Poker Articles
Internet Gaming: State vs. Federal Regulation?
By Joseph M. Kelly
UIGEA: What it all means
President George Bush made it official on Oct. 13, 2006, when he signed the
Port Security Bill. The Senate majority leader at the time, Bill Frist (Republican
- Tenn.), had attached anti-Internet gambling language to the port security
measure several hours before Congress adjourned on Sept. 30 for its election
recess. The language generally followed the language of the Unlawful Internet
Gambling Enforcement Act (UIGEA) that had been passed by the House in July 2006,
but the Senate had not even held hearings on the measure.
Interestingly, leading up to the passage of UIGEA, public reaction to prohibition
bills had not been particularly warm. Various polls found between 70 and 85
percent of respondents opposing prohibition efforts. On June 9, 2006, the Los
Angeles Times took Congressional representatives to task in an editorial staunchly
opposing an all-out prohibition of online gambling. The Times found prohibition
legislation to be an unnecessary burden on financial firms, which would be banned
from having their services used for electronic betting.
The editorial also criticized Congress for an inherent hypocrisy, considering
the continued exemption for online wagering on horseracing, which, thanks to
a powerful lobby, has seen a half-decade of legal safeguard in the U.S. The
West Coast's largest newspaper further questioned the priorities of Congress
in focusing on the banning of online gambling, at a time when the nation faced
so many political and social problems. The Times agreed with many leading gaming
industry advocates, that regulation instead of a ban on online gambling was
a proper answer to the issue, citing Britain's recent legalization of Internet
gambling as a role model for Americans.
Expansion of prohibited online gambling?
The passage of the UIGEA, codified at 31 USC §5361 et seq., was done in
a manner in which most members of Congress did not know that the Security and
Accountability for Every Port Act of 2006 (or "SAFE Port Act") even contained
a section relating to Internet gambling.
Though heralded as an Internet gambling "prohibition," the UIGEA does not actually
expand prohibited Internet gambling. Under §5362, the term "bet or wager"
- (A) means the staking or risking by any person of something of value upon
the outcome of a contest of others, a sporting event, or a game subject to
chance, upon an agreement or understanding that the person or another person
will receive something of value in the event of a certain outcome;
- (B) includes the purchase of a chance or opportunity to win a lottery or
other prize (which opportunity to win is predominantly subject to chance);
[or]
- (C) includes any scheme of a type described in section 3702 of title 28
(which pertains to the Professional and Amateur Sports Protection Act and
thus, in effect, prohibits sports betting except in Nevada and the other three
"grandfathered" states).
However, §5362(10) (A) also establishes that the term "unlawful Internet
gambling" "means to place, receive, or otherwise knowingly transmit a bet or
wager by any means which involves the use, at least in part, of the Internet
where such bet or wager is unlawful under any applicable Federal or State
Law in the State or Tribal lands in which the bet or wager is initiated, received,
or otherwise made. (Emphasis added).
In other words, to run afoul of the UIGEA, the gambling activity has to be
in violation of federal or state law independent of the UIGEA itself.
The only federal law prohibiting any form of Internet gambling prior to the
passage of the UIGEA is the Wire Act (18 USC §1084). On the state level,
10 states have Internet gambling prohibitions, which would be incorporated into
the UIGEA by reference.
Almost a month after the enactment of the UIGEA, there was a national election
in which both houses of Congress went from Republican to Democratic control,
and the discussion of Internet gambling changed from an emphasis on prohibition
to consideration of regulation. That's because the right-wing conservatives
who insist on prohibition have very little support in the Democratic Party.
Currently there are three bills in Congress relating to Internet gambling and
one relating to poker as a skill game. I will examine the proposed legislation,
and then give my opinion as a former gaming regulator as to why Internet gambling
should be regulated and what regulatory structure would work in the United States.
The first bill, and the one that has received most publicity, is H.R. 2046,
introduced on April 26 by Rep. Barney Frank [Democrat-Massachusetts]. H.R. 2046,
known as the Internet Gambling Regulation and Enforcement Act of 2007, would
establish a federal licensing and enforcement structure to regulate and control
Internet gambling. It would require Internet gambling operators to obtain licenses
that would authorize the licensees to accept wagers from players located in
the United States as long as they were able to maintain effective player protections.
The bill would also enforce prohibitions on gambling imposed by states, Indian
tribes and sports leagues.
The bill would provide the Director of the Financial Crimes Enforcement Network
(FinCEN) with the exclusive authority to promulgate regulations and license
Internet gaming operators. Licensees would be subject to a review of their corporate
structure as well as their financial stability and gaming business experience.
