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Online Gambling - Relevant Law

While it is clear that Congress has the constitutional power to regulate all interstate and foreign commerce, including the power to address Interstate gambling, to date, no federal law expressly declares Internet gambling illegal. The United States Department of Justice has claimed that Internet gambling is illegal under federal law, but presently has no plans to prosecute. Instead, Federal officials currently rely on existing laws which most likely never contemplated an Internet, as support for their contention that Internet gambling is illegal. These laws include Section 1084 (Wire Act), Section 1952 (Travel Act), Section 1955 (The Crime Control Act) and Section 1953 of title 18 of the United States Code.

A. The Interstate Wire Act (SECTION 1084)

The most germane existing statute appears to be 18 U.S.C. 1084(a) which provides, in relevant part: whoever engaged in the business of betting ... knowingly uses a wire communication facility for the transmission in interstate or foreign commerce of bets ... which entitles the recipient to receive money or credit as a result of bets .. . shall be fined under this title or imprisoned not more than two years, or both. As worded, Section 1084 appears to apply to Internet gambling operations. First, the operations are clearly "engaged in the business of betting." Internet casinos take bets from its customers ("players") on sporting events and a wide array of casino games. Secondly, the Internet Casinos also knowingly use a wire communication facility to transmit bets. These gambling services are transmitted through the Internet using telephone lines with the help of a modem. This transmission appears to violate the Wire Act because the Act prohibits gambling operators from using the telephone or telex for interstate gambling. Third, the Internet casinos transmit bets in interstate or foreign commerce via the Internet. Because the Internet is global in nature, it crosses the borders of many states and countries. Thus, when bets transmitted through the Internet from one state to another or from one country to another, they are being transmitted in interstate commerce. Finally, Internet casinos and players receive money or credit as a result of winnings and losses from the bets.

Section 1084, however, contains a very important and relevant exception. Under the section, transmissions to assist in the placing of bets or actually betting is not prohibited so long as it occurs between two states, or a state and a foreign country, both of which permit gambling. For instance, if an Internet casino based in Las Vegas accepts bets over the Internet from a player residing in another state that allows similar legalized gambling, that transaction would not violate section 1084. Likewise, the same transaction involving an off-shore casino and a resident of a state where gambling is permitted, does not violate section 1084. In fact, it would appear that, because presently every State allows some form of gambling (with the exceptions of Utah and Hawaii), Internet casinos that take bets from players located in states where gambling is allowed, may escape the clutches of federal law, even though they may violate some State law. In addition, if the gambling activity is determined to occur in Cyberspace, independently of the user's or operator's physical location, this defense would apply, since Cyberspace does not regulate gambling in any form. Furthermore, the scope of 1084 is greatly limited by its non-applicability to casino-style games such as Poker and Blackjack. Montpas argues that by its plain meaning, Section 1084 does not cover such casino-style gambling, and its legislative history would suggest that it was not intended to cover anything more than bookmaking activities. In fact, recently, 14 owners and managers (all of whom are Americans) of 6 off-shore companies were charged with illegally using the Internet to attract and take wagers from Americans on various sporting events. These individuals made the mistake of conducting part of their operations within the United States by advertising extensively within the U.S. and even having offices here. However, to date, no on-line casino offering casino style gambling has been indicted. Thus, an Internet casino, in order to avoid liability, may simply choose to offer casino style games and avoid any bookmaking activity, including sports betting.

To address the weaknesses of Section 1084, Senator Jon Kyl (R - Arizona), as part of the Crime Prevention Act of 1995, proposed an amendment to Section 1084, such that it would explicitly apply to Internet gambling. After its introduction, the bill was referred to the Senate Committee on the Judiciary where it died. Senator Kyl, however, has recently reintroduced the bill as part of the 1997 crime Prevention Act, which contains much the same language. Congressional opposition of the outright ban of on-line gambling contend that such gambling should be an option, especially since some form of gambling already is available in most States. As of early may, 1998, the Kyl bill is pending in the U.S. Senate.

B. The Travel Act (SECTION 1952)

Section 1952 may also be applicable to Internet gambling. It provides, in relevant part: (a) whoever travels in interstate or foreign commerce ... with intent to (1) distribute the proceeds of any unlawful activity ... (3)(B) shall be fined or ... imprisoned for not more than twenty years, or both ... As used in this sect ion, "unlawful activity" involves gambling in interstate commerce. Cases have held that the scope of the unlawful activity as used in Section 1952, includes the transportation of gambling activities via telephone lines. In United v. Smith, the court noted that the Travel Act can be used to regulate interstate gambling because telephone voices are "actually transported by wires across state lines to the same extent as materials are transported over state lines in moving vehicles." Thus, since Internet casinos transmit bets using the Internet which cross state lines, such transmissions may violate the Travel Act. The Act itself, however, limits itself to apply only to illegal gambling. Because off-shore gambling operations are lawfully licensed by their respective governments, they in fact operate legal businesses that may have some illegal implications when their activities reach some players located in states where such form of gambling is not allowed. For Section 1952 to explicitly apply to off-shore gambling operations, this question must be resolved.

