Constitutional & Regulatory
Cite as: Jennifer W. Chiang, Don’t Bet on it: How Complying with Federal Internet Gambling Law is not Enough, 4 Shidler J. L. Com. & Tech. 2 (Jun. 6, 2007), at <http://www.lctjournal.washington.edu/Vol4/a02Chiang.html>
A state-by-state overview of Internet gambling regulation in the United States
©2007 Jennifer W. Chiang
It is disputed whether the United States has a blanket federal prohibition on Internet gambling. As a result of the lack of cohesive federal oversight, states have passed their own Internet gambling laws which, depending on the state’s approach, may regulate making bets online, taking bets online and transferring money between bettor and casino. Some even extend to regulating speech and Internet casino advertisements. For example, card rooms and Indian casinos are prevalent in Washington State, but the state legislature recently made placing a bet over the Internet a Class C felony. This Article will analyze the current framework for Internet gambling regulations, with a brief overview of the federal Unlawful Internet Gambling Enforcement Act of 2006. It will detail the various kinds of regulations utilized at the state level and analyze their interplay with federal law in the United States.
<1>Internet gambling is legal in multiple nations,2 but in the United States placing a bet with or operating an Internet casino or sports book has never been clearly legal or illegal. Some have called the legal framework that the industry operates in a “grey zone.”3 Certain forms of wagers are illegal under existing federal statutes. For example, the Wire Act prohibits betting on a sporting event over a telecommunication system, which includes the Internet.4 While the federal government maintains that the Wire Act covers all forms of online gambling, the Fifth Circuit Court of Appeals construed the statute to only apply to sports betting.5 Currently, placing a bet with an Internet casino is not illegal under federal law.
<2>The uncertain status of Internet gambling under federal law has led some states to use the police powers reserved to them by the 10th Amendment to prohibit online gambling at the local level.6 Increasingly, states are passing legislation making it illegal for an Internet casino operator anywhere in the world to take bets from a person located within the state.7 Other states make it a felony to place a bet from within the state.8 States have the ability to legalize and encourage the development of Internet gambling or “i-gaming”9 within their borders. Several states have attempted to develop their own i-gaming policies; however, the various jurisdictional issues make it a challenge to legally enforce those laws.10
<3>This Article briefly details the rise of online gambling and corresponding attempts to apply existing federal legislation, enacted prior to the advent of the World Wide Web, to Internet-based casinos. It then focuses on the issues facing both federal and state regulations such as jurisdiction, the dormant commerce clause, and federal preemption. This Article also provides an overview of current state statutes regulating Internet gambling.
<4>The first i-casino opened in August 1995.11 By 1996 there were an estimated 15 i-gaming sites that accepted wagers,12 and by the next year, approximately 200.13 Shortly after the creation of the i-casinos, Internet sports book sites, such as the World Sports Exchange, went online and were fully operational by 1997.14 By 2002, the industry had grown to 1,800 i-casinos, lotteries, bingo games, and sports books, and estimates place the total number between 2,000 and 2,500 by 2006.15
<5>The i-gaming model enjoys success as a legal activity in many parts of the world. More than 70 foreign nations license or permit some form of i-gaming.16 Americans are responsible for approximately half of the $12 to $15.5 billion wagered annually via the Internet.17 The parent companies of i-casinos are publicly traded on the London Stock Exchange,18 invested in heavily by leading global investment firms and have revenues in the hundreds of millions.19 Morgan Stanley Securities Ltd. and Fidelity Management have been some of the largest investors.20
