© Copyright 2008, all rights reserved worldwide. Gambling and the Law® is a registered trademark of Professor I Nelson Rose, www.GamblingAndTheLaw.com

What do you do with a law that nobody wanted and that never should have been enacted? The failure to implement the Unlawful Internet Gambling Enforcement Act (“UIGEA”) is a direct result of how this bill was written and how it became law. Drafted in such haste that it contains clauses that are incomprehensible, the bill was never subjected to the normal system of review. Now prosecutors ignore it; federal agencies are struggling, and failing, in their attempts to promulgate the regulations Congress mandated in the UIGEA; while Congress itself debates whether those same regulations should be eliminated.

It is important to remember that almost nobody in Congress has much interest in Internet gambling. When Bill Frist (R.-TN), rammed the UIGEA through in the final minutes before Congress broke for its Fall 2006 pre-election recess, the few members of either chamber that had spoken out publicly about online gaming were primarily opponents: Rep. Jim Leach (R.-IA), Rep. Bob Goodlatte (R.VA) and Sen. Jon Kyl (R.-AZ). A few others occasionally had made public comments about Internet gaming: Rep. Barney Frank (D.-MA), who believes government should not interfere with adults’ rights to gambling; Rep. Frank Wolf (R.-VA), who believes the exact opposite, that all gambling should be outlawed; Rep. John Conyers, Jr. (D-MI) & Sen. John Ensign (R.-NV) who favor a detailed study.

A name conspicuous by its absence is the architect of the UIGEA, Bill Frist. Although Majority Leader of the U.S. Senate at the time, before 2006 Frist had given no indication that he had any interest in Internet gambling.

But he did want to be elected President in 2008. He even gave up his safe Senate seat with the idea of spending the next two years doing nothing but campaigning for the Republican nomination. To get there, he needed a power base and powerful allies. Frist decided in the middle of 2006 that prohibiting Internet gambling would be a step toward getting both. Frist was urged to outlaw Internet gambling by Jim Leach, then a 30-year-veteran of Congress and the powerful chair of the House Foreign Relations Committee. Leach was also from Iowa, where the first presidential caucuses would be held.

Leach invited Frist to testify at a July 2006 hearing, consisting only of opponents of online gaming, held in Iowa. Frist announced that he would make prohibition one of his priorities, thus scoring points with both his political base, the religious far right, and with Leach.

Frist first tried to attach the prohibition to the defense appropriations bill. He was prevented from doing so by senators who had no interest in Internet gambling, but were concerned about putting issues as important as defense at risk by attaching a completely unrelated issue. Then-Senate Minority Leader Harry Reid (D.-NV) even announced, prematurely as it turned out, that Frist would not get away with attaching his pet prohibition to any other unrelated bill.

Reid says he is personally against Internet gaming. But coming from Nevada, he obviously listens to what landbased casinos want. And in April 2006, those casinos announced, through their lobbying arm, the American Gaming Association they had switched from pushing for prohibition to having Congress conduct a legitimate study.

Leach apparently continued to put pressure on Frist. By September 2006 it was clear that Republicans would lose at least the House of Representatives to the Democrats. So Leach apparently insisted on a ban going through before the November 2006 election.

Versions of the SAFE Port Act had separately passed both the House and Senate. Representatives from both bodies were assigned to a conference committee, with instructions on the areas they could negotiate in order to resolve minor differences. Internet gambling was not an issue.

But Frist attached the prohibition act to this bill. Sen. Frank Lautenberg (D.-NJ) stated afterward that he was not allowed to see the new language, or even to have someone simply explain to the conference committee what this amendment to the port securities bill would do.

Under the rules, the bill that comes out of a conference committee, called the report, cannot be amended. The Republicans had the votes to get anything through both chambers of Congress, and if the Democrats didn’t like it, they could always vote against port security, and be depicted as being weak on terrorism.

