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Background

American law has always reflected an ambivalence towards gambling. Anti-gambling laws were common in colonial America, yet even in the Northeast where they were perhaps most numerous the lottery was a popular form of public finance. A majority of states continue to outlaw most forms of gambling, but most also continue to employ a lottery as a means of public finance and to allow several other forms of gambling as well.

Before the 1990s, individuals who wanted to place a casino- or sports-type bet in the United States basically had two choices: they could travel to a legitimate brick-and-mortar gaming establishment or place an illegal wager through a bookmaker. However, with the emergence of the Internet in the mid-1990s, a new form of gambling appeared — online gaming casinos and sports wagering. Internet gambling can take place on any electronic device that offers Internet access anywhere on the globe. The global legal framework for Internet gambling is a complicated mix of laws and regulations. In the United States, both federal and state statutes apply.

State regulation

Gambling is generally regulated at the state level, with each state determining whether individuals can gamble within its borders and whether gaming businesses can legally operate there. Five states (Illinois, Louisiana, Nevada, Oregon, and South Dakota) have enacted laws that specifically prohibit certain aspects of Internet gambling, but laws in other states that prohibit some types of gambling activities generally apply to Internet gaming as well.

For example, in states that prohibit all types of gambling, such as Utah, Internet gaming also would be illegal. In some states the status of Internet gambling is unclear, as laws may prohibit some types of gaming, but may not be interpreted as applying to Internet gambling.

Federal regulation

Although gambling regulation is generally left to the states, the federal government has the authority, under the Commerce Clause of the Constitution, to regulate gambling activity that affects interstate commerce. Internet gambling falls into this category, as bets are generally placed at a personal computer in one state or country and received at a server in another state or country.

There are many federal gambling laws, most enacted to prevent unwelcome intrusions of interstate or international gambling into states where the activity in question has been outlawed. In some cases, Internet gambling is not much different than gambling by telephone — a bettor places his bet with a bookie using his computer and e-mail rather than using just his telephone. Gamblers have introduced features like proxy gambling, gambling for credit, and at least the claim of gambling in a virtual offshore gambling locale to induce bettors to believe they have overcome legal prohibitions. In fact, they have not. Nevertheless, enforcement may be uncertain.

Illicit Internet gambling implicates at least six federal criminal statutes. It is a federal crime to

(1) conduct an illegal gambling business, 18 U.S.C. §1955;
(2) use the telephone or telecommunications to conduct an illegal gambling business, 18 U.S.C. §1084;
(3) use the facilities of interstate commerce to conduct an illegal gambling business, 18 U.S.C. §1952;
(4) conduct the activities of an illegal gambling business involving either the collection of an unlawful debt or a pattern of gambling offenses, 18 U.S.C. §1962;
(5) launder the proceeds from an illegal gambling business or to plow them back into the business, 18 U.S.C. §1956; or
(6) spend more than $10,000 of the proceeds from an illegal gambling operation at any one time and place, 18 U.S.C. §1957.

Internet gambling cannot be raided in a traditional sense, and gambling is rarely a high law enforcement priority even without the complications that the Internet can bring to the table. However that may be, using the Internet to conduct a gambling business, either involving betting on sporting events or involving a form of gambling illegal under the laws of the state in which any of the players are located, will almost certainly involve the violation of one or more federal criminal laws.

Wire Act

The Wire Act,[1] which prohibits gambling businesses from using interstate or international telecommunications wires to knowingly transmit or receive bets, is the main federal statute used to prosecute such activity. It has been used successfully to prosecute Internet gambling businesses,[2] but contains some ambiguities that may limit its applicability, especially concerning the types of gambling it covers.

