© Copyright 2007, all rights reserved worldwide.  GAMBLING AND THE LAW® is a registered trademark of Professor I Nelson Rose, Whittier Law School, Costa Mesa, CA

Gambling and the Law®:

Legal Poker Under Prohibition 2.0

“Laws are like sausages.  It’s better not to see them being made.”
 Otto von Bismarck
 
In the wee hours of the morning on September 30, 2006, with the members of Congress aching to go home to campaign for reelection, Sen. Bill Frist (Republican - Tennessee), then the majority leader of the U.S. Senate, rammed through the Unlawful Internet Gambling Enforcement Act of 2006. 
 
Frist didn’t even have time to come up with a good acronym.  The “UIGEA” is unpronounceable.  So, I’ll call it “Prohibition 2.0", since it attempts to, again, impose Prohibition on the United States.
 
Of course, we know how successful the first Prohibition was in preventing people from drinking.  Prohibition 2.0 will be just as successful in preventing people from gambling.
 
It is important to understand that this bill was not the result of serious study and debate.  No hearings were held.  Interested parties were not asked for their input.  In fact, it appears that no one even proofread Frist’s bill.  It was simply an underhanded political maneuver by a now-discredited politician.
 
Frist’s term in the Senate was almost up.  He planned to spend the next two years running for the Republican nomination for President.  With Prohibition 2.0, he hoped to score a few points with his political base, the religious far-right.  He also needed the help of Jim Leach (Republican - Iowa), then a powerful member of the House of Representatives, and a fanatic opponent of Internet gamlbing.
 
Frist added his Internet gambling Act to a completely unrelated bill dealing with port security.  According to Sen. Frank R. Lautenberg (Democrat - New Jersey), Frist refused to let any Democrat see the amendment.  And when Frist was asked what the amendment did, he refused to say.  So members of Congress could only vote against this ban on Internet gaming by voting against the SAFE Port Act, and being painted as weak on terrorism.

 

It’s important to know this history, to be able to ask the right questions.  Normally, with a piece of legislation, courts have to determine the actual intent of Congress.  Here, there was no real intent, since no one even knew what the Act did.  We’re left with only what the Act says on its face.  And Prohibition 2.0 is somewhat of a mess.
 
It starts with the findings.  The Act uses a recommendation from the discredited National Gambling Impact Study Commission, whose chair was the right-wing, incompetent, Kay Coles James.
 
Prohibition 2.0 tries to expand the reach of federal law.  “Bet or wager” includes risking something of value on the outcome of a contest, sports event “or a game subject to chance.”  This was clearly designed to cover Internet poker.

 

But, this new statute only applies to Internet gambling that is “unlawful,” defined as violating some other federal or state law.  Prohibition 2.0's major weakness is that it does not expand the reach of the Wire Act, the main federal statute the Depart of Justice (“DOJ”) uses against Internet gambling.
 
Although the DOJ has taken the position that the Wire Act covers all forms of gambling, courts have ruled that it is limited to bets on sports events and races. 
 
State anti-gambling statutes also have weaknesses, including the presumption that they do not apply if part of the activity takes place overseas.   So, it is still difficult to find a federal or state law that clearly makes Internet poker illegal.
 
Prohibition 2.0 creates only one new crime:  No one engaged in the business of betting or wagering may knowingly accept any money transfers in any way from a person participating in unlawful Internet gambling.  This includes credit cards, electronic fund transfers, and even paper checks.  But it is still limited to Internet gambling businesses, not mere players. 
 
Bizarrely, for an Act designed to stop money transfers, it does not make the transfer of money a crime.  In fact, payment processors, like banks and e-wallets, cannot be guilty of this new crime, because they are not in the business of gambling.  The definitions of Prohibition 2.0 are so restricted to actual gaming companies that payment processors might not be liable for aiding and abetting.

 

Payment processors will be subject to new regulations, although it is unclear whether the U.S. has the power to regulate foreign financial institutions.  Federal regulators have 270 days from Friday, October 13, 2006, the date President Bush signed Prohibition 2.0 into law, to come up with regulations to identify and block money transactions to gambling sites.

 

The regs will require everyone connected with money transfers to i.d. and block all restricted transactions.  So all payment processors are suppose to have systems in place to prevent money from going to operators of illegal Internet gambling.
 
The first step will undoubtedly be to take the credit card merchant code for online gambling, 7995, and expand it to all electronic fund transfers.  The federal government will order banks and all others involved with eft's to cease sending money to any Internet operator who has a 7995 merchant code.

