Case Study:
Mankind has engaged in gambling for many centuries. Archeologists have unearthed six-sided dice dating from around 3000 B.C. Ancient Egyptians played a game resembling backgammon. On the Indian subcontinent more than 3,500 years ago, there were public and private gambling houses, dice games, and betting on fights between animals. Farther east, Asian cultures also have a rich and long tradition of gambling. As cultural artifacts, playing cards had their primitive origins in Asia. When Europeans arrived in North America, they found that the native peoples had been gambling in a variety of ways for centuries. Of course, the European settlers and colonists were no strangers to gambling themselves. They brought with them a penchant for gambling in various forms, including card-playing, dice games, and lotteries. Even the Puritan settlers played cards. Much of America’s Revolutionary War was funded from lottery proceeds. Likewise, several of the young nation’s new universities, including Columbia, Yale, and Princeton, were founded with substantial financial assistance from lotteries. America’s connection to gambling has continued throughout its Civil War, two World Wars, and the emergence of Nevada as the icon of “Las Vegas-style” gambling. Today, gambling has gone global. This is not surprising, given gambling’s prevalence through time around the world. The Internet Age is creating new opportunities for gamblers as well as challenges for those wanting to limit the spread of gambling and access to it. It is no longer necessary to be physically present in a casino or horse track to place bets on blackjack, sporting events, and horse racing. “Virtual” casinos now offer gamblers a wide range of online gaming opportunities. In the 1990s, online casinos proliferated as Internet entrepreneurs sought to satisfy the worldwide demand for online gaming. Rodolphe Durand, a strategy professor and author of The Pirate Organization, has noted that, in Europe, these organizations originally operated in the “pirate space” as offshore activities. It was illegal in the countries where people were gambling. It was only later that rules, regulations, and laws were framed to allow a legitimate industry to flourish in Great Britain, France, and other European countries. Today, these companies are based outside the United States because of questions about the legality of such activity under state and federal law. Some, including Gibraltar-based Party Digital Entertainment Plc and 888 Holdings Plc, are publicly traded corporations. Despite its long history of gambling, the United States has also engaged in strict regulation of the industry. The surge in Internet gaming triggered efforts to ban such activity and to prosecute the principals of the so-called offshore online casinos. This regulatory action has angered governments in various countries, especially smaller countries where the online casinos are based. One country, Antigua and Barbuda (Antigua), filed a claim with the WTO in 2004 arguing that U.S. laws and policies pertaining to online gambling violate the terms of a fair trade agreement known as the General Agreement on Trade in Services (GATS). Antigua claimed that the United States discriminated against foreign suppliers of “recreational services,” including Internet gaming. The claim was based on the following argument: Even as it maintains a number of federal laws that prohibit offshore Internet gaming, the United States exempts off-track betting on horse races over the Internet from these same federal laws. According to the suit, this situation benefits domestic interests at the expense of offshore casinos. In 2005, a WTO compliance panel ruled that the United States had, in fact, discriminated between foreign and domestic suppliers of gambling services. But the panel gave the United States an opportunity to show that the prevention of offshore betting was necessary as a means of protecting “public order and public morals.” In March 2007, the WTO ruled that the continuing exemption for online betting on horseracing in the United States unfairly discriminated against foreign casinos. The United States can restrict online gambling only so long as its laws are equally applied to American operators as well as foreign operators, the ruling stated. The WTO ruling allows Antigua to seek trade sanctions against the United States. While Antigua may not have the economic muscle to bring about meaningful trade sanctions against the United States, it is possible that other countries affected by the United States ban, including Great Britain, may also petition the WTO for relief. In 2006, U.S. authorities arrested David Caruthers, the Britishborn chief executive of Costa Rica–based BetonSports. Agents intercepted Caruthers while he was in the Dallas/Fort Worth airport en route from London to Costa Rica. In a 26-page indictment, the U.S. Department of Justice charged Caruthers and others with multiple counts of racketeering, conspiracy, and fraud. Caruthers was convicted and sentenced to 33 months in prison. The U.S. government has adopted a variety of measures to make Internet gambling in the United States illegal, or at least make access to it more difficult. For example, in the fall of 2006, U.S. President George W. Bush signed into law the SAFE Port Act, which included the Unlawful Internet Gambling Enforcement Act (UIGEA). This measure prohibits U.S. banks, credit card companies, and other financial intermediaries from sending or receiving money to offshore casinos. Thus, the law makes it difficult for gamblers to fund their offshore accounts. In summer 