December 24, 2011
Ruling by Justice Dept. Opens a Door on Online Gambling
WASHINGTON — The Justice Department has reversed its long-held opposition to many forms of Internet gambling, removing a big legal obstacle for states that want to sanction online gambling to help fix their budget deficits.
The legal opinion, issued by the department’s office of legal counsel in September but made public on Friday, came in response to requests by New York and Illinois to clarify whether the Wire Act of 1961, which prohibits wagering over telecommunications systems that cross state or national borders, prevented those states from using the Internet to sell lottery tickets to adults within their own borders.
Although the opinion dealt specifically with lottery tickets, it opened the door for states to allow Internet poker and other forms of online betting that do not involve sports. Many states are interested in online gambling as a way to raise tax revenue.
New York has offered an online subscription service since 2005 that allows state residents to enter a string of Lotto or Mega Millions drawings.
The director of the New York Lottery, Gordon Medenica, said Saturday that the lottery had built a broader online gaming system for New York, but that the contractor that put the system together was wary about moving forward because it feared it could get into legal trouble.
“We’ve been waiting for a couple years,” Mr. Medenica said in a telephone interview. “We’re thrilled that this ruling has now come down and confirmed that our legal analysis was correct all along.”
As a result of the new policy, New York Lottery officials said they planned to add two additional jackpot games, Powerball and Sweet Million, to its current online lottery subscription service, and would allow New York residents to buy single-draw tickets online for the first time.
Mr. Medenica said it would take several months for the lottery to finalize the new offerings, and he said officials would “take a very cautious initial approach” in rolling out additional online options.
Michael Jones, the superintendent of the Illinois Lottery, said the request for clarification was prompted by research the state commissioned several years ago that indicated online sales could drive up participation. “When you look at the Internet, which is what everybody uses these days to buy everything, it seemed like a very, very logical thing to use the Internet to increase the player base,” Mr. Jones said. “States were in dire financial problems — the ability to use the lottery to raise revenue in a nontax way was a significant thing for states to do.”
He also said that online sales would enable the lottery to regulate purchases. “Right now we can’t guard against someone walking into a lottery retailer and buying too many tickets and behaving excessively,” Mr. Jones said. “Now with credit card purchases, we can guard against excessive play.”
Illinois could begin selling lottery tickets online in as soon as three months, he said.
The District of Columbia and Nevada have both approved limited forms of Internet gambling, and New Jersey has been considering legislation allowing sports betting and other forms of Internet gambling.
Steven Grossman, the Massachusetts state treasurer and the chairman of the state’s Lottery Commission, called the opinion a “turbocharged opportunity to engage new markets.”
“This will put additional pressure on Congress and others to allow online poker and other Internet gambling,” Mr. Grossman said.
Estimates of the size of the online gambling industry vary widely, from as low as $6 billion to as high as $100 billion. But even at the lower end, Mr. Grossman said, “that’s tens of billions of dollars that goes offshore.”
In a separate request in July, Senators Harry Reid, Democrat of Nevada, and Jon Kyl, Republican of Arizona, asked the Justice Department to clarify its position on Internet gambling, seeking either to affirm that federal law prohibits gambling over the Internet or to make sure that Congress has a role in drafting any expansion of online betting.
In a reply letter that was also issued Friday, the Justice Department said that while the new policy “differs from the department’s previous interpretation of the Wire Act, it reflects the department’s position in Congressional testimony at the time the Wire Act was passed in 1961.”
The new policy merely reverses the Justice Department’s longstanding position that all forms of online gambling are illegal in the United States. It does not necessarily pave the way for national rules governing online gambling.
But experts in gambling law said Saturday that the new policy does imply that states can band together to allow gambling across state borders. The exception would be online sports betting, which is explicitly prohibited under federal law.
“The next step,” said Mark Hichar, a partner and head of the gaming law group at the law firm Edwards Wildman in Boston, “could be for states to enter into compacts with each other to have interstate Internet wagering,” as some do now for horse racing.
The decision was cheered by states that have been contemplating gambling for the first time. But some gambling interest groups, like the American Gaming Association, which represents casino operators and makers of gambling equipment, said the opinion makes clear the need for a federal law establishing consistent regulatory standards.
“This is quite a Christmas present,” said I. Nelson Rose, a distinguished senior professor at Whittier Law School and a consultant to gambling companies and governments. “It says, ‘Keep it in your state and it’s legal.’ Given the continuing budget crisis, and so many states looking for ways to raise money, it’s really a major decision.”
Virginia A. Seitz, an assistant attorney general in the Justice Department’s office of legal counsel, wrote in the opinion that the prohibition in the Wire Act of using interstate communications for gambling applies only to betting on a “sporting event or contest.”
As long as the gambling operator and the customer are within the same state, the opinion says, and the betting activity does not include sporting events, a state’s own laws apply. Another federal law, the Unlawful Internet Gambling Enforcement Act of 2006, made it illegal for financial institutions to process payments for online wagers.
Taken together, the two laws allowed the Justice Department to invoke its authority over interstate communications as a means of blocking all Internet gambling.
Online gambling has been a focus in the Justice Department for years, but it burst into public view in April, when federal prosecutors charged the operators of three of the most popular online poker sites with fraud and money laundering.
The three sites, Full Tilt Poker, PokerStars and Absolute Poker, are based in Antigua and the Isle of Man, where online gambling is legal. That had made it difficult for American authorities to crack down on the operations, which had millions of United States customers.
But the Justice Department charged that the companies had used United States banks to process their transactions, violating the 2006 law that governed payment processing.
Those payment restrictions do not apply to transactions within a single state, however. With the ruling that the Wire Act applies only to sports betting, the way is clear for in-state online poker and other games.
Some gambling experts believed that the Justice Department’s position that the Wire Act prevented any Internet gambling conflicted with a federal appeals court decision, and therefore the new opinion simply confirmed what was already law.
But states have been reluctant to rely on the appeals court decision, handed down in 2002 by the United States Court of Appeals for the Fifth Circuit in New Orleans, because, in addition to the Justice Department’s continued crackdown, other federal and state court opinions offered conflicting directions.
The Justice Department previously tried to crack down on Internet gambling by going after companies that facilitated advertising for the gambling sites. In December 2007, Microsoft, Google and Yahoo paid a combined $31.5 million to settle federal charges that they promoted illegal gambling by serving ads for the gambling operations to other Web sites.