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An Analysis of the UIGEA: Legal and Practical Repercussions

A legal and practical analysis of the successes and failures of the UIGEA from its inception to its current application.

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Introduction

Surprise spread quickly over the online gaming industry when the Unlawful Internet Gambling Enforcement Act (UIGEA) was passed by Congress in 2006. Several publicly listed members of the gaming industry took it so seriously that they ceased taking bets from American players before even having read the Statute.

This article will evaluate the significance and impact of the Act on the gaming industry by discussing its historical background and legal consequences.

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History of the UIGEA

Congress had been attempting to pass anti-online gaming legislation since 1998. All of these efforts, however, had failed due the immense hurdles entrenched in the law making process. Each year the bill would be held up in committees by lobbyists from various interest groups wanting their piece of the pie. As a result, every legislative session Congress would run out of time before the Bill could be passed.

In 2006, however, while a Republican controlled Congress was fighting to separate itself from the corruption and scandal stemming from connections with online gaming lobbyist Jack Abramhoff, the party created an "American Values Agenda" which included prohibitions on online gaming.

Representatives Bob Goodlatte (R-VA) and Jim Leach (R-IA) lead the movement. Goodlatte said that online gambling was taking billions out of the American economy and Latte linked online gaming with threats such as identity theft, fraud, national security, and money laundering.

Polls showed, however, that the majority of citizens believed that online gaming was a personal choice and even with all of the pandering to the conservative right, the Republicans could not avoid the pending defeat in November 2006 with both Houses going to the Democrats. The Republicans did not quietly though, slipping the UIGEA through as an attachment to a Homeland Security bill just before the power shift.

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Passage of the UIGEA

In 2006, the political environment favored passing anti-gambling legislation. The scandal-ridden Jack Abramhoff had opposed anti-gambling efforts numerous times in the past and both Houses of Congress wanted to distance themselves from his past affairs. Thus, in 2006 Congress was able to pass Internet gambling legislation but nowhere near as broad or challenging as expected.

In the summer of 2006, two separate bills were introduced by the House of Representatives. The Leach Bill aimed at stopping certain electronic financial transactions (ETFs) surrounding online gambling while encouraging the cooperation of foreign governments. The Goodlatte Bill was similar to the Leach Bill but also intended to expand the scope of the Wire Act to encompass online casinos and poker rooms through a change in the definition of "the business of betting and wagering."

Due to controversies over the Goodlatte Bill, the House eventually comprised on a joint bill, which included aspects of both.

The House passed the Leach/Goodlatte Bill in July 2006 and the legislation was sent to the senate for consideration. While most analysts predicted that the Senate would run out of time before the Bill was passed, Senate Majority Leader Bill Frist (R-TN) was able to tack it onto the SAFE Port Act in the final hour. In order to achieve this without resistance or alarm, however, the controversial provision of expanding the Wire Act had to be removed. Because the Bill was now attached to nearly unstoppable Homeland Security legislation and the Wire Act provisions had been removed, the Bill's passage became inevitable.

Thus, even though the UIGEA is a reality, with the Wire Act provisions removed, there has really been no substantive change in the legal consequences than what previously existed under state and federal law prior to its passage. What it is did create is language leads to perplexities and conflicts.

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UIGEA Analysis

Language

§5363 - Prohibition on Acceptance of Any Financial Instrument for Unlawful Internet Gambling

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].

Prior to the UIGEA, entities or persons that assisted or facilitated online gambling transaction could only be charged with aiding and abetting (substantially assisting an individual in the commission of a criminal offense makes you equally liable as the individual committing the offense) or conspiracy (knowingly and voluntarily participating in an agreement to violate the law).

  • With the passage of the UIGEA law enforcement officers no longer need to rely on distorting the existing laws to punish those participating in online gambling transactions (aiding and abetting requires no knowledge and conspiracy requires no crime)

Bet or Wager

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.

Also included in this definition is a lottery prize awarded by chance, known as a "scheme" under United States Code

28 USC §3702 Scheme

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.

This is where the problem in the original language of the statute arises. The "business of betting or wagering is not defined anywhere in the UIGEA. This is how it reads,

§532(2) Business of Betting or Wagering

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.

While the Act tells what the "business of betting or wagering" is not, it avoids defining what it is. It is likely that the term was defined in the provision that expanded the Wire Act, which has been subsequently excluded.

  • The result is that by defining what the "business of betting or wagering is not" the Act as created a considerable amount of vagueness surrounding whether it applies to industry it was supposed to be directed at - "financial service providers."

Elements of a Violation of the UIGEA

To establish that an individual or entity is in violation of the UIGEA, it must be proven that,

(1) A "person" was engaged in the business of betting or wagering;
(2) That person knowingly accepted a financial instrument or proceeds thereof; AND
(3) That instrument was accepted (by the person) in connection with the participation
of another person in "unlawful Internet gambling."

