Volume 5 Issue 7 July 2006
US Congress: The Goodlatte-Leach Bill
On 11 July 2006, the US House of Representatives, by a 317-93 vote, passed a bill that, for the first time, would expressly render illegal or otherwise prohibit the vast majority of internet gambling in the US. The bill must now be approved by the US Senate. This article, by Kirkpatrick & Lockhart Nicholson Graham LLP, discusses the substance of the bill, what might be expected as the bill moves to the Senate, and the potential impact on US WTO obligations.
Representatives Leach and Goodlatte each introduced bills during the 109th Congress that sought to prohibit internet gambling. After both bills were approved by the US House Judiciary Committee in
May 2006, they were merged into a bill entitled the "Goodlatte-Leach
Internet Gambling Prohibition and Enforcement Act" (the "Goodlatte
Bill") before being considered by the US House. During debate in the
House, opponents of the bill expressed concern that the bill was an intrusion on the individual right to privacy or did not actually prohibit all internet gambling. Proponents, however, won the day. They espoused a laundry list of hot button reasons for passage, such as money laundering, increased addiction, underage gambling, damage to families, source of funds for terrorism, organized crime and fraud.
The Goodlatte Bill has two main features: (1) it amends the federal
Wire Act to clarify that it applies to internet wagering of all sorts; and
(2) it provides an enforcement mechanism by barring banks and credit card companies from processing payments for online wagers.
Wire Act Amendment
Title I of the Goodlatte Bill would amend the Wire Act to make it express that the Act covers internet transmissions and wagers placed on activities in addition to sports. For example, the bill amends the definition of "communication facility" to clearly cover internet transmissions. As revised, the definition of "communication facility" covers "any and all instrumentalities, personnel, and services ...used or useful in the transmission of writings, signs, pictures, and sounds of all kinds by aid of wire, cable, radio, or an electromagnetic, photoelectronic or photooptical system, or other like connection
(whether fixed or mobile)...." Hence, the bill now would clearly cover all wagering over the internet, wireless or mobile devices.

The Goodlatte Bill also adds an expansive definition of the phrase
"bets and wagers" clarifying that the Act applies to both sports and non-sports events. Specifically, "bets and wagers" would refer to "... the staking or risking by any person of something of value upon the outcome of a contest of others, a sporting event, or a game predominantly subject to chance, upon an agreement or understanding that the person or another person will receive something of value in the event of a certain outcome." The definition also includes "the purchase of a chance or opportunity to win a lottery or other prize ...." Accordingly, although DOJ takes the position that the Wire Act already covers internet gambling of all sorts, under the
Goodlatte Bill, such activities would now be expressly covered.
Title I would also amend the portion of the Wire Act that addresses exempted activities, by specifying that the transmission of wagers in connection with legalized gambling in a state, or on Indian lands within a state (if both the bettor and the gambling business are physically located in the state or on Indian lands) would be permitted if certain preconditions are met. The bill also provides that it does not prohibit "the transmission of information assisting in the placing of bets or wagers" (1) "for use in news reporting" and (2) from a state or foreign country where such betting or wagering" is legal to a state or foreign country where betting on the same event is legal.
Recognizing that the US Department of Justice ("DOJ") takes the position that the Interstate Horseracing Act ("IHA") does not legalize the transmission of wagers on horse racing over the internet, while a number of states permit such, Title I provides that nothing in the bill is to be "construed to prohibit any activity" allowed under the IHA and states that Congress does not intend to resolve that conflict in the bill.
Finally, Title I would add a civil enforcement provision to the Wire Act to permit the US to seek injunctive or declaratory relief to prevent violation of the Wire Act. This would appear to permit the US to seek and obtain court orders requiring Internet Service Providers ("ISPs") to block specific internet gambling sites.
Financial component
Title II of the Goodlatte Bill would create a procedure for thwarting the use of US payment systems for illegal internet gambling by requiring financial institutions and money services businesses to block transactions - including credit card, stored value and check transactions - with illegal internet gambling businesses. Like other financial services regulations, the bill would not require direct action by financial institutions. Rather, it would require the Treasury and the
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Federal Reserve to promulgate regulations requiring action by financial institutions. Within 270 days of the enactment of the bill, the
Treasury and Federal Reserve must promulgate regulations requiring
"designated payment systems" and their participants to adopt policies and procedures designed to block "restricted transactions." The policies and procedures mandated by the regulations would also have to be designed to prevent or prohibit the acceptance of the products or services of the payment system in connection with
"restricted transactions." The Treasury and the Federal Reserve, in consultation with the US Attorney General, would be given broad latitude to determine which payment systems are "designated payment systems" subject to Title II. Presumably, this term would encompass not only credit card payment and wire transfer systems, but also automated clearinghouses ("ACHs") and internet payment systems.
