On Wednesday, the House Financial Services Committee approved a bill that would effectively legalize online poker and other nonsports betting, overturning a 2006 federal ban that critics say merely drove Web-based casinos offshore.

The bill would direct the Treasury Department to license and regulate Internet gambling operations, while a companion measure, pending before another committee, would allow the Internal Revenue Service to tax such businesses. Winnings by individuals would also be taxed, as regular gambling winnings are now. The taxes could yield as much as $42 billion for the government over 10 years, supporters said.

The two measures — which are backed by banks and credit unions but have divided casinos and American Indian tribes — are far from becoming law. A bill to legalize online poker sponsored by Senator Robert Menendez, Democrat of New Jersey, has not yet had a hearing. The Congressional timetable has little spare room before the midterm elections, and the Obama administration has not taken a position.

But the vote suggests a willingness by Congress to look for unconventional ways of plugging holes in the budget and comes as struggling states have also been looking to extract revenue from the gambling industry, which took a hit as consumers cut back on travel and entertainment during the recession but continues to reap billions of dollars in annual profits. The committee vote Wednesday was 41 to 22, with seven Republicans joining most Democrats on the panel in favor of the measure.

Last year, Colorado expanded casino hours, raised maximum-bet limits and permitted roulette and craps, while Missouri eliminated a $500 loss limit at riverboat casinos. Delaware and Pennsylvania have weighed proposals to allow the conversion of slots parlors into full-service casinos, making further inroads into the eroding Atlantic City gambling industry.

Opponents, who only four years ago, when Congress was controlled by the Republicans, secured a law that banned the use of credit and debit cards to pay online casinos, said they were aghast. “People sometimes resort to drastic things when they are strapped for cash,” said Representative Robert W. Goodlatte, Republican of Virginia, who called the new proposals “unfathomable.”

Representative Barney Frank, the Massachusetts Democrat who leads the Financial Services Committee, has been the legislation’s champion.

“Some adults will spend their money foolishly, but it is not the purpose of the federal government to prevent them legally from doing it,” Mr. Frank said.

The committee’s top Republican, Representative Spencer Bachus of Alabama, noting the passage of far-reaching changes in financial regulation this month, said that “after all the talk last year about shutting down casinos on Wall Street,” he was incredulous that members would vote to “open casinos in every home and every bedroom and every dorm room, and on every iPhone, every BlackBerry, every laptop.”

Mr. Bachus said lobbyists had spent “tens of millions” to overturn the 2006 law. “They’ve had quite a bit of success in turning votes,” he said.

Supporters of legalization said fiscal considerations played a role in their thinking. “I was looking for the money,” Representative Jim McDermott, Democrat of Washington, said in an interview. He sponsored the companion measure to allow taxation of Internet gambling; he wants to dedicate the money to education.

Representative Brad Sherman, Democrat of California, said in an interview that the money was an attractive source of financing for other programs. “We will not pass an Internet gaming bill,” Mr. Sherman predicted. “We will pass a bill to do something very important, funded by Internet gaming.”

He added, “Forty-two billion dollars over 10 years has an effect.”

The legal status of online gambling has long been murky. The Justice Department asserts that the Wire Act of 1961 prohibits it, but prosecutors have largely left individual gamblers alone.

To crack down on the activity, a 2006 law — inserted at the last minute into an unrelated bill in one of Congress’s last actions before Democrats took control — banned financial institutions from transmitting payments to and from gambling operators.

In the same year, the authorities arrested David Carruthers, a British online-gambling executive, as he changed flights at a Texas airport. He was sentenced to 33 months in prison for racketeering. Last year, the authorities ordered four banks to freeze the accounts of online payment processors that owed money to some 27,000 people who had used offshore poker sites.

But the enforcement actions have barely put a dent in the industry, experts say. Gamblers have used online payment processors, phone-based deposits and prepaid credit cards to circumvent the ban. By some estimates, American online gambling exceeds $6 billion a year.

“Today, any American with a broadband connection and a checking account can engage in any form of Internet gambling from any state,” Annie Duke, a professional poker player, testified in May on behalf of the Poker Players Alliance, which hired a former Republican senator from New York, Alfonse M. D’Amato, to lobby for the bill.

