The Frank Bill, which would legalize internet gaming with several key restrictions, has attracted the usual range of partisan comment. Supporters of allowing people to play online insist it is a needed expansion of personal liberty, while opponents decry it as opening turning the dens and bedrooms of America into gambling parlors. Let’s start the conversation by reading an excerpt from the FoxNews article:

If running major financial institutions and the auto industry isn't enough for the Obama administration, a new House bill would put the Treasury Department in charge of Internet gambling.

Reps. Barney Frank, D-Mass., chairman of the House Financial Services Committee, and Peter King, R-N.Y., unveiled legislation Wednesday that would enable Americans to legally gamble online.

"The government should not interfere with people's liberty unless there is a good reason," Frank said. "This is, I believe, the single biggest example of an intrusion into the principle that people should be free to do things on the Internet. It's clearly the case that gambling is an activity that can be done offline but not online."

But the legislation grants the Treasury Department far-reaching power over online gambling.

The bill would allow the Treasury secretary to license and revoke licenses of Internet gambling Web sites under the guise of protection Americans' personal freedoms to gamble and consumer protection concerns.

The bill would also allow the Treasury secretary to "assess" license holders for the costs of background checks and investigations of Web sites applying for the license.

And the bill provides for mechanisms for state and local taxes to be collected and re-distributed.

Lawmakers Bet on Internet Gambling Legislation – Presidential Politics | Political News – FOXNews.com.

Let’s set aside the the anti-administration cant of the lede and focus on the bill itself. As the article suggests, it would create a new gaming regulatory authority within the federal Department of the Treasury.

This is a profound shift in national gambling policy. Since the ratification of the Constitution, the responsibility of permitted and regulating gambling has fallen predominantly on the states. True, there have been several federal forays into gambling prohibition, starting with bans on the interstate shipment of lottery materials in 1890 and culminating with the passage of the Wire Act in 1960, but for the most part the national government has steered clear of gambling regulation. The Johnson Act, passed in 1950, placed limits on the interstate transportation of slot machines, and a 1951 excise 10% tax on bookmaking, designed to punish illegal bookmakers, had the ancillary effect of keeping major Nevada casinos out of the sports betting business until the tax was lowered to .25% in the 1970s. None of these laws were passed to increase the liberty of the gambling public, nor even primarily to squelch interstate gambling. They were, rather, designed to cut off the financial life-blood of organized crime.

So the creation of a national gambling regulatory body is, indeed, a significant change in policy, and one that should not go unexamined, particularly by residents of states who rely on gambling and gambling tourism.

I’m not saying that a national gambling regulatory body is, ipso facto, a bad thing, just that we should consider all of the possible implications before creating one.

I said as much in an article in the LVRJ last week:

David G. Schwartz, director of the University of Nevada, Las Vegas’ Gaming Research Center, expressed concern about having the federal government oversee the industry. He said the new proposal would basically set up what he described as a federal Gaming Control Board.

“It would have the federal government regulating gambling, which goes against 220 years of how we’ve interpreted the Constitution, which is that states have the right to regulate gaming,” Schwartz said. “This seems to foist an overly complicated bureaucracy on the gaming industry.”

Which was promptly rebutted by a spokesman for the bill in today’s LVRJ letters section:

In your article about the introduction of legislation by Rep. Barney Frank to regulate Internet gambling (“Online betting gains backer,” May 7), David Schwartz, director of the University of Nevada, Las Vegas Gaming Research Center, expressed concern that federal regulation would take away the states’ rights to do so. His is not an accurate representation of Rep. Frank’s bill, which is designed to strengthen states’ rights.

As introduced, the Internet Gambling, Consumer Protection and Enforcement Act of 2009 expressly provides states the ability to control the types and levels of Internet gambling that are or are not permissible within their borders, without limitation. Additionally, the legislation seeks to utilize the expertise of state regulators to assist in the Internet gambling operator licensing process. This bill would not restrict the ability of any state to impose additional taxes on any type of Internet gambling activity which that particular state chooses to authorize.

Prohibition of alcohol failed and was replaced by a federal system that preserved states’ rights when it came to sales and consumption. This is precisely the approach being taken by Rep. Frank as he works to regulate Internet gambling, an activity that occurs across state and international borders.

