A SAFE BET, OR RISKY BUSINESS?
By: Lawrence G. Walters, Esq.
www.GameAttorneys.com In a stunning example of technology outpacing the law, the online casino gambling business has grown exponentially during the last few years, despite significant legal uncertainties. Based on recent estimates, over 1,400 Internet gambling sites exist on the Web, with a total of 14.5 million users placing bets.Total revenue for year 2000 from online gaming sites has been estimated at $1.5 billion, and is expected to grow to $5 billion by 2003. With numbers like those, American firms have taken notice and become involved in everything from software development to actually taking bets, but have generally turned a blind eye to the fact that gambling is illegal under state and federal law. Numerous articles have described the legal climate surrounding Internet gambling as “unclear” or in a “grey area.” Some industry leaders have even made claims that owning and operating online casinos in the United States is “legal.” To date, most analysis has come from casino owners or non-lawyers. As more webmasters consider adding casino affiliate programs or actual involvement in the gaming industry, the time has come to take an in depth look at the complicated legal issues generated by this new money-making opportunity.
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THE WIRE ACT
Historically, gambling has been seen by the courts as a hazard to the public and therefore implicates no constitutionally protected right. In fact, gambling has been seen as a “vice” activity that can legally be, and frequently has been, banned altogether. Thus far, most of the legal controversy surrounding the issue has centered on potential application of the federal “Wire Act” to online betting. Boiled down to its essential components, the Wire Act creates a federal felony punishable by up to two years in prison if an individual or company accepts any wager over any device using the telephone wires (like, for example, the Internet) or provides information that assists anyone else in doing so. To date, all online communications travel over some portion of the telephone lines. Even “wireless” Internet connections still use fixed wire transmissions somewhere along the way. Accordingly, the Government argues, any bet that is placed in the United States, or which uses the wires to facilitate placement of the bet outside the United States, violates the Wire Act.  American citizens who assist offshore companies by providing the technology, software or customers for the purpose of facilitating online gaming can be considered “conspirators” in violation of the Wire Act.
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TOO CLOSE FOR COMFORT?
These broad legal prohibitions have not dissuaded large public relations firms and software development companies from grabbing a share of the considerable profits generated from the online gaming industry.  Many hosting and software development companies have also been willing to roll the “legal dice” by creating offshore casino sites and providing them bandwidth. These firms have taken the position that providing only technical or marketing services to offshore gaming companies falls short of the “overt acts” required to prove conspiracy to violate the federal gaming laws. The legal soundness of such claims has yet to be significantly tested in the courts. However, all that is required to demonstrate an illegal conspiracy is “knowledge of, and voluntary participation in an agreement to violate the law.” The crime of “aiding and abetting” can be shown if a defendant willfully associates himself with a criminal venture.  The more difficult question becomes this: How far from the actual placing of bets does a company need to be in order to avoid claims of “aiding and abetting” or “conspiracy to violate the gaming laws?” A review of the few legal decisions on these issues can be instructive: In July, 2001, the Second Circuit Court of Appeals in New York handed down the most damaging legal opinion against the online gaming industry to date. In this case, the feds charged Jay Cohen with violation of the Wire Act based on Internet gambling activities.  Cohen was an American citizen who moved to the Caribbean island of Antigua to set up a bookmaking business called World Sports Exchange. That company, patterned after New York’s Off-Track betting Corporation, accepted bets on American sporting events.  Although the operation was based exclusively in Antigua, it targeted customers in the United States through advertisements in American radio, newspaper and television. Bets were accepted either by toll free telephone or via the Internet. In a single 15-month period, Cohen’s company collected approximately $5.3 million in funds wired from customers in the United States, and attracted nearly 1,600 customers. The FBI began an investigation of the company in 1997, and started placing bets in the State of New York, through the telephone and Internet. Cohen was eventually arrested and charged with criminal conspiracy and substantive offenses under the Wire Act.  Cohen raised various defenses to his criminal prosecution, including that he did not know his operation was illegal, that certain safe harbor provisions of the Wire Act should apply to his business, and that his company only provided information in the United States about the casino site rather than participating in the actual gambling activity. All of those defenses were rejected in a lengthy Circuit Court opinion, finding that the Wire Act applies to this very common online casino business structure. Cohen was sentenced to 21 months in prison, and his conviction and sentence were affirmed by the appellate court. The principles articulated in that opinion appear to criminalize virtually any close affiliation with an online casino that targets customers in the U.S. The linchpin of the Cohen decision is the online casino’s marketing to potential users in America. Most online casino sites similarly market to potential players in the United States and every other country. Given the current technological limitations of Internet technology, it may well be impossible to exclude United States residents from any Web-based marketing program. While exclusion of actual players from the U.S. may be somewhat more workable, any such system is certainly not foolproof, and it is not clear that player exclusions would create a defense to criminal prosecution. If the analysis in the Cohen case is accepted by other courts, it could spell the death knell for participation in the online gaming industry in the United States absent legislation approving it. Even affiliate promotion of casino websites under the court’s reasoning could result in criminal sanctions against the unsuspecting webmaster. While the First Amendment is implicated by an all-out ban on casino advertising, the concerns created by this decision are real. Moreover, the Cohen opinion is not a stray decision, or some sort of aberration. At least two other courts have held that foreign casino businesses