Confusion Over the Legal Status of Online Gambling? You Can Bet On It . . . Well Maybe?

The legal status of online gambling is extremely uncertain, to the say the least. Any entity interested in establishing online gambling must contend with a gauntlet of confusing federal and state law, that is not even completely settled at this point. The Unlawful Internet Gaming Enforcement Act (UIGEA) is a federal statute which generally restricts gambling institutions from knowingly accepting money transfers that are the product of illegal online gambling. The statute was passed in 2006 as a response to growing number of gambling websites based overseas and the unregulated nature of internet gambling at the time. The statute only prohibits money transfers from what it refers to as “unlawful internet gambling” which the statute defines as:

“The term “unlawful Internet gambling” means to place, receive, or otherwise knowingly transmit a bet or wager by any means which involves the use, at least in part, of the Internet where such bet or wager is unlawful under any applicable Federal or State law in the State or Tribal lands in which the bet or wager is initiated, received, or otherwise made.”

31 USC § 5362(10)(A). However, the statute specifically excludes from this definition any wholly intrastate “bets or wagers”. [1] So essentially Congress decided to ban the interstate transfer of funds from internet gambling that is illegal under either federal law or any state law, but not to make actual online gambling illegal.

The UIGEA  further requires  that the Treasury and Federal Reserve Board adopt regulations for payment systems/financial institutions  that potentially could be involved in the prohibited transfers of money to adopt certain due diligence procedures. http://www.fdic.gov/news/news/financial/2010/fil10035a.pdf. The procedures are meant to assure that payment systems are proactively preventing any improper transfers and allows these institutions to protect themselves from liability. “A joint rule has been issued by Treasury and the Federal Reserve Board that designates five payment systems as covered by the [UIGEA}. The designated payment systems are (i) automated clearing house (ACH) systems, (ii) card systems, (iii) check collection systems, (iv) money transmitting businesses, and (v) wire transfer systems.” Id. However, the statute does exempt some participants from being required to maintain these policies and procedures, but it does not specifically define which participants are exempted.

The regulations specifically provide that there are no exemptions for card systems “because card systems usually have a transaction coding system that would permit potential restricted transactions to be segregated by participants during the authorization process.” Id. Furthermore, card systems are the only payment system that is expected to block infringing transactions while it is occurring. The regulations do provide a nonexclusive example of policies and procedures that will provide a “safe harbor” for each of the particular regulated institutions. Id. at 6-8.

As an example of the both the size of the online gambling industry and the confusion over what is legal, is the arrest of “Neteller’s” two founders. In January 2007, the federal government arrested the two founders of “Neteller”, Stephen Lawrence and John Lefebvre, charging them  “with conspiring to transfer funds with the intent to promote illegal gambling.” http://www.justice.gov/usao/nys/pressreleases/January07/netellerarrestspr.pdf.   Neteller was a company based on the Isle of Man and publicly traded in the United Kingdom. The complaint alleged that Mr. Lawrence and Mr. Lefebvre through Neteller enabled “gambling companies to transfer money collected from United States customers to bank accounts outside the United States. According to Neteller’s 2005 annual report, LAWRENCE and LEFEBVRE, through Neteller, provided payment services to more than 80% of worldwide gaming merchants.” In 2005 the company processed about 7.3 billion dollars 95% of which was from internet gambling. When Mr. Lawrence and Mr. Lefebvre took the company public they acknowledged  in offering documents that U.S. law prohibited certain forms of internet gambling and the transfer of funds related to it and that they faced a possible risk of prosecution. If convicted both face up to 20 years in prison.