 

The Act allows federal regulators to exempt transactions where it would be impractical to require identifying and blocking.  This obviously applies to paper checks.  Banks have no way now of reading who the payee is on paper checks and cannot be expected to go into that business.

 

The great unknown is how far into the Internet commerce stream federal regulators are willing to go.  The Act requires institutions like the Bank of America to i.d. and block transactions to unlawful gambling sites, whatever they are.  But, while the Bank of America will comply, some foreign payment processors might not, because they are not subject to U.S. regulations. 

 

Will federal regulators then prohibit U.S. banks from sending funds to foreign e-wallets?  And would they then prohibit U.S. banks from sending funds to an overseas bank, which forwards the money to e-wallets?

 

The Act provides for limited civil remedies against Internet service providers.  ISPs can be ordered to remove sites and block hyperlinks to sites that are transmitting money to unlawful gambling sites.  An ISP is under no obligation to monitor its patrons. But the ISP can be forced to appear at a hearing to be ordered to sever its links.

 

The statute is limited to sites that the ISP hosts.  This would limit the reach of this statute to payment processors, affiliates and search engines that are housed on that particular ISP.  But like foreign operators and payment processors, foreign ISPs are difficult to serve and not necessarily subject to federal court injunctions.

 

A danger exists for affiliates.  Any American operator can be easily grabbed.  This includes sites that don’t directly take bets, but do refer visitors to gaming sites.  If the affiliate is paid for those referrals by receiving a share of the money wagered or lost, it would not be difficult to charge the affiliate with violating this law, as an accomplice.  The federal government could also charge the affiliate with conspiracy to violate this new Act.

The other danger lies with search engines.  Punch in “sports bet” on California-based Google, and you will get many links to real-money sites.

 

Lastly, the Act requests, but does not require, the executive branch to try and get other countries to help enforce this new law.

As if that were going to happen.

 

The fallout from the new Act has been nothing short of amazing.  Every publicly traded gaming company is running for cover, and many of the private ones as well.  Operators as big as PartyPoker and the payment processor FirePay stopped taking bets from the U.S. when President Bush signed the bill into law.  Other companies have said they will cut off U.S. players once regulations are in place.

 

The main question is: Why?

 

The new Act should add little to an online operator’s worries.  Legally, it creates a new crime, accepting money for unlawful Internet gambling transactions, that only applies if the gambling is unlawful under some other federal or state law.

 

Some legal commentators have said that the new Act is something new, because it makes an operator guilty of this new crime in every state, since every state makes non-licensed gambling illegal.

 

But, half the states do not have laws on the books against bettors.  In those states, betting even with an illegal bookie is not a crime.  And no federal crime applies to mere players.

 

Some states do make betting under some circumstances a crime.  Of course, in the history of the United States, only one person, a sports bettor in North Dakota, was ever charged under these archaic statutes.

 

I have heard it argued that up until now, the only potential criminal liability was on the bettors in those states, not the foreign operators.

 

Imagine what such a law would say:  It a crime in this state to make a bet, but it is not a crime to be in a gambling business that accepts the bet.

 

There never has been a law that penalizes only the players and not the operators.

More importantly, these laws were on the books long before this new Act was passed; so were the many state statutes outlawing unlicenced gambling businesses.  If an Internet poker operator was violating any of these state laws it was already in trouble.

 

Years ago, Congress made it a federal felony to be involved in any way in a “gambling business,” defined as five or more people violating state gambling laws for 30 days or with gross revenues of $2,000 in any single day.  Worse, if those were state felonies, the operators were already guilty of the federal crime of racketeering, which has far worse penalties than this new Act.

 

Internet poker operators had looked at the state and federal anti-gambling statutes and concluded that they probably did not apply.  This new Act does not extend the reach of the Wire Act or any other federal or state anti-gambling law.

 

There may be good reasons for folding a business that is making millions of dollars a day, including the risk of prosecution.  But this new Act did not change those odds.

But, as a practical matter, Prohibition 2.0 and the war of intimidation being waged by the DOJ was the final straw for many in the business.  Neteller finally cut off the American market when its founders were arrested under another law.

 

Of course, where there are problems, there are opportunities.  Entrepreneurs are already overloading my email mailbox with ideas to get around Prohibition 2.0.  The most obvious loopholes are contests of skill and games in which no purchase is necessary to participate. 

 

Like all prohibitions, the Frist bill contains silly exemptions.  Prohibition 1.0 allowed alcoholic beverages used for medicines and sacramental wine.  A movement started to have beer declared a medicine, and it is amazing how many men decided to become, or at least dress like, priests and rabbis.

