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A Good Look at Goodlatte 2001

7 November 2001

It took U.S. Rep. Robert Goodlatte, Republican-Virginia, 10 months to introduce a new version of his legislation to make Internet gambling a federal crime. He's used that time to craft a bill that would pass muster with the horse racing industry and with the U.S. Department of Justice.

Frank Fahrenkopf of the American Gaming Association says it's "a very streamlined, very tough bill." It gives states rights only within their own borders, banning online wagering and lottery sales across state lines, even if states were to agree to legalize this activity among themselves.

Nevada's hopes of hosting Internet gambling sites for international players would be stymied, although Las Vegas gaming lawyer Tony Cabot says the bill is "just a draft" and expects many changes. There's plenty of time for that.

Support from Horse Racing Group

"We are unique (among various forms of gaming) in that we have an existing federal statute that deals very specifically with what we can and can't do on an interstate basis using phones or computers or otherwise, and that's called the Interstate Horseracing Act," said Greg Avioli, chief operating officer of the National Thoroughbred Racing Association, a trade group based in Lexington, Kentucky.

Referring to the bill that Goodlatte introduced Thursday, the "Combating Illegal Gambling Reform and Modernization Act," Avioli told RGT Online Friday, "A specific provision in this bill says nothing in this section shall be construed to prohibit an activity allowed under, and it sites the Horseracing Act. So this bill is very specific that whatever racing could legally do under the Horseracing Act, it's not restricted.

"It doesn't expand anything we could do, it in no way expands the ability to wager on horses. But it just respects our existing law, which is all we asked to do."

Avioli said the NTRA's staff in Washington, D.C., had worked with Goodlatte's staff on the language of the new Goodlatte bill. And the NTRA is happy with the result.

"We're pleased with the bill," Avioli said. "The main target of this bill is illegal offshore gambling, which is bad for anyone in the legitimate licensed gambling business. We are very pro regulated, licensed U.S. gaming and therefore support the bill."

The key issue for the racing industry, Avioli said, is simulcasting, which accounts for about 85 percent of industry revenue. The Goodlatte bill defines the Internet very broadly, he said, and without the reference to allowing what's legal under the Horseracing Act, the bill would have been a threat to the industry.

"Simulcasting is defined as Internet wagering for the purposes of this bill," Avioli said. "If you didn't specifically address the racing issue the way we asked, simulcasting would have been criminally outlawed."

The Justice Department

The industry got a scare last year when Goodlatte's "Internet Gambling Prohibition Act" was debated. The Justice Department opposed that bill, and in the process said it didn't believe that interstate simulcasting was legal. Pari-mutuel racing operators were shocked to hear that, since they had been simulcasting for years.

In December, Sen. Mitch Connell, Republican-Kentucky, quietly added an amendment to the budget bill that amended the Interstate Horseracing Act to say that telephone and Internet horserace wagering is legal from state to state, as long as it's legal in both states. It also says that betting pools can be co-mingled, which is what happens with interstate simulcasting.

Last year, the Justice Department's opposition to Goodlatte's bill was based on its belief that the old Wire Act, perhaps with modifications, was sufficient to prosecute Internet gambling. The Department did not want a new law. The Wire Act is a 1961 law that was enacted to combat interstate bookmaking.

This time around, Goodlatte has taken steps to get the Department's support. That's why, Goodlatte's office said, the new bill is an amendment to the Wire Act, rather than a separate, new law.

"We have worked very closely with them [the Justice Department] in this Congress as we were drafting the bill to address those concerns" a Goodlatte aide said, "and we have taken the approach that they suggested, which was an amendment to the Wire Act, to the existing law rather than to create new separate law that would be specific to the Internet."

The aide said, "We are in the vetting process with the Department of Justice and the White House to get their support for the legislation." This year, of course, a new administration is in charge of the Department of Justice.

Fahrenkopf: "A Very Very Tough Bill"

The NTRA is satisfied that its interests are covered by the new Goodlatte bill, but Frank Fahrenkopf isn't so sure. He's the president of the American Gaming Association, the powerful casino industry trade group that's based in Las Vegas.

