The Future Of U.S. Internet Gambling Regulation 

Law360
April 30, 2010 

By Kevin V. Di Gregory 

According to the American Gaming Association, it is estimated that offshore online gaming operators had revenues of $5.9 billion dollars in 2008 from bets placed by people in the United States.¹ None of this gaming activity is regulated or taxed and, according to the U.S. Department of Justice, all of it is illegal. 

Legislation introduced in the current session of Congress calls for the licensing, regulation and taxing of Internet gaming by the United States government. This article discusses current enforcement of anti-gambling laws, the pending legislation, its friends and foes, and the legislation’s potential impact on state governments, tribal governments and the online gaming industry. 

Pending Federal Legislation 

Rep. Barney Frank, D-Mass., chairman of the House of Representatives Financial Services Committee, proposed The Internet Gambling Regulation, Consumer Protection, and Enforcement Act, H.R. 2267, designed to promote the licensing, regulation and taxing of Internet gambling businesses. It provides for the licensing of both domestic and offshore online gambling businesses by the Secretary of the Treasury, and essentially legalizes Internet gambling. The legislation allows state and tribal governments to impose limitations on a licensee’s ability to lawfully accept bets from their residents and, perhaps without intending to do so, also allows states to keep federal licensees out while they license, regulate and tax intrastate Internet gambling. 

However, the bill does nothing to interfere with the Professional and Amateur Sports Act, which prohibits betting on professional or amateur sporting events. A companion bill, the Internet Gambling Regulation and Tax Enforcement Act, H.R. 2268, introduced by Rep. James McDermott, provides for the taxation of licensed online gambling. 

In late March, Congressman McDermott introduced a revised version of his bill — co-sponsored by Congressman Frank — that would require that 25 percent of the revenue collected be used for foster care programs, and, in an apparent effort to garner the support of state and tribal governments, the legislation would give them 6 percent of the revenues collected from online gaming within their jurisdictions. Sen. Robert Menendez of New Jersey has introduced legislation to provide for the licensing of Internet poker and other games considered by some, but not by the Justice Department, to be games of skill. 

In late February, Senator Ron Wyden, D-Ore., and Sen. Judd Gregg, R-N.H., introduced a tax code reform bill that includes provisions for the licensing and taxing of Internet gambling similar to those in Congressman Frank’s proposal. 

Current Law and Enforcement 

For those supporting the legalization of Internet gambling and any of these proposals, time is quickly running out in this session of Congress. 

In 2006 Congress passed, and former President Bush signed into law, the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA). The UIGEA does not prohibit Internet gambling, but does prohibit gambling businesses from accepting certain financial instruments for bets that are illegal under federal and state gambling laws. Regulations promulgated to implement the UIGEA would require financial institutions to monitor all transactions for gambling activity and to block any transactions relating to bets that are illegal. However, implementation of the UIGEA has been delayed until June 1, 2010. It appears unlikely that Congress will act on any of the pending bills before that date. 

The Internet has, of course, presented enforcement difficulties of a far greater magnitude than federal gambling laws (most of which were promulgated almost 50 years ago to aid states in fighting organized crime) were designed to address. 

The Illegal Gambling Business Act prohibits the operation of a gambling business in violation of state law by five or more persons, for a continuous time period of 30 days or more or having gross revenue of a minimum of $2,000 on a single day. The Travel Act prohibits the travel or use of any facility in interstate commerce with the intent to operate or promote a gambling business in violation of federal or state law. The Racketeer Influenced Corrupt Organizations Act prohibits the violation of gambling laws by a criminal enterprise engaged in racketeering activity including “any act which is indictable under Section 1084” of Title 18 of the United States Code, colloquially referred to as “the Wire Act.” 

The Department of Justice has nevertheless utilized these statutes in conjunction with other federal laws to assail offshore and foreign Internet gambling businesses and the individuals who operate them, and to target Internet payment processing businesses as their co-conspirators. 

