On 30 September 2006 the US Congress passed the Safe Port Act. Tagged on to this Act is Title VIII: The Unlawful Internet Gambling Enforcement Act of 2006 (UIGE Act).
The UIGE Act makes it a criminal offence for the betting and gaming industry to accept financial transactions to facilitate “unlawful Internet gambling” and requires regulations to be made to prohibit financial institutions making “restricted transactions”.
Unfortunately (and this is not widely known), the UIGE Act does not clarify what is “unlawful Internet gambling”. Gaming that is legal prior to the Act coming into force remains legal and unregulated. But no clarification is given on what was previously legal or previously illegal.
The UIGE Act
The UIGE Act seeks to limit Internet gambling in the US as Congress found it to be a “growing cause of debt collection problems” for the financial industry and “necessary because traditional law enforcement mechanisms are often inadequate for enforcing gambling prohibitions or regulations on the Internet.”
In addition to the restrictions and regulations in relation to financial transactions the UIGE Act also requires the US government to address internet gambling issues when discussing money laundering, corruption and crime issues with foreign governments.
Section 5363 of the UIGE Act provides that no person engaged in the business of betting or wagering (defined widely to include betting on sporting events and games of chance) may knowingly accept in connection with the participation of another person in “unlawful Internet gambling” any credit, electronic fund transfers, cheques or the proceeds of other financial transactions.
This prohibition takes effect immediately the UIGE Act comes into force and the criminal penalties for contravention include a fine, up to 5 years’ imprisonment and a permanent injunction preventing the person from making or receiving bets or wagers.
Unlawful Internet Gambling
Central to the UIGE Act is the definition of “unlawful Internet gambling”.
Unlawful Internet gambling is defined to mean placing, receiving or transmitting a bet or wager using the Internet where such bet or wager is unlawful under any applicable Federal or State law in the jurisdiction where the bet or wager is initiated, received or otherwise made.
The UIGE Act states that no provision should be construed as altering, limiting or extending any existing law prohibiting, permitting or regulating gambling within the US. This means that if a bet or wager was not illegal before the UIGE Act then it is unaffected by the Act.
The illegality of Internet betting and gaming in the US derives, at a Federal level, from the Wire Wager Act 1961 (Wire Act). The Wire Act prohibits betting on any sporting event or contest over a “wire communication” facility and so whilst sportsbook betting is expressly outlawed the legality of non-sports betting and gaming is less clear.
The Department of Justice maintains that the Wire Act covers all forms of gambling. However this has not been tested in the US courts.
Some US States have enacted laws that specifically prohibit certain aspects of Internet gambling within the state. Thus, outside such States, it remains unclear whether Internet gaming is unlawful. If not, the UIGE Act does not apply to financial transactions which facilitate such gaming.
The UIGE Act does not prohibit legal Internet gambling on horseracing between two States where it is legal or Internet gambling within a State where this is legal.
The UIGE Act also provides that the Federal Reserve together with the Attorney General have 270 days from commencement of the UIGE Act to prescribe regulations requiring financial institutions to identify, block or otherwise prevent or prohibit “restricted transactions”. These regulations do not carry criminal sanctions, but are subject to regulatory enforcement and the effect will be to block funds from being transferred from the US to Internet gaming companies.
Again, the key is in the definition of “restricted transaction” which is defined by reference to funds which the recipient is prohibited from accepting under the UIGE Act and therefore only applies to unlawful Internet gambling. Therefore, outside those states that prohibit Internet gambling, it is not clear whether the regulations will apply to gambling other than sports betting (which appears to be the only form of Internet gambling prohibited under the Federal Wire Act).
Financial institutions that block a transaction will have no liability for doing so if they reasonably believe the transaction to be restricted (even if it is not) or if they do so in an effort to comply with the regulations. This will protect financial institutions against the gaming industry unless the industry can establish that there is no reasonable basis to believe that a gaming transaction is illegal.
Given this protection, it is unlikely that risk-adverse financial institutions will consider what is and is not unlawful Internet gambling and will refuse to process all gaming transactions. This will have the practical effect of stopping all Internet gambling even though the law remains unclear.
What does this mean for Internet gaming in and outside the US?
The UIGE Act does not extend the illegality of Internet gambling in the US: anything that was legal previously will remain so. The online betting and gaming industry, being aware of the risks will have to take a commercial decision whether to run these risks should they choose to continue business.
However, notwithstanding the industry’s desire to continue business, if financial institutions are not prepared to take similar risks, the Internet gambling industry will face an extremely difficult practical problem to overcome. Further, the financial institutions have been given ‘impunity’ to do so with the special protection given to them by the UIGE Act. The result will be all payments from the US to offshore Internet gaming websites are likely to stop.