Rep. Frank Introduces Bill to Facilitate Licensed Internet Gambling

April 26, 2007. Rep. Barney Frank (D-MA) and others introduced HR 2046, the "Internet Gambling Regulation and Enforcement Act of 2007".

The bill would provide for the licensing of operators of internet gambling facilities by the Department of the Treasury's (DOT) Financial Crimes Enforcement Network (FinCEN).

Rep. Barney FrankThe bill would not repeal the Unlawful Internet Gambling Enforcement Act (UIGEA), the recently enacted law that targets the financial transactions associated with internet gambling. Rather, Rep. Frank (at left) said in a release that the UIGEA needs to be "undone".

The bill would exempt from the provisions of the UIGEA financial transactions with licensed operators of internet gambling facilities.

The bill does not expressly repeal or amend the federal Wire Act, or preempt any state laws banning any types of gambling or internet gambling. However, the bill provides that "It shall be a defense against any prosecution or enforcement action under any Federal or State law against any person possessing a valid license under this subchapter that the activity is authorized under and has been carried out lawfully under the terms of this subchapter".

The bill allows states (as well as Indian tribes) to prohibit internet gambling within their borders. It also empowers sports leagues to prohibit gambling on their sporting events.

Rep. Frank's summary of HR 2046 [PDF] states that this bill "would establish a federal regulatory and enforcement framework under which Internet gambling operators could obtain licenses authorizing them to accept bets and wagers from individuals in the U.S., on the condition that they maintain effective protections against underage gambling, compulsive gambling, money laundering and fraud, and enforce prohibitions or restrictions on types of gambling prohibited by states, Indian Tribes, and sporting leagues."

Rep. Frank's release also states that "Traditional forms of legalized gambling already exist in nearly every state. By continuing to prohibit Internet gambling in the U.S., the U.S. has left Americans who choose to gamble online without meaningful consumer protections. The proposed legislation would institute practical and enforceable standards to bring transparency to Internet gambling and provide consumers the protections they expect and deserve."

The bill would add a new subchapter, titled "Regulation of Unlawful Internet Gambling", to Title 31 of the U.S. Code, which addresses financial services.

Opposition. Sen. Jon Kyl (R-AZ) has long advocated legislation to ban internet gambling. He stated in a release on April 26, 2007, that "I will strongly oppose any efforts to ease or remove the mechanisms that our state and federal authorities have long sought to help enforce existing laws prohibiting online gaming."

Sen. Jon KylSen. Kyl (at left) also released a short essay on April 30, 2007, expressing his opposition to internet gambling in general, and HR 2046 in particular.

He wrote that "Online gambling is already illegal under existing federal and state laws. The UIGEA simply provides the legal mechanisms necessary for authorities to enforce those laws. Principally, the UIGEA requires financial systems to block fund transfers associated with illegal Internet gambling, which is the most effective way to curb illegal activities of offshore websites beyond the reach of traditional law enforcement."

He added that "There is an attempt underway by Congressman Barney Frank to remove the online gambling enforcement mechanisms provided by the UIGEA. I oppose efforts to remove the tools that our state and federal authorities have long sought to help enforce existing laws prohibiting any form of online gambling."

Rep. Bob GoodlatteTLJ spoke with Rep. Bob Goodlatte (R-VA) (at right), who has long been a leader of efforts in the House to ban internet gambling.

He opposes HR 2046, and added that "Congress will steer clear" of it.

He said that Rep. Frank "wants to go in the opposite direction" of the legislation enacted last year. He added that "to try to help these offshore sites suck money out of the country" is not in the best interests of the U.S.

Anti Internet Gambling Legislation in 109th Congress. Last year the Congress enacted the " Unlawful Internet Gambling Enforcement Act" (UIGEA). Ultimately, it was not approved as a stand alone bill, but rather a one component of the unrelated port security bill, which both the House and Senate approved on September 29, 2006.

The larger bill was HR 4954 (109th Congress), the "Port Security Improvement Act of 2006". It is now Public Law No. 109-347. Title VIII of this bill is the UIGEA. See, story titled "House and Senate Approve Port Security Bill With Tech Provisions" in TLJ Daily E-Mail Alert No. 1,461, October 4, 2006.

The UIGEA is an attempt to stop internet gambling by regulating the financial transactions that fund what already constitutes unlawful internet gambling. It provides that no one engaged in the "business of betting or wagering" may knowingly accept certain financial transactions, including checks, electronic fund transfers, and credit card debt, in connection with "unlawful Internet gambling".

The UIGEA then requires the Department of the Treasury (DOT) and the Federal Reserve Board (FRB) to write regulations that require each "designated payment system" to identify and block these restricted transactions through the establishment of policies and procedures. It requires each "financial transaction provider" to comply with these DOT/FRB regulations.

The House had previously passed the UIGEA as a stand alone bill, HR 4411 (109th), on July 11, 2006. The vote was 317-93. See, Roll Call No. 363. Republicans voted 201-17. Democrats voted 115-76. Former Rep. Jim Leach (R-IA), who was the sponsor of HR 4411, lost his bid for re-election in November of 2006.

