The Unlawful Internet Gambling Act of 2006: The Law of Unintended Consequences
By Louis V. Csoka

Mark Twain once said, "No man's life, liberty, or property are safe while the legislature is in session." Given Twain's skepticism, he would not have been particularly surprised by the Unlawful Internet Gambling Act of 2006. More specifically, while the act probably will not accomplish its principle aim, namely make Internet gambling impossible or even unlikely in the U.S., the act manages to further mangle and undermine decade-old definitions of gaming laws. For example, among other things, the act manages to muddy the well-established definitions for skill-gaming and sweepstakes.

While many offshore corporations will merrily continue to offer Internet gambling to their United States customers even with the passage of the act, the act will significantly force some domestic companies, like United States banks and game operators, to spend thousands of dollars on ultimately meaningless compliance.

The Act in General
Like a bolt of lightning from a clear blue sky, the Senate Majority leadership unexpectedly rammed the act through Congress in the eleventh hour of legislative deliberations, by adding it to the wholly-unrelated Safe Port Act of 2006. Principally, the act aims to prohibit financial institutions from funding illegal gambling transactions over the Internet. As such, the laudable purpose of the act was, according to its sponsors, to prevent illegal Internet gambling by providing new mechanisms for enforcement [FN1]. But does it? Will the act do what it advertises to do, or is it merely another feel-good piece of legislation?

Most experts agree that, while the act will probably cause some unsettling and realignment in the Internet gaming industry, it will neither stop nor completely undermine Internet gambling from the United States. One reason for the act's likely ineffectiveness is that there are myriad independent third-party payment options, available to any Internet savvy consumer [FN2]. Because these third parties are not engaged in the gambling business themselves, there is a strong theoretical possibility that consumers can still direct their funds through them to an offshore gambling account.

As such, it is likely that, even before the ink from the presidential pen dried on the act [FN3], unscrupulous offshore gaming sites already had begun redesigning their funding instructions to their United States consumers on their websites that take into account the consequences of the act on their business. Unfortunately, however, the act's ineffectiveness is the least of its problems. Most significantly, the act will likely have several negative unintended consequences for domestic corporations and the economy.

One likely negative consequence from the passage of the act is that, as the liquor prohibition of the 1930s, which allowed the Mafia to become well-financed and powerful, the act will ultimately benefit the least-scrupulous offshore operators, allowing them to reap tremendous profits unchecked by any regulated and reputable Internet competitor. As one expert explained:

[T]he act may prove to be a sizeable step backwards. A number of the large and reputable Internet gambling companies have started to…accept…the principles of social responsibility. We have seen the introduction of more effective age verification and the use of tools to implement spending limits, restrict periods of play and offer self-exclusion ….On the payment side, the reputable banks and payment providers adhere to strict…anti-money laundering procedures….[With the passage of the act, however, these reputable companies will now leave the market and] others who are prepared to operate below the wire…[will fill that vacuum. They will] use less transparent and reliable ways to acquire and hold consumer deposits...[and] may not be so concerned about…social responsibility….In short, rather than combating the so called evils of Internet gambling, the new act may leave the U.S. consumer…[even more] exposed…[to the less scrupulous online predators] [FN4].

People with views similar to the above-quoted source would probably argue that, instead of passing the act, to seriously counter and address the issues presented by Internet gambling, Congress must do more than half-hearted feel-good measures. Specifically, Congress either must be prepared to act with the same strictness as the People's Republic of China against any undesirable Internet activity, or should allow reputable and regulated operators to do its bidding, by squeezing out the less-scrupulous operators from the marketplace. Partly-effective measures that merely eliminate legal competition will only help to improve the odds for the criminal element.

Another likely negative consequence from the passage of the act is that the act will impose thousands of dollars in compliance costs on financial institutions and gaming operators, who will not only have to adopt new compliance procedures but, for the reasons laid out further below, will undoubtedly be mystified as to the act's intended scope. Most significantly, until the courts or regulators definitively address the new ambiguities created by the act, affected operators will be faced with haunting compliance risks in trying to decipher the precise meaning of the act.

