed. While the postal service is quasi-public, the Internet is dependent on many different operators, making coordination difficult, if not impossible. The government would be unable to peruse the records of overseas services in order to find pertinent information that might lead to warrants or arrests; even if it could do so, the numerous wiretaps necessary would each require evidence before proceeding, a difficult and expensive process. Extradition treaties would be required to stop foreign operators, and the use of surrogate servers might prevent finding an operator’s true location anyway.

One palatable alternative might be to negotiate an international treaty on Internet gambling. An international commission of respected gaming experts might decide how to best establish a system of enforcement and dispute resolution. ²³ However, coordination would be difficult, and any one country could provide a safe haven for operators and prevent the entire system from working well. In sum, true prohibition and prosecution would exact great monetary and societal cost when federal law enforcement officers seem reluctant to prosecute the five dollar bettor and resources are shrinking. ²⁴

Even though direct prosecution of consumers who gamble might be difficult or unpalatable, it is clear that individuals need some kind of protection from well-financed (or worse, under-financed) operators and online casinos that cloak their fraudulent games. It is instructive to note what the Kyl bill does not do – penalize Internet Service Providers ("ISP’s"). In a previous version of the bill, ISP’s would have borne an affirmative duty to prevent Internet gambling from taking place through their servers, at least upon notification from a law enforcement or justice agency. ²⁵ Many of the problems associated with tracking individuals would be similar with ISP’s. Massive government intrusion in the form of wiretaps would be necessary to detect communications between ISP’s and their customers, and between ISP’s and potentially illegal servers. While theoretically feasible, it would require a totalitarianism foreign to our way of government and an enormous financial commitment. ²⁶

Using ISP’s to police the Internet is problematic in that there are an enormous amount of Internet sites in existence and the number continues to grow exponentially. Because this growth translates to millions of new sites per year, expecting each ISP to know the content of every site is unrealistic, and such a fact might translate to a potential defense against the knowing presentation of a forum in which gambling could take place. ²⁷ Though the ability to monitor all these sites for gambling activity is highly questionable, there is the precedent of filters preventing the viewing of obscene material in the home. Nevertheless, whereas filters against pornography tend to be consumer-driven, a filter in this context would be government-driven, raising important questions of constitutionality. ²⁸ It remains unclear how a site research system might be established by a governmental entity, should the government choose to centrally maintain a master list of illegal gambling sites for ISP uniformity. The burden of providing notice and due process to each individual site would no doubt prove too costly; though such a system is theoretically possible, it might fail in reality. ²⁹

If the prosecution of individuals seems harsh and intrusive, and the regulation of ISP’s seems unwieldy and difficult, then the government might look towards the regulation of credit cards to solve the Internet gambling issue. ³⁰ Many people remain reluctant to use credit cards in online transactions lest they risk sharing their financial information with hackers. Yet, it is also clear that the Internet gambling industry, at least for the time being, is highly dependent on the use of credit cards for growth, as charges on credit cards are the easiest ways to make deposits. Trouble may mount for Internet gambling should this become the only feasible solution for depositing funds into gambling accounts. A case now being tried involves a woman who has amassed seventy thousand dollars in gambling losses, but refuses to pay the resulting credit card bills because she claims that wagering over the Internet is illegal. ³¹ The suit seeks to bar the credit card companies from collecting on her gambling debts, potentially resulting in the end of their willingness to accept charges from Internet gambling operators. The government could also directly forbid credit card companies from making payments to operators, but with all of the caveats stated above regarding ISP liability. Credit card liability or loss may become moot, however, as deposits may soon come in the form of so-called "digital cash," which would be untraceable and perhaps beyond regulatory control.

In sum, many commentators believe Internet gambling by Americans to be inevitable. ³² It is their understanding that as technology advances, prohibition becomes futile. Whether or not a code-based system of ex ante enforcement will resolve this hindrance remains uncertain. Currently, operators need only one safe harbor in the world where casino servers can reside so as to evade government efforts. Ultimately, consumer demand and increasing desire by states for tax revenue may provide a strong catalyst for total or partial legalization and legitimacy.

***

Many of the problems associated with Internet gambling are intrinsic to the Internet itself, and not necessarily tied to wagering activity. Concerns regarding the potential for money laundering on the Internet, for instance, are generally applicable to all types of Internet commerce. Digital cash, for instance, will find numerous applications outside of the gambling context. On the other hand, in order to reduce the use of the Internet by problem gamblers, all online operators would have to coordinate the tracing of all payments, especially once alternative methods of deposit become commonplace. Such a feat seems beyond the realm of possibility.

