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Gambling and the Law
by Professor I. Nelson Rose
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.
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, wi
ll 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. Since no other federal laws were changed, casinos will still have to file Financial Transaction Reports and the other forms.
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.
© 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.
Wisconsin's Compacts - Bad Law And Politics
The Supreme Court of Wisconsin has thrown the future of Indian gaming and the fiscal health of the state into doubt.
And it was not entirely the Court's fault.
In a long and carefully drafted opinion, Justice David C. Prosser, writing for a narrow 4 to 3 majority, ruled that Gov. Jim Doyle had exceeded his authority in agreeing to extend and expand the state's casino compact with the Forest County Potawatomi Tribe. Although the decision is limited, on its face, to terms contained in this one compact, it impacts all tribal-state agreements in Wisconsin.
Which means the tribes may not be able to expand their already large casinos. And the state may not get the additional $100 million in tribal payments it desperately needs.
Everyone involved in the fight over Indian gaming, the Governor, Legislature and even the Court, is careful to declare that the legal fight is over the changes made in 2003 and that the compacts themselves are legal. To some extent this is true, because if the State Supreme Court says a compact is legal, who is to say differently?
Actually, there is someone - the United States Supreme Court. Even a lower federal court could easily find that the Governor did not have the power to sign tribal-state compacts for casinos, because Wisconsin does not permit casinos.
The original compacts were all negotiated and signed by Gov. Tommy Thompson and the state's 11 tribes by June 1992. Gov. Thompson was at a disadvantage, because a federal Judge Barbara Crabb had ruled, incorrectly, in 1991 that Wisconsin permitted casino gambling. She based her decision on the fact that there was a State Lottery, and Wisconsin defined a lottery as all games of prize, chance and consideration. She also relied on a poorly reasoned Opinion from then-Attorney General Doyle that in amending their State Constitution to bring in a Lottery, the voters had said the State Legislature could authorize casinos.
The original compacts expressly limited tribes to video and electro-mechanical gaming devices (slot machines), blackjack and pull-tabs not played in bingo halls. The compacts had terms of seven years, with automatic rollovers of five years, unless the tribe, or more likely the state, sent a written notice of nonrenewal. The state and tribes were careful to protect their sovereign immunity from lawsuits.
In 2003, now-Gov. Doyle, facing opposition from the Legislature, rushed through some startling amendments to these compacts: He agreed that tribes could now offer
Variations on the game of Blackjack, including, but not limited to, Spanish 21 and additional wagers offered in the game of blackjack, including additional wagers, multiple action blackjack, bonus wagers, and progressive blackjack wagers; Pari-mutuel wagering on live simulcast horse, harness, and dog racing events;
Electronic keno; and
The game of roulette, the game of craps, the game of poker and similar non- house banked card games, and games played at Blackjack style tables, such as Let it Ride, Casino Stud, and Casino War.
Even more amazing, Gov. Doyle committed the state to these compacts to the end of time and waived the state's sovereign immunity, agreeing that the tribe could sue the state.
Naturally, a few people were upset. These included racetracks which were trying to compete against tribal casinos and the State Legislature, which was hoping to squeeze more money from the tribes.
The Supreme Court's recent Opinion is the latest in a series of legal decisions - some good, some simply awful - handed down by Wisconsin state courts, federal courts, Legislatures and Attorneys General involving Indian gaming. Lurking behind many of these legal declarations are political fights and the smell of big money.
There wasn't much subtlety about the latest fight. Gov. Doyle is a Democrat, but the Legislature is controlled by the Republicans. Suit was filed in the Wisconsin Supreme Court by Mary E. Panzer, the Majority Leader of the Senate, John G. Gard, the Speaker of the Assembly, and a Legislative Committee. The defendants were Gov. Doyle and one of his officials.
The Republican controlled Legislature has authorized $94,385 - so far - in taxpayers' money for the lawsuit. Responding to complaints from the Democrats, they noted that this was less than the $125,000 in taxpayers' money Gov. Doyle paid an outside consultant last year to help negotiate what turned out to be unconstitutional compacts.
