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Red Ink Could Help Push for Online Gambling

6/18/10 - Gannett

By Bill Theobald

The federal government’s financial woes and Congress’ desperation to promote job growth may provide a boost this summer to efforts to legalize online gambling.

Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, is planning in July for his committee to discuss and try to pass two companion bills that would license, regulate and tax online gambling, generating an estimated $72 billion in revenue over 10 years and 16,000 to 32,000 jobs over five years.

Even with those gaudy numbers to use as an incentive, backers concede that a crowded legislative calendar, strong opposition and the upcoming fall election make passage difficult.

But they see momentum moving in their direction to undo a controversial 2006 law that bans the financial transactions needed to gamble over the Internet.

"I believe that its chances will increase over time as more people see the significant amount of revenue at stake," said Michael Waxman, executive director of the Safe and Secure Internet Gambling Initiative. The group was formed in 2007 by financial services companies. Waxman is the son of Rep. Henry Waxman, D-Calif.

Public attention to online gambling was renewed two weeks ago; June 1 was the deadline for banks to comply with the 2006 Unlawful Internet Gambling Enforcement Act.

When Congress passed the law, Internet gambling already was illegal but was flourishing. Congress tried to squelch it by blocking the ability of players to transfer funds into their online accounts. The new law caused some Internet gambling companies, which are based overseas, to drop their U.S. customers, but many did not.

The legislation had the support of professional sports leagues, state attorneys general and those who believe that gambling is harmful to society. It passed the House 317-93.

But the banking industry was strongly opposed to being put in the role of trying to identify and block gambling transactions. Federal officials writing the regulations to implement the law struggled for years with the complex task, and the deadline for compliance was delayed several times. Meanwhile, online gambling in the U.S. continued to grow, boosted by the popularity of poker on television. About 3 million U.S. players will gamble online this year, according to H2 Gambling Capital, a gambling consulting firm.

"It’s putting the banks in the position of being the law enforcer. It’s having banks jump through all these hoops," said Steve Kenneally with the American Bankers Association.

Among those hoops are that banks are now required to screen new commercial customers to ensure they are not Internet gambling businesses. Banks also must block credit and debit card transactions, which many have done for years. That task is relatively easy because companies that take credit cards — including those involved in gambling — are assigned a merchant code identifying what type of business they conduct.

But banks are not required to have policies and procedures to block most automated payments, paper checks and wire payments, because there is no way to tell the recipient’s business simply from its name. So play goes on.

"Prohibition hasn’t prevented millions of Americans who want to gamble online from doing it," Rep. Jim McDermott, D-Wash., testified at a hearing last month by the House Ways and Means Committee. McDermott is the sponsor of the tax legislation that complements Frank’s regulatory bill. The ban, he said, "has put consumers at risk, and it sends billions of dollars in revenue to other nations."

To obtain a license, under Frank’s bill, companies would have to block underage betting and prevent wagering by people in states where online gambling is illegal. Betting on professional and amateur sports also would be banned.

McDermott’s bill would require Internet gambling companies to pay the federal government a monthly fee of 2 percent of the amount players have deposited in their gambling accounts. A similar 6 percent fee would go to state or tribal governments based on what players from those states had in their accounts. Companies also would be required to report a player’s winnings annually to the IRS and issue a statement to the gambler. Congress’ Joint Committee on Taxation estimated the taxes and fees would generate $42 billion over 10 years for federal coffers, and McDermott estimated state governments would receive an additional $30 billion over the decade.

Several states, including Indiana, have passed laws specifically banning online gambling. Indiana Attorney General Greg Zoeller said the proposals in Congress would tread on the state’s authority.

"Rather than a one-size-fits-all federal approach, states should be free to decide for themselves whether to endorse online gaming at the state level and not have it forced upon them federally," said Zoeller, who wrote a letter to congressional leaders this month.

Sports associations, including the Indianapolis-based National Collegiate Athletic Association, oppose the legislation, Zoeller said, because they’re afraid it would open the door to sports betting.

Rep. Bob Goodlatte, R-Va., one of the chief architects of the ban, testified at last month’s Ways and Means Committee hearing that 45 attorneys general sent a letter opposing similar legislation Frank introduced in the previous Congress. He counted U.S. Attorney General Eric Holder and a variety of religious groups among the other opponents.

"People sometimes resort to drastic things when they are strapped for cash," he said. "However, it is unfathomable that Congress would consider legalizing (an) activity that imposes harm on the most vulnerable members of our society just to raise money for more big government spending."