Internet Gambling: A Legal Crapshoot or a Sure Thing? (Part 2)

27 April 1999

(Originally released October 28, 1998)

II. What Is The Status Of The Latest Legislative Proposals At The State And Federal Levels? Will That Legislation Necessarily Curtail The Rapid Growth Of Internet Gaming Activities?

    A. Proposed State Legislation

    Recently, many states have introduced bills that would explicitly ban or regulate gambling on the Internet. An Indiana bill would make Internet gambling a misdemeanor and providing Internet gambling services a felony.36 An Arizona bill seeks to extend restrictions on gambling to include using communications facilities to send or receive bets.37 Bills discussed in Nebraska38 and Illinois39 would prohibit using the Internet to conduct wagers.

    A New York bill would require corporations providing Internet gambling to file for authorization with the Secretary of State.40 California also introduced a bill to regulate Internet gambling. 41 Hawaii introduced a bill aimed to urge Congress to enact a ban on Internet gambling.42

    Kansas, while not introducing new legislation, has articulated that "placing, receiving, or forwarding a bet or conducting a lottery over the telephone or Internet is illegal."43

    B. Proposed Federal Legislation - The Kyl Bill

    In July, the Senate passed - by a vote of 90 to 10 - the Kyl bill (as an amendment to an appropriations bill), which, if passed by the House and signed by the President, will specifically make Internet gambling illegal. This bill, which amends Title 18 to add §1085 (following the Wire Act), would prohibit a person from knowingly

      use[ing] the Internet or any other interactive computer service to -
      (A) place, receive, or otherwise make a bet or wager with any person;
      (B) or to send, receive, or invite information assisting in the placing of a bet or wager with the intent to send, receive or invite information assisting in the placing of a bet or wager.44

    A similar section of the bill applies directly to "a person engaged in a gambling business." While the Wire Act is currently only enforceable against web site operators while the Kyl bill will also be enforceable against users.

    The bill also provides the federal government and states' Attorneys General the ability to enter proceedings in district court to obtain temporary restraining orders against any person to prevent a violation. Specifically, a court may require an ISP to terminate service to any customer "who is using such service to place, receive or otherwise make a bet or wager, engage in a gambling business, or to initiate a transmission" that violates the section.

    The bill does provide exceptions whereby states may host sites that offer lotteries and web site operators may offer certain fantasy sports leagues.

    On September 14, 1998, the House Judiciary Subcommittee on Crime approved H.R. 4427 to prohibit Internet gambling. This amended bill provides exemptions for activities occurring on or directed at authorized Indian lands (the approved Senate bill did not provide such as exception). The House bill also provides that interactive computer services will not be required to monitor or remove prohibited material unless ordered to do so by a court. The bill will now be considered by the full committee.

    C. Regulation vs. Prohibition

    A 1997 survey by Harrah's Entertainment, Inc. showed that 92% of adults in the U.S. believe that casino entertainment is acceptable for themselves or others.45Although the consumer demand for gambling seems almost insatiable, gaming over the Internet is not likely to remain unregulated. The push for legislation to control Internet gambling stems from the age-old concerns regarding gambling in general. Legislators fear that care-free, legal, Internet gambling will lead to higher rates of addiction, gambling by minors, and all of the evils that follow …bankruptcy, alcoholism, crime, etc. Other concerns involve more direct consumer protection issues such as fair odds and insurance that winnings will be paid out.

      1. Support for prohibition.

      Some in the law enforcement community support the complete prohibition of Internet gambling and believe that the industry cannot be effectively regulated. These commentators fear that without effective regulation consumers will be victims of manipulated odds and unfair payouts. They are also concerned about the accessibility of these Internet gambling sites to children.

      While many, including the U.S. Department of Justice, are concerned that a prohibition would be too difficult to enforce, at least one commentator believes it could be enforced indirectly by regulation of ISPs. Because of the nature of the Internet, law enforcement officials will have difficulty detecting the operators and users of gambling web sites. However, by forcing the ISPs to terminate the gambling sites, the sites will be unavailable to users. The caveat here is that the U.S. cannot readily exert control over foreign ISPs.

      Supporters of proposed the federal legislation include the American Gaming Association, Gamblers Anonymous, the National Coalition Against Legalized Gambling, the National College Athletic Association, and the National Association of Attorneys General.

      2. Opponents of the Kyl Bill

      Some opponents of the proposed legislation wonder why legislators are fighting so hard against gambling, which may have indirect detrimental effects on society, even before they receive the report from the commission they set up to study what effects Internet gambling is likely to have. These commentators argue that pornography, obscenity and hate language may create greater threats to the morality of the country and these are all still tolerated on the Internet.

      Other opponents question the consistency of the bill. If gambling is so dangerous to society, why does this bill allow lotteries and fantasy sports leagues? Lotteries, however, which are legal in many states are perceived differently than on-line casinos, because players risk a small amount of money and the proceeds go to the public. The fantasy leagues exception limits what services a web site can provide and does not allow the fees to be pooled and awarded as prizes.

      Another concern is that this bill will be an infringement on citizens' personal liberties. Although the government reports that it does not intend to go after first-time or small-time bettors, having such a law on the books might be enough to arouse the public's sense of government intrusion into their personal affairs.

      Some commentators believe that the Kyl bill will fail due to pressure from both business and the states. Internet gambling actually presents states with a moneymaking opportunity. By regulating Internet gambling, requiring licensing and a percentage of revenue, the states will earn revenue and provide consumers with confidence that the sites are fair. If you can't beat 'em, join 'em.

