Breaking Down the UIGEA: Did Congress Kill Internet Gambling?

Breaking Down the UIGEA: Did Congress Kill Internet Gambling?

By: Lawrence G. Walters, Esq.


  1. Introduction

More than a few jaws dropped as word of the surprise Congressional action leaked out. The United States government had finally passed a law prohibiting Internet gambling – or so it appeared. Interestingly, the industry seemed willing to accept this reality before it even read the Statute. Mere days after the weekend announcement that Congress had passed the “Unlawful Internet Gambling Enforcement Act of 2006,” (“UIGEA”), several publicly-listed gaming companies announced that they would no longer be accepting wagers from United States citizens.1 Over seven billion dollars was erased from the London Stock Exchange in a matter of days, as Internet gambling stocks tumbled upon the news of the law’s passage.2

But what is the real relevance and impact of the new legislation? Can it really be labeled as “prohibition?” This article will explore the text of the UIGEA, the events leading up to its passage, and implications for the future.

  1. Historical Background

Since 1998, the United States Congress has unsuccessfully attempted to pass some form of Internet gambling legislation. Although such legislation had passed in both the House and the Senate, in previous years, never did that occur in the same congressional session. Commonly, the bills would become bogged down in objections by special interest groups and their lobbyists, each seeking to include their own “carve out” from the proposed prohibition. Concerns came from the horse racing industry, parimutuel gaming, Indian reservations, land-based casinos, and, of course, the online gaming industry itself. Usually, Congress would run out of time before the pending legislation could clear committee hearings and be calendared for a vote by both Houses of Congress.

2006 proved to be a very different year, however. Republicans, having effectively controlled Congress since 1994, were now in trouble. Allegations of government corruption pervaded the news cycles on a regular basis, including specific concerns relating to the notorious lobbyist, Jack Abramoff’s, previous involvement in advocating for certain gambling interests.3 In response, conservative lawmakers created a ten-point “American Values Agenda” which included a proposed constitutional amendment prohibiting gay marriage, restrictions on stem cell research, and prohibitions on Internet gambling.4

Representatives Bob Goodlatte (R-VA) and Jim Leach (R-IA) led the charge to prohibit Internet gambling in the United States. They attempted to link online gaming with all manner of crime and disorder, in the attempt to garner support for their controversial legislation. Goodlatte claimed that online gambling was “sucking billions [of dollars] out of the United States.”5 Leach claimed: “The potential threat of identity theft and fraud is high for the individual bettor just as the risk posed to our national security from terror and criminal organizations that control such sites.”6 He further alleged that online gambling has become a “haven for money laundering activities.”7 Senator John Kyl (R-AZ), another anti-gambling zealot, attempted to link online gambling with the occasionally-popular War on Drugs by calling online gambling the “crack cocaine of gambling.”8

Despite this thoroughly-considered and focus-group-tested rhetoric, the American public was not buying it. Two well-respected polls conducted in 2006 confirmed that the vast majority of Americans believed that the government should not prohibit Internet gambling.9 However, Republicans stuck with their strategy, and continued to pander to the religious right/family values voters, by pushing their morality agenda in the hopes that voter turnout would save them from a feared drubbing at the polls in November, 2006. However, as history showed, the American public had become intolerant of the corruption and mismanagement in their government, and took out their frustration on the Republican leadership at the polls in the mid- term elections – turning over control of both Houses of Congress to the Democrats. However, Republican lawmakers were able to score a last minute victory against the online gambling industry, by pushing through the UIGEA as an add-on to a comprehensive Homeland Security bill that was politically impossible to oppose.

  1. Passage of the UIGEA

In early 2006, the United States Congress began debating various bills pertaining to online gambling. As noted above, all previous attempts to prohibit Internet gambling at the federal level failed, for a variety of reasons. In 2006, however, the political environment proved favorable for passage of the desired anti-gambling legislation.

For one, Congress was intent on distancing itself from any continued, perceived influence by those associated with disgraced lobbyist, Jack Abramoff, who had been involved in opposing various gambling bills in the past. Passage of this year’s online gambling legislation provided an opportunity to demonstrate that Congress was no longer beholden to his influence. In addition, the effort to vilify Internet gambling provided a convenient distraction to the increasingly unpopular War in Iraq.

In April, 2006, this author predicted that the online gambling industry was at its most vulnerable point in history, in regards to passage of Internet prohibition legislation.10 Unfortunately, that prediction became reality; but the legislation adopted by Congress was not as comprehensive or problematic as initially feared.

Notably, two (2) separate bills were under consideration by the House of Representatives during the Summer of 2006; the Leach Bill11 and the Goodlatte Bill.12 The intent of the Leach Bill was to prohibit various electronic financial transactions (“EFTs”) related to online gambling, and to encourage voluntary compliance by foreign governments with efforts to control those transactions. The Goodlatte Bill went a bit further. While it similarly made reference to regulating EFTs, the Bill also sought to expand the scope of the Wire Act13 to prohibit the offering of traditional online casino games of chance, in addition to its existing prohibitions on the business of betting on sporting events. The Goodlatte Bill thus sought to alter the definition of what constitutes “the business of betting or wagering” to include online casinos and poker rooms. Since it included a substantive prohibition on a new category of online gambling activity, the Goodlatte Bill was viewed as more controversial than the Leach Bill, and therefore it encountered more opposition as it moved through the halls of Congress. Ultimately, however, the House compromised on a joint Bill that incorporated provisions from both Bills.

On July 11, 2006, the House passed a consolidated Leach/Goodlatte Bill by a vote of 317-93.14 The proposed legislation then made its way to the Senate for consideration. While most industry observers believed that the Senate would run out of time before it could calendar the Internet gambling issue for discussion and voting, Senate Majority Leader, Bill Frist (R-TN), found a way to get this Bill passed. While his initial efforts to tack this Bill onto an Armed Services spending bill failed,15 the prohibition campaign finally reached fruition as a compromise Bill was tacked onto the SAFE Port Act, at the last minute, on September 29,

  1. However, in order to ensure passage of the Bill without debate, distraction, or delay, the proponents were required to remove more controversial the portions of the Bill that sought to expand the Wire Act to include prohibitions on online casinos and poker rooms. By removing these provisions, and attaching the remainder of the Bill to Homeland Security legislation, the Act became politically impossible to oppose.

While this shrewd move resulted in the Bill’s passage, it also caused a significant “gutting” of the law’s prohibitions, along with some confusion and inconsistencies in the remaining language. As discussed below, the UIGEA does not impose any substantive prohibition on gambling activity that was not already present, under state or federal law, before the Bill’s passage.

  1. Analysis of the UIGEA

The primary prohibition in the Bill is found in § 5363, entitled “Prohibition on Acceptance of Any Financial Instrument for Unlawful Internet Gambling.” That section provides, in pertinent part:

No person engaged in the business of betting or wagering may knowingly accept, in connection with the participation of another person, in unlawful Internet gambling – [credit, EFTs, checks, drafts, or the proceeds of any other form of financial transaction as set forth in federal regulation].

In other words, the Bill contemplates civil or criminal remedies against individuals and entities involved in assisting or facilitating online gaming transactions, who previously only faced liability under the criminal law concepts of “aiding and abetting” or “conspiracy.” One who substantially assists another individual in committing a criminal offense is punished the same as the principal actor who committed that offense.17 This is known as “aiding and abetting.” “Conspiracy,” on the other hand, requires the government to prove knowledge of, and voluntary participation in, an agreement to violate the law.18 Conspiracy does not require a completed crime, while “aiding and abetting” does not expressly require proof of an agreement to violate the law.19 After passage of the UIGEA, the government was no longer limited to relying upon these amorphous concepts of vicarious liability to punish those dealing in online gambling funds. Now, the Department of Justice has a new tool in its arsenal which is directed at those who facilitate the transmission of, or receive, funds relating to certain prohibited online gambling activities. The trick is to determine which online gambling activities trigger application of the financial transaction prohibitions.