Just as in the land-based casino industry, licensees would face background investigations
and agree to be subject to the jurisdiction of the United States. The bill would
also prohibit acceptance of bets or wagers that were either initiated or terminated
in a state or tribal land that prohibits that type of gambling, or involved
any sports league that opted out of authorizing online gambling activities.
All licensees under this bill would be required to have safeguards in place
to ensure that: all players were 18 years of age or older; all players were
located in jurisdictions where the placing of Internet wagers were legal; appropriate
measures were in place to prevent fraud and money laundering; and initiatives
existed to combat compulsive gambling.
The Director of FinCEN would have enforcement authority including revocation
or termination of an operator's license for failure to comply with the regulations.
Financial institutions such as banks and payment processors providing services
to licensees would be protected from liability. Sports leagues -- such as the
NFL, NBA and MLB -- would have the ability to opt out, preventing bets on games
in their leagues.
The Frank bill is now before the House Financial Services Committee, which
held a hearing on June 8.
On May 3, H.R. 2140, entitled the "Internet Gambling Study Act," was introduced
by Rep. Shelley Berkeley (Democrat-Nevada). This bill is believed to have the
support of the American Gaming Association and would provide a detailed examination
of the issues of regulating Internet gambling as well as the impact of the UIGEA
on Internet gambling in the United States. The study would be conducted by the
National Research Council of the National Academy of Sciences, which would have
12 months to complete the study.
H.R. 2607, introduced on June 7, by Rep. James McDermott (Democrat-Washington),
would amend the Internal Revenue Code of 1986 to provide a taxing method for
Internet gambling under H.R. 2046. The tax would be 2 percent on all funds deposited
with or on behalf of the licensee by anyone for the purpose of placing a bet
during the preceding 30- day period.
The "Skill Game Protection Act," H.R. 2610, was introduced on June 7, by Rep.
Robert Wexler (Democrat-Florida). This bill would amend the Wire Act by adding
a new subsection that would exclude games such as poker, chess, bridge, mah-jong
or other games in which success is predominantly determined by a player's skill.
This would be applicable only to competition between and among between individual
participants and not against someone operating the game.
The chances for passage of any of the aforementioned bills are, in my opinion,
minimal. On the positive side, the mere introduction of these bills has finally
opened the door for discussion of the legalization and regulation of Internet
gambling in the United States. On the other hand, the establishment of a federal
bureaucracy to regulate Internet gambling - as proposed by H.R. 2046 -- is contrary
to the long-accepted premise that gambling is a matter left to the states' discretion.
Ten states have already passed some form of legislation prohibiting Internet
gambling, which is their right.
However, the converse should also be true -- states that desire to legalize
and regulate Internet gambling should have that right as well. Put another way,
a state could decide to prohibit Internet gambling, it could decide to legalize
and regulate Internet gambling, or it could decide to take no action with regard
to Internet gambling. This is similar to the current status of interactive wagering
on horseracing.
States which choose to enact Internet gambling regulations could do so in the
same manner as land-based casinos. The operators would have to demonstrate that
they have the good character, honesty and integrity to be licensed and that
the games being offered were fair and honest and conformed to a payout percentage
approved by that state. The operators would also be required to provide player
protections like those mandated by H.R. 2046 for the prevention of underage
players, protections and assistance for those with a gambling addiction, and
protections from fraud and money laundering. Licensed operators would only be
allowed to accept play from those states in which Internet gambling was permitted
or those in which no law concerning Internet gambling existed. Again, this would
be similar to the manner in which interactive horserace wagering is conducted
at the present time.
Taxes could be based upon profits on a state-by-state basis. The same manner
in which winners of over a certain amount in land-based casinos receive an IRS
Form W-2G, winners over the same amount would receive a W-2G from the licensed
Internet operator. Operators would be responsible for taxes on their own profits,
just as the land-based gaming industry.
The gaming industry in the United States has been well-regulated since the
mid- 1970s by states such as New Jersey and Nevada. American gaming regulators
are respected for the job they do, not only in the United States but worldwide.
By contrast, the federal government has no experience in this industry, and
is noted for creating bureaucratic monsters in which efficiency is absent and
cost overruns the norm. If the Department of Justice had not taken what most
legal observers believe to be the incorrect position that the Wire Act prohibits
all forms of Internet gambling, jurisdictions such as Nevada, New Jersey, North
Dakota and the United States Virgin Islands would probably already have licensing
procedures in place for Internet gambling operators, and would be reaping the
benefits of a flourishing industry. As it stands now, those benefits simply
flow offshore, never to return.
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Joseph M. Kelly, Ph.D., J.D., is a Professor of Business Law at State College
at Buffalo,and an associate of Catania Consulting. He is licensed to practice
law in Illinois, Nevada, and Wisconsin. He is also co-editor of Gaming Law Review.
