Prepared for The Fourth Annual International Symposium on Internet Gambling Law and Management ©Copyright November 3, 2000 by Professor I. Nelson Rose All rights reserved worldwide.
More and more clients are asking their lawyers whether Internet gambling is legal. To adequately represent clients interested in becoming involved in any way with Internet gambling requires lawyers to not only determine whether current laws, primarily criminal statutes, apply, but also to predict what the law will look like in the near future. The nature of the Internet requires that any legal analysis, including predictions of future developments, include multiple levels of government, ranging from tribes and states to countries, multi-national federations and international law. Most important are the laws that might impact the owners and operators of a website, which include not only where these individuals reside, but also where their computers are located and even the site of their server. As a practical matter, whether a local law makes it illegal for a player to make a bet is of less concern to operators; although large gaming corporations have to be careful to avoid illegal activities abroad to protect their home licenses and all operators are concerned with the collectability of wagers placed by credit cards.
A prediction of the content of future statutes is at best an educated case, since legislation is shaped much more often by politics than by logic. Still, patterns are developing in the way governments are responding to the proliferation of online betting.
1. Most governments have not passed, or even seriously considered, any special legislation. Many of these say that they are studying the issue.
The most interesting potential development here is the United Kingdom. There are so many opportunities to gamble, including the world=s largest lottery and well-established sports books, that regulating the Internet did not appear to be a high-priority. In fact, there still is little movement toward placing any restrictions on a British citizens right to place a bet online. However, Great Britain taxes legal betting operations very heavily. Some of the best known operators are moving to other parts of the British Commonwealth. Ladbrokes, for example, calls itself Athe world=s biggest bookmaker. Its website is licensed by the government of Gibraltar. Ladbrokes.com, launched in February 2000, highlights repeatedly that bettors pay no tax. The loss of not just future tax revenue from online wagers but existing tax revenue from wagers placed by telephone and in person is forcing the government to reexamine its present position of simply ignoring Internet gambling.
2. Governments, principally through their State Lotteries, are beginning to operate online gambling games themselves, but restricting play to local patrons. A very small number of governments are operating the games themselves and accepting bets from anywhere in the world.
The best example of the latter is the principality of Liechtenstein, although when it started its InterLotto in 1995, it had significant restrictions on patrons located in the two relatively powerful countries that completely surround it: Austria and Switzerland. The current game site, PLUS Lotto, does not mention any restrictions and is available in many languages, including English.
The preferred position of almost all other State Lotteries is to restrict sales to residents of that particular state. One of the first to go online was Finland. Its Lottery, Oy Veikkaus, has restrictions (instructions in Finnish, local bank account required) which effectively limit play to citizens within that country.
International organizations of State Lotteries are putting tremendous political pressure on government-run games to restrict their marketing to patrons within their own borders. Unwritten agreements have existed since the 1980s among State Lottery directors, preventing cross-border marketing; that is why there are no billboards for the Washington State Lottery in Oregon. But in the late 1990s international organizations, such as AELLE, the European Association of State Lotteries and Lottos, began holding conferences in which the issue of State Lotteries marketing internationally on the Internet was of primary concern. The World Lottery Association, comprised of more than 140 lotteries, was created in 1999 by the merger of Intertoto and AILE (the International Association of State Lotteries) to “try and get some control on the Internet,” among other goals.
Few governments will therefore follow the example of Liechtenstein, although we have not yet heard from most Third World countries. National governments in much of Africa and part of South America and Asia could decide to ignore the political pressure put on them by the rest of the world and reap the economic benefits of being able to sell tickets to their relatively small State Lotteries to a much wider market.
3. Government licensing schemes range from merely selling licenses to requiring complete background checks and continuing oversight of operators. There appear to be approximately 54 jurisdictions issuing licenses. These are primarily smaller nations, such as Antigua, and states and territories of larger nations, including those in Australia, although at least one tribe is also issuing licenses.
It appears that many more governments will be getting into the business of regulating and licensing online gaming. With the possible exceptions of the governments of South Africa and the United Kingdom, these licensing bodies will continue to be parts of the governments of states, territories and smaller nations, rather than federal governments or the governments of larger nations. Governments which can issue licenses under existing laws will do so, for example, the Australian Capitol Territory used its Bookmakers Act of 1985. Other states will pass enabling legislation.
The trend is also toward more regulation. Government officials realize that the Internet gambling industry has failed to grow as quickly as predicted, in part due to a lack of confidence on the part of players. A single scandal in any part of the world can put the industry back months.
The United States government has also been putting pressure on foreign governments, such as Antigua, which have a major presence on the Internet. The major concern is money laundering, and individuals involved with the development of Antigua’s laws on Internet gambling have been visited by the Department of the Treasury’s Financial Crimes Enforcement Network, commonly known as “FinCEN.”
