FINCEN: gigantes de la computación apuestan a la industria del juego en línea

39 A Survey of Electronic Cash, Electronic Banking and Internet Gaming
In the last three years, the Internet gaming
industry has undergone enormous expansion,
going from twelve websites at the beginning of
1997 to an estimated 600-700 sites in early
2000. (For the purpose of this report, the
term Internet gaming describes web-based
casino gambling, sports betting, and lottery
operations.) Although the actual amount of
current or future gaming conducted via the
Internet cannot be measured or predicted
easily, experts are confident that upcoming
technology improvements and the relative
ease of establishing such sites will continue
the trend of expansion.
Gaming websites are located in a large number
of jurisdictions, including Africa, the Asia/
Pacific region, the Caribbean, and Western
Europe. In the United States, where gambling
regulation has been primarily a state responsibility,
there are many proponents of federal
legislation that would prohibit the transmission
or use of Internet gaming services. Although
continued world expansion of this industry is
not hard to predict, the legislative process
necessary to establish United States policy
remained unfinished in mid-2000, and the
effort to establish legal controls is ongoing.
This chapter of the report provides information
on several aspects of Internet gaming. The
first section evaluates the speed at which
Internet gaming is growing and factors involved
in the development of the commercial market
for Internet gaming and the types of financial
activity possible using current systems. That
discussion is followed by a description of
gambling websites as they now exist,
emphasizing the types of customers that are
targeted and how the sites attempt to deal
with obstacles such as customers’ security
concerns, legal issues unique to the United
States market, and technical problems. The
next section discusses the various approaches
of national and some regional jurisdictions
where there is a current or projected market
demand for Internet gaming.
The fourth section discusses recent enforcement
actions in the United States, focusing on civil
and criminal cases that charge Internetgaming
related misconduct and on recent
efforts to establish federal legislation that
criminalizes Internet gaming. The final section
of the chapter examines the prospects of
Internet gaming based on the conditions
described in the preceding sections.
The rate of growth of Internet gaming is a
matter of speculation, as is the total amount of
money spent per year. The number of gaming
sites also is a matter of speculation: most
current estimates range between 300 and 700,
with new sites appearing constantly and others
going out of business. (Rolling Good Times
Online, a source of such information, reported
282 individual sites accepting real-money
wagers in February 1999.) According to reports,
sites may be established with relatively low
capitalization for equipment, software, setup,
and maintenance expenses. However, final
startup costs depend on the amount required
for licensing and bonding by the jurisdiction in
question. Once a site is in operation, it must
achieve a relatively high volume of gaming
transactions to make a profit.
One gaming expert estimates that $10 must
be wagered for every $1 of revenue realized
by an Internet gaming operator.
According to the former chair of the Interactive
Gaming Council (IGC), the growth of
Internet gaming has been fueled mainly by
the work of young computer and marketing
specialists interested in applying their technology
in a high-risk venture with some
prospects of profitability. However, larger
software and electronics companies, many of
which have connections to other, more
conventional parts of the computer and
telecommunications industries, are playing
an increasing behind-the-scenes role in the
Internet gaming industry. The character and
long-term prospects of this role are not clear.
Some of those companies sell gaming systems
outright to gaming operators; others take an
ongoing percentage-licensing fee. According
to the former IGC chair, the number of
companies with such involvement has grown
slowly but steadily, with most companies
appearing to maintain the balance of their
activity in jurisdictions with more established
financial regulatory programs until governments
set firmer national policies.
Estimates of the total amount of business
done annually by the industry range from
$6 billion to $60 billion. $10 billion has been
cited by one industry analyst as the most
accurate estimate for 2000. A complicating
factor in gauging the growth of Internet
gaming is the uncertain legal status of the
industry (especially as it relates to the
United States), which may have caused
many operators to conceal their financial
situation and sometimes their identity. The
overall lack of clear regulation also makes
it difficult to determine how many enterprises
are entering the field and how many
are folding. For example, Antigua, which
boasts of its strict licensing regime, has
issued a list of seven or eight unlicensed
gaming websites that were operating from
Antigua in 1998. Further complicating
matters is the frequent ownership or licensing
(the relationship often is not clear) of
multiple sites by the same corporate entity
and the tendency to change site names or
use variations of the same name in different
levels of advertising. Online casino and
sportsbook listings often give both the
parent and the subsidiaries the same status,
and often both levels have websites that
seem to represent a single casino or
sportsbook. An example is Casino Fortune
of Trinidad, which apparently went from
being a single casino to being the corporate
name of several casinos, including one in
Botswana, owned by a company called the
Sunny Group. Meanwhile, Casino Fortune
maintains a separate gaming website exactly
like the other casinos.
