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Below is I. Nelson Rose's analysis of the United States' Unlawful Internet Gambling Enforcement Act of 2006. (More
Internet Gambling law articles.)
Click here for the actual text of the
Unlawful Internet Gambling Enforcement Act
 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-N.J.), no one on the
Senate-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 is based on the Leach and Goodlatte
bills, HR 4411 and HR 4777, but there are some important differences.
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's 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 importantly, 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 Horseracing. The DOJ believes
this will allow it to continue to argue that the Interstate Horseracing Act does not do exactly what it says it
does, legalize interstate horseracing.
§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 "target," as in "you are
the target 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 targeting 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% 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 horseracing, but not on dogracing. 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.
Congress had a little problem with the term "financial institution." To force casinos to report large cash
transactions, 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, except under a theory of aiding and abetting.
§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 i.d. and block all restricted
transactions. So all payment processors are suppose 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 the Bank of America and Neteller to i.d. and block transactions to unlawful gambling
sites, whatever they are. But, while the 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 F.T.C. 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.
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