WTO slams U.S. Net-gambling ban

Declan McCullagh, Staff Writer, CNET News.com
April 7, 2005

Federal efforts to curb offshore Internet gambling were dealt a modest setback Thursday after the World Trade Organization ruled some restrictions violated international trade agreements.

A WTO appeals board sided in part with the small island nation of Antigua and Barbuda, home to gambling Web sites that provide local jobs, by upholding portions of an earlier decision from a dispute resolution panel.

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The WTO's decision now poses a perplexing political problem for the Bush administration, which must try to balance its support for international free trade rules with its desire to defend federal restrictions relating to Internet gambling.

Complicating that process are the intricacies of the WTO's complex ruling, which weighed in at 146 pages (PDF) and spurred both sides to claim victory. The WTO board agreed with the United States in key areas, saying that some disputed laws were "necessary to protect public morals" and that it would not consider whether state laws in Louisiana, Massachusetts, South Dakota and Utah violated trade agreements.

Even though the Justice Department believes that Internet gambling is illegal, it's become wildly popular in the last few years. The industry was expected to collect revenues of between $4.2 billion and $5 billion in 2003, according to a Government Accountability Office study.

The lack of an unambiguous defeat or victory at the WTO may embolden the Bush administration to suggest only modest changes to federal gambling laws, said David Gantz, the director of the international trade law program at the University of Arizona.

"They may well be able to come up with a package that either satisfies Antigua, or even if it doesn't satisfy Antigua, satisfies the appellate body" at the WTO, Gantz said. "It's very hard at this stage to predict."

The Bush administration indicated it would take the fewest steps possible. "U.S. restrictions on Internet gambling can be maintained," Acting U.S. Trade Representative Peter Allgeier said in a statement. "This report essentially says that if we clarify U.S. Internet gambling restrictions in certain ways, we'll be fine."

Antigua's lead attorney, Mark Mendel, acknowledged the possibility of the United States merely tweaking federal laws and said his client was willing to start the "whole process" over if the changes were insufficient. "But we'd like to see a negotiated compromise that allows Antiguan operators to provide limited services in the U.S. that are subject to supervision," said Mendel, a partner at the Texas law firm of Mendel Blumenfeld.

In a 2003 complaint with the WTO, Antigua argued that federal and state laws restricting online gambling amounted to an illegal trade restriction that violated obligations that America had made in a free trade pact. A dispute resolution panel sided with Antigua, and the Bush administration appealed in January. No further appeals are possible.

Antigua and Barbuda are two flyspecks of land east of Puerto Rico that, combined, boast only two or three times the area of Washington, DC. Because the islands have scant arable land and a limited water supply, the government has come to view Internet gambling as an attractive source of revenue.

A sore point: Horse racing
One U.S. law that the WTO appeals board singled out for criticism was a federal law called the Interstate Horseracing Act. The wording appears to permit only out-of-state bets made domestically rather than internationally.

That amounts to a type of trade protectionism, Antigua argued, and the appeals board agreed. The U.S. failed to demonstrate "that the prohibitions embodied in those measures are applied to both foreign and domestic service suppliers of remote betting services for horse racing" and the law was illegal under WTO rules, the board concluded.

A spokesman for the U.S. trade representative said Congress may have to act but left open what might happen next. "We need to clarify one narrow issue, which is Internet gambling and horseracing," spokesman Richard Mills said. "It doesn't necessarily mean loosening restrictions. It could also mean tightening them."

The broader effects of Thursday's ruling remain unclear. They depend in part on what changes to U.S. law conservative Republicans can be persuaded to make--and whether America is willing to ignore portions of the WTO ruling, risking sanctions and a perception of the United States as hostile to an international trade regime it helped create.

One possible outcome, according to Antigua's interpretation of the ruling, is that virtual casinos could begin to advertise on U.S. search engines and Web sites. The Justice Department has tried to discourage that. In addition, credit card companies such as Visa and MasterCard could be permitted to process gambling-related transactions.

"If advising a client, I would urge caution," said Joseph Kelly, a law professor at SUNY College Buffalo and editor of the Gaming Law Review. "This is not going to be clear cut. There are going to be further proceedings on both sides."

Kelly said the United States may be able to ignore Antigua, but probably not other nations that are eagerly moving forward in legalizing and regulating online casinos. "How are you going to stop a British-licensed casino in the United Kingdom from taking wagers from American citizens?" Kelly asked. "You just can't."