In support of the new prohibitions, the UIGEA uses a variety of terms – some of which are ambiguous or undefined. Initially, the Act broadly defines a “bet or wager” as:

the staking or risking by any person of something of value upon the outcome of a contest of others, a sporting event, or a game subject to chance, upon an agreement or understanding that the person or another person will receive something of value in the event of a certain outcome.20

Further, a “bet or wager” specifically includes a chance on a lottery or prize awarded predominantly by chance; a “scheme” as defined in Title 28, U.S.C. § 3702 [relating to government-sponsored amateur or professional sports betting]; and, “any instructions or information pertaining to the establishment or movement of funds by the bettor or customer in, to, or from, an account with the business of betting or wagering.”21 While this final prohibition incorporates the term “business of betting or wagering,” that term is not specifically defined anywhere in the Statute. The only reference to that term comes in § 5362(2), which states:

The term “business of betting or wagering” does not include the activities of a financial transaction provider, or any interactive computer service or telecommunications service.22

Notably, the Act tells us what the business of betting or wagering is not, but does not convey what activity constitutes the “business of betting or wagering.” Instead, that term was likely defined in the provisions designed to expand the Wire Act, as discussed above, which were omitted from the final draft in order to ensure passage of the Bill. In defining what is not included in the term “business of betting or wagering” the law creates significant ambiguity as to whether its prohibitions could ever be directly applied to a “financial service provider” which happens to be the primary category of business intended to be governed by the Act.23

Nonetheless, the law does contain specific prohibitions. In order to establish a violation of the UIGEA, it must be shown that:

    1. A “person”24 was engaged in the business of betting or wagering;

    1. That person knowingly accepted a financial instrument or proceeds thereof; and,

    1. That instrument was accepted (by the person) in connection with the participation of another person in “unlawful Internet gambling.”25

Assuming that, to determine whether one is engaged in the ‘business of betting or wagering,’ it is appropriate to look back at the term “bet or wager” defined in § 5362(1), that only answers part of the question: The financial instrument must be accepted by a person engaged in the business of betting or wagering; and (perhaps most significantly), that instrument must be accepted in connection with the participation of another person in “unlawful Internet gambling.”

In the context of this statute “unlawful Internet gambling” is defined as follows:

To place, receive, or otherwise knowingly transmit a bet or wager by any means which involves the use, at least in part, of the Internet where such bet or wager is unlawful under any applicable Federal or State law in the state or tribal lands in which the bet or wager is initiated, received, or otherwise made.26

Therefore, the UIGEA only applies to online gambling transactions that are already prohibited by other state, federal, or tribal laws. This prohibition is similar to the language found in the Organized Crime Control Act,27 which prohibits a person from conducting an “illegal gambling business” which is defined as a gambling business that “is in violation of the law of a state or political subdivision in which it is conducted,” amongst other requirements.28 These laws both look to preexisting, substantive gambling prohibitions to determine whether a violation occurred.

Therefore, in order for the financial transaction to be prohibited by § 5363 of the UIGEA, the bet or wager must be “initiated, received, or otherwise made” in a place where such activity (the bet of wager) violates preexisting state, federal, or tribal law. Put another way, in order to determine whether a violation of the UIGEA exists, one must consult other substantive state and federal gambling prohibitions.29

  1. Impact of Existing State & Federal Laws

    1. Federal Law

In order to evaluate the potential applicability of the UIEGA to any particular form of Internet gambling activity, one must consider all existing state and federal statutes that may address the gambling activity at issue. While this article will not attempt to analyze such issues, since that is a topic best suited for formal legal advice, a few observations are in order:

The Wire Wager Act, or simply the “Wire Act,”30 is most often cited as the basis for

criminalizing online gambling operations. The Department of Justice has, in fact, successfully used this Statute to convict an individual of operating an online sports betting business established in Antigua.31 However, the Wire Act has never been successfully applied to any form of gambling aside from sports betting. In fact, the United States Fifth Circuit Court of Appeal has concluded that the Wire Act does not apply to Internet casino gambling that does not involve sports betting.32

A variety of other federal laws also address gambling activity. Those include the Travel Act,33 the Wagering Paraphernalia Act,34 the Organized Crime Control Act,35 and (less specifically) the Racketeer Influenced Corrupt Organizations Act.36 While one early state court decision recognized that some of these federal statutes apply to Internet gambling operations,37 the federal courts have only confirmed the applicability of the Wire Act when it comes to online gambling.38 To the extent that federal law can be consulted in order to determine the applicability of the UIGEA, federal statutes focus on activity such as sports betting, wagering pools, bolita, numbers, and “similar” games.39

    1. State Laws

In addition to incorporating the prohibitions of federal law, the UIGEA requires consideration of the restrictions of the laws of the specific state in which the bet or wager was “initiated, received, or otherwise made.” Astoundingly, this means that some financial transactions related to certain types of gambling are illegal if they were initiated in a state that restricts such activity, while identical gaming transactions emanating from a different state, which has failed to specifically address the activity at issue, remain perfectly legal. To adequately address the potential scope and applicability of the UIGEA, the laws of each of the fifty (50) states would need to be evaluated. Judicial interpretations of those laws would also need to be consulted. Moreover, just like federal law, state laws are constantly being passed, amended, and repealed. A Herculean effort would be required for one to properly analyze each state’s law as it applies to the variety of potential online gambling transactions that could be regulated by the UIGEA. Some states have passed specific prohibitions on the act of Internet betting, itself,40 while others prohibit the operation of various types of an Internet gambling business.41 Still other states have passed laws which are broad enough to potentially include Internet gambling, but which do not make specific mention of such prohibitions.42 

Read in its narrowest sense, the UIGEA may only apply to gambling transactions that are prohibited by a specific state’s law. The act of placing a bet online is not specifically prohibited by federal law.43 The last-minute Congressional hack job performed on the UIGEA before it was attached to the SAFE Port Act gave birth to a deformed legislative creature that will likely be the source of judicial headaches, for years to come. The legislative intent to prohibit all electronic financial transactions related to Internet gambling was clear, but the resulting Statute is anything but.

While state law supposedly provides the substantive basis for determining whether gambling financial transactions are prohibited under the Act, the application of state law to Internet commerce may result in insurmountable constitutional problems for the government. All state laws that seek to regulate global commerce such as Internet gambling may be unconstitutional under the “dormant” Commerce Clause of the United States Constitution.44 Under this argument, state laws which regulate national (or international) commerce are unconstitutional, since such commercial activity should only be regulated at the federal level. The reasoning behind this legal principle relates to the need for efficient and uniform execution of commercial transactions over state lines. It would be unreasonable to require a merchant to anticipate and comply with a hodgepodge of inconsistent state laws when attempting to engage in commerce at the national level. For this reason, industries such as the railroads and airlines are generally only subject to national, as opposed to state, regulation. Thus far, the courts have not hesitated in applying dormant Commerce Clause principles to attempted state-level regulation of Internet commerce.45 Virtually all state-level restrictions on Internet commerce have been struck down on this basis.46 While this argument has not been considered by the courts in relation to online gambling, the courts should be expected to use a similar analysis to that which has invalided state laws attempting to restrict commercial adult websites.47

Therefore, assuming that state law prohibitions on Internet commerce are unconstitutional under the Commerce Clause, the UIGEA would only apply to gambling activity prohibited under federal law. In the event that the courts recognize state law as providing a substantive basis for the prohibitions contained in the UIGEA, such would result in a confused state of the law, whereby some online wagering activities, originating in certain states with Internet gambling restrictions, would be prohibited – whereas others emanating from states without such prohibitions would be unregulated. It is uncertain how financial services providers would be expected to discern the underlying legality of these transactions so as to meet the UIGEA’s requirements of identifying and blocking such transactions. The inconsistency and burden resulting from the use of wildly varying state gambling laws as the substantive bases for UIGEA liability militates against use of state law for this purpose, from a constitutional perspective.

  1. Website Blocking Provisions

The provisions relating to Internet Computer Services, (“ICS’s”) are extremely interesting – and dangerous – from an academic and constitutional point of view. The Attorney General of the United States has now been empowered to unilaterally demand the immediate removal of any website he believes to be in violation of the UIGEA, in his unlimited discretion.48 The law provides the ICS with the right of advance notice and opportunity to “appear” before any judicial relief can be granted.49 It remains unclear exactly where the ICS is entitled to appear. However, nowhere in the Act does Congress provide any procedural safeguards for the website operator, whose business is about to be unilaterally terminated. This Due Process violation may not be so egregious but for the fact that Free Speech rights are at stake. The UIGEA allows the United States government to impose mandatory censorship by forcing ICS’s to ban selected websites, presumably before the affected website owner even knows what happened, and without any right to object.