See also, story titled "House Approves Unlawful Internet Gambling Enforcement Act" in TLJ Daily E-Mail Alert No. 1,408, July 11, 2006, and story titled "House Financial Services Committee Approves Internet Gambling Bill" in TLJ Daily E-Mail Alert No. 1,330, March 16, 2006.

There was also an attempt in the 109th Congress, as in previous Congresses, to enact legislation dealing with criminal prohibitions related to internet gambling. The bill in the 109th Congress was HR 4777, the "Internet Gambling Prohibition Act", sponsored by Rep. Goodlatte.

On May 3, 2006, the House Judiciary Committee's (HJC) Subcommittee on Crime, Terrorism, and Homeland Security approved this bill by voice vote, without amendment.  See also, story titled "House Crime Subcommittee Approves Internet Gambling Prohibition Act" in TLJ Daily E-Mail Alert No. 1,364, May 5, 2006. The full Committee amended and approved the bill on May 25, 2006. However, this bill did not become law.

HR 2046: FinCen. One of the main functions of the just introduced bill, HR 2046, is the creation of a licensing regime to be administered by the FinCEN.

The bill would allow financial institutions to provide services to internet gambling facilities that are licensed by the DOT's FinCen, and would allow certain operations of internet gambling facilities that are licensed by the DOT's FinCen.

The FinCEN is a unit of the DOT with about 300 employees. It currently works with law enforcement agencies, other financial services regulatory agencies, and financial services providers to combat criminal money laundering.

FinCen does not currently have the resources or expertise to assume the role of an effective sectoral licensor and regulator for the internet gambling industry. Although, FinCen does have expertise regarding financial transactions.

The bill would give the FinCEN rulemaking authority, licensing and license revocation authority. The bill states that the funding of the new licensing regime would be provided by license fees.

Rep. Goodlatte told TLJ that this regulatory regime would be "a totally foreign experience for" the FinCEN. He elaborated that internet gambling is associated with the social problems of gambling addiction, gambling by minors, family problems, bankruptcies, and organized crime. He said that the Department of the Treasury is not qualified to handle these problems.

HR 2046: Licensing Regime. The bill would add a new Section 5383 to Title 31. It provides that "No person shall engage in the business of Internet betting or wagering in the United States without a license issued by the Director in accordance with this subchapter".

To obtain a license, the applicant must agree "to be subject to United States jurisdiction and all applicable United States laws relating to Internet gambling activities".

The licensee must also maintain various mechanisms and safeguards to, among other things, "ensure that the individual placing a bet or wager is 18 years of age or older", "ensure that all taxes relating to Internet gambling due to Federal and State governments and to Indian tribes from persons engaged in Internet gambling are collected", "combat fraud and money laundering", "combat compulsive Internet gambling", and "protect the privacy and security of any person engaged in Internet gambling".

The primary enforcement mechanism under this bill would likely be the FinCEN's decisions to grant and revoke licenses.

Rep. Goodlatte told TLJ that HR 2046 would attempt to create "a totally unworkable scheme". For example, he said that "there is no technology that exists" to ensure that someone placing bets is at least 18 years old, or outside of a particular state.

HR 2046: Financial Activities, Payment Processing, and Investment Banking. The bill would add a new Section 5384 to Title 31 that provides exemption from the prohibition of the UIGEA for entities that provide financial activities and transactions, including payment and transaction processing activities, or  investment banking services.

It provides that "No financial institution shall be held liable for engaging in financial activities and transactions for or on behalf of a licensee or involving a licensee, if such activities are performed in compliance with this subchapter and with applicable Federal, State, and foreign banking laws and regulations."

It also provides that "No person shall be held liable for engaging in payments processing activities for or on behalf of a licensee or involving a licensee, if such activities are performed in compliance with this subchapter.

It further provides that "No person shall be held liable for engaging in investment banking activities for or on behalf of a licensee or involving a licensee, if such activities are performed in compliance with this subchapter, the Sarbanes-Oxley Act, the Securities Act of 1933 Act, the Securities Exchange Act of 1934, and any other applicable laws governing securities."

Rep. Frank's summary of the bill states that "Investment banks, financial institutions and payment processors that provide services to Internet gambling operators licensed under the Act would be protected from liability for such services."

HR 2046 would not repeal the UIGEA. Moreover, for internet gambling transactions involving unlicensed operators, and operators whose licenses have been revoked, the UIGEA would remain applicable.

HR 2046: State Laws. HR 2046 would add a new Section 5385 to Title 31 that provides for the preservation of certain state authority.

It provides that "No Internet gambling licensee may engage, under any license issued under this subchapter, in the business of Internet betting or wagering in any State which prohibits such business within such State if the Governor or other chief executive officer of such State informs the Director of such prohibition ..."

Rep. Frank's summary of the bill states that "Individual states and Indian tribes would have the option to prohibit or impose limits in whole or in part on Internet gambling within their borders."

