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Gambling and the Law:
The Unlawful Internet Gambling Enforcement Act of 2006 Analyzed

Copyright October 4, 2006, all rights reserved worldwide. Gambling and the Law® is a registered trademark of Professor I Nelson Rose, www.
GamblingAndTheLaw.com.


By I. Nelson Rose
WagerWeb.com Contributing Writer

The Unlawful Internet Gambling Enforcement Act of 2006 was rammed through Congress by the Republican leadership in
the final minutes before the election period recess. According to Sen. Frank R. Lautenberg (D-NJ), no one on theSenate-
House Conference Committee had even seen the final language of the bill. The Act is title VIII of a completely unrelated
bill, the Safe Port Act, HR 4954, dealing with port security. It can be found on pages 213 -244 of the Conference Report:
The following is a detailed analysis of the Act. The section numbers that follow refer to new sections that have been
added to title 31 of the U.S. Code:

§5361 The Act begins with Congress’ findings and purpose. These include a recommendation from the discredited
National Gambling Impact Study Commission, whose chair was the right-wing, Republican incompetent, Kay Coles James.
Findings include the doubtful assertion that Internet gambling is a growing problem for banks and credit card companies. It
correctly states that "new mechanisms for enforcing gambling laws on the Internet are necessary," especially cross-border
betting.

The Act contains a standard clause that it does not change any other law or Indian compact. It repeats this many times,
to make sure that no one can use the Act as a defense to another crime, or to expand existing gambling.

Most important, the Department of Justice is arguing before the World Trade Organization, in the dispute between the U.
S. and Antigua, that all interstate gambling is illegal under the Wire Act. The DOJ insisted that any Internet prohibition
passed by Congress not expressly authorize Internet betting on horse racing. The DOJ believes this will allow it to continue
to argue that the Interstate Horse Racing Act does not do exactly what it says it does, legalize interstate horse racing.

§5362 Definitions. Bet or wager includes risking something of value on the outcome of a contest, sports event "or a game
subject to chance." The Act otherwise allows contestants to risk money on themselves. The "game subject to chance"
restriction is designed to eliminate Internet poker.

The Act then confuses the issue of skill by stating that betting includes purchasing an "opportunity" to win a lottery,
which must be predominantly subject to chance. Someone will figure out a way to create an opportunity to win, where
the opportunity is subject to some chance. But the Act expressly prohibits lotteries based on sports events.

Betting includes instructions or information. This eliminates the argument overseas operators used that the money was
already in a foreign country, so no bet took place in the U.S.

The Act exempts activities that we all know are gambling, but are, by statute, declared not to be gambling. These include
securities and commodities, including futures, that are traded on U.S. exchanges. Boilerrooms and bucketshops, selling
foreign securities are gambling. Insurance is not.

Free games are not gambling. But there is a special provision that allows sites to offer points or credits to players only if
these are redeemable only for more games. Operators of free games, where players can win valuable prizes, will have to
stop giving points for wins that can be redeemed for cash. Free bingo, on the other hand, can still give small cash prizes
paid out of the advertising budget.

Fantasy leagues are legal, but subject to detailed restrictions. A fantasy team cannot be "based on the current
membership of an actual team." What they actually mean is a fantasy team cannot be composed merely of the players of
a real team. There is no limit on the cost of entering, but prizes must be announced in advance, and not based on the
fees paid by participants. Statistics must be derived from more than one play, more than one player, and more than one
real-world event.

Being in the "business of betting or wagering" still does not include mere players. It also expressly does not include
financial institutions involved in money transfers.

"Designated payment system" is a new term. It could have been labeled simply "_," as in "you are the _ of a criminal
investigation." It covers any system used by anyone involved in money transfers that the federal government determines
could be used by illegal gambling. The procedure will be that the Secretary of the Treasury, Board of Governors of the
Federal Reserve System and Attorney General will meet and create regulations and orders _ing certain money transfer
systems.

"Financial transaction provider" is a very broad definition covering everyone who participates in transferring money for illegal
Internet gambling. This expressly includes an "operator of a terminal at which an electronic fund transfer may be initiated,"
and international payment networks. This covers third party providers, like Neteller.

"Interactive computer service" includes Internet service providers.

"Restricted transaction" means any transmittal of money involved with unlawful Internet gambling.