The potential abuses authorized by this provision are glaringly apparent. Suppose the Attorney General does not enjoy the political commentary appearing on certain Internet gaming websites or portals, and thus decides to force the closure of those select sites while leaving a multitude of others online? Assuming that all this blocking activity occurs outside the formal legal process, little public attention or oversight will be devoted to these administrative enforcement efforts.

The First Amendment concerns of this newly-enacted censorship authority are staggering. The Internet has been called “the most participatory form of mass speech yet developed.”50 According to the United States Supreme Court, the web is a “unique and wholly new medium of worldwide human communication.”51 Given the importance of protecting the free flow of mass communication online, the courts have provided Internet communications with a high level of First Amendment protection, and have not hesitated to strike down laws restricting the content of online communications.52 Congress has apparently overlooked the level of constitutional protection ordinarily afforded to online communications in allowing the Attorney General to unilaterally disable access to select websites without any notice or opportunity to be heard.

  1. Foreign Jurisdictions

Indisputably, the Internet gambling industry operates outside the jurisdiction of the United States. Online gambling websites commonly obtain licenses from jurisdictions such as Antigua and Barbuda, the Isle of Man, Gibraltar, Malta, and Curacao. Therefore, as a practical matter, the Department of Justice faces significant hurdles in seeking to apply the UIGEA directly against any offshore Internet gambling entity. The UIGEA does however contain some lip service devoted to foreign cooperation with the United States’ decision to crack down on Internet gambling.

The law includes a section entitled “Internet Gambling in or Through Foreign Jurisdictions”53 This Section does not create any new prohibitions or regulated activities but is merely designed as an effort to encourage the United States government to work with various foreign governments to determine whether Internet gambling operations are being used for money laundering, corruption, or other crimes.54 Specific references are made to recognized white collar crime, such as money laundering and corruption, in an effort to avoid highlighting the international differences in regulation of Internet gambling. The United States knows that it cannot encourage foreign governments that license online gambling to cooperate with its enforcement actions under the theory that online gambling is illegal. Instead, the United States is trying to pigeonhole online gambling activity into other crimes that are already recognized by various international treaties and mutual legal assistance agreements between the United States and other governments.

The foreign jurisdiction section of the UIGEA also encourages the United States to advance policies that foster cooperation with the foreign governments, and to exchange information designed to enforce the UIGEA.55 Finally, the Secretary of the Treasury is required to submit an annual report to Congress detailing any deliberations between the United States and other countries relating to Internet gambling.56 

While these provisions express the desires of Congress to work with foreign governments to enforce United States policy on Internet gambling, such cooperation and information sharing is unlikely in all but the most egregious cases – particularly in those jurisdictions where Internet gambling is specifically licensed and authorized. While some precedent exist for information sharing and even assistance in connection with United States’ asset freeze request by other governments,57 such cooperative efforts only likely to occur when they involve some sort of distinct legal violation, such as tax evasion, extortion, or money laundering.

  1. Conclusion

The United States government is still a long way off from banning Internet gambling. This first attempt at prohibitionist legislation should more appropriately be viewed as a “shot across the bow” of the online gambling industry, as opposed to an outright frontal assault. Within 270 days from the enactment of the UIGEA, the Federal Reserve System, in consultation with the Attorney General, is required to enact regulations instructing financial service providers how to identify and block the restricted financial transactions.58 The enactment of these regulations will be no simple task, given the inherent difficulty encountered when attempting to monitor vast amounts of financial data flowing through the computer systems of the financial services industry. The real-world impact of the UIGEA will ultimately be dependent upon the reaction by service providers such as NetTeller® and foreign banks to the regulations ultimately promulgated by the Federal Reserve. To the extent these financial institutions find a way to voluntarily comply with the obligation of identifying and blocking transactions intended for online gambling services, the industry will suffer from the withdrawal of frustrated American bettors who are no longer able to easily transfer funds to their favorite betting sites.

However, from a purely substantive legal perspective, the UIGEA is a flop. It does little more than codify prohibitions that could have been imposed through a creative use of the conspiracy or aiding and abetting laws already in existence.59 The prohibitions directed at foreign online gaming website operators are unenforceable, as a practical matter, given the issues of personal jurisdiction and extra-territorial statutory application. The URL blocking procedure is patently unconstitutional. The substantive prohibitions on EFT’s border on incomprehensible – particularly if each state’s laws must be consulted to determine a violation. But for better or for worse, the mere passage of the UIGEA has changed the Internet gambling industry dramatically. No longer can “silk stocking,” publicly listed gaming entities operate in (presumed) open defiance of United States law by accepting online wagers from United States citizens.60 Their exit has generated new opportunities for smaller, privately-held companies to fill the void. While the passage of the UIGEA has certainly made the intentions of United States lawmakers known, and has increased the risks for those continuing to operate in the industry, it is a far cry from the outright prohibition that many had feared – and some assumed had already passed.

Lawrence G. Walters, Esq., is a partner in the national law firm of Weston Garrou, DeWitt & Walters, He has been practicing for over 17 years, and represents clients involved in all aspects involved in the online gambling industry. Nothing contained in this article constitutes legal advice. Please consult with your personal attorney regarding specific legal matters. Mr. Walters can be reached at, or via AOL Screen Name: “Webattorney.”

The Freedom to Market

The Freedom to Market

By: Lawrence G. Walters, Esq.


The popularity of online gaming has increased exponentially in recent years, making “Texas Hold Em” an indispensable American past-time, as well as a billion dollar industry. While millions of Americans decide whether to hold or to fold in front of their computers, the courts are still wrangling with the legality of such activities. These legal issues become even more clouded when the concept of commercial speech is injected in the mix, as with advertising activity. Yet advertising in the United States remains a critical part of any viable business plan, given that the vast majority of the industry’s customers come from this country. Creative marketing representatives continue to test the murky waters of advertising regulation, with novel promotional campaigns, designed to catch the eye of the potential bettor, while skirting possible legal pitfalls. Given the renewed effort by U.S. authorities to crack down on Internet gambling operations1, using both state and federal law, a renewed look at the advertising issues is essential to determine whether a given gaming promotion will earn you a cool million, or put you in hot water. This article will explore the historical treatment of gambling advertising by the courts, evaluate the current regulatory climate and discuss some considerations for the future of online gambling advertising.

Historical Overview

As is evident from early United States history, the government has viewed gambling as a “vice” activity; the same as drugs, prostitution and pornography. The government has used this categorization to justify significant regulation of both the conduct of gambling, and by extension, advertising activity. It seeks to prevent citizens from engaging in these vice activities out of a paternalistic belief that it has a responsibility to protect the individual from himself, given its “police power” to preserve the health, safety, and morals of the community. However, the power of the United States government to regulate advertising of a particular product or service is not coextensive with its ability to regulate the actual consumption of that same product or service. In other words, as discussed below, while the government might be able to regulate or even ban the conduct of gambling itself, it is less free to regulate the actual commercial speech about that activity.

The United States government has an extensive history with regulating the promotion of gambling. As early as the 1800’s, Congress made it illegal to mail letters containing information about lotteries or other similar enterprises offering prizes of any kind.2 By 1890, Congress extended the ban to include newspapers as well.3 The mailing of gambling advertisements in print form is still prohibited.4

For decades, the Communications Act of 19345 (hereinafter “§1304” or the “Act”) prohibited the broadcast and advertising of gambling activities. Although the Act appeared only to prohibit the advertising of information concerning lotteries, various regulatory and enforcement agencies had interpreted the law to include proscribe other forms of gambling advertisements as well. Throughout the years, exemptions had been carved out, allowing advertising for Indian casinos, state lotteries, jai alai, and other activities. Private casinos, however, were not granted an exemption, and accordingly, substantial efforts were devoted to invalidating or limiting §1304 by U.S. casino gaming interests. Those efforts finally suceeded in 1999, when the federal ban was struck down by a unanimous Supreme Court. In Greater New Orleans Broadcasting Association v. United States,6 the Justices ruled that the ban violated the First Amendment and was so wrought with exceptions that it could not fulfill its stated purpose of minimizing the ills of gambling. The ruling granted more First Amendment protections to commercial speech than ever before.