<6>Most i-gaming companies operate offshore in countries that have legalized the business, such as Gibraltar, Alderney, the Isle of Man and Antigua.21 However, when gambling first went online, the casinos weren’t all offshore unknowns. In 2001, MGM Mirage opened an i-casino on the Isle of Man.22 In order to ensure the casino preserved its gaming license in Nevada, the site only permitted visitors from six nations to make real money wagers.23 MGM hoped to demonstrate that online gambling could be regulated and profitable with a legitimate enterprise backing it.24 However, due to the political climate and hostility towards i-gaming, the venture shut down in 2003.25 Therefore, instead of money flowing from United States residents to United States companies and ultimately back to the American economy, the structure currently ensures that all i-gaming proceeds, and the associated taxation revenue from it, flows offshore to foreign markets. Just in tax revenues, regulation of i-gaming could bring in an estimated $3.3 billion annually for the federal government, and $1 billion for the states.26
<7>Certain forms of gambling are regulated by the federal government through the constitutional grant of power in Article One, §8, the commerce clause of the United States Constitution. For example, federal law regulates gambling acts that use the instrumentalities of interstate commerce or involve financial institutions. The Wire Act of 1961 is often promulgated as a ban on i-gaming.27 While the U.S. Department of Justice has used the Wire Act as the basis for declaring all Internet gambling as illegal, the Fifth Circuit Court of Appeals interpreted the Wire Act to cover only sporting events, leaving other casino games like poker and blackjack in a “grey area.”28
<8>Obtaining jurisdiction over the casinos and their operators is a key issue for regulation of i-casinos.29 A casino that operates in a state can be sued in that state, as well as any casino that has been incorporated in the state.30 However, i-casinos are exclusively located outside of the United States.31 For individuals associated with i-casinos, personal service in the state is the biggest risk in a civil suit.32 If the casino and its operators are located out of state, a traditional “minimum contacts” analysis33 must occur based on the long-arm statute of the state in question.34
<9>Another issue is whether state statutes regulating i-gaming violate the dormant commerce clause.35 As for physical casinos, state laws range from complete prohibition on gambling — for example Utah bans all forms of gambling including commercial, tribal and charitable36 — to the extremely permissive Nevada.
<10>The dormant commerce clause prohibits “differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter.”37 For example, where laws allowed in-state wineries to ship directly to consumers, but out-of-state wineries were prohibited from doing so, the U.S. Supreme Court struck down the laws as a violation of the dormant commerce clause because the laws discriminated against out of state wineries.38 An example of a gambling prohibition that potentially violates the dormant commerce clause is pari-mutual horse wagering. The states that regulate this form of quasi-online gambling are open to a dormant commerce clause challenge because they tend to give in-state operators favorable treatment by blocking outside actors.
<11>States have been less successful in attempting to regulate the payment systems involved in the transfer of money between bettor and i-casino. However, with the passage of the Unlawful Internet Gambling Prohibition Act of 2006, federal law now most likely makes state attempts to regulate i-gaming moot.
<12>After ten years39 of attempting to pass federal legislation banning Internet gambling, at two o’clock in the morning on the last day of the 2006 congressional session, the Unlawful Internet Gambling Act of 2006 (the “UIGA”)40 was passed as a part of the Safe Accountability for Every Port Act of 2006 (the “SAFE Port Act”).41 The bill prohibits anyone engaged in the business of betting or wagering from accepting, in connection with unlawful Internet gambling, credit, an electronic fund transfer, a check or other payment drawn from a bank or any other financial transaction that involves a financial institution as the payor or intermediary.42 It requires that by July 2007, the Federal Reserve, in connection with the Attorney General, will prescribe regulations requiring the payment systems to identify and block the prohibited transactions.43 The legislation has been attacked by the industry as unworkable and deceptive in its overnight enactment.44 One major criticism of the bill goes to the definition of “unlawful Internet gambling.”45 The statute defines it as “to place, receive, or otherwise knowingly transmit a bet or wager by any means which involves the use, at least in part, of the Internet where such bet or wager is unlawful under any applicable Federal or State law.”46 While the original bill clarified the Wire Act to indicate that it shall apply to all i-gaming, the version as passed did not contain any provision clarifying what is unlawful under federal law.
