Complete Analysis of the New Unlawful Internet Gambling Enforcement Act of 2006

From: Gambling-Law-US.com

By Chuck Humphrey

Overview
The Unlawful Internet Gambling Enforcement Act of 2006 (the "Act") enacted into law at 10 a.m. ET on Friday October 13, 2006. The Act adds the following
provisions to the money and finance provisions of Title 31 of the United States Code

SUBCHAPTER IV - PROHIBITION ON FUNDING OF UNLAWFUL INTERNET GAMBLING
5361. Congressional findings and purpose
5362. Definitions
5363. Prohibition on acceptance of any financial instrument for unlawful Internet gambling
5364. Policies and procedures to identify and prevent restricted transactions
5365. Civil remedies
5366. Criminal penalties
5367. Circumventions prohibited

Section 5363 bans and and Section 5366 criminalizes the acceptance of funds from bettors by operators of most online gambling Websites. The operators affected are those who:

(1) being engaged in the business of betting or wagering
(2) knowingly accept

(3) proceeds from credit cards, electronic fund transfers and checks
(4) in connection with with the participation of a bettor

(5) in unlawful Internet gambling, which is the sponsorship of online gambling that violates any other federal or state anti-gambling law..

The ban and criminal provisions become effective immediately on enactment.

Mere participation in online betting or wagering is not banned or criminalized by the Act.

Section 5364 requires financial institutions to adopt procedures and policies designed to block the flow of prohibited funding to the operators of the affected online gambling Websites. This provision does not become mandatorily effective until the federal regulators adopt implementing regulations. The Act allows the regulators 270 days (about July 2007) to write and adopt the regulations.

Section 5365 gives federal and state attorneys general the power to seek civil remedies to help enforce the other provisions of the Act. The remedies include ordering an Internet service provider to remove access to the Website of an operator who violates Section 5363 or other Websites that contain hyperlinks to such sites. Such remedies may only be sought as to Websites that are hosted by the particular Internet service provider.

Bets and Wagers

Section 5363 does not make it illegal for a mere player to make bets or wagers. Rather, the Act applies only to those involved in the business of betting or wagering. Section 5262 defines a bet:

• as the staking or risking of property in order to win something of value based on the outcome of:

  • a contest of others

  • a sporting event, or

  • a game subject to chance

• the purchase of a chance to win a lottery or other prize the award of which is predominantly subject to chance

• the making of a wager prohibited under the Professional and Amateur Sports Protection Act, or

• as including "any instructions or information pertaining to the establishment or movement of funds by the bettor or customer in, to, or from an account with the business of betting or wagering."

Some commentators have argued that the operation of online poker Websites should be excluded from the reach of the new law because poker, being a skillful game, is not a game of chance. Under current state law that argument does not hold water. Most U.S. jurisdictions apply the Dominant Factor test to determine if a contest is a game of skill or a game of chance. That test looks to which elements predominate (51%) in determining outcome of the game. If the elements of chance predominate, then it is a game of chance, notwithstanding that skill elements are important, but not predominant. Furthermore, the outcome is to be determined by the considering the nature of the game and the abilities of the average player coming to the game. See: Is Poker a Game of Skill? Online poker operators should consider mathematical analysis of their vast data bases of poker results to support attempts to overturn the case law that views the "luck of the draw" aspect of poker as resulting in its being a game of chance.

Excluded from the definition of "bet" are:

• various business transactions like securities and commodities trading and insurance policies

• participation in online games with no pay-to-play aspect and where the prizes are limited to free play of various games and

• certain fantasy sports contests

Conducting Unlawful Internet Gambling

Unlawful Internet gambling is defined as:

• placing, receiving or transmitting a bet

• by means of the Internet

• but only if that bet is unlawful under any other federal or state law applicable in the place where the bet is initiated, received or otherwise made.

• excluded from the coverage of "unlawful Internet gambling" are

  • waypoints along the World Wide Web that are only incidental to the places where the electronic transmission of the bet or wager is initiated and finally received.

  • online bets made solely within a single state under an enabling statute passed by that state. [Note: there are no such enabling laws at this time.]

