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November-07-2008,
Obama Should Support Overturning the UIEGA and Use Online Gaming as a New Revenue Stream...By Hartley Henderson

When Barack Obama was campaigning for the presidency, he listed three main areas of domestic policy he planned to focus on: health care, education and tax cuts for the middle class. Asked how he planned to pay for it, Obama stated that he would go through the budget line by line and stop funding for any programs or initiatives that were ineffective or impractical and implied he would find new revenue sources that were feasible. In light of those statements, Obama must readdress the USTR's decision to withdraw its WTO commitments regarding gambling services.

For anyone who isn't familiar with the case, Antigua has fought with the United States for almost a decade, arguing that the U.S. attempts to block online gambling to Americans from operators in Antigua violates a GATS commitment the U.S. made previously. The U.S. government stated that the commitment was made in error and wasn't bound by it, but the WTO courts ruled that the U.S. indeed was in violation of the agreement and the decision was upheld by an appellate body. Instead of living up to its commitments, the U.S. government instead chose to rewrite its commitments and in doing so had to compensate all countries that could have been affected by that decision. Antigua, Canada, India, Macao, Costa Rica and Japan asked for compensation, along with the EU. To date the government has come to agreements with Canada, Japan and the European Union, while the other governments are still in negotiations. No details were given on the agreements, although it has been reported that the European Union agreed to concessions in the areas of shipping and storage in exchange for allowing the U.S. to rewrite the commitments. The amount that it will cost the States in potential lost duty is unknown, although a representative from the EU did tell me it was "substantial" and that shipping and storage were areas the EU has been trying to get the United States to budge on for years. At the same time, it was far less than the $100 billion in compensation many experts believed the EU would demand. As well, because the country of Antigua was directly affected by the U.S. reneging on its commitments, and because they brought the case to the WTO, Antigua was granted $21 million in sanctions against the United States which it could apply by ignoring U.S. copyrights and trademarks (Antigua had asked for $3.4 billion in annual compensation). The WTO's compensation amount was based on what it felt Antigua could have made if horse racing was allowed to be offered by Antigua to the United States. Thus far, Antigua hasn't attempted to impose those sanctions.

While the U.S. came to this agreement, it's clear that the countries that asked for compensation weren't happy about it. Antigua and Costa Rica still clearly want the United States to open its borders to offshore wagering, and Peter Mandelsson, the EU trade commissioner, has been taking heat for the agreement ever since he signed it. Many in the United Kingdom feel that he let the U.S. off too easy and that he should have forced the United States to live up to its agreements, as the U.S. has demanded of other countries on numerous occasions under similar circumstances; plus, they feel he should have demanded that all lawsuits against European operators be dropped as a condition of the agreement. Furthermore, UK gambling companies still want access to the lucrative U.S. market, and now Bermuda is looking at online gambling as a possible revenue generator (so the U.S. will have another friend it will probably antagonize). According to a source at the WTO, the U.S. still has the opportunity to change its mind about rewriting its commitments without any repercussions. If they agree to simply abide by the old agreement, then the agreed to compensation would be withdrawn---Obama's new government should seriously look at that option. Don't forget, Obama has stated that he is going to look for any programs that are impractical and this is indeed an initiative that makes no sense. Aside from the fact that it will cost the U.S. several billion each year in lost duty, the decision could also have long term effects on trade, as countries could deem the U.S. as a country that doesn't take its commitments seriously (as Barney Frank and others pointed out last year when they asked the USTR not to follow through with their plans to rewrite the commitments). Many countries like Canada, Mexico and the EU are already worried that Obama may be protectionist, given his comments about scrapping the North American Free Trade Agreement, so stating they won't renege on this WTO agreement could actually show those who are concerned that his government isn't protectionist.