2010, U.S. Congressman Barney Frank sponsored a bill that would legalize online poker. As Frank noted, “Some adults will spend their money foolishly, but it is not the purpose of the federal government to prevent them legally from doing it.” The bill included provisions for taxing winnings from online poker; according to some estimates, this could yield some $40 billion in much-needed tax revenues over a 10-year period. Another rationale for removing the ban: supporters of online poker are emphatic that poker is a game that involves skill; thus, it is not gambling. The bill passed the House Financial Services Committee, but then, with midterm elections looming, lost momentum. Despite the prospect of generating much-needed revenue by taxing online poker, there is little interest in the issue on Capitol Hill. John Pappas is executive director of Poker Players Alliance (PPA), a lobbying group that is an advocate for legalization. “This won’t be a priority of the Republican congress, and it wasn’t a priority of the Democratic congress either,” he said. Adding to the complexity of online poker’s legal status is the fact that, in 49 of the 50 American states, online poker is not illegal. Specifically, federal law allows states to legalize and regulate online poker games as long as the players and the virtual casinos are physically situated inside state borders. Washington is the exception; in 2006, the state legislature passed a law that makes it a felony to for the state’s residents to play online poker. Against this backdrop of legislative maneuvering, gray areas, and legal red tape, some online sites abandoned the U.S. market. Others, such as Full Tilt Poker and PokerStars, stayed. Ultimately, an estimated 1.8 million professional and amateur poker players in the United States were playing online each year. On a typical night, as many as 100,000 people logged on to Full Tilt Poker. Another 200,000 players were typically active on PokerStars. In addition, large numbers of poker fans were tuning in to TV shows such as ESPN’s World Series of Poker and Poker After Dark on NBC. Significant advertising dollars for these shows came from online poker companies. In addition, the online operators paid production costs for some of the programs; in the broadcast industry, such arrangements are known as “time buys.” The advertisers typically operated two types of Web sites. Commercials for “tutorial” or “educational” poker sites with the Internet suffix “.net” urged viewers to log on and “play for free.” In addition, players who appeared on the shows were paid to wear hats, shirts, and other apparel displaying logos for the “.net” sites. By contrast, “dot.com” poker sites were not mentioned in the commercials. For example, online gaming operator PokerStars spent between $20 million and $30 million annually to advertise on ESPN. The ads were for PokerStars.net, an educational site, however, not PokerStars.com, the actual online gaming site. This tactic allowed the broadcasters to skirt Federal laws that prohibit the promotion of illegal activities such as prostitution. On April 15, 2011, the U.S. Department of Justice cracked down again. The agency unsealed indictments against the founders of the three largest online poker companies. The indictments alleged the defendants had engaged in bank fraud, money laundering, and other violations of the Unlawful Internet Gambling Enforcement Act. The Department of Justice also seized the internet addresses of, and blocked access to, Full Tilt Poker and other sites. The effects of what the industry has called “Black Friday” continue to develop. On July 26, 2011, Bodog announced that it was leaving the U.S. market at the end of 2011. Bodog has been a leading Internet poker site, and its exit from the United States indicates that few companies are willing to risk continuing online operations for U.S. residents. Against this backdrop, there is the continuing effort in states to legalize intra-state Internet gambling. The New Jersey legislature approved a bill that would have made it the first state to allow intra-state Internet gambling, but Governor Chris Christie vetoed it. Iowa and Nevada are among the states contemplating the legalization of Internet gambling for their residents. In Iowa, for example, an estimated 150,000 residents play online poker. Legalized play through the state’s 17 regulated casinos would generate an estimated $30 million to $35 million in annual tax revenues. U.S. Digital Gaming is a California company whose management has expressed an interest in operating Iowa’s online poker network. As Kirk Uhler, the company’s vice president of government affairs, noted, “What is driving this is the recognition that you have an existing activity that’s already taking place in an unregulated environment, and the revenue is all flowing overseas.”
Q1. Do you think that the Unlawful Internet Gambling Enforcement Act unfairly discriminates against offshore gaming companies?
Q2. How likely is it that legislative efforts to prevent people who want to gamble from gambling will be successful?
Q3. At a time when the U.S. government is desperate to generate revenues, would it make sense for policymakers to license, regulate, and tax Internet gambling? Do the results of the 2008 election and the current economic crisis create the conditions for tapping this new revenue source? Or, should concerns about the erosion of social values dominate the discussion of Internet gambling?
Your answer must be, typed, double-spaced, Times New Roman font (size 12), one-inch margins on all sides, APA format and also include references.