CYBERSPACE – Following the passage Saturday of the Port Security Improvement Act of 2006, an Act to which the Senate attached the entirely unrelated Unlawful Internet Gambling Enforcement Act of 2006, stock values for online gaming companies took a hard hit,and several companies announced plans to block wagers placed from within the U.S. and/or placed by American gamers.Party Gaming, owners of PartyPoker.com, issued a statement saying that passage of the new law is a clear indication that “the U.S. government intends to stop the flow of funds from Americans to online gaming operators through criminal sanction.”

In the statement, Party Gaming added that the law “will make it practically impossible to provide U.S. residents with access to its real money poker and other real money gaming sites,” and added that “If the president signs the act into law, the company will suspend all real money gaming business with U.S. residents.”

In an email to its affiliates, Party Gaming added that “Customers resident in the United States, or accessing us from the USA will no longer be able to access our real money gaming services,” but that there will be “no impact for non-US customers.”

888 Holdings PLC, another major gaming company, said in a statement that it will “suspend” online betting operations in the United States but added that the “precise effect of the legislation is unclear.”

“However,” 888 Holdings added in its statement, “this legislation indicates Congressional intent to treat internet gaming, whether sports-related or not, as illegal.”

Shares for internet gaming companies were down across the board yesterday, as investors reacted to the news and impact of the new law. PartyGaming shares fell 56-percent, 888 Holdings saw a drop of 26-percent, Sportingbet PLC took a hit of 64-percent, and shares of Austria-based Bwin.com dropped 35-percent.

The Act aims to cut off domestic online wagering at its source – the bank accounts and credit cards of American betters.

“The enforcement provision provided by this bill will go a long way to stop these illegal online operations,” Senator John Kyl (R-AZ) said Friday.

As stated in the summary of the Act, the law seeks to “prevent the use of certain payment instruments, credit cards, and fund transfers for unlawful internet gambling, and for other purposes.”

While clearly designed to close a set of loopholes that have allowed internet gambling companies to accept wagers from American customers despite existing laws prohibiting such wagering, the Act does provide a number of exceptions that have drawn the attention of the legislation’s critics.

The Act specifies that “nothing in this section prohibits…the transmission of information assisting in the placing of bets or wagers from a State or foreign country where such betting or wagering is permitted under Federal, State, tribal, or local law into a State or foreign country in which such betting on the same event is permitted under Federal, State, tribal, or local law.”

The Act further provides an exception for “the interstate transmission of information relating to a State-specific lottery between a State or foreign country where such betting or wagering is permitted under Federal, State, tribal, or local law and an out-of-State data center for the purposes of assisting in the operation of such State-specific lottery.”

Also unaffected by the Act will be gambling that takes place at race tracks and casinos, including off-track-betting (OTB) on horse races around the country.

Critics of the legislation note that the exceptions provided dovetail nicely with the interests of major lobbying forces around the country and such exceptions tend to undermine the argument that the Act is rooted in real moral or ethical concerns regarding gambling.

Representative James Leach (R-IA) claims there’s a fundamental difference between Internet-based gambling and more traditional table and slot machine games. Speaking to reporters, Leach compared Web-based gambling to crack cocaine, and said the Act was crafted to protect American families from losing everything.

With the “addiction” of internet gambling, Leach said, “there are no needle marks, there is no alcohol on the breath; you just click the mouse and lose your house.”

Leach and other supporters of the legislation have not indicated what preventative measures exist to keep Americans from losing all their money in other, perfectly legal ways, such as high-risk investment strategies, extensive acquisition of debt through bank loans, irresponsible credit card use, or ineffective retirement planning.

President Bush is expected to sign the Act into law in short order, but much remains to be done with regards to the specifics.

Some representatives of the U.S. banking industry had expressed concerns about the potentially burdensome nature of the proposed regulations and possible liability for accidental and unknowing processing of transactions associated with prohibited wagering.

Banking industry critics have been mollified, at least somewhat, by the bill’s existing language, which does provide at least some protection for the industry, according to director of congressional relations for the Independent Community Bankers of America, Steve Verdier.

“We got some language in the bill that looks like it protects the financial services industry,” said Verdier, adding that it “could have been a lot worse.”

Under the language of the Act as passed Saturday, “if you are acting as a normal bank, and you’re not in some sort of conspiracy with a betting house, then you are not going to be held liable.”

Verdier cautioned, however, that the full extent of the regulations that accompany the Act is not yet known, because the policies and procedures for identifying and preventing restricted transactions have not been crafted yet.

“We will have to see how those regulations get written,” said Verdier.

The Secretary and the Board of Governors of the Federal Reserve System, in conjunction with the office of the U.S. Attorney General, is responsible for creating the additional regulations, which they have 270 days to create, dating from enactment of the pertinent subsection.