Until recently, the lynchpin of its enforcement efforts has been the Wire Act. It prohibits the use, by any person engaged in a gambling business, of a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers or wagering information on sporting events or contests. The transmission of wagering information on a sporting event or contest from a state or foreign country where wagering on that event is legal into a state or foreign country in which such betting is also legal, is permitted. However, the transmission of the actual bets and wagers on the sporting event or contest is prohibited. 

The Department of Justice has taken the position that the Wire Act also applies to all betting or wagering on the Internet. A federal appeals court has rejected the Justice Department’s position and held that the application of the Wire Act is limited to sports betting.² 

In the last few years, the Justice Department has placed far less reliance on the Wire Act and has employed bank fraud, anti-money laundering and forfeiture statutes in gambling enforcement actions. 

The anti-money laundering statutes prohibit engaging in financial transactions involving property derived from criminal activity, or using the proceeds of criminal activity with the intent to promote such activity. 

Civil and criminal forfeiture statutes permit the seizure of real and personal property, including money held in bank accounts, if that property can be linked to criminal activity. Last year, the U.S. seized several bank accounts of payment processors working with offshore Internet gambling establishments, and indicted the Canadian owner of those payment processors for conspiring to commit bank fraud and money laundering, and conspiring to operate an illegal gambling business. Another individual who allegedly offered Internet gambling payment processor services and who allegedly disguised the illegal nature of the transactions was indicted by a grand jury in the Southern District of New York and was arrested on April 17, 2010, as he attended an Internet billing conference in Las Vegas. 

Besides those laws already mentioned, tribal gaming is also governed by the Indian Gaming Regulatory Act (IGRA), which authorizes gaming on tribal lands. Bingo, games similar to bingo and nonbanking card games authorized by the laws of the state where tribal lands are located are permitted. Casino games, however, can be lawfully conducted only in states where such gaming is otherwise permitted and in accordance with an agreement with the state, called a compact. 

Stakeholders 

Florida’s recent compact with the Seminoles places in stark relief the tension between legalized online gaming and tribal gaming. In that agreement, the Seminoles were given authorization to operate slot machines, banked card games, and “any new game authorized by Florida law for any person for any purpose.” 

The compact, recognizing the IGRA’s restriction of tribal gaming to tribal land, has a specific provision that would diminish the Seminoles revenue sharing obligation to the state if Florida legalizes online gaming. A bill had been introduced in the Florida legislature to legalize online poker prior to the legislature’s approval of the compact, and other states, including California, are considering legalizing intrastate Internet poker. 

At their convention in April, National Indian Gaming Association members debated Congressman Frank’s proposal and tabled a resolution to oppose it. His bill does nothing to change the restriction in the IGRA. As is evidenced by the Seminole-Florida compact, tribes are concerned about their exclusion from the Internet gambling marketplace and its economic impact. 

Other land-based casino operators, like Harrah’s , who support licensing and regulating Internet gambling, do not want to be left behind if online gambling is legalized and are readying themselves for the U.S. market.³ Their view of this potential expansion of the gaming industry was not accepted until recently by their trade association. 

In late March, Frank Fahrenkopf, president and CEO of the American Gaming Association announced, in an interview with Card Player, that the AGA, previously neutral on the issue, was “open to the concept of legalized Internet gaming, so long as there is a regulatory regime put in place that protects the consumer and protects the integrity of the game.” Fahrenkopf did not, however, endorse any particular piece of legislation, but suggested that the AGA might prefer state regulation and that the legalization of online poker would be a good beginning.⁴ 

Consumer protection and the potential societal impact of online gambling were on the agenda at the House Financial Services Committee’s hearing last December on Congressman Frank’s bill. The executive director of the National Council on Problem Gambling testified that his organization neither supported nor opposed the bill and offered comments to assist Congress in addressing problem gambling. Wired Safety, an established Internet safety and help group, reversed its previous position on Internet gambling and concluded that legalization and regulation, not prohibition, was the best way to protect families, problem gamblers and consumers from its potential harmful effects. 

More than a decade ago, Congress created the National Gambling Impact Study Commission Act and gave it the task of conducting a comprehensive study of the social and economic effects of gambling in the United States. The commission recommended that Internet gambling be prohibited.⁵ Attitudes about the best way to prevent the harmful effects of online gambling may be changing. 

