G

Among the most popular and controversial Internet businesses is gambling. Gambling is illegal or restricted in most of the United States, but there is little to stop individual users from sitting at home and gambling. In 2009, the value of the Internet gambling industry was estimated at $25.8 billion, with an annual growth rate of 20% and a predicted value of $35.8 billion by 2012 (Statista 2012). In comparison, in 2011, the value of the legal offline gambling business in the United States was estimated at $35.64 billion (Statista 2012). Over half of the online gamblers were from the United States perhaps because most U.S. states offer their citizens few opportunities for legal offline gambling.

The legality of some types of online gambling in the United States is unclear. In 2011, the U.S. Department of Justice, in what was perceived as a departure from past policy, issued an opinion that the Wire Act (18 U.S.C. § 1084) prohibited online wagering on sports, but not all online gambling within states or across state borders (Memorandum Opinion 2011). This reversal was hailed by gambling law expert I. Nelson Rose as “a big, big present” to the online gambling industry (Jonsson 2011). For the time being, however, the great majority of online gambling sites operate outside the United States, beyond the reach of U.S. law. Considering the problems this situation presents, the Committee on Financial Services of the U.S. House of Representatives has noted that these offshore sites “are not only vulnerable to criminal exploitation by money launderers; they also can easily abuse a customer’s credit card information or manipulate the odds of a particular wager to the casino’s advantage” (House Report 108–133 2003). In addition, offline gambling is generally considered to represent a trade-off for the jurisdictions that legalize it: the social undesirability of gambling is generally taken as given, and tolerated for the sake of the jobs and tax revenues it provides. Offshore Internet gambling operations provide none of these advantages, nor are they subject to the licensing and regulatory oversight that keeps legalized offline gambling honest.

The Department of Justice’s “present” to the gambling industry has led many states to enact or attempt to enact online gambling bills. Delaware was the first state to legalize full-service online casino gambling in June 2012 (Delaware Gaming Competiveness Act of 2012). Illinois followed more cautiously, amending existing law in August 2012 to allow Powerball games to be played online (Ill. S.B. 3497). In New Jersey, a bill authorizing online betting for casino games in Atlantic City was enacted in 2013 (New Jersey Internet Wagering at Atlantic Casinos Act).

Proposed California bills would allow potential operators to apply for a five-year license to run an intrastate online gambling Web site. Licensees would “pay a nonrefundable license fee in the amount of $30,000,000” as well as a nonspecified application fee; while this amount would be credited to future monthly fees, the very high start-up cost would impede the entrance of new competitors into the market, protecting existing gambling companies. The bill also allows for the state “to enter into an agreement with other states to provide Internet gambling” (Cal. S.B. 1463; see also S.B. 51, S.B. 678).

Colorado, Hawaii, Iowa, and Mississippi have all attempted to enact bills regulating online gambling, sometimes multiple times, and have thus far failed. Other states, including Maine, Michigan, and Utah, have moved in the opposite direction, strengthening or attempting to strengthen their bans on online gambling following the 2011 Department of Justice opinion. Legislation is also pending in Hawaii and Illinois that would legalize online sales of lottery tickets.

For some gamblers gambling is no more than a form of entertainment; for others it is an addiction. The use of credit cards and the ability to gamble in the privacy of one’s home complicate the problem: addicted gamblers can quietly run up debts to the maximum limit on all of their credit cards without anyone, even family members, being aware of what is happening until the bill arrives. Hockey player Jaromir Jagr’s Internet gambling loss of $500,000 attracted national attention to the problem, but most online gamblers can be financially ruined by far smaller losses. Age verification is another problem; mere possession of a credit card number is not proof of adulthood, and some gambling sites have accepted bets from minors (House Report 108–133 2003).

The various states have attempted to enforce their laws against online gambling through lawsuits. Because the online gambling Web site operators are generally beyond the reach of state attorneys general, the targets of these suits have often been credit card companies. Former New York State Attorney General Elliot Spitzer, before his downfall, was especially diligent in pursuing financial institutions that facilitate online gambling. In 2002, Spitzer’s activities resulted in two major Internet financial service providers, Citibank and PayPal, prohibiting their services from being used to fund Internet gambling. In a settlement agreement, in which it admitted no wrongdoing, Citibank agreed to stop allowing its cards from being used for Internet gambling; in doing so, it joined American Express, Bank of America, Chase Manhattan, Fleet, and MBNA. In February 2003, Spitzer’s office reached similar settlements in which 10 other banks agreed not to allow New York residents to use their cards for online gambling and other credit card issuers have since followed suit on their own initiative. In August 2002, PayPal agreed, also without admitting wrongdoing, not to allow New York residents to use its services for online gambling. Two months later, eBay acquired PayPal and expanded the Internet gambling ban to all PayPal users (Porter 2004, 16).

Actions by state attorneys general are a piecemeal approach to a nationwide problem, however. Like mail lotteries in the nineteenth century, Internet gambling is a nationwide problem that requires a nationwide solution. The United States cannot and should not do anything to regulate gambling operations in other countries aimed at citizens of those countries. When U.S. parties are involved, however, it can take action, as it did in United States v. Cohen.

