Content-Length: 44976 Content-Type: text/html; charset=UTF-8 Internet Gambling Report II ... Why Internet Gambling May Frustrate Public Policy

CHAPTER 4

WHY INTERNET GAMBLING
MAY FRUSTRATE PUBLIC POLICY

hy is Internet gambling attracting so much government attention? Several explanations abound. Some claim that government is simply protecting its citizens from social harms, dishonest operators and unfair games. Others claim the cause of the attention is the religious

right, whose moral agenda is to outlaw all gambling. Still others assert that the states are simply acting in their own self-interest to protect the revenues from their government-run lotteries.

Which is true? The answer is that all are true to some degree or another. Gambling has never been an issue of uniform agreement. Government policies on the subject differ as greatly as people’s opinions. No greater contrast can be shown than the sister states of Nevada and Utah. In one, you can play slot machines in the grocery stores, while, in the other, you go to jail for playing cards in your own home.

One thing is for certain; almost all governments regulate gambling in some fashion, despite whether it is legal or illegal. For example, Nevada has allowed casino gambling since 1931, but has extensive laws and regulations regulating its casinos. Utah, which permits no forms of legal gambling, has criminal laws that regulate the conduct of its citizens by attempting to detect and prosecute those who place or accept wagers.

Underlying the laws that regulate gambling is the society's public policy. This policy usually falls into one of four general categories. The most restrictive is that gambling is an undesirable activity that government should not tolerate. The least restrictive is that gambling is an acceptable activity that its citizens and residents may engage in without government interference. Between these polar positions are other policies, including the position that gambling is inevitable and that government should allow it, but restrict it. These restrictions could help assure that the operators are not encouraging people to gamble and are operating fairly and honestly while at the same time providing revenue to the government. Philosophical, theological, social, and economic arguments are offered to support each public policy position.

When a society adopts a public policy toward gambling, it then adopts a general approach to implement it. Implementation involves both adopting and enforcing laws. A society's implementation of gambling policy is often a better reflection of its citizens' attitudes toward gambling than are the legislature's attitudes in adopting the law. For example, in the United States, betting on individual sporting events is legal only in Nevada, Oregon and Delaware. Yet, Americans illegally wager billion dollars on sporting events in other states. While the government may believe that citizens should not wager on sports, many Americans do not share this view and are willing to break the law.

The combination of laws and enforcement usually results in one of five distinct policy models.²⁵ The most restrictive is for government to pass and strictly enforce laws that attempt to eradicate gambling from society. The least restrictive is for government both to allow gambling and to provide government regulation to ensure its survival against external threats. Each of these policy models is discussed below in greater detail. Allowing unregulated Internet gambling, however, will be unacceptable to most governments regardless of their differing policy goals.

25 Hybrid models exist that borrow elements of the Government Protection and Gambler Protection Models. Often, underlying these hybrids is public policy that views gambling as a savior. In other words, the financial reward from gambling is believed to be more important than the potential harm. These hybrid systems try to reap the revenues from gambling, while minimizing the harms, particularly to its citizens. Puerto Rico, for example, allows casinos to stimulate demand outside its borders to attract tourism, but seeks to protect Puerto Rican residents by prohibiting casinos from stimulating demand within the Commonwealth by advertising. Other jurisdictions allow casinos to attract players from outside their borders, while prohibiting their own population from engaging in gaming. They might adopt a Government Neutral or Government Protection Model for nonresidents, but attempt to eradicate the activity by its residents.

Eradication

Eradication requires the legislature to adopt laws that prohibit gambling and the criminal justice system to enforce those laws with the goal of eradication. This approach follows from a public policy that gambling is unacceptable. While this position may have philosophic, economic, or social foundations, the religious orientation of a society most often determines whether a particular country permits gambling. The secular laws of societies with a dominant religion tend to follow the teachings of that religion. Most of the world's religions do not tolerate gambling by its membership. This includes the religions of Islam, Hindu, Buddhism, and Judaism. Most Muslim, Hindu, and Buddhist countries prohibit most, if not all, forms of gambling.

Christianity is the predominant religion in North America, South America, Australia and Western Europe. The Christian religion is divided on the issue of gambling. Some denominations, such as the Baptists, Methodists, and Church of Jesus Christ of Latter-Day Saints (Mormons) take an absolutist position, which is that gambling is wrong whatever the circumstances. The “religious right” espouses this position. Most Catholic denominations, however, take a teleological approach. This is best expressed in a Catholic encyclopedia "Gambling...though a luxury, is not considered sinful unless the indulgence in it is inconsistent with duty."²⁶

Without a strong religious influence, the attitudes of a society usually focus on issues of individual rights and the negative impact of gambling on society. Therefore, religion as the basis for prohibitive public policy on gambling is less evident in Christian countries than countries with another predominant religion.

