Although online gambling is popular with millions of Americans, it is illegal in the United States, and the casino industry has considered it a threat.

But a trade group that represents major casinos like Harrah’s Entertainment, MGM Resorts and Wynn Resorts is working on a proposal that would ask Congress to legalize at least some form of online gambling, the group’s chief executive said.

The group, the American Gaming Association, issued a statement in the spring suggesting that online gambling could be properly regulated — the first public indication that its hard-line stance was softening.

The chief executive, Frank J. Fahrenkopf Jr., said in an interview by phone that the association had not settled on the details of its proposed legislation, including how the proceeds from Internet gambling would be taxed. “We have been working on something,” he said, “and continue to work on it.”

Gambling specialists said it was likely that any casino-supported legalization would be limited to Internet poker because it was considered the least threatening to brick-and-mortar casinos. Internet poker already had the backing of some in the casino industry, and was seen as a new and lucrative source of revenue for the casino companies.

Congress has been weighing a bill by Representative Barney Frank, Democrat of Massachusetts, that would legalize all types of Internet gambling apart from sports betting. In July, the House Financial Services Committee approved the Frank bill, but most industry analysts give it little chance of passage in the full Congress because it is opposed by the big casinos and some other gambling interests.

The move by casinos to open the door to online gambling could bring a powerful new lobbying force into Congressional debate. It would also most likely intensify fights in state legislatures as various gambling interests — groups that include lotteries, racetracks and Indian tribes — push lawmakers to grab more gambling dollars for states by moving to the Web.

California, Florida and New Jersey recently made unsuccessful efforts to legalize Internet betting on casino-style games, said Mark Balestra, the director of the BolaVerde Media Group, a consulting firm in St. Louis that tracks Internet gambling. Current law does not prevent in-state gambling over the Internet but to do so across state lines would require a change in federal law.

The flurry of activity suggests the state efforts will continue, Mr. Balestra said. “Gambling expansion typically happens during difficult times,” he said.

For some time, operators of large casinos have been split on the industry’s approach to Internet gambling.

Some companies like Harrah’s, which has actively supported legalization, have aggressively invested in software companies or businesses involved in Internet gambling overseas. Harrah’s, which operates the popular World Series of Poker, has also been building a prospective customer base. Last month, the company ran a full-page advertisement in USA Today, inviting readers to take part in a nongambling Internet version of the event.

But other operators like Wynn Resorts have argued that online gambling would, among other things, cannibalize profits by reducing casino attendance. In recent years, casino operators have sought to generate added revenue from visitors by investing heavily to turn smoke-filled gambling rooms into “resorts” that feature fine dining and other amenities.

The chief executive of Wynn Resorts, Stephen A. Wynn, also stated last year in response to a reporter’s questions that he thought it “would be impossible” to regulate Internet gambling.

However, the company, when recently asked for comment, issued a more temperate statement. “Wynn Resorts monitors any legislative activity, federal or state, that pertains to our industry,” the statement said. “We make judgments after such legislation is passed.”

A gambling industry analyst, Sebastian Sinclair, said that a change of heart among casino operators like Wynn Resorts should not be surprising, given the stakes involved. One of the Internet poker industry’s biggest sites, Pokerstars, which operates on the Isle of Man in the Irish Sea, has estimated annual revenues of $1 billion, according to Poker Analytics, a consulting firm in New York.

“When any industry is confronted with something of this nature, a game changer that is a paradigm shift, the first reaction is to circle the wagons to protect your business,” Mr. Sinclair said. “But then, that changes over time.”

Senator Harry Reid of Nevada, the Senate majority leader, might also be rethinking his opposition to Internet gambling. A spokesman for Mr. Reid said he was still reviewing the Internet issue and had not decided. Last month, The Reno Gazette Journal reported that several operators of smaller casinos in Nevada had left a meeting with Mr. Reid, a former state gambling regulator, with the impression that he was prepared to support a bill legalizing online poker.

Bill Hughes, the marketing director of one of those operations, the Peppermill Resort Casino in Reno, said that smaller operators viewed online poker as a threat to profits and jobs. Typically, poker accounts for about 2 percent of a casino’s revenues but some operators contend its legalization would soon lead to online versions of other casino games. “It opens the crack in the door to expand to all types of gaming online,” Mr. Hughes said.