About 15 companies develop and sell turnkey
interactive gaming software for Internet gaming
operations. Their number is growing slowly but
constantly. According to an IGC expert, the
largest volume of such sales has been produced
by Atlantic International Entertainment, Inc.
and Microgames. Other major players are
Cyberoad of Canada, Casino World Holdings of
Antigua, CyberSpace Casino Tech and Handa
Lopez of California, and Cryptologic of
Vancouver. However, some gaming operators
have established relationships with more
conventional software companies such as
Electronic Data Systems Corporation, the
supplier of Global Internet Corporation, a
Dominica-based Internet operator.
Whatever the growth rate or current level
of activity, it is certain that since 1997,
41 A Survey of Electronic Cash, Electronic Banking and Internet Gaming
those depending on the U.S. market have
been substantially slowed by the uncertain
legal status of Internet gaming operations in
the United States. Major supplier companies
such as Virtual Gaming of Antigua and GLC
(formerly Gaming Lottery Corporation) of
Gibraltar have formally declared that they
will avoid direct contact with the American
market as long as state and federal laws are
interpreted as prohibiting the offering of
Internet gaming services in U.S. jurisdictions.
Australia’s largest online operation,
Centrebet, terminated all U.S. commerce
in 1998.
The number of countries currently licensing
Internet gaming also is a matter of speculation.
One industry analyst estimated 20
such countries in November 1998. Among
those known to offer some form of licensing
are Antigua, Australia, Austria, the
Bahamas, Belize, Costa Rica, Dominica,
the Dominican Republic, Ecuador,
Gibraltar, Grenada, the Netherlands
Antilles, St. Kitts, and Venezuela. However,
the definition of “licensing” also differs by
Observers of the industry have pointed
out that websites often label themselves
licensed by virtue of holding only a
general license to conduct business, as
opposed to a specific license for Internet
gaming. The latter license may not be
granted in jurisdictions such as Costa Rica
and Venezuela, even though Internet
gaming operations apparently are based in
both countries. In addition, many casinos
operate in countries that do not license
Internet gaming. The choice of a site
location for Internet gaming may have
nothing to do with whether or not a
country licenses the operations.
An important marketing tool for the Internet
gaming industry is the ability to transfer
money quickly, inexpensively, and securely—
attributes that conventional casinos, lotteries,
and sports betting venues offer to their
customers. A person who enters an interactive
gaming website wishing to place a bet first must
register and deposit a prescribed minimum
amount of money (most often $300) with which
to establish an account. The conventional
ways of placing that money are (1) providing
the number of a credit card from which a cash
advance is taken and transferred to the casino
operator, (2) sending a check or money order,
or (3) sending a wire transfer or other
remittance of funds. The bettor is able to
gamble at the website only when the account
has been established. As the bettor gambles,
money is added to or subtracted from the
initial amount. The bettor may request that a
check be sent for the remaining balance at any
time; most operators guarantee a short turnaround
for this service.
According to one Internet gaming analyst,
the conventional methods of transfer have
impeded the growth of the industry because
they do not provide enough security (a large
sum must be forwarded or a credit card number
revealed), speed (the transfer of funds via
wire or other remittance system takes time), or
anonymity (personal information, especially
age, also is required to establish an account).
There is, in fact, a substantial record of
shadow websites collecting such deposits for a
period of time and then disappearing, in the
process destroying consumer confidence.
He notes that, although money order,
check, and credit card transactions still are
the most frequently used payment methods for
establishing accounts, several more efficient
methods of cash transfer are either on the
horizon or already in limited use. These
include stored-value smart cards, which can
store digital information about an account, and
electronic cash (e-cash). These new payment
mechanisms have the advantages of security
and speed. However, at present, high transfer
fees make digital cash impractical for the
interactive gaming industry. Another problem
is that several varieties of digital cash are
competing for the market, creating a situation
where a prospective bettor’s home computer
might be equipped for a type of digital cash
incompatible with a given gaming website.
Theoretically, as these problems are overcome, a
consumer will be able to use e-cash across a wide
range of purchases; this marketing approach is
being taken by both the provider companies and
the gaming companies that offer e-cash as a
payment option. At present, however, a relatively
small percentage of the Internet gaming
community is connected to an e-cash system.
When gaming establishments offer account
establishment via conventional credit card
within a five-minute period, the additional speed
of e-cash does not seem to be a great advantage
even though the security and anonymity of
the technology may prove more attractive.