<13>The only state that has passed legislation regarding financing is Oregon.47 Oregon’s i-gaming statute deals with how money is transferred between parties. Anyone engaged in Internet gambling may not knowingly accept a credit payment from another engaged in “unlawful gambling using the Internet.”48 The statute includes not merely credit payments via a credit card, but also electronic funds transfer or a check or other financial transaction that involves an institution as a payer on behalf of that person.49 However, the statute does not define what “unlawful gambling using the Internet” is in reference to. Because no other state law regulates i-gaming, the construction of Oregon’s statute could mean that this statute is saying gambling using the Internet is unlawful. Another possible statutory reading is that only if the Internet gambling is unlawful based on some other statute, such as Federal law, does Oregon’s statute take effect.
<14>While the long-term impact of the UIGA is difficult to predict, its immediate force crippled some i-casinos and caused many legitimate organizations to stop accepting bets originating in the United States. 50 In the two weeks after the bill was passed, the value of stock in publicly traded i-gaming companies on the London Stock Exchange fell by $7.6 billion dollars.51
<15>In April 2007, Democratic Representative Barney Frank of Massachusetts introduced a bill to repeal the UIGA.52 The bill contained provisions for licensing and regulating i-casinos.53 However, at the time he introduced it and as of May 4, 2007, he conceded it was unlikely to have enough support to pass.54
<16>Eight states specifically regulate or prohibit i-gaming.55 In the absence of clear, enforceable federal legislation banning all forms of i-gaming, these state laws regulating or prohibiting i-gaming create a lack of uniformity within the United States. Unlike China, the United States does not block or track Internet access.56 Without such restrictions on Internet access, it is all but impossible to regulate i-gaming by actually blocking an American from visiting certain websites.57 Thus, most state laws fit into the following four categories: laws against making bets, laws against taking bets, laws against financing of i-gambling wagers, and laws against advertising and promoting Internet gambling. The most common kinds of state regulation are laws against taking bets, and, to a lesser extent, laws against making bets primarily for technological reasons. Laws dealing with payment systems are almost exclusively federal because of the more complex nature of banking regulation and interstate commerce.
<17>Some states have chosen to regulate the actor — a person physically present in the state - in order to restrict i-gaming. This is considered one of the toughest methods to actually enforce and is used mainly as a deterrent.58 Enforcement is impracticable due to the prohibitive expense in time, money, and resources to track sites visited by individual users.59
<18>The most recent state to legislate i-gaming is Washington. In June 2006, the state legislature made placing a bet over the Internet from Washington State a felony, making it one of the most restrictive states in prohibiting users, rather than operators, or conduct.60 The governor of Washington recently signed S.B. 6613.61 This act purports to clarify an existing statute by stating explicitly that wagering via the Internet is illegal in Washington and increases the classification from a misdemeanor to a Class C felony, making it one of the few states that make it illegal for citizens to make bets online.62 Those convicted of a Class C felony in Washington face a maximum penalty of five years in prison and a $10,000 fine.63
<19>While the law may be the most restrictive, the members of Washington’s executive branch who lobbied for the law acknowledge its shortcomings and problems associated with any enforcement attempt. Although the Washington State Gambling Commission, charged with regulating all gambling in the typically gambling-friendly state, said in a press release, “[a]s for players, gambling on the Internet…runs a risk of a felony conviction” it has indicated there are no plans for an active campaign against regular players.64 The Commission has said that if a player’s name appears in an operator’s seized records, it will likely send the player a warning letter, notifying the player of the serious legal consequences of gambling.65 If the Gambling Commission observes a player’s name appear again on an operator’s list, the player may be charged with a felony.66
<20>Perhaps more importantly, by making simple betting a state felony, the federal anti-gambling statute now applies.67 The Racketeer Influenced and Corrupt Organizations Act (RICO) makes it a federal crime to commit “any act … involving … gambling … which is chargeable under State law and punishable by imprisonment for more than one year.” Without passing specific i-gaming regulations, the federal government is able to possibly use state laws as the basis for a RICO prosecution.