Pres. George W. Bush, would not, of course, veto the SAFE Port Act. He signed the bill into law on October 13, 2006.

Ironically, in what many consider the greatest upset of the 2006 mid-term elections, Jim Leach was defeated by his Democratic opponent. A poll by the Poker Players Alliance indicates Leach’s role in bringing prohibition back to American may have contributed to his narrow loss.

It is important to note that the federal Department of Justice (“DOJ”) did not write the UIGEA and has shown no desire to implement its terms. This may be in part because the bill has fundamental weaknesses, not the least of which is that no one had a chance to give any input, or even to look it over for typos. So, the UIGEA does not accomplish the DOJ’s main legislative goal: getting the Wire Act clarified to clearly cover all forms of Internet gambling, especially Internet casinos, lotteries and poker.

Instead, the new law creates new uncertainties. These include whether the UIGEA criminalizes gaming that was previously legal; to what extent state lotteries, Indian tribes and race books can take bets online; whether skill contests and no-purchase-necessary games are legal; whether a state can authorize Internet poker, limited to residents of that state; and even whether fantasy leagues can be created for casino games like blackjack and whether a fantasy team owner can be a player on his own team.

The UIGEA is often characterized as outlawing Internet gambling in the U.S. It actually does only two things. It creates a new crime: being a gambling business that accepts money for unlawful transactions. And it requires that new regulations be written by the Secretary of the Treasury and Governors of the Federal Reserve Board, in consultation with the Attorney General, meaning the Department of Justice (“DOJ”).

What it does not do is make it a crime to merely make bets on the Internet. It does not directly restrict players from sending or receiving money. It does not spell out what forms of gambling are “unlawful.”

The UIGEA scared every publicly traded Internet gambling company into dropping out of the U.S. market. Even privately owned web operators restructured, separating their operations, so American executives have nothing to do with the gaming side of the business.

The new crime has proved to have no teeth. I am unaware of it ever having been used against an Internet gaming operation. When the federal Department of Justice decided to go after the founders of Neteller, for example, it did not charge them with violating the UIGEA. Perhaps this was because the founders’ active involvement with Neteller had ended before the UIGEA became law. Or perhaps the DOJ knew that it would be opening a can of worms if it had to prove this new crime had been committed.

It is important to understand that there have actually been two separate legal developments impacting online gaming operators, players and suppliers. The UIGEA was the final factor scaring the publicly traded online gaming companies into stop taking bets from the U.S. This also made if difficult for players to find operators they could trust.

But both before and after the passage of the UIGEA, the U.S. Department of Justice has been waging a separate war of intimidation against all internet gambling. It was the DOJ, not the UIGEA, that scared credit card companies into blocking use of their cards for gaming, and forced Neteller from the market. The DOJ told some of the biggest search engines, including Microsoft, Google and Yahoo, to stop taking paid ads for online gaming. The DOJ sometimes even insisted on multi-million-dollar payments to drop criminal investigations it said it had against the search engine operators. The settlements gained some cash for the DOJ, which is underfunded in it war against online gaming, and, more importantly, they garnered widespread publicity for the position the DOJ has taken that all Internet gambling is illegal.

Although very few people have been prosecuted, the fear that they might be breaking the law has prevented large non-gaming companies from getting into the business, and scared off Nevada licensed operators. The entire industry has been hurt by the clouds of legal uncertainty. Even though I have found only one person in the history of North America who was ever charged with making a bet online, players are scared. I get more questions about whether it is legal to bet online than on any other subject. The DOJ and UIGEA can actually be seen as anti-consumer protection, because the large, publicly traded companies now won’t take bets from Americans. Some of my clients, privately owned, are still taking bets from the U.S. and are honest and competent. But the exit of sites like PartyPoker has created openings and opportunities for unscrupulous operators.

