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Online Gaming

An Overview of U.S. Gambling Laws as Applied to Online Gaming

Before embarking on an Internet Gambling venture, or even placing a wager online, you should be aware of the legal framework currently in place.

Each of the fifty states regulates gambling by statute. These regulations are putatively attributed to two public policy goals: the public must trust that the games are legitimate; and second, that the winner will be paid. Three states ban all forms of gambling outright - - Hawaii, Tennessee and Utah. Of the 47 states which allow some form of regulated gambling, only Illinois and Louisiana specifically prohibit online wagering. Nevada permits online wagering if both the bettor and the server are within Nevada and the gaming operation is licensed by the state. This means that 44 states have gaming laws that do not specifically address the Internet. However, many of these states have already taken the position that online gaming violates their regulatory schemes. In 1999, New York successfully prosecuted an Antiguan based gambling site for accepting wagers from New York residents. The states of Minnesota and Missouri, in separate proceedings, successfully prosecuted offshore gaming sites for deceptive trade practices; i.e., representing to bettors that online gaming did not violate those states' laws. The Attorneys General of at least four states have issued public statements that Internet gaming will be treated as illegal under state law (California, Indiana, Kansas and Texas).

At the federal level, five provisions of the U.S. Criminal Code potentially impact online gaming. These are: (1) The Wire Act; (2) The Crime Control Act; (3) The Amateur and Professional Sports Protection Act (APSPA); (4) The Racketeer Influenced and Corrupt Organizations laws (RICO); and (5) The Travel Act. Senator Jon Kyl (R-Ariz) introduced a bill into Congress, known as The Internet Gambling Prohibition Act, which would amend The Wire Act to clearly ban online gaming. In July 1998, the bill was overwhelmingly passed by the Senate (90-10) but, fortunately, has been held up in the House chamber due to warfare among the various gaming interests. And given the bill's rather expansive language on the subject of jurisdiction, its enactment into law could pose a real danger to the development of e-commerce, generally. As observed by the ACLU, "[t]he Kyl bill sets a precedent that the mere transmission or receipt of a message on the Internet may be sufficient to confer jurisdiction [for criminal prosecution] on state or local authorities at either end of the transmission."

With regard to existing federal law, the Wire Act will likely be interpreted to apply to Internet gaming (there's much rhetoric to the contrary, of course). This law criminalizes use of a "wire communications device" to transmit betting information, wagers, or arrange for their payment. The good news here, though, is that the Justice Department has intimated that the Wire Act does not apply to casino-style gaming, and so may be limited to sports betting. The APSPA prohibits the operation or promotion of gaming "based directly. . . on one or more competitive games in which amateur or professional athletes participate."

The Crime Control Act makes it a federal crime to "conduct, finance, manage, supervise, direct or own any part of an illegal gambling business." A business is illegal if it violates state or federal gaming laws. This Act is limited to illegal gambling operations that involve five or more persons who conduct, supervise, finance or own all or part of the business.

Under the Travel Act, "[w]hoever travels in interstate or foreign commerce, or uses the mail or any facility in interstate commerce with the intent to distribute proceeds of any unlawful activity or promote, manage, establish, carry on, or facilitate [same] is subject to federal criminal penalties." The Act defines "unlawful activity" to include "any business enterprise involving gambling. . .in violation of the laws of the state in which they are committed, or the laws of the United States." The Internet would, in all likelihood, be considered a "facility of interstate commerce" for the purposes of this Act.

Taken together, the current regime of state and federal gambling laws present significant risks to anyone involved with the online gaming industry. But this is not to say that all Internet gambling is illegal. To the contrary, a number of entrepreneurs have successfully navigated these waters. They have achieved this by carefully selecting their server and payment processor locations, and by screening the domicile of players and the legal situs of their wagers.