Anthony Cabot Gaming Guru

Bill Analysis: HR 4411

On July 11, 2006, the U.S. House of Representatives voted 317-93 to pass the Internet Gambling Prohibition and Enforcement Act (HR 4411). The bill is the newly combined works by Bob Goodlatte, R-Va., and Jim Leach, R-Iowa. One observation from the passage of this bill is that good bill drafting was not a prerequisite to passage. The bill is a mess. It is the result of what happens when two Congressmen cannot get past their own agendas and agree on the language of a prohibition bill. Whether Internet gambling should be regulated or prohibited is a policy issue that can be debated. This bill is an abomination of the legislative process. It is everything that could be perceived as what not to do in drafting legislation. It is in short: repetitive, inconsistent, verbose, cryptic, and poorly written.

The General Prohibitions Let me make an attempt to decipher the bill. Because Leach and Goodlatte apparently could not get over pride of authorship, the bill has two general prohibitory sections that are duplicative in many respects. The Goodlatte portion of the bill amends the Federal Wire Act and provides that it is illegal (up to five years in prison or a fine) for

a) someone in the gambling business (discussed below)

b) to knowingly

c) use a communication facility (discussed below)

d) in interstate or foreign commerce

e) to transmit

i) bets or wagers

ii) information assisting in the placing of bets or wagers

iii) a communication that entitles the recipient to receive money or credit as a result of bets or wagers or

iv) information assisting in the placing of bets or wagers;

f) or, to accept in connection with bets or wagers:

i) credit or the proceeds of credit

ii) electronic fund transfers

iii) checks or drafts

iv) any other proceeds from a from of financial transaction that the treasury and Federal Reserve may proscribe by regulation.

• The bill contains the first Federal definition of a bet or wager. There is some good news here. The definition has reverted to the traditional definition for games of chance, i.e., games predominately determined by chance. This leaves the possibility that poker will be excluded, but would have to be challenged in the court. The DOJ would undoubtedly take an opposing position.

• The terms 'bet or wager' are important because the bill would apply only to those in the 'gambling business,' which means the business of betting or wagering. Unlike the recently passed bill in the state of Washington, this bill does not apply to the casual bettor.

• The definition also includes sports wagering - betting on a sporting event or on the contest of others. The bill incorporates by reference the activities covered by the Professional and Amateur Sports Protection Act. Finally it includes lotteries.

• The bill fixes the slight ambiguity as to whether the Federal Wire Act applies to the Internet by adopting a broad definition of a communication facility. The new definition includes probably every known method of communicating from a remote location and clearly includes the use of the Internet or any other computer system. It would also cover mobile devices, the telephone network and cable and satellite television

• Because the exceptions to the rule are as important as the rule, here is a breakdown of the groups that received exceptions from the general prohibition against Internet and the potential winners and losers:

1. State Lotteries - The state lotteries get clearance to go online. They can start to take wagers from residents from their own state and can work together to provide multi-state jackpots. As important, they can begin to offer “casino-like” games that are based entirely on chance. The law clarifies that intrastate wagering is determined by the start and end of the transmission – not the routing. This takes out a large uncertainty and green lights the prospect for the first online state lottery.

2. Fantasy Sports Leagues - Somehow the mere perseverance of fantasy sports leagues over the past 20 years (and maybe the support of the sports leagues) has created an aura of credibility around fantasy sports. Fantasy sports are exempted provided that they are:

   • a. Not based on the current membership of an actual sports team or on the score, point spread or performance of teams;

   • b. All prizes and awards are established and made known before the start of the contest (a provision for no good reason prohibits basing the prizes on the number of entrants);

   • c. Winning outcomes are based on the skill of the participants predominately by accumulated statistics of individual performances of athletes, but not solely on a single performance of an athlete. This places into doubt the legality of fantasy contests based on golf or other individual-based sports.

3. Insured Depository Institutions - For some strange reason, transactions by insured depository institutions including insured credit unions are completely exempted from the prohibition. My next update may be on how to become an insured depository institution. By the plain language of the bill, these institutions could become the first major U.S. based Internet gambling sites.

Losers:

1. Horse Racing - The spokespersons from the horse racing industry have proclaimed victory based on this bill. I am puzzled by their insistence that it would not apply to that industry. The bill contains a statement that it is not intended to clarify the law surrounding the legality of Interstate account wagering on horse racing. The bill first states that it is not to be construed to prohibit any activity allowed under the Interstate Horse Racing Act, but then goes on to state “this Act is not intended to resolve any existing disagreements over how to interpret the relationship between the Interstate Horseracing Act and other Federal statutes.” While the horse racing industry reads this as maintaining the status quo, it does two things. First, it significantly calls into question the legislative intent behind the adoption of the 2000 amendments to the Interstate Horse Racing Act that the industry relies on to conduct account wagering. It is more difficult to argue that Congress intended to authorize interstate account wagering when it now takes no position in the dispute. Second, the horse racing industry's nemesis in the dispute is the U.S. Department of Justice. This same agency has significant responsibility under the bill including the ability to (1) notice financial institutions to code and prohibit certain gambling transactions, (2) institute criminal and civil injunctive actions and (3) influence the financial regulations to be adopted by the Secretary of the Treasury and the Federal Reserve. This is the equivalent to arming your adversary with an assault weapon in a knife fight. Likewise, any state attorney general may institute an action in the Federal District courts to enjoin a violation of the bill. Now you increased your potential enemy list to 51. The industry is obviously banking on controlling the U.S. Attorney General, but what is its influence over the Utah Attorney General?