Michael Brodsky, executive chairman of YouBet.com, an online site for parimutuel horse racing, said, “As with Prohibition, illegal online gambling is thriving as an underground economy.”

Banks and credit unions said the 2006 law was poorly drafted — so much so that the Obama administration delayed, to June 1 of this year, the deadline for banks to comply with the law, to address concerns about its enforceability.

In 1999, the National Gambling Impact Study Commission urged the prohibition of Internet gambling. Attorney General Eric H. Holder Jr. has said he would not support efforts to legalize online gambling, a view shared by most state attorneys general.

“Because Internet gambling is essentially borderless activity, from a money-laundering and terrorism-financing perspective, it creates a regulatory and enforcement quagmire,” said James F. Dowling, a former special agent with the Internal Revenue Service.

And Mr. Bachus released a November letter from the F.B.I. in which Shawn Henry, the assistant director of the cyber division, said it would be difficult for companies to verify the age and location of their customers.

The bill contains measures intended to protect minors and combat compulsive addiction. It would allow states and Indian tribes to “opt out,” so players from those states and reservations would not be able to make online bets. But those governments would have a potentially lucrative incentive to allow the activity since they could then collect taxes from Internet casinos.

Before voting, the committee approved amendments to delegate enforcement duties to states and tribes, continue a ban on betting on sporting events, ban marketing aimed at children, and prohibit companies that violated the 2006 ban from obtaining licenses.

The sat particularly badly with the island nation of Antigua, which complained to the WTO over what it saw as discriminatory trade practices. The WTO agreed and ruled against the United States back in April of 2007—a fact the US has more-or-less ignored. Gambling laws have always been a patchwork of contradictions; the federal government prohibits gambling across state lines but allows states to set their own laws when it comes to intra-state betting. Many states have laws that favor particular types of gaming over others; Kentucky has gone so far as to try to seize control of online gambling sites and makes no secret of its stance on horse racing. Taken as a whole, the US policy of simultaneously condemning and supporting gambling is uglier than the hypothetical love child of Janet Reno and Alan Greenspan.

The Bush Administration settled the initial Antigua complaint by offering the country concessions in other trade-related areas, but multiple European countries remain angry; the UK-based Remote Gambling Association has claimed that the US Department of Justice (DOJ) has discriminantly targeted certain websites while ignoring the operations of others. The European Commission reportedly plans to file its own complaint with the WTO. In the face of international bad feeling and an uncertain positive impact at home, it may be time for the UIGEA to fold its hand.

Source: http://arstechnica.com

“The bill introduction should happen in the next month,” a spokesman for House of Representatives Financial Services Committee Chairman Barney Frank said.

On Thursday, Reuters reported the EU could file a complaint about U.S. enforcement of the gambling ban at the World Trade Organization.

“Mr. Frank will bring back legislation to repeal the UIGEA (Unlawful Internet Gambling Enforcement Act),” the spokesman said, referring to a Republican-crafted bill passed in 2006 when the party controlled Congress and the White House.

Supporters of the ban argued offshore Internet gambling websites take billions of dollars out the U.S. economy, damage families and serve as vehicles for money laundering.

The law cost Europe’s online gambling companies billions in lost market value as they were forced to retreat from one of their most lucrative markets. It barred businesses from knowingly accepting payments in connection with unlawful Internet gambling, including payments made through credit cards, electronic fund transfers and checks.

Against Frank’s advice, the Bush administration finalized regulations late last year to implement the ban and gave companies until December 1 to comply.

Frank said the rules would burden the financial service industry at a time of economic crisis.

Many publicly traded European companies, including PartyGaming and 888.com, withdrew from the United States after Congress passed the ban, but they face possible criminal prosecution for activities before then.

Anurag Dikshit, a founder of PartyGaming, pleaded guilty in December to Internet gambling charges and agreed to pay $300 million in fines. He still faces possible jail time under a deferred sentencing arrangement. Other PartyGaming founders have not settled with the U.S. Justice Department.