In general terms, the Act outlaws the use of interstate telephone facilities by those in the gambling business to transmit gambling-related information. The elements of Section 1084 extend to anyone who: (1) being engaged in the business of betting or wagering (2) knowingly (3) uses a wire communication facility (4)(A) for the transmission in interstate or foreign commerce (i) of bets or wagers or (ii) information assisting in the placing of bets or wagers on any sporting event or contest, or (B) for the transmission of a wire communication which entitles the recipient to receive money or credit as a result of bets or wagers, or (C) for information assisting in the placing of bets or wagers. . . . [3]

The Act has been more sparingly used than some of the other federal gambling statutes, and as a consequence it lacks some of interpretative benefits which a more extensive case law might bring. The Act is addressed to those "engaged in the business of betting or wagering" and therefore apparently cannot be used to prosecute simple bettors.

In a literal sense, the Act outlaws (1) the transmission of any gambling-related ]]information[[ and (2) the transmission of sports bets, but the vast majority of prosecutions have involved sports gambling. While cases involving other forms of gambling under Section 1084 are not unknown, at least one federal appellate panel has concluded that the Wire Act applies only to sports gambling and information about sports gambling.

The Department of Justice generally takes the view that the Wire Act is not limited to sports-related gambling activities, but case law on this issue is conflicting. Thus, if an Internet gambling website operating in any country (including the United States) receives a bet transmitted by an individual located in the United States, the operator has violated the Act. For this reason, foreign entities offering gambling to U.S. citizens through the Internet would be subject to the Act. Although some Internet gambling businesses, including foreign entities, have been successfully prosecuted under the Act, courts do not agree on the applicability of certain sections of the statute.

An accomplice who aids and abets another in the commission of a federal crime may be treated as if he had committed the crime himself. The classic definition from Nye & Nissen v. United States[4] explains that liability for aiding and abetting attaches when one “in some sort associates himself with the venture, participates in it as in something that he wishes to bring about, [and] seeks by his action to make it succeed.”

With this in mind, the Department of Justice has advised the National Association of Broadcasters (NAB) that its members risked prosecution for aiding and abetting when they provided advertising for the online gambling operations. In addition to such accomplice liability, a conspirator who contrives with another for the commission of a federal crime is likewise liable for the underlying crime and for any additional, foreseeable offense committed by a confederate in furtherance of the common scheme.

Illegal gambling businesses

On the face of it, an illegal gambling business conducting its activities by way of the Internet seems to come within the reach of 18 U.S.C. §1955. The elements of Section 1955 apply to anyone who: (1)(A) conducts, (B) finances, (C) manages, (D) supervises, (E) directs, or (F) owns; (2) all or part of an illegal gambling business that; (3)(A) is a violation of the law of a State or political subdivision in which it is conducted, (B) involves five or more persons who conduct, finance, manage, supervise, direct, or own all or part of such business, and (C) has been or remains in substantially continuous operation for a period in excess of thirty days or has a gross revenue of $2,000 in any single day.

Operating a gambling website for over 30 days in a state under the conditions described above would violate this Act. A website could easily meet these conditions, including the requirement that at least five individuals be involved in its operation. The five people do not need to be directly involved in the gambling but must only be considered “necessary and helpful” to the operation. Computer operators, computer maintenance crews, accountants, and owners could all be included as “necessary and helpful” in the operation of an Internet gambling Web site.

Like the Wire Act, the Illegal Gambling Business Act applies only to gambling businesses, not individual gamblers. The Illegal Gambling Business Act does not require that the casino operators be convicted in state court, but the gambling activity must violate state law.[5] The proof requirements associated with the Illegal Gambling Business Act are minimal; the government must prove only that the business has met the three conditions.[6] The 30-day requirement is satisfied if there is a “repeated pattern of gambling activity.”[7]

Travel Act

The operation of an illegal gambling business using the Internet may also involve violations of the Travel Act.[8] The courts often abbreviate their statement of the Act’s elements to the following: “The government must prove (1) interstate travel or use of an interstate facility; (2) with the intent to . . . promote . . . an unlawful activity and (3) followed by performance or attempted performance of acts in furtherance of the unlawful activity.” The U.S. Supreme Court determined some time ago that the Travel Act does not apply to the simple customers of an illegal gambling business, although interstate solicitation of those customers may certainly be covered. Accomplice and coconspirator liability provisions, discussed earlier, apply with equal force to the Act.

