It is a pleasure to speak to you today about some of the many issues
involved with on-line gambling. Let me state at the outset that when I
refer to on-line gambling, I am including within that definition gambling
and gaming of all types, be it casino-type games or sporting events, and
I am also including gambling by other technologies, such as through interactive
television. For purposes of United States law, these distinctions are
not as significant as they are under the laws of other countries.
As you all know, the number of Internet gambling sites has increased substantially
in recent years. While there were approximately 700 Internet gambling
sites in 1999, it is estimated that by 2003, there will be approximately
1,800 such sites generating around $4.2 billion. In addition to on-line
casino-style gambling sites, there are also numerous off-shore sports
books operating telephone betting services. These developments are of
great concern to the United States Department of Justice, particularly
because many of these operations are currently accepting bets from United
States citizens, when we believe that it is illegal to do so. The United
States has other concerns too, some of which I would like to talk about
today.
In the United Kingdom, as you know, many forms of on-line gambling are
permitted. Moreover, it is not illegal for British residents to gamble
on-line nor is it illegal for overseas operators to offer on-line gambling
to British residents. In short, the United Kingdom has opted to regulate
the on-line gaming industry. The United States has taken a different approach,
opting instead to prohibit on-line gambling.
The Internet and other emerging technologies, such as interactive television,
have made possible types of gambling that were not feasible a few years
ago. For example, a United States citizen can now, from his home at any
hour of the day or night, participate in an interactive Internet poker
game operated by a computer located in the Caribbean. Indeed, a tech-savvy
gambler can route his bets through computers located in other countries
throughout the world, thereby obscuring the fact that he is placing his
bet from the United States or from some other country where it is illegal
to do so.
On-line gambling also makes it far more difficult to prevent minors from
gambling. Gambling websites cannot look at their customers to assess their
age and request photo identification as is possible in traditional physical
casinos and Off-Track-Betting parlors. Similarly, minors, many of whom
are more tech-savvy than their parents, can and do devise methods of defeating
age-verification procedures offered by some, but not all, on-line gambling
companies.
Although some companies are developing software to try to detect whether
a player is old enough to gamble or whether that player is from a legal
jurisdiction, such software has not been perfected and would, of course,
be subject to the same types of flaws and vulnerabilities that could be
exploited by hackers.
Unlike on-site gambling, on-line gambling is readily available to all
and permits the user to gamble, in many cases, anonymously. As was recently
pointed out by the American Psychiatric Society: Internet gambling,
unlike many other types of gambling activity, is a solitary activity,
which makes it even more dangerous: people can gamble uninterrupted and
undetected for unlimited periods of time. Indeed, the problems associated
with pathological and problem gamblers, a frighteningly-large percentage
of which are young people, are well-established and can be measured in
the ruined lives of both the gamblers themselves and their families.
Although there are certainly legitimate companies who are either operating
or who want to operate on-line casinos in an honest manner, the potential
for fraud connected with casinos and bookmaking operations in the virtual
world is far greater than in the physical realm. Start-up costs are relatively
low and cheap servers and unsophisticated software are readily-available.
On-line casinos and bookmaking establishments operate in many countries
where effective regulation and law enforcement is minimal or non-existent.
Like scam telemarketing operations, on-line gambling establishments appear
and disappear with regularity, collecting from losers and not paying winners,
and with little fear of being apprehended and prosecuted.
Through slight alterations of the software, unscrupulous gambling operations
can manipulate the odds in their favor, make unauthorized credit card
charges to the accounts of unsuspecting gamblers, or alter their own accounts
to skim money. There is also a danger that hackers can manipulate the
online games in their favor or can steal credit card or other information
about other gamblers using the site.
In the United States, both federal and state laws apply to on-line gambling.