EU industry officials said the pressure on Dikshit to make a deal showed the Justice Department had crossed a major line in its prosecution of cases.

The European Commission, acting on industry petition, began a formal investigation in March into whether Washington was singling out EU companies for enforcement actions while allowing U.S. online firms to operate freely.

Sources familiar with that investigation told Reuters in Brussels on Thursday they expect the investigators’ report, initially due last year, to recommend action at the WTO when it is released next month.

Rather than move immediately to litigation, EU officials would use the report as leverage to seek a negotiated solution with the United States, they said.

U.S. Sen. John E. Sununu complained a year ago that the law was ambiguous and was grabbing legitimate enterprises in its net. He warned that “risk-averse financial institutions will simply choose to block every transaction that may be interpreted or could resemble gambling, whether legal or not.”

Lottery Executive Director Rick Wisler said the problem is definitely affecting lottery sales here, which are down significantly. He said his concerns have been made known to Visa and MasterCard and that those companies say they will review them.

The problem seems to have spread beyond Internet lottery sales. We have been told that even employees at state liquor stores have declined to allow lottery ticket purchases using a bank-issued debit card.

Gambling proponents often cite the New Hampshire Lottery as a viable and reliable generator of public revenues and an example of why it should expand. But if even the sale of a scratch ticket is going to be thwarted by the feds, how do they expect bigger gambling to succeed?

Cohen, a proponent of the Internet gambling that Congress banned in 2006, also raised questions about William Wichterman, a White House staffer. Wichterman represented the National Football League, a proponent of the proposed rule, as a lobbyist as recently as March of this year.

“I am sure you will agree that, at a minimum, the appearance of a conflict of interest is undeniable,” Cohen wrote.

Cohen, instrumental in bring the lottery to Tennessee, called the late regulatory effort “midnight rulemaking.”

Casinos and gambling interests gave Cohen $64,000 in his recent bid for re-election, the third-largest industry group after lawyers and retirees, according to the center for Responsive Politics, a Washington watchdog group.

When the Judiciary Committee held a hearing on Internet gambling last November, Cohen’s questions to witnesses, including a representative of the Family Research Council, made his position clear. Five days later, he attended a fundraiser in Las Vegas where he collected checks from 10 professional gamblers, some with nicknames like Texas Dolly and Vegas Stud.

Cohen’s letter raises questions about Wichterman’s role in the rulemaking effort and on the White House policy on conflicts of interest. The White House did not immediately respond to a request for comment.

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American voters may hear more about “change” and “hope” rather than hard-line facts, but the Democratic and Republican presidential candidates, as well as their vice-presidential candidates, have been subtly informing gamers of their views on UIGEA (the anti online gambling legislation that defined the Bush administration) and whether they will be amending the problematic bill.

Trying to overturn a 2006 U.S. ban on online poker, gamblers have started a lobbying group, established a political action committee, and promoted their effort to politicians by holding poker tournaments at the Republican and Democratic nominating conventions.

“Up until this point, the minority of the public that is anti-gambling has yelled louder,” professional poker player Andy Bloch said.  “We’re trying to change that.”

The Poker Players Alliance, which claims 1 million members, has invited lawmakers and celebrities to a charity tournament Sept. 3 in Minneapolis, across the Mississippi River from St. Paul, where Republicans are meeting to formally nominate John McCain for president.

Before President George W. Bush signed the Republican- backed gambling ban in October 2006, the U.S. accounted for about half the market on Internet gambling sites operated from countries where betting is legal. Inserted into unrelated port- security legislation by then-Senate Majority Leader Bill Frist, a Tennessee Republican, the law forbids credit-card companies to process online-wagering transactions.

The ban hammered Internet gambling stocks in London; PartyGaming Plc fell 58 percent, and Sportingbet Plc plunged 64 percent, on the first trading day after Congress passed the measure. At the time, Gibraltar-based PartyGaming alone said it had 900,000 American players. PartyGaming and Sportingbet still trade for 80 percent less than their prices before Congress passed the ban.

Internet Gambling
House Financial Services Committee Chairman Barney Frank has sponsored legislation to allow and regulate online gambling, including poker. Frank, a Massachusetts Democrat, said he expects the measure to pass next year in a Democratic-controlled Congress.

