#126 © Copyright 2006, all rights reserved worldwide. Gambling and the Law® is a registered trademark of Professor I Nelson Rose, Whittier Law School, Costa Mesa, CA

It is not news that the new Unlawful Internet Gambling Enforcement Act of 2006 has panicked many publicly traded companies. But less noticed have been the quiet whoops of joy coming from many privately owned Internet operators, entrepreneurs and landbased gaming companies.

Understanding the UIGEA requires not only analyzing what the new law does, and does not do, but how it came to be enacted. It is also necessary to appreciate human psychology, especially how individuals value risk and reward: How willing are people to gamble when their own lives are at stake?

It is important to remember that the UIGEA is not the result of a concerted drive by the federal Department of Justice or state Attorneys General to put Internet gambling out of business. It was not reviewed by any of the parties that might be affected by its provisions. No hearings were held. No studies conducted. Even members of Congress were not given the opportunity to read, let alone analyze the bill.

The UIGEA is the underhanded handiwork of one man’s desire to be President. Majority Leader Bill Frist (R.-TN) attached the bill at the last minute to an unrelated ports security act and refused to let Democrats see the final language.

This Act is not the bill, HR 4411, that had passed the House of Representatives. That bill, the Internet Gambling Prohibition and Enforcement Act, is still technically alive, since it has not yet been voted on by the U.S. Senate. HR 4411 is comprised of most of the provisions of two prior bills, authored by James Leach (R.-IA) and Bob Goodlatte (R.-VA), which had been debated and passed by the House Judiciary Committee. It was supported by the Department of Justice.

Although prosecutors at the DOJ must be happy with the impact the UIGEA has had in closing down major online gaming operators and payment processors, they cannot be too thrilled with what Frist’s bill actually does. Where HR 4411 would give the DOJ millions of dollars to prosecute and close down illegal Internet gambling websites, Frist’s UIGEA gives them nothing. Worse, it requires the DOJ to use its limited resources to help write regulations against banks, which the DOJ knows will have almost no effect on the average player.

The DOJ has been campaigning for ten years for only one major change in federal law: To amend the Wire Act to make it clear that all forms of gambling, not just wagers on races and sports events, are illegal. HR 4411 would do that. Frist’s bill did not. In fact, the UIGEA greatly confuses the issues, by both expressly relying entirely on existing federal and state law to define what is “unlawful Internet gambling” while creating a new, weird definition of what is a “bet or wager.”

Still, Frist accomplished what he wanted: To score points with the religious far right. If his bill incidentally caused some online operators to stop taking bets from the U.S., that is an extra bonus. The fact that the bill acted like a terrorist attack on the London Stock Exchange, wiping out $8 billion in equity, is none of his concern. Since he is leaving Congress in December, he is also not worried that hundreds of thousands of poker players are so enraged that a few additional seats will be won by the Democrats.

Frist also created an anti-consumer protection law. He drove the largest, licensed, publicly traded companies from the U.S. market. Many of the remaining companies are excellent, honest operations. But the UIGEA is Prohibition, which we know also opens the door to less reputable dealers, who don’t mind violating a law, or cheating.

The passage of the UIGEA was the final tipping point for many individuals and companies. Coming so soon after the passage of Internet gambling prohibition bills by the House Judiciary Committee and then the full House, arrests of the chief executives of BetOnSports while changing planes in Dallas and then of SportingBet at JFK, many people said that enough is enough.

This is especially easy to understand with the latecomers to the industry. Bankers and other establishment-types had no idea what they were getting into. All they saw was that they were joining multi-billion-dollar, licensed, publicly-traded corporations. After the first sign of trouble, they demanded that their companies not do anything to violate any American law, even if that meant losing 85% of their customers.

The more interesting reaction has come from people who had been involved with Internet gaming for years. As a striking example: I have a client who was an executive with a privately-owned online poker company. I had kept him informed of developments, including the fact that the UIGEA did not greatly increase his personal risk. Yet, he decided to quit. When I told him there would be great demands for his skills with American companies, once the states start legalizing intra-state online poker, his reaction was, “No. I have had it with the gaming industry.”

Even the landbased casino world has been hit by the UIGEA. Harrahs announced that it would not accept World Series of Poker entries from winners of online poker satellites. Of course, I’m sure it would also not accept the $10,000 entry fee from organized crime figures that made their money selling child pornography. The operative word, left out of the press release, was “knowingly,” as in “knowingly accept the winner of Internet poker satellites.” All the poker sites have to do is forward the winner’s entry fee in that person’s name, through a different website.

But the WSOP has more important things to worry about. A major portion of advertising for all televised poker games comes from Internet poker sites. Some were straightforward “dot com” ads, as in PartyPoker.com, for online poker. Some were “dot net” ads, as in PartyPoker.net, for free sites with identical names. But why would PartyPoker run either a “dot com” or a “dot net” ad, when it is no longer accepting U.S. patrons?

It will be interesting to see whether poker tournaments will continue to accept “dot net” ads, which are technically and legally not about gambling, from those privately-owned online poker operators who are still taking bets from the U.S. My guess is that most U.S. tournaments will shy away from even these ads, until ad revenue shrinks to the breaking point and somebody realizes these “dot net” ads are not violating any law.

As for the future, things are already heating up for landbased casinos and cardclubs to go into the Internet gambling business – now that it is 100% legal. The UIGEA expressly exempts pure intrastate gaming.

We can thank Bill Frist for clarifying one part of the law: If a state legalizes online poker or casino games, limited to people who are physically within that state, we now know operators are not violating any law. Licensed gaming operators would no longer be risking their licenses.

So, we can also thank Bill Frist for the coming boom in intra-state, Internet gaming.

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© Copyright 2006. Professor I Nelson Rose is recognized as one of the world’s leading experts on gambling law. His latest books, Gaming Law: Cases and Materials and Internet Gaming Law, are available through his website, www.GamblingAndTheLaw.com.