The “FT”:http://www.ft.com/cms/s/ea2a206c-51e4-11db-bce6-0000779e2340,dwp_uuid=e676331a-4bb0-11da-997b-0000779e2340.html writes about a ‘meltdown’ in the online gambling sector, thanks to new US legislation.
The online gambling sector was in meltdown in the UK on Monday morning, as the fallout from last week’s moves in the US to tighten anti-gambling laws sent shockwaves through the sector. Legislation passed in Washington on Friday would outlaw the processing of bets taken on-line by banks and credit card companies. The act now only requires the signature of the US president to bring it into effect, a move which is expected in the next two weeks. The bill prohibits US gamblers from using credit cards, cheques and electronic fund transfers to make online wagers, and throws the high-risk industry – already damaged by the impact of arrests of executives on US soil – into turmoil. One person in the industry said the bill was an attempt to “strangle the industry through the banks”. Companies based in the UK, Gibraltar and elsewhere are losing billions of dollars in their stock market valuations, because of their exposure to the US market.
People like “Christopher Caldwell”:http://www.ft.com/cms/s/457bddcc-1363-11db-9d6e-0000779e2340,dwp_uuid=e676331a-4bb0-11da-997b-0000779e2340.html take these kinds of measures as evidence that governments can indeed regulate the Internet, protect their citizens from nasty content etc etc. I used to more or less agree with them, but after thinking it through and doing some further research, I’m nowhere near as sure as I was. States are indeed able to use third party private actors as proxy regulators as they’re doing here, by pressing credit card companies and companies like Paypal into service as enforcers. They’ve been doing this for years on the state level (Eliot Spitzer pioneered this). But this kind of regulation-by-proxy really seems only to work well when the proxy regulators have real incentives to do what states want them to do, or when the ultimate targets of the regulation are big multinational companies tht don’t want to get caught breaking the law. But according to this “GAO report”:http://www.gao.gov/new.items/d0389.pdf (PDF) it isn’t that difficult for offshore gambling companies to mask their transactions as ‘legitimate’ credit card transactions if they want to. Credit card companies don’t have either the means or the incentives to prevent this, as long as they _look_ as though they are trying to comply. So if I was to lay a bet,I’d lay substantial amounts of money that the new government legislation won’t put much of a dent in the willingness of US citizens to gamble on the Internet, or in the eagerness of offshore companies to make easy money by catering to this willingness. What _will_ happen is that the currently dominant multibillion dollar companies will lose control of the market to a congeries of small, shadier companies that are much more willing to cut legal corners than large, publicly quoted companies, because they have much less to fear from prosecution (few fixed assets, no corporate reputation to maintain etc).
{ 25 comments }
Villaveces 10.04.06 at 2:50 pm
What will most assuredly happen is the emergence of a massive new offshore payment industry, perhaps with millions of Americans opening offshore accounts (they don’t even need to know they are offshore – if you want to play click here).
This is going to expand the ‘shady’ transactions that are going on, and cause activities by narcotraffickers and terrorists to be much easier to conceal. Plaudits to Balko once again for his piece on the topic, where he also touches on the questions inherent in an Internet gambling ban. Chalk this up as another “win” for the evangelicals and a loss for freedom.
P O'Neill 10.04.06 at 3:10 pm
One thing I don’t understand is why Tradesports, apparently, continues to be legal while Sportingbet, Betonsports etc are not. Do they structure the “bets” (securities?) differently so as to avoid the legal problems?
robert the red 10.04.06 at 3:40 pm
But can’t a person refuse to pay a gambling loss that is incurred on a US credit card under this law? It is illegal to put the charge on his bill.
M. Townes 10.04.06 at 4:03 pm
I saw that news item and thought, “Henry Farrell!” My next reaction was that Congress must have better things to do, and this does seem unlikely to have much effect. Even before this, most of the TV ads which are clearly for gambling sites carried the disclaimer, “This is not a gambling site” – about as plausible as if the “Girls Gone Wild” ads carried a “This is not a pornography video” disclaimer. Clearly, however, there is already some sort of dodge afoot – I’d be interested to find out what.
example 10.04.06 at 4:13 pm
Theoretically, though, what do we gain by allowing our gambling money to go overseas? Evasion superiority? Isn’t this the logical companion to our laws banning online gambling in the States? You can’t convince me any of these gambling markets are useful. Do Americans lose when less American money is lost to overseas companies? At least they’re being thorough.
