The Law of Internet Gambling (Page 2)

E. Analysis of Internet gambling -- Technology is breaking down the d istinctions among the various forms of gambling. Every jurisdiction is free to decide how it wants to handle gambling, including definitions of terms. But, major tests have arisen:

1. Sports betting and OTB on the Internet probably meets every a nti-bookmaking statute. Some operators, like Kerry Rogers (see discussion of State v. Granite Gate Resorts, Inc. under Personal Jurisdiction), assert they are not in the business of gambling, because they merely try to match bettors on opposite sides of sports events. This is a limited form of pool-selling, a type of bookmaking.

2. True Internet lotteries, where there is a pooling of players' wagers, are lotteries under any test.

3. Internet instant lottery games, where players bet against the house, are lotteries under the "pure chance" and "need not be physically present" tests. However, these are also banking and percentage games, because the h ouse participates and has a percentage advantage; in some jurisdictions banking games are casino games and not lotteries.

4. Internet blackjack.

a. On the surface it appears to be a casino game. It is a banking and percentage game. But there is no casino, no dealer and not even any cards.

b. Machines are clearly involved. The Attorney General of Missouri indicted Pennsylvania residents operating a cybercasino in Granada for setting up a gambling device, the PC located in Missouri operated by an agent of the A.G. Older statutes may require that a gaming device actually take or deliver cash before it is declared a slot machine.

c. Since a telephone line is used, linking players' personal computers to operators' computers in foreign countries, the wagers may fall under the anti-bookmaking statutes. Older anti-bookmaking statutes often include language about wagering on contests of speed or skill. Playing a game head-to-head with a computer may not be a "contest."

d. Winners are determined by the host computer's random number generator, players do not have to be physically present to play, and players are not really playing a card game, but only choosing numbers -- just like a lottery.

(1) State Lotteries are offering a similar game, only played on paper, or on Video Lottery Terminals (VLTs).

(2) The very few courts that have looked at the question have decided that playing a game on a video monitor is not a lottery. The State Lotteries that run VLTs usually are allowed to do so because specific statutory or constitutional provisions have been adopted permitting these devices. See, e.g., Poppen v. Walker, 520 N.W.2d 238 (S.Dakota, 1994).

(3) Some skill is involved, assuming the online casino's programing is honest. So, Internet blackjack would not be a lottery in jurisdictions following the "pure chance" test.

