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The Frank Bill | A Lawyer's Analysis

7 May 2009

By Mark N.G. Hichar
Representative Barney Frank, Democrat of Massachusetts, has introduced new legislation (the “Frank Bill”) that, if enacted, would permit licensed Internet gambling businesses to accept bets from persons located in U.S. states or on tribal lands, unless the applicable state or tribe had elected to prohibit such gambling -- i.e., had “opted out.” Conversely, it would be illegal for any business to operate an Internet gambling facility that accepted bets from persons located in the United States, if that business had not been licensed by the Secretary of the Treasury (the “Secretary”).

The Frank Bill would specifically exempt Internet gambling conducted in accordance with its provisions from the Wire Wager Act and the Unlawful Internet Gambling Enforcement Act (the “UIGEA”), and it would provide “a complete defense” to persons licensed under and acting in accordance with its provisions against prosecution under any other federal or state law. Sports betting currently prohibited under the Professional and Amateur Sports Protection Act is specifically excluded from coverage under the Frank Bill, and thus would remain unlawful, except for participation in fantasy or simulation sports games (as defined in the UIGEA).

Named the “Internet Gambling Regulation, Consumer Protection, and Enforcement Act,” the Frank Bill was one of two pieces of legislation introduced by Representative Frank on May 6. The other, the “Reasonable Prudence in Regulation Act,” would extend by one year -- i.e., until Dec. 1, 2010 -- the date by which covered financial institutions would have to comply with the regulations promulgated under the UIGEA. As explained by the House Financial Services Committee on its Web site: “The regulations were completed by the Bush Administration at the last minute, and the legislation will stop Federal regulators from enforcing the UIGEA until Congress has had a chance to decide national policy.”

The Frank Bill envisions the licensing by the Secretary of Internet gambling Web site operators -- i.e., persons who direct, manage, supervise or control an Internet Web site through which bets are initiated or received. The Bill sets forth a strict licensing and regulatory framework designed to “protect underage and otherwise vulnerable individuals, to ensure the games are fair, to address the concerns of law enforcement, and to enforce any limitations on the activity established by the States and Indian tribes.” Licenses granted would be for terms of five years, and would be renewable. If the Frank Bill became law, the Secretary would be obligated to promulgate regulations to implement and enforce the new law within 180 days after enactment, and the substantive provisions of the new law would not become effective until 90 days after the publication of the regulations in final form.

Any person could seek a license for authorization to operate an Internet gambling facility offering services to persons in the United States. However, to receive a license, a person, and, if the person were a corporation, partnership or other business entity, the person’s partners, senior executives and directors, would have to demonstrate “by clear and convincing evidence” that she is “suitable.” Accordingly, as part of the application process, the applicant would have to provide detailed criminal and financial background information as to itself and other relevant persons. “Suitability” includes not only good character, honesty and integrity, but also a showing (again by clear and convincing evidence) that the person’s “prior activities, reputation, habits, and associations do not pose a threat to the public interest or to the effective regulation of the licensed activities; or create or enhance the dangers of unsuitable, unfair, or illegal practices, methods and activities . . .” This last showing could present a problem for Internet gambling operators -- such as PartyGaming plc -- that, in the past, illegally accepted bets from players located in the United States. (In April, 2009, PartyGaming plc entered into a non-prosecution agreement with the U.S. Attorney for the Southern District of New York, and in connection with that agreement, PartyGaming acknowledged that certain of its Internet gambling activities violated U.S. criminal laws.)

Applicants also would be required to show that they have or will acquire “adequate business competence and experience in the operation of Internet gambling facilities.” The ability to “acquire” this expertise indicates that it could be provided via third-party service providers. Applicants also would have to set forth their plans for complying with all applicable regulations including, in particular, those intended (i) to protect underage and problem gamblers, (ii) to ensure that the games are being operated fairly, and (iii) to address the concerns of law enforcement.

Certain service providers -- specifically, those that manage, administer or control bets initiated or received in the United States, or that otherwise manage or administer the games with which such bets were associated -- would be required to meet the same suitability criteria established for licensees, exactly as if they were licensees themselves. Any failure on the part of a service provider to be suitable or to maintain suitability would be grounds for the denial or revocation of the Web site operator’s license. From the language of the Frank Bill, however, it does not appear that service providers would be formally licensed. Accordingly, they would not benefit from the immunity from liability accorded licensees under the Frank Bill -- e.g., immunity from liability in connection with failures to withhold (or to restore) gambling privileges from (or to) self-excluded persons; immunity from liability for harm resulting from disclosure or publication of the names of self-excluded persons; and immunity from liability to persons based on their gambling activities based on claims that they were compulsive, problem or pathological gamblers.

