Defying what seemed like insurmountable odds, Congress recently passed legislation toughening enforcement against overseas Internet gambling operators through criminalizing their acceptance of payments from U.S. customers for gambling that violates federal or state laws. The Unlawful Internet Gambling Enforcement Act of 2006 (“the Act”) was attached at the last minute to the SAFE Port Act – the last piece of legislation passed by Congress before the pre-election recess. President Bush signed the law on Friday, October 1 3, 2006, and it became effective immediately. Similar language had passed one or the other legislative body on several prior occasions, but had never made it to the president.
The legislation requires financial services providers to comply with regulations (to be issued 270 days from the bill’s enactment) that would require blocking of “restricted payments. However, it raises potentially complex compliance issues for payments providers, due to its ambiguous treatment of legal gambling. The legislation exempts from its coverage the use of the Internet for transactions occurring solely within a state, on tribal reservations, or involving horse-racing and lotteries. However, historically, the Department of Justice has taken the view that even in-state Internet gambling is illegal, raising significant issues of federalism in the event that states or tribes now choose to license online gambling along the lines set forth in the legislation.
The Treasury Department will have its work cut out for it in the notice and comment period likely to take place during the first six months of 2007, given the growing concern of financial services providers about the potential compliance cost and enforcement hazard created by the legislation’s requirement to block all Internet gambling related payments.
Internet services providers and companies involved in online delivery of content and advertising may also find themselves impacted by the bill. The legislation provides states attorney generals the right to block links on the web that would enable persons in the United States to access unlicensed gambling sites online. The legislative history of the bill does not provide guidance as to how far Internet blocking enforcement may go, raising a host of potential issues for ISPs, search engines, online ad servers, and other online providers that may currently be acting as a conduit providing access to unlicensed gambling websites. Finally, the legislation may have an impact on the U.S. position in the existing legal action taken by Antigua against the United States in the World Trade Organization (“WTO”), as well as a series of cases undertaken in the European Union against EU member states for Internet gambling restrictions seen as protectionist. Antigua had won a partial victory against the United States in its WTO action, due to the WTO viewing the United States as permitting domestic operators to use the Internet for horseracing. Antigua’s position could be strengthened by the new law, as well as the determination of the EU to seek enforcement action against any country that treats domestic gambling operators using the Internet differently from foreign ones.
What the Law Does
The Act makes it illegal for Internet gambling operators to accept any payment for online bets or wagers, 2 and requires financial transaction providers to identify and block restricted transactions. 3 The law thus seeks to improve enforcement capabilities against unlawful Internet gambling operators, rather than making Internet gambling illegal. Proponents of the Act believe it solves the enforcement problem by targeting not only the gambling site operators but also the method by which they would receive payment for gambling. The law thus focuses on two main areas – setting criminal penalties for operators of illegal Internet gambling sites and requiring financial institutions and payment systems to block payments being made to those sites.
The new law provides a criminal penalty of up to five years for anyone engaged in the business of betting or wagering who accepts payments for unlawful Internet gambling. As a practical matter, it may be difficult to enforce the criminal penalties against operators, as most of the operators are in foreign jurisdictions where Internet gambling is legal. Even if these operators continue to accept payments from the United States, the U.S. authorities would need to either seek extradition of the operators (which they are unlikely to get, particularly if the operator’s country permits Internet gambling) or hope to catch the operator on U.S. ground. The recent high-profile arrest of BetOnSports CEO David Carruthers during a plane change at a U.S. airport has certainly made operators of foreign Internet gambling sites wary of treading on U.S. soil.
The new law also requires financial transaction providers to develop and implement policies and procedures reasonably designed to identify and block restricted transactions. 6 The purpose behind this requirement is the idea that if U.S. citizens are unable to use their credit cards or other payment methods to settle their gambling debts, they will be unable to gamble online. In fact, in the immediate aftermath of the bill’s passage, foreign Internet gambling companies lost $7 billion in value as it appeared that at least half of their business was about to be eliminated by the new law. The Act seeks to maintain current law with respect to certain industries, such as horse racing, 7 state lotteries, and fantasy sports leagues. 9 Additionally, the law carves out Internet gambling that may occur on an intratribal or intrastate basis.