Beyond theological arguments, many governments view gambling as undesirable as a matter of social or economic policy. A common view is that gambling is a deleterious profession; that is, a vocation that has no utility and produces no public good. Other social and economic reasons are offered for banning gambling. The most popular arguments of gambling opponents are

26 The New Catholic Encyclopedia 276 (1967).

that gambling leads to problem gambling,²⁷ diverts money from productive businesses,²⁸ lowers the standard of living,²⁹ and contributes to crime.³⁰

Eradication is not achievable unless the laws provide penalties that either prevent the offenders from engaging in the activity, usually through incarceration, or that have sufficiently severe penalties to provide a deterrent. Police and prosecutors also must have sufficient resources and motivation to enforce the laws.

Governments that seek to eradicate gambling will view Internet gambling as a serious threat to their policy goals. If these governments view gambling as religiously wrong, then it is wrong whether conducted in person or over the Internet. Religious-based, non-secular governments may react with totalitarian mandates. This mandate will attempt to prohibit the introduction of an activity that they view will corrupt the population and distract it from the path of the righteous. As has already occurred in some countries, these governments will restrict or prohibit Internet access because of its content.

Governments that view gambling as pragmatically wrong may conclude that Internet gambling is more harmful to the public than traditional gambling. Some governments may decide that because Internet gambling is immediately available to anyone with a home computer, it may contribute more heavily to problem gambling. Minnesota Attorney General Hubert Humphrey III expressed this when he wrote in a November 19, 1996 article in the New York Times: “[t]here is an insidious aspect to Internet gambling, unchecked, it has the potential to turn every family room in America with a personal computer into an unregulated casino.”

27 This is the belief that gambling creates or encourages destructive, pathological, or problem behavior that results in financial ruin to a significant number of people.

28 This is the belief that society benefits if its citizens invest their money in creating and promoting productive businesses that provide services and create products, and that spending money on gambling does neither. See, Cabot, Casino Gaming, supra note 3.

29 This is the belief that persons without disposable income use their money to gamble rather than to buy essential goods and services, such as health care and food. This lowers the standard of living among the poor. See, Cabot, Casino Gaming, supra note 3.

30 This is the belief that gambling creates crime because people will steal to support a compulsive gambling habit; organized crime is attracted to gambling because it is a cash industry and can be used to exploit people. Besides direct increases in crime, some assert that gambling leads to increases in prostitution and drug use. This belief is based on the proposition that persons who gamble also tend to partake in other vices. See, Cabot, Casino Gaming, supra note 3.

Government may also decide that small stakes gambling is harmless but that gamblers need protection from the high-stakes variety. It may apply a Government Neutral Model to forms of low-stakes gambling and a Government Protection Model to high-stakes gambling, or ban high-stakes gambling altogether. Id. In Mississippi, for example, licenses to conduct low-stakes bingo games are routinely granted with little regulatory scrutiny, while applicants wishing to operate high-stakes games must undergo more rigorous licensing and follow stringent regulations. In South Carolina, tavern owners can easily obtain licenses to operate low-stakes video gambling devices, but high-stakes gambling is prohibited.

Moreover, these governments may attempt to more stringently enforce anti-gambling laws against Internet gambling to dispel a belief by its citizens that they may violate laws over the Internet because the medium assures greater freedom from detection and prosecution.

On the other hand, some governments that seek to eradicate traditional gambling may tolerate Internet gambling. These governments may view Internet gambling as less detrimental to the poor than other forms of gambling because poor persons are less likely to have the computer equipment necessary to engage in Internet wagering.

Decriminalization

Decriminalization occurs when either laws or enforcement fail to achieve the goal of deterring an illegal activity. While the laws may prohibit an activity, the police or prosecutors may not or cannot adequately enforce them. This may occur because of difficulty of enforcement, lack of resources, philosophical differences on the value of the law or through corruption. The magnitude of gambling in many countries reflects decriminalization of gambling in places where gambling, under the written laws, is still illegal. As an example, in the United States, most state governments have indirectly decriminalized traditional sports wagering by adopting a policy of non-enforcement.

Law enforcement may view its attempts to enforce anti-gambling laws in the Internet arena as even more futile than in the illegal bookmaking arena. In these places, Internet gambling may receive tacit government disapproval, but will be allowed to continue unabated by law enforcement.

Gambler Protection Model

Another position that a government may espouse is that gambling is an inevitable vice. Proponents of this view believe that people are going to gamble even if it is illegal, and that government should permit gambling to help (1) prevent excessive gambling, (2) keep undesirable elements out of the industry, and (3) ensure that the casino provides fair and honest games.

