Online Gaming Regulation in the United States

-What on Earth is Going On?

Prepared By: Lawrence G. Walters, Esq.Weston, Garrou & DeWitt & Walters

www.GameAttorneys.comPrepared For: Canadian Gaming

Summit

Introduction Department of Justice contends all online gambling

& advertising is illegal. Current U.S. law appears to only prohibit Online

Sports Betting; not other forms. Legislation is pending to close the loopholes. Gambling advertising enjoys First Amendment

protection in U.S. No U.S. law prohibits online gambling advertising,

but issues remain unsettled.

Legality of Online GamblingPart I – Federal Law

The Wire Act, 18 U.S.C. § 1084 Prohibits the business of betting on sporting events (or other

contests) using the ‘wires.’ Internet included. The Travel Act, 18 U.S.C. § 1952

Prohibits domestic or foreign travel, or use of the mail, to promote unlawful activity (including ‘gambling’) or distribute proceeds thereof. Precise nature of prohibited gambling activity undefined.

The Wagering Paraphernalia Act 18 U.S.C. § 1953(a). Prohibits the carrying of records, items or devices relating to

certain types of gambling, in domestic or foreign commerce. Applies to sports books, wagering pools, bolita, numbers and other ‘similar’ games.

Federal Law; continued… The Organized Crime Control Act, 18 U.S.C. §1955

a/k/a “Illegal Gambling Act” Prohibits gambling businesses which meet certain

thresholds, in violation of state law. Racketeering Influenced Corrupted

Organizations Act (“RICO”) 18 U.S.C. § 1961

Prohibits operation of a business enterprise through a pattern of gambling offenses under state or federal law. Massive penalties including incarceration, forfeiture and fines.

Legality Of Online GamblingPart II – State Law

Approx. 6 states have prohibited online gambling: IL, LA, NE,OR, SD, WI, IN.

Other states considering bills. NJ Judge found defendant guilty of online

gambling despite absence of state law. Some existing state law may already prohibit

use of a computer to facilitate gambling. All state online gambling laws are potentially

unconstitutional under the Commerce Clause.

The Dynamic Duo Rep. Goodlatte Rep. Leach

The Rhetoric Online gambling is “sucking billions of dollars out of the United

States.” Rep. Robert Goodlatte, Richmond Times Dispatch (April 6, 2006).

Online gambling is “the ‘crack cocaine’ of gambling.” Sen. Jon Kyl, MSNBC.com, (April 10, 2001).

“The potential threat of identity theft and fraud is high for the individual bettor just as the risk posed to our national security from terror and criminal organizations that control such sites.” Rep. Jim Leach, Wall Street Journal (April 4, 2006).

"The Internet gambling and online capabilities have become a haven for money laundering activities.” Id.

“If we wanted to be effective in prosecuting illegal gambling over the Internet, we would prosecute individual gamblers.” Rep. Robert Scott, Richmond Times Dispatch (April 6, 2006).

The Polls Should Online Gambling be Banned?

Zogby International; www.Zogby.com87% believe online gambling is a personal

choice which should not be banned. Wall Street Journal; www.wsj.com

85% oppose government prohibition of online gambling

Pending Federal Legislation The Goodlatte - Bill HR 4777

Expands Wire Act to cover Casino/PokerCriminalizes gambling-related EFT’sRequires Hosts to block gambling sitesNo effect on individual player

The Leach - Bill HR 4411Unlawful Internet Gambling Enforcement ActFocuses primarily on EFT’s Encourages voluntary compliance by foreign

governmentsCompanion Bill Pending in the Senate (Sen. Kyl)

Legislative Outlook

Industry facing greatest potential for U.S. online gambling legislation this term

Goodlatte playing the ‘Abramoff Card’ Congress anxious to distance itself from perceived past

influence peddling Some ‘carve-outs’ likely, but status undecided Republicans desire to change the political conversation

from Iraq War to…anything else Gambling, porn and other vices provide the ideal

scapegoats Opposition coming from banks and some ‘family values’

groups

Life After Prohibition?

Hosting may become more difficult as industry shakeout plays out.

Billing processing industry will change – new opportunities for offshore processors.