II. Federal laws which might apply.

A. Criminal Statutes and Regulations.

1. Interstate Wire Act, 18 U.S.C. ?1084 -- Elements & Analysis.

a. "Business of betting or wagering" only - not common players.
b. "Knowingly uses a wire communication facility" -- designed for telephone & telegraph but covers Internet, unless direct uplink to satellite and downlink to home receiver.
c. "Transmission in interstate or foreign commerce" --
(1) Explicitly designed to cover international activities.
(a) Does not cover purely intrastate wagering.
(b) Does not cover wagering information sent from international waters to the U.S. U.S. v. Montford, 27 F.3d 137 (5th Cir. 1994) (must have some contact with a foreign country).
(2) "Transmission" probably does cover Internet sites that passively r eceive instructions from players. The 7th Circuit held a ticker tape machine which could only receive, not transmit, gambling information did not fall within the prohibition on transmissions, United States v. Stonehouse, 452 F.2d 455 (1971); but the 8th Circuit held the opposite, United States v. Reeder, 614 F.2d 1179 (1980).
d. "Of bets or wagers or information assisting in the placing of bets or wagers on any sporting event or contest, or for the transmission of a wire communication which entitles the recipient to receive money or credit as a result of bets or wagers, or for information assisting in the placing of bets or wagers" --
(1) Designed to cover both actual wagers and gambling information, such a s instructions and "the line," i.e. point spreads.
(2) Ambiguous whether "bets or wagers" and "information" stand alone or modify "sporting event or contest;" are Internet lotteries and casinos covered? All reported court decisions deal with bookies taking wagers on sports events and races (by telephone); no reported cases on any other form of gambling.
e. "Shall be... imprisoned not more than two years" -- a felony.
f. Exemption for "news reporting."
g. Exemption "for the transmission of information assisting in the placing of bets or wagers on a sporting event or contest from a State or foreign country where betting on that sporting event or contest is legal i nto a State or foreign country in which such betting is legal."
(1) Designed to allow licensed Nevada race books to receive race results from other states.
(2) Specifically not intended to allow out-of-state players to make bets across state lines. H.R. Rep. No. 967, 87th Cong., 1st Sess. 1961 (August 17, 1961), to accompany P.L. 87-216, S1656 (18 U.S.C. ?1084).
(3) However, at least six states allow their off-track betting operators to accept out-of-state phone wagers, under the theory that they are completely exempt because the OTB is legal, or that this exemption allows bets from any state where betting on horse races is legal. See discussion under "State Laws which might apply" supra.
h. Common carriers (telephone companies) required to discontinue service if told to by law enforcement agency on any level, federal, state, or local. Common carriers protected from all liability. Suit may be brought to restore service, and burden of proof is on phone companies.
i. Off-shore sports books are probably not protected by being licensed. Courts have ruled that Congress has the power to regulate or prohibit all interstate gambling. In Martin v. United States, 389 F.2d 895 (5th 1968), convictions were upheld on a business that took bets in Texas, telephoned partners in Nevada, and placed the bets with licensed Las Vegas sportsbooks.
2. Conspiracy, 18 U.S.C. ?371 -- A conspiracy to commit a crime is a crime itself, possibly a felony, even if the conspiracy is unsuccessful.
a. The general conspiracy statute requires an agreement, the purpose of the agreement must be to commit an unlawful act, at least one co-conspirator must do an overt act in furtherance of the conspiracy.
b. A co-conspirator may be convicted of a conspiracy that took place both in the United States and in a foreign country, even though he performed no overt act within the United States. United States v. Inco Bank & Trust Corp., 845 F.2d 919 (11th Cir. 1988).
c. For special conspiracy statutes, such as conspiracy to commit racketeering, no overt act is required. Salinas v. United States, 522 U.S. 52, 118 S.Ct. 469, 139 L.Ed.2d 352 (1997).
3. Money laundering, 18 U.S.C. ?1956 -- The most dangerous statute for I nternet gambling operations.
a. Held to be separate crime from illegal gambling, no double jeopardy. United States v. Conley, 37 F.3d 970 (3d Cir. 1994).
b. Crime includes conducting a financial transaction involving the p roceeds of unlawful activity, defined as racketeering, including violating the Wire Act.
c. Extreme punishments -- Under the Federal Sentencing Guidelines, a Wire Act violation would likely get 12 months in prison and a $30,000 fine; a conviction for money laundering begins with a mandatory sentence of four years and can easily reach 20 years, plus a fine equal to 100% of the money that passes through the site. Paul S. Hugel, Criminal Law and the Future of Internet Gaming, 2 Gaming L.R. 143 (1998).
4. Amateur and Professional Sports Protection Act, 28 U.S.C. ? ?3701-3704 -- Prevents any state or tribe from authorizing sports betting.
a. Congress grandfathered-in states with legal sports gambling.
(1) This possibly creates opportunities for Internet operators on Indian land in those states.
(2) It also may be a way to circumvent the Wire Act, which has an exemption if the bet is legal on both ends.
b. The statute is of questionable constitutionality, because there is no rational reason for the forms of sports wagers it allows and those which it prohibits, and even which states get special treatment and benefits.
(1) It is difficult to see how the federal government is remedying the problem when it allows the largest forms of sports wagering to continue in Nevada. NRS 463.0136, 463.0193, 463.160 (Licensed sports books).
(2) Other grandfathered-in sports wagering. Other forms of gambling were recognized during the debate in Congress over the Amateur and Professional Sports Protection Act. Sen. Report No. 102-248 at p. 7 (Nov. 26, 1991) (to accompany S.474). "[T]his bill bans sports betting outright in 44 States and gives one State, New Jersey, only 1 year to act before ittoo would be prohibited from allowing sports betting." (Sen. Bradley) Cong. R ec. S17434-01, S17435 (Oct. 7, 1992).
