Congress’s Online Gambling Ban – Burden Without Benefit, Says Study

The current laws about Internet gambling have had damaging unintended consequences far beyond their intended target, according to a study published March 27, 2008 by the Competitive Enterprise Institute.

The Unlawful Internet Gambling Enforcement Act (UIGEA), passed in October of 2006, has little to do with gambling itself, but is actually a wide-ranging regulatory mandate on banks, credit unions, credit card companies, wire transfer services, and even brokerages. The law forces financial institutions to cut off business with any entity that could possibly be engaged in online gambling transactions.

“The Act is unlikely to stop Internet gambling and could even threaten the stable, smooth operation of America’s banking system,” said Senior Fellow Eli Lehrer and author of the study time to Fold the Unlawful Internet Gambling Enforcement Act . “UIGEA and its currently proposed enabling regulations will undermine the financial privacy of all Americans and reduce the security of their bank accounts. In short, it makes almost no financial, social, or economic sense.”

Some members of Congress are at least aware of the problems with gambling ban. On April 2nd, the House Committee on Financial Services is scheduled to hold a hearing titled “Proposed UIGEA Regulations: Burden without Benefit?” to detail what has gone wrong with its implementation and how to fix it. Ideally, however, they would go much farther.

“Even before it considers proposals for the regulation of online gambling, Congress should consider an outright repeal of the Unlawful Internet Gambling Enforcement Act,” said Lehrer. “The law has very little to do with gambling and serves as a poorly thought-out banking regulation fraught with potentially perverse incentives. Quite simply, it is a bad law. Repealing it makes sense.”

From the study:
Furthermore, the list of chancy activities exempted from UIGEA contains several large holes and potentially problematic provisions. The law, as currently written, bans “staking or risking…something of value…upon an agreement or understanding that the person or another person will receive something of value in the event of a certain outcome” while specifically exempting investments in securities, commodities, over-the-counter derivatives, and insurance. Hedge funds and offshore reinsurance contracts do not fit neatly into any of these categories, so UIGEA could conceivably restrict those activities at the same time that it restricts gambling.

Transactions involving eBay (and other online auction providers) face a similar potential problem. Specifically, “mystery auctions,” which are quite common on eBay, could be found illegal under the law since their cost and value, as in games of chance, depends on the number of participants, and the outcome is uncertain.15 Unless eBay itself were to move to stop these “mystery auctions,” all transactions coming from PayPal, BidPay, or any other processor of eBay payments would immediately become suspect of involvement in “unlawful” transactions (since state law may technically forbid them as well) and thus subject to blocking. On the other hand no one has suggested that banks have an affirmative obligation to block offline gambling proceeds, even those from illegal gambling.

Thus, the law’s likely consequences appear particularly perverse: People who win money in existing offline illegal bookmaking could continue to deposit their earnings in a bank without any repercussions so long as they pay federal taxes (as they can today), while transactions on eBay and involving hedge funds and reinsurance become immediately suspect, and perhaps impossible to carry out, under UIGEA.

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