Frank, Bloch, and actor Ben Affleck were among almost 200 participants during last week’s Democratic National Convention at a tournament benefiting the Paralyzed Veterans of America.

The Washington-based lobbying group set up 20 tables with cards, chips and professional dealers in a second-floor room at Coors Field, home of the Colorado Rockies baseball team. Players got buttons reading: “Reduce your carbon footprint. Play online poker.”

Larger Political Force
“We’re trying to make this a larger political force,” said Toby Moffett, a lobbyist and former Connecticut Democratic congressman who represents the poker group and urged it to sponsor the convention events. “It shows our supporters we’re not going away.”

Gamblers say the law violates individual rights. “It’s a bad idea for legislators to tell people what they can and cannot do in the privacy of their own homes,” said poker pro Chris “Jesus” Ferguson during a lobbying trip to Washington last fall.

Online poker also is a potential source of tax revenue. “We’re facing this really horrific financial situation,” said Annie Duke, another poker pro.

The poker players face opposition from other political forces, including Christian conservatives.

“You can’t make public policy out of a group of individuals’ desires,” said Chad Hills, an analyst for gambling research and policy at Focus on the Family, the Colorado Springs-based group founded by Dr. James Dobson. “You have to say, `How is this impacting our culture? How is this impacting our children?”’

Alfonse D’Amato
The poker alliance, headed by former New York Republican Senator Alfonse D’Amato, spent $729,750 on lobbying during the first half of 2008, after spending $900,000 in all of 2007. Its political action committee, PokerPAC, began April 11 and raised $43,226 through Aug. 12.

In the presidential race, the Republican platform supports the ban on Internet gambling.

Hills, saying the Internet functions like the public library of previous generations, said gambling shouldn’t be allowed. “Some activities are not appropriate in the public library,” Hills said. “This is one of those things.”

The poker players may benefit from growing celebrity, as popular televised contests make stars of professionals like Bloch, Ferguson, Duke, and Duke’s brother Howard Lederer.

“People sitting in their homes, watching top professionals playing a game of skill, allows us to have this conversation,” Lederer said. “If I can use my celebrity to help further the cause I truly believe in, I will do it.”

Bloch and Lederer are among those who’ve given the maximum individual contribution, $5,000, to PokerPAC. “We realized we had to have a voice in Congress,” Bloch said.

“It always helps when you have someone who’s very well known,” said Representative Steve Israel, a New York Democrat and one of 48 co-sponsors of Frank’s bill. “When I’m at home, it always give me a thrill when someone approaches me and says, `I read about what you’re doing on Internet poker.’ That tells me how effective this cause has become.”

The Poker Players Alliance, a group that lobbies Congress against the ban, is opposed to the bill. Former Sen. Alfonse D’Amato, R- N.Y., who is the alliance chairman, said it does nothing to clear up confusion about the definition of unlawful Internet gambling.

But Jay Lakin, vice president of Poker Source Online, supports the measure, which was introduced shortly before Congress adjourned last week for its August recess.

Since Nevada is the only state that allows sports betting, Lakin said, the impact of the ban under the new bill would be minimal.

The Poker Players Alliance has argued the ban does not apply to Internet poker because poker is a legal activity, Lakin said.

So if the alliance supports the new bill and accepts the exemption, he said, it would be like admitting that poker is illegal.

“They’re between a rock and a hard place,” Lakin said.

Rep. Pete Sessions, R-Texas, introduced the bill in an effort to clarify the scope of the ban, which has befuddled federal regulators.

Sessions’ bill would narrow prosecution under the Internet gambling ban to persons who:

• Offer Internet sports betting in the United States.
• Process payments for illegal Internet sports betting in the United States.

So far, Sessions has four co-sponsors, all Democrats: Reps. Marion Berry of Arkansas, William Delahunt of Massachusetts, Gene Green of Texas and Jesse Jackson Jr. of Illinois.

Rep. Shelley Berkley, D-Nev., who is pushing her own measure calling for a study of Internet gambling, said she opposes Sessions’ bill.

