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A Comprehensive Analysis of the Internet Gambling Prohibition Act

by Allyn Shulman |  Published: May 02, 2006


A Comprehensive Analysis of the Internet Gambling Prohibition Act

Since 1995, when the first online gambling site opened its virtual doors, legislators have unsuccessfully introduced a myriad of bills in an attempt to curb the rapidly growing Internet gaming industry.

Even though online gambling revenues have reached more than $12 billion annually, congressmen such as Rep. Bob Goodlatte (R-Va.) are still attempting to ban it rather than regulate it.

Rest assured, poker players, the proposed legislation does not make it illegal for the gambler to play online poker; instead, the legislation attempts to craft innumerable unenforceable and awkward rules for online sites, financial institutions, Internet service providers, and the federal government itself.

Nevertheless, every person and entity involved in online gaming should support every effort to defeat any form of anti-gaming legislation.

H.R. 4777
Fraught With Problems

Recently, U.S. Reps. Goodlatte (R-Va.) and Rick Boucher (D-Va.) reintroduced legislation titled the "Internet Gambling Prohibition Act" (H.R. 4777). The congressmen previously introduced similar legislation in both the 106th Congress and 107th Congress, only to have their legislation defeated, partially by the efforts of the now infamous Jack Abramoff and his lobbying efforts. This has interesting political ramifications that will be discussed later.

In 16 pages of complicated legal meandering, the Internet Gambling Prohibition Act attempts to correct errors of previously proposed legislation. For example, in previous years, legislation was sought that would require banks and financial institutions to know where their customers' money was going. The framers were highly criticized because this would cripple financial institutions by requiring them to "police" their clientele. The task would be daunting and unfathomable.

The current bill is drafted in a way that prohibits the gambling site from accepting payment from a financial institution. This is, of course, a rule with no teeth, because the gambling sites are all offshore and beyond the jurisdiction of the United States. In other words, the United States has no power to make laws affecting companies legally doing business offshore.

As a matter of fact, Rep. Goodlatte recently appeared on CNBC, where he conceded that because gambling companies themselves are offshore, they aren't subject to U.S. laws and regulations. The language of the proposed bill only prohibits an online gambling company, based within the borders of the United States, from accepting money from a bank or financial institution.

In essence, Goodlatte's bill won't stop Internet gaming; it will just ensure that gaming companies are offshore. Similarly, it won't stop funding to the sites; rather, it will create additional opportunities for offshore funding.

Our lawmakers are just not paying attention to the poker industry. And even if they paid attention, before a new law is enacted, the online gaming industry will have already created a way around it. It is a matter of the simple principle that for every action, there is an equal and opposite reaction.

Years ago, the government began attacking credit card companies and online payment services like PayPal, threatening them with Patriot Act charges for doing business with gaming sites. The online gambling industry, which was raking in billions of dollars, was not going to be affected by these tactics. Immediately, offshore third-party vendors such as NETeller became firmly rooted in place to facilitate transactions between gamblers and gaming sites. In other words, making a law affecting U.S. financial institutions is a completely ineffectual way to affect the explosion of the $12 billion Internet gaming industry.

A Comprehensive Analysis of the Internet Gambling Prohibition ActAnalyzing a Statute
Let's remember that the drafters of bills and statutes are almost never wordsmiths. The bills often don't even say what the drafters meant to say. Therefore, many attorneys make their life's work analyzing the legally proper meaning of the words of a statute. This has been my field of expertise for many years.

Last year I was asked to testify before the North Dakota Senate, answering the question of what position the federal government might take if North Dakota passed a law allowing an online poker site to be housed there. Sen. Jim Kasper had introduced a bill to house an online site in order to regulate it and collect revenue.

North Dakota legislators wanted to know whether they were going to be sued by the federal government because the feds had previously been taking the position that the 1961 Wire Act forbade online poker. The government tried bullying broadcasting organizations by asserting that online gaming and the advertising thereof may violate the 1961 Wire Act.