[Except that, if this law is ineffective, Americans may be hurt by dishonest or unregulated companies.]
KCinDC 10.04.06 at 4:41 pm
Why do the credit card companies accept the gambling sites as vendors in the first place? Surely the chances the customers will run up debts they’ll never repay and go bankrupt are far greater than they are for other vendors. But maybe the gambling-addicted debtors can’t escape since bankruptcy reform? And maybe the CC companies take a much bigger cut with the gambling sites than with other vendors?
Ken Houghton 10.04.06 at 5:30 pm
Scores is legendary in the NYC financial services industry. I am told (wouldn’t know personally, of course) that credit card charges there appear on a bill as if from a rather nondescript restaurant name.
John Quiggin 10.04.06 at 6:21 pm
As far as enforcement goes, I’d have thought the obvious thing to do is to make debts to online gambling providers unenforceable (that is, not collectable by the credit card companies from their customers). This would give credit card companies a pretty strong incentive not to provide services to such providers. And losing gamblers would have a pretty strong incentive to provide the info.
derrida derider 10.04.06 at 7:33 pm
“So if I was to lay a bet,I’d lay substantial amounts of money that …”
Have you in fact laid this bet? What companies have you bought shares in?
I think this is a terrible blow to Paypal, though. Not so much through the direct revenue loss, but more by guaranteeing a market for a non-US competitor. If I was an entrepreneurial Canadian or UK bank I’d be setting up such a competitor now.
stuart 10.04.06 at 8:45 pm
Why do the credit card companies accept the gambling sites as vendors in the first place? Surely the chances the customers will run up debts they’ll never repay and go bankrupt are far greater than they are for other vendors. But maybe the gambling-addicted debtors can’t escape since bankruptcy reform? And maybe the CC companies take a much bigger cut with the gambling sites than with other vendors?
Because people that owe large amounts of money on their credit cards are their best customers, and as a group pay back far more than the amount that become bad debts cost.
Jake 10.04.06 at 9:01 pm
PayPal hasn’t allowed gambling transactions in a very long time, so it’s not like this really changes anything in that regard. Also, credit card companies do indeed charge gambling companies much more per transaction than they do in other industries, except perhaps the porn industry. On top of that, I think that the US already made gambling charges on a credit card uncollectable, which is why if you were an American, you had to use EFT or a check. The new bill extends the uncollectability to those forms of payment.
nick s 10.04.06 at 11:19 pm
But can’t a person refuse to pay a gambling loss that is incurred on a US credit card under this law?
It doesn’t quite work that way. Right now, even before this law, you couldn’t directly fund an online gambling account from a credit or debit card with a US billing address. I presume the new law — sneaked into the port security bill — will make it illegal to make payments to offshore middlemen like Neteller (registered in the IOM), but I have no idea how that’s going to be enforced.
Those who want to gamble online will find ways to do so until legislators try to go after ISPs for providing access to those sites. That’s when Caldwell’s argument gets tested.
Even before this, most of the TV ads which are clearly for gambling sites carried the disclaimer, “This is not a gambling siteâ€
It was semi-plausible: the .net sites don’t mention cash gambling, and the software they provide doesn’t include the features for it. The .com versions do.
I suspect that wholesale legalisation would be less sleazy in its effect on politics than the current climate, as Jack Abramoff proved by taking money from tribes with casinos to give to Ralph Reed to spend on conning Christian activists into campaigning for restrictions on gambling that helped out (or didn’t, in some cases) those tribes. When Congress and state legislatures restrict gambling, someone’s getting a payoff, and my guess is that it’s bigger than the payoffs they would receive to legalise it.
The big issue here isn’t actually online casinos or poker, but sports betting. The structure of big-league American sport — in essence, a taxpayer-subsidised cartel — is wrapped up with the fear of being corrupted by nationwide betting.
Chris Bertram 10.05.06 at 1:59 am
You can certainly use PayPal to top up your account with Betfair, so 11 is at least partly mistaken.
Isn’t this just a case of blatant protectionism by the US: an attack on non-US traders in violation of GATT?
Harald Korneliussen 10.05.06 at 3:37 am
Concealing the cash transfers as legitimate purchases would require the cooperation, or at least consent, of the buyer/gambler. I think that’s a significant hurdle. But anyway, Quiggin’s suggestion is better, it has already been shown to work here.