accepting bets from customers in the United States may violate federal law. InU.S. v. Kaczowski, such an operation was determined to have potentially violated the Wagering Paraphernalia Act, the Travel Act, the Wire Act and various New York State laws prohibiting the promotion of gambling. In People ex rel. Vacco v. World Interactive Gaming Corp.,  a New York state court found that an Antiguan online gaming company violated federal gambling and securities laws, and issued a court order prohibiting the continued operation of the enterprise. While these courts appear to criminalize the active marketing of gambling services to U.S. residents, some relationships with online gaming sites might not violate federal law. One case has identified the distinction between participation in an illegal enterprise and simply providing contractual services. In Jubelier v. MasterCard Intern., Inc.,  the court found that routine contractual relationships between online casinos and a credit card company were insufficient to establish criminal wrongdoing by the credit card company or make it responsible for any illegal acts of the casino. In that case, MasterCard International was alleged to be part of a RICO enterprise with online casinos because it processed payments for online gambling activities. The court found that extending liability under the RICO Act to the credit card company was simply going too far and was not consistent with the intent behind the racketeering laws.  Many questions remain regarding the extent of involvement required before one can be labeled a “conspirator” in violation of federal gaming laws. However, the reasoning used in the above-referenced cases can be used to criminalize many typical promotional or contractual relationships with online casinos.
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While violations of federal law have been of great concern to those considering involvement in some way with online betting, like-minded state governments have been comparably troublesome. In fact, State governments have been more active than the federal government in attempting to regulate this activity. However their efforts have met with varying levels of success. In Florida, for example, during 1998-99, the State Attorney General distributed “cease and desist” letters to at least 10 media companies providing publishing or broadcasting advertisements for offshore computer gambling sites.  This action prompted many Florida companies to scale back their operations, move from Florida or get out of the business all together. More recently, however, Florida seems to have backed off the issue and shifted its resources to other concerns, largely because the attorney overseeing the matter died. In Texas, a private individual attempted to recover winnings from an online casino based in California.  The casinos immediately raised complicated arguments regarding the ability of the Texas courts to exercise personal jurisdiction over corporations located in California.  Because websites, which are located in cyberspace, are technically doing business in every state where they are available, the courts have a difficult time determining where such virtual companies can fairly expect to defend a lawsuit. These complex jurisdictional issues have dissuaded some investigators from even pursuing civil or criminal actions against online casinos.  Although the online casino in this case had its offices in California, its server in California, and no offices in Texas, the court ultimately ruled against the gaming company and forced it to defend the claim in the Lone Star State. However, this case left unresolved the critical issues surrounding the legality of online gaming itself. In other states, such as Georgia, the issue of offshore Internet gambling has been ignored given the tricky jurisdictional considerations.  Daryl Robinson, counsel to Georgia’s attorney general, recently stated that the issue of online betting “is not on the forefront for us.” Interestingly, the first state to legalize Internet gambling, Nevada, was also the first to outlaw the activity. Making or accepting a wager over the Internet is now, by statute, a crime in Nevada unless the operator is one of the state’s licensees.  Bills that are currently pending in over a dozen states to outlaw Internet gambling have exemptions for local, legal gambling operations. For example, California’s proposed Assembly Bill No. 2179, would outlaw every form of gambling imaginable but excluded games “lawfully conducted by the California State Lottery.”  The South Dakota Legislature passed an anti-Internet gambling bill in February 2000, entitled “An Act to Prohibit the Use of the Internet for Certain Gambling Activities.” This legislation makes it a felony for a person engaged in a gambling business to use the Internet to make or accept wagers, or conduct an Internet gambling business from South Dakota, if the violation originates and terminates in the State.  However, the law exempts the State Lottery and licensed casinos in certain areas. The Michigan Legislature passed a bill which was intended to outlaw Internet gambling, but which, by apparently oversight, failed to reference the gambling statute in the list of activities that cannot occur by computer. The same Legislature, in the very next year, amended the law, and inexplicably omitted all references to gambling from the list of crimes prohibited on the Internet. Oregon, from a different angle, is considering a bill which would make it a felony for Internet casinos to accept credit cards, checks or electronic funds transfers from Oregonians to pay gambling debts, and has the support of major credit card companies.  Each state has its own unique traditional gambling prohibitions which further complicates the legal analysis. Since online casinos are presumably soliciting and obtaining users from each of the 50 states, a violation of any state’s laws might be alleged in a state prosecution. For example, New York law prohibits promotion of gambling when the defendant knowingly advances or profits from unlawful activity. “Advancing gambling activity” occurs when a person “engages in conduct which materially aids any form of gambling activity.”  Kansas law, on the other hand, prohibits anyone from operating or receiving all or part of the earnings of a gambling place, receiving, recording or forwarding bets, becoming a custodian of anything of value bet or offered to be bet, or setting up for use or collecting the proceeds of any gambling device.  Florida prohibits anyone from keeping any gaming apparatus, implement or place for the purpose of gaming or gambling.ition may be broad enough to prohibit online gaming without the necessity of specific Internet gambling legislation.  Florida also prohibits anyone from playing “by any device whatever” any game of chance for money. This prohib As is obvious, gambling prohibitions vary from state to state. An online casino may potentially be liable for violation of any state’s gaming laws given its nationwide (and worldwide) availability.
