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Academic

: CYB3RCRIM3

The DOJ and the WTO

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This post is specifically about the U.S. District Court of Utah?s opinion in U.S. v. Lombardo, 2007 WL 4404641 (2007), but it?s also about how cyberspace often leads to a clash between domestic, national law and international law.

The Lombardo case began with a 34-count indictment which charged an assortment of defendants with conspiring to violate the federal RICO act, bank fraud, transmitting wagering information in violation of the Wire Act and money laundering.

According to the District Court, the charges arose from the defendants? participation in an alleged criminal

`Enterprise? created for the purpose of providing transaction processing services to illegal gambling websites. The Enterprise consisted of individual defendants Baron Lombardo, Richard Carson-Selman, Henry Bankey, Tina Hill, Count Lombardo, Frank Lombardo, and Kimberlie Lombardo, as well as entity defendants CurrenC Worldwide, LTD, Gateway Technologies, LLC, Hill Financial Services, Inc., and BETUS. . . . [T]he Enterprise [used] a website called the `Gateway? . . . to facilitate payments . . . to various gambling websites. When bettors wished to gamble at one of the[se] websites . . ., their payment information was forwarded by the gambling site to the Gateway for processing.

When a bettor opted to pay using a Visa or MasterCard credit card, the Gateway processed the bettor's credit card payment information by mis-classifying the charge. . . to hide its gambling nature, thus duping banks into disbursing funds. The Enterprise paid money to at least one bank employee to ensure that mis-coded credit card charges were processed and paid. . . .

Gambling website operators were provided with constant . . . information regarding the status of credit card payments and wire transfers via the Gateway. Money was held by the Enterprise in foreign banks and was transferred to the United States through payments to accounts, entities, and individuals associated with the Enterprise. Some of the funds were also reposed in various trusts created by the Enterprise. The Enterprise charged the gambling website operators substantial per-transaction fees on all credit card payments and wire transfers processed through the Gateway. . . .

Baron Lombardo, Henry Bankey, and Richard Carson-Selman created . . . CurrenC Worldwide, LTD, through which the Enterprise conducted . . . payment processing. . . . Lombardo controlled the movement of gambling funds through credit card transactions via Gateway Technologies, which operated . . . the Gateway website. . . .Carson-Selman was responsible for selling the payment processing services to gambling websites. Tina Hill created Hill Financial to provide the accounting services . . . to move and track the gambling funds. Henry Bankey supervised . . . this accounting system. Count Lombardo . . . maintained the equipment on which the Gateway website was operated. Kimberlie and Frank Lombardo managed . . . Western Union wire transfers. . . .

U.S. v. Lombardo, supra.

The defendants filed three motions to dismiss the charges against them. We're only concerned with two of the motions: The motion to dismiss the Wire Act charges and the motion to dismiss the charges as barred by a decision of the World Trade Organization (WTO).

The Wire Act, which is codified as 18 U.S. Code 1084(a), provides as follows: "Whoever being engaged in the business of betting or wagering 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 . . . shall be fined . . . or imprisoned not more than two years."

The defendants moved to dismiss the Wire Act charges against them on the grounds that the Act only criminalizes the transmission of communications related to betting or wagering on sporting events or contests. They also apparently argued that the activity they allegedly engaged in concerned ?games of chance such as those employed by online casinos?, not ?sporting events or contests.? U.S. v. Lombardo, supra.

In ruling on this motion, the District Court noted that the Wire Act was adopted in 1961, well before the Internet, and has primarily been used to prosecute those who engaged in bookmaking, i.e., took bets on sporting events over the telephone. U.S. v. Lombardo, supra. It also noted that ?very few courts? have considered whether this bookmaking statute also applies to wire communications related to online casino gambling.

