The Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA)

The Unlawful Internet Gambling Enforcement Act (UIGEA) is a piece of legislation which prohibits US banks from processing financial transactions for unregulated online gambling operators. The bill was passed on September 30, 2006 and signed into law by George W. Bush the following month. Its main goal was to disrupt grey market, offshore iGaming sites from offering their services inside the US.

The UIGEA was instrumental in effectively shutting down the US-facing online poker industry in 2011, and has had a far-reaching impact on the course of online gambling in the country.

The road to the UIGEA

In the mid-90s, Internet gambling emerged as a popular pastime for Americans, who wagered untold millions each year at online sports books and at virtual casino and poker tables.

At the time, the law in regards to Internet gambling was grey at best. The most relevant gambling legislation had become law decades before the Internet was even invented, and lacked true clarity when applied to modern circumstances in the digital age of connectivity.

What’s more, the operators of those emerging offshore gambling sites were based outside the US, where it was assumed that they could not be prosecuted. The legality of placing wagers online was murky, and lawmakers were still catching up to the new realities of the industry.

Initial opponents of iGaming pointed to the Federal Wire Act of 1961, which was originally written to combat the mafia’s practice of taking sports bets over the phone. Fundamentally, however, there were no specific laws that explicitly outlawed online wagering for either operators or players.

First attempts at prohibition

In 1999, there was an attempt to outlaw Internet gambling in the form of the Internet Gambling Prohibition Act, sponsored by Senators John Kyl and Bob Goodlatte. The bill passed in the House, but died in the Senate.

During the same congressional session, Rep. James A. Leach, a Republican from Iowa, introduced the Unlawful Internet Gambling Funding Prohibition Act, which proposed criminalizing the use of certain banking processes used for internet gambling. While it didn’t make it to a vote in the House of Representatives, Leach’s language would be adopted several years later by the UIGEA.

In November 2002, Fifth Circuit judges clarified that the Wire Act did cover sports betting on the Internet, while cautioning that it was unclear whether games of chance and skill (casino and poker) were covered as well. The US Court of Appeals subsequently ruled that the Wire Act did not put any restrictions on real money wagering online in games of chance.

Conservatives looking to shut down Internet gambling were seemingly left out in the cold. They continued to push their campaign forward using the Wire Act as a foundation, but it was quickly established that the act, as it stood, simply lacked the bite to address iGaming. To achieve their goals, they would need to draft their own legislation.

The UIGEA has its origins in H.R. 4411, the Internet Gambling Prohibition and Gambling Enforcement Act, introduced by Rep. Leach on November 18, 2005. That legislation defined “bets and wagers” to include bets for contests, sporting events, games predominantly subject to chance, and lotteries. The bill eventually passed successfully through the House, but later stalled in the Senate.

Bill Frist makes his move

The UIGEA itself was written in haste by Republican Sen. Bill Frist, so much so that spelling errors were peppered throughout. While the need for the bill was debatable, the way the act was passed was undeniably sneaky.

To get it done, Frist attached UIGEA language at the last minute to a totally unrelated “must-pass” piece of legislation called the SAFE Port Act, a bill meant to fund counterterrorism efforts. It was passed on the last day before Congress adjourned for the 2006 elections.

The bill was signed into law by then President George W. Bush in October 2006. The eventual rules and regulations of the law went into effect on January 19, 2009, the day before President Obama took office.

The UIGEA’s purpose

The primary goal of the UIGEA is to prevent online gaming companies from participating in “restricted transactions,” or rather, payments related to wagers placed through the Internet deemed illegal by state or federal law.

To outline the objective, the bill was broken down into five different sections. It’s Section 5363 that refers to money transfers and clarifies that players sending funds cannot be charged, and that the onus of the illegal act is on the gaming companies themselves.

A sixth section, 5366, outlines the possible penalties for violators, which range from fines, being barred from involvement in gambling, and up to five years in prison. The act concludes by urging the executive branch of the government to encourage foreign nations to assist in enforcement.

The industry reacts

When the UIGEA was passed, many ambitious offshore online gaming companies were offering their services to US players, trying to capture their slice of the multi-billion-dollar iGaming pie.