The status of online gambling is further confused by the interaction between different federal laws which appear to conflict by outlawing a form of gambling or money transfer while another law specifically permits it. On September 10, 2011, the Department of Justice issued a memorandum finding that  “[i]nterstate transmissions of wire communications that do not relate to a “sporting event or  contest” fall outside the reach of the Wire Act.” http://www.justice.gov/olc/2011/state-lotteries-opinion.pdf. The memorandum was issued in response to a possible conflict between the Wire Act and UIGEA because  “officials from the New York State Division of the Lottery and the Office of the Governor of the State of Illinois sought the Criminal Division’s views regarding their plans to use the Internet and out-of-state transaction processors to sell lottery tickets to adults within their states.” Both states planned to implement the online sale of lottery tickets only to people within their respective states. The states established procedures to ensure that the transactions would remain wholly intrastate. However, the states were concerned that these programs could violate the Wire Act because the transactions would be routed across state lines via the internet, even though these forms of transactions are specifically allowed under the UIGEA. The Criminal Division of the Department of Justice held the view  that the “Wire Act is not limited to sports wagering and can be applied to other forms of interstate gambling.” However, the Criminal division did acknowledge that its interpretation did appear to conflict with the UIGEA. Based on case law and the language of the statute the DOJ found that the “Criminal Division’s premise [was] incorrect and that the Wire Act prohibits only the transmission of communications related to bets or wagers on sporting events or contests.”

The DOJ’s reversal in its interpretation of the Wire Act has opened the door to intrastate online gambling, thus allowing states to establish their “own virtual casinos and card rooms.” http://www.huffingtonpost.com/2012/01/04/online-gambling_n_1183545.html. Many states view this as opportunity to open a new stream of revenue.  However, there are several possible complications ranging from insufficient state populations to make online gambling profitable too overly complicated state law. Ron Dicker’s article points out that many less populated states that wish to cash in on gambling tax revenue simply lack the population size to financially justify the cost of  establishing and maintaining an online casino that is wholly intrastate, especially for games like poker. Some experts believe that that games involving betting against the house might still be financially feasible. Id. As of today Nevada, Delaware, the District of Columbia, and New Jersey have legalized intrastate online gambling. Furthermore, the establishment of online casinos would still need to comply with state laws, such as New Jersey that only allows gambling within Atlantic city.  New Jersey, for the time being, has decided that the if the game server is in Atlantic City and the gambler is outside the city the game will be considered to be taken place in Atlantic City. Finally, the reliability of DOJ’s memorandum is questionable at best: “ [t]his opinion could even be challenged or jettisoned, as Howard Stutz of the Las Vegas Review-Journal observed. Rose called the development a gift from the Obama administration to debt-ridden states. But it might not be a gift that starts giving as fast as many might hope.” Id.

One of the most recent developments in the continuing legal evolution of online gambling is a proposed bill in the House of Representatives by Congressman Peter King of New York. http://quadjacks.com/wp-content/uploads/King-IG-Bill-Final-113th.pdf. The bill is entitled the ‘‘Internet Gambling Regulation, Enforcement, and Consumer Protection Act of 2013.’’ The bill prohibits internet gambling itself and restricts States’ authority to independently regulate intrastate gambling. The new law would make it “unlawful for a person to operate an Internet gambling facility that offers services to persons in the United States, except as authorized under this Act.” The law exempts from this prohibition groups that are licensed operators, such as race tracks, casinos, qualified Indian facilities, etc.. The law would further create the Office of Internet Gambling Oversight (OIGO) established within the Treasury Department. The OGIO would be responsible for promulgating regulations to implement several aspects of the statute and review whether an existing state or Indian gaming regulatory body is in compliance with the requirements of the statue. Id. at Sec. 105(C). The bill specifically allows the OIGO to refuse licensing of a state and Indian regulatory authorities if they lack sufficient experience. Furthermore, in order for state and Indian agencies to be qualified they must opt in to Sec. 108 which states:  “Internet gambling provided by Internet gambling facilities licensed under this title shall be lawful in the United States only with respect to the acceptance of bets or wagers from individuals located in States and Indian lands that have opted-in under this section.” Finally the act would make it a crime to operate  an establishment in which the computer terminals are used principally for the purpose of online gambling.

Considering the constantly evolving and uncertain legal status of online gambling any person or entity considering the establishment of an online platform must do so very carefully. Even though a party may not be criminally liable if the law is subsequently changed, they could face millions of dollars in loses due to start up costs.

