Basic Information Regarding Online Gambling

 

The law surrounding Internet gaming in the United States has developed substantially in the last decade or so. The Department of Justice contends that all forms of traditional Internet gambling are illegal under United States federal law, as is the marketing, promotion, or advertising thereof. Indeed, some forms of online gambling, like sports betting, are specifically prohibited by federal statutes. Other gaming activity may or may not be legal, depending on the circumstances.

 

Federal authorities rely upon the Wire Wager Act as the basis for asserting that Internet gambling is illegal. This law does prohibit betting on sporting events, or other contests, using “wire” systems (including telephones or the Internet). Both the courts and the Office of the U.S. Attorney General have confirmed the limited scope of the statute. Various other federal laws may apply to certain online gambling activities, such as the Illegal Gambling Business Act, the Wagering Paraphernalia Act, and the Travel Act, however, their applicability depends substantially on the type of gaming activity, as well as the state law where the activity is occurring. Moreover, other forms of gaming-related entertainment may be exempted from traditional gambling laws, such as skill gaming, tournaments, sweepstakes, fantasy sports, and contests. However, those activities implicate other potential regulations, primarily at the state level. Accordingly, at least as far as federal law is concerned, the operation of U.S. facing online sports betting websites is illegal, while the legality of websites focusing on other forms of gaming activity is less clear.

 

On October 13, 2006, former President Bush signed the Unlawful Internet Gambling Enforcement Act (UIGEA), which restricts the acceptance of certain financial transactions pertaining to illegal online gambling, and imposes requirements on banks and other financial service providers to identify and block illegal financial transactions. The scope of the UIGEA remains largely untested in the courts, despite the fact that the law has been around for over a decade. The administrative regulations promulgated by the Treasury Department provide the opportunity for certain online gaming operations to continue using U.S. financial institutions to process their transactions, if supported by a “reasoned legal opinion”. Based on the plain language of the UIGEA, only financial transactions relating to wagers that are illegal where they are made are prohibited by the law. That requires an evaluation of the current state of gambling law in the location where the betting transaction is initiated. Accordingly, some gambling-related financial transactions may be illegal under UIGEA, while others may not.

 

Shortly after UIGEA was passed, many U.S. facing gambling sites began to block U.S. players and deposits. Online poker sites continued to serve U.S. players until the “Black Friday” indictments against executives from three large poker sites on April 15, 2011. Shortly thereafter, the U.S. player market was effectively cut off by major site operators. The withdrawal of the large poker sites created some opportunity for other companies willing to take on a degree of legal risk in order to serve U.S. players. However, enhanced banking and financial compliance obligations resulted in difficulty in receiving player deposits from the U.S. The development of Bitcoin alleviated that issue, for sites that accepted this alternative currency, however legal risks remained. Offshore Bitcoin gaming sites continue to operate, although criminal charges have been brought against U.S. Bitcoin gaming sites. Few gaming licensing jurisdictions permit player deposits in Bitcoin.

 

Aside from federal law, some individual states have passed their own online gambling and skill gaming laws. Most statutes focus on prohibiting the operation of an online gambling business, while a few also prohibit the act of placing a bet online. Very few prosecutions have occurred under state law, and thus the validity and constitutionality of these statutes have not been tested in the courts, as applied to website operations. Some states have also specifically legalized online gambling, within the state’s boarders. Other states have legalized fantasy sports betting, while still others have prohibited such activity. With more and more states passing laws directed to online gaming activity, the result has been an increasingly complex state of affairs. Some forms of Internet gambling may, for example, be legal in certain states while completely prohibited or criminalized in others. Since some federal laws like the Illegal Gambling Business Act and UIGEA rely on the legality of gambling activity at the state level, any attempt to determine the legality of a particular online gambling operation in the United States can result in complex evaluation and analysis. However, it should be stressed that very few unlicensed online gambling businesses actually operate in the United States, given the Department of Justice’s unequivocal position that all forms of unlicensed online gambling businesses are illegal in this country. Instead, these operations tend to be located in a handful of offshore jurisdictions, whose governments have decided to legalize and license Internet gambling businesses as a method of tax revenue generation and economic stimulus. Often, Internet gambling businesses will locate in nations like Malta, Costa Rica, Isle of Man, Gibraltar, or Curacao. The United Kingdom and various EU countries have also passed online gaming legislation.

 

A more difficult question is presented when the online gaming activity eliminates (or reduces) one of the required elements of gambling; i.e., “prize,” “chance,” or “consideration.” So-called ‘free’ sites and sweepstakes focus on eliminating “consideration;” skill games, contests (including fantasy sports games) focus on eliminating “chance;” and social games providing only in-game rewards focus on eliminating “prize.” Penny auction sites eliminate the concept of wagering, altogether, instead allowing participants to bid on prizes. Each of these business models must be evaluated separately, to determine whether they are impacted by potential state or federal gaming restrictions.

 

Service providers such as advertisers, payment processors, hosts and website developers have also been targeted for violating certain online gaming prohibitions. Some financial service providers have been criminally prosecuted, like NeTeller and eGold, while media outlets like Google, MSN, and Yahoo! have paid millions of dollars in fines, as a result of their involvement with online gambling sites. Even software developers have been prosecuted where their programs have been used for real money gambling. Accordingly, any involvement with online gambling activity comes with some degree of legal risk.

 

United States law enforcement authorities, at both the state and federal levels, have increased enforcement of criminal and civil forfeiture laws, over the years, against those openly violating this country’s online gambling laws. Both U.S. citizens and foreigners – passing through the United States while traveling – have been arrested in these crackdowns. For example, individuals associated with BetOnSports.com, a major sports betting website, were prosecuted and pled guilty to serious federal gambling offenses. Similar prosecutions have occurred in Florida, New York and Louisiana. In December, 2008, the owner of one of the largest poker sites; Party Gaming, d/b/a partypoker.com, voluntarily appeared in this country to plead guilty to violating the federal Wire Wager Act, and agreed to forfeit $300 million dollars, relating to the company’s activity before it discontinued accepting U.S. players. As noted above, the prosecutions have not been limited to actual website operators, but have also included hosts, website designers, advertisers, and billing processors.

 

Efforts to pass uniform federal online gambling legislation have repeatedly failed. Accordingly, the U.S. has adopted a state by state approach to internet gaming policy development. Thus far, Nevada, New Jersey, Delaware, and Pennsylvania have legalized online gambling for individuals within their borders. It is expected that other states will follow suit, although some states will continue statutory bans or simply not address the issue. Despite the crackdown on internet gambling, opportunities remain in the realms of skill gaming, contests, fantasy sports, sweepstakes, penny auctions, and social gaming. The public’s desire for gaming related entertainment remains at an all-time high.

 

For more information about Internet Gaming Issues, see:

 

Skill Gaming Legal Guide

 

Legal Overview of Daily Fantasy Sports

 

Sports Gambling Issues

 

Emerging Issues in E-Sports