I testified before the Senate that I would rest my reputation upon the fact that the Wire Act did not prohibit online poker. My proof was to be found in the words of the statute (which spoke only to sports betting), the legislative intent (which spoke to mob activity), federal case law (which applied the Act to wired communications), and attempts of our current legislators to pass laws banning online gaming. If it were already banned, there would be no need for such a law.

Recently, Rep. Goodlatte finally conceded what I have been saying, predicting, and writing about for years. In his website, he states:

"Under current federal law, it is unclear whether using the Internet to operate a gambling business is illegal. The closest useful statute currently is the Wire Act, which prohibits gambling over telephone wires. The Wire Act, which was written well before the invention of the World Wide Web, has become outdated. My legislation amends the Wire Act to make it clear that the prohibitions include Internet gambling and the use of other new technologies."

For 10 years, the federal government and anti-gaming proponents have taken the firm stance that the 1961 Wire Act bans online poker. After 10 years of asserting this position, but filing no lawsuits to test their supposition, those on Capitol Hill finally concede that the Wire Act does not speak to online gambling.

Rep. Goodlatte thinks his new bill cures past legal problems, but as we shall see, it cures certain problems while simultaneously creating new ones. What the bill says and what it accomplishes is quite different from what Goodlatte represents it says.

For the last 10 years, I have read sloppy news reports claiming that pending legislation will ban online gaming. This is a severe and careless overstatement. There has never been legislation that would ban online gaming. Bills have been introduced that affect the transfer of moneys from U.S. financial institutions to online gaming sites, but this is quite different than banning online gaming. The proper language always should have been that legislation has been introduced in an attempt to curb the rapidly growing online gaming industry. The current bill attempts to ban certain forms of online gaming while sanctioning others.

Although Goodlatte claims that the current bill prohibits all gambling on the Internet, it does no such thing. While this bill is admittedly more ambitious than past attempts, it is fraught with built-in, foreseeable problems and contradictions.

What H.R. 4777 Says and Does
For those of you who are technically minded, the 16-page Internet Gambling Prohibition Act amends Sections 1081 and 1084 of title 18, United States Code.

Since that is mumbo jumbo to most of us, I have taken the liberty of breaking down the proposed code into bite-sized categories: (1) Application of the Wire Act, (2) Financial Institutions, (3) ISPs, (4) Exclusions, (5) States Rights, (6) News and Media, (7) Penalties, and (8) Financing the Act.

It should be mentioned that when a bill is pending, it often goes through many stages of amendments. This paper analyzes the original version of the bill as it currently reads in April of 2006.

1. Application of The Wire Act
I am going to begin by explaining how the Wire Act has been amended, and then explain the ramifications thereof.

The Amendment

In the simplest of terms, where the Wire Act used to prohibit gambling businesses from accepting sports-betting wagers over the telephone, the amended version prohibits gambling businesses from accepting online bets where a person risks something of value "upon the outcome of a contest of others, a sporting event, or a game predominantly subject to chance."

Note that both the Wire Act and its proposed amendment speak only to one engaged in the business of gambling and not the individual bettor.

Clearly, Rep. Goodlatte is successful in his effort to have the Wire Act include behavior that occurs on the Internet. No doubt about it. On the other hand, he has stated many times and places that the amended Wire Act prohibits online gambling: "I have long been an advocate of prohibiting gambling on the Internet, which is why I have introduced legislation to do just that." Not so. That is an inexact overstatement.

Predominantly Subject to Chance

When authoring a statute, the framers are held to know and understand common legal terms. There are many words and phrases that have a specific legal meaning. Goodlatte's bill specifically prohibits games predominantly subject to chance. What does this mean? The common notion of this phrase distinguishes between games of chance (for example, lotteries, roulette, keno, and so on) and games of skill (for example, chess). The test is not whether the game contains an element of chance or an element of skill, but which of them is the dominating factor in determining the result of the game.

One California court explained it this way: "A game is not to be regarded as one of skill merely because that element enters into the result in some degree, or as one of chance solely because chance is a factor in producing the result. The test of the character of a game or scheme as one of chance or skill is, which of these factors is dominant in determining the result." (People v. Settles 29 CA2d Supp 781(1938))

Some jurisdictions consider poker to be predominantly a game of skill and other jurisdictions do not. The point is that even if this bill is approved as is, which is highly unlikely, there will be a storm of litigation in order to persuade the courts that poker is predominantly a game of skill. The floodgates will be opened and there will be years of litigation on this point alone.