 


[1] “Bet or Wager” is defined as “the staking or risking by any person of something of value upon the outcome of a contest of others, a sporting event, or a game subject to chance, upon an agreement or understanding that the person or another person will receive something of value in the event of a certain outcome.”

~ by tas817 on October 7, 2013.

10 Responses to “Confusion Over the Legal Status of Online Gambling? You Can Bet On It . . . Well Maybe?”

  1. This is almost just embarrassing. The need for a comprehensive legal structure for online gambling is apparent. So is the need for safeguards against fraud on the customers visiting gambling websites. I think the potential for large tax revenues should be motivation enough to get Congress to pass comprehensive reform for online gambling.

    Logging in to an online gambling website is much quicker, easier, and cheaper than flying to Vegas for a weekend. Maybe someone should make the argument in court that by forcing gambling only at brick and mortar casinos, the law is treating poorer people differently in violation of the Equal Protection clause. Rich people can fly to Vegas and gamble their hearts out; the poor can not. Why not let the poor and rich have the same privilege to gamble by lowering the barriers and allowing online gambling websites to operate? Or what about people who physically can’t get to Vegas, like the disabled? Do the prohibitions on online gambling treat them differently than people who are fit to travel to Vegas for the weekend? Just because they can’t physically get there, they are denied the enjoyment gambling.

    I think this article did a great job of revealing just how messed up this body of law is.

  2. I think Drew’s comments are well founded, but in the interest of healthy debate, I will bring up a point on the other side. In support of his argument, Drew cites the convenience of online gambling. Allowing online gambling brings gambling to the masses and provides a destination where one could theoretically gamble whenever, wherever, regardless of his or her financial situation. It follows that business would flourish and thus tax revenues from such ventures would be significant. But those on the other side of the debate see the accessibility of online gambling as one of its biggest issues.

    For some, an occasional wager here or there is enough to satisfy their desire to gamble; for others, they simply can not get enough. When gambling becomes addictive in nature, gambling businesses become even more profitable. When this happens, their business starts to look predatory, and we, as a nation, generally outlaw predatory business behavior.

    Of course, sweeping legislation that aims to curb online gambling to prevent the aforementioned situation also prevents the “responsible” gambler from exercising his or her desire to gamble at all. The law must find a way to balance these competing interests.

    • I’m not sure if I agree with your assessment of addictive behaviors. Alcohol and tobacco use are extremely addicting, yet we regulate them adequately (depending on your opinion), and haven’t outlawed the “predatory business behavior” of these institutions. I think the main problem here is that we just recently acknowledged that gambling can be a huge problem for some people and states with large gambling populations have invested large sums into help lines and resources for people who need assistance. Opening the floodgates to allow online gambling seems like it would be a step backward for those that have worked so hard to provide necessary resources. At the same time, I think that individuals should be responsible for their actions and it’s not really fair to ban those that can control their gambling behaviors from gambling online.

  3. While online gambling regulations can be justified as a means of protecting gamblers from themselves, the cynic in me can’t help but wonder what role brick and mortar casinos have played in the shaping and creation of today’s online gambling regulations. It would seem that casinos would have the most to lose from the nationwide legalization of online gambling. Online gambling provides users with a convenient medium through which users can gamble. It is significantly cheaper than going to a casino, and provides users with instant gratification (or disappointment). I have to imagine that these aspects of online gambling present a threat to the bottom lines of casinos.

  4. I do believe the brick and mortar casinos did actually support UIEGA initially because they saw online gambling as a threat to their revenue stream. Additionally, it is important to note that horse racing was always exempt from UIEGA… think really effective lobbyists! Of course this exclusion, opened the door to a charge levied at the World Trade Organization, by the tiny country of Antigua, that the U.S. was engaged in protectionist activities towards their own industries in violation of international agreements. Antigua did prevail in the litigation.