Current Legal Standards

Traditionally, a First Amendment challenge to advertising restrictions is analyzed by the principles set forth in the Central Hudson Gas & Electric Corp. v. Public Service Commission of New York case.7 In what has been referred to as the “Central Hudson Test,” the court must first determine whether the First Amendment applies at all. In doing so, the proper inquiry is whether the advertisement concerns a lawful activity and is not misleading or fraudulent. Once it is

determined that the First Amendment applies to a particular kind of commercial speech at issue, the speech may be restricted only if:

  1. The government’s interest in doing so is substantial;

  1. The restrictions directly advance the government’s asserted interest; and,

  1. The restrictions are no more extensive than necessary to serve that interest.8

It is the first element of the test that can be such a nuisance for the online gaming industry, and where many cases are won or lost. Although it may be true that the government has a substantial interest in regulating gambling in general, it is difficult to prove that such interest extends to online gambling. For example, online gambling cannot be accused of causing increased prostitution or drunkenness. Nor can the government seriously maintain that Internet gaming is pervasively controlled by organized crime. Yet in seeking to justify regulation of any form of gambling advertising, the government typically introduces this “parade of horribles” allegedly caused by gambling. However, the government’s hypocrisy becomes quite apparent when one reviews the many exceptions for Indian gambling, fishing tournaments, lotteries and the like, weighing against the argument that it has a substantial interest in restricting advertising for similar enterprises.

When the Supreme Court considered the Greater New Orleans Broadcasting Association

v. U.S., §1304 was analyzed using the Central Hudson test. According to Justice Stevens, the ban failed the test. The extent of the exemptions granted to other forms of gambling had made it so that the law could no longer be said to advance the government’s interest. In striking down the ban, the Justices recognized that some form of gambling was legal in nearly every state.9 In light of the decision, the state of the law regarding the government’s ability to regulate gambling advertising had become increasingly murky. While it is a generally accepted principle that the government can ban gambling all together because of its associated negative impacts on society, the First Amendment prohibits the government from banning all associated advertising. Yet from the perspective of the Department of Justice, all online gambling is illegal, and thus advertising such illegal activities is also unlawful.10 Although the decision may have seemed like a green light for the advertising of online games, the government quickly discovered other avenues to halt such advertising activities.

Online Gambling Advertising Taken to Task

By 2001, advertising for online gambling ventures had become ubiquitous on cable television and AM Radio, and was competing with the most popular industries, including retail and travel. In June 2003, the U.S. Justice Department shocked the online gambling industry by warning numerous media outlets that the continued acceptance of advertising from online gambling facilities may constitute “aiding and abetting” criminal conduct under federal law.11 Given the widespread mainstream promotion of online gambling, the government had become concerned that the average American could conclude that online gambling is perfectly legal. Apparently, the Department of Justice felt the time had come to do something about the proliferation of online gambling advertising on television, radio and the Internet. In an attempt to remind U.S. citizens that online gambling and sports betting is illegal, including the promotion thereof, an investigation emanating from the Eastern District of Missouri began. Before long, a series of investigative subpoenas were issued. Although no charges were ever brought against any of the targeted advertisers, the investigation created such a sense of fear that several large media outlets ceased, or dramatically decreased, their promotion of online gambling ventures on their own accord out of fear of prosecution. Some companies reached civil settlements with the government, and agreed to cease carrying online gambling advertising.12 For example, several St. Louis, Missouri, radio stations agreed to forfeit $158,000.00 to the Department of Justice, based on allegations that their commercials for offshore gambling operations violated, inter alia, the Wire Act.13 The government claimed that this settlement was part of over $30 million dollars in forfeitures, back taxes and penalties paid to the Department of Justice as a result of investigations conducted from 2000-2003.14

By 2004, large media outlets including Infinity Broadcasting, Clear Channel Communications, and Discovery Networks, the parent of the Travel Channel had pulled their ads.15 The decision to pull out of the online gambling advertising business by Discovery Network caused problems for Paradise Poker, who had contracted with the Network for advertising its services, before the decision was made. The intimidation took a serious turn soon thereafter when Paradise Poker attempted to recover $3.25 million dollars in unused advertisements. Specifically, Paradise Poker had a $3.85 million dollar contract with Discovery Communications to air a series of 30-second ads.16 After only a portion of those ads were aired by Discovery Communications, Paradise Poker filed suit in the Federal District of Maryland to recover the remaining balance. Instead, U.S. Marshals seized the money, on grounds that it was generated by illegal online gaming activity, and earmarked to advertise that activity in the mainstream media.17

Bigwig search engines like Google and Yahoo also followed suit and discontinued acceptance of advertisements.18 The Sporting News paid 7.2 million dollars in fines and compelled public statements about the dangers of online gambling, to avoid criminal charges arising out of the investigations.19 The increasingly aggressive DOJ investigations combined with a lack of case law and precedent governing the issue of advertising made it too risky for public companies like Yahoo to continue gambling with such lucrative advertising contracts.

These actions by the Justice Department illustrate the lengths to which the government may go to achieve a desired result. From the DOJ perspective, advertising for online gambling is just as illegal as the activity of online gambling, itself. But since online gambling advertising is not specifically prohibited by federal law, prosecutors used a “catch all” provision to fill in for the missing gaps of federal legislation. In so doing, the Justice Department succeeded in creating a “chilling effect.” By threatening enforcement and prosecution, the DOJ forced many companies to forego their constitutional right to engage in commercial speech. Although precedent criminalizing traditional advertising activities does not exist, the intimidation worked, and mainstream advertisers steered clear of the online gambling sector.

The government’s campaign against advertisers in the U.S. prompted one online gambling advertiser to initiate a test case. While most mainstream media outlets decided to shy away from the online gaming industry for a while, Casino City, a Louisiana company that operates the Casino City Network, filed a complaint in federal court against the Department of Justice. The complaint alleged that it advertised lawful overseas companies that offer online casino and sports betting, and was threatened with prosecution based on threats and subpoenas from the Justice Department. Casino City sought a judicial declaration that the aiding and abetting statutes cannot be constitutionally applied to criminalize online gambling advertising. Unfortunately for the industry, the District Court refused to issue a ruling on the merits of the First Amendment claims, and dismissed the case on the grounds that Casino City had not been threatened directly with legal action by the DOJ.

But the court went even further than it had to in order to resolve the case, and issued rulings on the constitutional claims. In doing so, it noted that the advertising involved in the case was directed to “illegal activity, namely Internet gambling.”20 The court further stated that the speech was not protected by the First Amendment because it was misleading and contained information regarding illegal activities, namely internet gaming.21 The court made no effort to distinguish between the types of gambling advertised, but instead concluded that all online gambling is illegal. This ruling was unusual, particularly given the fact that this case was filed in the Middle District of Louisiana, which is governed by the Fifth Circuit Court of Appeals – the court that issued the In Re Mastercard decision.22 That case distinguished between sports betting, which is clearly prohibited by the Wire Act, and typical casino gambling, which is not.23 Since the trial court ignored the precedent from a binding, higher court, the ruling was susceptible to reversal on appeal. However, the parties voluntarily withdrew the appeal before any decision was issued. 24

The issues surrounding of First Amendment protection as applied to online gambling advertisements have yet to be clarified by the courts. The DOJ maintains that the advertising is completely illegal. From a constitutional perspective, the answer is more complicated. Based on the ruling in the Greater Orleans Broadcasting case, an argument can be made that online gambling advertising is lawful, so long as the gambling activity is legal in the jurisdiction from which it emanates.25 However, the Government will likely contend that such analysis is limited to gambling activity that is legal in the United States, and not by some rogue nation. But the legal basis for such distinction is dubious. Courts in the future will likely wrestle with these complex issues of international jurisdiction and constitutional law. Notably, to date, no online gambling establishment has been prosecuted nor convicted for online gambling advertising.