<21>Illinois makes it a crime “to make a wager upon the result of any game, contest, political nomination, appointment, or election by means of the Internet.”68 Unlike Washington, the statute does not specifically include Internet casinos or poker and the first conviction results in a Class A misdemeanor.69
<22>Other states have chosen to pursue the i-gaming companies that are profiting from wagers by U.S. residents. This method can be more practical in terms of enforcement, however there are jurisdictional issues, as detailed above, when trying to enforce the laws. Because a business needs to be accessible to succeed, it is much more traceable than an individual user. However, because of this, most operators have avoided running their businesses from within the United States so that they are out of reach of these state laws.
<23>Louisiana prohibits anyone in the world from accepting a bet via the Internet from someone physically located in Louisiana, and it is the first state to attempt to enforce, via an arrest, this kind of law.70 Louisiana bans the “intentional conducting, or directly assisting in the conducting as a business of any game, contest, lottery or contrivance whereby a person risks the loss of anything of value in order to realize a profit when accessing the Internet.”71 In addition, it has a more severe penalty for those who design and maintain the websites.72 However, unlike other states that have laws on the books, but no criminal prosecutions, Louisiana became the first state to arrest a casino operator on criminal charges.73 On Sept. 6, 2006, upon arrival at Kennedy Airport in New York, Sportingbet Chairman Peter Dicks was arrested on a warrant issued by Louisiana state police. The warrant was issued for gambling by computer, a felony punishable by five years in prison and a $20,000 fine.74 Sportingbet, a publicly traded company, offers online sports betting. The Louisiana State police said that they have been investigating websites that take bets from Louisiana residents since January 2006.75
<24>At the time of the arrest, the industry’s attention was put on state regulations, as it appeared most i-gaming corporations had focused on protecting their businesses from federal regulations. At the time of the arrest, the head of the Louisiana Police Gambling Enforcement division announced that warrants had been issued for three others connected to Sportingbet..76 Since then, it has been reported that Louisiana has obtained sealed warrants against at least 50 people who work for online gambling companies.77
<25>Dicks was fortunate because New York only permits extradition if the accused person was physically present where he is accused of breaking the law.78 Because Dicks hadn’t physically been to Louisiana in decades and the charges related to his actions in Great Britain, the extradition order was not signed, and in late September, Dicks was allowed to return home.79 Since the arrest, Sportingbet’s board has instructed its executives not to travel to the United States.80 While no one has yet been convicted of violating the statute, it appears that Louisiana has its sights set on arresting those who accept bets that originate from within the state.
<26>Indiana also targets website operators. Indiana’s law includes a jurisdictional provision, providing that “[a] person outside Indiana who transmits information on a computer network and who knows or should know that the information is broadcast in Indiana submits to the jurisdiction of Indiana courts for prosecution.”81
<27>Currently, Nevada prohibits accepting wagers via the Internet by making all bets accepted or received from a person located within the state a violation of Nevada gaming laws.82 The statute has carve-outs for certain license-holding entities.83
<28>South Dakota prohibits the physical presence of an Internet casino business within its borders.84 It is a Class 6 felony, punishable by up to two years in prison,85 to “establish a location or site in [the] state from which to conduct a gambling business on or over the Internet.”86 It is also prohibited for a person engaged in a “gambling business” to use the Internet to make a wager.87 Gamblers making bets from computers within South Dakota are exempt from this law, as “gambling business” is defined as “a business that is conducted at a gambling establishment or involves the placing, receiving, or making of bets.”88 Because the law applies to both those who initiate a bet from South Dakota or receive a bet from someone in South Dakota, operators of Internet casino sites would be advised to avoid doing business with those in South Dakota.
