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September 30, 2006

This article should be read in conjunction with

Internet Gambling Funding Ban

and

Ciaffone: Comments & Predictions on Unlawful Internet Gambling Enforcement Act

and

An Insider's Thoughts on the Internet Gambling Funding Ban.

Early in the morning on September 30, 2006, a House-Senate conference committee finished work on the 2006 SAFE Ports Act.  It was passed by both chambers and sent to President Bush, who is expected to sign it.  It contained the Unlawful Internet Gambling Enforcement Act of 2006, a modified version of the original H.R. 4411 introduced by Representative James Leach in 2005.  The basic thrust of the law is to try to cut off the flow of funds from U.S. gamblers to online gambling websites.  The Act does this by criminalizing the acceptance of U.S. initiated financial instruments by operators of online casinos, cardrooms and sportsbooks and by prohibiting U.S. financial institutions from processing transfers of funds to them under regulations to be drawn up by regulators of financial institutions. 

Today the principal means of transfers to and from online gambling Websites is by using various financial intermediaries.  The most widely used are offshore companies like NETeller and FirePay, who draft on a player's U.S. bank account or credit or debit cards and then route the transferred funds to the gambling Websites on request by the bettors.  Some debit cards issued by U.S. banks are still directly useful for this purpose as well.  Money transmitters are used at times.  Paper checks can also be mailed or sent by overnight courier to the gambling Websites, but these are disfavored due to the effort involved and the time lag in clearing and posting funds to the bettors' accounts.

Immediately after the Act passed, one of my poker friends posted this message in an online e-mail forum:  "I'm awaiting Chuck's analysis of the bill, but I can tell you there's no possible way they can stop financial transactions. If they ban transfers to Neteller today, tomorrow we'll have Footeller, whose only purpose is to transfer to and from Neteller. If they ban Footeller tomorrow, the next day we'll have Barteller. Short of preventing any money from leaving the country, this simply cannot work."

Here are the points I made in response to that somewhat glib prediction of massive circumvention.

I am in the process of analyzing the bill.  Here are my first thoughts.

The problem with your prediction of circumvention is the very strength of the Leach approach.  That is, to just make it very difficult to transfer money to and from the online casinos, cardrooms and sportsbooks.  I suspect that the overwhelming majority of players--especially new sign ups--will just not jump through the hoops necessary to find a way around the ban on U.S. financial institutions facilitating money transfers. 

The bill has an "out" for the federal regulators in setting up procedures that U.S. financial institutions must follow in order to be safe.  The federal regulators are allowed to "exempt certain restricted transactions or designated payment systems...if [they] find that it is not reasonably practical to identify and block, or otherwise prevent or prohibit the acceptance of, such transactions..."  This language is slightly different than that in the original Leach bill and would, for example, allow an outright exemption to be created for paper checks or other money transfers where no means of "coding" is readily available.  Will the online gambling industry be able to survive if it has to rely on receiving and clearing paper checks?  Will players' appetites for funding accounts dry up if there is a 10-day or longer wait to put money in accounts?

In a quick first reading of the Act these points stand out:

1.  While the bill did not amend the Wire Wager Act as had been proposed in some later versions, it does create a new federal crime (to be 31 U.S.C. 5366) making violations of the new prohibition on accepting financial instruments for use in unlawful internet gambling punishable by fine and five years in the slammer.  [Subsequent note: The operator usually knows or should know if a player is a U.S. resident or is playing on a computer connected through a U.S.-based Internet service provider.  If so, the funds in the player's account are for use in "unlawful Internet gambling," regardless of the source from which the funds were received.  Accepting any funds from such a player after the Act becomes the law would thus trigger the potential criminal provisions of Section 5366.]
18 U.S.C. 2 continues to punish aiders and abettors of criminal offenses "against the United States" as if they committed the offense directly.  Most of the alleged legal "grey area" previously relied on by online casinos and cardrooms and their employees, principal shareholders, consultants and affiliates is now gone.  Those companies and individuals wrongly, but desperately, clung to the view that they were okay because the Wire Wager Act only applied to sportsbooks.  They ignored the other federal and state laws that made operating and supporting online casinos and cardrooms illegal.  Now a new federal criminal "offense against the United States" has been created and it is clearly applicable to all online gambling operators not exempted by the bill.

2.  Under the bill online cardrooms are pretty much left with the argument that poker is a "game of skill."  The definition of "bet or wager" in the bill includes "...the staking or risking by any person of something of value upon the outcome of...a game subject to chance..."  It is questionable whether under that language poker sites can even make the normal state-law predominance argument (i.e. that the elements of skill outweigh--51%--the elements of chance in determining outcome).  In any event, no federal or state court has ever squarely ruled that poker is a game of skill in the legal--51%--sense.  See: Is Poker in the U.S. a Game of Skill.  It would behoove the online cardrooms to hire the best university math and statistics departments to try to come up with the most plausible arguments that the current legal views and outcomes should be changed based on the wealth of data the online cardrooms have.

3.  State and federal attorneys general can seek relief against ISPs under the civil remedy provision of the bill (to be 31 U.S.C. 5365).  That relief is limited to removing access to an online gambling site or sites with hyperlinks to an online gambling site, but only where the ISP is the actual host of the offending site.  ISPs are not required to be pro-active in looking for offending sites.

Points and Observations Added After September 30, 2006

4.  Subsequently, another post was made claiming that the new law did not become effective for 270 days.  That is not correct.  New 31 U.S.C. 5363 is effective on signing of the bill. That section bars the online gambling sites from accepting a check, etc. involving a U.S. financial institution.  A 270-day period is granted to the Fed to issue regulations that U.S. financial institutions can rely on in blocking such transactions. However, the promulgations of such regulations is not a precondition to the application of section 5363.  Violating section 5363 is what triggers the 5-year felony criminal provision in new 31 U.S.C. 5366.

5.  A story in the Denver Post on October 4, 2006, questions whether games of skill run by the likes of Skilljam are made unlawful under the new law.  The story says: "'Internet skill games may or may not be legal,' said gambling expert I. Nelson Rose, a law professor at Whittier College in California. 'The new law says betting includes games 'subject to some chance.'''  Assuming that Professor Rose was referring to games that are in fact games of skill, I am not convinced that his cautionary observation is necessarily correct.

New 31 U.S.C. 5363 is the basic operative provision of the law. It says: "No person engaged in the business of betting or wagering may knowingly accept [money drawn on U.S. financial institutions] in connection with the participation of another person in unlawful Internet gambling." Note the two conditions: 1) being in the business of betting and 2) participation in "unlawful Internet gambling."

"Unlawful internet gambling" is defined as making or receiving a bet over the Internet "where such bet or wager is unlawful under any applicable Federal or State law in the State... in which the bet or wager is initiated, received or otherwise made."  "Bet" includes risking money on "a game subject to chance."

Even if a court were to construe "bet" to include all games with any degree of chance, no matter how much skill is involved (an unlikely outcome in view of the significant precedents for the predominance theory), it would still have to also find that the game involved was unlawful under State or Federal law.  With the exception of up to a dozen states, games of skill are not covered by state anti-gambling laws.  (For a list of states that may not recognize the predominance test see the first column of the table under Summary.)  If an online skill game Website does not take bets from players in the states that do not recognize the predominance test, then I do not think it would be found to be in violation of the new law.