  • Thus, when a person (individual or company) that is actively involved in the "business of betting or wagering" (as defined by §5362(1) and §532(2)) accepts a financial instrument that they know stems from that business AND it is from another person who is engaged in unlawful Internet gambling, then the UIGEA has been violated.
  • The problem thus becomes, what constitutes "unlawful Internet gambling?"

Unlawful Internet Gambling

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.

Thus, the UIGEA is simply a focused enforcement of the current Internet gambling laws in existence within specific jurisdictions.

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Applicable State and Federal Laws

Federal Laws

The applicable federal law criminalizing online gaming is the Wire Wager Act (Wire Act). Although the Wire Act has been used successfully against sports betting businesses, the United States Fifth Circuit Court of Appeal has read the Wire narrowly so that it does not apply to any type of gambling but sports betting.

While some other federal laws such as the Organized Crime Control Act, the Travel Act, and the Wagering Paraphernalia Act have been recognized by state courts as applying to Internet gambling, federal courts have only recognized the Wire Act thus far. In addition, federal statutes on the matter have only addressed sports betting, numbers, bolita, wagering pools, and like games.

State Laws

A large problem arises when evaluating the UIGEA under state law because each of the 50 states may have different legislation on Internet gambling. If we were to provide an analysis of the UIGEA under state law, we would need to evaluate each State's online gambling legislation, judicial interpretation, and keep a constant watch on amendments, repeals, and new legislation on the issue.

Because the act of wagering online is not expressly barred at the federal level, the UIGEA, when read narrowly, might only apply to state online gambling laws.
Aside from the insurmountable problem of analyzing the UIGEA under state specific law, a major Constitutional issue has been created. When state laws seek to regulate interstate, national, or international commerce, that law may be unconstitutional under the "dormant" Commerce Clause of the United States Constitution.

Underlying this Clause is the need for consistent and efficient transactions over state borders. Almost all state Internet regulations have been struck down under the "dormant" Commerce Clause. Although the courts have yet to deal with this issue surrounding online gambling, an extension of the Clause is likely.

Therefore, if the courts should find state laws on Internet gambling unconstitutional, the UIGEA would only be applicable under federal law where online gambling is not specifically illegal.

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Website Blocking Provisions

Under the provisions surrounding Internet Computer Services (ICS's), the Attorney General of the United States has nearly unlimited power to remove websites he or she believes are violating the UIGEA.

Although the ICS has the right of advance notice and opportunity to appear, it is ambiguous on where exactly they can "appear" and there is no mention in the Act of the procedural safeguards afforded to the website operator, who's company is about to be extinguished without the Due Process guaranteed by law.

If this were not bad enough, under the UIGEA, the US government is allowed to violate Free Speech rights through mandatory censorship. The US government can make ICS's shutdown a website without notice to the owner, thus denying their right to object.

The potential for abuse of authority under the UIGEA is overwhelming. The Attorney General can shut down a website for reason he or she desires, even on a whim.

Given that the Internet has been called "the most participatory form of mass speech yet developed" by the Supreme Court of United States, it appears that Congress has decided to ignore Free Speech rights by denying notice and right to be heard, even as the Court has afforded it so much protection.

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Foreign Jurisdictions

Because online gambling operates outside the jurisdiction of the United States, and companies frequently obtain offshore licenses, it will be difficult for the US government to enforce the UIGEA against international entities.

For this reason, the UIGEA devotes a section to this matter,

Internet Gambling in or Through Foreign Jurisdictions

  • Rather than creating new regulations, this section focuses on attempts pigeonholing online gambling into already existing international crimes such as money laundering, corruption, etc.
  • Advance policies which promote cooperation with foreign governments
  • Information exchanges aimed at enforcing the UIGEA
  • Annual report by the Secretary of the Treasury of a detailed summary of the communications between the US and other countries about online gambling

Although these policies are an excellent expression of the aspiration of the US government, the reality of their success is unlikely in all but the most serious of cases. In most circumstances, cooperation should only be expected when an actual violation of law occurs.

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Conclusion

Although the UIGEA effectively has failed at banning Internet gambling, its success and impact will be measured by certain future considerations. The ease of financial service providers in identifying and blocking restricted financial transactions under the UIGEA regulations, the reaction of service providers such as banks and NetTeller to regulations stemming from the Federal Reserve, as well as the their ability to voluntarily cooperate with such regulations will all play a part.

From a substantive legal perspective, the UIGEA is somewhat meaningless. It simply codifies prohibitions into a crime specific regulation that could have been pursued by creative uses of already existing laws. In addition, all of the new material is unenforceable for jurisdictional, constitutional, or simply inconceivable as a practical matter.

Ultimately, its real world effect is to increase the risk of operators in the industry, open up doors for small-scale entrepreneurs as the larger ones get out of the spotlight, and make the aspirations and intentions of the United States government known. The one thing it has not done is ban online gambling.

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