Ironically, in keeping the status quo with respect to these activities, and permitting states and Indian tribes to permit Internet gambling, the law appears to open the door for legal Internet gambling to flourish. For all the banner headlines heralding the collapse of the Internet gambling industry, it seems that for the first time there is a law that specifically contemplates, and essentially provides a roadmap for, the establishment of a legal domestic Internet gambling industry.
Banks and Payment Systems – What to Expect?
Financial institutions and payment systems are taking a hard look at the potential compliance obligations they face under the new law. To some extent, they are not immediately affected by the legislation because the requirement to identify and block restricted transactions does not arise until Treasury and the Federal Reserve issue regulations on the matter. However, should these entities become aware that a particular transaction does involve Internet gambling, they are obligated not to process the transaction under existing anti-money laundering policies and procedures.
Once regulations are issued, covered financial transaction providers will be subject to the threat of civil enforcement action, with fines or, in the case of the regulated financial institutions, the exercise of supervisory control by the federal functional regulators. The legislation defines the term “designated payment system” in unrestrictive language, as “any system utilized by a financial transaction provider that the Treasury secretary and the Board of Governors of the Federal Reserve System, in consultation with the attorney general, jointly determine, by regulation or order, could be utilized in connection with, or to facilitate, any restricted transaction.”3 Thus, it will be up to the regulators to determine what specific payment systems will even be covered by the law’s requirements. Federal regulators are also given authority to “exempt certain restricted transaction or designated payment systems from any requirement imposed under [the regulations required under the new law], if the Secretary and the Board jointly find that it is not reasonably practical to identify and block, or otherwise prevent or prohibit the acceptance of, such transactions.” Such exemptions will be determined during the rulemaking process required under the law.
The rulemaking process is likely to be a contentious one, as institutions seek to lessen the potential burden that could be placed on the wide variety of payment methods in existence today, particularly given the express authority granted to the regulators to exempt certain transactions or payment systems from the law’s requirements. Regulators will likely take significant time to determine what requirements are feasible, economically and technologically, for institutions that process payments. For example, the credit card associations have developed procedures that permit the member institutions to block Internet gambling transactions via a coding process that identifies which transactions are gambling transactions. Such transactions can fairly easily be identified by the code and blocked – in fact, some institutions currently do this already. However, the system is only as good as the codes used by the merchants – thus if an Internet gambling operator does not provide the proper coding, the transaction will not be recognized as an Internet gambling transaction and thus would avoid being blocked.
Even assuming the coding is accurate, the system only identifies the transaction as an Internet gambling transaction – it does not provide information sufficient to determine if the specific transaction is, in fact, a legal transaction. The result is that institutions choosing to block Internet gambling transactions may well be blocking transactions that are perfectly legal – if they were initiated, for example, by a U.S. citizen located physically in a jurisdiction where Internet gambling is legal and who bets online. Alternatively, if a state or Indian tribe moves forward to allow Internet gambling, an individual who visits that state or tribal land to gamble online may nevertheless have the transaction be denied due to the coding. Although the denial of such transactions may not subject the institution to any legal liability, to the extent customers of the institution find they are being prohibited from using their credit cards for legitimate transactions, it may represent lost business opportunities for the institutions.
Once beyond the realm of credit cards, the ability of banks and other financial institutions in the United States to identify and block Internet gambling transactions may be limited, and in some cases, impossible. Whether the gambler uses a stored value card, an e-wallet, a money order, or simply performs a money transfer, there is no current system, policy, or procedure that will identify the transaction as an Internet gambling transaction. Absent what would likely be extremely costly and burdensome changes to how these systems operate, it will be next to impossible for them to identify and block Internet gambling transactions. Thus, there may be ample opportunity for individuals who really want to gamble online to avoid the payment methods that are subject to the blocking requirements – and there will be little the regulators can do about it.
Regardless of what approach the federal financial regulators ultimately take, they often do not meet congressionally-imposed deadlines in issuing regulations. The rule-making process could well take much longer than 270 days, although there may be an effort to put an interim regulation in place at that time (such as one covering credit card payment systems only), while the more complex systems are subject to further consideration.