My testimony to the North Dakota Senate includes a section about why poker is a game of skill. This can be found at for a more in-depth analysis.

Consider this: If poker was deemed to be a game of chance, a professional poker player would not be permitted to write off losses. No one writes off losses for lottery tickets, bingo, slot machines, craps, baccarat, roulette, or keno, as they all constitute games of chance. However, the U.S. Supreme Court has already held that playing poker is to be considered a profession, which implies a level of skill.

In the United States Supreme Court decision of Commissioner of IRS v. Groetzinger, 480 U.S. 23; 107 S. Ct. 980; 94 L. Ed. 2d 25 (1987), the high court held that most states permit some form of gambling, and that if one gambled for a living, that ought to be considered a profession:

"Today … the vast majority of States permit some form of public gambling … If a taxpayer … devotes his full-time activity to gambling, and it is his intended livelihood source, it would seem that basic concepts of fairness (if there be much of that in the income tax law) demand that his activity be regarded as a trade or business just as any other readily accepted activity, such as being a retail store proprietor or, to come closer categorically, as being a casino operator or as being an active trader on the exchanges." (id. at 986)

In other words, a professional gambler pays taxes on his income and writes off losses and business expenses, just like any other profession. If poker was deemed to be just a game of chance, one can readily see that there would be far-reaching ramifications in other areas of the law.

Potential Problem

Although Rep. Goodlatte was successful in amending the Wire Act to include the Internet, the prohibited behavior is directed at the online gambling businesses, and as we all know, those businesses are outside the jurisdiction of the United States and are not subject to our laws. Here's where I foresee a potential problem.

A troublesome statute that is not at issue in the proposed legislation is 18 USCS § 1955. Federal Code section 18 USCS § 1955 prohibits illegal gambling where such gambling is a violation of law in the state where it is operating. The code section essentially says that anyone involved in the gambling business shall be imprisoned in state prison for no more than five years and have all of his assets confiscated.

Here's the potential problem: Case law clearly interprets this statute to include people who perform any act, function, or duty necessary to or helpful in the ordinary operation of the gambling business. It includes giving advice, being helpful, having a desk with pens and pencils, and making decisions about the business.

If this bill passed, the government would be frustrated that the online sites are outside of its reach. The next best thing would be to make an example of high-profile people living in the United States and "helping" a site by way of an 800 line, making decisions for the site or otherwise working for the gambling company. Of course, the federal government would have some hurdles in order to prove such a violation, but I believe that people so situated may be at risk. My suggestion is that those in this predicament seek counsel in order to make intelligent decisions about their personal future conduct within the United States.

A Comprehensive Analysis of the Internet Gambling Prohibition Act2. Financial Institutions

The bill prohibits a gambling business from accepting certain forms of non-cash payments, including credit cards and electronic transfers, for the transmission of bets and wagers in violation of the Act.

The way I see it, this is the least of the threats, because as I explained above, (1) the gambling businesses are offshore and beyond U.S. jurisdiction, and (2) most banks and credit card companies already refuse to send money to offshore sites. Therefore, there are already offshore third-party companies in place that are more than happy to handle our financial transactions.

Government cannot stop its citizens from sending money out of the country for legitimate purposes. For example, if I want to buy a widget offshore, the Constitution protects my right to do so. As long as there is a third party, not involved in gaming, I am permitted to place my money in that receptacle from a U.S. financial institution and then spend it. Once my money goes to NETeller, I can buy a watch, pay for a trip, or even place that money in a gaming site. Because there are legally allowable things that can be done after sending the money to NETeller, the government cannot tell my bank not to send my money there. Our Constitution protects one's personal right to send money from a U.S. bank or financial institution to a business outside of the United States.

