Unlawful Internet Gambling Enforcement Act (UIGEA)

The Unlawful Internet Gambling Enforcement Act (UIGEA)–enacted in October, 2006—prohibits gambling businesses from receiving payments for “illegal” online gambling from financial payment processors.  In other words, it cuts off the flow of money into unlawful online gambling operators. The law doesn’t itself make any gambling illegal, but if the online gambling is illegal under any state or federal law, it makes receiving money for the gambling illegal.

The UIGEA is a federal law that prohibits businesses from receiving “online” payments (whether by credit card, electronic funds transfer, drafts, or otherwise) for Internet or online gambling that is an illegal operation under any federal or state law. Simply put, it requires payment processors (i.e., credit card companies, banks, Western Union, Paypal, credit unions, and so forth) to have policies and procedures in place to identify and block such illegal Internet gambling transfers through its payment systems and procedures.

Interestingly, players who send the money transfers are not held in violation of the federal law and are thus insulated from criminal gambling prosecution. Gaming businesses, however, are not so immunize and are subject to federal criminal penalties including fines and imprisonment (and may also run afoul of state’s criminal gambling laws as well). In this way, the UIGEA is like the Wire Act in that the target are gambling providers, not individual bettors.

To illustrate how this works

Someone sets up a “virtual casino”–gambling on computers (instead of in-person or using physical equipment) using a computer server outside the United States, in some jurisdiction where providing online gambling is legal. But even though the business and server(s) are outside the U.S., it is offered over the internet to U.S. citizens.

Customers who want to gamble on the site have to first set up and fund an account with the casino, whether by money order, credit card, or some other means. They do this first, because the people who set-up online casinos aren’t dumb–if they don’t get the player’s money upfront, anyone losing will fail to pay their gambling debt.

Players log into the virtual casino from wherever they are located–all they need is an internet-capable device (e.g., computer or phone) and an internet connection. Once logged in, they select the game(s) they want to play from among those available on the site, such as blackjack, craps, roulette, or more exotic games. The player’s bets are deducted from his or her account, while any winnings are posted or credited to the account. When the player wants, he or she can withdraw the money from the account.

Since the casino is virtual, so are the fund transfers–no hard, cold cash changes hands. Rather, all payments from or to the player are by some form of electronic funds transfers–and there’s where the UIGEA comes in. Since there are 50 states’ worth of state gambling laws, not to mention various federal laws (such as the Wire Act) restricting gambling or making it illegal at least in some situations, there is a relatively high probability that the UIGEA makes any given online gambling funds transfer involving U.S. citizens illegal except for (at present) those for purely intrastate (within one state) online gambling. And, of course, if you can’t transfer money in connection with gambling, there is little incentive for anyone to provide online gambling services–at least for any interstate or international gambling.

Exceptions to UIGEA

There are exceptions to the UIGEA’s reach:

(1) In-state online gambling (or on-reservation online gambling in the event of Indian or tribal gambling). If the state permits gambling, the UIGEA doesn’t interfere with the transfer of funds. The UIGEA only blocks the transfer of funds for otherwise-illegal online gambling.

(2) Pay-to-play fantasy sports. The UIGEA specifically allows funds transfers for online fantasy sports. That said, it does not exempt fantasy sports from running afoul under other state and federal laws.

Case Studies: Unlawful Internet Gambling Enforcement Act (UIGEA)

Case Study 1: Offshore Online Casino

An offshore online casino operates from a jurisdiction where online gambling is legal and offers its services to players worldwide, including the United States. The casino provides various payment options, including credit cards and electronic funds transfers, for players to deposit money into their accounts.

However, the UIGEA prohibits financial payment processors, such as banks and credit card companies, from facilitating payments for illegal online gambling activities. Despite being based outside the U.S., the casino’s operations fall under the purview of the UIGEA as it targets U.S. citizens. If caught, the casino operators may face federal criminal penalties and other legal consequences.

Case Study 2: Payment Processor Compliance

A payment processing company facilitates financial transactions for multiple online gambling businesses. To comply with the UIGEA, the payment processor implements stringent policies and procedures to identify and block payments related to illegal online gambling activities.

They conduct thorough due diligence on their clients and regularly monitor transactional data for any potential violations. By maintaining robust compliance measures, the payment processor aims to mitigate the risk of facilitating unlawful gambling transfers and ensures adherence to federal regulations.

Case Study 3: State Legalization of Online Gambling

A state legalizes online gambling within its borders, allowing its residents to participate in internet-based gambling activities without violating state laws. The UIGEA recognizes this exception for in-state online gambling, enabling financial institutions and payment processors to process funds transfers related to legal gambling within the authorized jurisdiction.

This highlights the interplay between state and federal regulations concerning online gambling and demonstrates how the UIGEA permits certain transactions based on the legality of online gambling at the state level.

Conclusion

One of the important things to remember about the UIGEA is that it does not itself make any gambling illegal: it’s operation depends on the gambling being illegal under some other law. If the gambling is already illegal, the UIGEA, in barring the transfer of funds, adds another powerful enforcement tool.