Gaming websites vary enormously in size and
structure. Some are simple three-page sites
with no additional links, and some are elaborate
(and often repetitive) collections of ten
or more links and sublinks. Most home pages
offer a menu of links. The most common
listings are:
• “About Us” (which may or may not contain
information about the workings of the
• “Contact Us” (usually one or more email
addresses with assurance that someone will
be available to address problems);
• “Frequently Asked Questions” (mostly
about how to deal with transmission and
software glitches, often also addressing legal
issues associated with the questioner’s
• “Help” (a list of solutions to possible financial
and payment problems);
• “Rules” (sometimes a general statement of
how games are to be played and money
handled, sometimes a detailed description
of how each game is to be played); and
• “Security” or “Security Features” (a list of
ways in which a betting transaction with this
website will be expedited and protected).
The question “Is gambling on the Internet
legal?” brings a variety of responses; some
sites simply fail to ask it. Some sites, such as
Global Sports in Costa Rica, say that the only
jurisdiction that counts is the one where the
site is located; since they are licensed in Costa
Rica, for example, Global Sports maintains
that gambling is legal no matter where the
customer is sitting. Some sites warn the
customer to check local laws before entering.
A few list states such as Indiana and Minnesota
as jurisdictions where Internet gaming has
been declared illegal. And many simply say
that the status of a patron’s Internet gaming
activity is a complex problem that has not
been decided definitely or consistently. The
question of taxability of winnings is addressed
by about half of the sites, often with the
answer that no accounting of winnings goes to
any customer’s government, and that it is the
43 A Survey of Electronic Cash, Electronic Banking and Internet Gaming
customer’s responsibility to determine tax
requirements and to comply with them. In any
case, it is clear that customers cannot and
should not rely on site operators for complete
and accurate legal guidance.
The subject of licensing and specific regulatory
requirements is omitted entirely on
many gaming websites, and in some cases
there is no mention of ownership or location.
When licensing is mentioned, the terminology
differs somewhat. Some sites state the
case directly and briefly (for example, “Casino
Money is fully licensed by the government
of Venezuela.”) In a few cases, there is
mention of bonding, periodic monitoring, or
other regulatory activity. In other cases, the
issue of licensing and location becomes split,
as in “Casino Money is a fully licensed
sportsbook operating in Venezuela,” a construction
that may indicate that the location
and the licensing jurisdiction are not the
same. Compare the more specific statement,
“Casino Money is fully licensed by and
operating in Venezuela.”
According to several websites that comment
regularly on Internet gaming, the term license
is commonly used by the gaming business to
bolster its credibility and authenticity to
would-be customers. In some jurisdictions,
such as Australia, advertisement of a license
is indicative that background checks have
been made, that a special fee has been paid,
and that the business is subject to periodic
monitoring and auditing. In other jurisdictions
such may not be the case. The term
license may indicate that a franchise has
been issued to the operator by a software
and electronics firm that supplies it. In
other words, the business is licensed by
another firm but not necessarily by a
government entity.
Also prominent in many (but not all) websites
are efforts to reassure the customer of the
security and reliability of gambling at that site.
In 1998 the Bettorsworld website listed about
twenty online casinos and sportsbooks that
were reported not to be paying out winnings
or to be chronically late in paying. The
motivation of such a list may be suspect.
However, other sources also indicate that a
large number of gaming websites are of the flyby-
night variety. A fair number on
Bettorsworld’s list still have websites and
presumably still take bets. Because even the
reportedly reputable Bettorsworld cannot be
relied upon to provide information as to the
current status of some sites, gaming enterprises
make every effort to reassure the
potential customer.
Nearly all sites go into substantial detail about
how financial transactions are handled,
usually offering a wide variety of ways to
transmit money to open an account. Methods
for the collection of winnings are prominently
mentioned, as are encryption systems designed
to improve the security of credit card use.
Most sites claim to have the most exciting
games, the most sophisticated software, and
the most customers. Many sites also offer play
for fun (especially recommended by some sites
for U.S. customers who live in states that
prohibit gambling for money).
According to one industry analyst, the
technological level of most interactive gaming
sites still is far below the expectations of
Americans accustomed to efficient television
and telephone transmission. Despite the
advertising emphasis on the “virtual experience
of gambling in your own home,” game play
often is slowed by long image downloading
processes and frequent computer crashes; the
system works only as well as its least-efficient
link, which often is the user’s own PC. And
there still is no reliable way for a customer to
be sure he or she will not be cheated by rigged
games or nonpayment of winnings, will not be
breaking some law, or will not have a creditcard
number misused.
Throughout its history, gambling regulation in
the United States has been the province of
state governments. As such, the range of legal
gaming activity in the states is quite varied.
