Original URL: http://www.theregister.co.uk/2006/11/17/us_online_gambling_underground/

Online gambling now billion dollar three-card monte

The wrong ass

By Chris Nelson

Posted in Financial News, 17th November 2006 19:43 GMT

Analysis Now that the Unlawful Internet Gambling Enforcement Act has been passed in the United States, those billions of dollars once spent on online gambling will now go to children's recreation centers, programs to care for the elderly, and humble decorations for Mother Theresa's grave. More importantly, those evil mega-casinos that have emerged offshore will finally be swept from the Earth, like Sodom and Gomorrah.

Of course, it could just as easily be said that the Act has its teeth in the wrong ass.

The Act, which was signed into law by President Bush this October, is essentially a modernization of the Wire Act of 1961. It allows criminal prosecution of online sites which accept any money from American gamblers, and promises the creation of regulations which would block banks and financial institutions from engaging in online gambling transactions.

The idea, as enunciated in the House version of the bill, is to stop the "debt collection problems for insured depository institutions and the consumer credit industry." The problem is that these amendments to the Wire Act attempt to legislate morality beyond the borders of the US in a way the 1961 Act never intended, and the consequences will hurt everyone but the fraudsters.

The thrust of the Wire Act has long been to protect innocent victims from the effects of gambling - these historically have come in the form of greater organized crime syndicates, brutal interest rates, and anatomical re-arrangements by a fellow named Rocco. But the current amendment has nothing to do with the fear of organized crime, and more to do with stopping regular Joes from running up lots of credit card debt. The protected parties here are actually those poor, waif-ish credit card companies.

The first effect of this new regime has been intentional: shares of non-US-based internet gambling sites have begun to plummet. UK-based companies like PartyGaming PLC and SportingBet PLC have already declared that they will no longer do business in the US. Other gambling companies in Central America and the Caribbean have taken an even larger hit because they have, in compliance with US law, diverted their business away from US online gamblers.

Mission accomplished, right? Not exactly. First off, the act of criminalizing the acceptance of money by online casinos scares off only one type of gambling enterprise: the legitimate kind that doesn't cheat. What has probably been lost in all the hoopla is the fact that these companies even have shareholders, and refuse to engage in what has become illegal activity, despite the fact that they do their business in the UK and are outside US criminal jurisdiction. The vacuum left can and will be quickly filled by companies who, at the very least, do not share a similar respect for US law. And that is really the start of where this legislation goes horribly awry.

Since these companies are, by necessity, outside of US jurisdiction, there is nothing the US can do to stop a company whose sole purpose is to defraud American gamblers. Rigging computerized versions of card games is certainly nothing new, and making sure the house always wins is not an incredibly difficult enterprise when you hold all the figurative cards. And the new US system assures gamblers that large, established online gambling havens which benefit from repeat business and good reputations will be eradicated from the picture. This is tantamount to asking fraudulent startups to please rip-off every sucker they can find.

Proponents of the Act say that this type of fraud will be limited by the fact that the Act calls for a set of regulations to be drawn up by the Department of the Treasury and the Federal Reserve to "identify and prevent restricted transactions," within a 270-day period. Of course, this leads to the second serious flaw in the Act.

The Act creates a mandate, but leaves no clear apparatus to support its enforcement. The Fed and the Department of the Treasury can do their best to identify which international businesses are gambling fronts, but given the fluidity with which international businesses of all types can arise, small sham businesses can pop up in all sorts of places with relative ease. Both agencies will have to create and manage a world of banking data where international banks will use payment processing systems as straw men to funnel money, creating all sorts of new money-laundering crime that didn't exist before.

Further complicating matters is the fact that these online gaming companies may even choose to set up banks that appear legitimate to handle their online transactions. In fact, these companies may even be able to have well-established banks within the borders of their own countries handling their transactions, since the activity may not be regulated there.

Gamblers will also be able to use payment processors that are not as sophisticated as large banking institutions. Payment processors, such as PayPal, are companies that function like online banks, storing users' cash and performing online transactions more fluidly with ready money.

The totality of these factors, when viewed realistically, paints a picture of a world where American gamblers find themselves gambling online with companies created for the sole purpose of making a quick, treacherous buck. Far from stopping fraud, it seems that the Act promotes it. It isn't as though the billions of dollars spent by US gamblers will simply go away at the drop of a hat.

As long as it's legal somewhere (and even if it's not), enterprising non-US citizens will find a way to bring those dollars out of the US through online gambling. By eradicating groups that have shown that they are at least sensitive to US regulations, those poor little credit card companies will still lose their money, but this time, to sham businesses that have everything to gain through cheating.

Finally, the bill does nothing to combat the real problem, which is gambling addiction itself. Of course, this follows a long line of US policy that criminalizes behavior without really offering a solution to the fundamental problem, joining prohibition, prostitution, and the war on drugs. Pablo Escobar's ghost only wishes he could have seen the day when making money was this easy. ®