It is unclear whether increased regulation will lead to increased fees or competition among governments will result in lower costs to operators. There is evidence both ways. In October, 2000, the ruling party of Costa Rica announced that it would be introducing legislation to require operators to pass Interpol background checks and Abuy a $150,000 operating license, as well as pay sales and luxury (consumo) taxes and a yearly fee based on the volume of bets they process. On the other hand, one observer Anoted that states [in Australia] are starting to compete by offering lower tax rates, which range from 8% to a prohibitive 50%. And little territory Norfolk Island offers a 4% tax rate.
4. Some smaller governmental units, particularly states in the United States, are rushing through acts prohibiting wagering online. State anti-Internet gambling laws take one of two forms: They either prohibit all forms of Internet gambling, or they only appear to prohibit online gaming, while actually authorizing their local legal gambling operations to take bets online.
It is safe to say that all proposed prohibitions start as sweeping bans, broadly written. During the time they are being considered and debated, they either retain essentially the same form as proposed, or are amended by a series of exclusions for existing legal forms of gambling.
The difference in outcome seems to be whether the broad prohibition first proposed is adopted as is, before it can be subjected to amendments creating exceptions for existing forms of legal gambling. Attorney General Opinions, for example, are subjected only to internal review within the A.G.s office. Their publication often comes as a surprise, because few outsiders even know the question is under consideration. So, state A.G. Opinions in the United States are almost universally condemning of all parts of Internet gambling.
Legislation, on the other hand, usually requires months of hearings and are open to proposed amendments. Many of the prohibitions use language so broad that they would outlaw existing legal gaming, for example, prohibiting every form of betting which uses a computer. State Lotteries and parimutuel wagering on horse races could not exist without computers and have well-established interstate systems. Lobbyists for legal gambling operations have no choice but to ask legislatures to carve out exceptions for their clients. Politicians may talk Prohibition, but the future clearly is prohibition only for those forms of gambling that have little political power. For gambling operations with influence, mostly large established businesses, prohibition actually means clarifying the law to create partial legalization.
Nevada, as usual, led the way in showing how an established industry can turn an attempt at prohibition into legalization of its business and the raising of barriers against potential competition. Nevada was the first state not only to outlaw, but also to legalize, Internet gambling. Making or accepting a wager over the Internet is now, by statute, a crime committed in Nevada, unless the operator is one of the state’s licensees.
Even bans that are supposed to be universal will often be so poorly worded that they result in the accidental legalization of Internet gambling by local legal operators. for example, California’s A.B. 2179, attempts to outlaw, by name, every form of gambling imaginable. But, the proposed statute defines “prohibited online gambling game” as including “Lottery games, other than games lawfully conducted by the California State Lottery.”
Michigan is the prime example. The Michigan Legislature passed a bill, signed into law by the Governor, which was intended to ensure that activities, like bomb threats, that were already illegal if conducted off-line would also be crimes if conducted on the Internet. On November 3, 1999, the Michigan House of Representatives passed a different bill, HB 4689, with the stated purpose of making it a felony to accept a bet on the Internet. This bill attracted considerable attention and debate, because it contained a clause that would have expressly allowed Michigan licensed gaming operations to take bets on the Internet. A month later SB 562 sailed quickly through both houses with little discussion and was signed into law by Gov. John Engler. SB 562 was broader than HB 4689: it prohibits many crimes from being conducted on the Internet, beyond just gambling. However, the crimes are not given names as in the House bill; rather, the new law prohibits the use of the Internet to commit or attempt a list of specified crimes, defined purely by references to existing statutes. Gambling on the Internet, for example, is not expressly prohibited; SB 562 only makes it a crime to use a computer for communicating with a person with the purpose of ACommitting, attempting to commit, conspiring to commit, or soliciting another person to commit conduct proscribed under section 301, 302, 303, 304, 305, 305a, or 311 of this act [1931 PA 328, which created the Michigan criminal code] or section 18 of the Michigan gaming control and revenue act, the Initiated Law of 1996, MCL 432.218. Those sections listed are the state’s anti-gambling statutes. But, those sections expressly define gambling as not including all forms of legalized gambling in the state. This means that the prohibition on using the Internet for gambling is far from universal: Michigan’s State Lottery, racetracks, bingo and casinos do not even have to seek a second approval from the Legislature, as they would have had to under HB 4689, to play their games online.
5. Some larger governments, including the federal governments of the United States and Australia, are adopting a go-slow attitude. This has taken the form of proposed federal laws which would prevent states, territories and tribes within these federations from issuing Internet gambling licenses or operating the games themselves.