Current Regulatory Options and Efforts

The regulation of online gambling advertising may take several different forms based on several different federal statutes and legal theories. For example, radio and television broadcast is regulated by §1304, but that statute was invalidated by the courts. Cable television and the Internet communications are not “broadcast,” and thus are not covered by that prohibition. The “Wire Act”26 may address illegal gambling ads on such venues, in conjunction with the Aiding and Abetting statute.27 Direct mail promotions, on the other hand, would fall under Title 18,

U.S.C. §1302. This statute is specifically limited to the use of the mail in regards to advertisements of lotteries and the offering of prizes dependent upon lot or chance, but is generally regarded as including virtually all forms of gambling.

An additional option for federal regulation would be civil, administrative, or criminal enforcement of the Deceptive and Unfair Trade Practices Act or False Advertising legislation. The Federal Trade Commission (“FTC”) may investigate and prosecute claims if a specific advertisement is deemed to involve illegal activity, or is alleged to be somehow deceptive or unfair. Although the definition of what constitutes “unfair” is extremely broad and can vary from case to case, the FTC has not been actively involved in prosecuting gambling advertisement thus far. Although certain violations carry potential criminal penalties, advertising regulation is almost universally enforced through civil or administrative proceedings where jail is not a realistic consequence.

Various state governments have passed legislation that either specifically or tangentially affects the promotion of online gambling in the subject state. These laws are somewhat inconsistent with each other, and many were passed before the proliferation of Internet gambling, and as such, are vague when it comes to online gaming promotion. At any rate, these laws may be vulnerable to constitutional challenges, under the Commerce Clause or the First Amendment. As the states become more active in attempting to curb online gambling, legal challenges are certain to ensue, and the legal landscape will inevitably be clarified.

The Future of Online Gambling Advertising

The state and federal governments appear to be moving squarely in the direction of prohibiting all forms on online gambling. Some states have passed specific statute prohibiting various activities associated with online gaming; yet advertising is generally not included within these prohibitions.28 The Louisiana statute, which makes it a felony (punishable by up to five years in prison or extensive fines) to use a computer to place bets or wagers, was the first to be

used against a foreign gaming site executive. On September 7, 2006, executive, Peter Dicks, was arrested only moments after stepping foot on American soil at JFK International Airport. Dicks was detained at the airport on a Louisiana warrant that charged him with gambling by use of a computer.29 Similarly, just months before, David Carruthers, CEO of BetOnSports was arrested on federal charges pertaining to the Wire Act of 1961 when his plane landed at the Dallas Forth Worth Airport.30 These efforts will likely continue, as state and federal prosecutors vie for headlines, in the moral crusade to end the corruption allegedly generated by online wagering.

More recently, Congress introduced legislation targeting online gaming, The Unlawful Internet Gambling Prohibition and Enforcement Act of 2006. The Bill essentially modernizes the Wire Act of 1961, and specifically outlaws the placing of bets and wagers through the Internet using United States bank and credit transactions. The Act would also clarify the Wire Act so that all forms of gambling, not just sports betting, would be banned. Senate Majority Leader Bill Frist, self-appointed moral authority, has made statements that he is committed to banning online gambling and hopes to have this Bill heard on the Senate floor. The potential impact of the law on Internet gambling advertising remains to be seen, but if passed, online casino operators could no longer claim that their activities are not prohibited by the Wire Act, thereby making it easier for the federal authorities to regulate online casino advertising.

Online gaming operators, and their marketing representatives, continue to develop unique and interesting ways to get their message across to their intended consumers. After mainstream media outlets backed off from real money gambling ads, the ‘play for free’ or ‘dot net’ site was born. By providing only educational services about how online casino or poker games are played, and using only play money ‘chips’, the industry found a way to promote their brand name without risking the necks of their media outlets who accepted the ads. While not a perfect solution, the .net site allowed the gambling operation to create some brand awareness, while hopefully encouraging users to learn the games and ‘cross over’ to the ‘.com’ site where they could play for real money. Other companies used streakers at football games, ebay promotions, or poker tournaments to publicize their site, outside the traditional media commercial formula. Undoubtedly, the creative minds that developed existing forms of online marketing will continue to ponder the vague legal restrictions on Internet gambling advertising, in the attempt to develop the next safe way to promote their services. The law will never catch up with the technology.


Despite the best efforts of the Department of Justice, online gambling advertising is here to stay. Whether through the dot net site, or the next Virgin Mary grilled cheese sandwich, online gaming entrepreneurs will make their voices heard to a willing audience. The current legal actions being initiated against online gaming executives may help clarify some of the unsettled issues pertaining to online gambling advertising. In the end, the industry may need to resign itself to a continual ‘cat and mouse’ game of legislation and invention, until more progressive politicians realize that American citizens will find ways to gamble, despite attempts to silence advertisers. Perhaps then, the paradigm shift will occur, and talks of legalization will begin.

A Disturbing State of Affairs

A Disturbing State of Affairs

By: Lawrence G. Walters, Esq.

U.S. Representative Robert Scott (D-VA) recently said: “If we wanted to be effective in prosecuting illegal gambling over the Internet, we would prosecute individual gamblers.”1 It appears that Congressman Scott’s point of view is gathering steam, and the online gaming industry should be concerned.

Despite prohibitionists’ efforts2 at the federal level, most proposed federal legislation has overlooked (or intentionally omitted) criminalization of the mere act of placing a bet by a potential player. As Washington lobbyists jockey for position in this feud, state legislators are training their sights on players in a new wave of state-level restrictions that threaten to do more damage to the online gaming industry than federal prohibitionists could ever hope to wreak.

At least eight states restrict online gambling3 and more are considering similar bills. In addition, existing legislation in many states may be broad enough to cover online gambling activity as falling within prohibitions relating to “computers,” “devices,” or “communications facilities.” But with the recent trend toward attempts to criminalize player behavior, prohibitionists are truly opening a new front and creating an unprecedented threat to the industry.

Despite Congressman Scott’s position that individual gamblers would be an appropriate target for prosecution, pending federal legislation focuses on the operation of an online gambling business, or — where it seeks to attack a third party — on supporting service providers such as banks or hosting companies. State governments may be a step ahead of the feds in this regard as some state laws appear to specifically prohibit player wagering conduct.4

For example, Washington State,recently enacted a law amending the state’s Gambling Act to prohibit all forms of electronic gambling. The law draws no distinction between players and website operators.5 With more than half of the wagers placed on Internet gaming sites coming from United States citizens, any prohibition on player activity, in even a single state, may significantly impact gaming revenues if players respond by giving up their keyboard betting activity.

Illinois law prohibits individuals from making “a wager upon the result of any game, contest, political nomination, appointment, or election by means of the Internet.”6 While no widespread prosecution of online bettors has occurred in Illinois, its statute appears to be broad enough to ensnare even the casual bettor within its proscription.

Not all state laws include prohibitions on player conduct. Oregon’s Internet gambling statute focuses on prohibiting Internet gambling businesses from accepting certain Electronic Funds Transfers (EFTs) from financial institutions and others transferring such funds.7 Nevertheless, nothing prevents this state from amending its laws to include criminalization of player activity.

Some state statutes fall into a more ambiguous category. For example, Florida law punishes individuals who “play” or “engage in” any “game of chance” by “any device whatever.”8 The term “device” under the Florida Statute is not defined, and may well include computers, modems and/or gaming software. Many state laws are written in a similarly expansive manner, allowing the state to utilize its law to prohibit a vast array of gambling activities, potentially including those taking place online. Recently, the Colorado Attorney General attempted to rely on preexisting Colorado gambling statutes as a basis for claiming that online gambling was illegal, as was advertising such services at a Denver Nuggets football game.9 Important to note is the fact that Colorado has not passed specific online gambling

legislation. Nonetheless, Colorado Attorney General John Suthers claims that Internet gambling is illegal in Colorado, and virtually every other state.10 Similarly, a judge in New Jersey convicted a webmaster for promoting an online sports betting operation,, despite the fact that online gambling is not specifically prohibited by New Jersey law.11 This demonstrates the disturbing potential for reliance on ambiguous or even non-existent state law as a basis for prohibiting both the operation of Internet gambling sites, and the mere betting thereon. Politicians and law enforcement officials may find themselves invoking vague, expansive gambling prohibitions, as they are confronted with online gambling issues, but find that their state has not addressed this industry with any specific legislation.

