Nevada to test cyber statutes(Part 2 of a two-part series)

May 1, 2001 10:23 AM

It took some 11th-hour politicking last week to get an Internet gaming bill through the Nevada Assembly in a form that everyone could live with - everyone being the Democrats who control the Legislature and corporate gaming’s formidable lobby in Carson City.

Assuming the Senate passes the bill and Gov. Kenny Guinn signs it into law - and both look like safe bets at this point - Nevada’s gaming regulators will go marching into an uncharted region of cyberspace - that of developing a set of workable rules and safeguards for the first licensed, regulated online casinos in the United States.

Among the many challenges they face, certainly not the least of them is that Internet casinos are illegal in the United States. Or that’s what the Justice Department says. So far, 21 U.S. citizens involved in internet gambling in the supposedly safe haven of the Caribbean have been prosecuted for allegedly conspiring to violate the 1961 federal Wire Act, which prohibits taking bets, specifically sports bets, over phone lines. Nine of those defendants pled guilty to various misdemeanors and felonies and were fined. One, Jay Cohen, chose to go to trial. He was convicted in New York and sentenced to 21 months in prison. His case is under appeal.

Internet gambling handled an estimated $1.5 billion in wagers last year and is expected to be a $6 billion industry in a few years. That’s a lot of money to Nevada’s casinos, but it’s not worth a federal indictment, as Thomas Gallagher, president and CEO of Park Place Entertainment, the largest casino company in the world, made clear in a recent statement. "Before we rush to bring casinos into homes," he said, "we ”¦ must insure that access to internet gaming can, in fact, be limited to those who are legally allowed to gamble."

"The real risk is inviting federal intervention into what has traditionally been a states’ rights issue," says Bill Eadington, director of the Institute for the Study of Gambling and Commercial Gaming at the University of Nevada-Reno.

Nevada’s regulators are adamant about steering clear of a collision with the feds. The question is, can they?

"It’s an issue of how the Justice Department is interpreting the Wire Act," says Nevada Gaming Commission Chairman Brian Sandoval. "As regulators we can’t do anything to put our licensees at peril by going forward with this and possibly having someone face a federal indictment."

Since the Cohen trial, a federal judge in Louisiana, ruled against a group of internet bettors looking to nullify online gambling debts they had run up with several credit card companies. The judge said the Wire Act doesn’t apply to casino sites because it doesn’t mention them specifically.

If there is such a loophole in the Wire Act, Republicans John Kyl in the Senate and Bob Goodlatte in the House of Representatives have tried more than once to close it with bills outlawing internet gambling. There is bipartisan support for such a ban, and Frank Fahrenkopf, head of the American Gaming Association, the casino industry’s national lobbying arm, said he expects Goodlatte will try again with a bill toned down to protect internet service providers from prosecution. Democrat John Conyers and Republican Chris Cannon may introduce a competing version in the House.

It might be a lot safer, but not nearly as lucrative to the casinos, to restrict online gambling in Nevada to Nevada residents, as is done currently with sports betting. That means the sites will have to be able to identify players remotely and track the locations of computers not only statewide but around the world. And filtering mechanisms will have to be developed to prevent minors from accessing the games. Even then the legal ground is far from firm.

"What happens if someone from outside Nevada gets a call in to place a bet? Now you’ve got a disciplinary action," says Shannon Bybee, executive director of the International Gaming Institute of the University of Nevada-Las Vegas

"In the last six months a lot of people have been coming forward who believe they have the software," says Fahrenkopf. "The people who have to be convinced aren’t the operators but the regulators."

On the question of whether the technology exists, Sandoval says, "If I believe everything I hear, I have to say, yes. But to have something understood and tested is another thing."

Even a closed-loop system operating solely within the state is likely to face problems. While the federal ruling in Louisiana is expected to be appealed, another case that could prove significant is pending in Oregon. A woman who lost more than $350,000 betting online is using state racketeering laws to sue several banks, internet financial-service providers, software manufacturers and foreign-based internet casinos. She claims her losses aren’t legally collectable.

A similar case in California, although it was settled out of court, drove Providian Bank to refuse to process any future credit card transactions for gambling purposes. More recently, one of the world’s largest banks, London-based HSBS, notified its credit card holders it would not process or pay for gambling transactions.

Republican Congressman James Leach, in an attempt to hit the online gambling industry where it lives, has introduced a bill to outlaw the use of credit cards for gambling purposes. That would ban about 85 to 95 percent of all internet casino wagers made from the United States.

Fahrenkopf doesn’t think Leach’s bill has a chance. But if joined with the efforts of Kyl, Goodlatte, Cannon, Conyers and their supporters in Congress, it could prove lethal to online gambling in the United States. Fahrenkopf says if Goodlatte introduces another attempt at an internet ban, it will take Leach’s tack and target the financial-services side. If so, it makes sense to combine the bills. Fahrenkopf says he believes that will happen.