  • online bets made solely on or among Indian tribal lands under enabling laws adopted by the affected tribes and approved by the National Indian Gaming Commission. [Note: no such laws have been adopted or approved at this time.]

  • online bets made under the Interstate Horseracing Act. [Note: online interstate bets on horse races where such bets are legal at both ends of the online connection have been permitted under that law since 2000.]

The new law, therefore, only applies to online gambling operators who violate other existing state or federal anti-gambling laws. Some commentators on this aspect of the Act conclude that since there are only a handful of states that expressly ban Internet gambling, this law has not accomplished very much.

The better view is that all of the online gambling sportsbooks, casinos and cardrooms violate existing anti-gambling laws of every one of the fifty states. This is because:

• The gambling is legally deemed to take place simultaneously at both ends of the Internet connection.

• Under applicable state laws these interactive online gambling Websites are deemed to be doing business in the states in which the players are located when they make a bet.

• The general anti-gambling laws of every state criminalize the operation of unlicensed gambling like the sportsbooks, casinos and cardrooms that are covered by the new law.

Thus, this professional form of unlicensed gambling appears to be illegal whether or not the state has adopted a specific Internet anti-gambling law.

Accepting Funds for Betting Banned

Section 5363 contains the basic prohibition of the new law. It bans online gambling operators from accepting most forms of funds to be used by the players to gamble on their Websites. The ban applies to:

"(1) credit, or the proceeds of credit, extended to or on behalf of such other person (including credit extended through the use of a credit card);
"(2) an electronic fund transfer, or funds transmitted by or through a money transmitting business, or the proceeds of an electronic fund transfer or money transmitting service, from or on behalf of such other person;
"(3) any check, draft, or similar instrument which is drawn by or on behalf of such other person and is drawn on or payable at or through any financial institution; or
"(4) the proceeds of any other form of financial transaction, as the Secretary [of the Treasury] and the Board of Governors of the Federal Reserve System may jointly prescribe by regulation, which involves a financial institution as a payor or financial intermediary on be half of or for the benefit of such other person."

Funds accepted under paragraphs (2), (3) and (4) must be paid by or drawn on a "financial institution." That term is defined by reference to Section 1693a of the Electronic Fund Transfer Act, and "means a State or National bank, a State or Federal savings and loan association, a mutual savings bank, a State or Federal credit union, or any other person who, directly or indirectly, holds an account belonging to a consumer." (Emphasis supplied.)

Some commentators have expressed the view that operators can avoid the application of the ban by accepting funds only through online financial intermediary e-wallets like NETeller and FirePay. The commentators reason that those intermediaries are located offshore, are not "financial institutions" and are not subject to direct regulation by the Federal Reserve Board ("Fed") or other U.S. governmental agencies.

The commentators are wrong. Section 5362(4) defines "financial transaction provider" to include any "...international ...payment network utilized to effect ... electronic fund transfer[s]..."

If that were not enough to grant the Fed power to impose include NETeller, et al, in its regulations, the Act also grants regulatory and enforcement powers to the Fed and the Federal Trade Commission ("FTC"). The FTC's enforcement authority specifically applies to financial transaction providers not otherwise subject to the jurisdiction of any Federal functional regulators. The Fed's regulatory power also includes the authority to adopt policies and procedures designed to prevent the acceptance of financial transactions prohibited by Section 5363.

It is a legal maxim that a law cannot be circumvented by doing indirectly that which cannot be done directly. If it appears to the Fed or the FTC that these financial intermediaries serve primarily as conduits for transmitting funds to online gambling operators, then either one of them could adopt regulations or seek enforcement sanctions effectively banning U.S. financial institutions from dealing with those intermediaries except on stated conditions designed to prohibit the intermediary from retransmitting the funds to online gambling operators.

In its interim financial report for the six months ended June 30, 2006, NETeller admits that 85% of its business is from U.S. residents. The report also says: "The first half of 2006 represented another period of continued growth and progress in line with our 'deepen and extend' strategy despite regulatory developments affecting our main market, the online gaming industry." On the basis of those facts, the Fed could well find that NETeller is primarily a conduit for the transmission of funds to the online gambling operators.