 

The individuals most happy with Prohibition 2.0 are the online gaming companies that are still taking bets from the U.S.  The principals of privately owned Internet poker companies won’t be able to become instant billionaires by going public.  But they are consoling themselves with the hundreds of millions of dollars that would have otherwise gone to PartyPoker.

 

Frist, whose arrogance was matched only by his incompetence, actually created the greatest explosion of creativity in the poker industry that I have ever seen.  Everyone wants to be the next PartyPoker, to figure out a way to spread legal poker games online.

The cleanest way to run a traditional Internet poker site that does not violate any federal or state law is to be licensed by a state and limit players to people who are physically present in that state. 

 

Even in this situation, it is possible the federal DOJ might say there is a violation of the Wire Act, since a phone line might pass temporarily into another state.  But the DOJ would lose this argument for many reasons.  The sole purpose the Wire Act was enacted in 1961 was to help the states enforce their public policy, which, at the time, was prohibition.  What could possibly be the justification for preventing a state, like Nevada, from allowing its residents to bet with its own state-licensed poker sites?

 

The main obstacle to every state licensing, regulating, and of course, taxing, their own Internet poker sites is politics.  Utah is not the only place where legislators would hesitate to authorize even the most limited form of online gaming.  In Nevada, the problem is the opposite: there are already so many (landbased) licensed poker rooms that it is difficult to work out the details for sharing the new online revenue, and there is fear of diverting players away from the existing gaming floors.

 

In general, the answer is “skins.”  Players will log on to Caesars Palace’s future online poker room and choose which game they want to play, say $5 - $10 Hold’em.  They then are placed at a table that has a Caesars Palace logo on it.  They probably will not know, or care, that other players may see different logos because they signed up through different casino website portals.  Computers ensure that each casino gets its correct share of the table’s revenue.

 

But there are at least three other ways to have legal online poker.  All gambling requires prize, consideration and chance.  Eliminate any one, and it is not gambling.

A site could charge money, even for games of chance, so long as it does not give valuable prizes, only bragging rights.  So, someone could start a contest for the world’s greatest poker player, if all they win is a trophy, no cash.
 
Some poker sites allow players to play for free.  This is not gambling, despite what some law enforcement agents may say.  Since there is no consideration, it does not violate federal law or the laws of most states.

Others are looking at showing that poker is a game of skill.  I have written a Legal Opinion for one of the biggest operators that tournament poker should be considered a contest of skill, if courts and law enforcement were honest in applying established tests for skill versus chance.

 

There may or may not ever be lawsuits on the issue.  After all, is there any government lawyer who wants to be made a public laughingstock by claiming that poker is a game of chance?
 
I receive e-mails every day from player who want to know if they are going to be arrested because they have played poker online.  Some have asked for and received checks from poker operators, and are now afraid to cash the checks.

So, to answer these concerns:

 

1) You are not going to go to jail for merely playing poker online.  It is not a federal crime to make a bet.  Half the states do have ancient laws on the books making it a crime, sometimes, to make a bet.  But these are never enforced.  I have been unable to find anyone who has been charged, let alone convicted, for playing Internet poker.

 

2) It is safe to cash or deposit checks from online poker operators.  Be aware that Americans are supposed to report and pay taxes on virtually all income from any source.  The only crime the federal government really cares about when it comes to gamblers is tax evasion.

 

3) Your money can get tied up if a gaming operator or e-wallet decides to stop dealing with Americans.  It has been more than seven months since the CEO of BetOnSports was arrested changing planes in Dallas, and the money in its American former patrons’ accounts is still tied up.  Players will probably get 100% of their money back.  Eventually.  Without interest.  So, do not keep too much money in any one place.

 

4) Be careful about new sites.  Unscrupulous operators can jump in to fill the vacuum.  The danger is greater with e-wallets than with gaming operators.  Today, a crooked poker site would be slammed by players all over the blogosphere.  But a crooked bank could act legitimately, until its operators disappeared with all the funds.

 

5) Although there is virtually no chance of getting arrested, you can get into trouble by playing poker on the Internet, when you use someone else’s computer.  The company you work for owns the office computers, and can legally spy on what you are doing.  While it is not a crime under federal law to make a bet, it is grounds for dismissal if you are a federal employee gambling on federal property.  Similarly, some colleges don’t want gambling to take place in their dorms on their central computer systems.

 

Remember, even though there is money involved, it’s not worth losing your job for or getting kicked out of school – it’s only a game.

© Copyright 2007.  Professor I Nelson Rose is recognized as one of the world’s leading experts on gambling law.  His latest books, GAMING LAW: CASES AND MATERIALS and INTERNET GAMING LAW, are available through his website, www.GamblingAndTheLaw.com.