Congressman Frank’s bill has also garnered support from the trade association for U.S. community banks, The Independent Community Bankers of America (ICBA). The bill would remove the burdensome and costly responsibilities mandated on the ICBA’s 5,000 member banks by the UIGEA to determine whether financial transactions relate to violations of federal, state or tribal gambling laws, and police those that do. 

State governments do not want their sovereignty or their authority to decide whether to legalize or prohibit gambling to be compromised. The National Association of Attorneys General formally opposed an earlier iteration of Congressman Frank’s bill.[6] No doubt in response to the concerns of the attorneys general, the current version of Congressman Frank’s bill allows states to opt out of the proposed licensing framework. Professional and amateur sports leagues have consistently opposed legalization of Internet gambling. 

Over the last 10 years, the Justice Department has proposed amendments that would clarify the scope of the Wire Act, opposed a bill that prohibited Internet gambling while exempting the pari-mutuel industry, and supported the passage of the UIGEA. 

Conclusion

The Department of Justice steadfastly maintains that all forms of Internet gaming are illegal and continues to aggressively enforce federal laws against offshore online gambling businesses and their facilitators. Until legislation is passed that adopts a regulatory framework like those in the Frank, Wyden-Gregg and Menendez bills, operation of an Internet gambling business in the U.S. risks enforcement action and a seizure of assets. 

If such legislation does become law, federally licensed online operators would have to take measures to ensure that they do not accept bets or wagers from residents of those states or tribal lands that have prohibited or limited Internet gaming and opted out of the regulatory framework. Several states have specifically prohibited online gambling, including Illinois, Indiana, Louisiana, Montana, Oregon, South Dakota, Washington and Nevada, while no state has legalized any form of Internet gaming within its borders. If a state opts out and then licenses, regulates and taxes Internet gaming within its borders, online gaming operators may have to be licensed and face taxation by both state and federal governments. 

Kevin Di Gregory is a partner in the corporate investigations and white collar defense practice of Manatt Phelps & Phillips, practicing in the firm's Washington office. He previously served as a deputy assistant attorney general in the Criminal Division of the U.S. Department of Justice, where he testified at several congressional hearings on Internet gambling legislation. 

¹ The American Gaming Association is the trade association for the casino gaming and entertainment industry. This information is available here.

² Although the Department of Justice was not a party, its current position on the Wire Act was addressed and rejected when the same broad and inclusive view was taken by gamblers in multiple lawsuits filed in United States Federal District Courts against MasterCard, VISA and a number of banks that issue those cards. It was alleged that these credit card companies and banks interacted with online casinos and, in doing so, violated United States law. A test case to resolve the allegations, Thompson v. MasterCard International Inc., was heard by a judge in the Eastern District of Louisiana. Essentially, the plaintiff gamblers asked the court to relieve them of their credit card debts incurred while gambling at online casinos because the credit card companies aided and abetted violations of United States laws by those gambling enterprises. One of the laws upon which the gamblers relied for their argument was the Wire Act. The District Court rejected this argument saying that by the plain language of the Wire Act, as well as its legislative history, it applied only to sports betting. This ruling by the lower court was affirmed by the 5th Circuit Court of Appeals. Thompson v. MasterCard, International Inc., 317 F.3d 257 (5th Cir. 2002). 

³ See, “Harrah’s Thinks It Can Gain From Online Gambling,” Las Vegas Sun, June 22, 2009, available here, and “Harrah’s Places Bet on Internet Gambling.” The Blog of Legal Times, June 23, 2009, available at here.

⁴ See, “Interview with Frank Fahrenkopf, CEO of the American Gaming Association,” Card Player, March 24, 2010, available here.

⁵ The National Gambling Impact Study Commission Report, p.5-12, available here.

⁶ See, Letter of National Association of Attorneys General to the Honorable Nancy Pelosi, Speaker, House of Representatives, the Honorable Harry Reid, Majority Leader, United States Senate, the Honorable John Boehner, Minority Leader, House of Representatives, the Honorable Mitch McConnell, Minority Leader, United States Senate dated November 30, 2007, available here.