Analysis of Goodlatte's HR 4777 - The Internet Gambling Prohibition Act

23 February 2006

On paper, Rep. Goodlatte (R-VA)'s HR 4777-- The Internet Gambling Prohibition Act—certainly accomplishes what it sets out to do, which is outlaw most forms of remote gambling. However, for years the Department of Justice has worked under the assumption that remote gambling is already illegal, and operators targeting Americans have therefore already acted accordingly by moving offshore out of reach from American authorities. Although there are some provisions in HR 4777 that could indeed pose problems for the online gambling industry in North America, it appears that they might not do much more harm than cause some businesses to adapt.

The first eight-pages of Goodlatte's 16-page piece of legislation would amend title 18 of the United States Code, Section 1081, which is not actually the Wire Act but is a section which provides the definition for five different gambling-related terms that appear in other sections of the code that deal with gambling. Those terms include 'gambling ship', 'gambling establishment', 'vessel', 'American vessel', and 'wire communication facility.'

Although the first four terms would remain unchanged, the term 'wire communication facility' would be adjusted to read as 'communication facility," and the definition would be altered to address new remote forms of technology that were previously not addressed.

If the bill were to pass, the relevant section would read as follows (language supplemented by Goodlatte appears in bold):

The term "communication facility " means any and all instrumentalities, personnel, and services (among other things, the receipt, forwarding, or delivery of communications) used or useful in the transmission of writings, signs, pictures, and sounds of all kinds of aid by wire, cable, satellite, microwave, or other like connection whether fixed or mobile between the points of origin and reception of such transmission.

In addition to the revised definition of 'communication facility,' section 1081 would also be supplemented by 13 new paragraphs (some of which have one or more subparagraphs) that define other terms that appear in Goodlatte's new version of the Wire Act and in other gambling related Acts.

The first of the new paragraphs addresses the fact that the Wire Act, which was brought into law in the 1960's, was originally intended to prohibit bookies from accepting sports wagers via telephone and therefore does not contain language pertinent to casino gaming. The paragraph contains several subparagraphs and begins:

The term 'bets or wagers'—

"(A) means 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 predominantly subject to chance, upon an agreement or understanding that the person or another person will receive something of greater value than the amount staked or risked in the event of a certain outcome;

"(B) includes the purchase of a chance or opportunity to win a lottery or other prize (which opportunity to win is predominantly subject to chance)

The definition of bets and wagers goes on through several more subheadings to clarify that it does not include securities exchanges, commodity exchanges, over-the-counter derivative instruments, contracts of indemnity or guarantee, and life or health insurance contracts, as well as Internet-based games that do not contain an element of monetary risk, fantasy games and games that award prizes for skill or knowledge.

The most noteworthy of the several other paragraphs introduced to Section 1081 to explain terms previously without a definition in the code states:

The term 'information assisting in the placing of bets or wagers' means information knowingly transmitted by an individual in a gambling business for use in placing, receiving, making, or otherwise enabling or facilitating a bet or wager and does not include—

(A )any posting or reporting of any educational information on how to make a legal bet or wager or the nature of betting or wagering, as long as such posting or reporting does not solicit or provide information for the purpose of facilitating or enabling the placing or receipt of bets or wagers in a jurisdiction where such betting is illegal; or

(B) advertising relating to betting or wagering in a jurisdiction where such betting or wagering is legal, as long as such advertising does not solicit or provide information for the purpose of facilitating or enabling the placing or receipt of bets or wagers in a jurisdiction where such betting is illegal.

The actual modifications of the Wire Act itself, which is Section 1084 of title 18 of the United States Code, begins on page nine of Goodlatte's bill. The first paragraph that would revise the Wire Act does not do anything drastically different from what was the original intent of the act, which is to prohibit the offering of gambling services that have been defined as illegal. Although the definition of what sort of services are illegal has been updated to ban certain gambling forms that are conducted via relatively new technologies, the solution is probably not really that simple for the American government.

A potential weakness in the bill lies in the fact that the opening paragraph of the revised Wire Act explains actions that individuals "being engaged in a gambling business" may not undertake. The reality of the matter, however, is that virtually none of these illegal gambling businesses are based in the United States, so even if the law now clearly forbids a company from offering online casino gaming, pursuing legal action against a foreign-based company remains as difficult as before.

"While it does perhaps do some clarification and take some grayness out of the legality of some of these games of chance sites, it is clearly ineffectual with regard to being able to have an impact on offshore sites that are taking U.S. bets," stated gaming attorney Anthony Cabot of law firm Lewis & Roca.