While states are rushing to legalize or prohibit, larger federal governments are having trouble forming coherent policies. Even the reactions of the governments of Great Britain and South Africa fit this model, where the former has studiously avoided taking a position while the latter is moving, slowly, toward a federal form of licensing. States and small nations are typically not only smaller in population that federations but are often more homogeneous. The smaller the political unit the more likely it is to be dominated by a single religious group, or at least for the majority of the population to hold the same view of the morality of gambling.
Smaller political bodies are also more often swayed by the lure of easy money. At least one city considered trying to grab a piece of the virtual pie: The Las Vegas City Council debated licensing the city’s name for use on an Australian-based Internet casino, VegasOne.com. The City Council was told this online casino might have an annual net win of $360 million by the year 2003, giving the city about $90 million a year. Las Vegas has an annual budget of only $320 million. Of course, to win $360 million would require wagers of about $3 billion, meaning this single site would have to have as much action as the rest of the world combined.
Some state attorneys general have also been aggressive, at least against Internet operators over whom they can clearly exercise personal jurisdiction. Even local law enforcement has gotten involved, when the operator is physically within its jurisdiction. The District Attorney of Los Angeles County seized computer files and records of YouBet!, forcing the large horse-betting website to move out of the state and pay a $500,000 Acontribution to problem gambling programs.
Prohibitory state and local laws have a real-world impact. OTB operations in the United States, which are ignoring potential federal laws, publicly declare that they will not accept wagers from states where betting on horse races is illegal. Fear of loss of a state license has prevented large, legitimate gaming operators from becoming involved in online wagering through their U.S. based operations. Companies which have or contemplate applying for a license in a U.S. jurisdiction are even reluctant to accept wagers from Americans through their foreign-licensed subsidiaries. Meanwhile, competitive, legitimate operators without U.S. licenses are developing their gambling websites under licenses from foreign countries. This includes individuals and companies like K. Rupert Murdoch, who has a major presence in the United States, through Fox Television and other properties, but who also is heavily invested in Sports Internet Group PLC, an Australian company taking bets from Americans. If legitimate operators can gingerly take chances with possibly violating U.S. state laws, questionable operations, many of whom do not even claim to be licensed, will continue to flourish.
The law-making processes of federal governments are also, of course, subject to politics. In fact, it looks like politics will prevent a bill explicitly prohibiting Internet gambling from passing the United States Congress, at least in the foreseeable future.
Anyone who doubts that politics shapes legislation should examine the history of the Internet Gambling Prohibition Act, commonly called the Kyl Bill, after its author, Jon Kyl (R-Az) and similar proposals introduced into the House of Representatives. The Kyl Bill was first proposed as an amendment to the Crime Prevention Act of 1995. In its early years, the Internet Gambling Prohibition Act proposed placing far more restrictions on gambling than the infamous 18th Amendment=s Prohibition on intoxicating liquors. It would have outlawed virtually everything, from actual betting online to merely putting information in online gambling magazines. The proposed restrictions against putting gaming information online were so broad, that it would have been dangerous for a licensed casino to advertise its legal activities on the World Wide Web.
The Kyl Bill’s major weakness, besides violating the First Amendment=s protection of free speech, was that it would also have made it a federal crime to merely place a bet. The U.S. Department of Justice, which does not have fond memories of its role trying to enforce Prohibition, made it clear that it did not support a law that would require knocking on bedroom doors to go after $5 bettors.
In addition the national horse racing industry, which depends upon off-track betting to survive, found that its computer operations might fall under the prohibitions on computer-assisted gambling. Similarly, State Lotteries would have been prevented from conducting their successful multi-state drawings, like Powerball. So the Kyl Bill had to be amended.
Every form of legal gambling that has a lobbying presence in Washington, D.C., was able to get an exception written into the bill. As passed by the Senate, the Kyl Bill would outlaw all Internet gambling. But bettors have been dropped, so only businesses would be committing crimes by conducting gambling online. Also excluded:
1. Securities and commodities, as if day-trading was not gambling;
2. Closed-loop systems for placing bets on horse and dog races, including from a home PC in one state to an OTB operator in another.
3. Parimutuel pooling of bets between tracks.
4. State Lotteries, including multi-State Lotteries, so long as the betting PC is in a facility open to the general public.
5. Bets made for a fantasy sports league game or contest.
6. Closed loop intra-state systems, so bettors in Nevada can make wagers on sports events with licensed sports books in the state.
