Does the failure of the US 18th Amendment predict the future of internet gambling?

Bob Faiss, chair of the Gaming Law Practice Group at Lionel Sawyer & Collins, Las Vegas and Reno, takes a look at the striking similarities between the current ban on online gaming and Prohibition.

One of the most important chapters in the world history of gambling yet to be written will be shaped by the decision of the US Congress on legalisation of wagering on the internet. There is no shortage of predictions as to whether and when the US will end prohibition of a form of gambling that is legal and successful in many other parts of the world.
I just wonder if the history of the failure of the US with respect to the 18th Amendment to its constitution may justify an expectation for the future of internet gambling in that country.

Last Call - the Rise and Fall of Prohibition, a delightful and informative best seller by Daniel Okrent (Scribner, 2010), details the rise and fall of the 18th Amendment, which prohibited the manufacture, sale and transportation of intoxicating liquors from 1920 to 1933. Mr Okrent’s history of the 18th Amendment has interesting parallels to the US history with respect to internet gambling. Perhaps these parallels indicate the ultimate US decision on internet gambling.

I offer the following for your consideration:

1. Both intoxicating beverages and gambling were present at the beginning of society in the US. All of its original 13 colonies used lotteries to raise critical funding. The ships that brought the first Puritans to the US also brought along huge stores of intoxicating beverages.

2. The US position on intoxicating liquors was not respected by other countries. Border officials in Canada often refused to use their resources to enforce a US law contrary to Canada’s. Distilleries in Great Britain sold huge quantities of liquor to Canadian companies with full knowledge it was destined for US customers. Likewise, the US position on internet gaming has not been respected by other countries. Other jurisdictions have objected to application of federal statutes enacted decades before there was an internet, including the Wire Act, 18 USC, Section 1084, and the Illegal Gambling Business Act 18 USC, Section 1955. One example was the successful 2003 complaint of Antigua to the World Trade Organisation, which ruled that the US enforcement efforts against internet gambling were in violation of WTO commercial service accords.

3. Both the 18th Amendment and the enforcement actions of the Department of Justice against internet gambling suffered major court defeats. In 1921, Federal Judge Arthur Tuttle ruled that liquor shipments from Canada that were labeled as destined for Mexico could not be denied entry into the US because of a Canada-US treaty. Thereafter, Canadian officials did not hesitate to issue a bill of lading for any liquor export claimed to be intended for transfer through the US to Mexico. In 2002, the US 5th Circuit Court issued the only judicial decision concerning the legality of online gaming under the Wire Act. The court, in the MasterCard decision, said that "the Wire Act does not prohibit non-sports internet gambling", an interpretation that has not been judicially challenged.

4. Prohibition was made more palatable to the states by providing for concurrent federal-state regulation. This was a concession to states’ rights advocates, who continue in strength today. The states showed little enthusiasm for the opportunity to enforce, in large part because they had to bear the expense. The element of concurrent federal-state regulation has an important presence in the pending congressional bills to legalise internet gambling. This time there is an incentive. States will share in taxation of internet gambling.

5. Andrew Volstead, chairman of the House Judiciary Committee, and the chief draftsman of the legislative code of enforcement for the 18th Amendment, specifically kept out any penalty for the consumption of alcohol. The same is true of the US laws that have been utilised to police internet gambling. There was no crime by the drinker and there is no crime by the internet bettor.

6. The 18th Amendment was passed by Congress in December 1917, without any committee hearings on the merits of the legislation. The same was true of the adoption of the US Unlawful Internet Gambling Enforcement Act in 2006.

7. A lack of consensus and coordination between the leaders of the alcoholic beverage industry contributed to the adoption of the 18th Amendment. Brewers of beer and distillers of other alcoholic beverages seemed to fight as much between themselves as they did against the prohibition movement. The failure of agreement so far between leaders of the US gaming industry as to whether internet gaming should be legalised has contributed to the congressional stalemate. However, there have been signs that an industry consensus is growing in favour of internet gambling approval.

8. In the US congress then, Republicans generally supported Prohibition. Democrats generally opposed it. In the US Congress now, the greatest support for internet gaming has come from Democrats, the greatest opposition from Republicans.
9. Enforcement efforts against intoxicating liquor were ineffective. In 1926, according to Okrent, the annual sale of illegal alcohol was estimated to be $3.6bn, equal to the entire federal budget. US enforcement efforts against internet gambling have been far from effective. The annual revenue from US residents by internet gaming companies located outside the US, according to the American Gaming Association, was estimated at $5.4bn in 2009.

10. Some of the alcohol offered during prohibition was deadly, causing numerous deaths. Some the of the unregulated internet gambling is believed to have defrauded its US patrons.

11. The worst recession in US history created a crisis in government revenue during the life of the 18th Amendment. The prospect of tax revenue on the sale of alcoholic beverages was a tremendous inducement for repeal. The second worst recession in US history has created a crisis in government revenue. The prospect of billions of dollars in tax revenue from internet gambling is a tremendous inducement for its approval.

12. Republican congressional and business leaders supported repeal of the 18th Amendment because they believed tax revenue from sale of alcohol would provide justification for reduction of the income tax. Republican congressional and business leaders are now seeking justification to continue the Bush Administration income tax cuts. Perhaps billions in new tax revenue from legal internet gambling can be offered as an inducement to maintain the tax cuts.

13. After repeal of the 18th Amendment, alcoholic beverage companies located outside the US that had been accused of or considered to have violated the 18th Amendment and the Volstead Act were the only ones capable of immediately moving into providing liquor to a thirsty US public. They became the licensed and respected leaders of the US alcohol industry. Judging by the reported interest of many US gaming companies in associating with the most prominent and respected members of the internet gaming industry headquartered outside the US, that may prove to be another parallel.

Whether these parallels are in any way predictive of the future of internet gaming in the US remains to be seen. However, this may be another example of history repeating itself.