Those who log onto NETeller for the first time starting October 10, 2006, are greeted with a message announcing a change in that e-wallet company's customer terms and conditions. The following provision in paragraph 12.1(ii) is new (at least since March 31, 2005, which is the last time that NETeller permitted the Wayback Machine to record its old pages): "12.1 You are prohibited from engaging in any of the following: ... (ii) using the NETELLER Service for any purpose contrary to laws, statutes or regulations applicable to you, including without limitation, those concerning money laundering, fraud, criminal activity, financial services or consumer protection ..." Presumably this new provision applies to both players and the operators of online gambling Websites, since both are customers of NETeller.

Neteller has announced: "The Company expects to have a clearer view of how financial services companies can comply and any possible resulting impact on its business as the regulations are drafted in the 270 days following the signing of the Act. In the meantime, the Company will continue to operate its business to minimise any potential adverse impact, maintaining existing customer and merchant support across all the markets it currently serves.

On October 19, 2006, NETeller issued a further press release conceding that it will comply with the Act. It said:

NETELLER, a company registered outside the US, will comply with the Act and its related regulations as if it were subject to the Act's jurisdiction. This action is intended to ensure that the Company is able to continue to operate with the support of its principal commercial partners and to protect its shareholders, business partners, employees and reputation.

Various provisions of the Act, including the obligations of financial transaction providers such as NETELLER, remain unclear. This uncertainty should be largely resolved when the Secretary of the Treasury and the Board of Governors of the Federal Reserve System issue the regulations they are required to prescribe within 270 days.

On October 10, 2006, Fireone, the parent of the second leading e-wallet said: “The Company today announces that following the approval of the Act by the President of the United States, it will immediately cease to process settlement transactions originating from United States consumers that may be viewed as being related to online gambling. The Company expects the Act to be approved by the President of the United States in the immediate near term.”

Fed Regulations

Section 5364 mandates that the Federal Reserve Board and the Secretary of the Treasury issue "appropriate" regulations designed to identify and block the transfer of funds to the online gambling operators from U.S. financial institutions. The regulators are given nine months to put these regulations in place. Once the regulations are issued U.S. financial institutions will be required to comply with them.

The regulators are given the authority to "exempt certain transactions or designated systems from any requirement imposed ... if ...it is not reasonably practicable to identify and block, or otherwise prevent or prohibit the acceptance of such transactions." Sec 5364(b)(3). This provision was beefed up in the final version of the legislation in consideration of the views expressed by the banking industry that it would be impracticable, if not impossible, to block certain transactions, such as paper checks. See, for example, the letter from the Independent Community Bankers Association before Note: Even though U.S. financial institutions may not become obligated to block paper checks or certain other financial instruments, the acceptance of those items by the online gambling operators is still prohibited and criminalized under Sections 5363 and 5366.

The regulators are also mandated to "ensure that transactions in connection with any activity excluded fro the definition of unlawful internet gambling ... are not blocked... by the prescribed regulations. Section 5364(b)(4). In a summary of the new law the Independent Community Bankers Association states: "It will be difficult to craft and comply with this requirement. Procedures would have to discern the difference between legal and illegal forms of Internet gambling, which may depend on the exact location of the individual gambler. This goes well beyond what banks are required to do to root out terrorist financing and money laundering. However, financial institutions are shielded from liability for inadvertently blocking legal transactions." (Emphasis supplied.)

Criminal Penalties
Section 5366 imposes criminal penalties for accepting funds banned under Section 5363. The penalties include fines and jail time of up to 5 years. They also permit a court to enter permanent injunctions barring convicted violators from "making bets or wager or sending, receiving, or inviting information assisting in the placing of bet or wagers."

The new law did not amend, update or otherwise change the Wire Wager Act. This has been seized on by some commentators to reach the conclusion that operating an online casino or cardroom has not been criminalized. That view is irrelevant and a non sequitur. The new law is specifically applicable to all operators of online sportsbooks, casinos and cardrooms who accept bets and wagers in violation of any applicable state or federal anti-gambling law. It provides more severe criminal penalties than currently provided under the Wire Wager Act. Therefore, the new law is to be feared as much or more than the Wire Wager Act.