The federal Department of Justice made it clear that it was uneasy with so many explicit exemptions. Its position was founded in law: The D.O.J. has consistently stated that acts should be treated the same whether they are committed online, in person or on the telephone. If it is not a federal crime to make a bet by voice on the phone, it should not be a crime to make the identical bet by computer modem. The D.O.J. has also taken the position that present laws cover most Internet gambling. It has stated that expressly exempting certain forms of legal gaming from a prohibition on Internet gambling has the legal effect of authorizing those specified forms. Although the D.O.J.’s legal reasoning is correct, it is interesting to note that it has never gone after state-authorized off-track betting operations that accept wagers from across state lines by phone, as in New York, or by both phone and the Internet, as in Pennsylvania.
A similar proposed federal ban on Internet gambling by Rep. Bob Goodlatte (R-Va.), failed to pass the U.S. House of Representatives in 2000, although it did receive a majority vote. This bill was put before the House under a procedure that barred amendments, but required a two-thirds vote to pass. Opposition to the bill arose from groups with radically divergent agendas: Indian tribes felt they would be denied forms of gambling they now had, the D.O.J. and anti-gambling activists thought the bill would actually expand forms of betting which are now forbidden on the Internet, and the Clinton administration feared this initial interference with the development of commerce on the Internet.
VI. The First Emerging Major Fight: States v. Federal Governments.
The major conflict in the coming years will be the fight between federal governments and smaller governmental bodies. At the moment, the major contenders are the national legislatures of the United States and Australia against their member states and territories, and, in the case of the U.S., tribes. The other major federations do not appear to be in conflict: Canada has not acted, the European Union has stepped aside and South Africa has preempted the field.
The federal government of Canada is in the awkward position of having sold the control of gambling to its provinces, when it needed money for the Calgary Olympics. At the time it looked like the federal government was giving up relatively little: the only major forms of gambling were parimutuel wagering on horse races and State Lotteries, and the federal government did not see much financial loss in voluntarily excluding itself from the lottery market. The development of tribal gaming cemented the federal government’s position: Whether First Nations could operate casinos was an issue left to the provinces to negotiate. Although it is not impossible, the Canadian Parliament would be slow in becoming actively involved in any issue involving gambling, even gaming on the Internet.
The European Union is such a young federation that it is still in the process of developing basic power positions among its players. Nations (called Member States) which joined the European Union agreed that they would not keep out the goods and services of other Member States. But, the European Court of Justice has consistently ruled that Member States of the EU do not have to allow in legal gambling from other members. Gambling is one of the unique areas where local customs and morals trumps the law of this new federation. The first major opinion came in the Schindler case. The Court of Justice had to decide whether the United Kingdom could keep out advertisements and tickets of legal German lotteries. The ruling is a remarkable declaration of a state=s power to control all forms of gambling within its borders. The Court held that lotteries are “services” within the meaning of article 60 of the EEC Treaty. Article 59 prohibits a Member State from putting obstacles on cross-border services. But the Court declared that “given the peculiar nature of lotteries,” the U.K. could restrict or even prohibit lotteries from other EEC Member States, provided those restrictions were not discriminatory.
More recent cases have reaffirmed the right of Member States to decide for themselves how they will handle legal gambling. The Laara case extended Schindler. Finland had a law allowing only state-licensed games of chance for charities; criminal proceedings were brought against Mr. Laara for operating slot machines without a license. Because the case involved gaming devices, the Court had to decide whether Member States could exclude goods as well as services. More importantly for purposes of analyzing the holding as a precedent for Internet gambling, at the time Schindler was decided, the U.K. had forbidden all lotteries. Finland allowed slot machines, but allowed them only for a “public body” holding a license. Still, the Court focused on holdings from Schindler, drawing attention Ato the moral, religious and cultural considerations which attach to lotteries, like other forms of gambling, in all Member States. The Court held that Finland was not discriminating against non-Finnish citizens. It ended its Judgment with a ruling that the EC Treaty did “permit restrictions which are justified by virtue of a connection, even on an occasional basis, with the exercise of official authority or on grounds of public policy, public security or public health.” As for gambling:
the legislation at issue in the main proceedings responds to the concern to limit exploitation of the human passion for gambling, to avoid the risk of crime and fraud to which the activities concerned give rise and to authorise those activities only with a view to the collection of funds for charity or for other benevolent purposes.
The most recent gambling case before the Court of Justice, Zenatti, actually involved, in tiny part, Internet gambling. The question for the Court was whether the police prosecuting authority of Verona could prohibit Mr. Zenatti from acting as an intermediary in Italy for a U.K. company which accepted bets on sporting events. Zenatti sent the forms to the U.K. by fax and Internet. In Italy, licenses are issued only for accepting bets on races, regattas, ball games and similar contests and only for limited purposes. The Court held the Italian legislation, like the U.K. laws in Schindler, was designed to prevent gambling from being a source of private profit, as well as to avoid risks of crime and fraud and the damaging individual and social consequences of the incitement to spend money gambling. The Court, however, remanded the case back to the national court of Italy to verify whether, in fact, the limited issuing of gambling licenses was really to achieve those desirable social objectives, or whether gambling had been legalized merely to raise money for government. A Member State has the right to protect its citizens from the perceived evils of widespread gambling; it does not have the right to give itself a monopoly on legal gambling principally to make money.