In the case of Internet gambling, the jurisdictional element of the Travel Act might be established at a minimum either by reference to the telecommunications component of the Internet, to shipments in interstate or foreign commerce (in or from the United States) associated with establishing operations on the Internet, to any interstate or foreign nexus to the payment of the debts resulting from the gambling, or to any interstate or foreign distribution of the proceeds of such gambling.

The Act would only apply to “business enterprises” involved in illegal gambling, so that e-mail gambling between individuals would likely not be covered. But an Internet gambling venture that constitutes an illegal gambling business for purposes of Section 1955, and is engaged in some form of interstate or foreign commercial activity in furtherance of the business will almost inevitably have included a Travel Act violation.

Unlawful Internet Gambling Enforcement Act

The proscriptions of the Unlawful Internet Gambling Enforcement Act of 2006 are simply stated: (1) No person (2) engaged in the business of (3) betting or wagering (4) may knowingly accept (5) in connection with participation of another person (6) in unlawful Internet gambling (7)(A)(credit . . . including . . . use of a credit card; or (B) an electronic fund transfer . . . or (C) any check . . . or (D) the proceeds of any other form of financial transaction.[9]

The proscription, however, is attended by an exhaustive array of definitions, qualifications and exceptions, that color its construction. The Act uses the definition of “bet or wager” to place beyond the reach of the Act’s proscriptions many forms of activity that otherwise fit the definition but which for the most part are not ordinarily considered gambling. It describes “bet or wager” as “the staking or risking by any person of something of value upon the outcome of a contest of others, a sporting event, or a game subject to chance, upon an agreement or understanding that the person or another person will receive something of value in the event of a certain outcome.”[10]

The list of common activities exempted from the definition include securities and commodities exchange activities, insurance, Internet games and promotions that do not involve betting, and certain fantasy sporting activities. The definition of what is not “unlawful Internet gambling” for purposes of the Act provides the exemptions for various forms of previously legalized intrastate and tribal gambling, and sets aside the issue of the legality under the Wire Act of various forms of Internet use by the horse racing industry. The definition also exempts certain intrastate and intratribal forms of gambling, like state lotteries and Indian casinos that operate under state regulations or compacts, from the prohibitions of the Act, if certain age and location verification conditions are met. The Act features criminal, civil and regulatory enforcement mechanisms.

Racketeer Influenced and Corrupt Organizations (RICO)

Illegal gambling may trigger the application of RICO provisions. Section 1955, the Wire Act, the Travel Act, and any state gambling felony are all RICO predicate offenses. To establish the elements of a substantive RICO offense, the government must prove (1) that an enterprise existed; (2) that the enterprise affected interstate or foreign commerce; (3) that the defendant associated with the enterprise; (4) that the defendant participated, directly or indirectly, in the conduct of the affairs of the enterprise; and (5) that the defendant participated in the enterprise through a pattern of racketeering activity by committing at least two racketeering (predicate) acts, e.g., 18 U.S.C. §1084 (Wire Act), 18 U.S.C. §1952 (Travel Act), 18 U.S.C. §1955 (illegal gambling business). RICO conspiracies are outlawed in a subsection that imposes no overt act requirement. They are complete upon the agreement to commit a RICO offense.

Money laundering

Congress has enacted several statutes to deal with money laundering. It would be difficult for an illegal Internet gambling business to avoid either of two of the more prominent,[11] both of which involve financial disposition of the proceeds of various state and federal crimes, including those under 18 U.S.C. §1084 (Wire Act), 18 U.S.C. §1955 (illegal gambling business), 18 U.S.C. §1952 (Travel Act), or any state gambling law (if punishable by imprisonment for more than one year).

Section 1956 is really several distinct crimes: (1) laundering with intent to promote an illicit activity such as an unlawful gambling business; (2) laundering to evade taxes; (3) laundering to conceal or disguise; (4) structuring financial transactions (smurfing) to avoid reporting requirements; (5) international laundering; and (6) “laundering” conduct by those caught in a law enforcement sting.

