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Nelson Rose is a preeminent specialist attorney in the field of gambling law.
His response to the UIGE follows.
I. NELSON ROSE
PROFESSOR OF LAW, WHITTIER LAW SCHOOL
HOME OFFICE: 17031 ENCINO HILLS DRIVE
ENCINO, CALIFORNIA 91436
(81 788-8509
FAX: (81 788-3104
WEB SITE: www.GAMBLINGANDTHELAW.com
EMAIL: rose@sprintmail.com
Gambling and the Law®:
The Unlawful Internet Gambling Enforcement Act of 2006 Analyzed
© Copyright 2006, all rights reserved worldwide. GAMBLING AND THE LAW® is a
registered trademark of Professor I Nelson Rose, www.GAMBLINGANDTHELAW.com.
Note – This paper is copyrighted. You may quote it at length, republish it or
distribute it for free only if you include this copyright and trademark
information.
The Unlawful Internet Gambling Enforcement Act of 2006 was rammed through
Congress by the Republican leadership in the final minutes before the election
period recess. According to Sen. Frank R. Lautenberg (D- NJ), no one on the
Senate-House Conference Committee had even seen the final language of the
bill. The Act is title VIII of a completely unrelated bill, the Safe Port Act,
HR 4954, dealing with port security. It can be found on pages 213 -244 of the
Conference Report: http://www.saveonlinegaming.com/hr49543.pdf. It is based on
the Leach and Goodlatte bills, HR 4411 and HR 4777, but there are some
important differences.
The following is a detailed analysis of the Act. The section numbers that
follow refer to new sections that have been added to title 31 of the U.S.
Code:
§5361 The Act begins with Congress’s findings and purpose. These include a
recommendation from the discredited National Gambling Impact Study Commission,
whose chair was the right-wing, Republican incompetent, Kay Coles James.
Findings include the doubtful assertion that Internet gambling is a growing
problem for banks and credit card companies. It correctly states that “new
mechanisms for enforcing gambling laws on the Internet are necessary,”
especially cross-border betting.
The Act contains a standard clause that it does not change any other law or
Indian compact. It repeats this many times, to make sure that no one can use
the Act as a defense to another crime, or to expand existing gambling.
Most importantly, the Department of Justice is arguing before the World Trade
Organization, in the dispute between the U.S. and Antigua, that all interstate
gambling is illegal under the Wire Act. The DOJ insisted that any Internet
prohibition passed by Congress not expressly authorize Internet betting on
Horseracing. The DOJ believes this will allow it to continue to argue that the
Interstate HorseRacing Act does not do exactly what it says it does, legalize
interstate horseracing.
§5362 Definitions.
Bet or wager includes risking something of value on the outcome of a contest,
sports event “or a game subject to chance.” The Act otherwise allows
contestants to risk money on themselves. The “game subject to chance”
restriction is designed to eliminate Internet poker.
The Act then confuses the issue of skill by stating that betting includes
purchasing an “opportunity” to win a lottery, which must be predominantly
subject to chance. Someone will figure out a way to create an opportunity to
win, where the opportunity is subject to some chance. But the Act expressly
prohibits lotteries based on sports events.
Betting includes instructions or information. This eliminates the argument
overseas operators used that the money was already in a foreign country, so no
bet took place in the U.S.
The Act exempts activities that we all know are gambling, but are, by statute,
declared not to be gambling. These include securities and commodities,
including futures, that are traded on U.S. exchanges. Boilerrooms and
bucketshops, selling foreign securities are gambling. Insurance is not.
Free games are not gambling. But there is a special provision that allows
sites to offer points or credits to players only if these are redeemable only
for more games. Operators of free games, where players can win valuable
prizes, will have to stop giving points for wins that can be redeemed for
cash. Free bingo, on the other hand, can still give small cash prizes paid out
of the advertising budget.
Fantasy leagues are legal, but subject to detailed restrictions. A fantasy
team cannot be “based on the current membership of an actual team.” What they
actually mean is a fantasy team cannot be composed merely of the players of a
real team. There is no limit on the cost of entering, but prizes must be
announced in advance, and not based on the fees paid by participants.
Statistics must be derived from more than one play, more than one player, and
more than one real-world event.
Being in the “business of betting or wagering” still does not include mere
players. It also expressly does not include financial institutions involved in
money transfers.
“Designated payment system” is a new term. It could have been labeled simply
“target,” as in “you are the target of a criminal investigation.” It covers
any system used by anyone involved in money transfers, that the federal
government determines could be used by illegal gambling. The procedure will be
that the Secretary of the Treasury, Board of Governors of the Federal Reserve
System and Attorney General will meet and create regulations and orders
targeting certain money transfer systems.
“Financial transaction provider” is a very broad definition covering everyone
who participates in transferring money for illegal Internet gambling. This
expressly includes an “operator of a terminal at which an electronic fund
transfer may be initiated,” and international payment networks. This covers
third party providers, like Neteller.
“Interactive computer service” includes Internet service providers.
“Restricted transaction” means any transmittal of money involved with unlawful
Internet gambling.