Mr. Fahrenkopf, of the casino trade association, said that his group started about two years to look closely at a number of issues involved in Internet gambling, including taxation, online security and consumer protection.

He said that the big turnabout came when a study by a panel of industry officials concluded that online poker would not cut casino profits to the degree some operators had feared.

Poker Analytics said that data it compiled indicated that there were significant differences between those gambling in casinos and those playing poker on the Web. Among them, it said, was that people who played poker online were more likely to be male and less wealthy than those who visited casinos.

But final passage of the measure is still being viewed on Capitol Hill as a crap shoot at best. “This is, by no means, a sure thing,” said a senior staffer on the financial services committee. “In fact, I’d call it a long shot.”

That’s because the window to get anything passed is quickly closing. Congress is set to take a seven-week recess, leaving a two-week window in late September before the session breaks again prior to mid-term elections. And then there is the looming possibility of a lame duck session which, which according to the Financial Services Committee staffer, does not bode well for passage of anything.

Pairs Bet

Additionally, Rep. Barney Frank, D-Massachusetts, the committee’s chairman and chief sponsor of the measure, H.R. 2267, the Internet Gambling Regulation, Consumer Protection, and Enforcement Act of 2009, has stressed he wants that bill to go forward paired with a separate piece of legislation, H.R. 4976, the Internet Gambling Regulation and Tax Enforcement Act of 2010. Sponsored by Rep. Jim McDermott, D-Washington, this bill would establish a framework for taxing Internet gambling, including industry profits and individual’s winnings. Proponents say legalizing online gambling might raise $10 billion to $42 billion in new government revenue over 10 years, according to the Joint Committee on Taxation. The House Ways and Means Committee has yet to mark up McDermott’s bill.

Getting McDermott’s companion bill through Ways and Means, and then having both that bill and Rep. Frank’s bill pass in the House, and then the Senate, all in that brief September window, while not impossible clearly looms as a tall order, conceded John Pappas, executive director of the Poker Players Alliance, a Washington, D.C.-based lobbying organization. “We are not talking about an easy task,” Pappas said.

The Menendez Card

Pappas did, however, point to yet another bill, to legalize online poker, coming together in the Senate. It could sneak through in a lame duck session, Pappas said. The bill, sponsored by Sen. Robert Menendez, D-N.J., has not yet had a hearing.

Meanwhile, as the debate rages on full tilt, opponents of online gambling continue to point to a host of negative societal ramifications that to them appear to be a sure thing should legalization come to pass.

“Internet gambling’s characteristics are vastly different than those of other forms of gambling,” said Rep. Spencer Bachus, R-Ala., during a hearing held July 21. Bachus is the ranking GOP member on the Financial Services Committee and perhaps the country’s most vociferous opponent of Internet gambling.

“Online players can gamble 24 hours a day from home,” he said. “Children may play without sufficient age verification. Betting with a credit card can undercut a player’s perception of the value of cash, leading to addiction, bankruptcy and crime.”

‘Click the Mouse, Lose Your House’

Youth are particularly at risk, Bachus said, because “when you put a computer in the bedroom or dorm room of a young person, the temptation is too great for many of them to resist.”

Quoting John Kindt, a professor of business administration at the University of Illinois, Bachus went on to label Internet gambling “the crack cocaine” of betting. “It’s ‘click the mouse, lose your house,’” he said.

By some estimates, as many as 15 million Americans play poker online for money. Online gambling is thought to generating at least a $6 billion in profits annually.

According to a May 2009 Gallup poll, 58 percent of Americans called gambling “morally acceptable,” while 36 percent called it “morally wrong.” But there are concerns. In a Pew poll in 2006, 70 percent said they think legalized gambling encourages people to gamble more than they can afford. Six percent said gambling has been a source of problems within their family.

Compulsive Betting on Rise

A spokesman for Gamblers Anonymous (who in keeping with the organization’s hallmark asked that only his first name, Chuck, be used for this article) said GA has no formal opinion on the effort to legalize Internet gambling, and that they do not comment on public policy issues. But asked whether the proliferation of online gambling sites has swelled the ranks of compulsive gamblers seeking help, Chuck said, “the answer is, unequivocally, yes.”

Chuck had no hard data to support this assertion, only anecdotal evidence. “More and more people are coming into the program and telling us they became addicted online.”

