Some Bets Are Off

The strangely selective and self-defeating crackdown on Internet gambling.

On July 16, 2006, the CEO of BetOnSports.com attacked an anti–online gambling bill that the House of Representatives had overwhelmingly approved a few days before. “We want to be regulated,” David Carruthers wrote in the Baltimore Sun. “We want to be taxed. We want to be licensed. Instead of dealing with us constructively to address issues of mutual concern, these legislators prefer to pretend that they can control the Internet. Instead of protecting the public, they would rather waste time on public posturing to their partisan base.”

It wasn’t hard to understand why Carruthers was upset. The bill, part of the “American Values Agenda” championed by House Republicans, would have classified him as a felon, subject to a five-year prison sentence for the crime of accepting bets from Americans. What Carruthers evidently did not realize was that the U.S. Justice Department already considered him a felon. On the very day his plea for legitimacy appeared in the Sun, Carruthers was arrested at the Dallas/Forth Worth International Airport during a layover between London and Costa Rica.

Carruthers, a native of Scotland, thought he was running “the largest online wagering company in the world.” But according to Catherine Hanaway, the U.S. attorney for the Eastern District of Missouri, he was running a racketeering conspiracy. Now awaiting trial in St. Louis, Carruthers faces up to 20 years in prison if convicted of racketeering or mail fraud, which he supposedly committed by advertising that BetOnSports was “legal and licensed.” Never mind that BetOnSports was legal and licensed in the U.K., where it was incorporated, and in Costa Rica, where its operations were based.

Although he had been a highly vocal and visible critic of U.S. gambling policies, Carruthers miscalculated just how determined prosecutors and politicians were to deny Americans the right to bet online. Opponents of Internet betting, including both paternalists afraid of human frailty and domestic gambling interests afraid of competition, are eager to prosecute businesses the rest of the world considers legitimate. They are prepared to go after not just the gambling sites themselves but also third-party payment processors, marketers, even media outlets that carry ads for online poker or sports betting. In doing so the prohibitionists are willing to risk the collapse of international trade agreements and saddle American financial institutions with the onerous burden of monitoring transactions for signs of “unlawful Internet gambling.” All in a vain attempt to stop Americans from doing online what they already do by the millions in convenience stores and delis, at racetracks and casinos, and in poker games and football betting pools throughout the country.

‘The Crack Cocaine of Gambling’
The bill that Carruthers criticized on the day of his arrest was the Internet Gambling Prohibition and Enforcement Act, sponsored by Rep. Bob Goodlatte, a Republican who since 1993 has represented a northwestern Virginia district that includes Roanoke and Lynchburg (home of Jerry Falwell’s Liberty University). Goodlatte had tried for years to ban online gambling, which he calls a “scourge on the Internet.” He was joined in that effort by other conservatives, including Sen. John Kyl (R-Ariz.), who calls Internet betting “the crack cocaine of gambling,” and former Rep. Jim Leach (R-Iowa), who says it “erodes family values.”

In 2006 Goodlatte’s bill was combined with a Leach bill to become the Unlawful Internet Gambling Enforcement Act (UIGEA). The law was tacked onto an unrelated, supposedly urgent measure dealing with port security, which Congress passed just before adjourning for mid-term elections in 2006.

Unlike Goodlatte’s original bill, the UIGEA does nothing to clarify or expand the Wire Act of 1961, which prohibits using “a wire communication facility” to accept bets “on any sporting event or contest.” The Wire Act applies only to people “engaged in the business of betting,” not individual gamblers. It also seems limited to sports betting, an interpretation endorsed by the U.S. Court of Appeals for the 5th Circuit in 2002. Although the Justice Department implausibly maintains that the Wire Act covers other forms of gambling as well, including poker and blackjack, all the defendants it has successfully prosecuted under the law were involved in sports betting. Even in those cases, the equation of the Internet with a “wire communication facility” is questionable, as is the extraterritorial application of the law to businesses with no U.S. presence.

