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October 13, 2006

US Bill on Internet gambling

Morality or Protectionism?

by Sir Ronald Sanders

The value of publicly-traded Internet gaming companies in Britain and their subsidiaries in the Caribbean has been savaged by a Bill adopted in late September by the US Congress making it illegal for banks and credit card companies to make payment to foreign online gambling sites. Over US$7 billion was wiped off the market value of companies that were worth US$12 billion.

Revenues to the UK government – and more significantly to governments of Caribbean countries such as Antigua and Barbuda, Belize and Costa Rica – will be reduced immediately and employment will be adversely affected.{{more}}

If the United States was not the main centre of the world for gambling, the Bill, ostensibly adopted on the basis of morality, may have been acceptable.

But, the fact is that the US is the major centre in the world for gambling. Five years ago, spending in US land-based casinos alone reached almost US$26 billion. It is much more today. And, there is no effort in Congress to close down US casinos on any moral basis.

To the contrary, Nevada Congressman Jon Porter introduced a Bill last May to study whether on line gambling sites, run by US companies, could be regulated effectively. Mr Porter’s Bill is backed by casinos whose lobby, the American Gaming Association, is on record as saying that US based casinos would like to open on line.

Further, the Bill, passed by Congress in September, expressly makes legal bets through the Internet on US horse racing, US Internet lotteries, US fantasy sports and, more critically, allows states and Native American tribes to authorise Internet-gaming of almost any kind that occurs wholly within the borders of the state in which they are located.

So, even though the moral argument is being touted, and the religious right in the US has welcomed the Bill, it has little to do with morals and more to do with stopping Internet gaming companies from outside the US providing services to US customers.

Bob Goodlatte, the Congressman from Virginia, summed up this protectionist position when he declared that the Bill would stop “US $6 billion from being sucked out of the economy” annually.

It is this very protectionist position that caused successive governments of the small Caribbean Island, Antigua and Barbuda, to bring a case against the US to the World Trade Organization (WTO), complaining that in its commitments under the General Agreement on Trade in Services (GATS), the US bound itself to provide market access and national treatment to the cross-border supply of foreign services that come within the category of ‘other recreational services’ which includes gambling and betting services.

Antigua and Barbuda pointed out to a WTO Panel back in 2003 that while many US operators are allowed to offer gambling services in the US, US authorities take the view that all gaming services offered on a cross-border basis from abroad are unlawful. Up to then, the US had enforced its claims administratively by blocking credit card transactions and penalising credit card companies and banks that facilitate them, and by punishing US persons who own gaming entities that provide services to US residents.

Since then, US authorities have arrested officials of UK-based on line gaming companies, and now Congress has adopted the Unlawful Internet Gambling Enforcement Act which effectively turns into law the administrative action they have been taking.

But, the law – just like the administrative actions – adds up to a violation by the US of its GATS commitment.

A WTO Panel has already ruled that the US has to bring its laws into conformity with its international obligations. This new Bill, which specifically permits a whole host of domestic

Internet betting opportunities, is even more blatantly discriminatory against the supply of gaming services to the US from other countries than it was before Antigua and Barbuda won its ruling from the WTO.

Therefore, the WTO should take a very dim view of this very protectionist development once Antigua and Barbuda draws it to their attention.

It does appear that some Congressmen, especially Representative Jim Leach of Iowa and Senator Bill Frist who piloted the Bill in the House and Senate, had their eyes on the upcoming mid-term elections in the US where they hoped to drum up votes from the religious right.

Significantly, the very people that the US Congress supposedly voted to protect from Internet gambling have expressed outrage at the Bill. Michael Bolcerek, the President of the US Poker Players Association, is reported as stating that “allowing the Bill to become law would run contrary to public opinion” and “the millions of Americans who enjoy playing this great game will have the last voice in the debate comes Election day”.

The context of the Bill’s passage also raises serious questions of just how much study Senators gave to it, and the extent to which they really understood that it was also a trade issue with implications for the US in the WTO.

The Senate adopted the Bill in a late night pre-recess session of Congress. It was tagged on at the last minute to the Safe Port Act that was designed to stop companies from other countries (such as almost happened with a Dubai company earlier this year) having security rights at a US port. Many of those who voted for the Bill to cramp Internet gambling were really concerned about the security of US ports.

Sharp teeth will be given to the Bill after the President signs it into law. Then, the US Treasury Department, the Federal Reserve and the Department of Justice will write the regulations to enforce the law.

It looks, therefore, as if the battlefield for this issue is where Antigua and Barbuda took it in the first place – the WTO. If not, a sad precedent will be accepted by which the ill-advised domestic legislation of countries, even if it is passed by legislators without full understanding of its implications, will prevail over international trade rules to the detriment of business and employment.