An Illustrative Legislative History of the UIGEA

On Oct. 13, 2006, then U.S. President George W. Bush signed the SAFE Port Act of 2006, which contained as its eighth title an odd piece of legislation called the Unlawful Internet Gambling Enforcement Act, yielding the vowel-intensive acronym UIGEA. The act’s authors, and others who worked closely for or against it, pronounce the acronym “you-GEE-uh,” but many in the gaming industry, particularly non-Americans, are given to saying “you-AY-guh.” But whatever ambiguities may afflict the act’s moniker, they are dwarfed by the popular misunderstanding of the law’s effect.

The popular narrative in the gaming industry is that, prior to UIGEA, the acceptance of Internet wagers from the United States was legal, or at least not expressly illegal, and that UIGEA finally clarified U.S. law to make all Internet gaming illegal. As is often the case with popular narratives, this one is simply and demonstrably wrong, but yet the misunderstanding has proven remarkably durable. An understanding of the legislative process that produced this law and its regulations can be instructive as to why UIGEA is as it is, as well as explaining the policy developments that have followed it.

Section 5361(b) of UIGEA reads as follows:

(b) RULE OF CONSTRUCTION — No provision of this subchapter shall be construed as altering, limiting, or extending any Federal or State law, or Tribal-State compact permitting or regulating gambling within the United States.

An odd provision, to be sure, in a statute that many believe was intended to clarify U.S. Internet gaming law once and for all. The largely untold story about UIGEA is the lengths to which its authors ultimately went to avoid clarifying U.S. law governing Internet gambling. The version of UIGEA that was enacted in the SAFE Port legislation was the last of many iterations of Internet gambling prohibition or enforcement legislation. Looking at the decade-long process that produced the law is helpful in understanding its effect.

As we all know, until Dec. 23, 2011, the U.S. Department of Justice (DoJ) took the position that the Wire Act (18 U.S.C. §1084) prohibited any telecommunicated wager, and most of us are aware that in 2002 the Fifth Circuit Court of Appeals upheld a lower court decision that the Wire Act applied only to sports betting. However, as far back as 1995, the National Association of Attorneys General (NAAG) had been concerned that the Wire Act might not apply to non-sports gaming. Prior to the advent of Internet gaming, the question was largely moot; most non-sports gaming is impractical over a telephone. But at NAAG’s request, in 1995, Sen. Jon Kyl (R-Ariz.) included a provision in the Crime Prevention Act of 1995 that clarified the Wire Act as applying to non-sports betting. No action was taken on that bill.

In 1997, Kyl again introduced a bill aimed at clarifying the application of the Wire Act. The bill was reported by the Senate Judiciary Committee, and on July 23, the Senate voted 90-10 to add a modified version of that bill as an amendment to the bill making appropriations for the Departments of Commerce, Justice, State and Judiciary. The Internet gambling prohibition was not included in the final version of the so-called CJS Appropriations bill that was finally enacted that year. The differences between the committee-reported bill and the version that was offered as an amendment are critical.

First, for the first time, the authors seemed to understand that, inasmuch as most providers of Internet gambling services to Americans were outside the U.S.—and many of them were providing sports betting, which was clearly illegal at the time—it was very unlikely that a simple legal prohibition would have much practical effect. For the first time, the amendment included an enforcement provision, a requirement that U.S. ISPs block particular Internet URLs when they were notified by law enforcement that the URL belonged to a website that was accepting illegal Internet bets. For all future iterations of Internet gambling legislation, the provisions that provided for practical enforcement against offshore sites became the focus far more than the statutory prohibition.

Second, and also for the first time, the version that became the amendment exempted from the Wire Act prohibitions wholly intrastate Internet bets on pari-mutuel racing or on lotteries. This modification was presumably included at the request of horse racing and lottery interests. At that time, the horse racing industry was engaged in advanced deposit wagering (ADW) over the Internet, which the industry felt was authorized by the Interstate Horseracing Act (IHA) of 1978. In the ensuing Congresses, the treatment of intrastate Internet bets and Internet ADW bets on horse racing bedeviled the legislation’s proponents.

In the 106th Congress, Kyl introduced S. 629, which again combined a Wire Act clarification with an ISP-based enforcement mechanism; Rep. Bob Goodlatte (R-Va.) introduced a similar measure (H.R. 3125) in the House. Once again, those bills exempted from the Wire Act Internet wagers conducted by state lotteries; Internet wagers on horse racing, dog racing and jai alai; and certain wagers conducted pursuant to the Indian Gaming Regulatory Act.