The problem for the DOJ is that the UIGEA does nothing to clarify whether a particular online wager is illegal. “Unlawful” in the UIGEA is defined as violating some other federal or state law. So, if the gambling is already illegal, this new crime adds very little. If, on the other hand, the gambling was legal before the UIGEA was enacted, it is still legal.

The new crime it creates is greatly limited. Only gambling businesses can be convicted, not players. Bizarrely, for a law designed to prevent money transfers, the financial institutions involved in those transfers, including banks, credit card companies and e-wallets, are expressly defined as not being gambling businesses and so cannot be convicted of this new crime. Because financial institutions are so expressly excluded from the definition of gambling business, it is doubtful that a bank could even be convicted on a theory of aiding and abetting, unless it actually ran the gaming website.1

Although a felony, the new crime turns out to be much less than it seems. I have argued2 that the Act requires that the gambling already be illegal under some other federal or state law. There has been some discussion that Prohibition 2.0 greatly expanded the reach of anti-gambling laws, to cover overseas operators who were not violating any American law.3 The comments accompanying the proposed regulations make it clear that the federal agencies, including, most importantly, the DOJ, agree with my analysis. Here’s their discussion of whether the government should draw up a list of websites conducting illegal gambling:

The Act does not comprehensively or clearly define which activities are lawful and which are unlawful, but rather relies on underlying substantive law. In order to compile a list of businesses engaged in unlawful Internet gambling under the Act, the Agencies would have to formally interpret the various Federal and State gambling laws in order to determine whether the activities of each business that appears to conduct some type of gambling-related function are unlawful under those statutes.

In the most important case construing the UIGEA, the U.S. Third Circuit Court of Appeals emphasized that this statute does not change substantive law. “It bears repeating the [UIGEA] itself does not make any gambling activity illegal.”4

One reason prosecutors have ignored the UIGEA is that a conviction would require proving beyond a reasonable multiple layers of predicate crimes. A violation of the UIGEA requires an unlawful gambling act. This requires violation of some federal or state crime. If the federal crime is RICO5 then there must be a violation of some other enumerated federal or state crime, such as a felony gambling violation. But most state anti-gambling laws make violations only a misdemeanor. Even when the crime is a felony, there are myriad defenses, including the strong presumption in the law that a statute does not reach beyond its borders unless is expressly says so.

The regulations have also so far been mere threats. The federal agencies – Treasury, the Federal Reserve Board, with input from the DOJ – did finally issue proposed regulations, four months late. These were immediately subjected to a barrage of criticism. By the beginning of 2008, 217 written comments had been submitted, almost all of them negative.

The regulations were supposed to be promulgated by mid-June. The general public now had until December 12 to make comments. The agencies were then to make changes in the proposed regulations. The final versions were then to be published, supposedly giving everyone six months to set up their procedures.

This did not happen.

It took ten months just to draw up the proposed regulations. The delay was caused not only by having to enforce an unenforceable law, requiring all payment processors to identify and block all unlawful gambling transactions. The other problem is that the three agencies have conflicting goals. The DOJ wants all internet gambling outlawed; Treasury, including the IRS, does not really want it outlawed, it wants to tax it; and Ben S. Bernanke, Chair of the Federal Reserve Board, expressly stated that he opposes any new regulations that would put U.S. banks at a competitive disadvantage with their foreign competitors.

It is apparent from the proposed regulations that Treasury and the Board won most of the fights.

The proposed regulations put the burden entirely on payment processors to come up with procedures for identifying and blocking restricted money transfers. But this can’t be done in six months. In fact, it can’t be done at all.

The problem is defining “unlawful Internet gambling.” Even the DOJ admits that some forms of online wagers are perfectly legal and that operators who might be violating laws with one transaction would be completely legal with another.

For example, I can sit in my home in Encino, and, using my credit card, make bets by computer with a California licensed racebook. The system is called Advanced Deposit Wagering (“ADW”), since I have to fund my legal bookmaking account in advance. Congress, in December 2000, amended the Interstate Horseracing Act (“IHA”) to make it legal for ADW on horse races, even out-of-state races, so long as the bets and races were legal under the state laws where they take place.

