Prosecutors, plaintiffs aim to curb Internet gambling.

Hockey star Jaromir Jagr--who won fame playing forward for the Pittsburgh Penguins, Washington Capitals, and New York Rangers--has become the celebrity face of a different game: Internet gambling. Jagr, the highest paid player in the National Hockey League, lost $500,000 over two years by betting on sports events via an Internet site.

"It wasn't smart," said Jagr.

And it may have been illegal--although under current law, that's far from clear. With Internet gambling bills stalled in Congress, prosecutors seeking to stop abuses in online betting have been forced to rely on a 43-year-old statute whose authors could not have predicted the emergence of the Internet. In state courts, lawyers representing consumers who they say were lured into betting and losing online have turned to antigambling and consumer protection laws for remedies.

"Internet gambling differs from other forms of gambling in that there are few--if any--regulations to assure the fairness of games or establish the responsibility of game operators," according to an American Psychiatric Association (APA) mental health advisory on Internet gambling. Those who gamble online may be subject to fraud or theft by the Internet sites they frequent, which may also engage in criminal pursuits like money-laundering.

The Internet offers everything from sports betting and casino-style games to lotteries, bingo, and online tournaments in which people pay to play and winners receive prizes. Any of these activities may be considered gambling.

"Internet gambling involves any activity that takes place via the Internet and that includes placing a bet or wager," the General Accounting Office reported in 2002. "Courts generally have defined a bet or wager as any activity that involves a prize, consideration, and chance." Bettors, it found, are usually in different jurisdictions from those of the publishers of the Web sites they use.

Between 1997 and 1998, the number of Internet gamblers roughly doubled, as did revenues, going from almost 7 million gamblers generating about $300 million to 14.5 million gammers generating $651 million, according to the federal National Gambling Impact StudyCommission. The commission estimated that gambling problems cost the nation about $5 billion annually and recommended in 1999 that Congress ban all Internet gambling in the United States because of the difficulty of regulating its fairness and safety.

Brick-and-mortar casinos are monitored by regulators who visit the physical sites, examine the records, and verify background checks of the owners, operators, and employees. But these checks cannot be conducted in the online gaming industry, and fraud is widespread. Operators can tamper with software to manipulate games in their favor; make unauthorized withdrawals from credit cards or offshore accounts; collect from losers and fail to pay winners; and alter, move, or remove Web sites almost instantly.

"We now have seen evidence that organized crime is moving into Internet gambling," said John Malcolm, deputy assistant attorney general for the Department of Justice criminal division, in testimony before the Senate Committee on Banking, Housing, and Urban Affairs last year.

"Internet gambling businesses provide criminals with an easy and excellent vehicle for money-laundering, due in large part to the volume, speed, and international reach of Internet transactions and the offshore locations of most Internet gambling sites, as well as the fact that the industry itself is already cash-intensive," he said.

Pursuing the sites

Almost all states have made it illegal to run gambling businesses other than state-approved ones such as lotteries, horse racing, or riverboat gambling. Nevada is the only state where sports betting is legal. Illinois, Louisiana, Nevada, Oregon, and South Dakota have laws specifically banning Internet gambling, and the laws in other states that bail gambling generally apply to online gambling as well.

The Wire Act, enacted in 1961 to prohibit sports betting, is the main federal statute used to prosecute Internet gambling cases. Under the act, a person "engaged in the business of betting or wagering [who] knowingly uses a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers, or information assisting in the placing of bets or wagers, on any sporting event or contest" can be fined or jailed for up to two years. The act does not prevent the transmission of "information assisting in the placing of" those bets between jurisdictions where sports betting is legal.

The act's ambiguous wording raises questions about whether the Internet qualifies as a "wire communication" and whether other types of gambling (casino games, for example) are covered "contests."

Also, the act makes it illegal only to receive wired bets, not to place them. It raises jurisdiction issues: Where do Internet bets take place? Is it where the gambler's personal computer is located? At the point of financial transaction (a bank or credit card company)? On the server of the Internet provider that hosts the gambling site?

The FBI used the Wire Act to prosecute an offshore Internet gambling site in United States v. Cohen, and the Sec ond Circuit upheld the trial court's ruling that site owner Jay Cohen violated three clauses of the act. (260 F.3d 68 (2d Cir. 2001).)

Cohen moved from California to Antigua to start World Sport Exchange (WSE), a sports-betting company that targeted U.S. customers with newspaper, TV, and radio ads inviting them to bet with WSE by toll-free telephone or the Internet. Customers had to wire at least $300 to open an account in Antigua with WSE; then they could call or e-mail the company to request a bet. WSE would immediately issue an automatic acceptance and confirmation.

Over 15 months, Cohen reaped $5.3 million in wired U.S. funds, logging over 60,000 phone calls from U.S. customers, including more than 6,100 from New York.

The Second Circuit noted that betting in New York is illegal and found Cohen's setup constituted the placing of bets. "By making those requests and having them accepted, WSE's customers were placing bets," the court ruled.

Regulation

One way to regulate online gambling may be to control the international credit-card and funds-transfer networks that convey funds to offshore gambling sites.

New York Attorney General Eliot Spitzer, who has investigated several financial entities for their role in Internet gambling, said it was essential for the companies to stop facilitating illegal transactions and that those who process transactions known to be related to Internet gambling may be liable for aiding and abetting what may be underlying criminal activity.

