Gambling is a controversial, multibillion dollar industry with a history of corruption and, thus, is heavily regulated in the U.S. Although gambling is legal under federal law, interstate and online gambling are both significantly restricted. The Unlawful Internet Gambling Enforcement Act of 2006, instead of outlawing online gambling itself, prohibits financial transactions with online gambling service providers. This resulted in some offshore operators withdrawing their services from U.S. players, while others found ways to simply circumvent the law. Where there is money to be made, the gambling industry will find a way to make it.
The fact is, online gambling is ever-changing and the laws don’t always keep up. Now the federal government has found a new way to stop illegal gambling—by focusing not on the providers, but on those who design and develop the software being used for it, even if it’s used in a way not originally intended.
Software Developers Beware
Robert Stuart is a software developer whose company, Extension Software, designed a program that provides offshore-based gambling sites the ability to offer certain sporting events for betting, and track the bets that are placed. His product is legal in the manner that he licenses it, but he has been charged with promoting gambling in New York because his software has allegedly been used for illegal bookmaking there. According to New York state authorities, Stuart and Extension Software received around $2.3 million in licensing fees that are direct proceeds of illegal betting within the U.S. between September 2008 and June 2011.
If Stuart is successfully prosecuted, it sets a frightening precedent for other software designers whose product is used illegally.
Stuart claims the charges are the result of a witch-hunt after he backed out of a plea agreement with the New York district attorney’s office that would have required him to hack into his clients’ systems for the purpose of obtaining user names and passwords of gamblers and their bookies. Stuart refused on the grounds that he is a software developer, not a hacker, and that it was unethical for him to install backdoor modifications that would allow the authorities to retrieve information from foreign databases.
Although the Manhattan DA’s office insists nothing they asked of Stuart was illegal, experts say having done so without court orders from the U.S. and countries where his customers are located would have made Stuart criminally liable under the Computer Fraud and Abuse Act.
The Trouble with Sublicensing
While all of Stuart’s customers license and use his product legally, the trouble comes with sublicensing. The software is licensed on a quarterly basis and used in a time-shared environment—clients have the option of placing it on a server and then sublicensing to gambling entities such as casinos and bookmakers. Stuart claims he delivers and sets up the software legally, but what his clients do with it from that point on is out of his hands. However, New York authorities claim that Stuart’s company “knowingly advanced and profited from unlawful gambling activity by engaging in bookmaking to the extent that they received and accepted in any one day more than five bets totalling more than five thousand dollars.”
Here Comes the SWAT Team
Some legal experts find the U.S. government’s efforts to curtail online gambling both ridiculous and excessive. Stuart’s case is one such example cited, due not only to what is perceived as possibly illegal demands by New York authorities, but also by the rather heavy-handed way in which he was informed he was under investigation: 30 Arizona law enforcement agents in full SWAT gear raided his home and told Stuart he and his wife he would spend 35 years in prison if they didn’t cooperate. According to the search warrant, Stuart and his wife were laundering money, operating an illegal enterprise, and engaging in the promotion of gambling. All of the charges were eventually dropped, and in the end, Stuart was charged only with promoting gambling in the first degree.
It remains to be seen whether the Manhattan DA will find a way to successfully prosecute Stuart, but if so, it could mean that developers of legal software that could be used by others for illegal purposes had better watch their backs. The liability implications are chilling.