"Unlawful Internet gambling" is defined as betting, receiving or transmitting a bet that is illegal under federal, state or tribal
law. The Act says to ignore the intermediary computers and look to the place where the bet is made or received.

This does not completely solve the problem of Internet poker, or even Internet casinos. The Act does not expand the
reach of the Wire Act, the main federal statute the DOJ uses against Internet gambling. Although the DOJ has taken the
position that the Wire Act covers all forms of gambling, courts have ruled that it is limited to bets on sports events and
races. State anti-gambling statutes have similar weaknesses, including the presumption that they do not apply if part of
the activity takes place overseas. This new statute requires that the Internet gambling be "unlawful." But it would often
be difficult to find a federal, state or tribal law that clearly made a specific Internet bet illegal.

Nevada and other states are expressly permitted to authorize 100 percent intrastate gambling systems. Congress required
that state law and regulations include blocking access to minors and persons outside the state.

Tribes were given the same rights, with the same restrictions. Two tribes can set up an Internet gaming system, if it is
authorized by the Indian Gaming Regulatory Act. This means that tribes can operate bingo games linking bingo halls on
reservations. They can also link progressive slot machines, if their tribal-state compacts allow. But they cannot operate
Internet lotteries and other games open to the general public.

It is interesting that Congress decreed that states can decide for themselves if they want to have at-home betting on
horse racing, but not on dog racing. Congress also decreed that tribes can operate games that link reservations, even
across state lines, but not the states themselves: State lotteries are not exempt, as they were in the House bill. This will
lead to an inevitable fight over whether multi-state lotteries are legal, once players can buy tickets on the Internet, since
they will be sold only in states where the sales are legal.

Congress had a little problem with the term "financial institution." To force casinos to report large cash transaction, federal
law was changed to define "financial institution" as including large gambling businesses. Congress had to undo that
definition, so that in this Act casinos go back to being casinos.

The other definitions are standard or are described above.

§5363 "No person engaged in the business of betting or wagering may knowingly accept" any money transfers in any way
from a person participating in unlawful Internet gambling. This includes credit cards, electronic fund transfers and even
paper checks. But it is limited to Internet gambling businesses, not mere players. It also would not cover payment
processors or ISPs, even under a theory of aiding and abetting.

Strangely, the Act clearly does not make it a crime to knowingly transmit funds for illegal gambling. For a law designed to
stop the flow of money, it is bizarre to make it a crime only to receive the funds, but not to send them or transmit them:
Neither the player nor the intermediary can be charged with this crime. The language of the Act even eliminates the
possibility of charging financial institutions and computer hosts under a theory of aiding and abetting, since it explicitly
states, in the definitions section, that being in the business of gambling does not include a "financial transaction provider,"
or an ISP.

§5364 Federal regulators have 270 days from the date this bill is signed into law to come up with regulations to identify
and block money transactions to gambling sites. At this writing, President Bush had not yet signed this bill, but he will. So
the regs will go into effect by the beginning of July 2007.

The regs will require everyone connected with a "designated payment system" to ID and block all restricted transactions.
So all payment processors are supposed to have systems in place to prevent money from going to operators of illegal
Internet gambling. The first step will undoubtedly be to take the credit card merchant code 7995 and expand it to all
money transfers. Visa created the 7995 classification in 2001 to avoid having its credit cards used for online gambling. The
federal government will order banks and all others involved with electronic money transfers to cease sending funds to any
Internet operator who has a 7995 credit card merchant code. Any financial institution that follows the regs cannot be
sued, even if it wrongfully blocks a legitimate transaction.

The Act allows the federal regulators to exempt transactions where it would be impractical to require identifying and
blocking. This obviously applies to paper checks. Banks have no way now of reading who the payee is on paper checks
and cannot be expected to go into that business. Banks tried to defeat this bill, not because they cared about patrons’
privacy, but because they knew that it would cost them billions of dollars to set up systems to read paper checks.

The great unknown is how far into the Internet commerce stream federal regulators are willing to go. The Act requires
institutions like Bank of America and Neteller to ID and block transactions to unlawful gambling sites, whatever they are.
But, while Bank of America will comply, Neteller might not, because it is not subject to U.S. regulations. Will federal
regulators then prohibit U.S. banks from sending funds to Neteller? And would they then prohibit U.S. banks from sending
funds to an overseas bank, which forwards the money to Neteller?

