Technology

Online Gambling Still in the Cards?


It's a safe bet that the passage of anti-Internet gambling legislation by Congress has effectively ended the party for Gibraltar's PartyGaming (PRTY.L) and other online betting companies based outside the U.S. The bill, named the Unlawful Internet Gambling Enforcement Act, would prohibit credit card companies and other payment providers from processing online gambling transactions. Both supporters and opponents expect President George W. Bush to sign the bill into law in the next two weeks.

Proponents of the measure heralded its passage as a victory for family values and a blow against an addictive vice. Jim Leach, the Iowa Republican who sponsored the bill, said it will prevent casinos from further extending their corruptive reach. "Religious leaders of all denominations and faiths are seeing gambling problems erode family values," Leach said in a statement. "If Congress had not acted, gamblers would soon be able to place bets not just from home computers, but from their cell phones while they drive home from work or their BlackBerries as they wait in line at the movies."

LOOKING FOR LOOPHOLES. But U.S. casinos hoping for a slice of the $12 billion online market aren't so sure the party is over. They see a reason to celebrate in the language that ended up on the Senate's cutting-room floor. Unlike the version that passed the House earlier this year, the approved legislation does not explicitly outlaw betting on online casino-style games, such as poker and blackjack. The bill does bar financial institutions from accepting "illegal" bets, leaving the question unanswered as to whether some forms of online gambling are permitted. To date, sports betting is one of the only forms of gambling explicitly outlawed in the act.

The American Gaming Association, which lobbies for the U.S. casino industry, took a neutral stance on the bill, even though several prominent members, such as MGM Mirage (MGM), have said they would like to start online sites. AGA president and CEO Frank Fahrenkopf says the organization does not believe the act eliminates the possibility for U.S.-based casinos to open online sites, regulated by states or the federal government, in the future. "This bill did not make anything legal or illegal," says Fahrenkopf. "What it did was affect the mechanism by which Internet gambling takes place…and there is some question as to whether or not that will be effective."

Indeed, Nevada Congressman Jon Porter introduced a bill in May that would study whether online gambling sites, run by U.S. companies, could be effectively regulated. Fahrenkopf believes that bill is likely to be considered early next year. The measure is backed by the casinos and still gathering support. "It is still Congressman Porter's intention to move ahead with this bill," says Trevor Kolego, the congressman's legislative director. "We hope to pass it, if not by the end of this session, then next session."

CONGRESSIONAL CONCERNS. Congressman Bob Goodlatte, the Virginia Republican who pushed through the initial anti-online-gambling bill in the House, concedes that the final version is not the blow to online gaming he had hoped for. "It is not everything the House passed earlier this year, but it does include the enforcement prohibition to cut off funds going to the illegal online sites," says Goodlatte. He adds that the bill should prevent some of the annual $6 billion in online bets made by U.S. residents from "getting sucked out of our economy."

But he's still pushing for a separate piece of legislation that would change the wording of the 1961 Wire Act and clarify that various forms of online gambling are illegal. "We need to modernize the Wire Act, which is 45 years old, and does not apply to all forms of gambling," says Goodlatte, adding, "It clearly applies to sports betting."

Publicly, the Justice Dept. has maintained that all online gambling violates the Wire Act. But it has only prosecuted cases involving online sports betting. In July, law enforcement officials charged the company formerly known as BETonSports (BSS.L) CEO David Carruthers with racketeering and fraud for permitting U.S. citizens to gamble on the site (see BusinessWeek.com, 7/19/06, "Justice Gambles on Net Crackdown"). Carruthers was subsequently let go from the company and is currently under house arrest in a St. Louis hotel. Similarly, Sportingbet (SBT.L) nonexecutive Chairman Peter Dicks has also been charged by a Louisiana court with violating the Wire Act. He is out on $50,000 bail.

INVESTORS GLOOMY. Shares of publicly traded gambling companies plummeted after each arrest, but then recouped some losses amid expectations that the U.S. law enforcement action would be limited to sports betting operations and wouldn't severely dampen online gambling in the long run (see BusinessWeek.com, 7/12/06, "Betting Against Online Gambling"). On Oct. 2, the same hopeful arguments appeared silenced. But as stocks plummeted to new lows (see BusinessWeek.com, 10/2/06, "Party's Over for Online Gaming"). Companies warned investors to expect significantly lower profits as they planned their withdrawal from the U.S. market.

Eugene Christensen, CEO of gaming-analysis firm Christensen Capital Advisors, says investor pessimism is warranted. Although the law may not explicitly outlaw all online gambling, Christensen says it's clear that the U.S. plans to aggressively attack foreign Internet gambling sites. "It is, long term, a very substantial negative for the U.K.-based Internet gambling companies," says Christensen. "They have lost the U.S. market, and I think they have lost it for good."

Other analysts disagree. If the bill becomes law, they say that U.S. gamblers will still bet on these sites. But rather than using credit cards, they'll employ other e-wallet payment services based outside the U.S., such as NetTeller and FirePay. Frank Catania, former director of gaming enforcement in New Jersey and president of Catania Consulting Group, calls the law "a sham" that won't stop online betting in the U.S. "There are so many alternate means of payment that it is not going to stop what is happening here," says Catania. "We are going to be spending a lot of money for enforcement, and it is going to be worthless." Enforcing the act will cost about $2 million between 2007 and 2011, according to a May 26 Congressional Budget Office report.

EVADING THE LAW. Gambling addiction experts have similar problems with the law. Though it should help some people avoid becoming easily enticed by gambling sites, they say it does not go far enough in stopping people from gambling online. Arnie Wexler, the founder of the national gambling addiction hotline 888-LASTBET, says many online gamblers stopped using credit card companies for their transactions years ago, after several companies voluntarily stopped processing gambling transactions. "It is putting a Band-Aid on a cancer," says Wexler. "It is not really addressing the issue because [gamblers] have already figured out a way around this particular bill."

U.S. casinos are also hoping their online ambitions won't be dampened by the bill. Some foreign governments have already accused the U.S. of having protectionist motivations, rather than prohibitionist ones. In August, 2005, representatives from Antigua and Barbuda brought a case against the U.S. to the World Trade Organization, complaining that efforts by the U.S. to stamp out online gambling unfairly keep foreign companies from competing with U.S. gambling companies. They cited exceptions for horseracing and lotteries as evidence that the U.S. was not antigambling per se, but against foreign governments taking betting dollars through online sites. The WTO initially ruled against the U.S. However, in April, 2006, the U.S. said it had addressed the concerns, prompting Antigua and Barbuda to appeal to the World Trade Organization about the U.S.'s lack of appropriate redress.

Statements such as those made by U.S. Senate Majority Leader Bill Frist, however, suggest that the government has no plans to make exceptions for its own institutions. "Although we can't monitor every online gambler or regulate offshore gambling, we can police the financial institutions that disregard our laws," says Frist. "For me as majority leader, the bottom line is simple: Internet gambling is illegal." But whether that status extends to all forms of online gambling could yet be decided, when—and if—Porter's bill sparks a new round of debate.


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