The globe is a patchwork of laws on various “sin” activities:  alcohol, drugs, prostitution, pornography and gambling. Prior to the internet, however, citizens of the world could only avail themselves of other jurisdictions’ looser laws by being physical travelers between these patches.  Home jurisdictions rarely were concerned about this type of tourism; though some modest amount of dollars was exiting the jurisdiction, the tourism jurisdiction kept all of the negative consequences of the “sin” activity.

With the advent of the internet, U.S. residents need not travel to other states or other countries to engage in gambling, which is now available continuously on home computers, tablets and phones. For the past fifteen years, U.S. regulators have struggled with how to preserve autonomy of the states with respect to gambling regulations but at the same time to address concerns over online gambling sites operating out of foreign jurisdictions.

Furthermore, individual states argued that they were burdened with the consequences of the online activity, such as problem gambling, but without the economic benefits. Though U.S. regulators often argue that prohibiting online gambling is necessary to protect U.S. residents from both the negative effects of gambling and potential fraud, the growth of the U.S. domestic online gambling market suggests that federal regulation is more about economic protectionism than consumer protection.

U.S. online gambling regulation

Pre-2006 online gambling landscape

Traditionally, the U.S. government left the regulation of gambling to the individual states, allowing states to choose whether to allow some types of gambling but not others within their own borders. Though gambling was generally prohibited in almost every state for most of the twentieth century, by 2000, most states had liberalized state laws to allow various forms of gambling: casino gambling, tribal casino gambling, lotteries, pari-mutuel horse racing and electronic gaming devices such as video poker machines. Only two states forbid all types of gambling:  Utah and Hawaii. Though moral arguments have typically inspired gambling regulation, the desire for additional state revenue fueled states not only to permit private gambling but also to operate state-run lotteries.

The only federal attempt to regulate gambling until recently was the 1961 Wire Act, which prohibits making “bets or wagers” relating to “any sporting event or contest” using a “wire communication facility” in interstate commerce. This act was historically used to prosecute bookmakers in Nevada, where sports betting is legal, who took bets on sporting events over the telephone from nonresidents. With the advent of the internet, the U.S. Department of Justice eventually took the position in the late 1990s that the Wire Act not only covered interstate gambling of types other than sports betting, but that it also applied to bets and wagers made online. Many non-U.S. jurisdictions had a much more permissive stance on internet gambling, both sports betting and online casinos and poker rooms. Though online gambling companies took a risk setting up business within the U.S. borders, such companies could choose from many other favorable locales, presumably out of reach of U.S. laws.1 The amount of money pouring over borders, particularly the U.S. border, in search of online gambling led companies to find great success in this new business, even engaging in initial public offerings.

During the formative years of online gambling, the U.S. Department of Justice used the Wire Act to selectively prosecute a few operators of offshore sports betting sites and casinos. In 2002 and 2003, the DOJ pressured PayPal into not allowing U.S. gamblers to use the service to create and maintain accounts with online casinos. Other major U.S. banks followed suit, making it difficult for a U.S. gambler to use a Visa or MasterCard credit card issued by those banks. In 2004, the DOJ sent a letter to members of the National Association of Broadcasters threatening media outlets that accepted advertising from offshore gambling websites with prosecution for aiding and abetting violations of the Wire Act. This action resulted in most online gambling ads being pulled from television channels, radio stations and search engines.

Though the U.S. was able to use its jurisdictional power over U.S. companies and individuals, it then began to prosecute nonresidents. In a startling move, more than ten arrest warrants were issued for non-U.S. employees of BetonSports in July 2006, and the nonresident CEO was arrested while changing planes at the Dallas-Fort Worth airport, enduring years under house arrest and a year in a U.S. jail. The nonresident chairman of Sportingbet was arrested at New York’s Kennedy Airport, but released days later. In January 2007, authorities arrested NETeller’s Canadian founders Stephen Lawrence and John Lefebvre, who were mere minority shareholders at the time, not officers or directors, while vacationing in the U.S. The next week, authorities subpoenaed four international banks with major operations in the U.S. that participated in the IPOs of online gambling sites.