Only two states—Hawaii and Utah—prohibit
gambling altogether. The other states permit
an array of legalized activities, ranging from
bingo, lottery, and race wagering, to full-scale
casino gambling. In addition, under authority
granted by the Indian Gaming Regulatory
Act of 1988, native American tribes have
established casinos, lotteries, and bingo halls
on tribal land in approximately 30 states. In
total, more than 500 casinos exist in the
United States today.
After two years of research into all aspects of
gambling in the United States, the congressionally
mandated National Gambling Impact
Study Commission issued its final report in
June 1999. The commission’s recommendations
on Internet gaming include the following:
• that the federal government prohibit all
Internet gambling that is not already
explicitly permitted; that the United States
Department of Justice develop enforcement
strategies against Internet service providers,
credit card providers, money transfer
agencies, makers of wireless communications
systems, and “others who intentionally or
unintentionally facilitate Internet gambling
• that legislation be developed to prohibit
wire transfers to known Internet gambling
sites or to banks that handle their accounts;
• that any credit card debts incurred in Internet
gambling be made legally unrecoverable;
• and that “the federal government take steps
to encourage or enable foreign governments
not to permit Internet gambling organizations
that prey on U.S. citizens.”
The Internet Gambling Prohibition Act was
first introduced by Senator John Kyl (R-AZ) in
March 1997. The 1997 Kyl Bill would have
amended the Interstate Wire Act of 1961,
which prohibits the use of telephone and
telegraph communications facilities for the
placing of bets on sporting events. The
amendment would include the Internet,
which did not exist in 1961, among the
forbidden media. The final version of the
legislation subjected individual Internet
bettors as well as Internet gaming entrepreneurs
to a fine and/or prison.
The Kyl Bill was passed by the Senate by a
vote of 90 to 10 in July 1998. However, the
companion House bill, introduced by
Congressman Bill McCollum (R-FL), did not
reach the House floor for a vote before the
congressional session ended in the fall of 1998.
In March 1999, Senator Kyl introduced a
new Internet gaming bill that was substantially
similar to the 1998 version. Unlike the
earlier version, the new bill does not make
placing a bet via the Internet a federal
crime; it provides exceptions for fantasy
sports, parimutuel betting, state lotteries,
gaming activities permitted by the Indian
Gaming Regulatory Act and by agreements
45 A Survey of Electronic Cash, Electronic Banking and Internet Gaming
between states and Indian tribes based on
that law, and legally placed bets on horse
races. The bill also provides federal authorities
injunctive powers to shut down web sites; and
it requires gaming companies to comply with
state licensing and enforcement standards.
In June 1999, the Senate Judiciary Committee
approved the 1999 version of the Internet
Gaming Law by a vote of 16-1, sending it to the
Senate floor for consideration. The bill calls for
up to four years imprisonment and up to $20,000
in fines for operators of online casinos and
sportsbooks, and it would extend the provisions
of the Federal Wire Act to cover gambling on
the Internet as well as by telephone and wire.
On November 19, 1999, by a unanimous vote,
the Internet Gaming Prohibition Act passed the
Senate just prior to the start of the Congressional
holiday recess, but the House has not
yet passed any comparable legislation.
In April 1999, Congressmen Bob Goodlatte
(R-VA) and Frank LoBiondo (R-NJ)
announced that they would introduce their
bill in the House of Representatives after the
National Gambling Impact Study Commission
issued its final report in June 1999. On
November 3, the House Judiciary Committee’s
Subcommittee on Crime approved the
Internet Gambling Prohibition Act introduced
by Congressman Goodlatte and five cosponsors.
However, the bill was defeated in the full
House on July 17, 2000, falling 25 votes short
of the two-thirds majority necessary for passage.
Following the defeat, Goodlatte indicated that
he intended to continue seeking passage of the
legislation before the end of the current
session of Congress in December. If he fails, the
bill would have to start again with committee
hearings in the next session of Congress.
Another piece of legislation, the Internet
Gambling Funding Prohibition Act, was
introduced in the House of Representatives on
May 10, 2000. This new bill would prohibit
the use of credit and debit cards, checks, bank
drafts, and electronic transfers to place bets,
collect winnings, or otherwise conduct
gambling activities on the Internet. On
June 28, 2000, the bill was approved by the
House Banking Committee and, as of August 10,
was awaiting further action.