Rep. Goodlatte told TLJ that this is unworkable. He noted that some states, like Utah, will assert a complete ban, while others, like Nevada, will permit many forms of gambling. He said that under the proposed regulatory regime of HR 2046, the internet gambling entity will "need to know where the  person is placing the bet", but this will be impossible with wireless devices. Hence, this bill would "upend all of the state gambling laws".

HR 2046: Sports Leagues. HR 2046 would add a new Section 5386 to Title 31 that permits sports leagues, in effect, to declare unlawful internet gambling on their sports events.

It provides that "No Internet gambling licensee may engage, under any license issued under this subchapter, in the business of Internet betting or wagering in connection with any sport event or contest of any sporting league which prohibits such business if the chief executive officer of such sporting league informs the Director of such prohibition ..."

Rep. Frank's summary of the bill states that "Sporting leagues would have the option of prohibiting Internet gambling on sporting events or contests on league activities."

HR 2046: Impact Upon Federal Wire Act and State Gambling Laws. The criminal prohibition of the Wire Act, which is codified at 18 U.S.C. 1084, provides that "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 ... shall be fined under this title or imprisoned not more than two years, or both."

The Wire Act does not ban gambling. Although, state laws can and do ban gambling. The Wire Act only bans the use of a "wire communications facility" for transmitting bets.

Since the current statute affects only wire communication facilities, and some internet communications do not involve wires, this it leaves open the possibility that some internet gambling communications may not be illegal under the Wire Act. Bills introduced by Rep. Goodlatte in prior Congresses, which did not become law, would have addressed this issue.

Rep. Goodlatte told TLJ on May 3 that "the Wire Act is out of date and needs to be updated". However, he added that he has "not made any decision" whether to introduce a bill in this Congress to update the Wire Act.

HR 2047 would add a new Section 5387 to Title 31 that would provide relief to both financial institutions and operators of internet gambling facilities. It provides that "It shall be a defense against any prosecution or enforcement action under any Federal or State law against any person possessing a valid license under this subchapter that the activity is authorized under and has been carried out lawfully under the terms of this subchapter."

The Wire Act is a principle means by which the Department of Justice (DOJ) prosecutes offshore internet gambling entities. HR 2046 would preclude further prosecutions of licensed entities.

WTO and Trade Treaties. The U.S. faces actual and potential legal challenges before the World Trade Organization (WTO) for current state and federal laws affecting internet gambling. That is, internet gambling is a service that can be provided across national boundaries.

For example, to the extent that U.S. laws do not reach certain internet gambling permitted under the Interstate Horseracing Act, and remote gambling conducted by native American tribal groups, the claim can be asserted that U.S. law discriminates against foreign providers of gambling services.

Also, the nation of Antigua and Barbuda has filed a complaint with the WTO. See, stories titled "WTO Panel Instructs Congress to Amend Wire Act to Legalize Internet Gambling" in TLJ Daily E-Mail Alert 1,016, November 11, 2004; "WTO Appellate Body Upholds U.S. Laws Affecting Internet Gambling" in TLJ Daily E-Mail Alert No. 1,111, April 8, 2005; and "Allgeier Addresses Trade Agreements and Internet Gambling" in TLJ Daily E-Mail Alert No. 1,118, April 19, 2006.

See also, November 6, 2007, Cato Institute short paper titled "U.S. Response to Gambling Dispute Reveals Weak Hand", and TLJ story titled "Cato Paper Assesses WTO Proceeding on Internet Gambling" in TLJ Daily E-Mail Alert No. 1,484, November 7, 2006.

TLJ spoke with Cato's Sallie James, who wrote the above referenced paper. She noted that since HR 2046 provides an opt out for states, states will still be able to restrict internet gambling, and for some states that will mean a disparate impact on foreign providers. Hence, while the bill may ameliorate some existing trade issues, it would leave others in place.

James added that she supports the bill on "libertarian principles" but nevertheless has concerns about remaining trade issues.

Legislative Process. The original cosponsors include Rep. Shelley Berkley (D-NV), who represents Las Vegas, Nevada, and Rep. Robert Wexler (D-FL) who represents a south Florida District.

Rep. Frank Lobiondo (R-NJ) is not a cosponsor. He represents a district that includes Atlantic City, New Jersey. The only Republican cosponsor is Rep. Ron Paul (R-TX), a maverick libertarian, who has long opposed many types of government regulation of individual behavior, including online gambling.

The Library of Congress' Thomas web site states that this bill has been referred to the House Financial Services Committee (HFSC), which Rep. Frank chairs, and the House Commerce Committee (HCC). This Thomas listing does not identify a referral to the House Judiciary Committee (HJC). However, the bill would make it a crime, under Title 18, to violate the bill. Crime falls within HJC jurisdiction.

Rep. Goodlatte, who is a member of the HJC, told TLJ that HR 2046 "falls very squarely within the jurisdiction of the Judiciary Committee". However, he also said that it is the responsibility of the Chairman to request a referral.

Rep. Frank's release states that there will be a hearing on the bill in June of 2007.