While Goodlatte’s original bill would have updated the Wire Act with the Internet in mind and extended it to cover other forms of online gambling, the UIGEA does neither. It makes accepting money in connection with “unlawful Internet gambling” while “engaged in a gambling business” a federal crime punishable by up to five years in prison, but it leaves the definition of unlawful Internet gambling as fuzzy as ever. “It’s a mess,” says Nelson Rose, a professor at Whittier Law School and a leading expert on gambling law. “Nobody ever read it. There were no debates on it. It’s really a piece of garbage. It doesn’t clarify what’s legal and illegal, so the definition of what is an unlawful Internet gambling transaction depends on other federal or state laws.”

The UIGEA’s definition of unlawful Internet gambling explicitly excludes fantasy sports, in which participants create imaginary teams whose performance is judged by the real-life performance of the teams’ players. The law says these contests are OK as long as the prizes are determined in advance and the fantasy teams are not identical to any actual teams. The latter condition is aimed at preventing fantasy sports contests, which the professional sports leagues endorse, from morphing into actual sports betting, which they oppose. The leagues, which supported the UIGEA, are adamantly against broader legalization of sports betting, currently permitted only in Nevada, because they fear it would have a corrupting effect.

The UIGEA also includes an exemption for intrastate online gambling that is “expressly authorized” by state law, such as lotteries. Whether the law allows online participation in multistate lotteries such as Powerball is unclear. So is the legal status of interstate betting on horse racing via the Internet, offered by sites such as allhorseracing.com and youbet.com. The UIGEA includes an exemption for “any activity that is allowed under the Interstate Horseracing Act of 1978.” Businesses that take off-track bets and the state governments that license them read that law as allowing online betting, but the Justice Department disagrees. The UIGEA explicitly declines to resolve the issue, saying “this subchapter shall not change which activities related to horseracing may or may not be allowed under Federal law.”

Since the Justice Department is not likely to prosecute the officials who run interstate lotteries or the state-licensed businesses that take horse racing bets, the upshot is that the UIGEA leaves unmolested two politically favored forms of gambling that happen to generate government revenue and campaign contributions. (The horse racing industry donated more than $3 million in the run-up to the UIGEA, overwhelmingly to Republicans, including Goodlatte.) The law also lets brick-and-mortar casinos—another source of tax revenue and campaign money—offer remote gambling that does not cross state borders.

“No bill that would completely ban Internet gambling has advanced very far,” says Dan Walsh, director of government affairs at the Interactive Gaming Council, which represents online gambling companies. “It has to have exemptions, and when you have exemptions, you get caught in internecine fights between [Indian] tribes and commercial casinos, between horse racing and dog racing, between states that want to take lotteries online and convenience stores that don’t want the states to take lotteries online. The whole point of the bill is to stay out of those fights.”

Eliot Spitzer Doesn’t Want You to Pay for Fun
Although the UIGEA did not ban online gambling, it made life more complicated for operators of gambling websites. To begin with, it created a new federal charge, “acceptance of any financial instrument for unlawful Internet gambling,” and an additional penalty for people involved in gambling businesses that were already considered illegal. The Justice Department could have included this charge in its indictment of David Carruthers, adding five years to his potential sentence, if only the UIGEA had existed prior to his arrest.

By saying that unlawful Internet gambling includes betting prohibited by the state in which the bet “is initiated, received, or otherwise made,” the UIGEA also may have made it easier to prosecute people who accept online bets on things other than sports. About a dozen states explicitly ban online gambling, and “just about every state either has in their common law or in their state constitutions a flat prohibition on gambling that’s not expressly authorized,” says Behnam Dayanim, an attorney specializing in gambling issues at the Washington law firm Paul Hastings, which represents the Gibraltar-based online gambling company PartyGaming.