Early in 1999, FinCEN sent a survey to the
offices of the attorneys general of all the states
and United States territories and the Office of
the Corporation Council of the District of
Columbia. The survey posed three questions
related to the jurisdictions’ policy toward
Internet gaming:
• whether the jurisdiction has statutes or
regulations dealing with gaming in general
and, if so, whether any of them might apply
to Internet gaming;
• whether any existing or future statutes of
the jurisdiction apply specifically to Internet
• whether the jurisdiction had pursued any
criminal or civil actions pertaining to
Internet gaming.
Responses were received from 19 states, the
District of Columbia, and Guam.25
Responses to the question of applicability of
current laws or regulations to Internet
gaming overwhelmingly expressed the
opinion that laws designed for conventional
gambling could be interpreted to apply to
Internet gaming, depending on the circumstances
of a particular case. The criterion
most often cited is legal establishment that
Internet gaming actually occurs within the
boundaries of the state in which the gambler
is physically located.
Although no responding jurisdiction cited a law
or regulation specifically enacted to address
Internet gaming, one section of the Nevada
Gaming Control Act lists the Internet as a
“medium of communication,” giving the State
Gaming Control Board official jurisdiction over
Internet gaming. In New Jersey, an article of the
state constitution says that any new form of
gaming must be approved by referendum before
being legalized. Therefore, according to the
spokesperson for the state attorney general’s
office, the current interpretation of that article
makes Internet gaming illegal. Ohio’s interpretation
is that any form of gambling that is illegal
by state law in conventional form also is a
violation of state law when it is disseminated in
the state via a computer system. The Alabama
Attorney General’s office interprets the
definition of gambling devices in the state
code—”any device, machine, paraphernalia, or
equipment that is normally used or usable in the
playing phases of any gambling activity”—as
including Internet equipment. The interpretation
implicitly includes the Internet under the state
laws prohibiting conventional forms of gambling.
Alabama has taken no criminal or civil action
against Internet gaming, but the decision in a
1999 criminal case, brought for possession of
obscene material for transmission via the Internet,
rejected the defense that the relevant law
preceded the development of the Internet and
therefore was not applicable. In Arizona and
Tennessee, the authority to prosecute such cases
rests with local and district prosecutors, respectively,
rather than the state’s attorney general.
In March 1998, the United States Attorney
for the Southern District of New York indicted
21 U.S. citizens for conspiracy to transmit bets
and wagers on sporting events via the Internet,
in violation of the Interstate Wire Act of
1961. At that time, the U.S. Attorney General
issued a statement indicating that Internet
gaming would be considered illegal under
existing federal law.
The defendants were owners, operators, and
managers of nine offshore sports betting
companies based in Curaçao, Costa Rica,
the Dominican Republic, and Antigua, all
of whom had conducted some part of their
business in the United States. All were
identified after federal agents placed
telephone bets via an 800 number from
New York (territory where such bets are
illegal) and were paid when successful. One
defendant, the president of SDP Global of
Costa Rica, pled guilty and promised to pay
a fine of $750,000 and close his operation.
As of February 2000, ten other defendants
had pled guilty to the charges and reached
settlements, and six remained officially
fugitives because they had not answered
the charges. As of that date, only one
defendant, Jay Cohen, had gone to trial.
On February 28, 2000, the United States
District Court in Manhattan found Cohen,
the owner of the Antigua-licensed World
Sports Exchange, guilty of violating the
Federal Wire Act.
Indian Gaming Regulatory Act (IGRA)
As some states were testing how the Indian
Internet lottery fit with state law, a case at
the federal level was expected to eventually
determine whether Indian tribes have special
status that allows them to use long-distance
telephone lines and the Internet to transmit
the lottery to customers in the 33 states
where lotteries are legal. In 1997 the Coeur
d’Alene Tribal Court in Idaho ruled that the
federal Indian Gaming Regulatory Act
(IGRA) protected the tribe’s lottery from
47 A Survey of Electronic Cash, Electronic Banking and Internet Gaming
interference by state legal authorities and
that long-distance telephone companies
could not refuse 800 service by citing the
1961 Wire Act or state laws. (The tribe also
argued that long-distance and Internet
communication were needed because their
distance from population centers presented a
competitive disadvantage.) AT&T, the
company chosen to provide this service,
found itself caught between the tribal court
decision, violation of which could lead to a
contempt citation, and the possibility that
supplying an 800 number would lead to
criminal prosecution by states whose attorneys
general had advised that such service
would be considered a violation of state law.
In August 1997, AT&T sought declaratory
relief in federal court.
In December 1998, the United States
District Court for the District of Idaho
denied a complaint brought by the Coeur
d’Alene Indian tribe against AT&T for
having refused the tribe an 800 number to
be used by customers playing its National
Indian Lottery. The court ruled that the
tribal court ruling did not require AT&T to
supply an 800 number in any state where
transmission of gaming activities would
violate state law. In such states, a separate
agreement must be reached to address the
state’s regulatory interests before the lottery
can be offered.