Historically, the individual states were left to determine what forms
of gambling could be offered within an individual states borders
and to regulate such gambling. Not surprisingly, different states have
different laws about gambling. For example, the State of Nevada permits
and regulates casinos and sports bookmaking operations; while the neighboring
State of Utah, on the other hand, does not permit any gambling. This poses
a particular problem in the on-line world because, as I previously stated,
the person placing a bet may not be located in the same state or even
the same country as the person receiving the bet.
The Department of Justice views a gambling transaction as occurring in
both the jurisdiction where the bet is placed by the bettor and in the
jurisdiction where the gambling business that receives the bet is located.
Thus, if Internet gambling were regulated in the United States, it would
be subject to, and would need to be in compliance with, fifty differing
sets of gambling laws, which would pose certain unique problems.
While the prosecution of individual bettors and intra-state gambling crimes
are largely left to the individual states, there are numerous federal
gambling statutes that the Department of Justice has employed against
large-scale gambling businesses that operate interstate or internationally.
One such statute is the so-called Wire Act, which is codified at Section
1084 of Title 18 of the United States Code. This statute makes it a crime,
punishable up to two years in prison, to knowingly transmit in interstate
or foreign commerce bets on any sporting event or contest. It is the Department
of Justices position that this prohibition applies to both sporting
events and other forms of gambling, and that it also applies to those
who send or receive bets in interstate or foreign commerce even if it
is legal to place or receive such a bet in both the sending jurisdiction
and the receiving jurisdiction. This view was upheld by the Second Circuit
Court of Appeals in the recent successful federal prosecution of Jay Cohen,
who was the President of World Sports Exchange, a company which was based
in Antigua but which accepted bets via the telephone and the Internet
from citizens in the United States.
Another federal statute that is applicable to on-line gambling is Section
1955 of Title 18, United States Code, which makes it a crime, punishable
by up to five years in prison, to conduct, finance, manage, supervise,
direct, or own all or part of a gambling business, so long as it is illegal
to operate such a business under state law. In addition to criminal penalties,
this section also contains a civil forfeiture provision, which the Department
of Justice has used on occasion to great effect. For instance, the Department
of Justice recently used this provision to forfeit nearly three-quarters
of a million dollars that had been seized from a New Jersey corporation
named Intercash Ltd. that served as an intermediary between U.S. gamblers
and an English gambling house named American Sports Limited.1
Other statutes which the Department of Justice has employed against illegal
on-line gambling operations would include the Racketeer Influenced and
Corrupt Organizations Act (more commonly known by its acronym RICO), which
can be found at Sections 1961-1968 of Title 18 of the United States Code,
as well as Section 1952 of Title 18, United States Code, which is also
referred to as the Travel Act, which makes it a crime to use interstate
or foreign facilities in aid of unlawful activity, which includes gambling.
There is also Section 1953, which prohibits the transmission of wagering
paraphernalia, as well as other criminal and civil statutes that can be
applied in this context.
In addition to these statutes that have already been enacted, Congress
is currently considering legislation that would prohibit certain forms
of payments, including credit card payments, for illegal Internet gambling.
This bill passed the House of Representatives last month and is still
pending in the Senate.
In addition to the federal government, various state governments have
also taken actions against on-line gambling. For instance, in New York
State, where unauthorized gambling is illegal, the New York State Attorney
General reached an agreement with Citibank to block credit card payments
of on-line gambling transactions by its customers. The same Attorney General
recently reached an agreement with PayPal, which agreed to stop processing
payments from New York State customers to on-line gambling merchants.
Some companies have taken steps themselves against on-line gambling businesses.
For instance, just last month, PayPal was acquired by E-Bay, the on-line
auction service, which announced that it will phase out PayPals
on-line gambling business by the end of the year. Both Discover and American
Express have company policies that restrict the use of their credit cards
for Internet gambling and prevent Internet gambling sites from being issued
credit card merchant accounts.
