Is Internet gambling legal?

The law surrounding Internet gaming in the United States has been murky, to say the least. For years, the Department of Justice has contended that all forms of traditional Internet gambling are illegal under United States federal law, as is the marketing, promotion, or advertising thereof. However, the statutory language and judicial precedent pertaining to online gambling does not necessarily support the government’s broad pronouncements of illegality

Primarily, the Department of Justice relies upon the Wire Wager Act as its basis for claiming that Internet gambling is illegal. This law does appear to criminalize some forms of online gambling, however its scope has been limited by the appellate courts to apply only to sports betting operations, and not to other forms of casino gambling or poker. Various other federal laws may apply to certain online gambling activities, such as the Illegal Gambling Business Act, the Wagering Paraphernalia Act, and the Travel Act, however, their applicability depends substantially on the type of gaming activity, as well as the state law where the activity is occurring. Moreover, other forms of gaming-related entertainment may be exempted from traditional gambling laws, such as skill gaming, tournaments, sweepstakes, and contests. However, those activities implicate still other laws, primarily at the state level. Accordingly, at least as far as federal law is concerned, the operation of online sports betting websites is clearly illegal, while the legality of websites focusing on other forms of gaming activity is, to date, unsettled.

On October 13, 2006, President Bush signed the Unlawful Internet Gambling Enforcement Act (UIGEA), which restricts the acceptance of certain financial transactions pertaining to illegal online gambling, and imposes requirements on banks and other financial service providers to identify and block illegal financial transactions. The full meaning and scope of UIGEA is uncertain, at this point, since the courts are just beginning to interpret the law. The Administrative Regulations promulgated by the Treasury Department have little ‘teeth’ and provide opportunity for certain ‘legal’ online gaming operations to continue using U.S. financial institutions to process their transactions. Based on the plain language of the Act, only financial transactions relating to wagers that are illegal where they are made are prohibited by the Act. That requires one to evaluate the current state of gambling law in the location where the betting transaction is initiated. Accordingly, some gambling-related financial transactions may be illegal under UIGEA, while others may not.
This statute will certainly be challenged and interpreted by the courts in the years to come, but the initial response to its passage was a massive pull-out from the industry by most of the larger, publicly-listed online gambling entities. Many in the industry presumed that an all-out prohibition law had passed, when UIGEA was first adopted, and immediately decided to withdraw from the U.S. player market. Other smaller and/or independent gambling companies have continued accepting bets from U.S. players, under a variety of legal theories and justifications. The withdrawal of the large, publicly-listed entities has created significant opportunity for other companies willing to take on some degree of legal risk and service U.S. players looking online gaming entertainment.

To further complicate matters, some individual states have passed their own online gambling and skill gaming laws, addressing a variety of gaming-related activities. Most statutes focus on prohibiting the operation of an online gambling business, while a few also prohibit the act of placing a bet online, in the particular state. Very few prosecutions have occurred under state law, and thus the validity and constitutionality of these statutes have not been tested in the courts, as applied to website operations. A viable argument can be made that all Internet gambling prohibitions at the state level are unconstitutional under the Commerce Clause of the United States Constitution, since they seek to regulate activity at the state level, which should only be addressed by the federal government, on a national level. Regardless of the ultimate viability of these statutes, more and more states are adopting these laws, resulting in an increasingly complex state of affairs relating to online gambling legality. Some forms of Internet gambling may, therefore, be legal in some states while completely prohibited or criminalized in others. Since some federal laws like the Illegal Gambling Business Act and UIGEA rely on the legality of gambling at the state level, any attempt to determine the legality of a particular online gambling operation in the United States can result in endless circular evaluation and analysis, often resulting in little actual clarity. However, it should be stressed that very few – if any – online gambling businesses actually operate in the United States, given the Department of Justice’s unequivocal position that all forms of online gambling businesses are illegal in the United States. Instead, these operations locate in a handful of offshore jurisdictions, whose governments have decided to legalize and license Internet gambling businesses as a method of tax revenue generation and economic stimulus. Often, Internet gambling businesses will locate in nations like Malta, Guernsey, Alderney, Isle of Man, Gibraltar, or Curacao. The United Kingdom has passed legislation authorizing the issuance of “remote gaming licenses.” Although no licenses have yet issued, this decision represents the first of its kind for a large, industrialized nation to embrace the online gambling industry.

A more difficult question is presented when the online gaming activity eliminates (or reduces) one of the required elements of gambling; i.e., "prize," "chance," or "consideration." So-called ‘free’ sites and sweepstakes focus on eliminating "consideration;" skill games, contests and tournaments focus on eliminating "chance;" and virtual games providing in-game awards focus on eliminating "prize." Each of these business models must be evaluated separately, to determine whether they are impacted by potential state or federal gaming restrictions.

Service providers such as advertisers, payment processors, hosts and website developers have also been targeted under online gaming laws. Some service providers have been criminally prosecuted, like NeTeller and eGold, while advertisers like Google, MSN and Yahoo! have paid millions of dollars in fines, as a result of their involvement with online gambling sites. Accordingly, any involvement with online gambling activity comes with some degree of legal risk.

United States law enforcement authorities, at both the state and federal levels, have increased enforcement of criminal and civil forfeiture laws against those openly violating this country’s online gambling laws. Both U.S. citizens and foreigners – passing through the United States while traveling – have been arrested. For example, individuals associated with, a major sports betting website, were prosecuted and pled guilty so serious federal gambling offenses. Similar prosecutions have occurred in Florida, New York and Louisiana. In December 2008, the largest foreign owner Party Gaming, d/b/a, voluntarily appeared in this country to plead guilty to violating the federal Wire Wager Act, and agreed to forfeit $300 million dollars, relating to the company’s activity before it discontinued accepting U.S. players. As noted above, the prosecutions have not been limited to actual website operators, but have also included hosts, website designers, advertisers, and billing processors such as Neteller. While the outcome of these prosecutions is uncertain, it appears that the United States remains entrenched in its prohibitionist stance with regard to online gambling for the time being. Several attempts to regulate and/or license Internet gambling in the United States, and its territories, have failed due to the heavy-handed approach of the Department of Justice, which has asserted that any such effort would violate existing federal law. While legalization/regulation of Internet gambling seems inevitable at some time in the future, the United States may maintain its anti-Internet gambling stance for years to come.

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