Shawn Jordon, a former compulsive gambler, cofounded a gambling addiction self-help website in 2006. He says around 1,000 people visit the site every day. Jordon said he has gathered data from all over the world suggesting that gambling addiction is soaring.

What Happens in Vegas is Now Everywhere

Historically, Jordon said, looking at any given community, whether a town with 100,000 citizens or a city of one million, various data has suggested that around 5 percent of a population would be considered “problematic” gamblers, that is, they gamble beyond what would be considered recreational. Of those, Jordon said, an estimated 10 percent would be considered “compulsive” gamblers who can’t stop and in many cases rack up enormous debts. In recent years, according to Jordon, that smaller subset of clinically compulsive gamblers has been exploding.

“So in the example of a small town with 100,000 people  instead of there being just 500 compulsive gamblers the number is now closer to 5,000,” Jordon said. “That includes people who play lottery tickets, use Indian casino poker machines, go to the race track, you name it,” Jordon said. “Once upon a time what happened in Vegas stayed in Vegas. Gambling has proliferated to the point where sadly that is no longer the case.”

Litany of Loopholes

Jordon, who resides in Calgary, says he is not opposed to the legalization of Internet gambling. “There’s no way to stop it,” he said. “The genie is out of the bottle. All we can do is help people.”

In the mid-1990s, Congress created the National Gambling Impact Study Commission which in 1999 issued a final report calling for a ban on Internet Gambling. While the federal Wire Act of 1961 expressly prohibits sports betting and other forms of gambling, peer to peer gambling, such as online poker, fell into a gray area. In 2006, Congress passed the Unlawful Internet Gambling Enforcement Act, a law aimed at discouraging financial institutions from transacting with online gambling operations. The law, subject to numerous delays and postponements, officially took effect June 1.

However, because of the various means of getting around the measure  offshore credit card accounts, prepaid credit cards, to name two examples  the Internet poker industry continues to thrive, said PPA’s Pappas.

The law doesn’t specifically ban banks from transacting with online poker sites; rather, it merely requires that banks take proper steps to make sure that they do not facilitate any illegal gambling transactions. Embedded in the law is what amounts to a safe harbor, so that banks that wish to transact with an online poker business simply needs a reasoned legal opinion that their client is not involved in restricted transactions, Pappas explained. Sports betting activity, expressly prohibited by the Wire Act, would not fall into this category. Online poker, which is not expressly prohibited, would not.

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.

Similar legislation failed in the last Congress. Frank, a Massachusetts Democrat, has support for the bill from such companies as Youbet.com Inc., and Harrah’s Entertainment Inc., in addition to the Poker Players Alliance, formed to overturn a 2006 ban on Internet poker.

Supporters “have been mobilizing,” Frank said last week. “This is a grass-roots thing.”

The legislation would allow licensed gambling operators to accept online wagers from people in the United States. The bill would revise the 2006 law, which made it a crime for banks to process financial transactions used to place illegal bets online.

Harrah’s vice president Jan Jones said regulating and taxing online gambling might swell government coffers by $2 billion to $6 billion annually. “At a time where there is no money, that can be going to healthcare or S-CHIP,” the children’s insurance program, Jones said.

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.

The Board and the Treasury are required by the Act to develop a joint rule in consultation with the Department of Justice. The final rule requires U.S. financial firms that participate in designated payment systems to establish and implement policies and procedures that are reasonably designed to prevent payments to gambling businesses in connection with unlawful Internet gambling. The rule provides non-exclusive examples of such policies and procedures and sets out the regulatory enforcement framework. For purposes of the rule, unlawful Internet gambling generally would cover the making of a bet or wager that involves use of the Internet and that is unlawful under any applicable federal or state law in the jurisdiction where the bet or wager is initiated, received, or otherwise made.

Compliance with the rule is required by December 1, 2009. Rep. Barney Frank, D-Mass., has said he will seek to overturn the law, pointing out that even the most ardent fans of the regulations have said they will be difficult to interpret and enforce.

Part of the problem is to define “unlawful Internet gambling.” For instance, the National Football League’s “Fantasy Football” is exempted from the legislation, because the NFL claims the game is skill-based and not a game of chance and, thus, not gambling.