    Former House Representative Barney Franks began lobbying for the repeal of UIEGA almost from the moment it was passed. When he first started working against the bill relatively few paid attention to him, but as the fiscal crisis continued more states became interested in how they could get a slice of revenue from online gambling. Although Frank retired, his ideas can be seen in some of King’s proposed legislation. Although, one can argue that King’s bill doesn’t really suggest a comprehensive and cohesive strategy either. For sure though, any one thinking about entering the online gaming environment should do so very, very, carefully.

    • Senator Bill Frist and Senator Kyl are credited with getting the UIEGA passed by tacking it on at the last minute to the SAFE Port Act (that regulated port safety). Harrah’s and Mandalay Bay have each made over $10,000 in campaign contributions to Senator Frist.

      Also, I know that one of the primary lobbyist pushing UIEGA was hired by the NFL. The NFL’s lobbyist actually helped write it. No wonder there is an explicit exception in UIEGA for fantasy sports…

  5. I have to agree with Drew and point out that while the casino’s in Vegas are open right now; our own government is not. There is a serious financial crisis in this country; Detroit has declared bankruptcy, is it inconceivable that Michigan or another indebted state would be too far behind? If legalizing online gambling could put these books back in the black, then I think it’s a worthwhile concession to make! (See http://www.gamesandcasino.com/gambling-news/antigua-hits-back-at-us-gaming-laws/69.htm, noting that U.S. gamblers make up half of the 12 billion dollar market) Even knowing that some people will abuse the system to their own financial detriment, returning this money to a nearly bankrupt state would save more jobs and lives than it would harm. Using the logic that no one should be allowed to profit in order to save those who would become addicted, we should outlaw cigarettes, alcohol, the lottery, television, fast food and Pinterest. Nevertheless, I see the inherent dangers that accompany turning a tightly regulated industry over to the internet. Yet in this day in age, the government should be able to strike a balance in regulation that makes this a viable financial opportunity for some states to gain revenue while still protecting minors from engaging in the activity, and form inevitable attempts to defraud.

  6. I don’t know much about gambling (other than Vegas), so it is hard for me to picture online gambling as anything other than Vegas type games played online. I just don’t understand why the big deal is. It’s obvious people are going to gamble online, even if that means breaking the law. It seems the government would want to take advantage of this and use it to bring more revenue (and jobs) to the U.S. I mean is this where we get into the whole game of skill vs game of chance debate? The article by the American Gaming Association talked about preventing underage gambling, and having implementing tools for pathological gamblers to control their gambling. Are the casino’s in Vegas subject to these same limits? Maybe there’s an age restriction, but I find it hard to believe that there is someone at the door of each casino asking each patron if they have a gambling problem.

  7. As previous commentators have analyzed and discussed, the notion that online internet gambling entities are to be legally blackballed while IRL ones continue to prosper with massive profits to be patently ludicrous. Though the risks of unbridled gambling may be terribly detrimental to a select few the vast majority of citizens are simply having their access halted by lobbyists doing what they do in Washington; I never realized the horseracing lobby could be so potent. The new King legislation clearly does not strike at the heart of this matter and will fall short of addressing the material issues still. Ultimately, the improperly regulated industry of online gambling is certainly costing our states, some more than others, a large windfall than they sorely need in this economy and more technologically innovative and creative lawmakers will be needed to balance these forces.

  8. I think that Drew brings up the most interesting point, but do you think that the people who can’t afford to go to vegas should really be gambling? I know that most people would say that is not for us to decide, but as a taxpayer I worry that something as addicting as gambling would be a drain on government assistance should that person file for bankruptcy thanks to online gambling. It might be better if people are forced to show up to the casinos. Sometimes online gambling can be a “game” or just viewed as someone playing in an unreal world. When someone is forced to spend the gas money and time away from work and family to enter a brick and mortar casino, they might be more aware that they have a problem. In my experience with friends and family, gambling addiction is very real and can cause a downward spiral of the family unit. I would hope that as many possible restrictions are being placed in order to make sure that those who are able to access gambling have proper control of their habit. See http://www.dailymail.co.uk/news/article-2448599/Gambling-addict-hands-Ladbrokes-robbery.html recent article for a related story.

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