In its most basic form the promotion offense essentially involves plowing the proceeds of crime back into an illegal enterprise. Like most of the crimes under Section 1956, the elements of the promotion offense begin with a financial transaction and the knowledge that the proceeds involved flow from a predicate offense like illegal gambling.

The “concealment” offense shares several common elements with the other offenses in Section 1956. The courts have made it clear that conviction for the concealment offense requires proof of something more than simply spending the proceedings of a predicate offense. The tax evasion and structured transactions ("smurfing") offenses shadow the promotion and concealment offenses. A tax evasion, laundering prosecution requires the government to show that the defendant acted intentionally rather than inadvertently, but not that the defendant knew that his conduct violated the tax laws. Similarly, conviction for the smurfing offense does not require a showing that the defendant knew that his conduct was criminal as long as the government establishes that the defendant acted with the intent to frustrate a reporting requirement. The international laundering crime replicates the elements of the promotion, concealment and smurfing offenses (but not the tax evasion offense) and adds an international transportation element.

Of course, proof of the transportation element alone is insufficient without the evidence of an intent to promote, conceal or smurf. The final crime found in Section 1956 is a “sting” offense, the proscription drafted to permit the prosecution of money launderers taken in by under-cover officers claiming to have proceeds in need of cleansing from illegal gambling or other predicate offenses.

Section 1956 does not make spending tainted money a crime, but Section 1957 does. Using most of the same definitions as section 1956, the elements of 1957 cover anyone who: 1. A. in the United States, B. in the special maritime or territorial jurisdiction of the United States, or C. outside the United States if the defendant is an American; 2. knowingly; 3. A. engages or B. attempts to engage in; 4. a monetary transaction; 5. (in or affecting interstate commerce); 6. in criminally derived property that A. is of a greater value than $10,000 and B. is derived from specified unlawful activity.

Other federal statutes

Two other statutes have some applicability to Internet gambling — the Indian Gaming Regulatory Act (IGRA)[12] and the Interstate Horseracing Act (IHA).[13] Certain types of gaming on Indian reservations are permitted under IGRA, with the regulatory jurisdiction determining the type of gambling that is permissible. One case has addressed some of the issues and raised the question of whether Internet gambling takes place on tribal lands when bettors who are not on tribal lands use their home computers to access Internet lotteries via computer servers that are. The case involved the question of whether the state of Missouri could prevent a Native American tribe in Idaho from accepting money from Missouri residents via a lottery Internet site.[14] After dismissals, removals, and appeals, the case was eventually settled, but it is unclear whether the court resolved the issue of whether Internet gambling takes place on tribal lands when the website is located on those lands.[15]

Pari-mutuel wagering on state-licensed horse races takes place over the Internet in a number of states.[16] Federal and state laws govern this activity. In 1978, Congress passed the IHA to regulate interstate commerce with respect to pari-mutuel wagering on horse races. The IHA provides that no person may accept an interstate off-track wager[17] without the consent of the appropriate host racing association, the host racing commission, the off-track racing commission, and nearby race tracks. Pari-mutuel wagers fall into this category if they are legal in both of the states, are made by telephone or other electronic device, and are accepted by an off-track betting system in any state, as well as the combination of any pari-mutuel wagering interstate pools. The language of the statute appears to allow the electronic transmission of interstate bets as long as the appropriate consent is obtained.

Wagering on horses over the Internet is generally done using a closed-loop, subscriber-based system designed to limit access. In March 2000, DOJ officials testified that it was a violation of the Wire Act for an entity to offer bets on horse races over the Internet. The IHA was amended in December 2000 to explicitly expand interstate off-track wagers to include wagers through the telephone or other electronic media.[18]

Constitutional issues

There have been suggestions that prosecution of illegal Internet gambling raises various constitutional issues. Principal among these are questions as to legislative power under the Commerce Clause, restrictions imposed by the First Amendment’s guarantee of free speech, and due process concerns about the regulation of activities occurring at least in part overseas.