Of more concern is the newly-adopted statutes that specifically prohibit player activity. A wave of state laws sweeping the nation could leave carnage in its wake in the form of former online bettors. While federal legislation attempts to chip away at the online gambling industry by intimidating the banking and hosting industries, state level restrictions often cut to the chase by imposing outright prohibitions on player activity. Well-established legal principles, may affirmatively demand this dichotomy since federal government is limited in the types of activities it may criminalize. Generally Congress can only criminally prohibit activity that involves some element of interstate or foreign commerce.

While all Internet transactions can be viewed, at some level, as connected to interstate commerce, federal prosecutors and judges will not be thrilled to handle throngs of cases involving casual bettors engaged in small stakes poker or sports betting activity. The federal courts have historically been reserved for decidedly higher-stakes matters. Any attempt to bog down the federal courts in such penny ante cases would likely be met with swift rebuke from federal judges and magistrates. Moreover, given the practical difficulties encountered when attempting to enforce United States’ law against offshore gambling establishments, the states may be in a better position to effectively attack the online gambling industry with these player prohibitions.

The logical question is, then; what to do? The industry, and its trade organizations, are not powerless in the face of this mounting trend. Thus far, no court has considered the constitutionality of any state-level restriction on Internet gambling. There are a variety of legal arguments that address the validity and enforceability of any such law; and, any affected individual or company may be entitled to initiate declaratory test case litigation to challenge this legislation. Significant issues remain to be decided by the courts as to whether any of these state-level restrictions are constitutional, in light of the dormant Commerce Clause,12 and Due Process concerns. Some state Constitutions contain privacy protections which exceed those provided by the United States Constitution, thus giving rise to additional, potential state-level legal challenges.13

While gambling regulation has historically been a subject reserved to the states, the presence of the Internet creates a dimension to gambling regulation that was heretofore unanticipated by the courts when evaluating previous state level gambling legislation. The new era of state online gambling legislation, while intimidating and potentially damaging to the bottom line of the online gambling operator, may create unique opportunities for the development of online gambling law, and provide a vehicle for the preservation of cherished constitutional rights

Lawrence G. Walters, Esq., is a partner in the national law firm of Weston Garrou, DeWitt & Walters, He has been practicing for over 17 years, and represents clients involved in all aspects involved in the online gambling industry. Nothing contained in this article constitutes legal advice. Please consult with your personal attorney regarding specific legal matters. Mr. Walters can be reached at, or via AOL Screen Name: “Webattorney.”






After eight years of seemingly-endless legislative proposals, committee debates, and defeats, news that United States lawmakers intended to propose yet another round of prohibitionist legislation peaked little interest among industry leaders in early 2006. The common refrain of the “Kyl Bill,” the “Leach Bill,” and the “Goodlatte Bill,” became little more than background noise in an environment of seemingly constant regulatory changes. However, in this author’s view, the online gambling industry has never been more vulnerable to adverse United States legislation than right now. Dueling bills in both the House and Senate seek to expand the scope of the Wire Act, to now specifically apply to online gambling businesses, and to games of chance other than sports betting.1 The bills also contain dangerous provisions requiring ISPs/hosts to block URLs identified as belonging to illegal online gambling websites, after receipt of notice from government officials.2 Still other provisions focus on prohibiting Electronic Funds Transfers (EFTs) relating to online wagers.3 In short, the United States Congress is attempting to give the Department of Justice a variety of tools necessary to clamp down on all manner of Internet gambling operations – even those located overseas. While United States criminal jurisdiction will not likely extend to foreign companies owned by foreign citizens, United States lawmakers have found another way to skin the cat; by cutting off the money sources, and by blocking electronic access to the sites at the source.

The current political climate bodes well for passage of one or more of these Bills. Legislators are anxious to wash their hands of any perceived influence peddling by Jack Abramoff, et. al., which allegedly occurred in previous years in connection with Internet gambling interests.4 With the mid-term elections approaching, and the War in Iraq continuing to devolve into further confusion and unpopularity, the GOP is seeking to start a new political conversation, and the evils of Internet gambling may provide a convenient scapegoat, creating just the diversion necessary to accomplish its goals. Although some form of gambling is legal in almost every state, the government continues to vilify certain forms of gambling as criminal vice activity that must be prohibited altogether. One lawmaker has called Internet gambling the “crack cocaine of gambling.”5 Now is seen as the perfect time to crack down on this “evil” activity, and the wheels have been set in motion.

So what will the real impact of these Bills be if they pass? Will the online gambling industry come to a screeching halt? Will United States advertising opportunities dry up? Will multimillion dollar, publicly-traded companies be forced underground, and their CEOs declared fugitives or “wanted men” in the United States? Not likely.

Internet gambling has become part of the culture, both in the United States and globally, such that it will not be stopped, no matter what legislation is passed at the state or federal level. A recent poll conducted by the Wall Street Journal shows that 85% of Americans oppose a congressional ban on online gambling.6 Lawmakers are merely putting their fingers in the dike of a powerful new economic force that cannot be wiped off the map with new legislation or threats of prosecution. Notably, none of the currently-pending bills seek to punish player activity, on its own, and therefore United States gamblers will continue to place bets. Given the increasing popularity of online poker, fantasy sports leagues, and casino gambling, coupled with the numbers of new Internet users coming online each day, the popularity of online gambling in the United States will likely increase despite prohibitionist efforts on Capitol Hill.

However, certain things will change. For example, the online gambling market for hosts/ISPs in the United States will dry up, to the extent that it exists today. Since hosts may be required to block online gambling websites in response to official notification, no Internet gambling site will risk being blocked by hosting with a Internet Service Provider that is willing to comply with United States law. That category of hosts will not be limited to those based in the United States, either. Large ISPs, such as Yahoo! and AOL, all have foreign divisions, but will still comply with blocking requests, even if the websites are hosted by a foreign subsidiary or affiliated entity, given the risks of non-compliance to their operations as a whole. Other purely foreign hosts will likewise comply with blocking requests, just as they do currently with websites alleged to be involved with child pornography, out of a simple desire to maintain a cordial, diplomatic relationship with United States authorities. Therefore, new opportunities will be created for small hosting companies located beyond the reach of United States authorities, in the online gambling space. Of course, connectivity and infrastructure issues must be sorted out. However, some realignment of the hosting relationships will be a natural fallout from the passage of any United States legislation containing a URL blocking requirement.

Similarly, financial and billing relationships will change. Any new legislation that prohibits the processing of electronic financial transactions relating to Internet gambling will stimulate a revolution in alternative payment processing and e-wallet solutions to accommodate the industry. The real question is, of course, what will companies like NetTeller® do in response to United States EFT legislation? Will they rely on their offshore location to insulate them from

criminal prosecution under United States law? Or will they buckle under the pressure of United States regulators and reject any financial transactions related directly (or indirectly) to Internet gambling? Those companies that refuse to continue their involvement with the online gambling industry will open opportunities for new entities, unconcerned about United States regulation, to take their place. This seemingly endless “cat and mouse game” will have little real world impact on a United States citizen’s ability to place an online bet, other than, perhaps, some temporary inconvenience while the shakeout occurs.

Another more significant, albeit indirect, effect of the proposed legislation should be of some concern to the industry. That is the psychological impact on the United States bettor, who hears that his or her government has just made Internet gambling “illegal.” The average player is unlikely to sort through the legal nuances of the legislation that gets passed, and any implementing regulations. Therefore, even though these bills (in their current form) do not attempt to regulate player activity, players may become concerned about potential prosecution if they continue to place wagers online after passage of the legislation. This spin-off effect on United States player activity could be the most significant impact on Internet gambling businesses – yet it is one that is potentially avoidable or subject to significant mitigation by the industry. An educational effort must be immediately undertaken and funded by the industry’s leaders, trade groups, and media outlets. The moment a new federal online gambling law is passed, the industry must be ready with press releases, articles, speeches, blog postings, and any other form of communication necessary to communicate the precise impact of any pending legislation on United States player activity. If online betting is not prohibited by the new legislation, players must be immediately informed of that fact. Failure to do so will allow the rumor mill to generate significant misinformation, which plays directly into the hands of the prohibitionists on Capitol Hill.

