Just like any other form of gambling, online gambling has various social and economic effects on society. Because this gambling medium is rather new, there are a limited number of studies on its effects on people and their gambling habits. Likewise, economic factors are difficult to assess because most online gambling sites operate in foreign countries with little government oversight.
Unlike traditional casinos, online gambling sites are not licensed or taxed by state governments. Therefore, they provide no revenue for social and educational programs. The primary financial beneficiaries are the online gambling companies themselves, the foreign countries in which they are located, and the companies that process their financial transactions. For example, credit-card companies typically receive 2–5% of each transaction amount. In addition, they earn interest on the debt incurred by the card user. Because most companies consider money used for online gambling as a cash advance, the interest rates are very high—20% or more.
Other businesses that benefit directly or indirectly from online gambling include Internet service providers, phone and cable companies, nongambling Web sites that feature advertisements for online gambling sites, and software companies. Major software providers to online gambling sites include WagerLogic, Boss Media, Microgaming Systems, and World Gaming.
Mobile phone companies expect cellular gambling to become commonplace in the near future, particularly for phones with video streaming. Ladbrokes and William Hill are traditional British bookmakers that accept wagers via cellular phones using wireless application protocol (WAP). The company Eurobet launched wireless betting during the summer of 2000. In December 2003 industry analysts at Juniper Research released a report predicting that gambling via cellular phones would be a $6.7 billion business by 2006. In July 2004 the Philippines government decided to ban cell phones from the country's schools because students were using them to place online bets during school hours.
The economic effects of online gambling are discussed at length in an article by Ryan D. Hammer in the December 2001 issue of Federal Communications Law Journal of the Indiana University School of Law. The article "Does Internet Gambling Strengthen the U.S. Economy? Don't Bet on It" argues that people who do not gamble on the Internet suffer financially from online gambling. The high costs of litigation and unpaid bills are passed on from credit-card companies to other consumers in the form of higher interest rates and fees. Taxpayer money funds federal and state lawsuits against online gambling sites. State governments receive no licensing fees or tax revenues from online gambling sites but must fund treatment programs for pathological gamblers, a growing number of whom are online gamblers. The federal government collects income taxes from the big winners of lotteries and traditional casino games, but no taxes are collected from online gambling winners.
Besides the legality of the activity itself, other criminal issues are associated with online gambling. The 1999 report of the NGISC lists three of the major ones: operator abuses, computer hacking, and money laundering.
OPERATOR ABUSES. Operator abuses include stealing credit-card information and money from players, refusing to pay winnings, and manipulating the game software to increase profit. Because the industry is not regulated by any American government agencies, it is difficult to know how prevalent these problems are. Gambling Web sites can be extremely fluid, moving or closing down without notice. The NGISC report mentions an Internet gambler who was cheated out of $7,000 by an unscrupulous gambling Web site that refused to pay his winnings and immediately closed down. Studies have shown that lack of trust is a major factor keeping many traditional gamblers away from Internet sites. They worry that the games are "fixed" or that winnings will not be paid.
Internet gambling operators complain that most credit-card fraud is perpetrated against them rather than by them. There are many reports by industry insiders of stolen credit cards being used by online gamblers. These activities represent a financial loss to the operator, as well as the credit-card issuers. Because credit-card holders are not held liable for the fraudulent use of their credit cards, it is less of a financial burden for them, although it is still a matter of great concern.
COMPUTER HACKING. Computer hackers, savvy computer operators who illegally gain entry into others' computer systems, are also a problem in the online gambling industry (as in all Internet-based industries). Operators of gambling Web sites complain that hackers break into their financial databases and steal credit-card information or manipulate gaming software in their favor.
MONEY LAUNDERING. The biggest concern to law enforcement authorities is money laundering. Money laundering is the transfer of money gained via illegal means through third parties to purposely make its origins obscure. For example, a criminal could deposit large sums of cash with an Internet gambling site and later withdraw it via transfer to a legitimate bank account. This makes it very difficult for authorities to trace the path of money obtained illegally.
The GAO's Internet Gambling: An Overview of the Issues examined the vulnerability of Internet gambling to money laundering. In general, law enforcement agencies believe that Internet gambling could be a significant medium for money laundering, while banking and gambling regulatory officials do not. According to law enforcement officials, the factors that make online gambling susceptible to money laundering include the speed and anonymity with which financial transactions take place, as well as their offshore locations outside U.S. jurisdiction. However, many financial analysts believe the risk is low when credit cards are used because credit-card transactions are closely monitored and recorded. There is a fear that other, less traceable payment methods will become popular, as credit-card use is increasingly being blocked at online gambling sites.