The company I mentioned is the popular NETeller. Others will soon appear on the horizon. NETeller happens to be a publicly traded company on the London AIM Exchange with a user base of more than 2.3 million customers. More than 1,700 online merchants accept payments through the NETeller system, and most of those companies are not gaming sites. With corporate headquarters in the Isle of Man, the company processes billions of dollars yearly. Companies like NETeller are not going to pack up and disappear. This legislation merely encourages more of the same.

3. ISPs

The bill puts a burden on Internet service providers and other technology providers to block access to online gambling sites when requested to do so by a law enforcement agency. Here's my easy-to-read, edited version of what the bill says. I have taken the liberty of taking out nonessential words to make it more comprehensible:

"When any common carrier … is notified in writing by a Federal, State, tribal or local law enforcement agency … that any communication facility furnished by it is being used or will be used by its subscriber for the purpose of transmitting or receiving gambling information, … it shall discontinue or refuse the leasing, furnishing, or maintaining of such facility, after reasonable notice to the subscriber, but no damages, penalty or forfeiture, civil or criminal, shall be found against any common carrier for any act done in compliance with any notice received from a law enforcement agency."

Another section explains the responsibility of the ISP: "Relief granted … against an interactive computer service … shall … be limited to the removal of, or disabling of access to, an online site violating this section or a hyperlink to an online site violating this section that resides on a computer server that such service controls or operates."

In other words, this section would allow the government to tell an ISP to block a site, disable a hyperlink, or discontinue service. Computer gurus have advised me that in a practical sense, this would be a nightmare for everyone involved.

There are thousands of gaming websites. How would the government get a handle on this and distinguish the legal ones from the nonlegal ones? There are also thousands of ISPs, although the number of main ones is fewer. Asking an ISP to monitor its customers puts an excessive burden on the ISPs. Who would pay for all of this?

One computer expert explained it this way: The government and all citizens are concerned with spam, but even with joint governmental and private efforts, we have not been able to stop spam. This is because the spammers actually make money by spamming. With regard to online gaming, it is a $12 billion industry that not all Americans agree as to whether or not it should be legal. There is no consensus and no practical way to put the horse back into the barn.

Let's take the worst possible situation and imagine that your ISP blocked a company like The owners of PartyPoker didn't build that company to its overwhelming success without some great thinking at the top. If the site were blocked, PartyPoker would just have to use its resources to find a way around that. For example, an international call-in number might be used to circumvent the use of a local ISP. Perhaps the gaming site would subsidize the cost. Or, the poker sites might have to have a thousand addresses. The federal government is just not smart enough, nor are there resources enough, to accomplish this daunting goal.

Furthermore, it is shameful to expend federal resources to stop some forms of gambling while putting a stamp of approval on others. I would love to see an article from a computer guru explaining all of the Internet pitfalls and possible solutions if this legislation were to pass.

Above, we discussed the practical side of the issue. There is also the legal side. The Fifth and 14th Amendments to the United States Constitution provide that no person may be deprived of life, liberty, or property without due process of law. Every state Constitution has a similar due-process clause. Due process means substantive and procedural fairness. That means that you not only have to be treated fairly (substantive due process), but that the process by which you are judged must be fair, as well (procedural due process).

"Due process is an elusive concept. Its exact boundaries are undefinable, and its content varies according to specific factual contexts … Whether the Constitution requires that a particular right obtain in a specific proceeding depends upon a complexity of factors. The nature of the alleged right involved, the nature of the proceeding, and the possible burden on that proceeding, are all considerations which must be taken into account." (Hannah v. Larche, 363 U.S. 420, 442 (1960); In Re Tucker, 5 Cal.3d 171, 179 (1971)). Whether a prosecution is state or federal, the concern of due process is with the fair administration of justice. (Mayberry v. Madison 400 U.S. 462, 465 (1971))

The entire foundation of our free society is based upon this time-honored concept of due process. Due process basically means that the government guarantees that it will treat its citizens fairly. That means that the government cannot tell ISPs to block service without notice, an opportunity to be heard, and the right to be treated fairly. The lawsuits and hearings that would result from this proposed legislation defy imagination.

4. Exclusions
This section should have been titled "The sheer hypocrisy of it all." In one breath, Rep. Goodlatte says that gambling destroys the moral fiber of our society. In the next breath, his bill contains carve-outs for such things as lotteries, horse racing, and the stock market.

