GPWA Times Magazine - Issue 5 - May 2008

46 LEGAL ANALYSIS America’s ‘Cold War’ against online gambling By Joe Kelly and Gary Ehrlich Even following the enactment of the Unlaw- ful Internet Gambling Enforcement Act (UI- GEA) in 2006, advertisers, financial transac- tion providers, interactive gaming operators and many others remain uncertain as to the status of present United States law and policy concerning interactive gambling. Al- though antigambling activists hoped the statute would finally criminalize all interac- tive gambling operations except for narrow exceptions such as fantasy sports and state- licensed interstate horserace waging, the UI- GEA does not actually expand the definition of illegal gambling, as indicated by a state- ment in the “Congressional Findings and Purpose” (§5361): (b) Rules of Construction – No provision of this subchapter shall be construed as alter- ing, limiting, or extending any Federal or State law or Tribal-State compact prohib- iting, permitting, or regulating gambling within the United States. All the UIGEA does is impose penalties for offshore providers who accept financial transaction payments from United States fi- nancial institutions. The UIGEA also mandates that the Federal Reserve System and Treasury Department promulgate regulations for financial trans- action providers to stop payments to illegal operators. On April 2, 2008, the “Commit- tee on House Financial Services Subcommit- tee on Domestic and International Monetary Policy, Trade and Technology” held hearings on the UIGEA and the draft financial trans- action regulations which had been proposed. Louise L. Roseman, Director of the Division of Reserve Bank Operations, explained in testimony before the Committee: “I think it is very difficult without having more of a bright line about what is intended to be un- lawful Internet gambling.... The challenge we have is interpreting something, particularly federal laws, that Congress themselves isn’t sure what they mean.” In its written testimo- ny, the American Bankers Association (ABA) was also critical of the proposed regulations and the UIGEA: Banks are saddled with this exceptional burden, as stated in the UIGEA, “because traditional law enforcement mechanisms are often inadequate for enforcing gam- bling prohibitions or regulations on the Internet, especially where such gambling crosses State or national borders.” In other words, all the sophistication of the FBI, Secret Service, and other police comput- erized detection systems and investiga- tive expertise devoted to fighting terror- ism and financial crime are inadequate to the task of apprehending the unlaw- ful gambling business or confiscating its revenues. ABA believes that punting this obligation to the banking industry and the other participants in the U.S. payment system is an unprecedented delegation of governmental responsibility with no pros- pect of practical success in ex change for the burden it imposes. Congressional reaction to the proposed regu- lations has been generally hostile. The regu- lations have been criticized by two influential Republican Senators, John Sununu and Pete Domenici, in a letter dated Feb. 11, 2008, to Secretary Paulson and Chairman Bernanke. On April 10, 2008, Rep. Barney Frank in- troduced H.R. 5767, which would actually bar the proposal or adoption of regulations under UIGEA. While this bill may not be en- acted into law, it is indicative of Congressio- nal frustration and the near impossibility of drafting effective UIGEA financial transac- tion regulations. Given the ambiguities of United States law and policy governing interactive gambling, the United States Department of Justice (DOJ) has attempted to fill the vacuum. Frequently espousing the opinion that all interactive gambling including state-licensed horserac- ing is illegal, as well as the obvious difficul- ties in prosecuting offshore operators, the DOJ has essentially been waging a “cold war” – long on intimidation but short on prosecu- tions – against “soft targets” within the Unit- ed States or federal jurisdiction. For example, the DOJ warned the United States Virgin Islands (Jan. 2, 2004) that its interactive gambling law would violate federal law. It also informed North Dakota (March 7, 2005) that its proposed legisla- tion, which would have regulated interactive poker, would be a violation of federal law. The DOJ has even asserted in a letter dated July 14, 2003, to Rep. Conyers, that the Dec. 2000 amendment to the Interstate Horserac- ing Act does not legalize interstate horserace wagering between states that have licensed entities. Thus, according to the DOJ, compa- nies accepting interactive horserace betting from different states are in violation of fed- eral law. The DOJ has also warned advertisers of on- line gambling that they might be aiding and abetting criminal activity. On June 11, 2003, the DOJ informed the National Association of Broadcasters that if its members accepted online gambling advertisements they may be in violation of state and federal law and also that entities and individuals that accept and run such advertisements may be aiding and abetting these illegal activities…. Notwith- standing their frequent claims of legitimacy, Internet gambling and offshore sportsbook operations that accept bets from customers in the United States violate Sections 1084, Gary Ehrlich is a principal of CataniaConsultingGroup,Inc. He is a former Assistant Attorney General andDeputyDirector of theNewJerseyDivisionof Gaming Enforcement,a former chair of the Internet Gambling Task Force,and a current member of the International Masters of Gaming Law. GPWA TIMES | America’s ‘Cold War’ against online gambling

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