But in the UIGEA’s wake, online gambling operators welcoming US players suddenly had to decide whether to risk maintaining a foothold in the lucrative American market or play the long game and vacate the space, thus forfeiting millions of dollars in potential future revenue.

Cryptologic started the ball rolling early on by putting a cork in the flow of casino and poker bonus money previously available to US players. A stampede followed as Playtech/iPoker, the Ongame Network, Entraction, Boss Media, and 888 all exited the US market. Paradise Poker took the unorthodox approach of allowing players in 39 US States to continue playing for 30 days after the UIGEA became law, while suspending new player deposits.

The remaining 11 states – Illinois, Indiana, Louisiana, Michigan, Nevada, New Jersey, New York, Oregon, South Dakota, Washington, Wisconsin – were afforded no such luxury and were required to cash out immediately.

Microgaming took a similar approach, banning the same 11 states while initially allowing the other 39 to continue playing at their sites, but adding Kentucky and Utah to the blacklist soon after. Finally, in 2008, they stopped accepting new players from the country entirely, and 12 months later they closed their doors completely to their American customers and settled all US accounts.

Publicly listed online gambling sites were quick to respond to the passing of the UIGEA, the majority by removing themselves from the US immediately. Of those that stayed put, the most famously documented was Party Gaming, which saw its stock plummet drastically – almost 60% overnight – within 24 hours of the bill’s passing. The company finally accepted its fate and severed ties with the US market late in 2006.

Online poker and the UIGEA

It’s undeniable that the UIGEA has had a far-reaching impact, both immediate and long-term, particularly on the history of American online poker as we know it today.

While many online poker companies jettisoned their American player base, others chose to continue operations in the post-UIGEA environment. PokerStars, Full Tilt, and the Cereus Network (Absolute Poker and UltimateBet) remained defiant, and happily dealt poker hands to millions of American Hold’em fans at their tables.

The “Big 3” elected to flout the UIGEA, something their legal teams perceived as a low-level threat. The sites continued to build massive poker customer bases in a less competitive market and on the back of an American interest in online poker that clearly was not going to die easily, UIGEA or not.

While the bill was passed in October 2006, compliance was not required until December 2009. Nowhere did the UIGEA specifically mention online poker, nor did it tack on any new language regarding gambling online as a player.

The UIGEA also failed to clarify exactly what counted as unlawful gaming, and most interpreted the bill to apply only to sports betting as defined in the Wire Act. No one could have predicted, however, how the UIGEA would eventually be used to shut down the online poker industry in America nearly completely.

Black Friday

April 15, 2011 is a date with which most American online poker enthusiasts are painfully familiar. Descriptively tagged “Black Friday”, this ominous day in poker’s history had shattering repercussions for the industry across the board.

The events of that Friday in 2011 left operators and players alike stunned by the actions of the US Department of Justice (DOJ), which wielded its power to knee-cap the online poker market in America in one fell swoop.

On that day, the FBI in the Southern District of New York seized the domain names of PokerStars, Full Tilt Poker, and Absolute Poker/ UB, the top poker networks operating in the country.

In a matter of hours, those in charge at PokerStars and Full Tilt had suspended real-money play for US residents, as indictments against their founders and a handful of their associates were unsealed.

The consequences

Five years after its passing, the full legal force of the UIGEA was finally being felt in unexpected and immediate ways. The federal criminal case alleged that the defendants violated the UIGEA and engaged in bank fraud and money laundering to process transfers for their customers. Over 70 of the Big 3’s bank accounts across 14 countries were frozen, including hundreds of millions of dollars of player funds.

The 52-page indictment named 11 top executives and payment processors involved with the sites under fire, who were charged with fraud, money laundering and illegal gambling crimes. Prosecutors were seeking jail sentences for the indicted executives and $3 billion in reparations from the poker companies.

Preet Bharara, the United States Attorney for the Southern District of New York, expressed his view when the indictments were unsealed:

“As charged, these defendants concocted an elaborate criminal fraud scheme, alternately tricking some U.S. banks and effectively bribing others to assure the continued flow of billions in illegal gambling profits. Moreover, as we allege, in their zeal to circumvent the gambling laws, the defendants also engaged in massive money laundering and bank fraud. Foreign firms that choose to operate in the United States are not free to flout the laws they don’t like simply because they can’t bear to be parted from their profits.”