Impact on U.S. Internet Services Providers, Search Eengines, and Content Providers
The legislation also impacts interactive computer services, by permitting the Justice Department and the attorneys general to require them to delete links from or disable access to internet gambling operations on their servers. This authority is limited to such links that “reside on a computer service that such service controls or operates.”There are no criminal or civil penalties available for an interactive computer service that takes no action in response to a request that a site be deleted. Thus, such deletions would be accomplished exclusively through the exercise of injunctive authority by the courts. The language appears to permit blocking of links by individual ISPs and likely search engines as well, as it covers “any information service, system, or access software provider that provides or enables computer access by multiple users to a computer server, including specifically a service or system that provides access to the Internet and such systems operated or services offered by libraries or educational institutions.” This language has been interpreted very expansively by U.S. courts to include just about anyone who provides a means of access to the Internet. Thus, it would appear this language could be viewed as permitting the blocking of particular websites so that users could not have access to them, as well as the deletion of links to such sites. It may even authorize the blocking of search engine information regarding the sites, or the blocking of non-U.S. websites that in turn provided such links. How far the Justice Department and attorneys general will seek to do this in practice against potentially strong industry opposition in individual court cases remains to be seen.
Internet Gambling in Foreign Jurisdictions and Likely Impact on U.S. Law
During the limited debate in the House on the gambling measure, there was little discussion regarding the high probability that the new law would be in direct contradiction to a recent World Trade Organization (“WTO”) ruling against the United States. The WTO, after a formal complaint by the island nation of Antigua (where Internet gambling is a thriving, legal business) found that the United States was protecting a domestic gambling industry while blocking access to foreign competition.
The WTO decision has wide implications for the international gambling industry, and especially WTO and General Agreement on Trade in Services (“GATS”) members. The GATS requires full market access commitment; however, this commitment could be viewed as contradicting the national legislation of many WTO members who continued to ban particular activities, including Internet gambling. With the WTO panel’s decision in the Antigua versus United States case, member states are exposed to challenges over these bans. In part, the conflict can readily be resolved through providing identical treatment of foreign Internet gambling operators to domestic operators, namely, allowing them to be licensed under identical terms to those within the jurisdiction. For now, however, the United States continues to take the approach that all Internet gambling remains prohibited in the United States, despite the indisputable reality that betting on horses online within the United States remains possible within jurisdictions covered by the Interstate Horseracing Act, and to date subject to no enforcement action by the Department of Justice. The recently-enacted Act would authorize other forms of Internet gambling domestically (horseracing, intrastate and intratribal) while prohibiting all non-U.S. operators of Internet gambling, exacerbate the current WTO problem.
These issues are highlighted by recent actions in the EU, where the EU has undertaken a handful of cases involving restrictions of Internet gambling imposed by member states such as Finland, Italy, and Portugal. In these cases, the EU has found generally that domestic regimes imposing barriers against Internet gambling cannot treat foreign operators differently than domestic operators are treated. Thus, where a country generally forbids Internet gambling domestically (or all gambling), it is entitled under applicable international regimes to do the same to foreign Internet gambling. Where a country permits Internet gambling domestically, for that sector, it has to provide equivalent access to foreign-licensed services that are functionally identical.
Business Opportunities Uunder the New Law
In the long run, the legislation’s domestic carve-outs may be as substantial an impact as its ban on accepting foreign online gambling payments. If a state or Indian tribe expressly authorizes Internet gambling within its borders, and includes regulations to verify age of the gamblers and the physical location of the gamblers, then businesses can operate Internet gambling operations within those states or tribal lands.
States with existing brick-and-mortar gambling operations may see an economic benefit to permitting those businesses to expand into the online world. Given the popularity and growth of Internet gambling in the United States, there may be a substantial market for states and tribes that can act promptly to fill the void left by the foreign operators who are no longer accepting U.S. transactions. At the same time, the Justice Department has stated in testimony before Congress that U.S. gamblers are not themselves breaking federal law when they gamble online, raising the possibility that a number of them may simply open up foreign bank accounts or develop other means of engaging in the activity through entirely non-U.S. mechanisms, facilitated by new business models for operators.
The complex substantive issues, domestic and international, raised by this legislation received little attention during the past Congress, in part because there was little expectation that the bill would become law. During its consideration by the House of Representatives, the focus of members was on the moral issues raised by Internet gambling, rather than the details of the impact of the legislation on the payments system or for Internet operators. The legislative history of the bill contains almost minimal practical guidance on interpreting its enforcement provisions. Accordingly, 2007 is likely to see substantial efforts on all sides to define its parameters with greater precision than that afforded by the legislation itself.