2. Traditional Casinos - They can go online in their own state, but cannot engage in interstate or foreign commerce - even if completely legal in both jurisdictions. This is, at best, nothing more than they can do under existing Federal law, and seriously erodes future prospects. The state has to authorize and license the activity and state law has to require secure and effective age and location verification.

3. Tribal Gaming – Not unlike traditional casinos (but much worse because it is restricted to Indian land), the Tribes can go online and take bets from Indian lands in the state that they are located provided:

   • a. the tribes have explicitly authorized such bets

   • b. the state-tribal compact specifically allows Interactive gaming

   • c. tribal law requires secure and effective age and location verification

   • d. the gambling business complies with Indian Gaming Regulatory Act

Other exemptions are your typical exemptions for government sanctioned gambling which include (1) purchase and sale of securities under the Securities and Exchange Act of 1934, (2) commodity transactions under the Commodity Exchange Act or transactions exempt from regulation there under, (3) over-the counter derivative instruments, (4) contracts of indemnity or guarantee and (5) insurance contracts.

The bill also includes a bizarre exemption for games and contests that do not require consideration other than personal efforts to play or obtain Internet access; or free points that can be used or redeemed only in the sponsored contest. If the implication here is that anything else not involving payment for play, such as agreeing to visit a particular site to gain entry, is consideration, then this provision could have a huge impact on promotional games on the Internet.

The bill also does not apply to various forms of advertising. This would include the posting of educational information on how to make a LEGAL bet or the nature of betting or wagering provided the posting does not solicit or provide information for the purposes of enabling wagering in a state where it is illegal, the adverting legal gambling, the transmitting information for use in news reporting or the transmitting information assisting in the placing of wagers from a state or country where legal to a state or country where legal.

The Leach portion of the bill mimics the Goodlatte portion by also prohibiting any person engaged in a gambling business to knowingly accept, in connection with the participation of another person in unlawful gambling: (1) Credit, the proceeds of credit, credit card payments, (2) Electronic fund transfers or the proceeds from EFTs, (3) Checks, drafts or similar instruments, or (4) the proceeds from any other financial transaction specified by the Treasury Secretary and the Federal Reserve by regulation.

Unlike the Goodlatte portion of the bill, Leach does not set out a laundry list of illegal activity; instead Leach defines it as a gambling transaction made by use of a communications facility that violates a state or Federal law in the place where sent or received. By implication, the Leach prohibition includes all the illegal activity defined by Goodlatte.

The Enforcement Provisions

The bill contains enforcement mechanisms under both the Goodlatte and Leach portions of the bill. Under the Goodlatte portion, if a common carrier is informed by any law enforcement agency that its services are being used for gambling purposes, then it needs to refuse further services after reasonable notice to the subscriber and without any liability. Under 47 U.S.C. § 153(h)(1991), a "Common Carrier" or "Carrier" means any person engaged as a common carrier for hire, in interstate or foreign communication by wire or radio or in interstate or foreign radio transmission of energy, except where reference is made to common carriers not subject to this chapter; but a person engaged in radio broadcasting shall not, insofar as such person is so engaged, be deemed a common carrier. In a letter from the FBI to the Secretary of the FCC dated December 4, 2004, "the FBI reiterated its view that Internet access constitutes a telecommunications service, or at a minimum, contains a transport component that constitutes a telecommunications service. In addition, the FBI stated that any Internet access provider offering 'switching or transmission' as a common carrier for hire qualifies as a 'telecommunications carrier' under the unique definition of 'telecommunications carrier' set forth at Section 102(8)(A) of CALEA." Any person receiving a notice from any law enforcement agency can comply with immunity from damages, penalty or forfeiture whether civil or criminal. Even if an Internet Service Provider ("ISP") is not a common carrier, it would still be subject to injunctive relief.

The Federal Government or any state attorney general also may institute an action in the Federal District courts to enjoin a violation of the bill. This action could be brought against a financial institution to freeze an account (1) owned or controlled by a gambling business, (2) containing the proceeds from a gambling business, or designated for use to market a gambling business.

An injunctive action also could be brought against an ISP. In such case, the relief to be granted is limited to removing or disabling the site or removing hypertext links. The action needs to specify the interactive computer service to which it applies and the site or hyperlink to be removed or disabled. This remedy, however, would be available only after notice to the ISP. The bill does not require the ISP to monitor its service or any other affirmative obligation.

The bill would appropriate $10 million dollars for these investigations and prosecutions.

The Leach portion of the bill attacks the money train, the financial transactions between the players and the sites. The Treasury Secretary and the Federal Reserve would have nine months to enact regulations (in consultation with the Department of Justice) that would require the payment systems used by credit card companies, banks, payment networks, money transfer business and others to do the following: (a) identify and code restricted transactions and (b) block the restricted transactions. While this clearly applies to deposits with gaming companies, we will have to wait until the regulation adoption period to determine whether they will also try to regulate the pay-out process.

Credit card companies, banks, payment networks, money transfer business and similar businesses would be in compliance with the regulations if they follow the policies and procedures of the payment system that are adopted under and comply with the regulations. They also would face no liability for blocking or refusing to honor what they are following the policies of the payment system or reasonably believe it is a restricted transaction.

These financial regulations can be enforced by either the respective Federal agencies charged with regulating the respective financial businesses or the Federal Trade Commission in respect to those businesses that are not federally regulated. Leach excluded the state attorney generals from his enforcement procedures.

Further, the bill requests the Federal Government to cooperate with foreign governments to identify the use of gambling operations for money laundering, corruption and other crimes and to assist in the enforcement of the bill. This is the wishful thinking portion of the bill.