More importantly, this is a frivolous expenditure that makes no sense. Granted, it isn't "a program" per se, and it isn't money coming directly out of U.S. coffers, but obviously the amount lost to the government must be significant or shipping and storage wouldn't be on the WTO exclusion list now. Many accounts I have read indicate its worth is in excess of $3 billion to the industry. But what is the point anyway? The agreement, if passed, is only meaningful if the UIGEA remains in tact, and it seems clear that the UIGEA as it stands is coming under fire. The banks and the House financial committee have deemed the bill ineffective and impractical and have argued that trying to implement it would be virtually impossible, and very costly, even if it could be implemented. Barney Frank, Robert Wexler et. al., (who now have a much larger Democratic presence in the House and Senate) have passed a motion demanding that the UIGEA spell out exactly what is deemed an illegal transaction to make things easier for the banks, and they want exclusions for all forms of online gambling except sports. Frank, Wexler and other's arguments are that if horse racing, lotteries and fantasy sports are excluded from the UIGEA, then poker needs an exemption too---anything other than that is discriminatory. The DOJ has thus far dismissed the notion and claims it will continue to go after all online gambling, but shortly the DOJ will have a vastly different look, and indications are that those being considered for the new jobs don't think chasing offshore gambling companies is a good expenditure of time or money. So if the UIGEA is amended to allow poker, and possibly casinos, then the U.S. will essentially be throwing away many concessions they obviously deem important to protect for the ability to block online sports betting, which is a tiny percentage of the total online betting handle (not to mention it has already been found to be illegal by U.S. courts under the Wire Act back in 2000). As well, even finding the few sports gambling transactions will be very costly to the banks since checks aren't written under the sportsbook's name, and that expense is certainly one banks can't afford, not to mention that many of these banks are going to be bought out by the U.S. government anyway, so it will become a direct taxpayer expense.

Furthermore, California is going to legalize online poker sometime in 2009, whether the DOJ likes it or not. California feels this will provide the state needed revenue, and it is confident that it is not in violation of any federal laws. Other states will certainly follow suit, and before you know it you'll have an interstate poker network in the U.S. All gambling lawyers and pundits agree that it isn't a matter of whether it will happen next year, but when. Furthermore, Nevada, which is getting killed in the current financial climate, is seriously looking at offering online gambling and taking their chances with the courts. In fact the Palms Group is on the verge of bankruptcy, and Hilton and MGM aren't in great shape either. Online gambling may not be an option, but rather a necessity. That, of course, brings Antigua back into the equation. Antigua hasn't started with the trademark sanctions for two reasons. First, it is hoping the U.S. will change its mind; and second, it knows that the small damages given to it by the WTO courts were based on a hypothetical situation whereby horse racing could be offered stateside by Antiguan gambling operators. If, and when, interstate poker is offered in the U.S., Antigua will surely go back to the WTO and demand the settlement be revisited because the situation changed. At that point, given the enormity of poker, the WTO may indeed award Antigua something closer to the $3.4 billion per year Antigua originally sought. That is a lot of money that could be used for healthcare and education, not to mention it could affect many companies like Microsoft and Apple that are already struggling in this economy.

Without question, therefore, the pursuit of rewriting the WTO gambling commitments and the implementation of the UIGEA are faulty policies---not to mention that prohibition doesn't work. Obama said where he sees a bad policy that costs money he'll change it, and he should start here. He certainly has the mandate for it, and the overwhelming wins in Congress by the Democrats should give them the votes to overturn the UIGEA if they see fit to do so. Aside from the fact that the UIGEA can't work, it also puts a stranglehold on the country if the U.S. ever decides it wants to delve into the area of online gambling in the future. In the UK, Germany and many other countries the United States would consider close allies, online gambling is allowed and actually encouraged. And in all countries, including the United States, a large percentage of land based gambling revenue almost always is used for health care, education and amateur sports. Before the UIGEA was passed, it was estimated the online gambling revenues from the U.S. would approach $20 billion by 2012. If that is indeed the case, then a legal, regulated and taxed online gambling industry could be a huge windfall for the country. The U.S. could follow Austria's lead, whereby Americans betting at all sites would pay a tax on all wagers equal to a percentage of the stake if they lose. Half the stake could go to the State and half could go to the federal government to be used for health care and education.

Also, don't forget that the UIGEA was a Republican initiative that couldn't pass Congress under normal voting procedures and was only rammed through by Bill Frist by attaching it to an unrelated bill, with the full knowledge of other Republicans like Jon Kyl, Robert Goodlatte and George Bush who were upset they weren't getting their way. Overturning this ridiculous law and stopping a very dangerous decision to purposely renege on a WTO commitment will show the Republicans that Obama and his party won't be pushed around and will get things done the right way. Obama made a commitment to find additional revenue and stop funding on bad initiatives. Here are a couple that are staring him right in the face.

11-07-2008
Hartley Henderson
MajorWager.com
henderson@majorwager.com

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