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LIGHT AT THE END OF THE TUNNEL?
Despite the apparent legal quagmire in which virtual casinos appear to fall, hope may be on the horizon. In February of this year, a federal court from the Eastern District of Louisiana made the stunning pronouncement that “…internet gambling on a game of chance is not prohibited conduct under [the Wire Act.].” That holding has been seen as the beacon of light at the end of the dark tunnel of regulation by virtual gaming proponents in the United States. While this trial court decision is not binding on any court in the country, and is of questionable precedential value in future cases, it does provide some basis to argue that most online casino gambling is not illegal under federal law. The rationale for this court decision is even more important. The court relied upon the unsuccessful attempts to amend the Wire Act to encompass betting on games of chance as opposed to sporting events on the Internet. The court also cited to the Congress’s unsuccessful attempt to pass the “Internet Gambling Prohibition Act of 1999,” which would have specifically outlawed online betting on sporting events or games of chance. So the argument goes that if federal law already prohibited online gaming, why would Congress need to create additional prohibitions? While this is an appealing argument at first glance, it did nothing for Jay Cohen, who faces many months in prison for activities which one court has concluded are not criminal.  The Louisiana decision, however, coupled with the recent legalization of Internet gambling in the State of Nevada, may provide the required momentum for virtual gamers to effectuate a change in the law, or at least a clarification thereof, nationwide.
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The current state of the law often forces webmasters considering any involvement in the online gaming industry to guess at whether any particular business relationship with a virtual casino constitutes an illegal conspiracy to violate the gaming laws, which could result in significant criminal sanctions. In addition to the two-year maximum prison term allowed under the Wire Act, online gaming may constitute a violation of the Travel Act, other state and federal laws, or even be used as a predicate act for a Racketeering charge. Many of the old time gangsters used to run the numbers rackets so the federal government, when drafting legislation to be used against mob activity, included gambling violations as “predicate acts” for RICO (“Racketeering Influenced Corrupt Organization”) liability. A RICO conviction carries draconian sanctions, including decades in prison, forfeiture of all business assets, and a six-figure fine.  While it is difficult to determine whether the federal government would initiate Racketeering charges against a casino website given the current legal climate, it is a potential concern that must be considered when evaluating the legal risks. Also, even if the federal government would hesitate before bringing RICO charges in this circumstance, many states have their own version of RICO. A zealous state prosecutor with a thirst for headlines could consider a high profile RICO prosecution against online casino owners as a career jump start, or simply the appropriate charge under the circumstances. Either way, such a charge significantly raises the stakes for involvement with online gaming. The law in this area is in a state of flux, with conflicting court decisions on critical issues. It may take several more prosecutions, civil cases or legislative enactments before the law is clarified. This entire mess is driven by an odd mix of millions of insatiable (and often addicted) gamblers, a comparable number of people who believe that gambling is immoral, politicians wanting press and air time, and, perhaps most dramatically, brick-and-mortar casinos, race tracks and other gambling venues that are attempting to fend off competition for the gamblers dollars. This is, and has always been, a recipe for political bedlam.
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In the meantime, what this all comes down to, in the immortal words of Clint Eastwood is, “Do you feel lucky?” Just like the act of gambling itself, opening or becoming affiliated with a casino site carries risk, and participants should be prepared for the downside if the dice come up “snake eyes.” Accordingly, this is a business only for risk tolerant individuals. Those who are not prepared to endure a criminal prosecution to test the laws in their particular jurisdiction should consider another source of revenue. Those who choose to jump in the industry during these formative years run the risk of becoming one of the test cases. At a minimum, each and every relationship with an online casino must be reviewed and evaluated by an attorney with specific experience in gaming laws. Only after consultation with your counsel can you weigh the odds and decide whether taking a chance on virtual gaming is a safe bet or risky business. Lawrence G. Walters is a partner in the national law firm Walters Law Group. Nothing in this article is intended as legal advice. Please consult with an attorney regarding specific legal matters. Mr. Walters can be reached at [email protected] or www.GameAttorneys.com.
Online Casino Risk