That year, in testimony before the House Judiciary Committee, Deputy Assistant Attorney General Kevin DiGregory stated the department’s concern that H.R. 3125 would legalize Internet horse bets that the department considered illegal, notwithstanding the Interstate Horseracing Act. :

“H.R. 3125 will allow gambling online that currently is not allowed in the physical world. For example, people cannot not legally call gambling businesses in other states from their homes and place bets on horse races. Yet, H.R. 3125 would allow them to place the same such bets over the Internet. It is hard for the Department to understand why conduct previously deemed unacceptable in the physical world and over the telephone should now be legal when carried out in cyberspace.”

S. 629 ultimately passed the Senate on a voice vote at the end of 1999. However, in the House of Representatives, the exemptions for certain forms of gaming that the Justice Department deemed illegal at the time brought more controversy to the legislation. During committee consideration of the bill, the National Association of Convenience Stores successfully pushed for an amendment that would have removed the exemption for Internet lottery ticket sales. On July 17, 2000, the Clinton administration issued a Statement of Administration Policy in opposition to H.R. 3125, citing the exemption provisions as a primary problem. When H.R. 3125 was considered by the full House of Representatives, it was brought up under a mechanism that prohibited amendments to the bill (including amendments that might remove the exemptions, which opponents called carve-outs ), but which required a two-thirds majority for passage. While a majority of members did support the legislation, it was less than two-thirds, and the bill failed on a 245-159 vote.

At the end of 2000, Rep. Jim Leach (R-Iowa), an ardent opponent of all gambling, saw what was happening with the Goodlatte bill and decided to pursue a different approach. Leach was then Chairman of the House Banking Committee, and he proposed H.R. 4419. Leach’s bill, the Unlawful Internet Gambling Funding Prohibition Act, was intended to prohibit the processing of payment for any illegal Internet wager. In an effort to steer clear of the carve-out and exemptions morass, however, Leach’s bill did not actually define what constituted an illegal Internet wager, instead relying on other law to do so. He hoped that this approach would provide an easily passable bill by avoiding the problems that arise in trying to define what sorts of wagers are or are not legal. The Leach bill was approved by the Banking Committee on July 20, 2000. However, the 106th Congress adjourned before any further action could be taken on the legislation. Though it would be six more years before any legislation was enacted in this area, the Leach bill became the model for what became the UIGEA.

Also at the end of 2000, the horse racing industry’s allies in Congress succeeded in adding language to a FY2000 appropriations measure that affirmatively authorized in-home horse wagering. This effort was intended as a “clarification” concerning the application of the IHA vis-à-vis the prohibitions contained in the Wire Act. However, in his signing statement for that legislation, then-President Clinton reiterated the Justice Department opinion that, while the provision did make certain Internet horse bets legal under the IHA, Internet horse wagers would nevertheless continue to violate the Wire Act. It bears mentioning that, despite the department’s statements about the legality of Internet horse bets, they have never chosen to prosecute someone for offering such bets pursuant to the IHA.

The 107th and 108th Congresses struggled with Internet gambling prohibition bills following both the Leach model (simple payment processing prohibition with no Wire Act provisions) and Goodlatte model (Wire Act clarification paired with enforcement provisions). While space considerations prohibit a thorough discussion of those efforts here, suffice it to say that Leach-type bills proved more successful in the process.

One important development during that period, however, was the realization by certain U.S. gaming interests that, if a Leach-type bill were enacted requiring payment processors to block payments for illegal Internet gambling but without any clarification of what that term might mean under the Wire Act, those payment processors would block anything not specifically exempted.

The American Gaming Association (AGA) and others then sought a clarification that would make clear that if states were to license and regulate Internet gambling on an intrastate basis (something the DOJ considered to be prohibited by the Wire Act, but which seemed possible in light of certain court decisions), the payment processing prohibition would not apply to such bets or wagers.

In H.R. 556, Leach’s 2001 bill, the AGA’s concerns were addressed by the addition of an exemption so that the payment processing prohibition would not apply to “any transaction authorized under State law with a business licensed or authorized by a State.” A similar exemption was later added for Internet wagers conducted pursuant to the Interstate Horseracing Act.