Opponents of the legislation complained earlier this week before the Treasury Department and the Federal Reserve Bank issued new regulations describing the legislation. The opponents argued that a former NFL lobbyist was working in the White House and represented a conflict of interest. A White House spokesperson said the lobbyist, William Wichterman, was in compliance with ethics rules.

The legislation, HR 4411, was originally sponsored by Republican Rep. Jim Leach, R-Iowa, and it had the strong and influential backing of then-Sen. Bill Frist, R-Tenn. After 30 years in the House, Leach was narrowly defeated in the 2006 election. This summer Leach threw his support to Barack Obama to the consternation of many Republicans, and this week Obama named Leach and former Secretary of State Madeleine Albright as his representatives to an international economic summit in Washington.

William Wichterman, who with others at the Covington & Burling law firm earned $2.8 million lobbying for the NFL against Internet gaming and on other matters from 2004 through March, is working on the gambling restrictions in the White House Office of Public Liaison, White House spokesman Dana Perino confirmed yesterday.

“He appropriately sought and received clearance from ethics officers to be able to work on this rule,” Perino said, adding, “I know our ethics officers to be professionals who know the law and the guidelines inside out.” She said last night that she could not immediately reach the officers to learn their reasoning in this case.

The 2006 law at the center of the White House review has been of intense interest to the NFL. With the league’s support, it was tacked onto unrelated legislation, meant to upgrade counterterrorism measures at U.S. ports, in the waning hours of the congressional session that year and approved without getting a separate vote in the House or Senate.

Ever since, the measure has been attacked as unwieldy or unworkable by banks and the Internet gambling industry, now based mostly overseas and bringing in many billions of dollars each year. A top official of the Federal Reserve Bank testified in April that, due to the difficulties of pinpointing illegal gambling transactions amid the huge flows of funds online, “the ability of the final [implementing] rule to achieve . . . [its goals] is uncertain.”

Democrats such as Rep. Barney Frank (Mass.), chairman of the House Financial Services Committee, have sponsored alternative measures that would regulate and tax Internet gambling, rather than ban it altogether. But they have been thwarted by Republicans who have depicted the existing law as a way to safeguard morals and stop personal misspending.

“I am deeply disappointed to hear that your agency is proceeding with what I consider to be unseemly haste in issuing regulations” to implement the law, Frank wrote Monday in a letter to Treasury Secretary Henry M. Paulson Jr. He said the new regulations would “burden the financial services industry at a time of economic crisis” and tie the hands of the Obama administration.

The NFL’s general counsel, Jeffrey Pash, urged lawmakers in March to “support the integrity of American athletics” by rejecting Frank’s bill or any other alternative to the existing legislation. But Internet gambling officials have long maintained that the NFL’s real motivation is to block any competition for lucrative “fantasy football” gambling via the Internet, which was explicitly exempted from the 2006 ban.

The NFL provides statistics, logos and player information to fantasy leagues that pay substantial royalty fees, industry sources say. It backed the exemption on grounds that fantasy football is a game of skill, not chance.

Rep. Stephen I. Cohen (D-Tenn.) wrote to White House counsel Fred Fielding on Friday to express concern that the “impetus for the rule may have been a particular White House employee who has a clear and obvious conflict of interest.” Cohen said he had been told that Wichterman “has been a source of considerable political pressure to speed this regulation through to finalization.”

A phone call to Wichterman, seeking comment, was returned by a White House press aide, who declined to add to what Perino said.

“I am deeply disappointed to hear that your agency is proceeding with what I consider to be unseemly haste in issuing regulations implementing the Unlawful Internet Gambling Enforcement Act,” House Financial Committee Chairman Barney Frank, a Massachusetts Democrat, said in a letter to U.S. Treasury Secretary Henry Paulson.

“This midnight rulemaking will tie the hands of the new Administration, burden the financial services industry at a time of economic crisis, and contradict the stated intent of the Financial Services Committee,” Frank said.

The U.S. Treasury Department and the Federal Reserve are required to issue new rules on Internet gambling under a bill Congress passed 2006, when Republicans were still in control of the House of Representatives and the Senate.

That bill, which cost EU Internet gambling companies billions of euro in lost market value, prohibited companies from accepting payments in connection with “unlawful Internet gambling.”

But rather than define what types of gambling are illegal online, the bill relied on existing Federal and state laws to answer that question. It also still allowed any online horserace betting permissible under the Interstate Horseracing Act of 1978.

