INTERNET GAMBLING

There has been explosive growth in the availability of online gambling sites since the introduction of the World Wide Web in the early 1990s. With the increasing presence of these operations — mostly run offshore — the U.S. Congress as early as 1995 began to address this issue through legislation that would ban Internet gambling.

BACKGROUND

• The first online gambling site launched in August 1995. It is currently estimated that there are well over 2,000 Internet gambling websites offering various wagering options, including sports betting, casino games, lotteries and bingo.
• Internet gambling revenue for offshore companies was estimated to be $5.4 billion in 2009 from players in the United States and $25.8 billion from players worldwide, according to H2 Gambling Capital.

AGA POSITION ON INTERNET GAMBLING LEGISLATION
The American Gaming Association has followed the issue of Internet gambling since the mid 1990s.  Historically, AGA members have questioned the adequacy of technological safeguards to prevent money laundering, underage gambling and participation by residents of jurisdictions where it is deemed illegal.  After considerable study, however, our concerns about technology have been eliminated by advancements in the field, and the AGA believes that the technology now exists to properly regulate Internet gambling with appropriate law enforcement oversight and to provide appropriate consumer protections for individuals gambling online.  However, the AGA also believes that existing laws do not adequately protect the millions of Americans who gamble online every day. 

Thus, the AGA acknowledges that a properly regulated legal framework for Internet gambling is the best way to protect consumers.    The AGA also believes that online gambling operators and suppliers should be held to the same level of probity to which AGA members adhere in their traditional land-based operations.  The AGA will continue its policy of putting any gaming legislative proposal through three tests: 1) The legislation must not create competitive advantages or disadvantages between and among legal commercial casinos, Native American casinos, state lotteries and pari-mutuel wagering operations; 2) No form of gaming that currently is legal shall be made illegal; and 3) The legislation must respect fundamental states’ rights in an appropriate manner.  Decisions on whether to support, oppose or remain neutral on individual pieces of legislation will be made by the AGA board on a case-by-case basis.

LEGAL STATUS
There is disagreement between the U.S. Department of Justice and some U.S. courts over whether or not Internet gambling is legal in the United States. At issue are two laws: the U.S. Wire Act of 1961, which prohibited gambling over the “wires,” and the Professional and Amateur Sports Protection Act of 1992 (PASPA), which banned sports wagering in all states except those with pre-existing operations (Nevada, Oregon and Delaware).

The Justice Department in both the Clinton and Bush administrations has expressed the view that the U.S. Wire Act of 1961 applies to all forms of Internet gambling, and therefore it is illegal under existing law.

However, the U.S. Court of Appeals for the Fifth Circuit interpreted the Wire Act differently. In Thompson v. MasterCard International et al., the appeals court in 2002 affirmed a lower court ruling that, under federal statutes, sports betting conducted over the Internet is illegal, but casino games are legal.

Separately, the Word Trade Organization (WTO) issued a ruling in 2004 that found the aggressive efforts of the U.S. government to curb Internet gambling in violation of WTO commercial services accords. The ruling, which gives the WTO the authority to impose trade sanctions against the United States, stems from a complaint filed in 2003 by the Caribbean island nation of Antigua and Barbuda.

A WTO appellate ruling found that the U.S. violated the General Agreement on Tariffs and Trade (GATT) by the granting of authority for internet betting on horse races under the Interstate Horseracing Act.  A panel later ruled that the U.S. had not taken sufficient steps to comply with that ruling.

FEDERAL LEGISLATION AND REGULATION
Because of disagreements over the legal interpretation of the Wire Act, Congress has taken steps to pass legislation that would explicitly ban Internet gambling. These efforts have been unsuccessful largely because of the potentially broad impact of a ban on a variety of interests, including Internet service providers, state governments and different segments of the gaming industry.

With an outright ban meeting significant resistance, lawmakers in 2001 began to take a different tack: They introduced legislation that would ban the use of credit cards and other financial instruments for the purpose of illegal Internet gambling.

The Unlawful Internet Gambling Enforcement Act
In 2006, Sen. John Kyl (R-Ariz.) and Senate Majority Leader Bill Frist (R-Tenn.) secured the passage of the first federal legislation restricting the burgeoning online gambling sector when they attached the Unlawful Internet Gambling Enforcement Act (UIGEA) to federal legislation crafted to increase the security of U.S. ports.  The action took place in the waning hours of the 109th Congress, and later was signed into law by President Bush.  The AGA took a neutral stance on this legislation.

Rather than attempt to reach off-shore operators by strengthening U.S. anti-gambling laws, the legislation attacks the payment mechanisms used to place bets on the thousands of offshore online gambling sites currently in operation. The bill makes it illegal for banks, credit card companies or similar institutions to collect on a debt incurred on an online gambling site.  The language closely mirrors the legislation sponsored by Jim Leach (R-IA) that was easily passed out of the House Financial Services Committee earlier in 2006. 

