#125 © Copyright 2006, all rights reserved worldwide. Gambling and the Law® is a registered trademark of Professor I Nelson Rose, Whittier Law School, Costa Mesa, CA

Late at night on September 29, 2006, with the members of Congress aching to go home to campaign for reelection, Sen. Bill Frist (R.-TN), then the majority leader of the U.S. Senate, rammed through the Unlawful Internet Gambling Enforcement Act of 2006.

Frist’s term in the Senate was almost up. He planned to spend the next two years running for the Republican nomination for President.

Frist spoke of his opposition to Internet gaming in a speech in Iowa, home of the first presidential caucuses in 2008. He followed this with a speech on the Senate floor, declaring that outlawing it was a legislative priority.

Because no one else in the Senate, except Jon Kyl (R.-AZ), cares either way about Internet gambling, Frist had a problem. He couldn’t get a prohibition bill to the floor for a vote.

So, Frist added his Internet gambling Act to a completely unrelated bill dealing with port security. In a cynical move, he risked the safety of the U.S. in its war against the Islamist terrorists to show his right-wing religious base that he opposes gambling.

The House of Representatives had already passed the port bill. Frist hand-picked a Senate-House Conference Committee to add his pet Internet gaming bill as an amendment.

According to Sen. Frank R. Lautenberg (D-NJ), Frist refused to let any Democrat on the Senate-House Conference Committee see the final language of the bill. Conference reports cannot be amended, so members of Congress could only vote against this ban on Internet gaming by voting against the SAFE Port Act.

As you can imagine, Frist’s Unlawful Internet Gambling Enforcement Act of 2006 (which I call “Prohibition 2.0”), rushed through without having been read, is somewhat of a mess.

It starts with the findings. Prohibition 2.0 uses a recommendation from the discredited National Gambling Impact Study Commission, whose chair was the right-wing, incompetent, Kay Coles James.

Prohibition 2.0 tries to expand the reach of federal law to go after Internet poker. “Bet or wager” includes risking something of value on the outcome of a contest, sports event “or a game subject to chance.”

But, this new statute only applies to Internet gambling that is “unlawful,” defined as violating some other federal or state law. Prohibition 2.0’s major weakness is that it does not expand the reach of the Wire Act, the main federal statute the Department of Justice uses against Internet gambling.

Although the DOJ has taken the position that the Wire Act covers all forms of gambling, courts have ruled that it is limited to bets on sports events and races. State anti-gambling statutes also have weaknesses, including the presumption that they do not apply if part of the activity takes place overseas. So, it is still difficult to find a federal, state or tribal law that clearly makes a specific Internet bet illegal.

Although Prohibition 2.0 tries to outlaw poker and casinos, it does not touch Internet horseracing.

And, while Frist may hate gambling, fantasy leagues are somehow different. Prohibition 2.0 places no limits on the size of the fees charged. The main restriction is that a fantasy team has to be a fantasy: It cannot be an actual sports team. Statistics must be derived from more than one play, more than one player, and more than one real-world event.

Intrastate gambling is also O.K. States like Nevada can do whatever they want, so long as the bets don’t cross a state line and state law and regulations include blocking access to minors.

Tribes were given the same rights, with the same restrictions, so long as it is authorized by the Indian Gaming Regulatory Act. Tribes can operate bingo games linking bingo halls on reservations. 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.

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 dogracing. Congress also decreed that tribes can operate games that link reservations, even across state lines, but states cannot: state lotteries are not expressly exempt, although they are probably O.K., since they do not violate any state or federal law.

Prohibition 2.0 creates one new felony: No one engaged in the business of betting or wagering may knowingly accept any money transfers in any way from a person participating in unlawful Internet gambling. This includes credit cards, electronic fund transfers, and even paper checks. But it is still limited to Internet gambling businesses, not mere players.

Payment processors, like Neteller, cannot be guilty of this new crime, because they are not in the business of gambling. The definitions of Prohibition 2.0 are so restricted to actual gaming companies that payment processors might not be liable for aiding and abetting.

Payment processors will be subject to new regulations, although it is unclear whether the U.S. has to the power to regulate foreign financial institutions. Federal regulators have 270 days from October 13, 2006, the date President Bush signed Prohibtion 2.0 into law, to come up with regulations to identify and block money transactions to gambling sites.

The regs will require everyone connected with money transfers to i.d. and block all restricted transactions. So all payment processors are suppose to have systems in place to prevent money from going to operators of illegal Internet gambling.

The first step will undoubtedly be to take the credit card merchant code for online gambling, 7995, and expand it to all electronic fund transfers. The federal government will order banks and all others involved with eft’s to cease sending money to any Internet operator who has a 7995 merchant code.

The Act allows federal regulators to exempt transactions where it would be impractical to require identifying and blocking. This obviously 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.

The great unknown is how far into the Internet commerce stream federal regulators are willing to go. The Act requires institutions like the Bank of America and Neteller to i.d. and block transactions to unlawful gambling sites, whatever they are. But, while the Bank of America will comply, foreign payment processors might not, because it is not subject to U.S. regulations.

Will federal regulators then prohibit U.S. banks from sending funds to companies like Neteller? And would they then prohibit U.S. banks from sending funds to an overseas bank, which forwards the money to Neteller?

The Act provides for limited civil remedies against Internet service providers. ISPs can be ordered to remove sites and block hyperlinks to sites that are transmitting money to unlawful gambling sites. An ISP is under no obligation to monitor its patrons. But the ISP can be forced to appear at a hearing to be ordered to sever its links.

The statute is limited to sites that the ISP hosts. This would limit the reach of this statute to payment processors, affiliates and search engines that are housed on that particular ISP. But like foreign operators and payment processors, foreign ISPs are difficult to serve and not necessarily subject to federal court injunctions.

A danger exists for affiliates. 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, as an accomplice. The federal government could also charge the affiliate with conspiracy to violate this new Act.

The other danger lies with search engines. Although California-based Google does not take paid ads, punching in “sports bet” brings ups many links to real-money sites.

Lastly, the Act requests, but does not require, the executive branch to try and get other countries to help enforce this new law.

As if that were going to happen.

END
© Copyright 2006. Professor I Nelson Rose is recognized as one of the world’s leading experts on gambling law. His latest books, Gaming Law: Cases and Materials and Internet Gaming Law, are available through his website, www.GamblingAndTheLaw.com.