Skill Gaming
By way of background, the vast majority of states do not prohibit contestants from wagering on their own performance in a skill-based contest, so long as skill predominates in that contest and a number of other appropriate contest-management factors are also present. For the activity to be legal, the critical inquiry is whether the activity is one in which skill predominates over chance (the Predominance Test). As such, a contestant in these states could wager on his or her own performance in a chess tournament, for example. In chess, of course, skill vastly predominates over chance.

In sharp contrast, in a minority of states any activity which has some element of chance, no matter how small, may still be considered gambling (the Any Chance Test). As such, even wagering on one's own performance in a chess tournament (because of the random selection of a player's colored pieces) could theoretically present a legal risk in these states.

With that background in mind, the act attempts to make it clear that: 1) it has no intention of changing existing gambling laws, and 2) it appears to utilize the Predominance Test discussed above. Yet, in the same breath, it includes in the definition of illegal bet or illegal wager any "game subject to chance."

Given that just about every human activity is subject to chance, the act's definition has now placed significant uncertainty into a decade-old majority legal precedent concerning skill gaming. As noted above, even chess is subject to some chance. Does this mean that the new federal approach will now be the Any Chance Test? Will those games that have been previously allowed as skill games become prohibited?

Fortunately, given various other portions of the act, a strong argument can be made that the act did not intend to eliminate the Predominance Test. In particular, it is my belief that the sponsors of this language have probably tried to get at the increasingly-popular Internet poker tournaments, which some have argued are primarily skill-based. Nevertheless, given this reckless drafting by the act's sponsors, decades of gaming law precedent may now have become susceptible to be turned on its head. If the sponsors of the act have intended to undermine Internet poker, they should have certainly made their desires more explicit [FN5].

Sweepstakes
For several decades, federal courts, including the United States Supreme Court, have taken the view that, unless contestants are required to part with their hard-earned cash, a free contest does not constitute prohibited gambling. As such, it became the conventional industry wisdom that online sites that provide pure entertainment and prizes-completely free-would not have any substantial risk of violating gambling laws. Today, as a result of this precedent, there are hundreds, if not thousands, of online sweepstakes and online free game sites.

Unfortunately, the sponsors of the act could not leave decades of federal court precedent well enough alone. As with the Predominance Test, we also see further evidence of reckless tinkering with virtually-universal gaming law principles. This is especially confounding given the fact the act in several sections expressly avows the sponsors' intention not to change existing gaming laws.

In a most troubling fashion, the sponsors of the act, by negative implication, now appear to imply that it is illegal under federal law for game sponsors to offer completely free game credits, where those game credits can be risked and redeemed for prizes. Previously, this approach has only had some support in two states, from which contest participation could be restricted. However, as with skill gaming, the act again succeeds to saddle another group of well-established online businesses with legal uncertainties [FN6].

The Wire Act
While the act's sponsors have attempted to provide enhanced enforcement mechanisms to counter the online gaming industry, the act contains one serious oversight. If the act's sponsors did intend to counter online gaming, they should have also addressed the existing ambiguity in the federal Wire Act.

By way of background, the general consensus is that the Wire Act prohibits online sports wagering. This interpretation is further supported by a federal appellate case in which the court held that the Wire Act prohibited sports wagering, but not casino-style wagering. Under that interpretation, an online entrepreneur had to spend a few years in a Nevada jail, because he processed sports wagers online.

At the same time, the Department of Justice (DOJ) takes that position the scope of the Wire Act is broader, as it prohibits both sports wagering and casino-style wagering online. Notwithstanding that view from the DOJ, many have argued that the current reported cases do not appear to support such broader views. Instead, current cases are more in line with the view that the Wire Act was intended only to prohibit sports wagering, but not casino-style wagering.

As such, if the act's sponsors did intend to counter all forms of online gaming (including casino-style wagering such as roulette), they should have more explicitly eliminated this ambiguity in the Wire Act.

