Breaking Down the US I-Gaming Prohibition Bil

5 October 2006

U.S. Senate Majority Leader Bill Frist, R-Tenn., tried for several weeks to attach an anti-Internet gambling measure to a must-pass bill before the legislative break for mid-term elections. He failed in September to tack it onto the 2007 DOD Authorization Bill, but got his way early Saturday morning when, after battling all day with committee members, he succeeded in getting the Unlawful Internet Gambling Enforcement Act attached to the SAFE Port Act (H.R. 4954), which passed by unanimous consent.

The Frist bill is a relatively pared-down version of H.R. 4411, authored by Rep. Jim Leach, R-Iowa; it borrows the provisions from the Leach bill, which target U.S.-based banks, credit card companies and other Internet payment systems, prohibiting them from processing payments for online gambling sites.

Unlike the Goodlatte bill, the Frist provision does not focus on updating the Wire Act.

Charles Humphrey, an attorney and the creator of, pointed out in his analysis of the Frist bill that while it does not amend the Wire Act, it does create a federal crime, making violations of the new prohibition on accepting financial instruments for use in unlawful Internet gambling punishable by fine and five years in prison.

The bill also penalizes those who aid and abet criminal offenses "against the United States," as if they committed the offense directly. In other words, banks, credit card companies and third-party payment processors could be charged with aiding and abetting. The law does not, however, apply to the casual bettor.

"Most of the alleged legal 'grey area' previously relied on by online casinos and poker rooms and their employees, principal shareholders, consultants and affiliates is now gone," Humphrey said. "Those companies and individuals wrongly, but desperately, clung to the view that they were okay because the Wire Wager Act only applied to sports books. They ignored the other federal and state laws that made operating and supporting online casinos and poker rooms illegal. Now a new federal criminal 'offense against the United States' has been created, and it is clearly applicable to all online gambling operators not exempted by the bill."

I. Nelson Rose, a professor of law at Whittier Law School, has also analyzed the language of the bill.

Section 5362 defines the different terms relating to Internet gambling. According to the bill, betting:

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

Rose said this definition confuses the meaning of skill and that 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.

The Act exempts activities which, for all intents and purposes are gambling, such as trading securities and commodities (including futures) on U.S. exchanges.

As with previous versions of the bill, interstate horserace wagering is exempt.

"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 dog racing," Rose said. "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."

Operators who offer free games in which players can win valuable prizes, Rose said, will have to stop giving points 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 sports leagues are legal, but subject to restrictions. A fantasy team cannot be based on an actual team, Rose explained, which means a fantasy team cannot consist of players using the likenesses of real players. There is no limit on entrance fees, but prizes must be announced in advance and must not be based on participant fees.

The Act allows tribes to authorize intrastate gambling transactions, provided they follow age and location verification requirements, which mean they 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," Rose said. "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."

Federal regulators have 270 days (nine months) from the date the bill is signed by the President to come up with regulations for identifying and blocking transactions to illegal gambling sites.

Rose said the new regulations will require any business connected with a "designated payment system" to identify and block all restricted transactions. So, all payment processors will be required to have systems in place to prevent money from going to operators, he added.

"The first step will undoubtedly be to take the credit card merchant code 7995 and expand it to all money transfers," Rose said. "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 regulations cannot be sued, even if it wrongfully blocks a legitimate transaction."

The Act allows federal regulators to exempt transactions for which it is impractical to require identifying and blocking. This 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.

What remains to be seen, according to Rose, is how far into the Internet commerce stream federal regulators are willing to go. He said that while the Act requires financial institutions to ID and block transactions to illegal gambling sites, offshore payment processors may not comply because they are not subject to U.S. regulations. He questioned whether federal regulators would go so far as to prohibit banks from sending funds to overseas banks that finance offshore payment processors.

Rose said one very dangerous provision included in the Act could apply to affiliates. A statute relating to Internet service providers states that an ISP can be ordered to remove sites and block links to sites that are transmitting money to illegal gambling sites. However, they are not obligated to monitor patrons' activities in that respect.

But Rose said that once an ISP receives notice from a U.S. attorney or state attorney general, it can be forced to appear at a hearing and ordered to sever its links.

"The greatest danger here would seem to be with affiliates," Rose said. "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 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."

In its final chapter, the Act suggests that the U.S. government "encourage cooperation by foreign governments" in identifying whether Internet gambling is being used for crime, such as money laundering or corruption. Further, the Secretary of the Treasury is also expected to submit 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," Rose said.

Emily Swoboda is the senior staff writer at IGamingNews. She lives in St. Louis, Mo.