Experts say that the fast pace and instant gratification associated with online gambling make it more addictive than other types of gambling. Online gambling is quite different from traditional casino gambling. Casino gambling is a social activity, usually conducted in the company of family or friends. Online gambling is a solitary and anonymous activity. The Council on Compulsive Gaming of New Jersey estimates that 90–95% of online gamblers gamble alone. Online gamblers who contact the organization for help are usually younger than traditional gamblers and have built up large amounts of debt in a shorter time than traditional gamblers.
In general, online gamblers are younger than traditional gamblers because younger people are more computer-savvy. Many younger people have grown up playing video games and are comfortable with online games. However, younger people are also more likely to take risks. This makes them particularly susceptible to serious gambling problems.
In March 2002 a study on Internet gamblers was published by the American Psychological Association in its journal Psychology of Addictive Behaviors. The study was performed by researchers at the University of Connecticut in Farmington. Patients seeking free or reduced-cost services at the university's health and dental clinics were questioned about their gambling habits. The respondents filled out surveys left at the clinics between August 1999 and September 2000.
In total, 389 patients completed the questionnaires in full. Every one of the respondents reported gambling at some point in their lives. Nearly all (90%) had gambled in the previous year, and 42% had gambled in the previous week. Only 8% of the respondents had gambled online during their lifetimes. However, 4% gambled online on a weekly basis.
The younger respondents were more likely to have Internet gambling experience than the older respondents. The median age of the online gamblers was 31.7 years, compared to 43.5 years for traditional gamblers. Ethnicity also made a difference. Non-Caucasians comprised only 16% of the total group surveyed but nearly 36% of the Internet gamblers.
All participants were given the South Oaks Gambling Screen (SOGS), a common series of questions used to determine the probability that a person has a gambling problem. Results showed that the mean SOGS score of online gamblers was 7.8, compared to 1.8 for those without online gambling experience. Researchers categorized all respondents into levels depending on their SOGS scores. Level 1 gamblers had a SOGS score of 0–2 and were considered not to have a gambling problem. Level 2 gamblers had a SOGS score of 3–4 and were considered probable problem gamblers. Level 3 gamblers had a SOGS score of 5 or greater and were considered probable pathological gamblers.
Internet gamblers were much more likely to have a gambling problem than non-Internet gamblers. Just over 74% of Internet gamblers were rated at Levels 2 or 3, compared to just under 22% of the traditional gamblers. Although this research was performed with a relatively small number of Internet gamblers, it does suggest that there may be a relationship between online gambling and serious gambling problems.
Psychologists George T. Ladd and Nancy M. Petry, authors of the University of Connecticut study, wrote that "the availability of Internet gambling may draw individuals who seek out isolated and anonymous contexts for their gambling behaviors." The Internet is also hard for problem gamblers to ignore in their daily lives. While they might be able to resist traveling to another state to casinos, the easy availability of online gambling is difficult to avoid. Internet gambling sites are always open and accessible.
Experts hope that online sites will use sophisticated software to identify problem players—for example, those who engage in incremental betting or gamble frequently—and either warn such gamblers or limit their play.
On January 16, 2001, the APA issued a public health advisory about Internet gambling. The advisory, from the Committee on Treatment Services for Addicted Patients, states that Internet gambling has undergone explosive growth in recent years. However, few safeguards are in place to ensure the fairness of the games or to establish exactly who has responsibility for operating them. Because there is no federal or state regulation of online gambling sites, no measures are taken to prevent underage gamblers from participating. Children and teenagers already play nongambling games on the Internet and are at significant risk of being lured to gambling sites.
In June 2002 the U.S. Federal Trade Commission (FTC) issued a Consumer Alert warning parents about children and online gambling. The FTC says that it is too easy for kids, particularly teenagers, to access online gambling sites. The agency complained that many nongambling game-playing sites popular with kids contain links to gambling sites. The FTC also conducted an informal survey of one hundred Internet gambling sites and found that 20% had no warnings at all to children. Many sites lacked measures to block minors from gambling.