"Restricted transactions" is defined broadly in the Goodlatte Bill and includes the acceptance of any of the following payment methods in connection with an illegal gambling business:
- credit, or the proceeds of credit, including credit extended through the use of a credit card;
- an electronic fund transfer, or funds transmitted by or through a money transmitting business;
- any check, draft, or similar instrument which is drawn by, or on behalf of, such other person and is drawn on or payable at or through any financial institution; or
- any other form of payment, as the Treasury and the Federal
Reserve may jointly prescribe by regulation, which involves a financial institution as a payor or financial intermediary on behalf of, or for the benefit of, the customer.
As a technological matter, blocking credit card transactions will be relatively simple because of the use of codes by the credit card issuers. Moreover, many credit card issuers already block transactions connected with internet gambling. However, blocking the payment of checks, money orders and ACH transfers may be much more difficult.
The regulations prescribed by Title II are required to include examples of policies and procedures reasonably designed to identify, block and prevent, or prohibit the acceptance of the products or services with respect to each type of restricted transaction.
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Alternative means of accomplishing the goals of the policies and procedures are to be provided, if practicable. Participants in a designated payment system (for example, banks in an ACH) would be deemed to comply with the regulations prescribed by Title II, if they reasonably rely on the policies and procedures of the designated payment system and the designated payment system's policies and procedures are compliant with the regulations. Practically, this would be difficult, as the participants in a payment system would have little control over the policies and procedures of the payment system and limited ability to monitor the payment system's compliance. On the plus side for financial institutions, Title II includes an exemption from liability for blocking restricted transactions, transactions reasonably believed to be restricted transactions, or transactions blocked in accordance with the policies and procedures of a designated payment system. Additionally, the regulations could exempt transactions if it is not reasonably practical to identify and block, or prevent or prohibit the acceptance of, such transactions.
What might happen in the US Senate
The Goodlatte Bill is currently in the US Senate. Most commentators do not believe that the Senate will act on the bill before the end of the
109th Congress. At this point, proponents of internet gambling prohibitions, such as Senator Kyl, have not introduced companion legislation in the Senate, and many commentators view this lack of companion legislation as a significant indicator that the Senate is unlikely to pass any gambling bill this year. In addition, the Senate will recess in early August for a month, and given the Fall election cycle, it is unlikely that the Senate will manage even to further consider the matter this year.
Impact of passage on the WTO dispute
In April 2005, the World Trade Organization ("WTO") considered a complaint by Antigua and concluded that the US had not demonstrated that its current gambling laws, including the Wire Act, are applied in a nondiscriminatory manner to both foreign and domestic service suppliers. The WTO decision reasoned that the IHA, which permits off-track wagering on horse racing (including horse races in another state, if both states meet the IHA requirements), was an exception to the Wire Act, and that by blocking all cross border wagering (including horse racing), the US was discriminating against non-US service providers. The US response to the WTO ruling was to notify the WTO, in April, of the DOJ's position that the online transmission of wagers on horse racing constitutes illegal activity under the Wire Act, if the transmission crosses state or international
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boundaries. Antigua disagrees with the DOJ, and at its request, the
WTO, on July 19, 2006, set up a panel to investigate whether the US restrictions on internet gambling comply with international trade agreements. The panel is to submit a report on the case in 90 days, from which either side may appeal.
Significantly, the Goodlatte-Leach Bill will not clarify this situation. In fact, Title I contains a specific provision stating that the bill "is not intended to resolve any existing disagreements over how to interpret the relationship between the [IHA] and other Federal statutes." In sum, it would appear that even if the bill were to pass the Senate and become law, there would still be, at a minimum, questions as to the applicability or legality of US-based wagers on international horse racing contests. Moreover, because the WTO investigation is ongoing, a final determination as to the legality of cross jurisdictional betting is still outstanding. Accordingly, the viability of business models of both US-based internet gambling and foreign operators, who seek US customers continues, to be in limbo.
Linda J. Shorey
Partner
Deborah J. Peckham
Partner
Robert A. Lawton
Associate
Sean P. Mahoney
Associate
Kirkpatrick & Lockhart Nicholson Graham LLP
Unless otherwise stated © 1999-2006 Cecile Park Publishing Ltd.
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