The Silver Lining
Lastly, the one positive aspect of the act is that, subject to some limitations, it intends to preserve a state's ability to legalize Internet wagering intrastate, subject to appropriate state regulations [FN7]. Nevertheless, even this gesture by Congress is somewhat undermined by loose and indeterminate language. In summary, the act is an unfortunate combination of feel-good legislation and reckless drafting that will haunt both the domestic financial services industry and the domestic gaming industry for years to come [FN8]. The real winners under the act are unscrupulous offshore gaming operators to whom Congress just handed a powerful monopoly position by eliminating any reasonable possibility for legitimate competition in the future.

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[FN1] The socially-conservative Senator Kyle of Arizona has been trying for years to pass similar legislation to the act in the U.S. Congress without any success. Given Senator Kyle's inability to succeed directly, the act represents an effort to accomplish indirectly Senator Kyle's goals by his supporters on Capitol Hill. According to Senator Frank Lautenberg, a senator in the opposition party to Senator Kyle, "[the portion of the language dealing with Internet gambling] was attached to the Safe Port Act such that nobody on the Senate-House Conference Committee saw the final language before it was passed." Jake Williams', Banning Online Poker is a Bad Idea, available at http://www.hardnewscafe.usu.edu/ (last visited Nov. 1, 2006).
[FN2] The well-known Neteller has indicated that, in light of the act, it will no longer process third-party payments for on-line gaming sites. This development does not mean, however, that other offshore companies are not ready to fill the vacuum left by Neteller and provide third-party payment services. See I. Nelson Rose's, The Unlawful Internet Gambling Enforcement Act of 2006 Analyzed, available at www.gamblingandthelaw.com (last visited Oct. 9, 2005).
[FN3] In signing the act, President Bush said this: "We're going to protect our ports. We're going to defend this homeland, and we're going to win this war on terror." He did not reference, however, the act's apparent intent to also prevent online gambling. Bush Signs U.S. Port Security Act; Contains Ban on Internet Gambling is available at www.foxnews.com (last visited Nov. 1, 2006).
[FN4] Comments of Peter Wilson, partner at Tarlo Lyons in London, from Insights-Surveying the Prohibition-Era Business Landscape, available at www.igamingnews.com (last visited Oct. 9, 2006). Previously, given the permissive gaming policy climate in the United Kingdom, some British companies appear to have participated in Internet gambling with their United States customers. With the passage of the act, a significant portion of the spoils will now likely go to more unknown Caribbean operators.
[FN5] Notwithstanding the likely possibility that the authors of the act have, among other things, probably intended to proscribe Internet poker, it is an entirely different question whether they will be successful. Among other things, as this discussion on the practicalities of enforcement and as discussion on the Wire Act further below will illustrate, this issue is not completely free from doubt. The "game subject to chance" language in the act, however, appears to place online poker in significantly greater jeopardy than it faced previously, prior to the passage of the act.
[FN6] The act introduces similar painful uncertainties to the respective realms of Fantasy Sports and Interstate Horse Wagering, topics which in the interest of space are not addressed in this article. Nevertheless, fantasy sports, as some others, appears to have become somewhat a winner under the act. Some have suggested that this may be in part due to the NFL's apparent influence in Congress. For further reading, there are several detailed articles available on the Internet about the act. See I. Nelson Rose's, The Unlawful Internet Gambling Enforcement Act of 2006 Analyzed, available at www.gamblingandthelaw.com (last visited Oct. 9, 2005).
[FN7] For example, it was not previously clear whether intrastate gambling over the Internet (where both the bettor and the server are located in the same state that legalized that activity) in which some of the signals (information packets) may be routed through an out-of-state server was legal under the Wire Act. The act now appears to remove this ambiguity from the Wire Act. As a result, if Nevada legalizes Internet gambling intrastate, a Las Vegas patron may someday bet on a Reno casino's website that is sited on a Reno server, even if some of the data packets are occasionally routed (bounced) through a Los Angeles server for use by that Reno site.
[FN8] As with other ambiguous laws, the only hope that some may have is with federal regulators, who will be issuing clarifying regulations for the act in the matter of months, which will hopefully be helpful in addressing some of the ambiguities cited herein.

Csoka is an associate with the Las Vegas firm of Gordon & Silver, Ltd. He may be reached at (702) 796-5555.