That has caused confusion and at a hearing in April both Treasury and Federal Reserve officials told Frank’s committee they were “struggling” to determine what type of online gambling was illegal under the bill.

“The challenge we have is interpreting … federal laws that Congress itself isn’t sure what they mean,” said Louise Roseman, the Fed’s director of reserve bank operations and payment systems.

The House Financial Services Committee passed legislation in September that would block implementation of the new regulations, but neither the full House or the Senate has followed up with a vote on the measure.

In response to Frank’s letter to Paulson, a Treasury spokeswoman said the Treasury and the Fed were working together “to gather considerable public comment and complete these regulations as directed by Congress.”

Meanwhile, the European Commission has been investigating whether the U.S. Justice Department was unfairly singling out EU Internet gambling companies for enforcement in response to the 2006 law.

An EU team who visited Washington in September to investigate the issue, is expected to release its report by the end of the November. Depending on what it says, that could set the stage for the European Commission to bring action against the United States at the World Trade Organization

While most of us are distracted watching the presidential election, the U.S. Treasury Department is quietly pushing through new rules that potentially will have devastating consequences for privacy and e-commerce.

It’s an understatement to say the Internet has done more to shape society over the last 10 years than any other technological innovation, transforming communications, business, and entertainment. The benefits generated by the technological revolution easily parallel those of the earlier industrial revolution. What’s important is that this explosion in growth occurred in an era relatively free of government interference. Unfortunately, that may not remain the case.

Regulatory incursions onto the Internet are becoming more frequent, threatening the open dynamic that has generated so much for consumers. Without vigilance, we face the prospect of turning the Internet into something akin to an electronic version of the Post Office rather than the engine of growth it has become.

This can be seen in Congress’ attempt to eliminate unlawful Internet gambling. Not only does the Unlawful Internet Gambling Enforcement Act of 2006 raise serious questions about privacy, but its vague definitions and poorly defined goals force banks and payment centers into a tight position.

They’re now required to serve as an arm of the government, monitoring private Internet transactions, and blocking those that are “illegal.” The problem is that the legislation never defined “unlawful Internet gambling,” leaving banks and payment centers to sort out that thorny issue for themselves. This generates a great deal of confusion, leaving consumers and Internet users facing the real prospect of perfectly legal activities being blocked simply due to uncertainty and caution on the part of banks and payment centers. For those processing these transactions, the ambiguity is compounded by compliance costs and the paperwork burden.

Despite the confusion surrounding the legislation, the Treasury Department is drafting a final rule it hopes to release in November to put the program in motion. But some in Congress are well aware of the burdens and complexities associated with this vague rule. Just last month, the House Financial Services Committee passed legislation introduced by Rep. Barney Frank (D-Mass.) that offers a simple solution.

The Payments System Protection Act makes clear that the law can be enforced against sports betting, which the courts already have said is illegal. But it also requires regulators to define exactly what “unlawful Internet gambling” is prior to issuing broader regulations. This would substantially reduce the uncertainty and compliance costs for banks and payment centers. The Senate recently followed suit with its own attempt to clarify the ambiguities in the 2006 Act.

Beyond correcting the economic burdens of the law, however, Americans ought to be concerned about the larger questions of the law’s impact on privacy and Internet freedom for the future. Once the federal government begins implementing guidelines for various types of online transactions, what is to prevent it from becoming more involved in every activity on the Internet? The Founding Fathers took great care constructing a government that would protect our endowed rights and liberties, not restrict and monitor them. Americans don’t want the government monitoring their private transactions, online or offline.

The Internet has proved to be a powerful and valuable force in our economy. Annual e-commerce retail sales in the United States reached $107 billion in 2006, a 22 percent jump over the previous year. Restrictive government mandates would only restrain such growth, not encourage it. Each new mandate also brings further government encroachment upon the rights and liberties guaranteed by the Constitution. It is precisely because it developed relatively free from government oversight that the Internet has become such a dynamic part of our economy.

Congress has acknowledged the potential downside of its foray onto the Internet with the 2006 Unlawful Internet Gambling Enforcement Act, and is working to correct its overreach. The Treasury Department should follow this lead, and not rush forward with sweeping government mandates that threaten the future growth and innovation on the Internet.