A similar argument relies on comparison of the benefits and costs to society between illegal and legal gambling. The costs of making gambling illegal often focus on the best use of government resources to control the deviant behavior of its citizens. Gambling is often seen as harmful only to the person who engages in it; that is, it is a victimless crime. This contrasts with crimes such as murder, rape, theft, and other “serious deviant behavior.” By legalizing gambling, limited law enforcement resources, such as police, judges, prosecutors, and prisons can be freed up so that they can concentrate on the “serious deviant behavior.”

The argument concludes that although this “victimless” deviant behavior should be permitted and controlled through regulations, it should not be encouraged. Regulations should assure that the behavior does not result in the person’s financial ruin. Particularly, regulations should implement strategies to reduce or eliminate participation by problem gamblers. For example, problem gamblers could be offered either financial or psychological counseling.

Illegal gambling also may impose costs on society that government-controlled gambling may eliminate. For example, illegality may allow criminals to protect their gambling monopolies with violence. Illegal gambling profits and winnings also may go untaxed. Moreover, persons indebted to criminal gambling organizations may resort to crime to pay their debts because criminals are likely to use threats or actual violence to collect debts. Therefore, governments that follow the Gambler Protection Model allow casino gambling but attempt to regulate the industry to minimize undesirable social consequences.

Central to this approach is that casinos should not exploit the public by encouraging them to gamble or exploit gamblers by encouraging them to gamble beyond their means. These governments may adopt laws that prevent casinos from advertising its entertainment, sponsoring junkets, or conducting other activities that stimulate demand for casino gambling.³¹

Governments that follow this model will likely view Internet gambling as frustrating their policy goals. These governments place heavy restrictions on the gaming operators by preventing the stimulation of demand for their product. Accordingly, casinos in these places must close early, and cannot advertise or offer credit. Unregulated Internet operators, however, would not face the same prohibitions as operators of traditional casinos. They can advertise their gambling product to stimulate demand, encourage gambling by

31 Great Britain offers the purest form of gambler protection. A casino applicant can only obtain a license if it proves that the area where it proposes a casino has a substantial unstimulated demand for one. The proponents of the British system believe that allowing casinos to stimulate demand for casino gaming is undesirable. They reason that legal gaming creates social burdens, particularly compulsive gambling and stimulates gambling among lower-income residents. They assert that compulsive gambling can devastate families and individuals. Likewise, encouraging gambling among the lower classes may result in nondiscretionary dollars going to gaming instead of food, clothing and education.

offering 24-hour operations and allow gambling on credit. Moreover, these governments have no method of assuring that the games offered by Internet operators are fair and honest.

These governments also will be interested in knowing who is playing in the Internet gaming sites. Many places have traditionally denied casino access to certain individuals on grounds of public policy. Such persons include minors, intoxicated persons, and habitual gamblers. In most places, an age limit operates to protect minors who otherwise might gamble. The ease with which children can gamble over the Internet erodes the ability of government to carry out their protectionist policies for minors.³² As more children begin to use the Internet, these problems may worsen.

Aside from parental supervision, no absolute methods exist to determine the age of a user who is accessing material over the Internet.³³ Current technology can restrict access to sites to authorized individuals. For example, Informer Data Security has introduced the Secure Access Management (SAM) software system, a dial-back security system.³⁴ SAM ensures that no connection may be made with a system's resources--say, a casino--before a remote user's access is verified as authentic.³⁵ Although the software is promising in some respects, the technology fails to ascertain the identity of the person sitting behind the monitor. Orwellian stigma set aside, it is this information that is crucial to the proper regulation of Internet gaming sites.

Internet gambling site operators also may implement some other safeguards against participation by minors. An Internet operator can interrogate a potential player by requiring him to complete a fill-in-the-blank form that requests information such as age.³⁶ But, nothing prevents the minor from simply lying. Another method is to require the player to provide a Social

32 U.S. Secretary of Education Richard Riley has said that the nation's schools and libraries should have free or discounted access to the Internet under the provisions of the 1996 Federal Telecommunications Act. Education Chief Says Schools, Libraries Need Free Or Discounted Telecom Services, BNA's Electronic Information Policy & Law, April 19, 1996, Vol. 1, No. 2, at 34.

