Yesterday, I read a news report picked up from my many sources that discussed the 33-count indictment of 27 individuals and three corporations charged with unlawfully operating a highly sophisticated international online gambling operation in Queens County, New York, that booked more than $3.3 billion in wagers on a variety of sporting events in the last two years.
The report said: "Today's case represents the first time Internet gambling charges have been brought against anyone in this country since President Bush signed into law last month the Unlawful Internet Gambling Enforcement Act."
I have received a number of e-mails asking for an interpretation of what's going on.
First, the news reports are misleading as the arrests have nothing to do with the new law that was passed. The new law only speaks to what a financial institution can and cannot do and what U.S. gaming companies can and cannot do.
The individuals arrested have been under investigation for over two years. The investigation began in July 2004 when NYPD officers assigned to the Queens Major Case Squad and the Queens Narcotics District developed information about an illegal sports-betting ring and began a joint investigation with the District Attorney's Organized Crime and Rackets Bureau.
The investigation included physical surveillance, intelligence information and court-authorized electronic eavesdropping. The scheme involved placing sports bets via a secure Internet site and toll-free 800 number. Bets were taken on all kinds of sports, including football, baseball, basketball, hockey, car racing, and golf.
The indictment charges that James W. Giordano was the "bookmaker" and boss of the enterprise who controlled and oversaw the entire operation. Although he is a successful poker player, the charges are not poker-related.
The indictment also charges Enterprise Corruption (a violation of New York State's Organized Crime Control Act), as well as money laundering, promoting gambling, possession of gambling records, conspiracy, and the running of gambling collection rooms in and outside the U.S. Another interesting twist is that a technology provider was also indicted. I will address more on that issue in an article to come.
There is a world of difference between sports-betting and poker. The primary reason is because the 1961 Wire Act prohibits certain sports-betting activity but there is no commensurate federal law that specifically prohibits poker.
Although hopeful prosecutors have cited the 1961 Interstate Wire Act (18 U.S.C. section 1084) as prohibiting online poker, the courts have interpreted the 1961 statute to apply only to sportsbetting.
Title 18 USCS section 1084 speaks to the transmission of wagering information. Congress enacted this section as part of a series of legislation supporting a federal policy against organized racketeering. Subsection (a) of section 1084 states in relevant part:
"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 wagers 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 pacing of bets or wagers, shall be fined under this title or imprisoned not more than two years, or both."
In the case of "In Re Mastercard International," the judge analyzed the Wire Act and concluded that it only prohibited wagering on SPORTS EVENTS.
"Comparing the face of the Wire Act and the history surrounding its enactment with the recently proposed legislation, it becomes more certain that the Wire Act's prohibition of gambling activities is restricted to the types of events enumerated in the statute, sporting events or contests."
There are other federal laws that make illegal certain acts done within the U.S. For example, although the U.S. has no jurisdiction outside of our borders, our government can make laws regarding U.S. activity. So, for example, Federal Code section 18 U.S.C.S. § 1955 (2003) prohibits certain gambling where such gambling is a violation of law in the state where it is operating.
Although online gambling sites are not within the U.S., case law holds that if a company had offices with pencils and pads or a phone line, or other substantial activity occurring within the borders of the U.S., the company could be seen as doing business in the U.S. This is true notwithstanding the fact that the Internet servers are outside the U.S.
So, for example, in the current arrests, even if the servers are outside of the U.S., but substantial business activity is conducted in the U.S., this brings the business within the our borders. A "1-800" line brings the business within our borders. Collecting money within the U.S. is sufficient. Thirty phone lines were tapped and there were tens of thousands of conversations in a two-year time period which I predict will likely prove that the sports-betting business was being conducted within the U.S.
Because the government believed there was illegal activity afoot, they procured search warrants which enabled them to tap 30 phone lines for two years. Now, I have been accused of being cynical, but if I lived in the U.S. and I was involved with an online site, as an advisor, an expert, a software company, a consultant, or if I allowed an offshore site to use my name for promotions, I would assume my phone was tapped.