Obligations of U.S. Financial Institutions

Financial institutions and money transmitting businesses, like Western Union, ("financial transaction providers") are not subject to any liability if they rely on and comply with the regulations adopted by the federal regulators. Financial transaction providers are not liable to a customer for blocking a transaction in accordance with the regulations. Section 5364(d).

Obligations of Internet Service Providers

An Internet service provider ("ISP") such as AOL, Comcast.net or Verizon.net, is subject to civil enforcement proceedings brought by a federal or state attorney general to force it disable access to the online gambling Website or to other Websites that have a hypertext link to the online gambling Website. Section 5365(c). The ISP against whom the relief is to be sought must be the actual host of the offending Website. Since all of the current online gambling websites are hosted by ISPs outside the U.S., and thus beyond the jurisdiction of the U.S. courts, this provision is basically only applicable to affiliates of online gambling sites. It is very easy for such affiliates to transfer their Websites outside the U.S. to avoid being removed from the World Wide Web. Finally, no ISP is required to monitor its service or to affirmatively try to track down any activity by its customers that might be in violation of the Act.

Aider and Abettor Liability

The federal aider and abettor statute, 18 U.S.C. 2, provides:

"(a) Whoever commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal.
(b) Whoever willfully causes an act to be done which if directly performed by him or another would be an offense against the United States, is punishable as a principal."

The criminal provision of Section 5366 creates a new "offense against the United States." All those who aid or abet an online gambling website that is in violation of Section 5363, and thus of Section 5366, are punishable as if they were the online gambling Website. The same goes for those who are employees and officers. In appropriate cases this "punishable as a principal" law may also ensnare directors, major shareholders, advertising media, affiliates and those who are so-called consultants, team members or front men for the online gambling Websites.

Sampling of Responses to the New Law

A commentator for BettingMarket.com concluded:

"It is now widely believed that when the Unlawful Internet Gambling Enforcement Act of 2006 is signed into law, all but the most cavalier of online operators will stop accepting bets from US citizens.

"The notion that a number of the leading companies, may then decide to hang around in the US, exploiting opt out clauses in the Act, simply beggars belief.

"Until the climate changes, the best advice would be to give the US a wide bearth once and for all. To do otherwise would be to antagonise the US authorities, and to further increase the risk of arrest. And that is something that beleagured ordinary investors can live without."

Jeff Simpson, the business editor of the Las Vegas Sun expressed this conclusion: [I]f the poker community keeps whistling past the graveyard, pretending that there's nothing wrong with flouting the law in pursuit of easy money, even tougher crackdowns are ahead.

In a press release, PartyGaming, the parent of PartyPoker.com said:

"The Act is expected to be signed into law by President Bush within the next two weeks.... [I]t will immediately make unlawful the receipt by a gambling business of proceeds or monies in
connection with unlawful internet gambling. The Act does not clarify the definition of unlawful gambling.
However, as the first piece of Federal legislation dealing explicitly with internet gaming, it does make
clear that the US government intends to stop the flow of funds from Americans to online gaming
operators through criminal sanction. The Act also asserts that, under US law, a wager must be permitted
under the laws both of the customer’s place of residence and that of the operator.

"After taking extensive legal advice, the Board of PartyGaming Plc has concluded that the new legislation,
if signed into law, will make it practically impossible to provide US residents with access to its real money
poker and other real money gaming sites. As a result of this development, the Board of PartyGaming
has determined that if the President signs the Act into law, the Company will suspend all real money
gaming business with US residents, and such suspension will continue indefinitely, subject to clarification
of the interpretation and enforcement of US law and the impact on financial institutions of this and other
related legislation...."

Echoing that conclusion, publicly-held 888.com, has announced that once the Act is signed into law it will no longer allow U.S. residents to play on its real money sites at Casino-on-Net and Pacific Poker. SportingBet has announced that its online porker room, Paradise Poker will stop taking U.S. bets on October 13.

