Internet Gambling Banned

The House and Senate worked late into the night on Friday, Sept. 29, 2006 to finalize 'H.R. 4954: Security and Accountability For Every Port Act' or the SAFE Port Act and get it to the House floor. By early in the morning on Saturday, Sept. 30, 2006, just before adjourning for the election break, the House had passed the bill by a count of 409-2, and the Senate had agreed to the conference report by unanimous consent. Senate Majority Leader, and Presidential hopeful Bill Frist (R-TN) was the point-person for certain groups lobbying to ban Internet gambling with the addition of Title VIII to the legislation.

Title VIII of H.R. 4954 is entitled 'Unlawful Internet Gambling Enforcement Act of 2006' (the Act). The bill prohibits banks and other financial institutions from processing payments for online-gambling companies. However, exempted from this legislative ban are state lotteries, fantasy sports leagues, horserace betting and Indian gaming. An earlier version of the bill ' passed by the House on July 10, 2006 ' approved an additional provision updating and expanding the 1961 Wire Act, which prohibits gambling companies from using wire-based communications to place bets, to specifically include use of the Internet. However, this provision was not ultimately included in the version finally passed by the full Congress. President Bush signed the bill into law on Friday, Oct. 13, 2006, a date that many offshore online-gambling entities are finding sufficiently unlucky as their potential U.S. market vanishes.

The Act requires that within 270 days of enactment, the Secretary and the Board of Governors of the Federal Reserve, in consultation with the Attorney General, issue regulations that would prohibit approving a transaction between a U.S.-based customer account and an Internet-gambling merchant. The wording of the Act seems to extend to credit cards, electronic funds transfers, checks or similar instruments, or any other form of financial transaction as prescribed by the above-referenced agencies tasked with preparing the regulations. Financial institutions would be required to follow those regulations, and would be subject to criminal fines and imprisonment, for not more than 5 years, as well as civil penalties for failure to comply with the Act.

For and Against

Various arguments were raised on both sides regarding passage of the bill. Proponents of the Act claim that the industry needs to be under a tight rein since certain of the offshore Internet gambling entities provide a money-laundering front for terrorist groups, drug cartels and others engaged in criminal activity. Other supporters of the bill claim that children and gambling addicts need to be protected from the ease and availability of Internet gambling. The National Football League (NFL) and National Basketball Association (NBA) have been involved in a multi-year push for the Internet gambling ban, arguing that gambling of any sort is ultimately detrimental to their leagues. Joe Browne, an NFL executive vice president has stated that: 'It's been 10-plus years that the NFL has been supporting legislation '. We don't believe that gambling of any sort is healthy for our league ' that it goes to the integrity of the NFL and, perhaps just as important, the perception of the integrity of our games.'

Certain gambling interest groups, such as the Poker Players Alliance that has a membership reported to be from 25,000 to 120,000, are arguing for further exemptions to the Act, including for poker. The general position taken by these groups is that regulating, rather than banning, Internet gambling will still protect the interests that the Legislature is concerned about while presenting an opportunity to collect billions in additional tax revenue. This same sort of argument has been used before by groups hoping to legalize other illegal activities ' generally to no avail.

Passage As Response to Lobbying Scandal

In the most recent five legislative sessions, bills banning online gambling have passed the Senate twice and the House once, but never at the same time. Advocates, including Reps. Jim Leach (R-IA) and Bob Goodlatte (R-VA) and Sen. Jon Kyl (R-AZ), have historically tried various legislative stratagems to pass bills that never ultimately came to fruition. Frank Fahrenkopf Jr., head of the American Gaming Association, be-lieves that 'the politics of the moment got the bill passed.' Gambling lobbyists have faced tough opposition recently as the leaders of Congress made passage of an online gambling ban a top priority. This Congressional position was only strengthened by the publication of a committee report about disgraced lobbyist Jack Abramoff that came out the same week the Act was passed.

Former lobbyist Abramoff and the then-House Majority Leader Tom DeLay have been credited by many as being the force behind the defeat of a similar Internet gambling ban that had been proposed in 2001. Abromoff's efforts on behalf of his gaming clients to defeat the earlier bill have been under scrutiny as part of the ongoing governmental investigation into corruption. The Act, many years in the making, is seen as a substantial victory for social conservative groups and the professional sports leagues. It is likely that these groups had a hand in persuading lawmakers to ante up and put aside any remaining Abramoff mystique or other remaining taint form lobbying malfeasance.

