Internet gambling

Background
Before the 1990s, individuals who wanted to place a casino- or sports-type bet in the United States basically had two choices: they could travel to a legitimate brick-and-mortar gaming establishment or place an illegal wager through a bookmaker. However, with the emergence of the Internet in the mid-1990s, a new form of gambling appeared &mdash; online gaming casinos and sports wagering. Internet gambling can take place on any electronic device that offers Internet access anywhere on the globe. The global legal framework for Internet gambling is a complicated mix of laws and regulations. In the United States, both federal and state statutes apply.

State Regulation
Gambling is generally regulated at the state level, with each state determining whether individuals can gamble within its borders and whether gaming businesses can legally operate there. Five states (Illinois, Louisiana, Nevada, Oregon, and South Dakota) have enacted laws that specifically prohibit certain aspects of Internet gambling, but laws in other states that prohibit some types of gambling activities generally apply to Internet gaming as well.

Federal Regulation
Although gambling regulation is generally left to the states, the federal government has the authority, under the Commerce Clause of the Constitution, to regulate gambling activity that affects interstate commerce. Internet gambling falls into this category, as bets are generally placed at a personal computer in one state or country and received at a server in another state or country.

Federal law generally supports state laws and regulations to ensure that interstate and foreign commerce do not circumvent them.

The Wire Act
The Wire Act, which prohibits gambling businesses from using interstate or international telecommunications wires to knowingly transmit or receive bets, is the main federal statute used to prosecute such activity. Thus, if an Internet gaming website operating in any country (including the United States) receives a bet transmitted by an individual located in the United States, the operator has violated the Wire Act. For this reason, foreign entities offering gambling to U.S. citizens through the Internet would be subject to the Wire Act. Although some Internet gambling businesses, including foreign entities, have been successfully prosecuted under the Wire Act, courts do not agree on the applicability of certain sections of the statute.

Other Federal Statutes
The Travel Act and the Illegal Gambling Business Act have also been used to prosecute gambling establishments (often located offshore) that accept bets over the telephone. The Travel Act provides criminal penalties for anyone who undertakes interstate or foreign commerce with the intent to distribute the proceeds of any unlawful activity. The Illegal Gambling Business Act makes it a crime to operate an “illegal gambling business.”

The Travel Act imposes criminal penalties for those who utilize interstate or foreign commerce with the intent to distribute the proceeds of any unlawful activity. Under the Travel Act, unlawful activity includes any business enterprise involving gambling in violation of the laws of the state where the gambling takes place or of the United States. Thus, gambling over the Internet generally would violate the Travel Act because an interstate facility, the Internet, is used to conduct gambling.

The Illegal Gambling Business Act makes it a crime to operate an illegal gambling business, which is defined as any gambling business that meets three conditions:

Operating a gambling website for over 30 days in a state under the conditions described above would violate this act. A Web site could easily meet these conditions, including the requirement that at least five individuals be involved in its operation. The five people do not need to be directly involved in the gambling but must only be considered “necessary and helpful” to the operation. Computer operators, computer maintenance crews, accountants, and owners could all be included as “necessary and helpful” in the operation of an Internet gambling Web site.
 * it violates a law of the state where it takes place,
 * it involves at least five people (not even the same five people) at all times during a 30-day period, and
 * it operates for the most part continuously for longer than 30 days or takes in gross revenues of $2,000 in a single day.

Like the Wire Act, the Illegal Gambling Business Act applies only to gambling businesses, not individual gamblers. The Illegal Gambling Business Act does not require that the casino operators be convicted in state court, but the gambling activity must violate state law. The proof requirements associated with the Illegal Gambling Business Act are minimal; the government must prove only that the business has met the three conditions. The 30-day requirement is satisfied if there is a “repeated pattern of gambling activity.”