Impact will depend on response by offshore banks and ecommerce companies.

Personal jurisdiction issues may prevent any substantive prosecution.

Importantly: No impact on player activity.

Legality of Gambling Advertising Commercial speech entitled to constitutional

protection. Gambling Advertising is commercial speech. Power to ban gambling ≠ Power to ban speech about

gambling. Restrictions on gambling ads must meet the Central

Hudson Test. Does the means chosen to regulate commercial

speech “fit” the legitimate governmental interest to be addressed?

Legal Status of Gambling Advertising - continued

Federal broadcast ban declared unconstitutional by USSC in Greater Orleans Broadcasting Assoc. v. United States.

Logical extension of holding:Gambling Advertising is legal even if received in a

jurisdiction where gambling is illegal.Legal Status of gambling activity evaluated in

jurisdiction of origin.

U.S. Justice Department Position

“All online gambling is illegal.” Multiple federal statutes cited as basis. Department of Justice disagrees with In re

Mastercard Int’l case. Advertising online gambling = “aiding & abetting”

illegal gambling. No federal law specifically prohibits online gambling

advertising. No prosecutions or convictions have resulted from

advertising.

The Jury In Missouri April, 2002: Department of Justice issues warning letter. September, 2002: Grand Jury issues round of

Investigative Subpoenas to Media Outlets. May 2004: US Attorney Raymond Gruender appointed

to 8th Cir. Ct. Appeal. April, 2005: Esquire Magazine received subpoena re:

BoDog Poker Advertising. No indictments yet. At least one significant settlement: [The Sporting

News; $7.2 Million USD]

Statutory Prohibitions Aiding & abetting [requires underlying crime] Conspiracy [requires underlying crime] Racketeering [requires multiple predicate offenses] FTC legislation [relates to deceptive ads] Broadcast ban: 18 USC §1304 [validity in

question] U.S. Mail restrictions. FCC regulatory prohibitions.

Casino City Case Challenged the use of aiding & abetting laws to

criminalize online gambling advertising. Trial court dismissed case based on standing. Court included gratuitous dicta indicating online

gambling advertising is illegal. Casino City appealed to 5th Circuit, but later

dismissed the appeal – no decision. Similar challenge could be brought by different

plaintiff – with standing to sue.

Problems with Aiding & Abetting Theory

Occurs when one substantially assists another in the commission of a crime.

DOJ’s “Theory of Choice” Requires the completion, or attempted

completion, of a separate, independent criminal act.

Legal operation of offshore, licensed gambling entity complicates liability theory.

Personal jurisdiction issues unsettled.

Rise of the .Net Ad

Reaction to the threatened federal crackdown against online gambling advertising.

Informational sites = Pure Speech. Way to reassure media outlets regarding legality

of advertising. Foot in the door to buy time. Confidence builds as advertising proliferates. Slowly drifting back towards .com advertising.

Overview of Personal Jurisdiction Foreign citizens subject to U.S. prosecution if

“minimum contacts” exist. Foreign jurisdiction limited by due process notions of

fundamental fairness. Assertion of personal jurisdiction must be

“reasonable.” Decisions made on a ‘case by case’ basis. Intent to cause effects in U.S. considered. Legislative intent also considered.

Which Laws Apply Outside US?

Wire Act – yes; Travel act – yes; Paraphernalia – yes; Illegal Gambling Business Act – arguably, no; Racketeering – yes; Aiding & Abetting – depends; Conspiracy – depends.

Extradition Governed by international treaties (E.g.; the

“Mutual Legal Assistance Treaty”; US/CA) Generally requires “dual criminality.” Often impacted by political considerations. History of extradition from Canada in vice

cases.Tobacco paraphernalia websites. Internet obscenity.

Conclusions

• DOJ’s bark may be worse than its bite.• Current federal law may only apply to sports betting.• The legal landscape is changing, at both the state,

and (possibly) the federal level.• New federal legislation will not stop the industry.• Advertising law unclear, but some risk involved.• Online gambling becoming ingrained in the culture,

thus legislation unlikely to have any major impact.• Profitability pushing increased risk taking.