The Internet Gambling Study Commission Act

Congressman Jon Porter (R-NV) introduced a bill earlier this year that would study whether U.S.-based online gambling sites could effectively be regulated. The bill, entitled 'The Internet Gambling Study Commission Act,' was co-sponsored by more than 40 House Members and is backed by many U.S. casinos, including MGM Mirage, which has previously expressed a desire to increase its Internet presence with an online gambling Web site. The legislation calls for creation of a federally appointed panel to study questions relating to Internet gaming, and requires the panel to report its findings and recommendations for future action. The bill was meant to counter the efforts in the House, including the Act being discussed herein, to enact a sweeping ban that would prohibit all forms of online gambling.

Criminal Enforcement

Even prior to the passage of the Act, it is currently illegal for online gambling companies to do business within the United States. Likewise, it is illegal for U.S. residents to place bets on the Internet, except for pari-mutuel horse racing, which is specifically carved out from the law. Publicly, the Justice Department takes the position that all online gambling is illegal, is clearly in violation of the 1961 Wire Act and that there was no need to update its language. Others claim that the language of the 1961 Wire Act clearly applies to sports betting, but potentially does not apply to all other forms of gambling. The addition of this new law will likely add further teeth to the Justice Department's position and make it far more difficult for Internet gambling sites to obtain wagers from U.S. citizens. While the Justice Depart-ment has made its belief of the wide scope of the 1961 Wire Act known, all of its attempts to raise criminal claims have previously related solely to sports betting. Most recently in June, BetOnSports PLC and its former chief executive, David Carruthers, were indicted in a St. Louis Federal Court. This resulted in Carruthers remaining under house arrest in a St. Louis hotel and the company closing its U.S. operations. Similarly, Sportingbet Chairman, Peter Dicks, has been charged with violations of the 1961 Wire Act by a Louisiana Court. He was arrested at New York's Kennedy International Airport on Sept. 6 following his arrival on a flight from England. U.S. Customs, performing a routine name check, discovered he had an outstanding warrant issued by the Louisiana State Police Gaming Enforcement Division. However, on Sept. 29, a Queens, NY, judge cleared Dicks to return to London after New York Governor George E. Pataki declined to sign a warrant extraditing him to Louisiana. New York law only permits extradition if the accused person was physically present where he is accused of breaking the law, and since Dicks has not been in Louisiana in many years, and all the relevant charges involved his activities in Great Britain, New York had no right to extradite him.

World Trade Organization Action

In August, 2005, representatives from Antigua and Barbuda brought a case against the U.S. in the World Trade Organization (WTO), arguing that the U.S. treatment of online gambling unfairly keeps foreign companies out of the market, allowing the U.S. companies to act competition free. The WTO ruled against the U.S., which resulted in the U.S. stating earlier this year that it had fully addressed the concerns that had been raised. It is possible that the Act may cause this issue to be revisited, or may demonstrate the United States' resolve to treat all online gambling the same.

Initial Results of the Act

With more than 7.8 million Americans utilizing Internet gambling sites every year, this Act has severely impacted the $12 billion in revenue earned by the foreign-based gambling concerns. One UK-based company, Sportingbet PLC, reports that more than 60% of its business comes from the U.S. market. Likewise, Party-Gaming PLC, a poker Web site, claims 80% of its business is from U.S. residents. Following the announcement of the Act being passed by both the House and the Senate, shares of publicly traded gambling companies have plummeted. The announcement led to a major wholesale sell-off of UK-based online gambling stocks such as PartyGaming PLC, 888 Holdings PLC and Sportingbet PLC. PartyGaming PLC itself lost almost '2 billion of its market capitalization ' more than half its value at the time. Likewise, Sportingbet PLC lost almost '500 million and 888 Holdings PLC lost almost '128 million. This does not even take into account the loss of shareholder value in other companies that supply credit card processing and other services for these companies. In a possible move to raise shareholder confidence in online gambling companies and ensure a well-regulated gambling environment, Britain may introduce legislation allowing London-listed gambling companies to move their offshore headquarters to Britain.

Online gambling analysts vary in their opinions as to the ultimate effect of the Act. Some believe it will have a significant effect on curtailing the $6 billion wagered online annually by individuals in the U.S. This is potentially true in light of the announcements of the three above-referenced companies that it is their intention to cease any U.S. operations. Other online gambling experts believe that gamblers will continue to place bets in the wake of passage of this Act. PokerStars, the second largest poker Web site, has announced its intention to continue to allow U.S. residents to utilize its Web site on the basis that the Act prohibits processing bets on games of chance and not poker, which it considers a game of skill. Moreover, other experts have opined that for years customers of these sites have been utilizing alternative payment services based outside the U.S., instead of using their credit cards. Moreover, cash payments made directly to online gambling concerns, not transmitted via a financial institution, would not appear to be subject to the Legislation or any resulting regulations, which could leave yet another easy method for online gamblers to use.

