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The War On E-Gambling
by Michael Martinez
For online gambling firms, the writing is on the wall: The United States is not a good place to do business.
In the past year, the chief executives of two British-based e-gambling firms were arrested in the United States on racketeering and mail- and wire-fraud charges. Former BetOnSports CEO David Carruthers was arrested last July. An evidentiary hearing is scheduled for March. Former Sportingbet CEO Peter Dicks also was arrested on e-gambling charges in New York last year, but was allowed to return to Britain after a judge said the warrant could not be enforced.
Last month, Stephen Lawrence and John Lefebvre, the founders of the payment-processor Neteller, were charged with handling billions of dollars in illegal e-gambling proceeds in the United States. Neteller, a publicly traded firm on the London Stock Exchange, shut itself off from American business shortly after the arrests.
Also in January, the Justice Department issued subpoenas to at least four major, U.S. investment banks in a probe of Party Gaming, 888 Holdings and other offshore e-gambling firms.
Life Under The New Online Ban
The activity has occurred against the backdrop of a long-running congressional debate about e-gambling that culminated in a new law late last year. The act effectively bans the U.S. financial industry from processing online bets. The Treasury Department and the Federal Reserve Board are still developing rules for the law and policy watchers are unsure how it will affect the prosecution of e-gambling cases, but businesses already are closing their U.S. operations.
Before President Bush signed the bill into law, the federal government considered e-gambling illegal under a 1961 statute prohibiting wire transmissions that accept bets over state and foreign lines. But there was enough political momentum in Congress last year to act on the issue, which had support from then-Senate Majority Leader Bill Frist, R-Tenn.
Even though the Justice Department already had begun pursuing e-gambling cases, some policy watchers have wondered whether the department was emboldened by Congress in recent months. "The fact that Congress passed this law probably has moved it up on their list of priorities," said Radley Balko, a former policy analyst at the Cato Institute and now a writer at Reason Magazine. "It's certainly giving them political cover to make these arrests and launch these investigations."
But Frank Catania, a former assistant attorney general and board member at the Interactive Gaming Council, a trade group for the online gaming industry, said the recent U.S. crackdown on e-gambling has been spurred more by a few aggressive U.S. attorneys, particularly in the southern district of New York, than by Justice as a whole. "This isn't a major priority for the Justice Department," Catania said.
Both the law and prosecutions may only serve to drive the gambling activity to other online venues. Concern already is brewing that the virtual world Second Life is providing a way around the law. Second Life residents have access to casinos in their online universe and gamble with a virtual currency called the linden.
But a Justice spokeswoman told ABC News last month that Second Life will not give online gamblers cover from prosecution because lindens can be redeemed for dollars.
Butting Heads With Other Countries
As the U.S. government fights e-gambling within its borders, it also faces a big fight at the World Trade Organization over that stance -- and it's a battle that could be lost.
U.S. trade officials confirmed in January that a WTO panel ruled against the United States in its long-running dispute with Antigua and Barbuda, a tiny island country whose economy relies heavily on its e-gambling business. Antigua and Barbuda has accused the United States of violating international trade rules by prosecuting offshore gambling sites while still allowing online bets for horse-racing and, in some states, lotteries.
A WTO panel ruled in favor of Antigua and Barbuda two years ago. U.S trade officials appealed that order in 2005 and lost. The most recent ruling said the United States had yet to comply with the 2005 order. A final ruling on whether the United States has complied with the 2005 order is expected in March.
Balko said the combination of the WTO case and the arrests of foreign nationals on e-gambling charges has put the United States in a precarious position, particularly since the businesses are legal in the companies' home countries. "It's a pretty striking development," he said. "It raises a lot of serious questions about how long the arm of U.S. law reaches internationally."
U.S. Attorney Michael Garcia of the southern district of New York said last month after the Neteller arrests that "criminal prosecutions related to online gambling will be pursued even in cases where assets and defendants are positioned outside of the United States."
There also are concerns in the industry that the federal government is driving consumers to shadier businesses by forcing legitimate online operations to back out of the U.S. market. "The crackdown has taken the online bets out of a fairly transparent set of companies and put them into companies that aren't transparent at all," Alan Feldman, an MGM Mirage spokesman, told The Wall Street Journal last week.
Time To Hold Or Fold On The Hill?
While few people expect lawmakers on Capitol Hill to backtrack considerably on e-gambling during the 110th Congress, some are pushing for the law passed last year to be retooled to make room for online poker.
The Poker Players Alliance and the Online Players Alliance, a group recently formed by the IGC, are pushing for a poker exemption. They say the game is fundamentally different from other forms of online gambling because it combines skill and chance. The groups also claim that the federal government is denying itself valuable revenue by criminalizing Internet gambling and not regulating and taxing poker.
On the PPA Web log last month, President Michael Bolcerek said his organization plans to continue to be engaged with Congress in 2007. "While we are working toward the short-term goal of a poker exemption, the PPA will also be laying the foundation for the eventual U.S. regulation of online poker," he said. "This is the only proven public policy for online gaming."
Rep. Jon Porter, R-Nev., whose district includes part of Las Vegas, said at the Consumer Electronics Show in January that there might be a window for Congress to re-examine online gambling this session as lawmakers tackle other Internet-related issues.
But some observers are skeptical that the issue will have any traction, even if there is friendlier turf in a Congress controlled by Democrats. "I'd like to see the government launch a more academic study into the issue that isn't being led by lawmakers or people appointed by the White House," Catania said. "But we'll see if that ever happens."
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