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”.  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.
 “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.”