The bill does not update the federal Wire Act of 1961 to specifically apply to all forms of online gambling.  It does not resolve the dispute between the U.S. Justice Department and the Fifth Circuit Court of Appeals on whether the Wire Act applies to all forms of online gambling.  It does not resolve whether the U.S. horseracing industry is legally entitled to an exemption from a ban on online gambling.  Nor does it resolve whether Native American tribes, as sovereign nations, retain the right to operate online gambling sites regardless of federal restrictions.  Essentially, the bill maintains the status quo in the U.S., never clearly defining exactly what is legal or illegal online wagering.

The Federal Reserve and Department of the Treasury released the final regulations pertaining to the UIGEA in November 2008.  As with the draft regulations that were first released in 2007, the final rule does not state a clear definition of what is considered “illegal Internet gambling.”  The final rule places the enforcement burden on financial institutions like banks and credit card companies, but tells financial institutions not to spend time looking at individual credit card transactions.  However, financial institutions must perform “due diligence” to make sure that their commercial customers are not in the Internet gambling business.  They must undertake the same “know your client” processes that they already use to prevent money laundering.  Over 12,000 small businesses are subject to the new regulations, and the rulemaking agencies estimate that the recordkeeping burden on financial institutions will add up to “approximately one million hours.”

The final regulations went into effect on January 19, 2009, but companies originally had until December 1, 2009 to comply.  However, just days prior to when the regulations would have gone into effect, the Department of the Treasury and the Federal Reserve Board announced the release of a joint final rule to extend the compliance date for regulations implementing certain provisions of UIGEA.  The compliance date was moved from December 1, 2009 to June 1, 2010.

The Internet Gambling Regulation Consumer Protection and Enforcement Act
In May 2009, Rep. Barney Frank (D-Mass.) introduced the Internet Gambling Regulation Consumer Protection & Enforcement Act of 2009.  The bill is similar to legislation he introduced during the 110th Congress and would establish a federal regulatory and enforcement framework under which Internet gambling operators could obtain licenses authorizing them to accept bets and wagers from individuals in the United States. 

Reasonable Prudence in Regulation Act
A second piece of legislation introduced by Rep. Frank in May 2009 is the Reasonable Prudence in Regulation Act, which calls for a one-year delay in the date for compliance with regulations pursuant to the Unlawful Internet Gambling Enforcement Act (UIGEA) passed in 2006. 

Internet Gambling Regulation and Tax Enforcement Act of 2009
Introduced by Rep. Jim McDermott (D-Wash.), this legislation is the companion to Rep. Frank’s bill that would license and regulate Internet gambling.  Under this bill, any establishment licensed under Rep. Frank’s legislation would be required to pay a 2 percent fee (i.e. federal tax) on all deposits. In addition, the bill would increase the protection against tax cheating.

Federal Regulatory Actions
In addition to this legislative action, the Justice Department recently began to crack down on the offshore Internet gambling sector, arresting several industry players on charges of money laundering and/or violation of the Wire Act.  Gibraltar-based PartyGaming settled a legal dispute with United States authorities in April for providing online gambling services to Americans prior to the implementation of the Unlawful Internet Gambling Enforcement Act of 2006. The company agreed to a $105 million settlement with the Justice Department but will not be prosecuted for the violations.  Officials from BetOnSports.com were indicted in 2006 and are currently being tried.  The site’s founder and CEO have both pled guilty and are facing jail time once all involved have been tried.

STATE LEGISLATION
In 2001, Nevada — the first state to legalize casino gambling in 1931 — made another pioneering move in gaming by passing legislation that allowed the Nevada Gaming Commission, working with the Nevada Gaming Control Board, to adopt regulations governing the licensing and operation of interactive gaming in the state. Before such regulations could be adopted, however, the law required Nevada regulators to study Internet gambling systems and determine if the proper technology and security measures existed to regulate it and prevent access by minors.

Even if regulators found that Internet gambling in Nevada could be adequately controlled, they also were required by the state legislature to determine if interactive gaming could be operated in compliance with federal law. In 2002, the U.S. Department of Justice advised Nevada of its view that federal law currently prohibits gambling over the Internet, including casino-style gambling, halting the state’s efforts to legalize, regulate and tax Internet gambling. 

Recently, leaders in Nevada have revisited the issue and are considering intrastate Internet gambling.  A bill also has been introduced in California that would legalize intrastate Internet gambling only.

While Nevada took steps to legalize Internet gambling should the federal government ever legalize it, other states took the opposite course. Today, Illinois, Indiana, Louisiana, Massachusetts, Nevada, Oregon, South Dakota and Utah all have in place laws expressly banning Internet gambling within their borders. Additionally, attorneys general in Florida, Kansas, Minnesota, Oklahoma and Texas have issued opinions that Internet gambling is illegal in their states.