And here’s an example of why it is impossible to know what is an unlawful gambling transactions. The DOJ agrees that I can make ADW bets with a California licensed bookmaker on races held here or in any of the 20 other states that have legalized ADW. But everyone else who has read the IHA, including state racing commissions and the World Trade Organization, believe it is perfectly legal for me to set up my ADW with a licensed bookie in another state. So, how is a credit card processor supposed to handle my request to fund an ADW in Oregon?

Everyone agrees that I could not make online bets on horseraces if I were in Utah. So payment processors would have to have cyber-border software to ensure that I don’t try to make a bet with my laptop from Salt Lake City. How else will a credit card company or my California bank know not to transfer the money even to a California licensed horsebook?

Of course, it is only operators who want to block bettors from some jurisdictions, not credit card companies, who have cyber-border software. Credit card companies do not even know what country the cardholder is located when he or she makes a purchase by phone or computer.

There is, of course, something bizarre about requiring financial institutions to identify and block only unlawful Internet gambling transactions. There is no similar law dealing with importing cocaine or selling child pornography. But, it was clear from the day Prohibition 2.0 passed that there would be loopholes for banks.

Banks do not now read the face of paper checks. Requiring all banks to read 40 billion paper checks each year would cost the industry billions of dollars. Banks lobbied Sen. Frist. He added a provision to the Act giving Treasury and the Board the sole power to decide when it would not be “reasonably practical” to i.d. and block transactions. The DOJ was given no say. So, Treasury and the Board exempted almost all paper checks.

In fact, almost all financial transactions are exempt. The agencies were worried about trying to regulate foreign companies. So, it is clear that the regulations apply only to U.S. payment processors. There are some requirements that American financial institutions make inquiries of their foreign partners. But those restrictions will be easy to get around, since an overseas automated clearing house, like its American counterpart, has no way of knowing where the retail customer is located in an online transaction nor what specific good or service was purchased with transmitted funds.

Significantly, almost everyone involved in the transfer of money is exempt from the requirements of identifying and blocking “restricted transactions.” Players are always exempt, whether they are sending money by check or wire, using their credit or debit cards, or getting paid. But all financial intermediaries are also exempt.

The federal agencies understood that it would be impossible for the institutions that transfer trillions of dollars a day around the globe to identify any single transaction. The systems work because the intermediaries know what they need to know and no more: that the bank wiring the funds actually has those funds and the bank requesting the funds is who it says it is. Trying to get any more information, such as whether the wire is for funds to be used for gambling, would cause the entire system to slow down to the point that it would collapse.

Similar thinking went into the other exemptions. The regulations “exempt all participants in the Automated clearing house systems, check collection systems, and wire transfer systems, except for the participant that possesses the customer relationship with the Internet gambling business.” So, only if an online gaming company is the customer of an American bank will the bank have to ask questions. U.S. financial institutions are supposed to ask foreign payment service providers if the cross-border funds are going to an illegal gambling operator. But what sort of answer do you think they’ll get?

More importantly, the regulations expressly recognize that there is no way the federal government can tell in advance whether a particular transaction involves unlawful gambling. More than once, the federal agencies expressly turned down the idea of coming up with a list of web operators operating illegal gambling. Banks, being basically conservative, wanted the list so that they would simply not do business with those companies. But even the DOJ acknowledges, as it has to, that not every online wager is illegal. The regulations implicitly acknowledge that the role of the federal government is to encourage, not block or unnecessarily burden, legal transactions

So the regulations put the burden on the credit card companies, banks, e-wallets and other payment processors to come up with their own procedures for checking on whether money is being transferred for unlawful Internet gambling. And there is no way to do that.

The regulators admitted that it was beyond their capacity to determine whether any particular transaction was “unlawful gambling.” But the proposed regulations require bank employees to do exactly that. This was naturally met with derision.