C. The Crime Control Act (SECTION 1955)

Under Section 1955, it is a federal crime for a gambling business to violate state law. The Act provides, in relevant part: (a) whoever conducts ... an illegal gambling business shall be fined under this title or imprisoned not more than five years, of both. (b) As used in this se ction ("illegal gambling business" means a gambling business which (I) is a violation of the law of a state ... in which it is conducted; (ii) involves five or more people who conduct ... all or part of such business; and (iii) has been or remains in substantial continuous operation for a period in excess of thirty days or has a gross revenue of $2,000 in a single day. To find a violation, law enforcement officials would only need to find that the casinos were being operated by at least five people (which is likely) and that the casinos are operating for a period of at least 30 days (which does not require continuous days of operation). Since Internet casinos are likely to have at least five people operating the systems (including computer operators, maintenance crews, accountants, and owners), and would certainly operate continuously for at least 30 days, the crime control act appears to apply to them. However, because off-shore casinos operate from a State of foreign jurisdiction that allows such gambling, there is a question whether Internet gambling activity is illegal simply because some players may be located in states where such gambling is prohibited. The problem for U.S. officials is that off-shore gambling operations are duly licensed by foreign governments and therefore are engaged in lawful gambling operations.

D. The Interstate Transportation of Wagering Paraphernalia Act. (SECTION 1953)

The Interstate Transportation of wagering Paraphernalia Act (ITWPA) may create another federal barrier to Internet gambling. The Act specifically prohibits the knowing distribution of materials for illegal gambling activity in Interstate or foreign commerce. In United states v. Mendelson, the defendants were convicted under the ITWPA for the interstate transport of gambling software finding that software merely "designed for use in" illegal gambling also falls within the scope of the statute. Under this interpretation, off-shore casinos shipping software through interstate commerce of the Internet that enables a subscriber to log on to the casino for illegal gambling, should violate federal law. Subsection (b), however, provides an exception to legalized gambling. Under this exception, there is a question whether it would be illegal to provide such gambling software to those residing in States where such gambling is permitted (e.g. Nevada). This author believes that such activity would not be in violation of the ITWPA for the simple reason that the act of transporting gambling paraphernalia from one state (or country) to another, both of which allow on-line gambling, is not prohibited under the ITWPA.

E. A STATE'S APPROACH: The Minnesota Experience

The only State that has been quite vocal in dealing with Internet Gambling has been Minnesota. Unlike most States, Minnesota has been quite aggressive in attacking Internet gambling. The Minnesota Attorney General has declared Internet Gambling to be a violation of Minnesota Criminal Law. Minnesota applies its criminal statutes to operators outside of the State who supply illegal gambling services which thereby cause an illegal "result" within the State. In fact, a suit was filed by Minnesota against Wagernet (an on-line casino) and its founder. The case, however, was based on a consumer fraud theory whereby Minnesota's Attorney General charged Wagernet with false advertising of its on-line casino as a legal way to bet on sporting events (which is prohibited in Minnesota). While this suite may deter some operators from providing on-line gambling in the short run, the reality is that this theory of liability will not cover those operators who exercise some discretion and do not advertise themselves as a legal form of gambling in the United Stats. In fact, most on-line casinos presently provide a disclaimer stating that their activity is void where prohibited. Such approaches by individual states are problematic because they fail to recognize the limited effect one state can have on regulating the Internet. Because a single state cannot prevent Internet gambling from existing, the best that can be hoped for is that many states will also criminalize the activity, and yet, in the end, all it takes is one state to legalize the activity and Internet gambling will be available.

Thus, because the Interstate Wire Act, the Travel Act, the Crime Control Act, and the ITWPA all encompass the transportation of wagering information over telephone lines and wires, they are applicable to Internet gambling. However, the very language of the statutes and their exceptions make questionable the legality of on-line gambling. Furthermore, the global nature of the Internet makes enforcement of these laws difficult, if not impossible. Just as Minnesota's ability to restrict Internet gambling is severely limited when another state permits it, The United States cannot stop Internet gambling if another country has legalized it, which is presently the case. Therefore, The two key questions presented to United States authorities with regard to off-shore gambling operators are whether United States Courts have personal jurisdiction over prospective defendants, and whether such jurisdiction can be enforced.