To be clear, these exemptions did not clarify such bets or wagers as legal under the Wire Act; the legislation did not seek to resolve that difficult question. Rather, the exemptions simply made clear that, legal or not, bets or wagers subject to the exemptions would not be subject to the payment processing prohibition.

Opponents of the bill argued that, in the absence of policy clarification, exemption from enforcement constituted de facto legalization, and at different times, Indian tribes (who felt that they were being treated unfairly vis-à-vis state-licensed entities), convenience stores and others railed against this new form of exemption.

To address the question of whether the bill authorized new forms of online gambling, an amendment was offered by Rep. Sue Kelly (R-N.Y.). The Kelly amendment to H.R. 2143 (a Leach-type bill introduced by Rep. Spencer Bachus (R-Ala.) added a “Common Sense Rule of Construction.” This amendment was incorporated into Section 5 of H.R. 2143 and stated simply: “[n]o provision of this Act shall be construed as altering, limiting, extending, or changing the status of, or otherwise affecting any law relating to, affecting, or regulating gambling within the United States.” Variations on this provision have been included in every subsequent iteration of Leach-type legislation, including UIGEA itself.

In the 109th Congress, the House again passed a bill (H.R. 4411) that was a Leach-Goodlatte hybrid, containing both a Wire Act clarification and a payment processing enforcement mechanism, by a vote of 317-93. However, H.R. 4411 gained little traction in the Senate because of political difficulties surrounding its exemptions from the Wire Act.

Kyl, by that time, had abandoned efforts to amend the Wire Act and was instead pursuing a pure Leach-type approach to Internet gambling prohibition. In September 2005, Kyl sought to offer a Leach-type Internet gambling prohibition amendment during debate on the Commerce-State-Justice appropriation; however, that amendment was rejected on a point of order that it was non-germane.

However, Kyl’s subsequent effort during the evening of Sept. 29, 2006 was successful, as he, with the aid of Senate Majority Leader Bill Frist (R-Tenn.) added similar language to the conference report for the SAFE Port legislation. Title VIII of the SAFE Port Act prohibits payment processing for “unlawful Internet gambling” with that term only defined by other federal or state law. It consciously avoids discussion of the Wire Act and contains a version of the aforementioned Kelly amendment that states in unambiguous terms that it is not changing U.S. gambling law.

Once enacted, UIGEA required the U.S. Department of the Treasury and the Board of Governors of the Federal Reserve to issue regulations providing guidance for the financial industry to comply with the new law. While an entire paper could be written about that rulemaking, there is one point of particular relevance to this paper. Proponents of UIGEA, including Kyl, Goodlatte, Bachus, the sports leagues and others, urged the two agencies to create a list of prohibited businesses to which U.S. financial institutions should not transfer money, modeled after the list of terrorists and their supporters held by the U.S. Office of Foreign Asset Control (OFAC). In doing so, of course, the regulatory agencies would then have to effectively clarify in regulatory law the definition of “unlawful Internet gambling” before they could determine who was engaged in such activity.

The agencies chose not to try to develop such a list. In testimony before Congress explaining why the agencies were struggling with the regulation, the Federal Reserve official in charge of developing the regulation gave as one reason: “The activities that are permissible under the various federal and state gambling laws are not well-settled and can be subject to varying interpretation.” In the end, the regulation directed financial services providers to treat merchant customers in the Internet gambling sector as legal if they could show a U.S.-issued gaming license or if they could provide a well-reasoned legal opinion that their activities were legal. In short, with Congress having punted to the regulators the definition of “unlawful Internet gambling,” the regulators, in turn, decided to punt it to the lawyers for their various opinions as to what the term might mean.

On Dec. 23, 2011, the U.S. Department of Justice Office of Legal Counsel issued a memorandum reversing the department’s long-held view that the Wire Act applies to non-sports betting. Given that the public policy odyssey that brought us to the present began with Kyl’s simple attempt to clarify that the Wire Act did cover non-sports betting 17 years ago, some might argue that this process has come full circle. This development has prompted some in Congress to take the position that it is finally time for Congress to clarify U.S. law regarding Internet gambling where UIGEA failed to do so. If they succeed in doing so, we can only hope that the new law, in addition to yielding more legal clarity, will produce a more user-friendly acronym.

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