If one accepts that many of the problems and concerns regarding Internet gambling are intractably connected with the Internet itself, then perhaps the government should reconsider whether to make Internet gambling legal. Arguments against gambling as a pursuit range from the moral (whether through Judeo-Christian theology or civil philosophy) to the social and economic. Supporters of regulation argue for fetters on gambling activity if only for the stigma attached with government condemnation. At the very least, as this argument goes, prohibition would send a clear message of the risks and amorality associated with the activity, and eliminate the need to structure a complex and perhaps impossible solution. Indeed, such a position argues that the worst one could do is to have a regulatory system that would be partially ineffective, as perhaps all legalized gambling regimes would be. It is beyond the scope of this essay to pursue a policy debate on these particular matters (e.g. that perhaps gaming on the Internet is less amoral as it affects the poor to a lesser degree than in real space), as such a debate focuses upon gaming itself, rather than whether it ought to be made available on the Internet. Instead, it is important to outline what the possible benefits might be from legalization in the face of the realization that many of Internet gambling’s concomitant difficulties are inevitable.

There are a number of beneficial side effects possible from the legalization of gambling on the Internet. ³³ Internet gambling would drive network development as operators would push for greater bandwidth to deliver highly interactive media in competition for the gambling customer. The race for better graphics and interfaces would create an impetus for multimedia development. Competition would benefit consumers as different casinos would obtain business by offering better odds and amenities, thus perhaps eclipsing real world casinos, providing healthy advances in a sheltered sector. In addition, it is possible that such gambling could be more wholesome than that in real space, as conditions in the home, for instance, are away from alcohol, time and emotion manipulation, and other methods whereby traditional operators attempt to remove money from the unsuspecting. Though it is easier to enter an Internet gambling hall, it is also easier to leave; instead of being a trap, all the Internet gambler need do is turn off his or her computer, not leave a physical space.

States are desperately attempting to keep money from flowing beyond their borders. They are not merely afraid of losing income taxes, but are also concerned about local gambling and lottery revenue; it is perfectly reasonable that states do not want competition. Through the prohibition of Internet gambling, individuals must continue to patronize existing establishments, thereby ensuring the steady flow of money to state coffers. Nevertheless, if the government is able to establish the complete eradication of Internet gambling, and if this is primarily due to the potential loss of state revenue, why not instead force casino sites to institute a proper tax reporting system in exchange for allowing domestic Internet browsers to scan their pages? At the least, such a solution would make Internet gambling legal to the extent gambling already exists in different states.

Ensuring that taxation is preserved is only part of the potential benefit that might be achieved through the legalization and legitimization of Internet gambling. Given the legal, regulatory, and technical challenges of Internet gambling, the government ought to take the activity as a given and attempt to influence it as strongly as possible. Time is of the essence in that the sooner action can be taken, the more influence the government might have on the growth of gambling in this new medium. As with other areas of the Internet, consumers are seeking one or a series of gambling brands in which they might place their trust and money. The government could establish an award system and influence those sites that were given the use of its imprimatur as a tool with which to lure consumers. Individual sites would open themselves up to regulators who could then use a checklist to determine whether the site would be worthy of approval. Consumers would learn to look for this government seal, protected by signature technology, that would alert them as to whether a particular site is trustworthy. The government agency assigned with the task of parceling out medallions of approval might look to:

This list, while not exhaustive, might be a good baseline for sites that would be palatable to consumers and regulators alike. A seal of approval from a governmental authority might be just the type of marketing device that gambling sites are looking for. As with "Amazon.com," those sites with an early marketing advantage can greatly leverage that into success. Because of consumer reticence to deliver financial information over the Internet, governmental approval might be a worthwhile goal in order to attract a greater number of consumers, especially wealthy Americans. The involvement of the United States government in Internet gambling, while repugnant to some, would serve to influence the growth and development of the industry so as to maximize consumer protections, deliver tax revenue to the appropriate authorities, and ensure at least minimal attention to the protection of children. If Internet gambling is in some ways inevitable, then such a system would serve to "enforce" self-regulation when a typical regulatory framework seems unwieldy.