“Unlawful Internet gambling” is defined as betting, receiving or transmitting
a bet that is illegal under federal, state or tribal law. The Act says to
ignore the intermediary computers and look to the place where the bet is made
or received.
This does not completely solve the problem of Internet poker, or even Internet
casinos. The Act does not expand the reach of the Wire Act, the main federal
statute the DOJ uses against Internet gambling. Although the DOJ has taken the
position that the Wire Act covers all forms of gambling, courts have ruled
that it is limited to bets on sports events and races. State anti-gambling
statutes have similar weaknesses, including the presumption that they do not
apply if part of the activity takes place overseas. This new statute requires
that the Internet gambling be “unlawful.” But it would often be difficult to
find a federal, state or tribal law that clearly made a specific Internet bet
illegal.
Nevada and other states are expressly permitted to authorize 100% intrastate
gambling systems. Congress required that state law and regulations include
blocking access to minors and persons outside the state.
Tribes were given the same rights, with the same restrictions. Two tribes can
set up an Internet gaming system, if it is authorized by the Indian Gaming
Regulatory Act. This means that tribes can operate bingo games linking bingo
halls on reservations. They can also link progressive slot machines, if their
tribal-state compacts allow. But they cannot operate Internet lotteries and
other games open to the general public.
It is interesting that Congress decreed that states can decide for themselves
if they want to have at-home betting on horseracing, but not on dogracing.
Congress also decreed that tribes can operate games that link reservations,
even across state lines, but not the states themselves: state lotteries are
not exempt.
Congress had a little problem with the term “financial institution.” To force
casinos to report large cash transaction, federal law was changed to define
“financial institution” as including large gambling businesses. Congress had
to undo that definition, so that in this Act casinos go back to being casinos.
The other definitions are standard or are described above.
§5363 “No person engaged in the business of betting or wagering may knowingly
accept” any money transfers in any way from a person participating in unlawful
Internet gambling. This includes credit cards, electronic fund transfers, and
even paper checks. But it is limited to Internet gambling businesses, not mere
players. It also would not cover payment processors, except under a theory of
aiding and abetting.
§5364 Federal regulators have 270 days from the date this bill is signed into
law to come up with regulations to identify and block money transactions to
gambling sites. At this writing, President Bush had not yet signed this bill,
but he will. So the regs will go into effect by the beginning of July 2007.
The regs will require everyone connected with a “designated payment system” to
i.d. and block all restricted transactions. So all payment processors are
suppose to have systems in place to prevent money from going to operators of
illegal Internet gambling. The first step will undoubtedly be to take the
credit card merchant code 7995 and expand it to all money transfers. Visa
created the 7995 classification in 2001 to avoid having its credit cards used
for online gambling. The federal government will order banks and all others
involved with electronic money transfers to cease sending funds to any
Internet operator who has a 7995 credit card merchant code. Any financial
institution that follows the regs cannot be sued, even if it wrongfully blocks
a legitimate transaction.
The Act allows the federal regulators to exempt transactions where it would be
impractical to require identifying and blocking. This obviously applies to
paper checks. Banks have no way now of reading who the payee is on paper
checks and cannot be expected to go into that business. Banks tried to defeat
this bill, not because they cared about patrons’ privacy, but because they
knew that it would cost them billions of dollars to set up systems to read
paper checks.
The great unknown is how far into the Internet commerce stream federal
regulators are willing to go. The Act requires institutions like the Bank of
America and Neteller to i.d. and block transactions to unlawful gambling
sites, whatever they are. But, while the Bank of America will comply, Neteller
might not, because it is not subject to U.S. regulations. Will federal
regulators then prohibit U.S. banks from sending funds to Neteller? And would
they then prohibit U.S. banks from sending funds to an overseas bank, which
forwards the money to Neteller?
For financial institutions within the U.S, the Act provides that exclusive
regulatory enforcement rests with their federal regulators, like the Federal
Reserve Board. The Federal Trade Commission is supposed to enforce regulations
on everyone else. It is extremely doubtful whether the F.T.C. will ever try to
do anything about the Netellers of the world, who are beyond regular U.S.
regulatory control.
§5365 Since there is no way to regulate overseas payment processors, the Act
allows the U.S. and state attorneys general to bring civil actions in federal
court. The courts have the power to issue temporary restraining orders,
preliminary and permanent injunctions, to prevent restricted transactions. The
only problem with this enormous power is that it is, again, practically
useless against payment processors who are entirely overseas.
It is difficult to serve a company with the papers necessary to start a
lawsuit, a summons and complaint or petition, if the company has no offices,
or officers, in the U.S. Even if the papers for such a lawsuit can be served,
there is normally no requirement that foreign countries enforce these types of
orders. Other countries are particularly reluctant to enforce a T.R.O., which
does not even require that the defendant be present. Preliminary injunctions
are also often ignored, because they are issued without a full trial and can
be modified at anytime by the trial judge. Neteller operates out of the Isle
of Man. I do not know of any treaty or other law which would require the Isle
of Man to enforce even a permanent injunction against one of its licensed
operators.