The money at stake is much bigger. The Potawatomi alone are supposed to pay the state $40.5 million in June, 2004. At the time this is written, the tribe says that it will probably pay only the $6.4 million it was obligated under the old compact.
The legal problem began in 1848, with the state's first Constitution, which reflected the morality of the time: "The Legislature shall never authorize any lottery, or grant any divorce."
It is clear the ban on lotteries was only supposed to cover lotteries, not other forms of gambling. However, over the next 150 years, bad decisions led to the word "lottery" often being defined as all games of prize, chance and consideration. This, of course, would make "lottery" synonymous with "gambling."
The Legislature helped create the current mess in 1990 by giving then-Gov. Thompson a blank check: "The Governor may, on behalf of this state, enter into any compact that has been negotiated under 25 USC 2710(d) [the federal Indian Gaming Regulatory Act ("IGRA")]."
Having authorized the Governor to do whatever he wants, the Legislature now is unhappy with the result.
The Court rather meekly found that the compacts, in general, were constitutional. It first decided that the test was whether there were adequate safeguards in place, such as the unrealistic idea that the voters would let the Governor know if they did not like the compacts he negotiated.
But a majority of the Court found the Legislature had given the Governor more power than it had to give. Specifically, it held that the compacts had to have expiration dates, the Governor could not give away that state's sovereign immunity. The most interesting ruling was that the compacts could not allow games like poker and craps, because Wisconsin does not permit those games.
The inevitable question then should be, how can the compacts allow slot machines and blackjack, since Wisconsin does not permit those either?
The State Supreme Court really did not have an answer for that. The best it could come up with was Judge Crabb's obviously wrong ruling and its own prior refusal to hear appeals about the scope of gaming in the original compacts.
A strict reading of the IGRA should lead a federal court to declare all of the compacts illegal, since neither the voters nor the Legislature has approved any form of casino gaming.
But even if that happens, the Legislature will immediately pass an Act or propose a constitutional amendment. Tribal casinos will never close in Wisconsin. The state needs the money.
Gambling and the Law
by Professor I. Nelson Rose
Casinos Coming To Asia
The explosion of legal gaming which is sweeping the world has finally reached Asia.
Most Asian nations have had some form of legal gambling for decades, usually lotteries and racetracks. Some are quite successful: Japan has one of the world's largest lotteries, and nothing comes near the Hong Kong Jockey Club when it comes to bets on horse races.
Illegal and gray market gambling have also always been big. The most blatant are the tens of thousands of pachislo machines, indistinguishable from slot machines, which now out-gross traditional pachinko machines in Japan. These gaming devices are technically legal because they do not pay out in cash. Players are paid in tokens, which the mob conveniently buys for cash.
But the gaming industry has seen few major breakthroughs in Asia, until recently. Now, every government is looking at major expansions, including bringing in casinos.
The proliferation has even hit the biggest market of all - China.
The 1950's image of an overpopulated, economically struggling, Marxist backwater is far from the reality for much of 21st century China. The People's Republic of China ("PRC") does have more than 1.2 billion people. But the country is going through an economic boom that is so spectacular that more than one observer has called it a bubble.
I am writing this in July in Beijing. Everyday the newspapers contain stories that would be unbelievable anywhere else. For example, the China Daily reported "China's tax revenue grew 26.2 per cent in the first half of the year." Imagine what America's budget deficit would look like if "income tax from individuals and companies was up 28.2 per cent" from the same time last year.
There are hundreds of millions of people now in the middle and upper classes. Particularly in the southern and coastal regions, and in major cities like Beijing and Xian, incomes are skyrocketing. Villas are advertised in the Shanghai papers for US$250,000 to $5 million, triple the prices of 1999.
The richest part of China is the semi-autonomous Hong Kong. The South China Morning Post reported that retail "sales leaped 19.7 per cent to $16.5 billion in May," mainly due to increased tourism from the mainland.