Here is a statement made by Jeffrey Pollock, Harrah's vice president of sports and entertainment marketing and its World Series of Poker Commissioner: "I honestly haven't spent much time thinking about what the (poker) dot-coms do or don't do because we're not in business with them.... First of all, we do not accept money from any dot-com site. If an individual is registered by a third party, that third party signs an affidavit saying the funds did not come from illegal sources. So we are not in business with dot-com sites." Surely that remark is breathtakingly disingenuous. Something approaching half of the $88,000,000 in entry fees Harrah's took in for the championship event at the 2006 World Series of Poker came from the dot.com online poker cardrooms. The payments were thinly disguised as coming from advertising agencies for those dot.com sites or from the Trojan horse dot.net sites run by those online cardrooms. There can be no doubt that Harrah's actually knew the true source of the funds that paid for those 4,400 or more entries. This is especially so in light of the fact that none of the dot.net sites have any way of making any money since they are all free play sites. Could anyone honestly think that the advertising agencies paid in money of their own?

The ludicrous nature of Commissioner Pollock's PR-spin is demonstrated by the recent information Harrah's has given to the online cardrooms that it will not be accepting third-party registrations for the 2007 World Series of Poker events. One observer expressed the view that the main event at next year's World Series of Poker would draw fewer than 2,200 players, a drop in attendance of some 75%.

Additionally, one of the online cardrooms, FullTiltPoker.com, has announced: "Unfortunately due to the upcoming change in legislation Full Tilt Poker will no longer be able to satellite US residents into live tournaments in US. This policy will be effective immediately."

A number of the online cardrooms, all of which are privately-held companies, have announced they intend to continue their real money U.S. facing online poker rooms. Included is the current second largest online cardroom, PokerStars.com, as well as UltimateBet.com, FullTiltPoker.com, DoylesRoom.com and AbsolutePoker.com, among others. PokerStars is sending e-mails to some of its players that state:

PokerStars has received extensive expert advice from within and outside the U.S. which concluded that these provisions do not alter the U.S. legal situation with respect to our offering of online poker games.

Furthermore it is important to emphasize that the Act does not in any way prohibit you from playing online poker.

Therefore, our business continues as before - open to players worldwide including the US. You may play on our site as you did prior to the Act.

PokerStars believes that poker is a game of skill enjoyed by millions of players and we remain committed to providing you a safe and fun environment in which to play. We value your loyalty to PokerStars, and look forward to continuing to serve you with the best online poker experience, as we have for the past five years, six billion hands, and 40 million tournaments.

Doyle Brunson sent a personal e-mail under his picture and over his signature to players at DoylesRoom.com saying:

We at Doyle’s Room have taken extensive legal advice and believe that it is far too early to fully understand the implications of this bill on our industry. Based on the legal advice we have received, the new bill does not make internet poker expressly illegal nor does it take aim at players who enjoy online poker. However, there are some U.S. States that have existing regulations in place that may prohibit online gaming, so we encourage all of our U.S. players to review the laws of the State in which they reside.

Until such time as the law becomes clearer, Doyle’s Room will operate as normal with our full exciting range of games and tournaments at all limits.

And finally, please rest assured your money is completely secure at Doyle’s Room. I personally guarantee it.
(Emphasis supplied.)

The fact that the new law does not expressly name poker as a prohibited online game should not be taken as providing comfort to the owners and sponsors of DoylesRoom.com. As pointed out previously in this article, the Act creates a new federal crime with a five-year felony penalty, which exceeds that mandated under the Wire Wager Act. Mr. Brunson is a U.S. citizen residing in Las Vegas, Nevada and is thus readily subject to indictment and arrest. Nevada is a state that has a specific law (NRS 463.750 License required for person to operate interactive gaming) making operating an Internet gambling site illegal. The new Act clearly applies to DoylesRoom.com, and thus to Mr. Brunson. Furthermore, while the absence of illegality by those playing online may be comforting to them, it should not provide any comfort to DoylesRoom.com or to Mr. Brunson.

PokerStars and some of its privately-held competitors maintain segregated account deposits with European banks in an attempt to protect players deposits. PokerStars uses Royal Bank of Scotland. On October 12 reports surfaced that Barclays and Royal Bank of Scotland warned corporate customers not to accept US online gaming transactions. The report quoted an unnamed industry source as saying: "banks with US licences did not want to be linked with any funds that could be considered illegal, and wanted to remain whiter than white so as not to breach any legislation, however unclear that legislation is."

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