The special status granted by the IGRA was
ruled to apply only to gaming activities physically
located on the reservation, a line of
reasoning that caused the closing of both the
telephone and Internet phases of the lottery,
although the ruling itself applied only to
telephone lines. If the lottery is deemed not
to be entirely operated on tribal lands, the
Internet phase is open to criminal prosecution
by receiving states in the same way that
offshore websites with some operations in the
United States have been prosecuted. The tribe
appealed the decision to the United States
Ninth Circuit Court, which remanded the case
to a Missouri state court in September 1999.
Argument of the tribe’s legal standing continued
in that court into 2000.
Several states have taken legal action against
individuals and companies that have offered
offshore Internet gaming services to individuals
within the state jurisdiction. Authorities have
initiated civil and criminal cases, issued
official policy statements, and sought to restrict
transmission in other ways. The following
discussion is a summary of some of the state
actions to date.
In December 1997, the Attorney General of
the State of Florida signed an agreement
with Western Union to the effect that the
latter company cease providing Quick Pay
money transfer services from Florida residents
to known offshore gaming establishments.
Quick Pay is a reduced-fee system normally
used to expedite collection of debts or
payment for goods. According to the Florida
State Attorney General and a Western
Union spokesman, in 1998 the policy of
Quick-Pay restriction yielded satisfactory
results, and the prohibition of the use of
Quick Pay accounts for gaming purposes was
upheld in the federal court case Cheyenne
Sales Limited v. Western Union Financial
Services International. No known website,
however, includes mention of the restriction
on the use of Western Union services by
Florida residents.
The state also was able to persuade the
media to stop advertising offshore gaming
sites. Florida contended that the advertising
of such sites in the state constitutes doing
business in the state and invokes all the
legal restrictions inherent in aiding and
abetting such activity. In this case, those
restrictions include the placing of illegal
bets (i.e. a form of gambling not specifically
permitted by law), which is a misdemeanor,
and running a betting operation, which is a
third-degree felony.
In 1998 Indiana’s Attorney General issued a
policy statement on Internet gaming. The
statement was in response to concerns
expressed by the Indiana Commissioner of
Higher Education about the proliferation of
gambling on college campuses. The Attorney
General noted that Indiana law prohibits all
forms of gaming that are not specifically
permitted, i.e. river boat gambling, pari-mutuel
betting on horse races, charitable gambling,
and the state lottery. He further asserted that
a person placing a bet from Indiana with an
offshore gaming establishment was engaged in
in-state gambling just as if the person engaged
in conventional gambling. He then concluded
that the solicitation and acceptance of
wagers are subject to prosecution under
Indiana state law.
Following the statement, the Attorney
General’s office sent email messages to more
than 100 offshore Internet gaming operators
demanding that they cease offering their
services in the state and that they post a
warning on their websites that using them is
illegal for Indiana residents. (Two such
warnings have been discovered, on the sites
of 123 Casino and Sportsbook in Grenada,
and AAA Casino, whose location is unknown.)
According to the Attorney General, the main
reason for his warning was to bring attention
to the danger of exposing minors to
Internet gaming, not to enforce a given law.
As of March 1999, Indiana had not developed
a policy regarding criminal sanctions
against Internet gaming enterprises offering
their services in the state.
In 1997 the Office of the Attorney General of
Maryland reached an out-of-court agreement
with RealTIME, which offered Internet games of
chance to users and whose equipment was located
in Maryland. RealTIME, which had argued that it
should not be prosecuted in Maryland because it
was not offering gambling to residents of Maryland,
agreed to cease its operations in Maryland.
In 1997 the Attorney General of Minnesota
brought suit against Granite Gate Resorts, a
Nevada corporation, and its president, Kerry
Rogers, based on the defendants’ operation
of a Belize-based Internet sports betting
operation. The lawsuit alleged that Granite
Gate and Rogers engaged in deceptive trade
practices, false advertising, and consumer
fraud by offering Minnesotans access to sports
betting. Such betting is illegal under state law.
The trial and appellate courts rejected the
defendants’ argument that Minnesota courts
lacked jurisdiction because the defendants had
merely placed information on the Internet and
Minnesotans had chosen to access it. The
appellate court concluded that “Granite Gate’s
advertising had an effect in Minnesota, that the
effect was intended, and furthermore that
Internet advertising is not different from other
advertising forms such as telephone solicitation
or radio advertising.” Minnesota courts had
previously concluded that such advertising
allowed sufficient contacts with potential
customers to establish personal jurisdiction.