Legal gambling is already one of the prime beneficiaries of the loosening of restrictions and a booming economy. The Hong Kong Jockey Club was only first allowed to take bets on soccer in August 2003. For its first 11 months it reported a handle of HK$16.1 billion (US$2.06 billion) and a gross profit of HK$3.3 billion (US$423 million). I don't know of another sport book in the world that makes 20% on more than $2 billion in bets on all events, let alone on only one sport.
The former British colony of Hong Kong has only sports betting (and the world's most successful racetrack). The former Portugese colony of Macau has casinos.
Hong Kong became a Special Administrative Region of China in 1997, Macau in 1999. Fear was rampant at the time. Was the Communist government in Beijing going to tolerate what were arguably the most wide-open, capitalist cities in the world? The answer has been, surprisingly, yes.
When Portugal controlled Macau, a company owned by one of the richest men in the world, Stanley Ho, had a monopoly on casinos. It would not have been surprising if the new government had outlawed gambling; China still considers gambling one of the few sins worthy of the death penalty. Instead, three years after the turnover, the new rulers of Macau decided to issue more casino licenses and put them out to bid. Stanley Ho did win one, but so did Steve Wynn and a Hong Kong group that issued a sublicense to another American, Sheldon G. Adelson, owner of the Venetian in Las Vegas.
In May, 2004, Adelson, aided by his on-site top executives, including VP and General Counsel Thomas Smock, opened the Sands, the first new casino in Macau in 40 years.
I visited the Sands two weeks after it opened. It is a magnificent, western-style casino, which has been enormously successful by testing, and where necessary, disregarding accepted wisdom. For example, it was said that Asian gamblers would not play slot machines. The Sands installed a few video poker machines in a dark corner. The games have proven so popular that the casino has ordered hundreds more.
How gambling will spread depends almost entirely upon the unique laws and politics of the region.
Until recently, residents of mainland China could only visit Macau as part of a tour group. China now allows its residents to travel there independently, and the exit and entry point between Zhuhai and Macau has become one of the busiest border crossings in the world.
A string of casinos is being built in Macau, intentionally designed to conjure up comparisons with the Las Vegas strip. Laws will first have to be changed. For example, the traditional Macau casino was nothing more than a room with table games. It made sense to keep out minors at the door. But hotel casinos have restaurants, shows and gamblers who bring their children. Tom Smock has told me that legislation is already pending to let minors enter the buildings.
Steve Wynn forced another change in the law, when he refused to begin construction of his massive hotel-casino project until the Macau government allowed casinos to issue credit to players.
The PRC is committed to aiding the growth of the casinos in Macau and sports and race betting (and shopping) in Hong Kong. Construction is beginning on the world's second longest bridge, spanning 19 miles across the China Sea, to connect Macau, Hong Kong and Zhuhai.
The government has even allowed an Institute for the Study of Commercial Gaming to be set up at the University of Macau. Jason Zhicheng Gao, a noted professor and expert poker player from Canada, has been recruited as the organizations's first director.
China hopes to have the best of both worlds. It can get all the jobs, tax revenue and economic growth from legal gambling while keeping it somewhat isolated in its remoter regions of Hong Kong and Macau.
But China cannot control what other countries do. By the time you read this, Singapore may also have voted to legalize casinos. Adelson's Sands said it would invest $2 billion if Singapore gave it a casino license. Thailand, Taiwan, and even Japan, are debating the issue.
Chinese players call slot machines "tigers." It will be interesting to see how governments will react when they realize that it is they and not the players who have caught a tiger by the tail.
[Professor Rose can be reached at his Web Site: www.GAMBLINGANDTHELAW.com]
Copyright 2001, all rights reserved worldwide. GAMBLING AND THE LAW is a registered trademark of Professor I. Nelson Rose, Whittier Law School, Costa Mesa, CA.
Roes's latest book, Internet Gaming Law, has just been published:
www.liebertpub.com/igl
I. NELSON ROSE