The European Court of Justice understands the limited power of a federation, a lesson that has not sunk into the federal legislatures of the United States and Australia. These two federations, which are basically governments of governments, are trying to stop the entire political process while they consider what to do about Internet gambling. But, while federal governments have great power, states have almost always been the chief guardians of morality, including the control of gambling.
The law of nations holds that every state has an inherent Apolice power@: the right, perhaps even the obligation, to protect the health, safety and welfare of its citizens. The police power is most commonly connected with governmental action taken in emergency situations, especially where public health is endangered, as in an epidemic. But gambling, licensed or illegal, even legal lotteries, has always been held to fall within a state=s police power.
Federal governments, on the other hand, sometimes forget that they only have the power given them by the states that created them. The result is constant tension and endless disputes over who has the final say. The conflict is actually easily resolved, if the federal government remembers that the reason for it becoming involved in areas, like gambling, that are state issues is only to help enforce public policy decisions made by the states themselves.
This would not be a problem if everyone agreed on the solution for any particular political problem. But, as the fight over Internet gambling shows, a state may want to do something that is completely opposite the wishes of its federal government.
In Australia, a moratorium on state Internet gambling licenses failed by a tie vote in the Commonwealth Senate. It was never clearly explained exactly how the federal government could stretch its power over communications to overrule the states when it comes to the control of gambling.
The United States, the oldest constitutional federation in the world, may be the ultimate test. If states decide to allow limited gambling on the Internet, especially if the wagers do not cross state lines, what right does the federal government have to tell them ANo@?
As an extreme example: In the movie ACasino,@ one of the main characters is based on the real-life Frank ALefty@ Rosenthal. The movie is a fictionalized account of events that actually happened, as told in the nonfiction book Casino: Love and Honor in Las Vegas. Rosenthal ran the Stardust and three other casinos for the Chicago mob. When the Nevada Gaming Commission found that AFrank Rosenthal is a person whose licensing would reflect or tend to reflect discredit upon the State of Nevada,@ Rosenthal appealed.
In ruling against Rosenthal, the Nevada Supreme Court declared that when it comes to legal gambling, there are no federal civil rights!
We view gaming as a matter reserved to the states within the meaning of the Tenth Amendment to the United States Constitution. Within this context we find no room for federally protected constitutional rights. This distinctively state problem is to be governed, controlled and regulated by the state legislature and, to the extent the legislature decrees, by the Nevada Constitution. It is apparent that if we were to recognize federal protections of this wholly privileged state enterprise, necessary state control would be substantially diminished and federal intrusion invited.
There are few, if any, other areas of human affairs where a state=s highest appellate court would make such a statement. As a declaration of state=s rights it matches, or surpasses, any statement coming out of the era of the conflict over racial desegregation. Taking the Nevada Supreme Court at its word: To control gaming a state may discriminate on the basis of race. Federal constitutional prohibitions on discrimination would not apply. Even state constitutional rights do not apply, unless the State Legislature gives its blessing.
Other courts have said the Rosenthal opinion goes too far. But, the Nevada Supreme Court=s basic approach still holds true. Take this statement by the United States Supreme Court: “While lotteries have existed in this country since its founding, States have long viewed them as a hazard to their citizens and to the public interest … Gambling implicates no constitutionally protected right; rather, it falls into a category of ‘vice’ activity that could be, and frequently has been, banned altogether.”
State police power has three interesting, and unusual, attributes:
1) A state=s police power is virtually unlimited. It is the nature of government for the state to exercise power for the good of society as a whole, at the expense of individual rights. This is obvious in totalitarian and authoritarian regimes. But the same is true of democracies. Ever since Jean-Jacques Rousseau published his Social Contract in 1762, it has been generally accepted that a democratic state derives its sovereign power from the surrender by individuals of their natural liberties.
Constitutional and other legal safeguards protect citizens from improper use of the state=s power. But, when a state is faced with a threat to the health, safety and welfare of its citizens, particularly in an emergency, the police power prevails. The police power trumps constitutional and other legal rights; government has the legal right and power to do literally almost anything to anyone. For example: During an epidemic, government health officials will not wait for a jury trial before quarantining a house. At its most extreme, government can even take life without due process safeguards — the police do not conduct evidentiary hearings before shooting a Islamist terrorist firing a rifle.