“People in Congress are still trying to eliminate sports betting on the Internet when it is very clear that millions wish to exercise their rights as Americans and bet online,” Berkley said.

The House Judiciary Committee was prepared to vote last week on Berkley’s bill, which would require a one-year study of Internet gambling by the National Research Council of the National Academy of Sciences.

Berkley said the committee agreed to her request to postpone the vote until she is confident there are enough votes to pass it.

Frank Fahrenkopf, president of the American Gaming Association which lobbies for Nevada casinos, said his group is neutral on Sessions’ bill.

But Fahrenkopf added that AGA would oppose any effort to add Sessions’ bill to Berkley’s legislation.

“We don’t want to do anything to hurt the chances of the Internet gambling study bill,” Fahrenkopf said.

The Attorney General’s Bureau of Gambling Control, the state Gaming Control Commission and the Legislative Counsel will now recommend a structure for the system, analyze potential revenue and draft regulations to be included in the bill’s language as it moves to the Senate Appropriations Committee in August, its final stop before a Senate floor.

In a mark up of the Payments System Protection Act (H.R. 5767) in the House Committee on Financial Services on June 25, 2008, Rep. Bachus, citing research at McGill, claimed that one-third of college students who gambled online attempted suicide.

“This assertion, which is reportedly based upon our empirical research, is not predicated upon any factual evidence,” responded Derevensky in an interview with the Safe and Secure Internet Gambling Initiative. “None of the studies conducted with adolescents or college students, to the best of my knowledge, have looked at a connection between Internet wagering and suicide attempts.” Derevensky raised these same concerns in a letter sent last week to Reps. Bachus and Barney Frank (D-Mass.)

Derevensky believes there is an opportunity for Congress to better protect consumers in a regulated environment. “If Congress is serious about minimizing the threat posed by Internet gambling, it should look to create an environment where Internet gambling operators are required to put in place safeguards that protect against compulsive and underage gambling.”

Last week, a study conducted jointly by the University of Western Ontario and University of Nevada, Las Vegas called for the legalization and regulation of online gambling.

“Just as legalized commercial gambling in casinos allows for governments to regulate it, so, too, could the legalization of online gambling allow for better regulation and attempts to reduce the growth of problem gamblers,” said June Cotte, associate professor at the University of Western Ontario, as reported by Poker News.

Existing technology and security controls have already proven to be effective in addressing compulsive gambling. Safeguards currently available in the industry include the ability to control the amount of money wagered, set limits on amounts bet and amounts lost, restrict the duration that someone can play, identify and stop players whose gambling patterns seem out of the ordinary, and allow for consumers to be excluded from online gambling.

“It is disappointing that Rep. Bachus is using scare tactics and false claims in an attempt to justify why Congress should limit my ability to gamble online,” said Jeffrey Sandman, spokesman for the Safe and Secure Internet Gambling Initiative. “We are encouraged by the academic community’s support of Internet gambling regulation. They emphasize the important point that consumers will be better protected if there are safeguards put in place to combat underage and problem gambling.”

The Internet Gambling Regulation and Enforcement Act of 2007 (H.R. 2046), introduced by Rep. Frank, would establish an enforcement framework for licensed gambling operators to accept bets and wagers from individuals in the U.S. It includes a number of built-in consumer protections, including safeguards against compulsive and underage gambling, money laundering, fraud and identity theft. A companion piece of legislation that would ensure the collection of taxes on regulated Internet gambling activities, the Internet Gambling Regulation and Tax Enforcement Act of 2008 (H.R. 5523) was introduced by Congressman Jim McDermott (D-WA).

Additionally, Rep. McDermott introduced last week, the Investing in our Human Resources Act (H.R.6051), which would direct new revenue generated by regulated Internet gambling activities to be spent on job training for those in the declining sectors of the economy and educational assistance for foster care youth. The bill also includes provisions to encourage responsible Internet gambling behavior and an awareness of unsafe practices, something which has been praised by problem gambling advocates.

“Though I support the dedication of resources to raise awareness about problem gambling, I encourage Congress to also provide appropriate funding for research, treatment and the prevention of problem gambling,” added Derevensky.