The Frank Bill - Four Potential Snags

14 May 2007

Congressman Frank's bill, HR 2046, would not repeal the Unlawful Internet Gambling Enforcement Act (UIGEA). It would change it, adding modifying clauses (proposed sections 5381-5389) to Title 31, where UIGEA already inhabits sections 5361-5367. And in doing so, it would also make a big change in American gambling law. For the first time, the federal government would be actually issuing gambling licenses and setting the rules on who can and can't play.

Up to now, state law has been the primary reference point. State authorities licensed each gambling establishment, and it is the lack of a state license that is the primary sore point against Internet gambling. After all, about a dozen states have licensed Internet services to take their horse bets, and even Virginia, home of the tireless Congressman Goodlatte, has authorized Internet subscriptions to its state lottery. Usually federal gambling laws were only triggered when state gambling law was violated. The Wire Act (18 U.S.C. §1084) and the Illegal Gambling Business Act (18 U.S.C. §1955) both require an underlying violation of state gaming law. So does the Travel Act (18 U.S.C. §1952) and RICO (Sections 1961-68).

We can predict that state governments will not be pleased with the changes HR 2046 promises to bring . . . first, because they don't really get to choose. Unless a given state, through its governor, makes its objections or reservations known within 90 days of this bill's passage, that state will automatically be fair game for U.S.-licensed Internet gaming (proposed Section 5382). Clearly, state legislators will not like being cut out of the decision process, which a 90 day limit effectively accomplishes.

In the same vein, to make those objections or reservations known, many states will be faced with finally updating their gambling laws, an unpopular task which many of them have been putting off for decades at the least. Sixteen states and the District of Columbia, for example, have no clear definition in their books of what gambling is or is not, even yet. This, too will be lots of work on short notice.

Second, there also seem to be Constitutional questions. The states control gambling because, at the time the country was formed, it was regarded as a minor crime in a social nuisance, and so came under the "police power." And the police power is reserved to the states, under the 10th Amendment of the Bill of Rights. Federal licensing of Internet gaming may clash with powers the states are guaranteed under the Constitution.

There is the question of different state standards. While Congressman Frank's bill will not force Internet gambling on anybody, at the same time the rules and regulations are not written. (For that matter, the UIGEA regulations are not due out for another two months, maybe longer). Picture yourself as the manager of the XYZ casino in Nevada. You would love to accept bets online, if you could. But suppose the U.S. national rules for I gaming are less strict than Nevada’s rules for operating a brick-and-mortar establishment? Will XYZ be risking its Nevada license by operating online under U.S. rules? Will this new law supersede or overrule the Internet gambling laws of those eight states that already have them? Would differing state standards trigger the Commerce Clause?

And many other devils lurk in many other details. State taxes, for instance, are supposed to be collected under Congressman Frank’s scheme, but what are those, when most states don't have any Internet gambling? And would it be fair to charge the same gambling tax to an online business, with relatively few expenses, as to a brick-and-mortar operation with huge sunk costs and overhead? Then, too, HR 2046 requires that underage gambling, bets from unauthorized jurisdictions, money laundering, fraud and abuse by problem gamblers all be prevented by "appropriate safeguards" (proposed Section 5383(g)). "Appropriate" in whose eyes? Will this replace state standards with a single national standard, diluting some state laws and supercharging others? What will happen to the eight states which outlaw Internet gambling (other than their own)?

Third, the Frank bill promises to exacerbate the conflict over Indian gaming and sovereignty. It will grant, to federally recognized tribes with the right to gaming operations, the same option as state governments. That is, whether to participate in the national scheme, hold out some exceptions, or opt out altogether. But Indian gambling is divided into Class II (bingo and some card games) and Class III (full-on gambling- slots, roulette, etc.). Class III requires a pact with the tribe’s home state, and many states, like California , have made a condition of their pacts that the tribes not use the Internet to gamble. Will HR 2046 overrule those pacts? And since Class II requires no state approval, will tribes now begin to offer bingo and perhaps even poker online? What about a tribe eligible for Class III but not yet approved? Can they go directly online and avoid state participation altogether?

While state authorities may think that HR 2046 goes too far, gambling operators will probably think it doesn't go far enough. The Sports Protection Act, (28 U.S.C. §3701 et seq) forbids states and tribes from legalizing sports books, apart from horse races and the existing facilities in Nevada. This law does nothing to change that; it is, therefore, unclear just the purpose is of allowing sports leagues, such as the NFL or the NCAA, to also "opt out" and veto American licensed online gaming from betting on their particular sports. It couldn't be done anyway. Sports gambling is the big enchilada; I have heard estimates that betting on the last Super Bowl alone reached $8 billion in that one single day. And for American operators, it will still be out of reach, even if the bill becomes law.

Finally, Congressman Frank's proposed law does nothing to resolve the single most important issue regarding Internet gaming: Where does the bet take place? The only coherent standard in the whole world, so far, comes from the United Kingdom, which states that the bet takes place at the location of the gaming operator's computer server. Here, prospective Section 5383 says no one may engage in the business of Internet betting in the United States without a license. But there is still no guidance, no what, why or wherefore, here or in any other federal law, how to determine whether the Internet betting is in fact "in the United States."

That will not be a problem anytime soon, however. Proposed section 5383 gives almost complete control of the licensing process to the director of the Financial Crimes Enforcement Network, who is chosen by the Secretary of the Treasury, who is in turn chosen by the President. And the Bush administration has demonstrated time and again that it is completely hostile to Internet gambling in all its forms. Even if HR 2064 were to become law tomorrow, it is very unlikely there will be any U.S. federal licensing of gambling, online or off, until a new occupant sits in the White House.

Mr. Owens is a lawyer in Sacramento, Calif., specializing in Internet gambling law. Released in 2005, he coauthored "Internet Gaming Law" with Professor I. Nelson Rose, America's senior authority on gambling.