The House and Senate worked late into the night on Friday, Sept. 29, 2006 to finalize 'H.R. 4954: Security and Accountability For Every Port Act' or the SAFE Port Act and get it to the House floor. By early in the morning on Saturday, Sept. 30, 2006, just before adjourning for the election break, the House had passed the bill by a count of 409-2, and the Senate had agreed to the conference report by unanimous consent. Senate Majority Leader, and Presidential hopeful Bill Frist (R-TN) was the point-person for certain groups lobbying to ban Internet gambling with the addition of Title VIII to the legislation.

Title VIII of H.R. 4954 is entitled 'Unlawful Internet Gambling Enforcement Act of 2006' (the Act). The bill prohibits banks and other financial institutions from processing payments for online-gambling companies. However, exempted from this legislative ban are state lotteries, fantasy sports leagues, horserace betting and Indian gaming. An earlier version of the bill ' passed by the House on July 10, 2006 ' approved an additional provision updating and expanding the 1961 Wire Act, which prohibits gambling companies from using wire-based communications to place bets, to specifically include use of the Internet. However, this provision was not ultimately included in the version finally passed by the full Congress. President Bush signed the bill into law on Friday, Oct. 13, 2006, a date that many offshore online-gambling entities are finding sufficiently unlucky as their potential U.S. market vanishes.

The Act requires that within 270 days of enactment, the Secretary and the Board of Governors of the Federal Reserve, in consultation with the Attorney General, issue regulations that would prohibit approving a transaction between a U.S.-based customer account and an Internet-gambling merchant. The wording of the Act seems to extend to credit cards, electronic funds transfers, checks or similar instruments, or any other form of financial transaction as prescribed by the above-referenced agencies tasked with preparing the regulations. Financial institutions would be required to follow those regulations, and would be subject to criminal fines and imprisonment, for not more than 5 years, as well as civil penalties for failure to comply with the Act.

For and Against

Various arguments were raised on both sides regarding passage of the bill. Proponents of the Act claim that the industry needs to be under a tight rein since certain of the offshore Internet gambling entities provide a money-laundering front for terrorist groups, drug cartels and others engaged in criminal activity. Other supporters of the bill claim that children and gambling addicts need to be protected from the ease and availability of Internet gambling. The National Football League (NFL) and National Basketball Association (NBA) have been involved in a multi-year push for the Internet gambling ban, arguing that gambling of any sort is ultimately detrimental to their leagues. Joe Browne, an NFL executive vice president has stated that: 'It's been 10-plus years that the NFL has been supporting legislation '. We don't believe that gambling of any sort is healthy for our league ' that it goes to the integrity of the NFL and, perhaps just as important, the perception of the integrity of our games.'

Certain gambling interest groups, such as the Poker Players Alliance that has a membership reported to be from 25,000 to 120,000, are arguing for further exemptions to the Act, including for poker. The general position taken by these groups is that regulating, rather than banning, Internet gambling will still protect the interests that the Legislature is concerned about while presenting an opportunity to collect billions in additional tax revenue. This same sort of argument has been used before by groups hoping to legalize other illegal activities ' generally to no avail.

Passage As Response to Lobbying Scandal

In the most recent five legislative sessions, bills banning online gambling have passed the Senate twice and the House once, but never at the same time. Advocates, including Reps. Jim Leach (R-IA) and Bob Goodlatte (R-VA) and Sen. Jon Kyl (R-AZ), have historically tried various legislative stratagems to pass bills that never ultimately came to fruition. Frank Fahrenkopf Jr., head of the American Gaming Association, be-lieves that 'the politics of the moment got the bill passed.' Gambling lobbyists have faced tough opposition recently as the leaders of Congress made passage of an online gambling ban a top priority. This Congressional position was only strengthened by the publication of a committee report about disgraced lobbyist Jack Abramoff that came out the same week the Act was passed.

Former lobbyist Abramoff and the then-House Majority Leader Tom DeLay have been credited by many as being the force behind the defeat of a similar Internet gambling ban that had been proposed in 2001. Abromoff's efforts on behalf of his gaming clients to defeat the earlier bill have been under scrutiny as part of the ongoing governmental investigation into corruption. The Act, many years in the making, is seen as a substantial victory for social conservative groups and the professional sports leagues. It is likely that these groups had a hand in persuading lawmakers to ante up and put aside any remaining Abramoff mystique or other remaining taint form lobbying malfeasance.