The District Court acknowledged that the U.S. Court of Appeals for the Fifth Circuit has held that the Wire Act ?only prohibits transmissions related to bets or wagers on sporting events or contests.? U.S. v. Lombardo, supra. The Fifth Circuit based its holding on two factors: One was the legislative history of the Wire Act (the Congressional debates and other records indicating why the Act was adopted). The other was the fact that when the Fifth Circuit issued its decision, legislation had been introduced into Congress to ?fix? the Wire Act; this legislation, which was never passed, would have expanded the Act so that it explicitly encompassed gambling unrelated to sports. U.S. v. Lombardo, supra.

I think the Lombardo District Court should have stopped at this point and granted the motion to dismiss the Wire Act count(s), but it did not. Instead, the District Court cited a New York state court decision that indirectly supports the proposition that the Wire Act applies to gambling other than sports betting. The Lombardo court?s relying on this New York decision is problematic both because it?s a state court decision ? and we?re talking about a federal statute, which is properly construed by federal courts ? and because the court did not actually address the sports betting issue. So instead of going with a federal Court of Appeals, the Lombardo court denied the motion to dismiss based on a state court decision that didn?t really address the underlying issue.

It?s the other motion to dismiss, though, that I find the most interesting. In this motion, the defendants asked the District Court to dismiss the Wire Act counts on the theory that decisions from ?the World Trade Organization (WTO) bar prosecution of Defendants for facilitating online gambling protected under the General Agreement on Trade in Services (`GATS?). U.S. v. Lombardo, supra. Here?s a bit of context on GATS:

As a member of the WTO, the United States has agreed to multiple treaties, including GATS. Pursuant to GATS, the United States has made a series of commitments to allow foreign providers of services access to certain domestic markets. . . . Congress formally approved GATS in the Uruguay Round Agreements Act (`URAA?) in 1994.

U.S. v. Lombardo, supra. In approving GATS, Congress could have excluded certain activities ? like gambling ? from the commitments it made to open its markets to foreign service providers. It did not, apparently because in 1993 Congress equated gambling with real-world casinos and horse-racing and other activities, all of which do not raise the transnational issues cyberspace often presents.

The problem arose in 2003, when Antigua filed a suit with the WTO, claiming the U.S. was discriminating against legitimate, licensed online casinos based in Antigua. Antigua said the U.S. was violating its GATS commitments by enforcing federal statutes to in effect ban Internet gambling. As you can read in the story you will find here, Antigua?s Internet gambling companies wanted access to the U.S. market for online gambling, which was estimated to be worth $15.5 billion annually. The U.S. responded by saying it made a ?mistake? when, in GATS, it committed to open its borders to ?other recreational services? that included ?gambling and betting services.? In 2005, the WTO ruled against the U.S. and gave use one year to bring our law into compliance with GATS.

As I understand it, we?ve pretty much stalled ever since, except for a couple of really clever mistakes. In May, 2007, the U.S. told the WTO we were simply going to take back our mistake and withdraw ?gambling and betting services? from GATS and from WTO jurisdiction. The WTO pointed out that a country can only withdraw a sector commitment (like a GATS commitment) if it pays compensation for future lost revenue to countries disadvantages by the decision. The European Union demanded $100 billion as their compensation, and other countries began filing similar (though smaller) claims. Antigua claimed damages of $3.44 billion, but in December of 2007 the WTO awarded it $21 million in damages.

The most interesting aspect of the Antigua award is that it is not a cash payment (which, apparently, is customary in WTO disputes): As this article explains, Antigua was given the right to violate copyright protections on items including music and movies form the U.S. So, Antigua won the right to legitimately commit $21 million worth of copyright violations because someone goofed up in executing GATS.

And what about the Lombardo defendants, you ask? They lost on their GATS motion to dismiss the Wire Act charges. The District Court held, correctly, IMHO, that they did not have the right to use the WTO?s decision on the GATS issue as a defense. The WTO?s decision is not a decision of a U.S. court (preferably a federal court) construing the Wire Act, and so simply was not relevant to the charges against them.

Personally, I think we should simply license online gaming and quit trying to overcome the inevitable. Last year, Representative Barney Frank introduced an interesting bill that would do just that. If you?re interested, you can find the text of the bill here.

Full post as published by CYB3RCRIM3 on September 12, 2008 (boomark / email).

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