In June 2002, Citibank, the country's largest credit card issuer, settled a suit in which Spitzer accused it of knowingly profiting from illegal activities. Citibank denied wrongdoing but agreed to stop allowing its cards to be used for Internet gambling charges. Other credit card issuers--including American Express, Bank of America, Fleet, MBNA, and Chase Manhattan--had already blocked this use of their cards.

Spitzer also pursued PayPal, an electronic funds-transfer service that handles online transfers between members via e-mail. In August 2002, PayPal agreed to stop online gambling companies from using its service to receive money from New York residents. When the Internet auction company eBay acquired the service in October of that year, it stopped offering PayPal to Internet gamblers nationwide because of the "uncertain regulatory environment surrounding online gaming."

In February 2003, Spitzer settled with 10 banks that signed agreements to block New York cardholders from using their credit cards for online gambling.

Credit card associations--such as Visa and MasterCard--license their member banks to issue cards, authorize merchants to accept those cards, or both. They can restrict the use of their cards for Internet gambling by developing transaction codes that issuing banks can choose to block. Credit card companies--such as American Express and Discover--issue their own cards and license merchants to accept them. Many credit card companies prohibit customers from using their cards to pay for Internet gambling, and they won't license online gambling sites.

Another approach may be to prevent U.S. businesses from providing services and support to offshore gambling sites. In April 2004, federal marshals seized $3.2 million from TV and media company Discovery Communications and warned that it could be party to an illegal activity by running ads for an online poker room owned by Tropical Paradise, a casino based in Costa Rica. When Discover pulled the ads, Tropical Paradise sued for breach of contract.

State suits

Lawyers for consumers who have lost money on Internet gambling sites say their clients have little chance of recompense from the offshore sites; they look instead to companies that assisted in the financial transactions.

"When faced with the practical realities of civil litigation, when you have huge credit card companies funding Internet gambling here in the United States and they' re the ones trying to collect against American citizens, a proper first line of defense is to go after those companies acting as a conduit for money to get to the offshore gambling organizations," said Ira Rothken, a San Rafael, California, attorney who has settled several suits on behalf of online casino customers. "It's a much more complicated and lengthy process to sue the gambling organizations because they' re almost always located in jurisdictions hostile to American law."

Rothken argues that credit card companies participate in illegal online gambling by granting merchant accounts to Internet gambling sites that accept bets from residents of California, where gambling is illegal. An English statute signed by Queen Anne in 1710 states that gambling debts are unenforceable under the common law; therefore, anyone who lends money knowing it will be used for gambling is making an unenforceable contract. The statute "basically [means] it's unlawful to provide loans for gambling in the state of California," said Rothken.

"It's one thin g for someone to gamble with money they have in their pocket and lose it; it's another to gamble with money they don't have and end up in financial ruin. When the credit card companies allowed their logos to be placed on Internet gambling sites and 'branded' themselves to those sites, they violated the law," Rothken said.

He represented Cynthia Haines, who amassed over $70,000 in online gambling debts, using a Visa issued by Providian National Bank and other credit cards. Providian sued Haines to collect the debt, and Rothken filed a cross-complaint against Providian, Visa, and MasterCard, alleging unfair business practices for granting merchant accounts to Internet casinos.

In a settlement and stipulated judgment against Visa and MasterCard, Haines's debts were cleared and attorney fees paid. MasterCard changed its rules regarding Internet gambling debts and what merchant banks had to do about them, and Visa agreed to issue warnings and notices about the legality of Interact gambling.

Another Rothken client, Frederick Marino, also accrued over $70,000 in online gambling debts, which culminated in the loss of his house and the breakup of his marriage. He sued American Express and Discover, and in a settlement Discover erased his debt and agreed not to issue merchant accounts to Internet gambling businesses.

Rothken is also involved in a multidistrict litigation, Retailers National Bank v. Harding, in which the plaintiffs recently stood up for their right to have California claims heard in a California court. The credit card companies involved had tried to get the suits transferred from California to Louisiana. (No. 3:03CV04190 (N.D. Cal. filed Sept. 12, 2003).)

In Harding, the complaint against financial institutions, including Western Union, claimed that their processing Internet gambling transactions is an unlawful and deceptive business practice under a section of the USA PATRIOT Act that requires companies to know their customers. "Either they know who their customer is and therefore know what type of transaction is taking place, or they don't know and they should know," said Rothken.

"It's not clear if the Wire Act would apply to garden-variety games like blackjack and poker, although the Department of Justice believes that it would. But you don't need to go that far. The PATRIOT Act and state law provide sufficient bases to litigate most of these cases," he said.

The future of online gambling in the United States is unclear: Wired News reported that Keith Furlong, deputy director of the Interactive Gaming Council, called the credit card companies' ban on gambling transactions "the most important issue affecting the growth of the gaming industry." To survive, gambling sites will need to find new transaction methods, such as e-cash services or unregulated foreign online banks or offshore bank accounts from which money can be wired to Internet gambling sites.

"The main [legal] theory has been that it is against public policy ... to enforce Internet gambling loans," said Rothken. "If gamblers were to move to the equivalent of paying in cash, cases would require a different analysis."