33 Id. at *71-72.

34 Paula Jacobs & Deborah Schwartz, Working with a net, HP Professional, September, vol. 8, no. 9, 1994, at 42.

35 Id.

36 Id. at *73-74.

Security or credit card number. Verification³⁷ by credit card as a prerequisite to entering an Internet gambling site may soon be used as a surrogate for protecting minor access.³⁸ Currently, this requires the operator to assume that the minor will not have his own card or unrestricted access to someone else’s card. Conceivably, credit cards could be encoded with age information. Based on the response, the site would then allow or deny access. A future method of age verification may be to have age information incorporated into new technology such as Digicash or CyberCash.³⁹ Still, these are, at best, flawed systems as some minors may have credit cards, or access to their parents’ credit cards or digital cash.

Another method is through compliance with a program that issues adult “passwords,” such as Adult Check. There, the adult user would register with Adult Check, provide certain information and pay a small fee. Adult Check would then verify the information (usually the credit card) and issue an adult password. The home user then must use the password to gain access to “adult” sites that are participants in the program. Again, while better than having no systems, adult check systems can be defeated by minors that obtain their parent’s credit card or adult pass words.

Likewise, current technology is insufficient to ascertain whether the person logging onto an Internet gaming site should not be playing because they are intoxicated, a problem gambler, or should be prohibited for some other reason.⁴⁰ In Nevada, for example, casinos do not allow visibly intoxicated people to participate in any gambling activities. In addition to intoxicated persons, Nevada law prohibits casino owners from gambling in their own establishments.⁴¹ Some policy-makers also may want to prohibit pathological gamblers from participating in gambling activity, or set limits on their betting.

37 "Verification" is the "method by which a user types in his or her credit card number, and the Internet site ensures the credit card is valid before it allows the user to enter the site.” Id. at *75.

38 Id. at *76.

39 NAAG Internet Gambling Subcommittee Report 14 (June 11, 1996).

40 Nev. Gam. Comm. Regs. 5.0011(3).

41 Nev. Gam. Comm. Reg. 5.011(11). Because it may appear improper or may compromise an establishment's integrity, persons managing a gaming establishment (including any owner, director, officer, or key employee) cannot gamble at their own establishment. Id.

Lastly, no guarantees exist that the operators will employ any system that verifies the identity of the player. Many will purposely attempt to avoid such identification to maintain the anonymity required or requested by many patrons. After the introduction of anonymous digital cash, many patrons will demand anonymity.

Government Neutral Model

Few governments view gambling as an acceptable activity that should be regulated no more heavily than any other business. The basis for viewing gambling as an acceptable activity may have different origins. Some believe that government should not interfere with a person's choice to engage in activities that do not harm other persons. Others view life as containing elements of risk, and do not believe that reasons exist to single out gambling for prohibition. Still others view gambling as having positive social values, maintaining that gambling:

» Serves as a social adhesive for the working class;

» Provides a form of adult play;

» Provides a useful diversion from the stresses of the modern world; and

» Provides enjoyment to elderly citizens and others who would otherwise have no entertainment outlets.

Governments rarely take a neutral approach to gambling. One exception is charitable gambling, which is common in many American states and in other countries where commercial casino gambling is prohibited. Often government approaches the licensing of charitable gambling no more intensely than the licensing of other businesses. Nevertheless, the sums generated by this form of gambling can be significant. For example, in Minnesota, the pull-tab industry generates about $1.26 billion in handle (gross revenue) each year. Yet, regulatory scrutiny of this gambling industry is not significantly more intense than that for many other industries under government authority.⁴²

42 This Government Neutral model may distinguish gambling transactions based on monetary amounts. Governments often impose greater restrictions on business activities based not on the activity but on the monetary amounts involved. For example, local offering of stock in a company of less than $1 million may undergo less government scrutiny than $100 million in a national or international offering. Commercial real estate brokers may undergo more rigorous licensing than residential real estate agents. See, Cabot, Casino Gaming, supra note 3. Likewise, the Government Neutral Model may apply lesser standards to smaller transactions, and more heavily regulate larger transactions. For example, governments may allow private parties or charities to offer prizes only to a certain monetary for every year, or require different licenses based on net revenues generated in a given year. Id.

Because few governments have adopted a government neutral model, its extension to Internet gambling is unlikely. No good reasons exist for governments to apply this model to Internet gambling and another model to traditional gambling.

Government Protection Model

Governments may dislike gambling, but allow it to achieve other goals. Proponents of this view assert that while gambling is undesirable, its negative impact is outweighed by its direct and indirect benefits. They view the negative impact as less serious than what would occur if tourism declined or if the government did not have tax revenues to provide other needed services. In other words, they see gambling as the lesser of two undesirable alternatives.⁴³

While the gambling industry may carry some burdens, such as increases in problem gambling, it also may provide positive economic benefits. The presence of casinos and related businesses may increase tourism, employment, and accommodations previously deficient or nonexistent. These increases may lead to new residents or retaining existing ones. Regardless of whether any other goals are achieved, gambling, at minimum, generates needed taxes.