In the days and weeks that followed Black Friday, PokerStars worked with the DOJ to resume non-US operations, pay out US players and regain their domain name. While it was frustrating for US players to be shut out of PokerStars, they ultimately reaped the benefit of the company’s cooperation with authorities by receiving timely and full pay outs of their balances.

The case against Full Tilt Poker, however, deepened in complexity in September 2011 when the DOJ added the accusation that FTP was basically running a “global Ponzi Scheme” by defrauding players to line the pockets of its shareholders. The Alderney Gambling Control Commission subsequently revoked Full Tilt Poker’s license to operate real-money gaming under their jurisdiction.

PokerStars saves the day

After months of negotiations with the DOJ, PokerStars stepped in to acquire Full Tilt Poker. In late July 2012, the US Attorney General’s office approved a deal allowing Full Tilt Poker to forfeit all assets to PokerStars. In return, PokerStars was required to forfeit $547 million to the US government over a three-year period.

Once the transfer of assets was finalized, PokerStars made available all outstanding balances owing to all non-US customers of Full Tilt Poker — an amount totaling $184 million — within 90 days. US players, owed approximately $150 million, were refunded separately.

The forced shutdown also revealed serious problems at Absolute Poker and UB. Both sites, along with Full Tilt, had misappropriated player deposits, using them to settle other expenses, and thus could not pay back their players in full.

Absolute Poker/UB’s journey with the DOJ was less straight forward. Originally formed by several Sigma Alpha Epsilon frat brothers at the University of Montana, including step brothers Brent Beckley and Scott Tom – both named in the indictment – Absolute Poker/UB were slow to respond to the crisis. Although unable to withdraw or deposit funds, US Players were still able to access the site five days after the original indictment, and the network didn’t officially close to the US until over a month after the event.

Industry media reports pegged the company’s liabilities to players at $53.7 million (of which $24.2 million was owed to US players). At the same time, they quoted a reliable internal source from Absolute Poker who suggested the company’s liquid assets at the time amounted to a mere $5-6 million.

After a long and protracted wait, the DOJ announced on April 10, 2017 – almost a full six years after Black Friday – that Absolute Poker and UB players would be compensated in a claims process similar to that of Full Tilt. For the many who had significant account balances at either of these online poker sites, it has been both unexpected and welcome news indeed.

The UIGEA today

In 2011, the DOJ released a new opinion regarding the Wire Act, stating that it should only apply to sports betting, not to casino or online poker. That gave individual states the green light they needed to open up their own legal online gambling websites, if they chose to do so. Nevada, Delaware and New Jersey were the first to legalize, and more states – like Pennsylvania – exploring the possibility.

Meanwhile, various bills have been put forth to regulate online gambling on a federal level and place the UIGEA in the rear-view mirror for good. So far, however, there have been no successful attempts to push through any nationwide legislation regulating iGaming.

The DFS debate

The latest debate surrounding the UIGEA is whether the bill’s Fantasy Sports carve-out applies to daily fantasy sports (DFS), as well as sports betting. The UIGEA states that the term “bet or wager” does not include participation in any fantasy sports game as long as certain conditions are met. The bill’s fantasy sports carve-out language is vague and broad, failing to clarify anything with complete authority.

The UIGEA’s original author, Rep. Jim Leach, has since stated that the carve-out was never intended to create any loop holes for activity such as Daily Fantasy Sports, which didn’t even exist at the time of the UIGEA’s 2006 passage.

Leach’s revelation isn’t a game-changer alone, but there is growing opinion in some circles that DFS should also be considered gambling, and therefore, exempt from the UIGEA’s carve-out for fantasy sports.

Just how far the UIGEA’s reach extends or when its impact will be shifted or superseded by another federal law remains to be seen.

Conclusion

While the intentions of the UIGEA where to protect consumers by removing offshore online gambling sites from the US, it has ironically achieved the opposite. When the law’s provisions were put into place, they had the effect of driving out the more reputable sites, while allowing unscrupulous offshore companies to continue in operation.

The UIGEA was used to great effect to take down the US online poker industry, but offshore poker sites and casinos continue to offer their services in the country. Fortunately, US states are beginning to understand the importance of regulating the industry, and have begun to legalize iGaming to provide a safe environment for players to gamble online.