Gambling is one of the most regulated industries in the United States. Traditionally regulated by state law, gambling is largely illegal in many jurisdictions. Where it is legal, it is legal only to the extent that the state says so (it is legal only when the gambling institution is properly licensed and pays certain gambling taxes to the state). Gambling is big business, bringing in huge amounts of cash and tax revenue, and employing thousands of state citizens.
How big is gambling? Gamblers legally lost $50 billion in 1998, while casinos grossed $7.5 billion. In 1999, casinos did better, grossing $22 billion. Internet gambling, which saw its birth in 1995, [Janower] reportedly grossed $651 million in 1998, doubling since the year before, with 14.5 million online gamblers. There were estimated 300 Internet gambling sites at that time. USAToday reports that the estimated profits for Internet gambling is $2.2 billion for 2000, $3.0 billion for 2001, $4.1 billion for 2002, $6.0 billion for 2003, $8.3 billion for 2004, and $10.2 billion for 2005. The same USAToday article, estimated that there were approximately 1400 gambling web sites operated by approximately 300 different companies at the time. [Electronic Frontier] [Yures] [Final Report].
Internet gambling has created the opportunity for anyone with a computer and a credit card to easily waste away vast sums of money, engaging the offerings of off-shore gambling companies. These cyber casinos may be unregulated. There is no assurance that the game is on the level. There are no background checks on the operators. Scams can fold up shop at a night fall. There is no money going into a state's coffers. There are no state citizens being employed. Removed from the highly social glitz and glamour of Las Vegas or Atlantic City, Internet gambling is a solitary activity between an individual and a computer screen, where compulsive gamblers can become entranced and minors can act like adults. It is a disruptive innovation to the business plans of established incumbents gambling businesses. Finally, DOJ has expressed concern that Internet gambling can provide an easy means for money laundering. [Electronic Frontier] [Final Report]
The question of the legality of Joe Gambler placing a bet at the ACME casino in the state of Nevada is normally answered by state law, in this case the law of Nevada. The gambler, the casino, and the transaction all are in Nevada. Disrupting this easy analysis, a new technology hit the scene where the gambler can be in one state, the gambling institution in another, and the gambling event in yet another state. This new technology was of course - - the telephone. [Final Report n1]
The inability of state law to adequately address interstate gambling via the telephone network became a significant concern for the US Government. Then-attorney General Robert F. Kennedy, in 1961, sought to rectify this situation by proposing the Interstate Wireline Act. This law states
Whoever being engaged in the business of betting or wagering knowingly uses a wire communication facility for the transmission in interstate or foreign commerce of bets or waters or information assisting in the placing of bets or wagers on any sporting event or contest, or for the transmission of a wire communication which entitles the recipient to receive money or credit as a result of bets or wagers, or for information assisting in the placing of bets or wagers, shall be fined under this title or imprisoned not more than two years, or both.
18 USC § 1084(a). [Electronic Frontier]
The Internet is also an interstate network. Gambling over the Internet is treated the same as gambling over the interstate telephone network. Even where the gambling institution and servers are offshore in some place like Antigua or Costa Rica, the gambling institution is knowingly using wire communication within the jurisdiction of the United States for the purpose of gambling. Thus, the Wire Act applies. Right? [scope]
The Department of Justice is of the opinion that it has no difficulty applying the Wire Act to the Internet. [Gregory] [Media Response to DOJ Letter to Nevada stating that online gambling is illegal]. Arguments that the Wire Act can not reach offshore institutions has been dismissed by DOJ as "nonsense." [Suarez]
Pursuant to the Wire Act, DOJ can require that common carriers (aka telephone carriers) disconnect the communications facilities of violators of the Act. [18 U.S.C. § 1084(d)] DOJ has recommended that this remedy be expanded to any communications facility and not just telephone carriers. [Gregory 2000]
Unlawful Gambling Enforcement Act of 2006
A great claim of cyberlibertarians is that if you make something illegal, it will just move off shore, and you cant reach it. Maybe. But there is usually a tail that you can grab. In this case, the tale is money. Online gambling because problematic if none of the debts or payments are honored. The Unlawful Gambling Enforcement Act sought to solve the problem of illegal gambling in exactly this way.
The Department of Treasury describes the new law in its rule making proceeding implementing the new law:
"The Act prohibits any person engaged in the business of betting or wagering (as defined in the Act) from knowingly accepting payments in connection with the participation of another person in unlawful Internet gambling. Such transactions are termed "restricted transactions." The Act generally defines "unlawful Internet gambling" as placing, receiving, or otherwise knowingly transmitting 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. The Act states that its provisions should not be construed to alter, limit, or extend any Federal or State law or Tribal-State compact prohibiting, permitting, or regulating gambling within the United States. The Act does not spell out which activities are legal and which are illegal, but rather relies on the underlying substantive Federal and State laws.
The Act requires the Agencies (in consultation with the U.S. Attorney General) to designate payment systems that could be utilized in connection with or to facilitate restricted transactions. Such a designation makes the payment system, and financial transaction providers participating in the system, subject to the requirements of the regulations. The Act further requires the Agencies (in consultation with the U.S. Attorney General) to prescribe regulations requiring designated payment systems and financial transaction providers participating in each designated payment system to establish policies and procedures reasonably designed to identify and block or otherwise prevent or prohibit restricted transactions. The regulations must identify types of policies and procedures that would be deemed to be reasonably designed to achieve this objective, including non-exclusive examples. The Act also requires the Agencies to exempt certain restricted transactions or designated payment systems from any requirement imposed by the regulations if the Agencies jointly determine that it is not reasonably practical to identify and block, or otherwise prevent or prohibit the acceptance of, such transactions.
[Fed Reg Oct 2008]