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.

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.”

Meanwhile, a new bill related to online gambling was introduced this week by U.S. Rep. James McDermott, D-Wash. H.R. 6501 amends the Social Security Act to establish a trust fund from the proceeds of taxing Internet gambling. The trust fund would be used to provide education, job training, public-transit subsidies and other services to individuals in foster care or in declining sectors of the economy. The bill was referred to the House Committee on Ways and Means and Committee on Education and Labor.

UIGEA, which bans gaming sites from accepting money transfers of any kind for bets deemed to be unlawful gambling, directs the U.S. Treasury Department and the Federal Reserve Board to create regulations that would require banks and processors to block payments to those sites.

Two critics of the UIGEA, Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, and Rep. Ron Paul, R-Texas, senior committee member, on April 10 introduced H.R. 5767, which would have prohibited the Federal Reserve and Treasury Department from implementing the regulations called for in UIGEA. The bill was defeated in committee on June 25.

A bill offered as a substitute to H.R. 5767 also was defeated at the June 25 committee meeting. Dubbed the “Payments System Protection Act of 2008,” the bill would have prohibited implementation of UIGEA until the Treasury Secretary, the Federal Reserve, and the U.S. Attorney General jointly developed regulations defining the term “unlawful Internet gambling.” That bill was sponsored by Rep. Peter T. King, R-N.Y.

Banks, processors, the Fed, and the Treasury Department have said the regulations for implementing UIGEA are unworkable and will hurt the financial industry while having little impact on illegal online gambling (Digital Transactions News, April 21 and March 24). Critics say the regulations fail to define what constitutes unlawful Internet gambling, leaving it to each financial institution to reconcile conflicting state and federal laws and court decisions, as well as inconsistent Department of Justice interpretations, when determining whether to process a transaction. In addition, some of the information needed to determine whether a transaction is illegal is unavailable to banks.

It’s unclear how H.R. 6501, the bill that would tax Web-based gambling, would impact the UIGEA. McDermott did not return calls for comment. However, one UIGEA critic says the bill might gain more support than H.R. 5767 because taxes on gambling would be used for programs to help the disadvantaged.