For financial institutions within the U.S, the Act provides that exclusive regulatory enforcement rests with their federal
regulators, like the Federal Reserve Board. The Federal Trade Commission is supposed to enforce regulations on everyone
else. It is extremely doubtful whether the FTC. will ever try to do anything about the Netellers of the world, who are
beyond regular U.S. regulatory control.

§5365 Since there is no way to regulate overseas payment processors, the Act allows the U.S. and state attorneys
general to bring civil actions in federal court. The courts have the power to issue temporary restraining orders, preliminary
and permanent injunctions, to prevent restricted transactions. The only problem with this enormous power is that it is,
again, practically useless against payment processors who are entirely overseas.

It is difficult to serve a company with the papers necessary to start a lawsuit, a summons and complaint or petition, if the
company has no offices, or officers, in the U.S. Even if the papers for such a lawsuit can be served, there is normally no
requirement that foreign countries enforce these types of orders. Other countries are particularly reluctant to enforce a T.
R.O., which does not even require that the defendant be present. Preliminary injunctions are also often ignored, because
they are issued without a full trial and can be modified at anytime by the trial judge. Neteller operates out of the Isle of
Man. I do not know of any treaty or other law which would require the Isle of Man to enforce even a permanent
injunction against one of its licensed operators.

The Act provides for limited civil remedies against "interactive computer services." An Internet service provider can be
ordered to remove sites and block hyperlinks to sites that are transmitting money to unlawful gambling sites. ISPs are
under no obligation to monitor whether its patrons are sending funds to payment processors or even directly to gambling
sites. But once it receives notice from an U.S. Attorney or state Attorney General, the ISP can be forced to appear at a
hearing to be ordered to sever its links.

But the statute has an interesting requirement: The site must "reside on a computer server that such service controls or
operates." This would limit the reach of this statute to payment processors, affiliates and search engines that are housed
on that particular ISP. The same problem of going after foreign operators and payment processors affects this section.
Foreign ISPs are difficult to serve and not necessarily subject to federal court injunctions.

The greatest danger here would seem to be with affiliates. Any American operator can be easily grabbed. This includes
sites that don’t directly take bets, but do refer visitors to gaming sites. If the affiliate is paid for those referrals by receiving
a share of the money wagered or lost, it would not be difficult to charge the affiliate with violating this law, under the
theory of aiding and abetting. Being a knowing accomplice and sharing in the proceeds of a crime make the aider and
abettor guilty of the crime itself. The federal government could also charge the affiliate with conspiracy to violate this new
Act.

The other danger lies with search engines. Although California-based Google does not take paid ads, punching in "sports
bet" brings ups many links to real-money sites. This new Act expressly allows a federal court to order the removal of "a
hypertext link to an online site" that is violating the prohibition on money transfers. But what prosecutor would want to
be ridiculed internationally for trying to prevent Google from showing links?

The Act gives ISPs a little more security by declaring that they cannot be convicted of violating the Wire Act, unless, of
course, the ISP is operating its own illegal gambling site.

This section of the Act ends with a limitation, that, frankly, makes no sense. It says that, after all the talk of getting court
orders to prevent restricted transactions, "no provision of this subchapter shall be construed as authorizing" anyone "to
institute proceedings to prevent or restrain a restricted transaction against any financial transaction provider, to the extent
that the person is acting as a financial transaction provider." This could be a typo, since the bill was rushed through
without an opportunity to even be read. Or perhaps it means that banks can be ordered to not transfer money to
gambling sites, but only if they know about it. It is indecipherable.

§5366 Criminal penalties: Up to five years in prison, and a fine. And barred from being involved in gambling.

§5367 The Act naturally makes ISPs and financial institutions liable if they actually operate illegal gambling sites themselves.

Lastly, the Act requests, but does not require, the executive branch to try and get other countries to help enforce this
new law and "encourage cooperation by foreign governments" in identifying whether Internet gambling is being used for
crime. The Secretary of the Treasury is told to issue a report to Congress each year "on any deliberations between the
United States and other countries on issues relating to Internet gambling." That report will go unread.

© Copyright October 4, 2006. Professor I Nelson Rose, Whittier Law School, Costa Mesa, CA is recognized as one of the
world’s leading experts on gambling law. His latest books, Gaming Law: Cases and Materials and Internet Gaming Law, are
available through his website,