It is offensive to hear a legislator preach about morality and then condone things like lotteries, which have long been held to be the most insidious form of gambling. The reason a lottery has traditionally been looked down upon is that it is a scheme based entirely upon chance. Juxtapose that to the game of poker; everyone agrees that poker has at least some elements of skill.

Also excluded from the strong arm of the bill are business transactions under the securities laws, transactions pursuant to the Commodities Exchange, over-the-counter derivative instruments, contracts of indemnity or guarantee, contracts for life, health, or accident insurance, certain reward programs or contests conducted by businesses and some fantasy sports leagues.

5. States Rights

The 10th Amendment to the U.S. Constitution preserves state rights: "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people."

This means that laws relating to the health and welfare of its citizens usually fall within the purview of state law. Almost every state has some form of legal gambling, be it a casino, lottery, video, lottery terminal, horse wagering, bingo, or some other form of gambling. Traditionally, the federal government has stayed out of the gambling arena and left its regulation to the states.

This bill would allow states such as North Dakota to house a poker site for citizens of North Dakota alone. The bill leaves the regulation of wholly intrastate betting or wagering to the states, with fixed controls to be sure that it does not extend beyond their borders or to minors. For this provision to be applicable, the bettor, the gambling business, and any facility processing the bets or wagers must be physically located in the same state, and the state must explicitly permit such bets or wagers and explicitly authorize and license the gambling business.

6. News and Media
Clearly excluded from the bill are news reports, information about how to make a legal bet, and advertising in a jurisdiction where such betting is legal. Since the Internet goes everywhere, the terms of this section of the bill scream out lawsuit. The relevant sections say that the following is excluded from the reach of the bill:

"Any posting or reporting of any educational information on how to make a legal bet or wager or the nature of betting or wagering, as long as such posting or reporting does not solicit or provide information for the purpose of facilitating or enabling the placing or receipt of bets or wagers in a jurisdiction where such betting is illegal."

Also protected is: "Advertising relating to betting or wagering in a jurisdiction where such betting or wagering is legal, as long as such advertising does not solicit or provide information for the purpose of facilitating or enabling the placing or receipt of bets or wagers in a jurisdiction where such betting is illegal."

The U.S. Supreme Court has long held that "commercial speech" (that is, advertising) is protected under the First Amendment as long as it concerns a lawful activity and is not misleading. (Central Hudson Gas v. Public Service Commission, 447 U.S. 557, 100 S.Ct. 2343, 65 L.Ed.2d 341 (1980)). Since online poker rooms offer free poker, they are offering something legal in every jurisdiction. This raises an interesting legal dilemma for the government, and we can't know the outcome until such time as legislation passes and these ideas are tested in a court of law. At the very least, dot-nets would always be legal to advertise because they offer free poker. This was the solution utilized by ESPN, the Travel Channel, and other national broadcasts, not wanting to risk governmental intervention.

7. Penalties

The bill increases the maximum prison term for a violation of the Wire Act from two years to five years. As discussed earlier, gaming sites are offshore and not within U.S. jurisdiction. However, certain individuals operating the business within the boundaries of the United States may be at risk.

8. Financing the Act
The implications of this section of the bill are hilarious. Online gaming is a $12 billion industry with private businesses employing the best of the best to increase revenues. The industry is growing beyond anyone's wildest dreams. Sites employ teams of people to analyze the market and offer more for less. In the framers infinite wisdom, the bill has earmarked a paltry $10 million for investigation and prosecution of this Act; $10 million versus $12 billion. The conclusion is obvious. On the other hand, spending $10 million to prevent a private act by a consenting adult is a shameless, unabashed waste of taxpayers' money.

The Abramoff Debacle

The debate over this bill is politically infused with the criminal behavior of the now infamous lobbyist Jack Abramoff, who lobbied against previous versions of this bill. The long and the short of it is that Abramoff had a client, eLottery Inc., that wanted to sell state lottery tickets online. If the bill passed, the company would be out of business. Abramoff used bribes, fraud, and hundreds of thousands of dollars to assist in the bill's defeat. At one point, eLottery's backers even circulated a forged letter of support from Florida Gov. Jeb Bush®. By the time things were sorted out, the bill failed.

