December 12, 2007
RE: Prohibition on Funding of Unlawful Internet Gambling 72 Federal Register 56680 (October 4, 2007) [FRB Docket No. R-1298; Treasury Docket No. DO-2007-0015]
Dear Ms. Johnson and Mr. Klingman:
We are writing to express our concerns with the Prohibition on Funding of Unlawful Internet Gambling (“Regulation”), proposed by the Federal Reserve Board (“Fed”) and Department of Treasury (“Treasury”) (collectively, “Agencies”) on October 4, 2007.
As you may know, we have long been concerned about selective enforcement by federal officials of laws limiting Internet gambling. In fact, the House Judiciary Committee recently held a hearing on the topic where the Committee received testimony that some 23 million U.S. persons have played poker online, with many millions more engaging in other forms of online activities that this regulation may cover.
In light of the breadth of online activities that could be viewed to be covered by the Regulation, the approach taken by the Agencies in the proposed Regulation in refusing to define which transactions are legal and which are not is extremely troubling. This question rests at the very core of the underlying law and of the Regulation itself, yet the Agencies made no effort whatsoever to provide an answer to the numerous institutions to which the Regulation will apply. This is a fatal flaw that must be corrected, if the final regulation is to have any legitimacy and not be subject to legal challenge for its vagueness.
The Agencies recognize that there is confusion as to whether or not certain Internet gambling activities are, in fact legal. The commentary offered by the Agencies notes that the Department of Justice (“DOJ”) has long taken the position that all Internet Gambling is illegal under the Wire Act of 1961. This position was most recently reaffirmed by in testimony before the House Judiciary Committee, U.S. Attorney Catherine Hanaway last month, in which she clearly articulated the DOJ’s position that all Internet gambling is illegal based on 18 U.S.C. §§1084 (the “Wire Act”), 1952 (use of facilities in interstate commerce), and 1955 (the illegal gambling business statute).
At the same time, the Agencies point out that the Unlawful Internet Gambling Enforcement Act (“UIGEA”) clearly exempts three categories of transactions from the definition of “unlawful Internet gambling.” This creates a fundamental contradiction in the interpretation of federal law by federal officials, and the proposed Regulation does nothing to resolve it. It is clear that the Agencies affirmatively chose not to provide any clarity on the issue of legal versus illegal transactions, stating that “the Agencies’ preliminary view is that issues regarding the scope of gambling-related terms should be resolved by reference to the underlying substantive State and Federal gambling laws and not by a general regulatory definition.”
The Agencies no doubt relied on the sense of Congress statement regarding UIGEA, in which the Congress expressly stated that UIGEA “is not intended to resolve any existing disagreements over how to interpret the relationship between the Interstate Horseracing Act and other Federal statutes” in avoiding making the decision. However, the Agencies do not in fact have the luxury of leaving this issue open. We note that Congress in UIGEA expressly stated that the Agencies “shall … ensure that transactions in connection with any activity excluded from the definition of unlawful internet gambling … are not blocked or otherwise prevented or prohibited by the prescribed regulations.” (emphasis added). The Regulation must therefore ensure not only that unlawful transactions are blocked, but that lawful ones are not blocked. If the Agencies choose to implement one element of the legislation and to refuse to implement another, they are simply not following the requirements of the law.
A regulation that refuses to advise covered persons of what activities are subject to the regulation raises constitutional, as well as statutory questions. This is the case when a regulation fails to define an offense with sufficient clarity that ordinary people can understand what conduct is prohibited and encourages arbitrary and discriminatory enforcement. The “void for vagueness” doctrine, derived from the due process clauses of both the Fifth and Fourteenth Amendments, requires that a regulation be sufficiently clear that it “provide[s] adequate notice of prohibited conduct” and that it prevents arbitrary or discriminatory enforcement. In the words of Justice Marshall:
It is a basic principle of due process that an enactment is void for vagueness if its prohibitions are not clearly defined. Vague laws offend several important values. First, because we assume that a man is free to steer between lawful and unlawful conduct, we insist that laws give the person of ordinary intelligence a reasonable opportunity to know what is prohibited, so that he may act accordingly. Vague laws may trap the innocent by not providing a fair warning. Second, if arbitrary and discriminatory enforcement is to be prevented, laws must provide explicit standards for those who apply them. A vague law impermissibly delegates basic policy matters to policemen, judges, and juries for resolution on an ad hoc and subjective basis, with the attendant dangers of arbitrary and discriminatory application.
There are legitimate arguments that the Regulation itself is vague and unclear due to its failure expressly to specify whether certain types of activities, such as poker, bridge, and mah jong, are illegal if carried out online. But the problem in implementing the Regulation is not merely one of overbreadth and vagueness. The position of the DOJ and the position taken by Agencies implementing UIGEA are simply incompatible. Any designated payment system would therefore have to make a decision that the DOJ and the Agencies were either unwilling or unable to make. However, unlike the DOJ and the Agencies, the designated payment system faces liability for the wrong decision. Further complicating matters, the decision would have to be made with respect to both Federal and state law, which would create an overwhelming compliance issue for the designated payment systems.
It is also unclear how any designated payment system will be found to be in the safe harbor, as it is likely to prove extremely difficult to have policies and procedures in place to block unlawful transactions if it is impossible to tell what is unlawful. As currently drafted, the Regulation essentially leaves that decision in the first instance to the individual payment system but ultimately, it will be the decision of each different regulator, as they will be evaluating whether or not a particular entity’s policies and procedures are reasonable. Such a scenario creates an additional concern about disparate and unequal enforcement of the law.
These concerns are integral to the underlying law and the implementation of the required regulation. The Agencies have failed to answer the central question of what is lawful and what is not, which creates confusion for designated payment systems and subjects them to liability in an arbitrary manner, and makes the Regulation vulnerable to challenges on constitutional grounds. For these reasons, the Regulation is fatally flawed and must be revised to specify which transactions are lawful and which are not. Specifically, the Regulation must indicate, clearly and expressly, at a minimum, whether the following Internet gambling transactions are legal and therefore not required to be blocked:
· Transactions relating to horse racing, if they meet the requirements of the Interstate Horseracing Act of 1978;
· Transactions involving a bet or wager occurring exclusively within a single State and that meet the requirements identified in UIGEA; and
· Transactions involving a bet or wager occurring on an intratribal basis.
The final regulation must also provide sufficient guidance to designated payment systems to enable them to identify which states and tribal lands have met the requirements set forth under UIGEA relating to age and location verification and data security. It should also identify whether activities such as online participation in poker, bridge, and mah jong are within its scope, as many experts view these activities as skill-based activities that are not covered by UIGEA (emphasis added).
The need for the Agencies to define what transactions are lawful and what are not is fundamental. The continuing failure to do so raises serious constitutional questions, as we have outlined. Even a clear and precise enactment may nevertheless be "overbroad" if in its reach it prohibits constitutionally protected conduct. The Supreme Court has long held that laws so vague that a person of common understanding cannot know what is forbidden are unconstitutional on their face. For this reason, there is some risk that the courts will ultimately find UIGEA to be unconstitutionally vague, with this regulation imposing an unascertainable standard, and unconstitutionally broad because it authorizes the punishment of constitutionally protected conduct.
For these reasons, we strongly urge the Agencies not to issue this Regulation unless and until they are able to resolve the contradictory positions taken between the Agencies and DOJ, define what activities are lawful and what are not, and thereby reduce the profound risk of unequal and selective enforcement of the law created by the proposed Regulation.
s/ The Honorable John Conyers, Jr.
s/ The Honorable Shelley Berkley
s/ The Honorable Robert Wexler</SPAN>
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