In “The Wisdom of Crowds,” the author, James Surowiecki, shows that many times, in the words of the subtitle, “the Many Are Smarter Than the Few.” If we needed any more proof, we need only look at the comments submitted in response to the regulations proposed for the UIGEA.

The UIGEA was basically the work of one man, then-U.S. Senate Majority Leader Bill Frist (R.-TN). Compare that with the 217 comments submitted by very smart and motivated men and women, some with massive staffs, representing every individual and business that would be affected by regulations proposed for implementing the UIGEA.

The UIGEA required the Treasury Department and the Federal Reserve Board to write these regulations, with input from the Department of Justice (DOJ). These Agencies were supposed to come up with rules requiring financial institutions to identify and block “unlawful Internet gambling transactions.” The proposed regs. took months longer than the UIGEA allowed, but the Agencies still could not come up with a workable way to accomplish this impossible task.

Commentators had a little over two months to send in their written responses. The result is a devastating indictment of the proposed regs. and of the UIGEA itself.

The Agencies said, when they issued these proposed rules, that they could not give any guidance for determining whether an online bet is illegal. They refused to issue a list of sites that banks should block, recognizing that even an operator who is in the business of illegal gambling will sometimes have transactions that are perfectly legal. They said that it would take a detailed examination of federal, state and even tribal laws to determine whether a particular transaction involved unlawful Internet gambling, which was beyond their capacity.

Many commentators pointed out the inherent contradiction in this position: If the federal government does not have the resources to determine whether a particular transaction should be identified and blocked, how are banks and credit card companies supposed to do that?

A great example is the UIGEA’s own exemption of fantasy sports. By definition, fantasy sports leagues are not gambling under this statute, if certain requirements are met. One is that a fantasy team cannot consist of 100% of the members of a real-world sports team.

When a bank wires money it doesn’t even know what businesses the parties are in. It certainly is not in a position to check every fantasy team against the roster of every real-world team.

The British Bankers’ Association pointed out that the technology does not exist to do what these Agencies want. And if it did, banks would be opening themselves to lawsuits for transactions that should not have been blocked.

Twenty years ago, Treasury declared casinos to be “financial institutions” under a different statute, the Bank Secrecy Act. Regulations promulgated under that misnamed Act require the filing of Cash Transaction Reports and Suspicious Transaction Reports. So far, the proposed regs. do not include casinos as financial institutions under the UIGEA. This is fortunate. As the American Bankers Association noted, unlike the Bank Secrecy Act, which only requires reporting of what might be illegal activity, the UIGEA requires financial institutions to actually determine guilt or innocence. Banks have to act as the police, prosecutors, judges and executing marshals.

Not the usual job of banks. As an understatement, or perhaps sarcasm, one commentator wrote, “We believe a professionally trained officer of an agency of the U.S. Government would be better able than an employee of a financial institution to determine if a business conducting a gambling-related function is an unlawful Internet gambling business.”

Comments from gaming companies noted that, since it is nearly impossible to know when a gambling transaction might be violating some obscure law, banks will simply block all gaming and wagering transactions, even ones that are perfectly legal and should be let through. Executives of horse and dog racing organizations, including Patty Jones of the Nevada Pari-Mutuel Association, pointed out that many remote pari-mutuel wagering transactions are expressly allowed under federal and state laws. Ernie Passailaigue, President of the North American Association of State and Provincial Lotteries, made the same point about state lotteries.

Skill game representatives asked the Agencies to establish a certification system. Harlan W. Goodson, former Director of California’s Division of Gambling Control, said that the regulations should at least clarify that the definition of “unlawful Internet gambling” does not include games of skill.

The Poker Players Alliance urged its members to write in. Some may have gotten a little over-zealous: A Poker Playing Citizen wrote the Agencies, “The Third Reich had nothing on you guys.”