The Act provides for limited civil remedies against “interactive computer
services.” An Internet service provider can be ordered to remove sites and
block hyperlinks to sites that are transmitting money to unlawful gambling
sites. ISPs are under no obligation to monitor whether its patrons are sending
funds to payment processors or even directly to gambling sites. But once it
receives notice from an U.S. Attorney or state Attorney General, the ISP can
be forced to appear at a hearing to be ordered to sever its links.
But the statute has an interesting requirement: The site must “reside on a
computer server that such service controls or operates.” This would limit the
reach of this statute to payment processors, affiliates and search engines
that are housed on that particular ISP. The same problem of going after
foreign operators and payment processors affects this section. Foreign ISPs
are difficult to serve and not necessarily subject to federal court
injunctions.
The greatest danger here would seem to be with affiliates. Any American
operator can be easily grabbed. This includes sites that don’t directly take
bets, but do refer visitors to gaming sites. If the affiliate is paid for
those referrals by receiving a share of the money wagered or lost, it would
not be difficult to charge the affiliate with violating this law, under the
theory of aiding and abetting. Being a knowing accomplice and sharing in the
proceeds of a crime make the aider and abettor guilty of the crime itself. The
federal government could also charge the affiliate with conspiracy to violate
this new Act.
The other danger lies with search engines. Although California-based Google
does not take paid ads, punching in “sports bet” brings ups many links to
real-money sites. This new Act expressly allows a federal court to order the
removal of “a hypertext link to an online site” that is violating the
prohibition on money transfers. But what prosecutor would want to be ridiculed
internationally for trying to prevent Google from showing links?
The Act gives ISPs a little more security by declaring that they cannot be
convicted of violating the Wire Act, unless, of course, the ISP is operating
its own illegal gambling site.
This section of the Act ends with a limitation, that, frankly, makes no sense.
It says that, after all the talk of getting court orders to prevent restricted
transactions, “no provision of this subchapter shall be construed as
authorizing” anyone “to institute proceedings to prevent or restrain a
restricted transaction against any financial transaction provider, to the
extent that the person is acting as a financial transaction provider.” This
could be a typo, since the bill was rushed through without an opportunity to
even be read. Or perhaps it means that banks can be ordered to not transfer
money to gambling sites, but only if they know about it. It is indecipherable.
§5366 Criminal penalties: Up to five years in prison, and a fine. And barred
from being involved in gambling.
§5367 The Act naturally makes ISPs and financial institutions liable if they
actually operate illegal gambling sites themselves.
Lastly, the Act requests, but does not require, the executive branch to try
and get other countries to help enforce this new law and “encourage
cooperation by foreign governments” in identifying whether Internet gambling
is being used for crime. The Secretary of the Treasury is told to issue a
report to Congress each year “on any deliberations between the United States
and other countries on issues relating to Internet gambling.” That report will
go unread.
END
© Copyright 2006. Professor I Nelson Rose, Whittier Law School, Costa Mesa, CA
is recognized as one of the world’s leading experts on gambling law. His
latest books, GAMING LAW: CASES AND MATERIALS and INTERNET GAMING LAW, are
available through his website, www.GamblingAndTheLaw.com.
I. NELSON ROSE
Professor I. Nelson Rose is recognized as one of the world's leading experts
on gambling law. A tenured full Professor at Whittier Law School in Costa
Mesa, California, Prof. Rose is also an internationally known scholar, author
and public speaker.
Professor Rose is best known for his internationally syndicated column,
"Gambling and the Law®" and his landmark 1986 book with the same name. The
author of more than 1,000 published works, including GAMBLING AND THE LAW and
BLACKJACK AND THE LAW. He wrote the chapter on Internet gambling for the first
casebook on gaming law, GAMING LAW: CASES AND MATERIALS, and in 2005
co-authored INTERNET GAMING LAW (available at www.liebertpub.com/igl).
Harvard Law School educated, Prof. Rose is a consultant to governments and
industry. He has testified as an expert witness in administrative, civil and
criminal cases in the U.S., Australia and New Zealand, including the first
NAFTA tribunal on gaming issues, and has acted as a consultant to major law
firms, international corporations, racetracks, licensed casinos, players,
Indian tribes, and local, state and national governments, including Arizona,
California, Florida, Illinois, Michigan, New Jersey, Texas, the province of
Ontario, and the federal governments of Canada, Mexico and the United States.
With the rising interest in gambling throughout the world, Prof. Rose has
addressed such diverse groups as the National Conference of State
Legislatures, Congress of State Lotteries of Europe and the National Academy
of Sciences. He has taught classes on gaming law to the F.B.I., at the
University of Ljubljana in Slovenia, Sun Yat-sen University in China and the
Universidad de Cantabria in Spain, and as a Visiting Scholar for the
University of Nevada-Reno's Institute for the Study of Gambling and Commercial
Gaming. Prof. Rose has presented scholarly papers on gambling in Nevada, New
Jersey, Puerto Rico, England, Australia, Antigua, Portugal, Italy, Argentina
and the Czech Republic.
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