(3) Delaware and Oregon - Lotteries based on sports events. 29 Del.C. ?4805(b)(4), cf. National Football League v. Governor of the State of Delaware, 435 F.Supp. 1372 (D.Del. 1977) (State Lottery may run parimutuel game, if it complies with pay-out provisions of Lottery Act); Oregon - State Lottery can run games based on sporting events. ORS ? 461.213.
(4) But other forms may also have been grandfathered-in. See (Sen. Bradley) Cong. Rec. S17434-01, S17435 (Oct. 7, 1992); 138 Cong. Rec. S18332-01 (Oct. 29, 1992):
(a) Mississippi - Licensed operators may run sports pools. Code 1972, ?? 75-76-55, 75-76-89, 75-76-5(gg): "'Sports pool' means the business of accepting wagers on sporting events, except for athletic events, by any system or method of wagering other than the system known as the 'pari-mutuel method of wagering.'"
(b) Montana:
i) The Montana State Lottery may also run sports pools and other games based on sporting events: "Lottery game"... includes but is not limited to weekly (or other, longer time period) winner games... and sports pool games." MT ST ?23-7-103 (4) (a) [enacted before 1992].
ii) Licensed operators may conduct sports tab games, "on premises appropriately licensed to sell alcoholic beverages for consumption on the premises..." MT ST 23-5-501, 23-5-502, 23-5-512, 23-5-513.
iii) Licensed operators may conduct sports pools. Id. and 23-5-503.
iv) Licensed operators may conduct Calcutta pools on sports events, except elementary and high school sports and horse races = all college and professional sports). MT ST 23-5-221, 23-5-222, 23-5-501.
(c) New Mexico - "Keirin," parimutuel wagering on bicycle races, allowed. N.M.S.A 1978 ch. 60, art. 2D; see, Cong. Rec. S18332-01 (Oct. 29, 1992).
(d) North Dakota:
i) Nonprofit organizations may run sports pools on professional sports events. NDCC, 53-06.1-03(1)(a), 53-06.1-09.
ii) Qualified organizations may conduct calcuttas on amateur sports events- NDCC ? 53-06.1-07.3; WY ST ? 6-7-101(a)(i), 6-7-101(a)(iii)(F).
(e) Washington - Low-limit sports cards. WA.St. ? 9.46.0335 (no license required).
(f) Wyoming - Qualified organizations may conduct calcuttas on amateur sports events. WY ST ? 6-7-101(a)(i), 6-7-101(a)(iii)(F). See, Cong. Rec. S17434-01 (Oct. 7, 1992).
c. The Act is concerned with limiting the power of states and tribes to authorize sports betting and does not address sports books licensed by foreign countries.
d. It is unclear if the Act would prevent a grandfathered-in state, such as Nevada, from authorizing Internet sports books. The sports betting service must be "operating in" that state. See "Where does the bet take place," supra.
5. Miscellaneous anti-gaming and anti-lottery laws.
a. "Illegal gambling business" under the Organized Crime Control Act ( "OCCA"), 18 U.S.C. ?1955 -- Turns state gambling crimes into a federal offense. Requires five or more persons in business for more than 30 days or gross revenue of $2,000 in any single day. Federal jurisdiction is based on the presumption of an impact on interstate commerce. OCCA covers everyone involved in the financial and operational side of the gambling business, but not bettors. Present state anti-gambling statutes, with the exception of Nevada, Louisiana and Illinois, were not designed to get at out-of-state Internet operators and would not be a strong foundation for a ?1955 charge.
b. The Travel Act, 18 U.S.C. ?1952 -- Makes it a federal crime to travel or use any facility in interstate or foreign commerce to carry on "unlawful activity," defined as a business enterprise involving gambling "in violation of the laws of the State in which they are committed or of the United States." The Act would seem to be limited to the transportation of physical items, but courts have held "facilities" includes telephone lines carrying gambling information. United States v. Smith, 209 F.Supp. 907 (E.D.Ill. 1 962); United States v. Villano, 529 F.2d 1046, 1052 n.6 (10th Cir. 1975).
c. Interstate Transportation of Wagering Paraphernalia ("ITWP"), 18 U.S.C. ?1953 -- This law is more clear than the Travel Act in being limited to physical items. However, law does cover software that can be used by illegal bookies, if shipped on discs.
d. Lottery Statutes, 18 U.S.C. ??1301-1307 -- Broad prohibitions on importing, shipping in interstate or foreign commerce, or using the U.S. mails for lottery material; but, probably limited to physical items.
(1) Section 1301 was amended in 1994 after the Pic-A-State case, to prohibit the use of agents in other states buying out-of-state lottery tickets. Pic-A-State Pa., Inc. v. Commonwealth, 1993 WL 325539 (M.D.Pa. 1993); 42 F.3d 175 (3rd Cir. 1994).
(2) Section 1304 puts restrictions on "broadcasting" "any a dvertisement... or information concerning any lottery..." The Federal Communications Commission construes "lottery" broadly, as including virtually every form of gambling, but, "broadcasting" narrowly: the signal must be able to be picked up by anyone from the air and without a scrambler. Internet communications are not broadcasts.
(3) But, the F.C.C. can fine a radio or T.V. station that broadcasts advertising for Internet gambling. 47 C.F.R. ??73.1211 and 76.213.
e. Gaming devices, Johnson Act, 15 U.S.C. ??1171-1178 -- Restricts gambling devices from being shipped interstate or on federal land. Requires the device be "designed and manufactured primarily for use in connection with gambling," which would exclude all but dedicated terminals.
6. Racketeer Influenced and Corrupt Organizations ("RICO"), 18 U.S.C. ??1961-1968 -- designed to reach the upper echelon of organized crime.
a. Draconian civil and criminal punishments, fines, forfeitures and imprisonment.
b. Covers anyone involved with an organization that commits two predicate crimes within ten years. Makes a federal crime of state felony gambling offenses. Also includes the Wire Act, Travel Act, ITWP, OCCA, money laundering and mail fraud.

