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Kevin Smith

'Middle Man' Smacked by Third Circuit

22 April 2002

A consortium of U.S.- and British-based betting services learned a hard lesson in U.S. district court, and other operators, according to one gaming law expert, should take heed.

A recent decision by the Third U.S. Circuit Court of Appeals in United States v. $734,578.82 in United States Currency shows how important it is for Internet bookmakers and other interactive gaming companies to make sure all of their business is conducted offshore.

The court ruled that a New Jersey-based company that profited from Internet gambling activities must forfeit the money to the U.S. government.

Frank Catania, the former head of the New Jersey Division of Gaming Enforcement and now the head of a consulting group for online gaming companies, said the decision to allow the government to seize funds from Intercash Financial Services (IFS) wasn't much of a surprise to anyone familiar with the structure of the case.

"I don't see anything really shocking about it," Catania said. "They had an office here in New Jersey and it was stupid for them to be bringing that money to New Jersey. They left themselves open for the FBI to come in and go after them."

The case involved two foreign companies and their relationship with IFS.

The two foreign companies--Intercash Ltd. I.O.M. in the Isle of Man and American Sports Ltd. in England--used IFS's New Jersey offices as a middleman for bettors.

The companies set up a system that enabled American punters to wire money to a U.S. account that was administered by IFS. Once money was deposited in the account, bettors would contact the British site and place their bets. The foreign companies claimed that no U.S. law was violated because all the gambling transactions actually occurred in England, where the bets were ultimately "accepted."

The companies' lawyers maintained that the companies played no role in fixing odds, declaring winners or losers or accepting or relaying bets or wagers.

The lawyers, Clark E. Alpert, David N. Butler and Andrew M. Moskowitz of Alpert Butler Sanders Norton & Bearg in West Orange, N.J., argued that under a generally accepted conflict of laws principle, a gambling transaction occurs in the country where the bet or wager is accepted. As a result, they said, the activities of the New Jersey company, Intercash Financial Services-NJ, were not illegal since it merely acted as a conduit for funds.

According to court papers, American Sports Ltd. promoted its business on the Internet as a provider of recreational betting services that accepted wagers on sporting events throughout the world.

Most of the business was derived from North American sports such as professional and college football and basketball games. The ads also explained how Americans could wire money, set up an account and place bets. Funds were sent by Western Union wire transfers to an account at Fleet Bank in New Jersey.

An American middleman company was necessary to accept the wire transfers. Catania agreed that the actual bets are OK under the argument the lawyers put forth, but as soon as funds were held for any length of time in the U.S., he said, the door was open to U.S. law enforcement.

"Anyone who is going to do any type of sports betting should be out of the country," he said. "Every single bit of it should be out of the country. Nothing should come into this country."

Casino gambling, he said, still falls into a legal gray area, so he recommends to clients who are setting up any type of a gaming operation that they do it from an offshore location. He even recommends that operators keep their profits out of the States as well, but he acknowledges that doing so is difficult.

"It is a double-edged sword," he said. "You have to be concerned about paying your income taxes. If people are making money outside of the U.S. there should be some type of reporting for it. There are procedures in place and they should follow them cause you don't want to be open for tax prosecution later on."

In his ruling Circuit Court Judge Theodore A. McKee wrote that despite the lawyers argument, the case wasn't about American law being levied on foreign companies.

"It may well be true that British citizens and British companies will be affected by this in rem action in New Jersey. This does not mean that the law of New Jersey or the law of the United States is being applied to those citizens or companies," he wrote.

Instead, McKee found that the government's only burden was to prove that the New Jersey company was violating New Jersey law by "promoting" gambling. McKee, who was joined by Third Circuit Chief Judge Edward R. Becker and Senior Circuit Judge Joseph F. Weis Jr., found that the government met its burden by showing that the forfeiture was "predicated solely upon conduct that occurred in New Jersey."

The civil forfeiture case began when the FBI searched IFS's offices and seized the contents of two Fleet accounts--one in the name of and/or for the benefit of IOM and ASL, and another maintained solely for the benefit of ASL.

Although the caption of the lawsuit suggests that the government seized more than $730,000, prosecutors later amended the suit to reflect that they had seized only $489,578; some of the funds had been withdrawn after agents served the warrant, but before the bank tendered the proceeds to the government.

Click here to view the ruling.

'Middle Man' Smacked by Third Circuit is republished from
Kevin Smith
Kevin Smith