It’s what spurred the invention of the pre-paid cell phone subscription. Bills from minors weren’t collectible.
Jake 10.05.06 at 5:41 am
Sorry, you can’t use PayPal for gambling in the US. You can use PayPal for gambling if you are in the UK and don’t have any US financial instruments attached to your account. But PayPal Europe is a separate entity from PayPal, Inc.
I just meant to say that nothing has really changed regarding PayPal with the new law, but yes, it was unclear maybe to the point of being incorrect.
Peter Clay 10.05.06 at 6:10 am
Well, this is presumably driven more by existing US gambling interests bankrolling legislators – if online gambling takes off, why would people need to go to Vegas?
dfinberg 10.05.06 at 8:55 am
Laundering the insertion of money into the gambling system seems pretty trivial. Look at something like allofmp3, where you buy gift cards and deposit them. Any Foreign operation would be happy to set this up, selling happy fun points that happen to be valid at legitimate retailer x, but can also be deposited at betbetbet. It is hard to tell at first glance whether or not the deposit of money by the book operator is legal, that would be the more interesting point (most people want some hope of getting their hypothetical winnings back).
glenn 10.05.06 at 9:35 am
…or you can do like italy has done and blocked access to hundreds of gambling sites! No kidding, you just cannot access them from Italy!!
jet 10.05.06 at 10:32 am
But I thought it was always okay for the government to protect the people from themselves? Or is it only okay when *you* think it is worth doing? It is okay for the government to single out fast food chains for regulation to keep them out of neighborhoods, but it isn’t okay to single out gambling companies for regulation?
Just another example of how government intrusion into the daily lives of people is nearly always a Bad Thing.
nick s 10.05.06 at 12:55 pm
Well, this is presumably driven more by existing US gambling interests bankrolling legislators – if online gambling takes off, why would people need to go to Vegas?
Celine Dion? Weddings? There are people who go to Vegas and don’t gamble, surprisingly enough. But the Nevada casinos weren’t lobbying for the ban, or at least not openly: they think they benefit from a rising tide of interest. States with a stake in lottery sales? States with smaller casinos or tribal interests? Possibly.
joejoejoe 10.06.06 at 12:13 am
I’m in the US and just flipped open my local phone book to find a page full of Escort Services that list ‘Major Credit Cards Accepted’. Prostitution is illegal in my community and just about every US community but that doesn’t prevent the agencies from advertising and accepting credit cards. Passing a prohibition law and enforcing it are very different.
Jo Wolff 10.06.06 at 1:27 am
I was part of a government committee that had to consider the regulation of gambling in the UK. Internet gambling was only in its infancy – this was about four or five years ago – but was one of the concerns we had to address. Our view, and perhaps we were wrong, was that attempts to prohibit it would have exactly the effects that Henry predicts. Acordingly we thought that the best strategy in the circumstances would be to have codes for responsible operation, and allow those who met them certain advantages, such as the right to advertise, while making it illegal for others to do so. I haven’t followed this in detail, but I think the Gambling Commission is going down this road, having a ‘white list’ for responsible operators.
Whatever one thinks of the merits of the internet gambling, one has to recognise the limits of the law in changing behaviour. If law was always effective the prisons would be empty.
minerva 10.06.06 at 3:10 am
People gamble on the internet. Offshore sites. If that isn’t an indicator that human beings are fundamentally irrational, I don’t know what is.
Harald Korneliussen 10.06.06 at 7:47 am
Minerva, that always confounded me, too. Would they gamble in a casino where they couldn’t even see the roulette, where the croupier only announced what the winning numbers were?
It’s not as if it’s not happening. One businessman here who ran an offshore gambling operation was criticised for making sure that when people only played with “monopoly money” (this was an option at this particular site) everyone won a lot, but once they switched to real money, payoffs suddenly became more realistic.
Now there are cryptographic ways of assuring that the house doesn’t cheat (at least for pure chance like the roulette. Much harder for poker. Impossible if you think of collaboration as cheating, which it clearly is), but I never heard of a casino that used them. It would require an open-source gambling app anyway. I think even I would have heard about that, if it existed.
Todd Larason 10.07.06 at 10:15 pm
Harold, #24: http://www.phathash.com/ is an attempt tp provide crypto-secure verification for blackjack fairness.
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