Commerce Clause

Congress possesses no legislative power that cannot be traced to the Constitution. Among its constitutionally enumerated powers, Congress enjoys the authority to regulate interstate and foreign commerce. Over the years, the Supreme Court regularly confirmed the enormous breath of Congress's legislative prerogatives under the Commerce Clause. Within the last decade, however, it has announced a series of decisions pointing out that Congress's Commerce power is not without limit. These limitations, notwithstanding, the federal appellate courts have concluded, thus far, that the federal gambling statutes, directed as they are against an economic activity, come safely within Congress’s legislative authority under the Commerce Clause.

First Amendment

Gambling implicates First Amendment free speech concerns on two levels. Gambling is communicative by nature. Gambling also relies on advertising and a wide range of auxiliary communication services. Historically, gambling itself has been considered a vice and consequently beyond the protection of the First Amendment. There is every reason to believe that illegal gambling remains beyond the shield of the First Amendment. Gone, however, is the notion that the power to outlaw a vice includes the power to outlaw auxiliary speech when the underlying vice remains unregulated. The Supreme Court made this readily apparent when it approved an advertising ban on gambling illegal at the point of broadcast, but invalidated an advertising ban on gambling lawful at the point of broadcast. Although the Court acknowledges the ambivalence of American gambling policies, it does not appear to threaten the basic premise that the First Amendment permits Congress to outlaw gambling in any form and to ban any speech incidental to illegal gambling.

Due Process

Commentators have suggested two possible due process issues triggered by application of federal criminal law to offshore Internet gambling. They point to the due process limitations on the exercise of personal jurisdiction over the defendant or subject matter jurisdiction over the gambling activity.

Questions of personal jurisdiction are the more familiar of the two. They revolve around issues, often addressed in civil cases, concerning the reach of a state’s long-arm statute. The Supreme Court has explained that:

the Due Process Clause protects an individual’s liberty interest in not being subject to the binding judgments of a forum with which he has established no meaningful "contacts, ties, or relations." By requiring that individuals have fair warning that a particular activity may subject them to the jurisdiction of a foreign sovereign, the Due Process Clause gives a degree of predictability to the legal system that allows potential defendants to structure their primary conduct with some minimum assurance as to where that conduct will and will not render them liable to suit. . . . [T]he constitutional touchstone remains whether the defendant purposefully established minimum contacts in the forum State.

The federal appellate courts, called upon to apply these principles in Internet commercial litigation, have concluded that suing nonresident parties doing business on the Internet where their customers are found does not offend due process requirements. Yet, more than a passive Internet site is required; the critical test is the level of commercial activity associated with the website.

Subject matter jurisdiction, although raised less often, is closely related. It involves the question of when, in fairness, nonresidents can be bound by local law for conduct they committed elsewhere. The authority of Congress to establish extraterritorial jurisdiction is limited by due process, but only a few lower court cases have attempted to explain the boundaries. Those cases suggest that due process insists that the offshore application of federal criminal law be limited to those instances where there is some nexus to the United States, some factor to alert an individual overseas of the need to avoid the conduct condemned in our law.

International regulation

Foreign countries and jurisdictions have taken a variety of approaches to regulating on-line gaming, including legalizing some forms, seeking effective regulatory approaches, and prohibiting it entirely. Internet gambling has been legalized in over 50 countries and jurisdictions, mostly in Europe, the Caribbean, and the Australia/Pacific region. A few countries and jurisdictions specifically have prohibited it.

Regulation of online payments

Many major credit card industry participants have attempted to restrict the use of credit cards for Internet gambling but have faced challenges in their efforts to do so. Full-service credit card companies that issue their own cards and license merchants to accept cards have implemented policies prohibiting customers from using their cards to pay for Internet gambling transactions and will not license Internet gambling sites. Credit card associations[19] have instituted a different approach — a transaction coding system that enables association members, at their discretion, to deny authorization of properly coded Internet gambling transactions.

