#123 © Copyright 2006, all rights reserved worldwide. Gambling and the Law® is a registered trademark of Professor I Nelson Rose, Whittier Law School, Costa Mesa, CA

For Internet gambling operators, the bad news seems to just keep on coming.
First, the U.S. House of Representatives Judiciary Committee approved two bills, by Jim Leach (R.-IA) and Bob Goodlatte (R.-VA), which were expressly designed to outlaw almost all online gaming. Then, the C.E.O. of BetOnSports, David Carruthers, was arrested by federal officials while changing planes in Dallas. The grand jury indictment named not only the principals, but the company itself as a defendant. The Department of Justice obtained a temporary restraining order, ordering the company to stop taking bets from the U.S. and return all money in accounts held by Americans.
Finally, the entire house approved overwhelmingly, 317 – 93, a new bill, HR 4411, which combined the Leach and Goodlatte bills into a proposed Internet Gambling Prohibition and Enforcement Act.
Some owners, operators, players, and particularly investors, panicked. Trading in BetOnSports shares was suspended from the London exchange and share prices of other companies dropped as much as 70%.
Panic was usually an overreaction. Although the DOJ announced that BetOnSports was only the beginning, and Goodlatte threatened extradition of all operators, we are not going to see a lot of licensed gaming executives arrested. The legal and political reality is that it is a lot easier for the DOJ to bring charges against someone who takes sports bets from Americans, and who makes the mistake of coming to the U.S., than it is for law enforcement agents to have any impact on a foreign licensed poker site.
The major problem for the DOJ is that there are not a lot of laws that clearly outlaw Internet gambling, and fewer still that give American authorities any real power over an operator who remains outside the U.S.
Take Rep. Goodlatte’s public statements that the DOJ might extradite overseas operators. Since extradition involves a foreign country forcibly removing a person who is legally in that country and sending him to stand criminal trial in the U.S., it can only be done pursuant to treaty. And few extradition treaties mention illegal gambling. In fact, I do not know of any, prior to the U.S. – Hong Kong treaty of 2000.
Even if there is an extradition treaty in place, and it covers gambling, what are the chances that a country is going to send individuals it licensed, to stand trial in the U.S., for operating gaming websites it also licensed?
The opponents of Internet gaming in Congress have been looking for other ways to attack the industry. Sen. Jon Kyl (R.-AZ) first proposed making it a federal crime to even make a bet. This surely would have stopped all online betting, if enforced. But the DOJ made it clear that it did not want to be in the business of, as it put it, “knocking on bedroom doors and arresting $5 bettors.”
They then tried broad attacks, such as making it a crime to use a computer in a gambling business. But these opponents of all gambling ran into a political reality of modern America: Legal gaming has become a big, legitimate industry involving billions of dollars and millions of jobs. Racetracks and state lotteries, in particular, rely on interstate betting using computers.
Finally, the anti-gambling activists got smart.
Although HR 4411 would make it clear that all forms of gambling that violate any federal, state or tribal law, are “unlawful,” it would do nothing to make it easier to arrest or extradite foreign-based sports-bet, let alone poker, operators. What the latest proposal, pending in the U.S. Senate as this is being written, would do is go after the money and hyperlinks that drive the business of Internet gaming.
The bill would make it a felony to knowingly transfer money in any form to or from a gaming website. The Treasury Department, in cooperation with the DOJ, would write regulations that would have to be followed by banks for identifying and blocking all money transfers for online gambling transactions.
In practice, this could mean very little, or a lot. Most banks already do not allow their credit cards to be used on websites that have merchant account numbers identifying the site as a gaming business. This would be extended to wiring money and even clearing paper checks.
But the danger is not to the relatively few transactions taking place directly between banks and gaming sites. Most bettors now deposit and withdraw money using intermediaries, like Neteller and FirePay. The real threat is that the DOJ will take a zero-tolerance position, requiring banks to block transfers of funds to any site that knowingly forwards money to gaming websites.
Dedicated players will find ways around this. After all, it is not possible to block everyone. Neteller might be made off-limits, but will banks be prohibited from transferring funds to PayPal, which does not forward money to gaming sites but will to Neteller.
Still, the casual player will find it difficult to get money to a site to make a bet.
And the bill’s real teeth comes from blocking access to the sites at all. For the first time, the DOJ and any state attorney general could force Internet Service Providers to sever links to gambling websites.
A system would be set up to use the courts. The law enforcement agency would file a suit against an ISP, asking the court to issue an injunction, ordering the ISP to block access to a particular named site.
I think this still raises questions whether there would be adequate protection of operators’ constitutional rights. After all, the ISP is not the real party in interest here. The gaming website would seem to be a necessary and indispensable party. Denying a website the right to have American patrons without having its day in court would seem to be a violation of due process.
Still, the law might be upheld. Or foreign operators would be served with a copy of the complaint, a process that takes about a year. The result would be that most casual players will not even be able to find the best known names in online gaming.
Will the bill pass? Probably not.
While online wagers on horse-races and state lotteries will still be allowed, identical bets on dog-races, poker and casinos will not. This does not make a lot of sense to U.S. operators who are either already in the business, or would like to be. Nevada casinos, in particular, have the power to stop this bill, which lets their competitors expand while they cannot even get started.
Sen. Harry Reid, the Democratic leader of the U.S. Senate, is from Nevada. Frank Fahrenkopf, the former head of the Republican party, now leads the American Gaming Association, the casino industry’s main lobbying group.
The most rational rule for all forms of online wagers would be to expand the law already adopted by Congress for horseracing. In December 2000 the Interstate Horseracing Act was amended to let the individual states decide whether they were in favor or against allowing their residents to bet from their homes on horseraces.
Eventually, if HR 4411 does not pass, established casino companies, through Reid and Fahrenkopf, will be able to convince Congress that states like Nevada and New Jersey should have the same right to allow their residents to bet online with each others’ licensed casinos.
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© Copyright 2006. Professor I Nelson Rose 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, www.GamblingAndTheLaw.com.