Two other statutes have some applicability to Internet gambling &mdash; the Indian Gaming Regulatory Act (IGRA) and the Interstate Horseracing Act (IHA). Certain types of gaming on Indian reservations are permitted under IGRA, with the regulatory jurisdiction determining the type of gambling that is permissible. One case has addressed some of the issues and raised the question of whether Internet gambling takes place on tribal lands when bettors who are not on tribal lands use their home computers to access Internet lotteries via computer servers that are. The case involved the question of whether the state of Missouri could prevent a Native American tribe in Idaho from accepting money from Missouri residents via a lottery Internet site. After dismissals, removals, and appeals, the case was eventually settled, but it is unclear whether the court resolved the issue of whether Internet gambling takes place on tribal lands when the website is located on those lands.

Pari-mutuel wagering on state-licensed horse races takes place over the Internet in a number of states. Federal and state laws govern this activity. In 1978, Congress passed the IHA to regulate interstate commerce with respect to pari-mutuel wagering on horse races. The IHA provides that no person may accept an interstate off-track wager without the consent of the appropriate host racing association, the host racing commission, the off-track racing commission, and nearby race tracks. Pari-mutuel wagers fall into this category if they are legal in both of the states, are made by telephone or other electronic device, and are accepted by an off-track betting system in any state, as well as the combination of any pari-mutuel wagering interstate pools. The language of the statute appears to allow the electronic transmission of interstate bets as long as the appropriate consent is obtained.

Wagering on horses over the Internet is generally done using a closed-loop, subscriber-based system designed to limit access. In March 2000, DOJ officials testified that it was a violation of the Wire Act for an entity to offer bets on horse races over the Internet. The IHA was amended in December 2000 to explicitly expand interstate off-track wagers to include wagers through the telephone or other electronic media.

International Regulation
Foreign countries and jurisdictions have taken a variety of approaches to regulating on-line gaming, including legalizing some forms, seeking effective regulatory approaches, and prohibiting it entirely. Internet gambling has been legalized in over 50 countries and jurisdictions, mostly in Europe, the Caribbean, and the Australia/Pacific region. A few countries and jurisdictions specifically have prohibited it.

Regulation of Online Payments
Many major credit card industry participants have attempted to restrict the use of credit cards for Internet gambling but have faced challenges in their efforts to do so. Full-service credit card companies that issue their own cards and license merchants to accept cards have implemented policies prohibiting customers from using their cards to pay for Internet gambling transactions and will not license Internet gambling sites. Credit card associations have instituted a different approach &mdash; a transaction coding system that enables association members, at their discretion, to deny authorization of properly coded Internet gambling transactions.

Many major U.S. issuing banks that are members of these associations have chosen to block such transactions because of concerns over Internet gambling’s unclear legal status and the high level of credit risk associated with the industry. These efforts are hampered, however, by Internet gambling sites that attempt to disguise their transactions to keep from being blocked by the issuing banks. In addition, some association members &mdash; primarily those in foreign jurisdictions where Internet gambling may be legal &mdash; continue to acquire Internet gambling sites as merchants. Further, efforts to restrict the use of credit cards for Internet gambling can be circumvented by cardholders’ use of on-line payment providers to pay for gambling activities. With such intermediaries, issuing banks cannot necessarily determine the nature of the activity being charged.

Law Enforcement Concerns
Law enforcement representatives claim that the anonymity and jurisdictional issues characteristic of Internet gambling make on-line gaming a potentially powerful tool for money launderers. The believe that several characteristics of Internet gambling make it particularly vulnerable to money laundering, including the volume, speed, and international reach of Internet transactions and the offshore locations of most Internet gambling sites. However, regulatory agencies and officials from the credit card and gaming industries do not view Internet gambling as being particularly susceptible to money laundering, especially when credit cards, which create a transaction record and are subject to relatively low transaction limits, are used for payment. Likewise, credit card and gaming industry officials do not believe Internet gambling posed any particular risks in terms of money laundering.

Gaming industry officials do not believe that Internet gambling is any more or less susceptible to money laundering than other types of electronic commerce and point out that, in their view, the financial industry, which is responsible for the payments system, is better suited to monitoring for suspicious activity in the area than the gaming industry itself.