Rolling the Dice: Online Gambling Law and Policy

    Online gambling is a fairly lucrative business—it was pulling down $5.9 billion in 2005, and had an estimated 23 million playing around the same time. Many developers may find this particular area of game development promising. However, there are a lot of legal issues that arise when contemplating this particular game type. Many people are at least marginally aware of the risks, but there is also a lot of ignorance and a general lack of understanding about how the law functions with regard to gaming laws generally. For instance, many know that online gambling in the U.S. is a no-no. Yet many do not know the extent to which the U.S. can claim jurisdiction over off-shore companies who operate gambling sites with U.S. subscribers. This entry will try to cover some of the general theories and policies surrounding online gambling games.

    Gambling laws can be broken down into two categories: U.S. and U.S.-like laws, and the rest of the world. This isn’t as clear cut as it sounds—U.S. gambling laws differ from state to state. However, with regard to federal law’s treatment of online gambling, for purposes of this article, this is as straightforward as it gets.

    A caveat on what I mean by online gambling—generally speaking, this means any game of chance or casino game that requires a monetary investment in exchange for a chance at a prize or sum of money. “Bets and wagers” typically means betting on the outcome of any competition or game of chance (although the Wire Act has a limited definition). Mini-games within your game and gambling in MMORPGs (something I might cover at a later date) are not within the scope of this discussion. Furthermore, competitions (i.e. eSports) are not of any real concern here, unless you’re betting on them or operating a site or game that permits betting on the outcome of those competitions.

    U.S. Gambling Laws

    As stated above, state laws vary. Some states license particular operators and collect taxes based on revenue from gambling enterprises (i.e., Nevada), while others only allow for state lotteries. Some define gambling vaguely (i.e., “all games of chance”), while others specify game types that constitute illegal gambling (craps, poker, roulette, game or race betting, etc.). This does have some effect on federal law. One of the reasons online gambling is so heavily regulated now is at least in part a result of licensed brick and mortar Casino operators lobbying Congress to regulate the online industry.

    The current state of federal law is interesting to say the least. Although each state can control gambling within its state lines, Federal Law prohibits use of “wire communication facilities” (i.e., internet, phone, etc.) to “engage in the business” of unlawful betting and wagering. 18 U.S.C. 1084. The use of the Wire Act (Title 18) to prohibit online gambling isn’t always reliable—for instance, 1084 only concerns “sporting events and contests”, so it wouldn’t penalize the operator of a poker site. Under federal law, any business or enterprise engaged in unlawful gambling can be subject to a fine or imprisonment. There not much under federal law that directly penalizes individuals who gamble online, and the Department of Justice seems disinclined to support or enforce any such law. Those laws are typically governed by the states (for instance, both Hawaii and Utah have outright bans on online gambling).

    Because the Wire Act isn’t always reliable and could rarely be used to shut down operators, the government implemented another Act that specifically concerns online gambling. The Unlawful Internet Gambling Enforcement Act of 2006 (UIEGA) makes it illegal for even licensed operators to accept “restricted” transactions. It also forces banks and financial institutions to implement policies and regulations that identify and block “restricted” transactions between account holders and online gambling operators. UIEGA ss. 5364. Restricted transactions include money transfers to unlawful online gambling operators, as well as transactions between lawful, licensed online operators and individuals who can’t legally gamble within their state or territory. The law is fairly ambiguous, potentially full of holes, and pretty quirky in its application. For instance, most state laws are silent or uncertain concerning online gambling—therefore it can’t always be determined whether online gambling is “unlawful” under state law. As stated before, the Wire Act only addresses betting and wagering on sporting events and competitions, so the types of gambling typically found online may still technically be “lawful” under Federal Law.

    It sounds a bit like I’m contradicting myself, but that’s actually more or less how the law is drafted. Keep in mind that gambling in the U.S. is always conditioned on licensure—almost any operator of a gambling enterprise (virtual or brick and mortar) requires a license from the state where it is based before it can accept bets and wagers.

    In short, you can’t feasibly operate an online gambling site in the U.S. until a state starts granting licenses to online operators. This hasn’t happened yet. Even then, according to the UIEGA, the site or game would probably have to be wholly intrastate, blocking interstate users.

    The Rest of the World

    Many countries have laws similar to the U.S.; that is, they have laws that ban or otherwise prohibit online gambling. Other nations and regions, such as the Isle of Man, license online gambling sites. Still others, such as the Caribbean, have laws so friendly that they are breeding grounds for offshore online operators. So what happens when an online operator that can legally operate within its territory caters or otherwise appeals to U.S. subscribers?

    In this way, the U.S. has managed to have an effect on international gambling. By forcing financial institutions to regulate online gambling transactions, the law resolves many of the jurisdictional issues we’ll discuss below. However, new methods have arose to work around those issues—a user can transfer money from their bank account or credit card into an offshore eWallet, which can then finance gambling. While the law has shut down plenty of operators who relied primarily on transactions through major financial institutions, other operators have implemented or rely on financial transfer methods that are entirely legal under the loopholes of the UIEGA.

    U.S. Jurisdiction and Enforcement of Judgments

    To be liable under U.S. law, a U.S. Court has to be able to exercise personal jurisdiction over the defendant operator. This can happen through the use of one of two analyses—the “effect” test establishes personal jurisdiction by asserting that the operator’s activity within the U.S. has a substantial effect within the U.S. The Zippo test examines the extent of the interactivity between U.S. users and the operator.

    In other words, getting personal jurisdiction isn’t terribly difficult. The problem is enforcing a judgment against the offshore or foreign operator.

    The U.S. can’t just go into a foreign country and seize property or individuals (at least in matters concerning the Judiciary). To enforce a judgment, the foreign country has to acknowledge the U.S. Court’s jurisdiction. Furthermore, it has to accept the ruling. Sometimes this happens through Comity—countries will acknowledge U.S. jurisdiction and judgments so that the same treatment will be extended to them by the U.S. Sometimes this happens through treaties. Sometimes this doesn’t happen at all. In those cases, unless the operator has property in the U.S., there is typically nothing the Court can do against that operator.

    There is very little that is certain in this area of the law—Courts and lawmakers must constantly balance the laws of those countries and states that permit or otherwise license gambling against the moral and social pitfalls that gambling allegedly creates. As a result, the legal landscape on this issue is constantly changing. As with any uncertain terrain, it is important to tread carefully and look ahead.

Comments (2)

  1. MCPokerace

    Interesting. My question about online gambling has always been about cheating and other “tort”-like offenses. Brick and mortar casinos have authority to prosecute civilly and criminally for cheating, fraud, etc. that happens in their casinos. Is there an online equivalent?

  2. MCPokerace

    Interesting. How does the law treat cheaters, etc.? Brick and mortar casinos have the authority to prosecute civilly and arrange for criminal prosecution against those who cheat and defraud casinos. Is there an online equivalent?

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