c. If Internet gambling is illegal, the op erators can be charged with RICO.

7. The Communications Act of 1934 gives the Federal Communications Commission ("FCC") authority to regulate all interstate and foreign wire communications, broadly defined. 47 U.S.C. ??151, 153. But, the FCC has made it clear it will have nothing to do with the Internet. Federal law enforcement is thus left to the Department of Justice ("DOJ"). Pure intrastate communications are outside the FCC's jurisdiction and are regulated by the states.
B. Recent Developments.
1. Proposals in Congress to amend the Interstate Wire Act.
a. Internet Gambling Prohibition Act, author Jon Kyl (R.-Az), commonly called "the Kyl bill," first proposed as part of the Crime Prevention Act of 1995, 141 Cong.Rec. S19110-07, S19113-4 (Dec. 21, 1995); reintroduced as S 474 (March 19, 1997), passed by Senate when attached to appropriations bill, but deleted from final version of appropriations bill, H.R. 4276, in House; reintroduced with significant amendments as S 692 (March 23, 1999). Other bills: HR 4350 (Introduced July 29, 1998), HR 2380 (introduced Sept. 3, 1997). Bills have gone through many rewrites and the Senate and House proposals differ in significant details. Major features present in some or all:
(1) Amend the Wire Act, 18 U.S.C. ??1081 and 1084;
(2) Attempt to clarify which types of gambling are illegal;
(3) For the first time, make it a federal crime (a misdemeanor, up to six months jail and a fine) to make a bet over the Internet.
(4) Increase punishment for felony of being in the business of gambling and violating ?1084;
(5) Allow licensed OTB operators to take Internet bets, but only i ntrastate; details vary.
(6) Exempt "closed-loop subscriber-based services."
(7) Exempt fantasy sports leagues.
b. Problems with the Kyl and other bills:
(1) First Amendment -- Language has been narrowed, but still covers advertising and other information.
(2) Treaties requiring the U.S. to consult with foreign governments before imposing criminal penalties for acts committed in those countries;
(3) Sovereignty of foreign governments may be impinged upon.
(4) Enforceability -- Federal government cannot arrest:
(a) Millions of Americans using PCs in the privacy of their own homes;
(b) Foreign citizens operating under a government license in their own country;
(c) Foreign governments, like Liechtenstein, when the government itself is the operator.
c. The state Attorneys General -- the most active and vocal opponents of Internet gambling. The National Association of Attorneys General ("NAAG") created a task force of 39 states in June, 1995, led by Hubert H. Humphrey III, Minnesota; James E. Doyle, Wisconsin; and Daniel E. Lungren, California. It found six "major deficiencies" in the Interstate Wire Act and urged amendment of ??1084 and 1081 (definitions):
(1) Current federal law only applies to gambling businesses. It is not a federal crime to make an illegal wager. "Add a penalty for 'casual bettors.'"
(2) The law clearly prohibits wagers on sporting events, but it is unclear whether it covers other forms of gambling, such as lotteries or Internet casinos.
(3) It is a crime to send information that aids in the making of wagers, but the law is ambiguous about receiving such information. An Internet gambling operator could claim its computers are simply passively receiving bets.
(4) The law is limited to "wire" communications; an Internet operator could get around the law by using microwave transmitters and home satellite dishes.
(5) Telephone companies, let alone Internet access providers, are not criminally liable if an illegal bookie uses a telephone line.
(6) The present law does not allow "a prospective remedy" for law enforcement. NAAG wants to add a civil remedy, similar to the Red Light Abatement laws that allow closing down brothels, since obtaining a criminal conviction against an Internet operator would be so difficult.
d. Response by U.S. Department of Justice, "Thanks, but no thanks."
(1) A unique situation: states asking the federal government to assume more power, and the feds refusing.