Prior to the UIGEA, other federal gambling statutes referred to state law, but none of them mentioned the Internet. Hence it was doubtful that Congress had authorized states to regulate interstate and foreign commerce, a federal power under the Constitution, by criminalizing the actions of website operators in other countries. An online casino also could argue that its acceptance of a bet from a gambler in, say, Salt Lake City occurred in Costa Rica (or wherever its server was located) and therefore did not violate Utah law.

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • Naga Sadow||

    As an employee of a brick and mortar casino, I wholeheartedly endorse gambling as a legitimate pasttime . . . if you go through my company that is, otherwise it should be illegal and you should be treated as a common criminal. j/k

  • TallDave||

    I bet if they just started them "short-term hedge funds" the whole problem would go away.

  • TallDave||

    started calling*

  • BakedPenguin||

    I'm a little more fortunate than most, as I have friends in the UK who are willing to lend me their addresses so that I have a "UK" account. FOAD, Goodlatte.

  • Eliot Spitzer\'s Ghost||

    Beware BakedPenguin! I WAS a *@!#ing steamroller once. I may be again . . .

  • ||

    Here's hoping that this will be a shiny thread in the coming "Democrats get everything they want" storm. The Clinton years were pretty good for gambling and porn, not so much for drugs and pop music lyrics.

  • ||

    Somebody, anybody, tell me again why the GOP is more "libertarian" than the Demorats. Please.

  • BakedPenguin||

    If Obama pledged to legalize online gambling and (even just medical) marijuana, I'd vote for him in a heartbeat. I suspect he won't, so go LP stooge!

    Eliot - it would be great if Goodlatte was busted for gambling on college football or something.

  • J||

    Barney Frank is the man. I disagree with him on so many economic issues, but time and time again he shows himself to be one of the most rational, honest politicians.

    I'm from his district, and while I wish he would lay off the socialist stuff, I still feel like he better represents me than 99% of congress would.

  • Paul||

    Based on what I read in this article, it seems that the U.S. government is pretty successful at scaring the pants of anyone selling gambling or payment services. We can make fun of it all we want, but looks like some legit businessmen are looking at real prison time.

    Never underestimate a governments ability to regulate or ban something by sheer force of will.

  • Lajaw||

    as soon as the welfare system is dismantled, and my tax money will not go towards idiots, I will support gambling of every sort. But until the welfare "safety net" is gone, I cannot support gambling because of the idiots that do so and lose their shirts that I must then support through the welfare system. But until everyone is solely responsible fore themselves in all matters financial and otherwise, it is best to make gambling illegal.

  • ||

    I will trade a 2% reduction in my marginal income tax rate for personal and civil liberties anytime.

    OK - I know that makes me a "socialist" - but goddamnit - I like my vices, freedom, and "sins" too much.

  • ||

    Lajaw wins the thread. You can't get any more insightful than that.

    In fact, in the same spirit, since some people drive without car insurance and their accidents drive up my rates, let's ban driving until all those slackers are insured. It's the only fair way.

  • ||

    Welfare, HUD, and the food stamp program are less than 2% of the federal budget.

    I want to see a "Libertarian" complain about the military taxes he pays sometime.

    Granted - I don't support either - fuck welfare and fuck the military. They are both evil. One just costs a lot more than the other.

  • ||

    I want to see a "Libertarian" complain about the military taxes he pays sometime.

    You're new here, aren't you, shrike?

  • ||

    Lajaw: Why ban gambling for the vast majority that is able to gamble responsibly, just because a small minority gets in trouble?

    By the same logic, why shouldn't we reintroduce prohibition and ban alcohol?

  • Paul||

    it is best to make gambling illegal.

    Cool.

    What does this article have to do with making gambling illegal?

  • Paul||

    I will trade a 2% reduction in my marginal income tax rate for personal and civil liberties anytime.

    You must mean an increase of your marginal tax rate?

    Funny, 'cause what we got is an increase of our marginal tax rates in exchange for our civil liberties. They increased our taxes, we gave them our civil liberties.