These governments view the problems attributed to gambling as less substantial or subject to alleviation by both regulation and the generation of the gambling tax revenues.

43 The Atlantic City experiment was based on the concept that gambling is not meant to be an end, but to be a means to fulfill worthwhile goals. The pretense for the experiment was that government is uneasy with, and hostile to, the gaming industry but accepts it with the view that it must (1) achieve the worthwhile goals; (2) minimize social and governmental costs; and (3) be strictly controlled.

Where the Gambler Protection Model supports regulation for the gambler, the Government Protection Model provides regulation to protect the gambling industry and the government's economic interests in it. The Government Protection Model is often found where the government has a heavy reliance on the industry to meet tax expectations.⁴⁴ An analogy can be made to the restrictions that a bank puts on a business to which it lends money. When a bank lends a few hundred dollars to a borrower, a simple promissory will suffice. In contrast, if the bank lends a million dollars, the loan documents are likely to be hundreds of pages long. In both cases, the bank wants to see the business succeed, but it puts more restrictions on the borrower when the bank's interest is greater.

Government's primary role in the Government Protection Model is to protect the industry from threats to its existence. Gambling is different than most other industries because it is perceived by many as a vice. Its very existence may be tenuous, as public perception of its benefits and burdens greatly influence the legality of the activity. Its fragile existence is threatened by: (1) a federal government that can declare gambling illegal, (2) voters or legislators who can change the law, or (3) gamblers who choose not to play in places that are perceived as dishonest or unfair. As a growth industry, casinos also need the support of capital markets, such as banks and stock exchanges. Access to these markets is often contingent upon the favorable perception of the gambling industry by these institutions.

The mechanisms that create the necessary perceptions are stringent licensing, regulation, and strict enforcement of transgressions by casino operators that violate the perception of honesty and freedom from criminal elements.⁴⁵

44 Often commentators are confused by how a government can claim that gambling is a moral and acceptable activity, but still have an extraordinary regulatory apparatus. The basis for distinction is not that government believes on that gambling is immoral or produces undesirable social effects, but instead that if outside parties view that activity as such, the industry as a whole will suffer

45 Operators realize that this protection is effective only if provided by government. Convincing others that the industry is honest and free of criminals by self-regulation is difficult, if not impossible. Therefore, operators are willing to subject themselves to losses of freedoms, risk, and expense as the price of maintaining both the reality of control and the desired public perception. Often this price is high. To achieve the desired results, government creates a burdensome licensing process, costly accounting and reporting systems, and disciplinary procedures that could result in severe fines or license revocation. See, Cabot, Casino Gaming, supra note 3.

Government's second role in the Government Protection Model is to promote and defend the gaming industry. This requires it to take an active interest in convincing the outside world that the regulatory system has successfully excluded organized crime, and is protecting the honesty of the games. When the industry is attacked, government staunchly defends it against its critics. Id.

A final role that government plays in the Government Protection Model is to provide a means for solving the industry's problems by setting standards and providing dispute resolution. Id. For example, no single casino may be capable of testing equipment or games sold to ensure that they cannot be manipulated or cheated to the casino's or the gambler's detriment. Equipping and maintaining a lab and personnel would be too costly for a single operation, so government, through collective funding from casino taxes, may finance and operate a games laboratory to provide this service. Another example is expert law enforcement to detect and apprehend individuals who cheat the casinos. This may require intelligence, agents trained in cheating detection, and special laws to address the ties of the gaming industry. Id.

Governments that follow the Government Protection Model may view Internet gambling as frustrating their policy goals. An unregulated environment means that criminals can become gambling operators. This may lead to a misconception in which the public does not realize that the traditional casino industry is regulated, but that Internet gambling is not. As the media exposes criminal involvement in an unregulated Internet environment, the public may erroneously perceive that criminals are involved in all gambling environments, including regulated environments that require operators to undergo extensive licensing examinations and approvals.

The same type of negative perception can be created by a scandal that occurs involving an Internet gambling operator. This may include instances where an Internet operator cheats the players, refuses to pay legitimate winnings, or absconds with the player's money placed with the operator to make future wagers.

Governments that rely on gambling tax revenues may view Internet gambling as unacceptable because otherwise taxable gambling revenues would go untaxed. This may reduce both general tax revenues and tax revenues earmarked to address social problems caused by gambling, such as problem gambling. Moreover, other positive benefits that may accrue from gambling, such as increased tourism, employment or development may not be present in Internet gambling.

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