Though none of those efforts succeeded in completely stemming the tide of online gambling, the U.S. was beginning to get attention from the world community for its aggressive stance toward foreign operators of online gambling sites.

 

The World Trade Organization

In March 2003, Antigua and Barbuda complained to the World Trade Organization that the actions of the U.S. government in prosecuting participants in offshore online gambling constituted a discriminatory prohibition of foreign online gaming providers in violation of the General Agreement on Trade in Service (GATS). However, the U.S. took the position that it opposed offshore online gambling to ensure public morals and public order, namely to protect against money laundering, fraud, underage gambling and organized crime. Eventually, the Appellate Body of the WTO issued a narrow opinion, finding the U.S. had engaged in discrimination because the U.S. allowed off-track horse betting and ordering the U.S. to harmonize its horse racing laws with its WTO commitments within a reasonable time.

Instead of doing so, the U.S. eventually requested that its scheduled GATS commitments be amended to exclude gambling services from WTO jurisdiction, triggering an obligation for the U.S. to pay damages to affected member states in order to withdraw. Antigua, however, refused to settle and continued to enforce its claim. To date, both countries are still in negotiations, though a WTO arbitrator determined that the value of the violations of the U.S. under GATS were approximately $21 million.2

 

The Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006

Not only did the U.S. not follow the WTO’s order that it harmonize its domestic gambling laws, it passed the Unlawful Internet Gambling Enforcement Act in 2006, which not only reinforced its stance on foreign operators of gambling websites, but pointed its prosecutorial power on domestic financial institutions. According to the Act, businesses such as financial institutions involved in unlawful internet gambling may not knowingly accept payments from another person in a prohibited online bet or wager. Interestingly, the Act excluded “intrastate transactions,” leaving open the possibility of domestic, intrastate online gambling. Other exceptions include “intratribal transactions,” “interstate horseracing,” and online fantasy sports.

 

Black Friday 2011

The boldest move the U.S. government has taken after passage of the UIGEA was the unsealing of eleven indictments on April 15, 2011, known as “Black Friday” in the gambling world. The U.S. indicted individuals at PokerStars, Full Tilt Poker and Absolute Poker for a UIGEA violations, fraud and money laundering. The U.S. froze at least seventy-six bank accounts and instituted civil forfeiture proceedings for $3 billion. The indictments led to prison terms for some Full Tilt Poker defendants as well as forfeiture amounts. This crackdown was particularly unpopular among U.S. online poker players, who argue that poker is a game of skill, not gambling.

gambling-chips

Current state of domestic online gambling

In late 2011, the DOJ’s Office of Legal Counsel changed course and issued an opinion that the Wire Act applies to online wagers, but only those involving a sporting event or contest.

Thereafter, three states, Nevada, New Jersey and Delaware, passed laws legalizing intrastate online gambling. Another seven states have introduced state legislation to allow online gambling.  To say that offshore online gambling must be prohibited for public morals and public safety reasons is particularly disingenuous when domestic online gambling is becoming widespread.  However, as domestic online gambling grows, the pressure to keep offshore online gambling illegal also grows as U.S. states attempt to preserve the domestic market. In addition, a divide has appeared between domestic physical casinos and domestic online casinos. In 2015, bills were introduced in both the U.S. House of Representatives and the Senate with the title “Restoration of America’s Wire Act,” proposing to clarify that the Wire Act prohibits all online gambling involving interstate or foreign commerce, thereby possibly preserving intrastate online gambling while strengthening enforcement against offshore gambling sites. One supporter of the bill, Sheldon Adelson, cited family values as a reason to prohibit online gambling, though he owns a network of domestic casinos.

 

ENDNOTES

  1. These locales included out of the way “havens,” such as Antigua, Curacao, Grenada, the Dominican Republic, Netherland Antilles, Trinidad, St. Vincent and the Cayman Islands, but also the United Kingdom and Australia.
  2. Antigua had originally argued that the amount of damages caused by U.S. violations was $3.4 billion.