Some details obviously remain to be worked out. For instance, there is no way to be sure that government seals of approval would not be mimicked on sites that had not been cleared, but this could be avoided through code manipulation or tracking technology. Additionally, how would the government be sure that an operator’s code would not be altered after passing government examination? Perhaps some kind of "bot" could be devised to ensure that code kept on file with a government agency is indeed that continually used on a site. These and other problems will present themselves in the switch to such a system based upon influenced self-regulation, but they number far less than those to be found in attempting prohibition.

***

This essay has assumed that the effectiveness of any deterrent to gambling on the Internet lies not in the moral culpability of action, but in the ability of government to catch the would-be offender. Perhaps it is possible for the government to deter a large percentage of the American populace from engaging in Internet gambling through a series of well publicized arrests, in order to inculcate an inaccurate view of the degree to which law enforcement officials are able to detect the average Internet gambler. Nevertheless, Internet gambling seems vaguely reminiscent of the war on drugs. If narcotics were available in discreet and easily accessible locations, virtually impervious to recrimination, would the threat of government sanction lose its force? The question of whether Internet gambling should be legalized may eventually be decided solely on whether the government ought to have its imprimatur on the activity at all, though it is hard to see the difference between Internet gambling and riverboat gambling or lotteries in any real sense. Instead of excessive, and perhaps hypocritical, moralizing, the government ought to be practical and use its stamp of approval to shape the growth of gambling in this medium so as to minimize its deleterious effects in ways that may supersede those protections in real space casinos.

Perhaps this essay states too forcefully the ability of operators and individuals to escape prosecution, or indeed the willingness of either to risk this possibility, should the government choose to pursue selective enforcement of laws prohibiting Internet gaming. Many questions regarding the ability of government to regulate the Internet remain, and the future of Internet gambling is inextricably linked with the government’s potential to impose its power on this space; Internet gambling is one of the early battlegrounds for determining the extent to which governmental control of the Internet will become reality. There are technological solutions, filters and PICS being examples, that might aid police agencies in the detection or prevention of Internet gambling. This essay has attempted to avoid discussion of the technical sophistication of such potential solutions, as consideration of them remains beside the point. They may turn out to be effective in the governmental quest to bring order to the Internet, but at what pecuniary, constitutional, and societal cost? Even if the government is capable of eliminating most "illegal" Internet gaming, this essay has sought to demonstrate that there are significant reasons for it to abstain from doing so.

There is precedent for the prosecution of individual offenders of real space crimes who engage in similar activity on the Internet. For instance, Operation Long Arm involved the Customs Service raiding several dozen homes and businesses where individuals were suspected of downloading child pornography from Denmark in violation of federal law. ³⁶ Gambling is seen as a victimless crime by many, so it may not be worth the tremendous amount of resources and societal fortitude it would take to hinder the growth and development of Internet gambling through criminalization. Will the government have the stomach to use police-state tactics to prosecute individual citizens for the most trivial Internet gambling violations? The government may find that many of the perceived problems of Internet gambling, such as the ease with which money laundering might be pursued, are inherent to the Internet itself, and not due to gambling per se. Instead, this essay has sought to demonstrate that, absent perhaps an international treaty on gambling enforced in every jurisdiction in the world, influenced self-regulation is the best way to achieve worthy policy goals.

The government ought to use its power judiciously so as to have the utmost positive influence on how Internet gambling develops. Thoughtful intervention can satisfy both the developing Internet gaming industry and those who desire more control over the potential ills the industry might create. Between anarchy and prohibition lies a middle way for government regulators to pursue. Hopefully, the positions advocated in this essay are a step in the correct direction.

FOOTNOTES

2. See John T. Fojut, Ace in the Hole: Regulation of Internet Service Providers Saves the Internet Gambling Prohibition Act of 1997, 8 DePaul-LCA J. Art. & Ent. L. 155, 155 (1997) (citing Evan I. Schwartz, Wanna Bet?, Wired 3.10, <http://www.wired.com/wired/3.10/features/gambling.html>).

15. Se Anthony Cabot, Gambling on the Internet - The Conflict Between Technology, Policy & Law, sec. 5 at 1-3 <http://www.commerce.net/events/conference/1996/gambling> (giving an excellent discussion of the frailty of 18 U.S.C. §1084 in the context of Internet gambling, from which I generally paraphrase here).

36. See Lance Rose, Online Gambling: Killer App or Sucker Bet?, <http://www.boardwatch.internet. com/mag/96/jan/bwm20.html>.