Loopholes

#128 © Copyright 2006, all rights reserved worldwide. Gambling and the Law® is a registered trademark of Professor I Nelson Rose, www.GamblingAndTheLaw.com

Even though I have called the Unlawful Internet Gambling Enforcement Act “Prohibition 2.0,” it is not a complete prohibition. Fortunately for the online gaming industry and its patrons, the bill’s champion, then Majority Leader and now failed presidential candidate Bill Frist (R.-TN), was as incompetent as he was arrogant.

First are forms of gaming which are not gambling. Although the Frist bill attempts to expand “bet or wager” to include any “game subject to chance,” Prohibition 2.0 applies only to gambling that is illegal under some other federal or state law. So, operators all over the world are developing skill contests and no-purchase necessary games, which are not gambling in most states.

Then there are the intentional exemptions. One provision requires federal regulators to make new rules forcing all financial institutions and payment processors to identify and block unlawful Internet gambling transactions – but only if such rules are “reasonably practical.” Frist did not want to anger America’s banks by requiring them to read the face of billions of paper checks.

Other carve-outs were purposely left vague. The Department of Justice has taken the position, in defending the U.S. against Antigua in the World Trade Organization, that the Interstate Horseracing Act (“IHA”) does not authorize interstate wagers. The horseracing industry obviously disagrees. Rather than settle the issue, Prohibition 2.0 simply exempts “a bet or wager that does not violate any provision of the” IHA, without saying what those are.

The most interesting exceptions to the new Prohibition 2.0 are due to its conservative Republic authors knowing nothing about gambling or the creativity of the gaming industry.

Take the exemption for fantasy sports. A bet or wager is not a bet or wager, if the money is for

“participation in any fantasy or simulation sports game or educational game or contest in which (if the game or contest involves a team or teams) no fantasy or simulation sports team is based on the current membership of an actual team that is a member of an amateur or professional sports organization.”

There are other requirements. But notice the loopholes. It doesn’t have to be about sports, it doesn’t have to involve a team, and it can be based on the current membership of an actual, non-sports team.

Does this mean fantasy poker is legal?

Can you be a member of your own fantasy team?

There is another specific exception for gaming conducted pursuant to the Indian Gaming Regulatory Act (“IGRA”). Unfortunately, nobody knows for sure what that exception is. But even the most conservative reading allows tribes to operate online games if the participants are physically on a reservation and the game meets all the requirements of IGRA.

The legislative history to IGRA expressly calls for technology to be used to expand participation in Class II games. Tribes began operating high-stakes bingo games across state lines even before IGRA was enacted. I gave a legal opinion in 1988 that the multi-state “Million Dollar Bingo” could be played wherever Indian bingo was allowed. Under IGRA, tribes have used cross-border linked bingo machines for more than a decade.

But Class II also includes poker. So, at the very least, tribes could set up a national Internet poker site with players using terminals on Indian land.

States have been given more leeway than tribes. I believe the new law allows a state to legalize almost any form of Internet gambling, except sports betting, so long as it is limited to players who are physically in that state. It doesn’t matter where the server is.

The federal Department of Justice (“DOJ”) might argue that as long as a wire crosses even temporarily into another state, the gambling could still violate another law, the Wire Act. But the Wire Act was designed to help the states enforce their public policies. If a state says it wants to allow, and regulate and tax, bets by its residents with its own operators, why would the federal government care?

In addition, the Wire Act contains an interesting provision that seems to expressly authorize interstate and even international wagers, so long as the bet is legal on both ends. The DOJ concedes that wagering information can be sent across state lines, but denies that any actual wagers can be transmitted.

State lotteries can use this and similar loopholes in Prohibition 2.0 to continue to run multi-state games. A state lottery only sells tickets to people who are within its borders. It then partners with other lotteries and simply sends accounting information via computers, with no wagers ever having to cross a state line.

The DOJ has seemed to concede that horseracing can do the same thing, under the IHA. The official position of the U.S. in the W.T.O. dispute is that residents of one state can bet on races taking place in other states, so long as the bet is made with an in-state horse book.

The DOJ position is wrong, but not frivolous. The House Report which accompanied the Wire Act when it was passed in 1961 shows at least part of Congress did intend that only information, but not actual wagers, could be sent across state lines. But for 45 years, almost no one has read the law that way. Not only are wagers on horseraces sent to other states, but so are bets on dog races, which do not fall under the Interstate Horseracing Act. The New York State Legislature enacted a law decades ago allowing players to make bets by phone from other states, under a system called Advanced Deposit Wagering.

This leads to an interesting question: If states like Nevada, New Jersey and California legalize intra-state Internet poker, do they even need a new law to link up for multi-state Internet poker?

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