DC Circuit Rules in Internet Gambling Case

January 27, 2009. The U.S. Court of Appeals (DCCir) issued its opinion [19 pages in PDF] in US v. Soulbury Limited, an in rem case regarding seizure by the US government of money of an internet gambling enterprise located outside of the US.

This case pertains to efforts by the US government to terminate internet gambling operations that are located outside of the US, which are legal where located, but illegal in the US, under the Wire Act.

These gambling operations, and their owners and operators, are beyond the jurisdiction of US courts. However, by seizing funds of these businesses located abroad, by alleging violation of the US money laundering statute, and then denying access to the courts to contest the seizure, by asserting the US fugitive disentitlement statute, the US may be able to terminate these foreign based operations.

Fugitive disentitlement is a common law principle that allows dismissal of appeals in criminal cases where the defendant has escaped custody after filing an appeal and is evading the jurisdiction of the court. In 2000 the Congress codified the principle, and expanded it to civil proceedings, in the Civil Asset Forfeiture Reform Act of 2000 (CAFRA). It is codified at 28 U.S.C. § 2466.

In this case, the government seeks to use the CAFRA to enforce US gambling law against non US citizens living abroad for their internet based activity. The government's tactic in this case could be applied in other situations where the US seeks to regulate foreign based conduct, internet based or otherwise, that violates US law. Similarly, foreign governments, utilizing their own related statutes, might enforce their laws against US based persons or companies.

The Court of Appeals wrote that the US alleges that William Scott "operated a network of offshore Internet gambling sites from the Caribbean that catered primarily to U.S. residents". The US attempted to criminally prosecute Scott, without success, because he is not a U.S. citizen, and lives outside of the US.

The US then brought an in rem action in the U.S. District Court (DC) to seize nearly $7 Million in bank funds of Soulbury Limited, a British Virgin Islands corporation, held by a foreign financial institution located in a dependency of the United Kingdom by alleging illegal money laundering. Soulbury, of which Scott is a major shareholder, sought return of the money.

The District Court granted summary judgment to the US. The District Court held that the federal fugitive disentitlement statute precludes Soulbury from contesting the seizure of the funds. Soulbury was afforded no opportunity to contest whether there was in fact any money laundering or violation of the Wire Act, or to raise any procedural deficiencies with the seizure.

Court of Appeals. This appeal followed. The Court of Appeals reversed and remanded in a narrow opinion.

Section 2466 provides in part that the court "may disallow a person from using the resources of the courts of the United States in furtherance of a claim in any related civil forfeiture action or a claim in third party proceedings in any related criminal forfeiture action upon a finding that such person ... declines to enter or reenter the United States to submit to its jurisdiction ... or ... otherwise evades the jurisdiction of the court in which a criminal case is pending against the person".

The Court of Appeals adopted the test articulated in 2004 by the Second Circuit in Collazos v. US, 368 F.3d 190. The DC Circuit wrote that the statute requires that "(1) a warrant or similar process has issued in a criminal case for the claimant’s apprehension; (2) the claimant had notice or knowledge of the warrant or process; (3) the criminal case is related to the forfeiture action; (4) the claimant is not confined or otherwise held in custody in another jurisdiction; and (5) the claimant has deliberately avoided criminal prosecution by leaving the United States, declining to enter or reenter the country, or otherwise evading the criminal court's jurisdiction."

The Court of Appeals held that the District Court erred in resolving the issue of "notice or knowledge" on summary judgment. That is, the US had not shown that Scott had notice of the warrant for his arrest.

However, the Court of Appeals also held that the District Court was correct including that "the criminal case is related to the forfeiture action". In the criminal case the US alleged violation of the Wire Act by Scott. In the civil forfeiture case the US alleged money laundering. The Court of Appeals concluded that they are related.

The Court of Appeals also held that "Under the correct interpretation of the fugitive disentitlement statute, there is a genuine issue of material fact whether Scott is a person to whom the statute applies and therefore whether Soulbury's claim can be dismissed under the statute."

The case is remanded to the District Court.

Commentary. This case relates to US efforts to regulate foreign based conduct that is legal where practiced, but illegal in the US. The US criminalizes some internet based gambling operations. The operations prohibited in the US are legal and legitimate in many other countries.

The US procedures employed in this case may illustrate a tactic for enforcing US criminal laws extraterritorially.

Perhaps it should be noted that the same sort of procedures might be employed by other governments, including against US based activities that are lawful in the US.

For example, some internet based activities that are legal, and protected by the First Amendment, in the US, are criminal in other countries. A foreign government might issue a criminal complaint against a US defendant, then assert its money laundering statute to seize from a financial institution funds of a US defendant, and when the US defendant or financial institution seeks to contest the seizure, dismiss the challenge under its fugitive disentitlement statute.

A foreign government might thereby effectively regulate internet based First Amendment activities in the US.

This case is US v. Soulbury Limited, U.S. Court of Appeals for the District of Columbia, App. Ct. No. 07-5383, an appeal from the U.S. District Court for the District of Columbia, D.C. No. 03cv02540.