Jeffrey Sandman

WASHINGTON, D.C.

Technically, we are both right: the bill would give states the right to permit citizens to gamble online, and it would also create a new regulatory authority within the Treasury department.

I’d like to hear more about how this new authority would interact with existing state gaming regulatory structures. Nevada, for example, already has a legislative framework for legalizing online gaming. Assembly Bill 578, passed back in 2001, provides for licensing companies who already own casinos here to additionally accept bets over the Internet. Presumably, the state’s fees, taxes, and regulatory requirements would be layered over the Treasury Department’s. States are free to opt out, but apparently do not license those who wish to run online casinos or accept bets from their states, which seemingly runs counter to the assumptions of AB 578, that the state would be the primary actor in licensing.

Does this mean that there will be conflict between states and the feds? Without knowing more, it’s hard to say. Here are the guidelines for suitability from the bill:

`(2) SUITABILITY FOR LICENSING STANDARDS DESCRIBED- For purposes of this subchapter, an applicant and any other person associated with the applicant, as applicable, is suitable for licensing if the applicant demonstrates to the Secretary by clear and convincing evidence that the applicant (or individual associated with the applicant, as applicable)–

`(A) is a person of good character, honesty, and integrity;

`(B) is a person whose prior activities, reputation, habits, and associations do not–

`(i) pose a threat to the public interest or to the effective regulation and control of the licensed activities; or

`(ii) create or enhance the dangers of unsuitable, unfair, or illegal practices, methods, and activities in the conduct of the licensed activities or the carrying on of the business and financial arrangements incidental to such activities;

`(C) is capable of and likely to conduct the activities for which the applicant is licensed in accordance with the provisions of this subchapter and any regulations prescribed under this subchapter;

`(D) has or guarantees acquisition of adequate business competence and experience in the operation of Internet gambling facilities; and

`(E) has or will obtain sufficient financing for the nature of the proposed operation and from a suitable source.

`(3) UNSUITABLE FOR LICENSING- An applicant or any other person may not be determined to be suitable for licensing within the meaning of this subchapter if the applicant or such person–

`(A) has failed to provide information and documentation material to a determination of suitability for licensing under paragraph (1);

`(B) has supplied information which is untrue or misleading as to a material fact pertaining to any such determination;

`(C) has been convicted of an offense punishable by imprisonment of more than 1 year; or

`(D) is delinquent in filing any applicable Federal or State tax returns or in the payment of any taxes, penalties, additions to tax, or interest owed to a State or the United States.
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They seem generally in line with existing state regulations. But I’ve got questions about who gets licensed. Here is what the bill says:

`(1) LICENSING REQUIRED FOR CERTAIN INTERNET GAMBLING- No person may operate an Internet gambling facility that knowingly accepts bets or wagers from persons located in the United States without a license issued by the Secretary in accordance with this subchapter.

Does this mean that individual employees need to be licensed? Or just key employees? What about owners? Would a company be licensed, or just a subsidiary?

Clause 6 of section 5383, “Enforcement Actions,” suggest that it includes owners, directors, and other key employees, as it references enforcement against any “individual owner or holder of a security of a licensee, or of a holding or intermediary company of a licensee or any person with an economic interest in a licensee or a director, partner, or officer of a licensee.”

One other important note that hasn’t received much attention is that this law specifically says that:

`No provision of this subchapter shall be construed as authorizing any licensee to operate an Internet gambling facility that knowingly accepts bets or wagers on sporting events from persons located in the United States in violation of section 3702 of title 28, United States Code, except for fantasy or simulation sports games (as defined in section 5362 of this title).

So despite all of this talk of rolling back the dark ages of Prohibition, the law does nothing to legalize the largest illegal form of gambling in the United States today, sports betting. Which raises another question: is there any ethical or social distinction between using the Internet to bet on a horse race or buy lottery tickets and using it to bet on sports? This law suggests there is, but there are doubtless many sports bettors who would disagree. Specifically singling out sports betting as forbidden mollifies the sports leagues but gives the lie to the talk of increasing liberty for gamblers.

That being said, that the bill is sparking discussion of national gambling policies is certainly a good thing. Whatever legislation passes will shape the future of gambling in the United States, so it deserves close scrutiny, particularly by those who have a stake in existing gambling operations.