Now, Goodlatte is using the Abramoff debacle as leverage to get this bill passed. Prior to introducing this bill, he sent a number of letters to his colleagues stating that the bill failed in the 106th Congress and 107th Congress primarily because of Abramoff. The letters essentially urge congressmen to separate themselves from the criminal acts of Abramoff by signing on to the bill.

Goodlatte has said publicly that passing his bill would send an important message to the American people about lobbying and corruption in Congress. This is disingenuous and intellectually dishonest, because any proposed legislation should rise or fall on its own merits and not be clouded by an agenda that has nothing to do with the bill itself.

The World Trade Organization Ruling
In 2005, the World Trade Organization ruled that the United States had until April 3, 2006, to bring its laws into compliance with its decision, which ruled in favor of a complaint filed by the Caribbean nation Antigua and Barbuda. The complaint claimed that aggressive efforts by the United States unfairly discriminated against offshore online gambling companies.

When The Wall Street Journal reported the WTO decision, it noted that it could have wide-ranging implications for offshore Web gambling.

The reintroduction of this bill has fueled renewed protests from the Caribbean nation, which says it goes against the WTO decision. Mark Mendel, lead counsel representing Antigua in the WTO case, has publicly stated that the exceptions and exclusions in the recent gaming bills highlight the discriminatory trade effect of the United States prohibition on the cross-border provision of gambling and betting services into the United States.

"By creating carve-outs for certain domestic remote gambling opportunities, … (the) legislation flies directly in the face of the WTO ruling. The economic basis of the U.S. restrictions simply cannot be more obvious."

Antigua and Barbuda will use WTO procedures to try to force U.S. compliance with this historic decision while we sit this one out and watch from the sidelines.

A Voice of Reason

I am a longtime supporter of the excellent work and reasoning of Congressman John Conyers. While Goodlatte is attempting to ban online gaming, others want to receive the benefits of taxation and regulation. The well-respected Conyers, first elected in 1964, says that trying to prohibit online gambling is "ill-conceived":

"You might remember a failed experiment the U.S. government tried in the 1920s called Prohibition. Today, Congress is rushing to pass a similar ill-conceived prohibition of Internet gambling. Gaming prohibitionists believe they can stop the millions of Americans who gamble online by prohibiting the use of credit cards to gamble on the Internet. Just as outlawing alcohol did not work in the 1920s, current attempts to prohibit online gaming will not work, either.

"Instead of a prohibition that will drive gambling underground, into the hands of unscrupulous merchants, Congress should examine the feasibility of strictly licensing and regulating the online gaming industry. State regulation will ensure that gaming companies play fair and drive out dishonest operators. It also provides potential tax revenue for financially strapped states."

When I testified before the North Dakota Senate, representatives of online sites promised North Dakotans that if online gaming were permitted in the United States, they would bring their companies here and would welcome the regulation and taxation. Numbers and statistics were flying around the room while senators listened wide-eyed at the revenue that could be made in the United States by taxation.

Rep. Goodlatte says that online gambling sucks billion of dollars per year out of the U.S. economy. Why not regulate and benefit from the taxation instead of generously making offshore governments rich? Why not stop trying to legislate morality and, instead, keep all of that money in the United States, where it belongs?

Let's Take Action

Well, folks, we can buy a lottery ticket; we can gamble in the stock market; we can gamble in a casino; but Goodlatte says gambling is such an evil, he is endeavoring to legislate away our ability to play online – unless, of course, it is state-sanctioned.

Every time our government threatens to chip away at our rights by legislative enactment, it is crucial that we make our voices loudly heard in chorus. Remember, the House members have only a two-year term, and they all want to be re-elected. Since the Abramoff debacle, many legislators are a bit skittish about bills like this one. It is crucial that we come together as an industry and tell our congressmen that we strongly oppose this legislation. Therefore, I am asking each of you to go to and send a letter to your congressmen opposing this legislation.

Here's to protecting the time-worn rights guaranteed by a free society! spade