States Crack Down On Internet Sweepstakes Cafes

A number of states are taking aggressive action to close down Internet sweepstakes cafes in their communities.  These actions follow the findings of an AGA white paper endorsing the elimination of these illegal, unregulated, and largely untaxed businesses.

• In a headline-grabbing sweep in March, federal and Florida state agents arrested fifty-seven people associated with more than forty Internet sweepstakes cafes in that state operated by the Allied Veterans of the World & Affiliates, which purports to be a charity.  The sweep, called Operation Reveal the Deal, also netted the principal of an Oklahoma business that provides software to the operation.  Those arrested included three officials of Allied Veterans, the president and vice president of the Jacksonville Fraternal Order of Police, and a former president of the Jacksonville Bar Association who was described by authorities as the mastermind of a scheme to milk profits from the supposedly charitable gambling sites.  Of roughly $300 million taken in by Allied Veterans, according to public accounts, two percent went to charity.

Those arrested were charged with multiple felony counts of illegal gambling, operating illegal slot machines, money laundering, fraud and racketeering.  By court order, 292 bank accounts holding more than $64 million were frozen.  The sweep inflicted a political casualty, as well.  Florida Lieutenant Governor Jennifer Carroll resigned from office the day after law enforcement agents interviewed her in connection with the investigation.  Her public relations firm worked for Allied Veterans in 2009 and 2010, while she served in the state legislature.

• In March, the Ohio Court of Appeals affirmed criminal convictions against three cafe operators in City of Cleveland v. Thorne, No. 2010-CRB-04521 (8^th Dist., March 22, 2013).  The appellate court impatiently swept aside elaborate arguments by the defendants that their customers truly bought Internet time or other business services, and thus paid no consideration to gamble.  “The justice system is not some lumbering oaf,” the court wrote, “who must ignore the patently obvious gambling scheme apparent here simply because of a contrived separation between consideration and the scheme of chance.  By advertising these businesses as casinos, appellants obviously intended gambling to occur on their premises. They should not be surprised that law enforcement and the jury saw these same things and found sufficient evidence of gambling.”

Also in March, the Ohio House of Representatives overwhelmingly approved legislation that would place a $10 ceiling on the prize payouts that Internet sweepstakes cafes could make, effectively shutting down the businesses.  House Bill 7 (March 13, 2013). The House vote followed an investigative report by the Columbus Dispatch that a majority of the cafes in Ohio flouted a requirement that they provide full business information to the state attorney general, while barely twenty percent of the Ohio cafes identified the people who own and operate them. In a separate development, cafe operators in the city of Warren were arrested and charged with illegal gambling.  

• In March, the Mississippi Legislature adopted a new law declaring that Internet sweepstakes cafes represent illegal gambling activity in that state.  The new law bars any person from offering a “simulated gambling program” on an “electronic video monitor” in return for direct or indirect consideration “including consideration associated with a product, service or activity other than the simulated gambling program.”  House Bill 974 (March 6, 2013).
• In December, the California Bureau of Gaming Control issued an Advisory that California law prohibits “so-called ‘Internet cafes’ that sell Internet time or phone cards in conjunction with a ‘promotional sweepstakes.’”  In response to that Advisory, Sacramento police raided and closed two cafes and charged the business manager at each location with operating an illegal gambling business.  Alameda County and the City of Hayward also addressed local bans or moratoria on the cafes.  
• Other states also stepped up enforcement efforts.  In December, Michigan law enforcement agents seized computers and cash from three cafes in Monroe and Washtenaw Counties and froze bank assets associated with the operators of those cafes.  In Honolulu, local police raided three cafes, seizing twenty-two computers and arresting six employees who were charged with felony and misdemeanor gambling crimes.  

In North Carolina, where the state Supreme Court recently upheld a state ban on the cafes, the same court resolved an outstanding tax dispute concerning cafes in the town of Lumberton.  The court emphasized, however, that its tax decision was a retrospective one and had no impact on its previous ruling confirming the cafe prohibition. IMT, Inc. v. City of Lumberton, No. 127A12 (March 8, 2013).