"There was a whole bunch of language in the [Goodlatte] bill in the last session which dealt with the pari-mutuel industry specifically," Fahrenkopf said. "That's gone. Now Goodlatte's saying, 'Well, that's okay, because we haven't repealed any of the existing things.' . . .

"But I'm not sure they're protected. My advice to the thoroughbred horse racing people and their representatives is: They'd better get their lawyers to look very closely at this legislation. If I was them, I'd be concerned."

In past years, the AGA has supported – or at least agreed not to oppose – the efforts by Goodlatte and Sen. Jon Kyl, Republican-Arizona, to outlaw Internet gambling. But, in an interview Friday, Fahrenkopf seemed almost shocked by the new Goodlatte bill.

"The [current] Goodlatte bill is a very very different bill than the Kyl/Goodlatte bill that was kicking around in the last session. This is a very streamlined, very tough bill. Very very tough bill.

"The word I am getting is that the lotteries and the horse racing people have signed off on this bill. But in my analysis of it, I'm not sure they've looked at it carefully enough, because I think there's some severe limitations that will impact those industries."

Fahrenkopf said the AGA lawyers haven't had time to thoroughly examine the bill yet. But, he said, "I even have questions, although Goodlatte tells me he doesn't agree with me, on whether or not Powerball in the lotteries would be allowed under this legislation."

Fahrenkopf said Goodlatte had called him to request the AGA's support for the legislation.

"I told him we were going to scrub the bill very hard to see what's in there, because it's so different from past bills," Fahrenkopf said. He has asked the AGA's lawyers and the lawyers for each member company of the AGA to review the bill.

The AGA's board meets Dec. 11 in Las Vegas. Fahrenkopf expects the board to discuss the Goodlatte bill at that meeting, and perhaps announce a position on it afterwards.

Carve-Outs and ISPs

One of the problems that Goodlatte encountered last year was the issue of loopholes, or "carve-outs." To gain support, he agreed to exempt interstate pari-mutuel wagering and online state lottery sales from his bill.

These kind of changes angered some far-right, anti-gambling groups, who said the bill would actually expand gambling. With a split in the ranks of anti-gambling forces, Goodlatte's support was weakened.

Fahrenkopf, the former national head of the Republican Party, said the new Goodlatte bill probably has less potential for generating dissension within the ranks of anti-gambling interests. But that may depend on how some of the provisions are perceived, he said.

"If in fact what the horse racing people think is that they're protected, that's the creation of a loophole," Fahrenkopf said. ". . . You can interpret this that if the lottery people are signed on, then there may be loopholes that aren't as obvious to these people. But that's what hearings are for, and it's going to be interesting to see whether or not they're (anti-gambling interests) going to be willing to go along with it."

The bill exempts play-for-free games in which the prizes are points or credits that can be "redeemed only for participation in games or contests offered by the sponsor." It also exempts fantasy sports leagues, saying that "participation in any simulation sports game" is permitted as long as "all teams are fictional" and the value of the prizes is "not determined by the number of participants or the amount of any fees paid by those participants."

Another issue that has caused problems for Goodlatte in past efforts is the role of Internet Service Providers in the enforcement of a ban on Internet gambling. In the 2001 version of his bill, an aide said, ISPs cannot be forced to block any Web sites from their subscribers.

If an ISP hosts a Web site that's offering illegal gambling, she said, the ISP could be asked and even required to take the site down. But that would be rare, she said, because most gambling Web sites are based offshore.

"Just a Draft," But What About Nevada?

Tony Cabot, a lawyer with the powerful Nevada firm Lionel Sawyer & Collins and an expert on Internet gambling law, said the details of the bill as introduced are not all that important, because so many changes are likely.

"I'm sure Congressman Goodlatte is going to get a lot of input on the bill from all sides," Cabot told RGT Online. "It's the first 10 yards of a marathon.

"If you look back a few years on the Kyl bill, it was being amended every two weeks. This [the new Goodlatte bill] is really just a draft, it's almost a discussion draft. I wouldn't place any credence in what it says now to what might ultimately be passed."

But, Cabot conceded, the bill in its present form would be a roadblock to Nevada's efforts to license and regulate Internet gambling.

"In the present form [of the Goodlatte bill] the only thing that's legal is intrastate wagering," Cabot said. "Obviously Nevada would like to have their servers in Nevada and take bets from outside the United States as well."