Because gambling is treated as a police power issue, governments can act in ways that would be unthinkable in other commercial and social settings. “The police power of the State to suppress gambling is practically unrestrained.” “Because we are dealing with authorized gambling, the State may exercise greater control and use the police power in a more arbitrary manner.”
2) A state’s police power is often tied to morality. It used to be a given that government played an important role in upholding the moral standards of a community. The 1980s led to a pervasive belief in situational ethics, the notion that there are no absolute standards of right and wrong. By the 1990s, even anti-gambling crusaders rarely argue that gambling should be outlawed because it is immoral; they fear being viewed as right-wing religious fanatics. However, government=s police power is still aimed at morally suspect behavior, even if the justification given is more pragmatic than religious.
For example, the Florida Supreme Court upheld and rationalized that State Legislature=s ban on Sunday racing and betting as follows:[T]he legislature could reasonably find that the Sunday racing and betting restrictions serve several legitimate state purposes which promote the public health, safety, morals, and general welfare of the citizens of the state of Florida. The restrictions serve these legitimate purposes: 1) they encourage people to spend their weekend leisure time at non-gambling, presumably more healthy recreational pursuits and other activities; 2) closing such facilities on what might otherwise be the busiest day of the week could help curb the compulsive gambler syndrome; and 3) racing on less busy days means there is less opportunity for mischief that sometimes attends these events, and therefore a lighter burden on law enforcement authorities is created… The mere fact that the state of Florida has no uniform day of rest for other businesses does not preclude the legislature from having a day of rest and surcease from racing and pari-mutuel wagering.
Gambling has always been inextricably linked with the morality of a society, supporting the use of the police power. There may be few published appellate decisions on the legality of Internet gambling. But, the question of a state government’s ability, under its police power, to control the transmission of gambling information and wagers was resolved years ago.
The explosion of legal gambling in recent years has not weakened state government’s police power over gambling.[Plaintiffs] further urge that because of greater acceptance of gambling, the prohibition on the forwarding of money to be wagered on horse racing is an archaic and unreasonable exercise of the police power… It has long been settled that the police power extends to objectives in furtherance of the public peace, safety, morals, health and welfare, and the prohibition or regulation of betting on horse races falls within the power. Not only does the Legislature have the power to completely prohibit wagering on horse races, but it may also limit such wagering to persons physically present within the enclosure.
3) A state=s police power is a local issue. We are, after all, dealing with State police power. Larger government organizations like federations almost never become involved, unless the threat to society is beyond the control of local government.
During the formative stages of modern governments the protection of citizens= health and safety was best left to authorities on the scene. Given the technology existing then, and perhaps even today, the major threats of fire and disease were not controllable from distant national capitols.
Morality also was and still is decided primarily at the local level. In the American system states are encouraged to experiment. New Jersey=s experiment with using large land-based casinos as a tool of urban redevelopment failed, but Iowa=s refinement of the idea — putting the casinos on river boats — has been copied by half-a-dozen other states.
Gambling, both legal and illegal, has always been a state Apolice power@ issue; it is the duty of local and state governments to act to protect their citizens= health, safety and welfare. The federal government only becomes involved when it is required, as with Indian gaming. Under the Commerce Clause and the doctrine known as Aour Federalism,@ it is difficult to understand how the federal government could justify intervening if states choose to allow their citizens to make or accept Internet wagers from other states with identical policies. If no interstate commerce is involved, the federal government should have no role whatsoever. Putting it bluntly, where does the government of the United States have the Constitutional power to prevent Nevada from deciding that its public policy favors allowing its citizens to wager online with other individuals who are also physically located in Nevada?
Even when interstate commerce is involved, the federal government should not be interfering if legislatures in Nevada and Michigan, or Queensland, should decide that it is alright for their citizens to gambling online with operators licensed and operating in the other state.
VII. The Second Emerging Major Fight: States v. States.
The police power that all state governments have cuts two ways. It is well established under international law that a state=s police power within its own borders is virtually absolute. In addition a state may exercise power over its owns citizens while they are abroad, so long as there is no interference with the foreign country=s sovereignty. But states, even in the same federation, are not allowed to interfere in the internal affairs of other states. A government can often impose its morality on citizens of another government, but only when those foreigners are physically within it borders. A state cannot reach out and impose its view of what is moral and what is not on citizens of foreign states, who are residing in their own home states B but it can act to protect its own citizens.
As the cases from the European Court of Justice show, states have enormous power when it comes to creating restrictions on gambling within their borders. This includes the power to make it a crime for its own citizens to place bets, or for anyone to accept a bet from one of those citizens. Of course, a state would first have to enact a law which would expressly make using the Internet for gambling purposes illegal.