Prominent American gaming attorney Martin Owens of the Law Offices of Martin Owens believes Goodlatte's bill might have been a lot more effective if it became law several years ago. "If they had passed this law six or seven years ago, it would have been a very tough blow against online gaming in general," said Owens. "But right now, Internet gambling is already offshore and the bill contains carve-outs for the states."

"So what exactly is [Goodlatte] doing? He's essentially shutting the barn door not only after the horses are out but after they've torn the barn down."

Larry Walters of Weston, Garrou & DeWitt on the other hand points out that a potential strength of the revised definitions of illegal gambling is that it now provides mechanisms to take action against individuals residing in America who are associated with online poker or casino sites and believe that the Wire Act does not apply to online poker and casinos.

"As a U.S. citizen, you are required to conform your behavior to the dictates of the law, so if there is some ultimate beneficial owner of some trust that owns an offshore entity, the feds will be able to get to that person and say they're violating the new Wire Act," said Walters.

Included in Goodlatte's legislation are clauses that seek to target payment processing, but these are also framed similarly to the clauses that prohibit a company from offering remote gambling because they state that gambling businesses may not accept credit, checks or electronic fund transfers. Once again, the fact that these companies reside on foreign soil could prove difficult in achieving Goodlatte's goal of eliminating online gambling in America.

HR 4777 also contains exemptions for horse racing, Indian tribes, and States' rights. It states:

Nothing in this section prohibits the transmission of information assisting in the placing of bets or wagers from a State or foreign country in which such betting on the same event is permitted under Federal, State, tribal, or local law into a State or foreign country in which such betting on the same event is permitted under Federal, State, tribal, or local law.

In the past such carve-outs have proven troublesome for other federal bills that sought to prohibit online gambling, leading some prohibition activists to believe that the bills would actually expand rather than limit online gambling.

There is a clause near the end of the bill which or may not prove practical and effective in accomplishing Goodlatte's goal. The clause puts the burden on Internet service providers and other technology providers to block access to online gambling sites if it is requested by a law enforcement agency to do so. The relevant paragraph states:

When any common carrier, subject to the jurisdiction of the Federal Communications Commission, is notified in writing by a Federal, State, tribal or local law enforcement agency, acting within its jurisdiction, that any communication facility furnished by it is being used or will be used by its subscriber for the purpose of transmitting or receiving gambling information, in interstate or foreign commerce, within the special maritime and territorial jurisdiction of the United States… it shall discontinue or refuse, the leasing, furnishing, or maintaining of such facility, after reasonable notice to the subscriber, but no damages, penalty or forfeiture, civil or criminal, shall be found against any common carrier for any act done in compliance with any notice received from a law enforcement agency.

Commenting on the provisions dealing with Internet service providers, Walters stated, "Essentially, they're carving out protection for the ISPs. They're saying, 'to the extent that these ISPs might be facilitating online gambling, we're going to give them some protection under federal law; we're not going to allow criminal charges to be brought against them, but in exchange we're going to require that they remove or disable access to any offending online Website or hypertext link to an offending Website that resides on a computer server that the Website operates.'

"This could apply to a lot of different companies-- to any interactive computer service. To the extent that AOL or any of these other big companies have European divisions, they may be subject to this law. And even foreign companies that provide services may voluntarily comply so as not to tick off the Department of Justice."

HR 4777 authorizes the appropriation of $10 million for investigations and prosecutions of violations of the Wire for the years 2007 through 2010.

Goodlatte's office confirmed to IGN today that it is also supportive of the Unlawful Internet Gambling Enforcement Act (H.R. 4411) introduced in November by Rep. James Leach (R-Iowa) and that it believes the two bills are complimentary. While Goodlatte's bill addresses online gambling by updating the Wire Act, Leach's bill is considered more of a threat to the industry because it proposes much more stringent methods to prevent the transmission of funds to pay for gambling services.

Bradley Vallerius

Articles by Bradley P. Vallerius, JD manages For the Bettor Good, a comprehensive resource for information related to Internet gaming policy in the U.S. federal and state governments. For the Bettor Good provides official government documents, jurisdiction updates, policy analysis, and many other helpful research materials. Bradley has been researching and writing about the business and law of internet gaming since 2003. His work has covered all aspects of the industry, including technology, finance, advertising, taxation, poker, betting exchanges, and laws and regulations around the world.

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