  • ||

    Yes, you interpreted my error correctly, Paul.

    I value what little freedom I have left and Big Government has no enemy in either major party,

  • ||

    Good article Mr. Sullum.

  • ||

    The Unlawful Internet Gambling Act was the last straw for me. I was a Republican for over forty years. The RP has lost my vote.

  • rechoboam||

    "as soon as the welfare system is dismantled, and my tax money will not go towards idiots, I will support gambling of every sort. But until the welfare "safety net" is gone, I cannot support gambling because of the idiots that do so and lose their shirts that I must then support through the welfare system. But until everyone is solely responsible fore themselves in all matters financial and otherwise, it is best to make gambling illegal."

    Well if gambling is taxed (extortionately, in most cases) the resulting tax influx should pay for the welfare. I assume the nation makes a profit on nicotine overall, to take another example.

  • z||

    The Unlawful Internet Gambling Act was the last straw for me. I was a Republican for over forty years. The RP has lost my vote.

    It should be noted that 1. UIGA was passed a month before the 2006 elections. 2. There was a LOT of publicity about it in the online poker world. 3. Republicans were slaughtered.

  • ||

    GABLING IS NOT ILLEGAL!

    What, that's right, this debate over Poker is one of semantics.

    Do not believe me, awes.

    Go to YAHOO, MSN, LYCOS or most any other home page and click GAMES.

    Then click SKILL, you will find anywhere from 25-100 'skill' games played for money at companies located IN the United States or owned by the same.

    The games marketed on the SAME page as children's games include card games such as Hearts, Spades, Solitaire, Free Cell, Rummy, Poker Solitaire and a host of others.

    The same company that owns Fox News, the bastion of the conservatives, owns the largest via MSN and AOL - World Winner.

    WHERE IS THE OUTRAGE?

    No, gambling is NOT ILLEGAL.

  • PokerKeep||

    This is one of the first articles in a main stream media publication to address this issue from an unbiased point of view. Kudos to Reason Magazine and Jacob Sullum for a job well done.

    U.S. regulation and taxation are going to happen probably within the next year or eighteen months. It's the only logical solution to this complete fiasco called UIGEA.

    Support our right to gamble online. Join the Poker Players Alliance (http://pokerplayersalliance.org/) and support APCW (http://www.apcwinteractive.org/) in their efforts to legalize and protect the industry and it's players.

  • Skinski||

    I agree, U.S. regulation and taxation will happen ! I pay my taxes , I've served my country , and will be a cold day in hell before my Government stops me from playing my cards in my own home.

    As PokerKeep said , "Support our right to gamble online. Join the Poker Players Alliance (http://pokerplayersalliance.org/) and support APCW (http://www.apcwinteractive.org/) in their efforts to legalize and protect the industry and it's players."

  • ||

    Cast your vote for online gambling: http://www.parade.com/articles/editions/2008/edition_05-11-2008/Intelligence_Report

  • ||

    Jacob, excellent job capturing the entirity of the issue. Probably the best reporting I have seen in my time following the post UIGEA media.

    Well done to you and the editors at Reason for publishing such a fine article.

  • ||

    Very, Very good article! It does a great job of explaining what a double standard the gov't has if it does not benefit them. Also on imposing the views of a few men in congress on the American public. (which elected them into office). It sounds to me like all hell is getting ready to break loose. Once again great article.

  • DG||

    This is the best article I have read on the UIGEA. Thank you Jacob.

  • ||

    as for me, there's nothing wrong playing online gambling. It's a very good way to relax. Why would others see it the other way around? No law can stop me from enjoying my favorite 21 Nova online casino game. Oh cmon! give me a break!

  • ||

    Don't they realize that the government can earn profits from the taxes they can impose on online gambling? I wonder why they are so against it. In one way or another US players can play in casinos outside the US like gamblux online casino and get away with the law.

  • nfl jerseys||

    mrfhfg

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