The Minnesota Supreme Court affirmed the
appellate court’s decision in April 1999.
49 A Survey of Electronic Cash, Electronic Banking and Internet Gaming
In April 1997, the State of Missouri brought a
civil suit against Interactive Gaming and
Communications of Pennsylvania, which ran
the Sports International Internet sports
betting establishment of Antigua, and against
its chief executive officer, Michael Simone.
As in Minnesota, the case was based on
state consumer law. The case was initiated
when a state law enforcement agent saw an
advertisement for the sports betting website
and placed a wager over the company’s 800
number, which was located in Pennsylvania.
As a result of the state’s civil case, a restraining
order and fine were issued. A second wager,
placed after the restraining order, led to a June
1997 criminal indictment against Interactive
Gaming and Communications for promoting
gambling by allowing Internet bets of more
than $100. Simone eventually pled guilty to a
lesser charge and was fined.
Consistent with its position that state law
prohibits Internet gaming, Missouri also
sought a permanent injunction against the
Internet lottery run by the Coeur d’Alene
Indian Tribe of Idaho. The case was removed
to the federal level, where in 1999 the United
States Court of Appeals rejected a district
court decision that the lottery was protected
by the 1988 Indian Gaming Regulation Act.
The court held that the lottery would be
protected only if the gaming occurred on
Indian lands. At the direction of the Court of
Appeals, the case has been remanded for a
decision on the legal location of the lottery,
which would be the basis of a final decision.
New York
In October 1998, the New York State Attorney
General’s office brought civil charges against
Casino International, an Antigua-based
Internet gaming company, for several violations
of state gaming laws. This action was taken
pursuant to New York state law forbidding all
forms of gambling except the state lottery. The
Attorney General’s office alleged that Casino
International maintained an illegal Internet
gaming site in the United States through two
Internet Service Providers (ISP) based in Long
Island, New York.
The gaming company failed to respond to the
state’s charges, and in May 1999, a default
judgment was issued. According to the Attorney
General’s office, Casino International
distributes its gaming website through ISPs in
every U.S. state. Although the company
claims to be licensed by the Antiguan
government, the Free Trade Zone Commission,
which is the official licensing body, does
not support this claim.
According to the Attorney General’s office,
the settlement did not hold the New York
ISPs responsible for the alleged violation.
The Attorney General’s office likened the
ISP’s position to that of an express mail
service that unknowingly delivered illegal
drugs; as part of the injunctive relief in the
case, the New York ISPs were simply forbidden
to continue the practice.
New York also brought a civil case in 1998
against World Interactive Gaming Corporation,
an Internet casino operator and a subsidiary of
Florida-based Atlantic International Entertainment,
for fraudulent solicitation of stock
investments and for violation of several federal
and state gambling laws based on operation of
an Internet casino. That case is pending.
In September 1997, the State of Wisconsin
filed suit against three Internet gaming
operations: Net Bet, Online International,
Inc., and the Coeur d’Alene Indian lottery.
Net Bet, based in Nevada, operated Casinos
of the South Pacific in the Cook Islands,
whose website advertisement said that only
residents of Nevada, Minnesota, New Jersey,
and the Cook Islands were prohibited from
placing legal bets. In May 1998, the Net Bet
defendants agreed to include Wisconsin in their
list of prohibiting jurisdictions and to cease
sending betting information into Wisconsin.
Online International, Inc., a Wisconsin-based
corporation, planned to operate an Internet
gaming website from a location in that state to
supply Internet gaming to jurisdictions outside
the United States. In late 1998, the corporation
was ordered by the court to dissolve. In the
third case, that of the Coeur d’Alene Indian
lottery, the court held that the tribe was
immune from suit but that Wisconsin does
have jurisdiction over Unistar, the company
engaged by the tribe to run its Internet lottery.
Unistar was alleged to have advertised gaming
on a website aimed at Wisconsin residents (an
action that the tribe could not authorize outside
its reservation), misrepresenting the legality of
gambling in the state. In May 1999, after the
tribe and Unistar had shut down their lottery
following a separate court ruling in Idaho, they
agreed not to offer the lottery to Wisconsin
residents until they had obtained a specific
ruling on its legality from a court in Wisconsin.
Private lawsuits also have set precedents for
the nature and treatment of Internet gaming.