(2) The DOJ does not want to be in the business of arresting gamblers. The DOJ's Criminal Division sent NAAG a letter stating: "[T]he Department does not agree that federal law should be amended so broadly as to cover the first-time bettor who loses $5, particularly when Internet gaming is expected to mushroom and federal resources are shrinking." "Moreover, we believe that the envisioned expansion of federal jurisdiction would not serve as a deterrent to Internet gaming since it is unlikely that federal p rosecutions will be pursued against bettors."
(3) Under pressure from NAAG and Congressional hearings, DOJ made a showy arrest of Internet operators using laws already on the books. See below.
e. Present operators want exemptions.
(1) Legitimate Internet gambling operations want to be regulated, not outlawed.
(2) Horse racing interests --
(a) Racing industry wants to preserve the Interstate Horse Racing Act, 15 U.S.C. ??3001-3007, which set up a complicated system to allow licensed OTB operators to take bets on foreign races.
(b) Some OTB operators, presently taking interstate telephone wagers, do not want to at-home bettors explicitly excluded.
(3) Indian tribes -- Only one, the Coeur d'Alene, is presently taking Internet wagers. But tribes are concerned about any infringement on their sovereignty. And many tribes have Internet linked slot machines and bingo games to protect.
2. Criminal complaints filed by U.S. Attorney in New York City.
a. The first federal charges for Internet gambling were filed in March, 1998 against 14 individuals connected with six companies. All defendants claim their gambling businesses were licensed by foreign countries. All were operating openly, even taking out ads in Pro Football Weekly and other magazines. There is no allegation of any connection with organized crime.
b. Some commentators have said it is going to be hard to get convictions. But the federal prosecutors spent months gathering evidence, choosing only the most vulnerable defendants and framing their Complaints to make the strongest possible case:
(1) Only Americans were charged, avoiding the sticky question of whether this country can arrest a citizen of another country, who claims to be licensed by his own government. There is little dispute that the U.S. can charge American citizens with certain crimes, no matter where in the world they may live.
(2) The only form of gambling involved was sports betting. If the Wire Act covers anything, it is sports betting.
(3) The defendants were not charged with violating the Wire Act, but rather with conspiracy to violate the Wire Act. Prosecutors do not have to prove the defendants transmitted any bet by wire to another country, only that they agreed to do so and one of them did an "overt act" in furtherance of the conspiracy.
(4) Only operators and others involved in the business of gambling were charged. As a matter of public relations, it would have been awkward to explain arresting bettors, when the whole point of the anti-gambling laws is supposed to be to protect the public.
(5) The government only charged individuals who made the mistake of conducting part of their operations within the U.S.: Defendants sent envelopes with return addresses of Costa Rica, Curacao and the Dominican Republic, but with postmarks from Florida, Texas and Nevada and carrying U.S. stamps; 800-numbers had been given to U.S., not foreign, companies; defendants wrote checks on banks in this country; one undercover agent even received a $400 U.S. Postal Money Order with a handwritten note that it was sent from Las Vegas.
(6) Every sports book took at least one bet over the telephone, giving prosecutors a fall-back position if a court rules the Wire Act does not apply to the Internet.
c. The immediate impact of these criminal charges was virtual panic among cyber-bettors. Foreign sportsbooks that accept bets by phone or online are barring Americans -- or closing their doors completely; apparently some operators are disappearing with the loot. The Las Vegas Sporting News reported that a sportsbook located in the Dominican Republic folded, leaving at least one player unable to retrieve $10,500 from his telephone-betting account.
d. The DOJ pulled off a great public relations coup. It showed it can put the fear of God into the entire industry -- using laws already on the books; thus, that the new laws are unnecessary -- at least for the easy cases.
e. Many defendants have accepted plea bargains, but at least one has made motions to dismiss. United States v. Jay Cohen, Indictment No. 98 CR 294 (TPG) (S.D.N.Y. 1998).

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