The bill would prevent online casinos in Nevada from taking bets not only from other states, but from foreign jurisdictions as well.

"That's a huge problem," Cabot said. "I think what would be acceptable is if the bill said it has to be legal in both the sending and receiving locations. That way they would only take bets where it's clearly legal to take bets from."

In June, Nevada enacted a law that authorizes state gambling regulators to license and regulate Internet gambling by casino-hotels that already have licenses for traditional gambling in the state. The regulators must first determine that this can be done lawfully, meaning in compliance with federal laws, and that it can be effectively regulated.

During the summer, the Nevada Gaming Control Commission held a two-day seminar on the technical issues involved. The Commission has a new chairman, who is still getting educated on the matter of Internet gambling, Cabot said.

States' Rights and Money Laundering Issues

Another gambling law expert, Joseph M. Kelly, professor of business law at SUNY College in Buffalo, New York, said the Goodlatte bill, "at least in theory, would infringe states' rights if there is Internet gambling between two states that legalize it. This law would have the effect of negating the Nevada law and U.S. Virgin Islands legislation."

In July, the Virgin Islands legalized online gambling. Regulations have not yet been written to implement the new law.

"This bill would seem like a drastic revision of states' rights," Kelly said.

A Goodlatte aide confirmed that state-to-state online wagering, even if legal in both states, would be banned under the bill.

"Within the state, it's left up to the states," she said, "but between two states, even where it's legal in both states, that would be prohibited.

The same holds true for the online sale of state lottery tickets. "Intrastate," she said, "as long as it was done wholly within the state, if the state chooses to do that under the guidelines that are set out under the bill, they could."

But even if two states both agree to permit online lottery sales to each other's residents, that would be prohibited, she said.

Kelly also questioned Goodlatte's claims about the connection between Internet gambling and money laundering. In a press release announcing his new bill Thursday, Goodlatte's office said, "The Federal Bureau of Investigations and the Department of Justice recently testified that Internet Gambling serves [as] a vehicle for money laundering activities, and can be exploited by terrorists to launder money."

"As I understand from reading the transcripts [of recent Congressional hearings], the FBI said there are two cases that are under investigation," Kelly told RGT Online.

"There may be many many cases of money laundering on Internet casinos out there, but there haven't been any prosecutions on that yet, to the best of my knowledge." If it happens, Kelly said, it's most likely to occur in venues that have no licensing and no regulatory controls.

"Let's say the recommendations of Sir Alan Budd [to legalize and regulate online gambling in Britain] go ahead, or you have other jurisdictions along the model of Great Britain, it's going to be very very hard to say that these jurisdictions don't have the proper regulatory system to handle Internet gambling, to combat money laundering."

Besides, Kelly said, he's always believed that Internet casinos would not be the best place to launder money, because there's a computer record of transactions.

Goodlatte Has Plenty of Time

Last year, time worked against Goodlatte. His bill was brought up under special rules that required a two-thirds majority. In a July 2000 vote, it got a majority but not two-thirds. He didn't get another chance during that session.

But that session ended early to make way for the November 2000 elections. This year's Congressional session will be interrupted by a break for end-of-the-year holidays, but it picks up in January from where it leaves off in December.

So Goodlatte has lots of time, until late 2002, for hearings, amendments and votes on his bill.

Avioli, of the NTRA, said it would be unusual for a new bill to be enacted before the holiday recess. Fahrenkopf doesn't expect much activity on the Goodlatte bill until late January or February.

The bill has 27 co-sponsors, mostly Republicans. They include the chairman of the Financial Services Committee, Michael Oxley, Republican-Ohio; Rep. James Leach, Republican-Iowa; and Rep. John LaFalce, Democrat-New York.

Leach and LaFalce have introduced their own bills targeting Internet gambling. Leach's bill would prohibit the use of credit cards and other financial instruments of U.S. banks for unlawful Internet gambling. LaFalce's bill would ban the use of credit cards for Internet gambling period, whether unlawful or not.

Leach's bill was passed last week by the Financial Services Committee and is now in the Judiciary Committee. Goodlatte's bill contains similar language, and the two may be combined.

For the complete text of the new Goodlatte bill, click here.

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