Can Internet Gambling Be Effectively Regulated? Managing the Risks Authored by Malcolm K. Sparrow John F. Kennedy School of Government Harvard University With Contributions by Coleman Bazelon, PhD Charles Jackson, PhD December 2, 2009 TABLE OF CONTENTS I. OVERVIEW OF APPROACH AND SUMMARY OF RESULTS................................... 1 A. Our Approach..........................................................................................................2 1. Gambling by Minors................................................................................... 3 2. Criminal and Fraudulent Behavior.............................................................. 3 3. Network Access, Data Privacy and Security Issues.................................... 3 4. Problem Gambling...................................................................................... 4 B. The Status Quo Offers No Effective Protection ..................................................... 4 C. Legalization and Regulation Would Afford Significantly Better Protection than the Status Quo................................................................................ 6 D. Regulatory Methods and Technologies for Controlling Each Type of Risk Already Exist.............................................................................................. 7 1. Gambling by Minors................................................................................... 9 2. Criminal and Fraudulent Behavior.............................................................. 9 3. Network Access, Data Privacy and Security Issues.................................. 11 4. Problem Gambling.................................................................................... 12 E. Conclusions........................................................................................................... 15 II. REGULATORY METHODS AND TECHNOLOGIES AVAILABLE FOR CONTROLLING EACH RISK ............................................................................... 16 A. Gambling by Minors............................................................................................. 16 1. The Issue of Gambling by Minors ............................................................ 16 2. Existing Controls in Other Jurisdictions................................................... 17 3. Relevant Technologies for Risk Mitigation.............................................. 20 4. Conclusion ................................................................................................ 23 B. Defrauding of Consumers by Site Operators........................................................ 24 1. The Issue of Fraud by Site Operators ....................................................... 24 2. Existing Controls in Other Jurisdictions................................................... 26 3. Relevant Technologies for Risk Mitigation.............................................. 28 4. Conclusion ................................................................................................ 29 C. Cheating or Defrauding of Players by Other Players............................................ 29 1. The Issue of Players Being Defrauded by Other Players.......................... 29 2. Existing Controls in Other Jurisdictions................................................... 31 3. Relevant Technologies for Risk Mitigation.............................................. 32 4. Conclusion ................................................................................................ 33 D. Involvement of Organized Crime in Gambling Operations.................................. 33 1. The Issue of Involvement of Organized Crime in Online Gambling................................................................................................... 33 i 2. Existing Controls in Other Jurisdictions................................................... 34 3. Relevant Technologies for Risk Mitigation.............................................. 36 4. Conclusion ................................................................................................ 36 E. Money Laundering by Players.............................................................................. 37 1. The Issue of Money Laundering by Players ............................................. 37 2. Existing Controls in Other Jurisdictions................................................... 39 3. Relevant Technologies for Risk Mitigation.............................................. 40 4. Conclusion ................................................................................................ 42 F. Money Laundering by Site Operators................................................................... 43 1. The Issue of Money Laundering by Site Operators.................................. 43 2. Existing Controls in Other Jurisdictions................................................... 44 3. Relevant Technologies for Risk Mitigation.............................................. 44 4. Conclusion ................................................................................................ 45 G. Violation of Jurisdictional Restrictions or Prohibitions........................................ 45 1. The Issue of Violation of Jurisdictional Restrictions................................ 45 2. Regulatory Strategy.................................................................................. 46 3. Relevant Technologies for Risk Mitigation.............................................. 47 4. Conclusion ................................................................................................ 49 H. Breaches of Data Confidentiality.......................................................................... 50 1. The Issue of Data Confidentiality............................................................. 50 2. Existing Controls in Other Jurisdictions................................................... 51 3. Relevant Technologies for Risk Mitigation.............................................. 52 4. Conclusion ................................................................................................ 53 I. Communications and Computer Security Failures ............................................... 53 1. The Issue of Communications and Computer Security Failures...................................................................................................... 53 2. Existing Controls in Other Jurisdictions................................................... 55 3. Relevant Technologies for Risk Mitigation.............................................. 56 4. Conclusion ................................................................................................ 58 J. Problem Gambling................................................................................................ 59 1. Problem Gambling.................................................................................... 59 III. SPECIAL ATTENTION TO PROBLEM GAMBLING.................................................. 60 A. Introduction........................................................................................................... 60 B. What is Problem Gambling?................................................................................. 60 1. Terminology.............................................................................................. 60 2. Prevalence Rates and Trends .................................................................... 61 C. Potential Effects of Legalization of Online Gambling on Problem Gambling............................................................................................................... 62 1. Potential Adverse Effects of Legalization ................................................ 63 ii 2. Potential Benefits of Legalization............................................................. 69 D. Concluding Remarks............................................................................................. 72 iii Acknowledgements The authors would like to thank Dorothy Robyn, PhD, who contributed to this project while at The Brattle Group. The authors would also like to thank Pallavi Seth, PhD, and Michael Sutcliffe of The Brattle Group for their assistance. iv EXECUTIVE SUMMARY This study was commissioned by Wired Safety, an Internet Safety and Educational charity. It examines a range of harms potentially associated with online gambling, and alternative methods for mitigating or minimizing them. Recognizing that the current U.S. prohibitionist regime with respect to online gambling is largely ineffective in achieving its aims, and provides no platform or opportunity for the implementation of most of the relevant harm-reduction strategies, we find that an alternative regime of legalization and regulation of online gambling would likely improve consumer welfare and protections. The body of this report evaluates a range of strategies, both regulatory and technological, that could be used to mitigate potential harms associated with online gambling more effectively. Notwithstanding the current prohibitionist legal and regulatory approach, millions of U.S. residents gamble online through offshore gambling sites. As a result, the United States finds itself in the unfortunate position of incurring all the social costs of online gambling while having no control over the gaming sites that serve U.S. residents. The United States cannot disqualify industry participants from competing effectively for U.S.-based customers or offer its residents any consumer protections. Nearly