But the PPA itself launched a creative attack. Since the DOJ thinks that all Internet gaming is illegal, then any commercial promotion of any Internet gaming also would violate federal law. This creates a chilling effect on commercial speech, in violation of the First Amendment.

Edward J. Leyden, President of the Interactive Media Gaming and Entertainment Association (iMEGA), said it would have the same effect on “innovation surrounding the internet.”

Visa U.S.A.’s lawyer noted that every bank would be required to do due diligence in setting up a merchant account, and there had to be procedures like the code number 7995 now given to all Internet gambling. But either one, due diligence or a new code number, would be enough if the merchant was honest. And neither one would work if an operator of illegal gambling lied. (I worked on a case where an illegal bookie told Visa he was selling books.)

The wisdom of crowds, or at least of high-priced lawyers working for large financial institutions, is finally shown by the commentators’ showing the unintended, and ridiculous, reach of the UIGEA and proposed regs. Not only would credit cards and wired funds be covered, but so would stored value cards and even gift cards.

On April 2, 2008, Congressman Barney Frank (D.-MA) chaired a hearing of the House Financial Services Committee titled: “Proposed UIGEA Regulations: Burden Without Benefit?” Witness after witness joined Frank and his co-sponsor, Rep. Ron Paul (R.-TX), in blasting the proposed regs as unworkable. They proposed a bill, the Internet Gambling Regulation and Enforcement Act, which would kill the proposed regs and require the federal regulators to devise a way of knowing whether a transaction was illegal gambling. He and Paul soon proposed another bill, the Payment Systems Protection Act6, which was designed to cure the major weakness of the UIGEA, by requiring the federal agencies to define exactly what was unlawful Internet gambling.

It looked like this second Frank-Paul bill would pass, because it gained powerful allies: financial institutions. Banks were concerned that they might be fined if they transmitted funds that the government later decided they should have blocked. And banks called the proposed regs “an unfunded mandate,” meaning the federal government was requiring them to do something, which will cost billions of dollars, without being reimbursed.

In a strange twist, the Frank-Paul bill became a political football in this most political of years. Despite the fact that no one had even read the original UIGEA, the Republican leadership decided that stopping Internet gambling could be made into a motherhood and apple pie issue – just think of all those foreigners coming into Americans’ homes to exploit little children. Because the bill was a change in the law, it required a majority to go to the floor of the House. It therefore died on June 25, 2008, an exact tie, party-line vote, 32 to 32.

But advocates, like the Poker Players Alliance, did not give up. They continued to educate members of Congress about what the UIGEA and its proposed regs would do.

In a very sophisticated maneuver, the PPA got its members to flood representatives’ offices with angry phone calls and emails, convincing four of the Republicans to send a letter to the agencies. Having voted against the Frank-Paul bill, to stop the proposed regs and define “unlawful Internet gambling,” they now asked the agencies… to stop the proposed regs and define “unlawful Internet gambling.”

So, will the proposed regs become final? The bureaucrats in Treasury and the Fed. Reserve know how to count votes. The Agencies know that with a new President and Congress, the UIGEA itself could be undone, let alone its regulations.

The future depends on which party wins in November.

If the Republicans win, the regs will be written just about as is. The PPA couldn’t even get anti-Internet gambling language permanently removed from the party’s platform.

But if the Democrats win the White House, they will keep control of the House, so Frank will remain Chair of his Committee and will again try to kill the proposed regs. Harry Reid (D.-NV) will remain Majority Leader and push for what the Nevada casinos want: The UIGEA and its regs to be amended to allow licensed casinos to take bets online from any state that does not object.

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© Copyright 2008. Professor I Nelson Rose is recognized as one of the world’s leading authorities on gambling law and is a consultant and expert witness for governments and industry. His latest books, Internet Gaming Law and Gaming Law: Cases and Materials, are available through his website, www.GamblingAndTheLaw.com.