Direct restrictions on Internet wagering by United States citizens are unlikely at the federal level, for a variety of reasons. First, the Feds typically seek to avoid these penny ante crimes of little economic or real world impact. Federal courts, prosecutors, and penitentiaries are reserved for criminals of a different stature. Moreover, as a matter of federal jurisdiction, a federal crime must involve some aspect of interstate activity or commerce. While all online transactions arguably involve interstate commerce, to one degree or another, it is unlikely that the United States Congress will seek to regulate the placement of bets by individuals using their personal computers at home, with little effect on interstate commercial activity. Such restrictions could be seen as intrusions into basic civil liberties, contributing to allegations that Big Brother is watching, and over-regulating our private lives. Accordingly, the likelihood of federal restrictions on player activity is remote.

Industry leaders remain hopeful that all forms of proposed prohibitionist legislation will be defeated, and that lawmakers will recognize that Internet gambling has become a mainstay form of entertainment for United States citizens. Unfortunately, cooler heads do not always prevail, and the Internet gambling industry may soon be forced to accept some new form of United States federal legislation specifically criminalizing, for the first time, Internet gambling activity. As noted above, the primary effect of such legislation will be to drive the service

providers further offshore, and away from the long arm of United States jurisdiction. But to counteract the disturbing potential secondary effect, in the form of United States player paranoia, the industry must unite in its educational efforts to clearly inform United States players as to the effect, or lack thereof, on their desire to continue engaging in recreational online betting.

Lawrence G. Walters, Esq., is a partner in the national law firm of Weston Garrou, DeWitt & Walters, He has been practicing for over 17 years, and represents clients involved in all aspects involved in the online gambling industry. Nothing contained in this article constitutes legal advice. Please consult with your personal attorney regarding specific legal matters. Mr. Walters can be reached at, or via AOL Screen Name: “Webattorney.”

Investment or Conspiracy?

Investment or Conspiracy?


  1. Introduction

Depending on whom you ask, investing in Internet gambling businesses is either a sound financial decision, or facilitation of criminal activity, in violation of United States law. As international stock exchanges – in particular, the London Stock Exchange – have opened up to offerings of online gambling operations, the investment opportunity is becoming legitimized. The potential profits to be realized by those investments have not escaped the attention of respected, established investment houses like Goldman-Sachs, Merrill Lynch, and Fidelity.1 In fact, these companies now hold hundreds of millions of dollars in shares of online casinos and other betting operations.2 The allure of high-end profitability may be causing some investors and advisors to underestimate the potential legal exposure associated with United States-based ownership of online gambling establishments. This article will explore some of the potential legal concerns associated with investing in Internet gambling enterprises, either as a United

States citizen or investment fund manager. Nothing in this article is intended as legal advice regarding investment activity, which can only be competently provided by a licensed attorney, after a full evaluation of the specific investments involved, along with a host of additional factors.

  1. Department of Justice Position

Indisputably, the United States Department of Justice (“DOJ”) contends that all Internet gambling activity is illegal under federal law.3 A spokesperson for the DOJ recently confirmed this position, but declined to comment further on the hypothetical liability of an investment company or individual investor located in the United States.4 However, United States Representative Bob Goodlatte, a staunch anti-gambling lawmaker, claims that these investors are promoting illegal gambling in violation of federal law.5 This hard line position has been consistently maintained virtually since the inception of the online gambling industry, despite the

lack of any specifically-applicable federal legislation. The underpinnings of this view date back to early American history, wherein gambling was viewed as a “vice” activity, to be banned, instead of a viable form of entertainment to be enjoyed.

The DOJ’s stance on Internet gambling received recent support from the Report compiled by the United States Government Accountability Office, (“GAO”), issued in November 2002, which has been widely interpreted by government officials as warning that online gambling activities could be a haven for money laundering schemes.6 Consistent with this view, the United States Attorney’s Office in the Eastern District of Missouri has been investigating media

outlets involved with online gambling advertising under the theory that such advertising violates the “aiding and abetting” prohibitions under federal law.7 This theory presumes that the underlying Internet gambling activity is illegal, since aiding and abetting cannot occur in a vacuum – it must generally be premised upon a separate, underlying crime (or attempted crime) that has been aided or abetted.8 The offense occurs when a defendant willfully associates himself in some way with the criminal venture and willfully participates in it as he would in something he wished to bring about.9

The government’s theory in this regard has recently produced some results. After years of grand jury investigations and subpoenas, looking into the advertising activities of numerous media outlets in regards to online gambling, the DOJ announced a $7.2 million settlement with The Sporting News, which had carried advertisements for various gambling websites.10 Other broadcasting companies have also taken this matter seriously, and have pulled their gambling ads out of fear of prosecution.11 At least one major online gaming conference scheduled for November 2003 in Orlando, Florida, was cancelled in response to the government crackdown against advertising activities.12

These actions all focused on gambling advertising. So what about financing or investing?

Does the government have a legal leg to stand on?

  1. Legal Analysis

    1. Overview

Despite the broad pronouncements from the DOJ as to the illegality of all forms of online gambling activity, the legal reality is, of course, a bit more complicated. Numerous factors, such as the physical location of the gambling enterprise, the defendant’s degree of involvement with the business, the type of gambling activity offered, and the legal status of online gaming in the host jurisdiction, all play a part in the potential legal exposure of a particular individual who owns, operates or is otherwise involved with an online gambling venture. Each of these factors could play a significant role with respect to the legality of investing in online gambling businesses.

    1. Locus of Gambling Activity

One significant question that must be considered in evaluating these legal issues is: Where does the “illegal” gambling activity occur? Obviously, United States law does not apply to the activities of all persons throughout the world. While the complex issues of international law, extraterritorial statutory application, personal jurisdiction and extradition treaties are all outside the scope of this article, it suffices to say that foreign entities and individuals are generally not required to comply with the dictates of United States’ law. Exceptions to this general principle exist, for example, where the foreign business activity is intended to produce “effects” in the United States.13 There can be no dispute that most offshore gambling websites solicit and service United States bettors. However, the impact of that activity on the ability of the United States to regulate foreign gambling establishments remains unsettled.

In this regard, it should also be noted that mere individual betting activity by United States players has generally been insufficient to constitute a violation of federal gambling law.14 Therefore, U.S. player activity should not be found sufficiently “illegal,” so as to justify imposition of criminal liability on those associated with foreign gaming operations, under federal law. However, at least one appeals court considered the existence of United States bettor activity in determining that the Wire Act applied to an Antiguan sports betting operation.15 All this begs the questions of where is the betting or wagering activity occurring? To the extent that the operation is really being operated from overseas, by foreign citizens, application of United States’ law is a dicey proposition for the government, making it more difficult to impose liability on investors.

    1. Degree of Involvement

While something more than United States betting activity may be required for United States law to apply, just about any affiliation with, or involvement in, gambling operations has historically been sufficient to implicate criminal liability. Even waitresses and janitors have been found to be sufficiently involved with gambling operations be subjected to criminal liability under the Organized Crime Control Act, 18 U.S.C. § 1955.16 Some courts differ, however, and conclude that only conduct that is strictly “necessary” to the operation of the gambling business is sufficient to implicate criminal exposure.17 Nonetheless, those who finance illegal gambling businesses have generally been subject to criminal prosecution and conviction.18 Therefore, investment of funds in a gaming enterprise appears to justify potential liability. But, since illegal gambling operations were not historically listed on foreign stock exchanges, the question of United States ownership of equity shares in such operations has never been evaluated from a criminal liability perspective. A viable argument can be made that passive investors in activity that is not clearly illegal should not be subjected to criminal penalties, due to lack of criminal intent or “mens rea.” With more and more investors getting involved with the online gaming industry, the opportunity for the courts to consider this question may not be far off.