The Internet Gambling Study Commission Act

Congressman Jon Porter (R-NV) introduced a bill earlier this year that would study whether U.S.-based online gambling sites could effectively be regulated. The bill, entitled 'The Internet Gambling Study Commission Act,' was co-sponsored by more than 40 House Members and is backed by many U.S. casinos, including MGM Mirage, which has previously expressed a desire to increase its Internet presence with an online gambling Web site. The legislation calls for creation of a federally appointed panel to study questions relating to Internet gaming, and requires the panel to report its findings and recommendations for future action. The bill was meant to counter the efforts in the House, including the Act being discussed herein, to enact a sweeping ban that would prohibit all forms of online gambling.

Criminal Enforcement

Even prior to the passage of the Act, it is currently illegal for online gambling companies to do business within the United States. Likewise, it is illegal for U.S. residents to place bets on the Internet, except for pari-mutuel horse racing, which is specifically carved out from the law. Publicly, the Justice Department takes the position that all online gambling is illegal, is clearly in violation of the 1961 Wire Act and that there was no need to update its language. Others claim that the language of the 1961 Wire Act clearly applies to sports betting, but potentially does not apply to all other forms of gambling. The addition of this new law will likely add further teeth to the Justice Department's position and make it far more difficult for Internet gambling sites to obtain wagers from U.S. citizens. While the Justice Depart-ment has made its belief of the wide scope of the 1961 Wire Act known, all of its attempts to raise criminal claims have previously related solely to sports betting. Most recently in June, BetOnSports PLC and its former chief executive, David Carruthers, were indicted in a St. Louis Federal Court. This resulted in Carruthers remaining under house arrest in a St. Louis hotel and the company closing its U.S. operations. Similarly, Sportingbet Chairman, Peter Dicks, has been charged with violations of the 1961 Wire Act by a Louisiana Court. He was arrested at New York's Kennedy International Airport on Sept. 6 following his arrival on a flight from England. U.S. Customs, performing a routine name check, discovered he had an outstanding warrant issued by the Louisiana State Police Gaming Enforcement Division. However, on Sept. 29, a Queens, NY, judge cleared Dicks to return to London after New York Governor George E. Pataki declined to sign a warrant extraditing him to Louisiana. New York law only permits extradition if the accused person was physically present where he is accused of breaking the law, and since Dicks has not been in Louisiana in many years, and all the relevant charges involved his activities in Great Britain, New York had no right to extradite him.

World Trade Organization Action

In August, 2005, representatives from Antigua and Barbuda brought a case against the U.S. in the World Trade Organization (WTO), arguing that the U.S. treatment of online gambling unfairly keeps foreign companies out of the market, allowing the U.S. companies to act competition free. The WTO ruled against the U.S., which resulted in the U.S. stating earlier this year that it had fully addressed the concerns that had been raised. It is possible that the Act may cause this issue to be revisited, or may demonstrate the United States' resolve to treat all online gambling the same.

Initial Results of the Act

With more than 7.8 million Americans utilizing Internet gambling sites every year, this Act has severely impacted the $12 billion in revenue earned by the foreign-based gambling concerns. One UK-based company, Sportingbet PLC, reports that more than 60% of its business comes from the U.S. market. Likewise, Party-Gaming PLC, a poker Web site, claims 80% of its business is from U.S. residents. Following the announcement of the Act being passed by both the House and the Senate, shares of publicly traded gambling companies have plummeted. The announcement led to a major wholesale sell-off of UK-based online gambling stocks such as PartyGaming PLC, 888 Holdings PLC and Sportingbet PLC. PartyGaming PLC itself lost almost '2 billion of its market capitalization ' more than half its value at the time. Likewise, Sportingbet PLC lost almost '500 million and 888 Holdings PLC lost almost '128 million. This does not even take into account the loss of shareholder value in other companies that supply credit card processing and other services for these companies. In a possible move to raise shareholder confidence in online gambling companies and ensure a well-regulated gambling environment, Britain may introduce legislation allowing London-listed gambling companies to move their offshore headquarters to Britain.

Online gambling analysts vary in their opinions as to the ultimate effect of the Act. Some believe it will have a significant effect on curtailing the $6 billion wagered online annually by individuals in the U.S. This is potentially true in light of the announcements of the three above-referenced companies that it is their intention to cease any U.S. operations. Other online gambling experts believe that gamblers will continue to place bets in the wake of passage of this Act. PokerStars, the second largest poker Web site, has announced its intention to continue to allow U.S. residents to utilize its Web site on the basis that the Act prohibits processing bets on games of chance and not poker, which it considers a game of skill. Moreover, other experts have opined that for years customers of these sites have been utilizing alternative payment services based outside the U.S., instead of using their credit cards. Moreover, cash payments made directly to online gambling concerns, not transmitted via a financial institution, would not appear to be subject to the Legislation or any resulting regulations, which could leave yet another easy method for online gamblers to use.