In 1997 a Texas citizen, Tom Thompson, sued
Handa-Lopez, Inc., operator of the Curaçaolicensed
Casino Royale Internet casino, for
nonpayment of winnings. In a case before the
United States District Court, Western District
of Texas, the company claimed it had aimed
no explicit advertising at Texas, and hence
had established none of the contacts that are
necessary for a state to have jurisdiction. The
plaintiff argued (and the court agreed) that
the act of Internet advertising implicitly
includes everyone in the world able to access
the website, thus automatically establishing
the minimum contact that is needed for due
process. Here the court confirmed what
some Internet gaming enterprises say is a
fundamental principal: if they seek business
worldwide, they must be prepared to operate
lawfully worldwide.
In 1998 a different type of court test challenged
the status quo of Internet gaming operations.
After losing more than $70,000 in gambling on
at least ten different Internet sites, California
resident Cynthia Haines was sued by her bank
for nonpayment of the accrued debt on several
credit cards. Haines countersued, claiming
that the credit card companies were profiting
from Internet gaming activity, and argued that
such profit taking is both illegal and unfair
because no authority regulates Internet gaming.
The defendants argued that the case was
inadequate because the plaintiff had sued only
the credit card companies and not the Internet
gaming companies, and that in California
such a case could not be based on admittedly
illegal conduct by the plaintiff. Experts
projected that a finding for the plaintiff could
end the credit-card option for Internet gaming
companies, forcing them to rely on other
forms of payment. Beginning in July 1999, a
series of out-of-court settlements were
reached with the companies that Haines had
As a result of the Haines case, MasterCard
has announced rules for the use of its credit
cards for Internet gambling. According to
the new rules, in the future all Internet
casino merchants seeking to use MasterCard
must post on their websites a notice that
Internet gaming may not be legal in the
state where a potential participant is located,
51 A Survey of Electronic Cash, Electronic Banking and Internet Gaming
and that it is the responsibility of the consumer
to ascertain his/her state’s legal
position. In addition, Internet merchants
must ascertain and record the state or
country of each potential customer, and
card-issuing institutions such as banks must
receive notice of all Internet gaming transactions.
Such notification make it possible
to code records for future reference.
According to MasterCard, the new rules
are an effort to accommodate the wide
variations in the legal status of Internet
gaming around the world and the role of
MasterCard as a payment system for individuals,
banks, and merchants in many
different countries. Visa International has
adopted similar requirements for its merchants.
(See Appendix G for a discussion of Internet
gaming regulation around the world.)
In 1996, Internet gaming companies formed
the Interactive Gaming Council (IGC), an
international trade group within the Interactive
Services Association (ISA). The stated goals
of the IGC are to provide a forum for legitimate
companies to discuss problems and advance
their interests, to establish fair industry guidelines
that will improve customer confidence,
and to represent the industry in public policy
discussions and disseminate information about
such issues. The IGC now has at least 55
members, but only a partial membership list is
available because some companies prefer not
to be publicly identified.
The Council has pushed for an industrywide
code of conduct that would include,
inter alia, truth in advertising, privacy and
confidentiality for customers, strict licensing
requirements, and observance of the gaming
laws of jurisdictions from which customers
may be placing bets. In 1998 the IGC proposed
an independent, international Internet
Gaming Control Board that would be
overseen by the ISA and would establish an
international certification and regulation
system for Internet gaming licensees.
Two diametrically opposed regulatory
philosophies currently exist with regard to
Internet gaming: a strategy calling for
legalization and regulatory controls and a
strategy prohibiting such activity.
Opposition in the United States to legalized
Internet gaming is based on several factors.
First, there is the fear that Internet gaming
and, more specifically, the underlying financial
activity, offer unique opportunities for
money laundering, fraud, and other crimes.
Government officials have also expressed
concerns about underage gaming and
addictive gambling, which some claim will
increase with the spread of Internet gaming.
Others point to the fact that specific types
of Internet gaming may already be illegal
under state laws.
On the other side of the argument is the
strategy of legalization and regulation, which is
urged by the IGC on behalf of the worldwide
industry. Many countries subscribe to this
approach and have found that strategies other
than prohibition are workable from their own
economic and law-enforcement perspectives.
Regardless of which strategy is pursued,
technological advances are likely to have great
impact on the development and implementation
of policy. For example, in 1998, Atlantic
International Entertainment announced plans
to develop a “portable gaming center” that
would bring virtual casinos and sports betting
to conventional television sets via telephone
lines. Such a device would make offshore
gaming operations available to customers who
do not have computers or Internet access.
Technology is also moving the industry rapidly
toward a point where financial transactions can
be fully opaque. Although electronic cash has
not “arrived” in the commercial world at
large, it is being mentioned with increasing
frequency by Internet gaming sites as a way to
guarantee security, a factor which experts cite
as one of the chief concerns of potential
Internet gaming customers.

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