Many major U.S. issuing banks that are members of these associations have chosen to block such transactions because of concerns over Internet gambling’s unclear legal status and the high level of credit risk associated with the industry. These efforts are hampered, however, by Internet gambling sites that attempt to disguise their transactions to keep from being blocked by the issuing banks. In addition, some association members — primarily those in foreign jurisdictions where Internet gambling may be legal — continue to acquire Internet gambling sites as merchants. Further, efforts to restrict the use of credit cards for Internet gambling can be circumvented by cardholders’ use of on-line payment providers to pay for gambling activities. With such intermediaries, issuing banks cannot necessarily determine the nature of the activity being charged.

Law enforcement concerns

Law enforcement representatives claim that the anonymity and jurisdictional issues characteristic of Internet gambling make on-line gaming a potentially powerful tool for money launderers. The believe that several characteristics of Internet gambling make it particularly vulnerable to money laundering, including the volume, speed, and international reach of Internet transactions and the offshore locations of most Internet gambling sites. However, regulatory agencies and officials from the credit card and gaming industries do not view Internet gambling as being particularly susceptible to money laundering, especially when credit cards, which create a transaction record and are subject to relatively low transaction limits, are used for payment. Likewise, credit card and gaming industry officials do not believe Internet gambling posed any particular risks in terms of money laundering.

Gaming industry officials do not believe that Internet gambling is any more or less susceptible to money laundering than other types of electronic commerce and point out that, in their view, the financial industry, which is responsible for the payments system, is better suited to monitoring for suspicious activity in the area than the gaming industry itself.

References

  1. 18 U.S.C. §1084.
  2. See, e.g., United States v. Cohen, 260 F.3d 68 (2d Cir. 2001)(full-text).
  3. 18 U.S.C. §1084(a).
  4. 336 U.S. 613 (1949)(full-text).
  5. United States v. Murray, 928 F.2d 1242, 1245 (1st Cir. 1991)(full-text).
  6. United States v. DiMuro, 540 F.2d 503, 508 (1st Cir. 1976)(full-text), cert. denied, 429 U.S. 1038 (1977).
  7. United States v. Nerone, 563 F.2d 836, 843 (7th Cir. 1977)(full-text); United States v. Allen, 588 F.2d 1100, 1104 (5th Cir. 1979)(full-text), cert. denied, 441 U.S. 964 (1979).
  8. 18 U.S.C. §1952.
  9. 31 U.S.C. §5363.
  10. Id. §5362(1)(A).
  11. 18 U.S.C. §§1956 and 1957.
  12. Pub. L. No. 100-497, 102 Stat. 2467 (1988), codified at 27 U.S.C. §2701 et. seq.).
  13. Interstate Horseracing Act of 1978, Pub. L. No. 95-515, § 2, 92 Stat. 1811, codified at 15 U.S.C. §§3001-07 (1994).
  14. State ex rel. Nixon v. Coeur D'Alene Tribe, 164 F.3d 1102 (8th Cir)(full-text), cert. denied, 527 U.S. 1039 (1999).
  15. However, the issue of where Internet gambling takes place was addressed and resolved in United States v. Cohen, 260 F.3d 68 (2d Cir. 2001)(full-text), cert. denied, 122 S. Ct. 2587 (2002).
  16. Horse racing uses the pari-mutuel system of wagering, in which bettors bet against one another instead of against the house. For pari-mutuel wagering, the money bet on a race is pooled, and approximately 80% is returned to the winning bettors. The remaining 20% (the takeout) is distributed among the state government, the jockeys that race at the track, and the racetrack owners. The amount allotted for the takeout varies among states.
  17. An interstate off-track wager is defined as “a legal wager placed or accepted in one State with respect to the outcome of a horse race taking place in another State.
  18. District of Columbia Appropriations Act of 2000, Pub. L. No. 106-553, § 629, 114 Stat. 2762, 2762A-108, codified at 15 U.S.C. §3002(3)).
  19. Credit card associations, such as VISA and MasterCard, license their member banks to issue bank cards, authorize merchants to accept those cards, or both.

See also

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