Among the operational capabilities applicants would have to demonstrate and licensees would have to satisfy on an ongoing basis are the following. They would be required to implement and maintain appropriate safeguards to ensure (among other things) that:

    1. the individual placing the bet is of legal age under the law of the state or tribal land in which the individual is located;
    2. the individual placing the bet is physically located in a jurisdiction that permits Internet gambling;
    3. all taxes relating to Internet gambling due from the licensee and from the gamblers are collected;
    4. risks of fraud, money laundering and financing of terrorist activities are addressed;
    5. the risk of compulsive gambling by users is addressed;
    6. the privacy and security of persons engaged in Internet gambling are protected;
    7. assessments by the Secretary are paid; and
    8. there will be compliance with the Secretary’s regulations and orders.

The Frank Bill also provides guidelines for the development of problem gambling, responsible gambling and gambler self-exclusion programs. If the Bill is enacted, the Secretary will be required to promulgate regulations setting forth the standards for these programs and obligating licensees to implement such programs as a condition of licensure.

The cost of administering the new law would fall to the licensees. The Secretary would assess licensees' user fees “in an amount appropriate” to meet the Secretary’s expenses in administering the new law. How this “appropriate amount” would be determined is not stated and would presumably be addressed in the Secretary’s regulations. The user fees would be paid directly and solely by the licensees and could not be deducted from amounts paid or deposited by bettors.

The Frank Bill does not set forth how Internet gambling proceeds will be taxed or in what percentage. Presumably this will be addressed in separate legislation.

Under the new law, the Secretary would have administrative powers permitting it to investigate the suitability of each applicant, ensure compliance, examine licensee books and records and, when necessary, issue summonses on licensees, applicants and related persons to compel the production of books and records and/or testimony under oath. The Secretary also would have the power to investigate possible violations of the new law and assess civil fines.

Although the Secretary would have broad investigatory powers, as aforesaid, the Frank Bill contemplates that applicant suitability reviews would be delegated to existing gambling regulatory bodies. The Frank Bill provides that state and tribal regulatory bodies with expertise in regulating gambling would be permitted to conduct suitability reviews of prospective applicants, if they chose to do so and if the Secretary determined that they were qualified. Applicants favorably reviewed by such qualified regulatory bodies could provide the certification of suitability so received, together with the documentation submitted, and such certification and documentation would be relied on by the Secretary as evidence that the applicant had met the suitability requirements under the new law. However, notwithstanding any such certification, the Secretary would still retain the authority to review, withhold or revoke any license if the Secretary had reason to believe that an applicant or licensee did not meet the suitability requirements.

To ease concerns on the part of “financial transaction providers” (which term includes credit card issuers, banks, payment networks and money-transmitting businesses), the Frank Bill specifically exempts them from liability for engaging in financial activities and transactions involving licensees, provided such activities are performed in compliance with the new law and other applicable federal and state laws. (As mentioned above, the UIGEA would not be applicable to any Internet bet or wager occurring pursuant to a license issued under the Frank Bill.)

Finally, as noted above, states and tribes could opt out of (or merely limit) the provisions of the law, and no licensee could knowingly accept bets initiated or otherwise made by persons located within such states or on the tribal lands of such tribes for which an “opt-out” notice was in effect (except in accordance with any limitations in such notice). This restriction would continue until the Governor or tribal leader revoked or amended its “opt-out” notice. The Secretary would be obligated to notify all licensees and applicants of those states and tribes that had provided such a notice prohibiting (or limiting) Internet gambling on their lands. The state Attorney General or any state agency authorized to prosecute violations of consumer protection laws would be authorized to enforce violations by licensees.

In conclusion, the Frank Bill emphasizes consumer protection in regard to the Internet gambling it would authorize and, if enacted, would preserve the right of states and tribes to control the gambling that occurred within their boundaries.

The Frank Bill | A Lawyer's Analysis is republished from iGamingNews.com.
 

UIGEA Provides Answer to U.S. State Lottery Coding Crux

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The UIGEA Regs | A Lawyer's Analysis

17 November 2008
On Nov. 12, the Department of the Treasury and Board of Governors of the Federal Reserve System (the “Agencies”) issued final regulations to implement the Unlawful Internet Gambling Enforcement Active 2006 (the “UIGEA”).1 Generally, the UIGEA prohibits gambling businesses from accepting credit, ... (read more)
Mark N.G. Hichar
Mark N.G. Hichar