      Other commentators believe a complete prohibition would be impossible to enforce and therefore favor regulation. At least one commentator suggests that the prohibition is unlikely to become law. Such a prohibition, like that of alcohol in the 1920's, could very well encourage organized crime and make ordinary citizens into criminals.

III. How Will The Recent Indictments Affect The Internet Gambling Industry Surge, If At All?

In March of this year, the U.S. Attorney's Office for the Southern District of New York filed charges against fourteen people for conspiracy to violate the Wire Act. These fourteen U.S. citizens were charged with owning or operating sports betting businesses over the Internet or phones. If convicted, each will face a sentence of up to five years in prison and a fine of $250,000. The charges allege that the businesses maintain offices in the U.S., advertise in U.S. magazines and mail materials from within the U.S. The evidence also suggests that 800-numbers had been given to U.S., not foreign, companies and that checks were written on banks in the U.S.

Some commentators believe that it will be very difficult to convict the fourteen. Others, however, note that the prosecutors have chosen whom to prosecute very carefully and may have a strong case. They base this opinion on the following details.

  • The prosecutors only charged American citizens, thereby avoiding the questions relating to the arrest of citizens of a foreign country.
  • The gambling involved sports betting which is definitely covered by the Wire Act.
  • The defendants were charged with conspiracy and not direct violation of the Act, therefore the prosecutors need only prove that the defendants agreed to transmit bets and that one of them acted in furtherance of the conspiracy.
  • Only individuals who conducted part of their operations in the U.S. were charged.

Regardless of how the court analyzes this case, the effect on these companies was immediate. The same day the charges were announced, the U.S. Attorney also directed that their companies' wire and telephone services be terminated. Section 1084(d) of the Wire Act requires that upon notification from a federal authority, a common carrier must terminate service to a business that uses the service in violation of the statute. It is not yet completely clear that the U.S. attorney can direct the common carriers to terminate service to entities that are organized and exist under another sovereign nation's laws. Nevertheless, the carriers have, in this case, cooperated.

Federal prosecutors have sent a message to the Internet gambling community that they are willing to enforce current laws and to the extent possible, regulate the Internet activity of U.S. citizens. The indictments might deter some U.S. entrepreneurs from entering the industry immediately. However, many might only consider this a warning to be more careful when operating their facilities, to not conduct any business within the U.S. and to not accept bets from the U.S.

IV. How Should The Internet, A Supranational Entity Be Governed?

There is much confusion surrounding if and how activities that occur on the Internet can and should be regulated. The Internet is a network of over ten thousand networks. When you use an Internet web site, data from your computer is transmitted via repeaters, hubs, bridges, and gateways to a host computer on another network. Therefore, activity on the Internet does not necessarily occur in one, identifiable physical location. How can these activities occurring in some "cyberspace" location be regulated? One school of thought believes that the Internet population should be free to self-regulate, while others advocate traditional legal regulation.

Complete self-regulation may not be a feasible alternative. While the activities that occur on the Internet may occur in an unknown location, many of these activities are likely to have effects in the real, physical world. For example, an Internet gambler may place bets in cyberspace, but any loss of money will effect his ability to pay his bills or purchase food.

Traditional territorial legal regulation might also be a less-than-perfect solution. Activities that one country believes may have a negative impact on the physical world, may be considered tolerable or even laudable in another country, at least from a revenue enhancement perspective. Regardless of how strongly the U.S. feels about the negative social impact of gambling, it may lack the legal basis for imposing its laws on another country to control gambling on the Internet.

For the time being, the activities of Internet users in a certain physical location will be governed by that jurisdictional entity's local law. Traditional regulation, however, requires a method for law enforcement and the ability to exercise control over those who violate the laws. It can be close to impossible for law enforcement officials to locate a person using the Internet because a user can configure his connection so as to appear to be in a different location. Although complete control of what people do on-line may be impossible, if the activity involves or causes any "real world" illegal activity, the U.S. government has made clear that it is willing to enforce U.S. laws.

V. Conclusion

The debate regarding if and how the Internet gambling industry should or can be regulated is likely to continue for some time. If the Kyl bill becomes law, it will likely face challenges from various groups, and very specific questions regarding enforcement of a prohibition will need to be addressed.

Proponents of on-line gambling may find comfort in knowing that prosecutors have not yet convicted anyone operating an Internet gaming web site under current law -- and that users and web site operators often can operate quite anonymously on the Internet without detection by law enforcement officials. Until the legal landscape in this area is more clearly demarcated, however, the best bet for those considering offering on-line gambling is not to conduct any business in, nor accept bets or wagers from anyone residing in, a state or country where the particular type of gambling under consideration is prohibited. 46

©Michael J. Wagner 1998, all rights reserved.

361998 IN H.B. 1124 (SN).
371998 AZ H.B. 2367 (SN).
381997 NE L.R. 397 (SN).
391997 IL S.B. 1687 (SN).
401997 NY A.B. 7818 (SN).
411997 CA A.B. 2655 (SN).
421997 HI H.C.R. 150 (SN).
43Kan. Atty. Gen. Op. No. 96-31.
441997 U.S. S.B. 474.
45PlayStar Responds to Kyl Bill to Prohibit Internet Gambling, Business Wire, July 30, 1998.