In addition to on-line gambling itself, the United States government is
also concerned about the substance and scope of advertising for on-line
gambling. Advertisements for on-line gambling are omnipresent on the Internet,
in print ads, and over the radio. The United States Federal Trade Commission
recently looked at this issue and found, not surprisingly, that advertisements
for gambling over the Internet appear even on websites oriented towards
children. The shear volume of advertisements for offshore sports books
and online casinos is troubling because it misleads the public in the
United States to believe that such gambling is legal, when in fact, it
is not. Indeed, as I am sure you all know, many of these advertisements
affirmatively foster that erroneous belief.
Some states which outlaw the promotion of gambling have taken action to
curtail these advertisements. For instance, in December 2001, the Colorado
Attorney General and the Colorado Limited Gaming Control Commission sent
notices to certain radio operators asking them to stop broadcasting advertisements
for Internet casinos and sports bookmaking operations. Similarly, in February
2002, the California Horse Racing Board and the California Broadcasters
Association sent notices to every radio and television station in California
to stop running advertisements for illegal off-shore wagering services.
Another major concern that the Department of Justice has about on-line
gambling is that Internet gambling businesses provide criminals with an
easy and excellent vehicle for money laundering, due in large part to
the volume, speed, and international reach of Internet transaction and
the offshore locations of most Internet gambling sites, as well as the
fact that the industry itself is already cash-intensive.
It is a fact that money launderers have to go to financial institutions
either to conceal their illegal funds or recycle those funds back into
the economy for their use. Because criminals are aware that banks have
been subjected to greater scrutiny and regulation, not surprisingly, they
have turned to other non-bank financial institutions, such as casinos,
to launder their money. On-line casinos are a particularly inviting target
because, in addition to using the gambling that casinos offer as a way
to hide or transfer money, casinos offer a broad array of financial services
to their customers, such as providing credit accounts, fund transmittal
services, check cashing services, and currency exchange services.
Individuals wanting to launder ill-gotten gains through an on-line casino
can do so in a variety of ways. For example, a customer could establish
an account with a casino using illegally-derived proceeds, conduct a minimal
amount of betting or engage in offsetting bets with an overseas confederate,
and then request repayment from the casino, thereby providing a new source
of the funds. If a gambler wants to transfer money to an inside source
in the casino, who may be located in another country, he can just play
til he loses the requisite amount. Similarly, if an insider wants to transfer
money to the gambler, perhaps as payment for some illicit activity, he
can rig the game so the bettor wins.
The anonymous nature of the Internet and the use of encryption makes it
difficult to trace the transactions. The gambling business may also not
maintain the transaction records, in which case tracing may be impossible.
While regulators in the United States can visit physical casinos, observe
their operations, and examine their books and records to ensure compliance
with regulations, this is far more difficult, if not impossible, with
virtual casinos.
Similarly, in the United States, land-based casinos are now required to
file suspicious activity reports with the Treasury Departments Financial
Crimes Enforcement Network. The USA Patriot Act, which was enacted in
the aftermath of the tragic events of September 11, 2001, requires all
financial institutions, which now specifically includes casinos, to adopt
money laundering compliance programs. Less than two months ago, the Treasury
Department published its final rules pertaining to the maintenance of
Bank Secrecy Act compliance programs by casinos and card clubs. Detecting
money laundering and ensuring compliance with these new regulations will
be difficult enough when it comes to physical casinos. The difficulty
of these tasks will increase immeasurably, and perhaps become insurmountable,
if virtual casinos are permitted to flourish.
In conclusion, let me state that although the United States Department
of Justice continues to believe that interstate on-line gambling should
be prohibited, we realize that other countries disagree and have opted
to pursue the regulatory route. Because not all countries have outlawed
on-line gambling and because of the inherently-international nature of
these on-line operations, the United States recognizes the need for international
cooperation to combat money laundering and other illicit activities connected
with the on-line gaming industry, problems which we all share. We look
forward to working together with you in that effort.
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1 United States v. $734,578.82
in United States Currency, 286 F. 3d 641 (3d Cir. 2002)
|