In the late 1990s, the FBI began investigating an offshore gambling operation run by Jay Cohen, a United States citizen. In 1996, Cohen had left the United States and moved to the Caribbean island nation of Antigua and Barbuda, where he opened an online gambling business. The business, World Sports Exchange (WSE), accepted wagers on U.S. sporting events; it had no other business. All of Cohen’s partners in WSE were, like Cohen himself, citizens of the United States, and WSE accepted bets by telephone and Internet from the United States (Cohen, 260 F.3d at 70). After undercover agents placed bets with WSE from New York, the FBI arrested Cohen and charged him with violation of the Wire Act. Cohen was convicted in the federal district court for the Southern District of New York, and his conviction was upheld on appeal.

An interesting feature of the Wire Act and similar laws is that they criminalize the use of interstate means of communication for acts in violation of state law. Conceivably, a state might decide to legalize Internet gambling; had WSE accepted bets from that state, it would have committed no violation of the Wire Act—acts that violate federal law in one state might not violate federal law in another.

Cohen was a U.S. citizen; had he been a foreigner who never set foot in the United States, it would have been difficult or impossible for the government to bring him to trial. While individual prosecution of U.S. persons operating some of the world’s two thousand or so sizeable online gambling operations may have some effect, the most likely result is that those persons will be driven out of the business and their places will be taken by non-U.S. persons. If, as it seems, the United States is committed to a policy of controlling and reducing online gambling, the logical point of attack is still the financial mechanisms that make it possible. Actions against banks that issue credit cards have produced results, but the number of banks is large. The number of credit card companies is small, but thus far litigation against them has been less successful. In 2001, a federal district court dismissed several actions against Visa and MasterCard that had been consolidated under the name In re Mastercard International, Inc. Internet Gambling Litigation; the decision was subsequently upheld by the U.S. Court of Appeals for the Fifth Circuit (313 F.3d 257).

Several bills have been proposed in Congress to give the federal government a greater ability to control Internet gambling. Bills that would create a federal gambling law tend to be met with distrust from the states; one attempt, the Unlawful Internet Gambling Funding Prohibition Act, would have made no changes in substantive gambling law but would have strengthened the federal government’s ability to attack the financial devices that enable illegal Internet gambling from within the United States. The Act was passed by the House but died in the Senate. However, a reformed version of the Act was passed as the Unlawful Internet Gambling Enforcement Act of 2006 as a last-minute attachment to an unrelated bill, the SAFE Port Act of 2006.

Treaty

• General Agreement on Trade in Services, Marrakesh Agreement Establishing the World Trade Organization, Annex 1B, Apr. 15, 1994, 33 I.L.M. 1168 (1994)

Statutes and Proposed Legislation

• California Authorization and Regulation of Internet Poker and Consumer Protection Act of 2013, S.B. 678 (Reg. Sess. 2013–14)

• California Internet Gambling Consumer Protection and Public-Private Partnership Act of 2012, S.B. 1463 (Reg. Sess. 2011–12)

• California Internet Gambling Consumer Protection and Public-Private Partnership Act of 2013, S.B. 51 (Reg. Sess. 2013–14)

• Delaware Gaming Competiveness Act of 2012, H.B. 333 (Del. 2012), 29 Del. Code §§ 4803, 4805, 4810–4811, 4815, 4819–4820, 4824–4826, 4834–4836, 4 Del. Code 543

• Federal Anti-Lottery Act, 18 U.S.C. §§ 1301–1304

• Hawaii Internet and Lottery Gaming Act, H.B. 2422 (Reg Sess. 2011–12)

• Illinois Amending Lottery and State Finance Act, S.B. 3497 (Ill. 2012), 20 ILCS 1605/7.12, 1605/14.4

• Michigan McCauley-Traxler-Law-Bowman-McNeely Lottery Act, S.B. 1003 (Mich. 2012), Mich. Code § 432.9

• Mississippi Internet Gaming Act of 2012, H.B. 1373 (Reg Sess. 2012)

• New Jersey Internet Wagering at Atlantic Casinos Act (Amending and Supplementing Casino Control Act), A. 2578 (Reg Sess. 2012–13)

• Unlawful Internet Gambling Enforcement Act of 2006, 31 U.S.C. §§ 5361–5367

• Unlawful Internet Gambling Funding Prohibition Act, H.R. 2143, 108th Cong. (1st Sess. 2003)

• Wire Act, 18 U.S.C. § 1084

Committee Report and Attorney General’s Opinion

• Report of the Committee on Financial Services on the Unlawful Internet Gambling Funding Prohibition Act, H.R. Rep. No. 108–133 (2003)

• Virgina A. Seitz, Memorandum Opinion for the Assistant Attorney General, Criminal Division: Whether Proposals by Illinois and New York to Use the Internet and Out-of-State Transaction Processors to Sell Lottery Tickets to In-State Adults Violate the Wire Act, Opinions of the Office of Legal Counsel 35 (2011)

Cases

• In re Mastercard International, Inc. Internet Gambling Litigation, 313 F.3d 257 (5th Cir. 2002)

• United States v. Cohen, 260 F.3d 68 (2d Cir. 2001)

• Cohen v. United States, 128 F.App’x 825 (2d Cir. 2005)