INTERNET GAMBLING LAW

Brief History of Gambling online.

Online gambling is increasing at a staggering rate, while the history of the industry is still as new as the Internet itself. The world’s first virtual online casino, Internet Casinos, Inc. (ICI) commenced operation on August 18, 1995 with 18 different casino games, online access to the National Indian Lottery, and plans to launch an Internet sports book. A second gambling site is also currently operating with an active sports book and plans to launch an online casino in the spring of 1996. The Interactive Gaming & Communications Corp. (SBET) is a publicly traded company listed on the NASDAQ Bulletin Board. The company accepts bettors’ sports wagers phoned in to Antigua on a toll free line via satellite. Some foreign governments have also entered the business holding their sites out to people worldwide. For instance, the government of Liechtenstein is operating an online international lottery in six different languages, including Chinese. Several other Internet companies have also announced plans to launch their own online casinos in the near future. In all, according to Rolling Good Times Online gambling magazine, there are 452 gambling-related sites on the net and more are up and running every day.

Most of these online gambling companies are located outside of the U.S. to avoid government prosecution. ICI operates out of the Turks and Caicos Islands and WagerNet is based in Belize. Site users can either send cash through one of the companies offering secure payment systems for the Internet or open an offshore account, a requirement for Americans to use ICI’s site. Bets can be as low as a nickel for certain slot machines and go into the thousands of dollars.

The economics of the industry are amazing. While it may cost up to $300 million to build a new resort casino, ICI’s virtual casino was developed for only $1.5 million and employs only seventeen (17) individuals as opposed to thousands for a traditional casino. ICI estimates that the company averages about a twenty four (24%) profit margin, versus the typical U.S. casino, which ranges between eight percent (8%) to sixteen (16%) of each dollar wagered. Interactive Gaming & Communications’ Sports International handled $48 million dollars in its first year of 800 telephone line operations and made a staggering profit.

In sum, an estimated twenty million people are currently on line with a projected 160 million online by the year 2020. ICI has received over 40,000 registrations for its service since its beginning and registers over 7,000,000 visits per month at its site. With over $500 billion spent on legal and illegal gambling in the U.S. alone in 1993, it’s estimated that over ninety percent (90%) of adults participate in some form of gambling. The overall market for online gambling is estimated to be approximately $49 billion worldwide.

State Laws.

Contrary to the understanding of many online gamblers, the majority of U.S. states have made it illegal to operate any type of gambling businesses outside of that actually sponsored by the state including certain legalized operations such as lotteries, horse racing, or riverboat gaming, that vary state- by-state. For example, Tennessee law states that “a person commits an offense who knowingly engages in gambling.” Gambling is defined as “risking anything of value for a profit whose return is to any degree contingent on chance,” not including a lawful business transaction. The phrase “for a profit” emphasizes that only gambling conducted as a business will be prosecuted in Tennessee.

Many of the state statutes are quite comprehensive. For instance, Massachusetts provides for the following:

Whoever knowingly organizes, supervises, manages or finances at least four persons so that such persons may provide facilities or services or assist in the provision of facilities or services for the conduct of illegal lotteries, or for the illegal registration of bets or the illegal buying or selling of pools upon the result of a trial or contest of skill, speed or endurance of man, beast, bird or machine, or upon the happening of any event, or upon the result of a game, competition, political nomination, appointment or election, or whoever knowingly receives from at least four such persons compensation or payment in any form as a return from such lotteries, such registration or such buying or selling shall be punished by imprisonment in the state prison for not more than fifteen years or by a fine of not more than ten thousand dollars, or by both such fine and imprisonment.

More recently, many businesses have become the subject of litigation by states. On July 18, 1995, the first state action was filed against an Internet gambling operator for its promotion of a gambling operation. Minnesota attorney general, Hubert H. Humphrey, III, filed an action against Granite Gate Resorts, Inc. of Nevada and its president, Kerry Rogers, operators of WagerNet alleging that WagerNet’s representation that its service was legal constituted a deceptive trade practice, false advertising, and consumer fraud under Minnesota law. The state sought an injunction, a declaratory judgment, and damages. A memo published by the attorney general’s office sets out the jurisdictional basis for prosecuting WagerNet and other entities like it. Minnesota’s general criminal jurisdiction statute, section 609.025, provides that a person may be convicted and sentenced if the person “being without the state, intentionally causes a result within the state prohibited by the criminal laws of this state.” This has been interpreted by the court to find that an Indian tribe who placed a political advertisement in a newspaper circulated in the state had to register under state ethical practices laws, because “what they did caused something to occur beyond the reservation boundaries, namely, the dissemination of a political message, which is the activity sought to be regulated.” The memo concludes from this that “individuals and organizations outside of Minnesota who disseminate information in Minnesota via the Internet and thereby cause a result to occur in Minnesota are subject to state criminal and civil laws.” As a result, many businesses may be prosecuted by a state under a similar theory even though the company may not be located in that state.

Once again, the laws vary on a state-by-state basis and can be quite complicated. Consulting an attorney prior to the operation of any gambling oriented site is highly recommended.

Federal Law.

There is also federal legislation governing gambling sites. In particular, Federal law prohibits those in the business of betting or wagering from “knowingly us[ing] a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers, or information assisting in the placing of bets or wagers, on any sporting event or contest.” Violation of the statute provides a penalty of a fine or imprisonment for up to two years and potential asset seizure under racketeering statutes. In addition, the common carrier transmitting the signals can be ordered by the government to refuse further services to the operator. As such, some companies set up an 800-number via satellite rather than wire-line transmission to avoid the auspices of the statute.

Interstate transmission of bets or gambling information can qualify as legal only if both the state of origination and the state in which the bet is placed allow such wagering. As such, an Antigua company’s taking of bets via telephone from a resident in Massachusetts is considered a criminal act under federal law, despite the fact that it is legal to take bets in Antigua. Only the party, however, “in the business of wagering or betting” (e.g. the virtual casino, not the user) can be convicted under the statute. WagerNet’s registration agreement therefore requires the user to warrant that he is using WagerNet “for [his] own personal use and [is] not ‘engaged in the business of betting or wagering'” in an effort to avoid violating U.S. Federal law. Legislation has been introduced to prosecute those who use online gambling sites, punishable by up to $5,000 in fines or a year in jail or both. Currently, however, only the virtual casino can be prosecuted and not the site user.

The legal issues involved are typically very complicated and require counsel with a specialization in Internet and gaming law.