<29>Montana makes it a misdemeanor to operate an illegal gambling enterprise.89 An illegal gambling enterprise includes internet gambling.90 Internet gambling is defined as “the conduct of any legal or illegal gambling enterprise through the use of communications technology that allows a person using money, paper checks, electronic checks, electronic transfers of money, credit cards, debit cards, or any other instrumentality to transmit to a computer information to assist in the placing of a bet or wager and corresponding information related to the display of the game, game outcomes, or other similar information.”91
<30>Some state regulations, rather than regulating betting or payment systems, aim to cut off the flow of information about online gambling. For example, the recently passed Washington State statute not only prohibits Internet gambling as described in above, but also makes it illegal to communicate about Internet gambling.92 The statute prohibits “[transmitting] or [receiving] gambling information by … the Internet.”93 Gambling information is defined as “any wager made in the course of and any information intended to be used for professional gambling. In the application of this definition, information as to wagers, betting odds and changes in betting odds shall be presumed to be intended for use in professional gambling.”94 However, there is a carve-out clause in the Washington law, which provides that newspapers, radio, or TV stations licensed by the FCC are not subject to the law. At the time the statute was passed, a consumer reported that he received a letter that his favorite gambling related magazines could no longer be delivered to him because of the law.95
<31>The Washington State statute has First Amendment commercial speech implications that are more complex than this Article can do justice. As University of Washington School of Law Professor Stewart Jay told the Seattle Post Intelligencer, "[i]f the P-I puts it on the Internet, it's legal. If Joe Blow puts it on the Internet, it's illegal. It's a very crude distinction that's being made here. When you discriminate between forms of speech and providers, the government has to provide a compelling reason."96 If an advertiser for an online gaming site, or a magazine is affected by this law, there are valid First Amendment commercial speech issues that the attorney should raise. Several articles, while not coving the Washington law, provide a good overview of the First Amendment issues in online gambling regulation.97
<32>Nevada passed a bill in 2001 that would have allowed those with a non-restricted gaming license who are physically present in Nevada to obtain an interactive gaming license.98 The license allows these casinos to accept bets via the Internet from Nevada citizens.
<33>However, no casino was granted a license because part of the bill required that the Nevada Gaming Commission (NGC) determine whether the license would comply with federal law.99 The U.S. Department of Justice issued a letter stating that it considered Internet gambling a violation of federal law and Nevada stopped the push to regulate Internet gambling.100
<34>Rather than ban i-gaming, North Dakota considered passing legislation to legalize, license, tax and regulate Internet poker.101 The Internet Poker Bill of 2001 would have allowed entities in North Dakota to operate online poker rooms, and a concurrent resolution, if approved by voters, would have amended the state constitution to make Internet poker legal.102 Like Nevada, after receiving a letter from the Department of Justice, the Senate voted down the regulation, even though it had been passed in the House.103
<35>The boundary-less web of the Internet is not yet in sync with the multitude of restrictions on i-gaming, leaving it an industry in flux. Some nations have shown a desire to regulate the industry.104 To this end, other nations have come together to discuss an international agreement for the regulation of i-gaming.105
<36>In March 2007, the World Trade Organization held that the UIGA is illegal, rejecting a U.S. appeal from an earlier ruling.106 As a result, Antigua and Barbuda, the complaining countries, may seek sanctions by withdrawing protection for U.S. trademarks and copyrights.107 Since 2000, the income of the 32 registered casinos in the two countries has fallen from $1 billion to $130 million.
<37>Meanwhile, U.S. bettors are losing the opportunity to gamble online as many gambling companies, in the wake of arrests and profit seizures, have simply stopped accepting bets originating from a U.S. IP address.108 As a result, annual i-gaming revenue has decreased by half since the UIGA passed.109
<38>The global Internet gambling industry is in flux. Regulations vary state by state and new federal regulations are about to go into effect. Anyone involved in running, promoting, or using i-gaming sites must consider carefully the risk in traveling to the United States. While those involved in such activities may be in compliance with one state’s laws, they may be simultaneously violating another state’s laws, potentially subjecting them to arrest warrants and extradition. Those in the Internet gambling industry, even peripherally – e.g. magazine publishers - must stay abreast of the current legal developments to ensure compliance with US law.