Legislating Morality: The Unlawful Internet Gambling Enforcement Act

Over the weekend, the U. S. Congress approved and passed to the President a bill to prohibit financial institutions from sending payments to offshore internet gambling websites. President Bush is expected to sign it. The internet gambling industry was taken somewhat by surprise, and stocks in online casinos are tumbling all over the globe. Some view the action as a purely political ploy to help Republicans retain control of Congress after the November elections. Others see it as one more belated attempt for the law to catch up to technology.

The name of a popular bestseller some years ago was "Please Don't Eat the Daisies." The author, a mother of several young children, was preparing a dinner party and told her kids not to track mud into the living room, not to touch the china on the table, and so on. But she forgot to tell them not to eat the daisies in the centerpiece, and so they did. People will come up with ways of doing things that regulators, legislatures, and competitors simply cannot think of in advance. But the effects of these novel ideas are not always welcome.

Once enough people got onto the Internet, gambling websites were probably inevitable. The same privacy, anonymity, and ability to operate anywhere in the world with T1 lines that makes the Internet so attractive for pornographers also attracts internet gaming firms. As I noted in my Aug. 1 column, various governments over the centuries have taken attitudes toward gambling ranging from pure laissez-faire to near-total prohibition. But until recently, a government that wanted to regulate gambling could identify the bookies, their hangouts, and their customers without too much trouble. The advent of the Internet changed all that.

Because of the dispersed nature of communication over computer networks, it is impractical to identify individuals who place bets online without serious curtailment of individual liberties. In principle, Federal agents could stage raids on college dorm rooms and other places where they suspect Internet gambling is occurring, but this kind of action would be tantamount to creating a police state.

If you examine the machinery of internet gambling by U. S. customers who use offshore companies, most of it is dispersed widely. Customers gamble online, paying mostly by credit card to foreign internet casinos. The thousands of individual customers are spread all over the place. There are fewer foreign sites with servers and operators, but they are inaccessible to U. S. enforcement officials. The one link in the chain that is both accessible and fairly concentrated is the group of U. S. financial institutions which forward their customers' money to the internet casinos. This is precisely the group targeted by the law that Congress just passed.

If you are a credit-card company, what your customers do with their money is normally none of your business. Outright fraud is a concern, since by law a customer's liability in most cases of credit-card fraud is limited to $50, with banks picking up the rest of the tab. Thus motivated, banks have developed sophisticated ways of ferreting out fraudulent companies who abuse their credit-card systems. But most internet gamblers tacitly agree to the rules of the game, which over the long term mean that most gamblers lose big to the casinos, just as in real life. Nevertheless, in the eyes of the law they have not been defrauded. Rather, they chose to take an action which is technically illegal, so they can't have any recourse except to deduct gambling losses on their tax returns to the extent allowed by law (a loophole I have never understood).

The present law simply prohibits banks from reimbursing online casinos, which puts the banks in a bind. If they don't obey the law and keep on sending funds to the casinos, they will be liable to legal penalties. But if they do obey and refuse to pay online casinos, how will this affect the other parties involved?

Well, pretty soon you will see lists of unacceptable credit cards on the online gambling sites: cards issued by companies who have begun to obey the law. Depending on how dedicated a gambler is, he may shift to another card, or he may just drop that site for another one that is less picky about credit cards. What he probably won't do is quit gambling, especially if he has a habit established.

If the U. S. banking industry as a whole stands firm, foreign-owned credit firms will rush in to fill the vacuum. If this occurs, we will simply have succeeded in moving a major part of the system offshore. After all, the only pieces that have to stay here are the customers.

While I have no special insight into the mentality of those who passed this law, I suspect that they view gambling as an intrinsic evil which should be curtailed or eliminated where possible. I happen to be in sympathy with that view, but I also happen to be in sympathy with the outlook that says when you decide to do a thing, find a good way of doing it.

What is gambling, after all? In my very limited experience, accumulated chiefly in convenience store lines behind people who just wanted one more scratch ticket and yeah, lemme have five of them Texas Holdems, gambling is a way people have of facing the apparent randomness of life headon, and trying to win. It has everything to do with emotion, desire, and the consumer mentality, and very little to do with logic, higher education (except for the ill-gotten gambling dollars that pay for some of it), or the nobler aspects of life. If we went about creating a society of self-controlled, self-directed citizens who knew who they were, were largely content with their lot in life, and could count on their circumstances maintaining some stability over the next few years, I suspect we'd have a lot fewer gamblers to start with. The ones who were left could send all their money to Bermuda for all I care.

So while I agree with the goal of the anti-gambling legislation just passed, as an engineer I can see several big problems that stand in the way of its achieving it. Maybe I'm wrong and this will put a big damper on the whole business. I hope so. But some problems are deeper than a solution by legislation can address.

Sources: A summary of the recent legislation is at http://www.canada.com/nationalpost/columnists/story.html?id=101747ec-8d41-42f5-9209-1236e3ced739&p=1