    1. Nature of Gaming Activity

Another factor that will weigh significantly in the liability evaluation is the specific type of gambling activity offered by the online gaming operation that is the subject of the investment. Federal law does not appear to treat all games of chance equally. This concept is best illustrated by the applicability of the Wire Act, 18 U.S.C. § 1084, which is most often cited as the basis for criminalizing online gambling operations. While much has been written about this particular federal law, and its relationship to Internet gambling, for these purposes it is important to recognize that the statute was only intended to apply to the business of wagering on sporting events, and not to other common forms of casino gambling.19 This limited applicability has been judicially recognized in the online gambling context as well. In 2002, the Fifth Circuit Court of Appeal affirmed a lower court’s holding that the Wire Act applies only to sports betting, and not to other forms of Internet gambling on games of chance.20 In accordance with this distinction in applicability, it could be argued that investing in non-sports-related Internet gambling operations is much safer than taking an equity position in an offshore sports book. These nuances often escape the lay investor, however, thereby resulting in heightened risk. Other federal anti-gambling statutes vary in their applicability to certain forms of prohibited gaming activity. For example, the Travel Act, 18 U.S.C. § 1952, prohibits certain travel-related acts conducted in connection with “unlawful activity.” The term “unlawful activity” is defined to include “any business enterprise involving gambling…in violation of the laws of the state in which they are committed or the United States.”21 Therefore, one must look to other federal anti-gambling statutes, or state gambling prohibitions, to discern the precise nature of the activity prohibited by the Travel Act.

The Wagering Paraphernalia Act, 18 U.S.C. § 1953(a), on the other hand, applies to bookmaking, wagering pools on a sporting event, numbers games, policy, bolita or “similar” games.22 Finally, the Organized Crime Control Act, 18 U.S.C. § 1955, (“OCCA”), looks solely to state law to determine whether a violation of the Act has occurred.23

As is evident, the particular nature of the online gambling activity offered by the specific website operation under investment consideration will bear heavily on the potential applicability of federal anti-gambling statutes. Therefore, this aspect of the business model is critical when conducting the legal exposure evaluation. Further complicating this issue is the fact that each state has its own set of gambling prohibitions, some of which specifically apply to Internet gambling activities.24 Other states’ laws are silent, while still others are considering their options, in this regard. Therefore, the applicability of some federal laws will depend on the current status of state law, as it relates to online gambling.

The brokerage house, fund manager, or individual investor, should therefore be keenly aware of the nature of the gambling services offered by any Internet gaming operation that is considered for potential investment, given the risk variable generated by this factor. The specific nature of the gaming activity provided by the websites in question must be carefully considered in determining the risks associated with any potential investment in this industry.

    1. Legal Status of Gaming in Offshore Jurisdiction

Another issue which must be considered in evaluating the risks of investing is the legality of the gaming operation in its host country. The question here is whether online gaming is legal or licensed in the country where the website is based. While the courts have not been particularly sensitive to the claims that the location of the website’s server should control the legality of the gaming activity, the legal status of online gambling in the website’s principal place of business, i.e., where the transactions occur, should enter into the legal analysis. Unfortunately, early court decisions on this issue have not been particularly favorable or well- reasoned. For example, in one case,25 a New York trial court found that an Antiguan corporation operating an online casino used by residents of the State of New York could be subjected to the jurisdiction of the court, even though the website’s server was located in Antigua, and the entity was licensed to conduct Internet gambling in that location. Similarly, the Second Circuit Court of Appeal in United States v. Cohen,26 was not receptive to claims that the gambling activity took place in jurisdictions which embrace, and even license, online gambling activity.27 The

Defendant in that case, Jay Cohen, was ultimately convicted and sent to prison, despite the fact

that the sports betting services he offered were provided via licensed Antiguan corporations.28 Nonetheless, as courts become more knowledgeable and sophisticated on the issues of

online transactions, they are likely to pay closer attention to the thorny issues generated by deciphering the legal status of gaming transactions in their jurisdiction of origin. This is particularly true given the political pressure generated by the claim initiated in the World Trade Organization (“WTO”) by Antigua and Barbuda against the United States in connection with its extraterritorial enforcement of anti-gambling legislation to the detriment of the claimants, allegedly in violation of international trade agreements.29 This claim called the world’s attention to what has been portrayed as ‘bullying’ by the United States against developing nations, who’s gambling policies may be different than that of the DOJ.

Although the Appellate Body of the WTO reversed the decision rendered by the initial Panel, in favor of the claimants,30 the DOJ has since apparently backed off its previous enforcement efforts against offshore corporations involved in Internet gambling activities. Indeed, no federal prosecutions of record have been initiated based solely on gambling violations against offshore casinos since the WTO debacle. Although the ruling itself may not force

significant changes in United States gambling legislation, its real world impact may be to significantly reduce the previous vigor with which the federal government had threatened to pursue Internet gambling operations directed at United States’ citizens, conducted from offshore entities. This change may also reduce the practical risks of prosecution facing investors in such entities.

  1. Pending Legislation

It should be noted that the legal landscape applicable to online gambling, and consequently to investment activity therein, may change significantly if certain Republican legislators have their way. Representative Leach (R-IA) and Senator Kyl (R-AZ) have repeatedly introduced prohibition legislation directed at prohibiting the funding of Internet gambling transactions by financial institutions, and others.31 Although the bills have consistently been defeated for a variety of reasons, including the failure to properly “carve out” exceptions for recognized forms of Internet-oriented gambling such as off-track betting on horse racing, online sale of state-run lottery tickets, or possible future involvement in the industry by powerful casino interests, each year is a new battle. Past legislative defeats have also been blamed on

admitted-criminal Jack Abramoff’s questionable influence peddling on Capitol Hill, on behalf of the Internet gambling industry.32 Passage of the legislation at this time could be seen as an opportunity for lawmakers to clean house, and divorce themselves of past unsavory associations. In the event that Representative Leach’s legislation, or something similar, is enacted into law, the opportunity for U.S. investors to put money into virtually any form of online gambling operation may quickly dry up. However, at present, all existing federal legislation was created before the development of the Internet, and therefore may not specifically apply to gambling online, despite repeated contrary assertions by federal law enforcement officials.

  1. Impact on Investment Activity

Investing in an offshore gambling enterprise, even one listed on a publicly-traded foreign stock exchange, can be risky business. Government officials have made their position clear: All online gambling is illegal. Investing in an illegal business, particularly one that has a nexus with the United States – in this case, in the form of customers’ wagering activity – can be punished under various legal theories. As noted above in regards to advertising liability, the DOJ could claim that contributing funds to an allegedly criminal enterprise makes the investor guilty of “aiding and abetting” illegal activity. Of course, the government may encounter difficulty in proving that an underlying crime occurred, if the online gambling activity is legal and licensed in the jurisdiction of origin, or if the specific games offered by the business are not covered by existing federal statutory provisions. However, assuming those roadblocks are cleared, liability cold be imposed since it has historically attached to those who knowingly contribute funds to criminal activity.

Another option would be reliance on the conspiracy theory of criminal liability. In order to prove one guilty of criminal conspiracy, the government must prove knowledge of, and voluntary participation in, and agreement to violate the law.33 While numerous potential defenses may exist for the innocent investor, who believed that the gambling activity was legal and licensed, federal conspiracy charges are serious business. The defendant charged with criminal conspiracy can face up to 5 years in a federal prison.34 Therefore, due care must be exercised when considering any agreement to contribute funds to online gambling activities.

  1. Conclusion

Despite the unhesitating acceptance of Internet gambling shares in major brokerage houses’ portfolios, the legal issues remain murky. These unsettled legal issues may result in potential criminal exposure for investors. Acknowledging this theoretical risk, the practical reality associated with prosecuting a well-respected investment house, or otherwise innocent individual investor, based on mere ownership of shares in a publicly-traded online gambling business, indicates that the real risk of prosecution is minimal. Law enforcement officials may get farther by merely threatening future prosecution, thereby leaving the legal issues unresolved, but significantly decreasing the number of potential investors who are willing to take a risk. In sum, like many highly profitable investment opportunities, online gambling investments do involve some risk. However, the down side with this investment may not just be just the loss of principal; it could involve loss of liberty.

Lawrence G. Walters, Esq., is a partner in the national law firm of Weston Garrou, DeWitt & Walters. He represents clients involved in all aspects of online gambling operations. Mr. Walters can be reached at, or via his website,