There is a strong presumption that a government has not reached out beyond its borders in enacting a statute. Any state or federal prohibition on Internet gambling or the transmission of gambling information via computers will be presumed to include only activities taking place with the borders of that particular government entity. For example, U.S. federal criminal statutes do not apply to activities taking place entirely outside of the territorial boundaries of the United States, unless the statute itself contains an extremely clear statement of congressional extraterritorial intent. This strong presumption against extraterritorial application of federal criminal statutes has been part of American law for decades. In 1922 the United States Supreme Court reaffirmed this doctrine: If Congress intends a criminal prohibition to apply outside the United States, it must “say so in the statute.” The only exception is the limited class of offenses committed directly against the federal government itself, such as the foreign theft of U.S. government property. Federal courts have consistently halted criminal proceedings when it was shown that the conduct was outside the United States and no statement of Congressional intent to intrude on the sovereignty of an independent nation could be found in the statute. For example, in United States v. Velasquez-Mercado, an indictment for a federal sex crime was dismissed, because the allegations were that the act occurred outside the U.S. and “the plain language of the statute” did not clearly indicate an extraterritorial reach. And in Ito v. United States, the Ninth Circuit Court of Appeals overturned a defendant’s conviction for bringing aliens into the United States where defendant’s conduct occurred outside U.S. territorial waters.
United States federal civil statutes carry the same heavy presumption that they are limited to acts committed within the territory of the United States. In the past, courts have been more willing to look beyond the language of the statute itself in civil cases to see if the legislative history reveals a clear Congressional extraterritorial intent. However, in 1991 the United States Supreme Court declared that the requirement that there be a clear statement of Congressional extraterritorial intent in the statute itself applies to civil as well as criminal laws. This reflects the growing recognition of international law and the impact American laws can have on the sovereignty of foreign nations. A strict drafting standard is necessary to avoid “unintended clashes between our laws and those of other nations which could result in international discord.”
There is an equally strong presumption against extraterritorial application of state statutes. State law is identical to federal law in presuming that a legislature does not intend for its enactments to apply to activities occurring outside of the state=s borders. Of course, in many cases states have expressly declared, by both statute and case law, that their laws do not apply extraterritorially, unless the statute in question contains an explicit statement of legislative intent.
Interestingly, one of the principal authors of ‘1.03 (“Territorial Applicability”) of the Model Penal Code, Herbert Wechsler, used gambling as an example of the need for legislatures to be particularly explicit if they intend a criminal statute will apply to extraterritorial conduct:
. . . if this state attempts to reach conduct outside the state or conduct involving the result which is going to occur in another jurisdiction where it would not be an offense, it is only where the legislative purpose plainly appears to reach conduct in this state, regardless of where the result is to occur, that the statute is to apply . . . If the state wants to make gambling criminal, for example, when the wager is to be placed in another state B which it may want to do B it may do so, so far as that is constitutional; but you read the statute carefully to see that the legislature really meant to do that and was not only dealing with wagers within the state.
Nevada has enacted a law which expressly makes it a crime in Nevada for a person located anywhere in the world to accept a wager over the Internet from a person physically located in Nevada. This statute meets the test for overcoming the presumption that a law will not have extraterritorial reach. However, it fails an additional constitutional test, at least to the extent it impacts legal Internet operators in the United States.
The Commerce Clause of the United States Constitution has been construed by the United States Supreme Court as barring states from interfering with interstate and international commerce under certain circumstances. “The Congress shall have Power … To regulate Commerce with foreign Nations, and among the several States …” This constitutional barrier to a state attempting to infringe on commerce from other states and foreign nations is known as the Dormant Commerce Clause. Dormant Commerce Clause jurisprudence forbids individual states from regulating within their borders commerce that is essentially national or international in character in such a way as to “burden” interstate or international commerce.
The dormant Commerce Clause issue arises when Congress has not spoken clearly on a particular issue. This is the case with Internet gambling. In their constitutional law treatise, Professor John Nowak and Professor Ronald Rotunda summarize this area of jurisprudence by stating Athat local legislation that thwarts the operation of the common market of the United States exceeds the permissible limits of the dormant Commerce Clause.@ Because some states might opt to legalize on-line gambling legislation in other states aimed at prohibiting on-line gambling undoubtedly would disrupt the common market of the United States and violate the dormant Commerce Clause.
Applying state law to Internet gambling risks the Internet activities being subjected to conflicting laws, imposed by different states with different priorities. A related concern is the risk that a tiny, conservative state or country, or even county or city, could effectively impose its standards of morality on the rest of the planet. This threat materialized in 1995, when CompuServe temporarily blocked access worldwide to over 200 Internet sites, after a single prosecutor in Munich, Germany, alleged that the sites contained sexual and other material that violated German law.
Nevada=s statute very likely violates the Dormant Commerce Clause, because it is so clearly designed to protect Nevada gaming interests at the expense of all out-of-state competitors. Other state prohibitions on Internet gambling would also be unconstitutional, if they unreasonably interfered with the sovereign powers of other states or nations. One author analyzed the Louisiana statute outlawing all Internet gambling and concluded that its language was so broad and vague that it could potentially prevent regular business transactions, like buying real estate. It would be impossible for the rest of the United States, let alone the rest of the world, conform their commercial activities to fit this new Louisiana law.
It is possible that a state, particularly one which completely prohibits Internet gambling, does have the police power to prosecute foreign operators for accepting bets over the Internet from residents of that state. The state government would have to first enact a carefully drafted statute and second be able to force any potential defendant to come physically to that state for trial. Under present law, it is almost impossible for a state to bring an overseas operator to trial. For the law of nations also holds that governments are almost never allowed to impose their criminal laws on foreign citizens in foreign States. It takes an extraordinary situation for a country, like the United States, to invade another country — say Panama — to arrest a citizen of that country, Manuel Noriega, for violating American drug laws. Extradition is difficult; extradition treaties may cover criminal fraud, but never illegal gambling.
Even with a friendly nation, a foreign power has to use political persuasion more than legal power. When the United States decided to go after the head of the biggest illegal telephone sports betting ring in history – Ron AThe Cigar@ Sacco, who made the mistake of going on CBS=s TV show A60 Minutes@ to brag about his bookie operation – the arrest was made in the Dominican Republic by police of that country. Sacco was charged with violating local gambling laws, because the Dominican Republic only allows local betting, and Sacco was taking phone bets from the Americans. He was then deported to the U.S. as an undesirable alien.
This idea of comity, that countries have to respect the criminal law, in particular, of other countries has been formalized in treaties. For example, there are a number of Mutual Legal Assistance Treaties requiring a country to exercise moderation and restraint before it attempts to unilaterally enforce its laws on foreign citizens in their home countries. Under the MLAT between the United States and the U.K., for example, the American government would be required to enter into consultations with the government of England before U.S. officials could subpoena the bank records of a U.K. Internet gambling operator. The MLAT calls for the offended government, in this case the U.S., to try civil means, non-criminal enforcement, before taking criminal-like action, such as seizing assets.
Put another way: A state which has made Internet gambling illegal can arrest its own local citizens who are making bets. But a foreign operator sitting in a foreign country and violating no law of that country probably cannot be touched. Even U.S. citizens may be safe, if they refuse to come voluntarily to the United States for trial: The U.S. does not allow true trials in absentia. Criminal defendants have the right to be present at trial under both the Sixth Amendment constitutional right to confront witnesses and the common law right to be present at trial, codified under Rule 43 of the Federal Rules of Criminal Procedure.
Knowing there is little chance of being actually convicted of a crime is little consolation for and officer or director of an international gaming company. Legitimate operators, especially individuals and companies with licenses to protect, face a serious problem. It is impossible for an Internet gaming operator to know if it is committing a crime where the bettor is, without checking the laws of every jurisdiction. Operators willing to take greater risks, or with less to lose, will take bets from everywhere, hoping that their first contact with foreign law enforcement will come in the form of a warning rather than an arrest warrant. More conservative companies and individuals will refuse to accept a wager from any jurisdiction that has not first been cleared by their lawyers.[Professor Rose can be reached at his Web Site: www.GamblingAndTheLaw.com]
I. NELSON ROSE
Professor I. Nelson Rose is an internationally known public speaker, writer and scholar and is recognized as one of the world=s leading authorities on gambling law. A 1979 graduate of Harvard Law School, he is a tenured full Professor at Whittier Law School in Costa Mesa, California, where he teaches one of the first law school classes on gaming law.
Professor Rose is the author of more than 300 books, articles, book chapters and columns. He is best known for his internationally syndicated column, “Gambling and the Law7,” and his landmark 1986 book by the same name. His most recent book is a collection of columns and analysis, co-authored with Bob Loeb, on Blackjack and the Law.
A consultant to governments and industry, Professor Rose has testified as an expert witness and acted as an advisor to major law firms, international corporations, licensed casinos, players, Indian tribes, and local, state and national governments, including Arizona, California, Florida, New Jersey, Texas, and the federal governments of Canada and the United States.
With the rising interest in gambling throughout the world, Professor Rose has spoken before such diverse groups as the National Conference of State Legislatures, Congress of State Lotteries of Europe, United States Conference of Mayors, and the National Academy of Sciences. He has presented scholarly papers on gambling in Nevada, New Jersey, Puerto Rico, England, Australia, Portugal, Argentina and the Czech Republic.