Technology

Neteller Arrests Bode Ill for Online Gambling


Two of the company's former directors have been arrested as part of the U.S. government's crackdown on gambling Web sites

When President George W. Bush signed anti-online-gambling legislation into law last October, publicly traded gambling companies folded their cards and left the U.S. table. For instance, PartyGaming, the Gibraltar-based parent of once-leading gambling site PartyPoker, withdrew from the $6-billion-a-year U.S. market. Other companies traded on the London Stock Exchange, such as Sportingbet, followed suit, closing betting sites to U.S. customers and selling off other gambling businesses for $1 to whomever would take them.

However, the game wasn't over for all gambling sites. Private companies such as Antigua-based Bodog Entertainment Group, FullTiltPoker.com, and PokerStars.com kept their virtual doors open to U.S. customers. They took their cues, in part, from Neteller, a publicly traded Internet payment processor used by many online gambling sites, which was making a fortune from transaction fees paid by online bettors. Instead of closing its doors to U.S.-based online gamblers—and forgoing as much as 70% of the $846.7 million it made in fees during the first half of 2006 alone—the company took a wait-and-see approach.

Neteller got an eyeful on Jan. 15. That's when U.S. law enforcement officials arrested two of the company's former directors and founding shareholders, Stephen Lawrence and John Lefebvre. The U.S. Attorney for the Southern District of New York and the Federal Bureau of Investigation have charged that the two men helped transfer billions of dollars in illegal gambling proceeds from Americans to overseas Internet gambling companies. According to the complaint, more than 95% of the $7.3 billion processed by Neteller in 2005 were transactions involving Internet gambling companies. Lawrence's attorney, Peter Neiman of Wilmer Cutler Pickering Hale & Dorr, declined to comment. Calls to Lefebvre's attorney were not immediately returned.

Left in a Lurch

The moves demonstrate how far the U.S. government is prepared to take its crackdown on gambling, and they bode ill for the closely held Internet gambling sites that continue to cater to U.S. clients even after October. "In the eyes of the U.S. Justice Dept., what Neteller is doing is even worse [than the gaming companies] because they are acting like a bank and helping all this money leave U.S. accounts," says Christopher Costigan, president of the online gaming industry publication Gambling911.com, which initially reported the arrests. He speculates that Neteller will withdraw from the U.S. market.

The case focuses on sports bets placed by a then-Miami resident. According to a statement by an FBI agent involved in the case, the witness bet on National Football League games in August and September with gambling businesses based in Antigua and Costa Rica. In each case, the witness used Neteller to transfer funds. Unlike online poker bets, which are considered illegal by the Justice Dept., though not expressly banned by U.S. laws, sports betting is explicitly outlawed under the 1961 Wire Act (see BusinessWeek.com, 10/3/06, "Online Gambling Still in the Cards?").

The action against Neteller will likely leave the gambling companies that did not withdraw from the U.S. market in a lurch. As long as Neteller was processing payments, companies such as FullTiltPoker.com were able to continue business as usual. After all, many U.S. Internet gamblers were already using Neteller accounts to transfer funds between their checking accounts and online gambling sites because U.S. banks had stopped processing such transactions as early as 2001. Thus, gamblers already on the still-open-for-business private sites could simply continue playing. Those with accounts on sites closed to U.S. business simply needed to transfer whatever money remained with those sites to their Neteller accounts and then transfer the money again to an account with an open site (see BusinessWeek.com, 10/19/06 "Online Gambling Goes Underground").

Riskier Environment

Indeed, sites that remained open in the U.S. by processing payments through Neteller and other services experienced a jump in enrollment, thanks to reduced competition from PartyGaming's sites. While PartyPoker.com saw a 67% drop in its numbers between September and October, when the company withdrew from the U.S. market, FullTiltPoker.com had a 42% increase in audience, according to a November report by Nielsen//NetRatings (NTRT). The site's audience increased to 939,000 in December from 751,000 in November. The total U.S. audience for the top gambling sites, however, decreased 56%.

Meanwhile, PokerStars.com saw its audience jump to 1.5 million U.S. users in December from 1.4 million in November. Bodog.com saw an increase to 771,000 in December from 728,000 in November. Even PartyPoker saw an increase. The company's U.S. audience increased to 1.3 million in December from 1.18 million in November, according to Nielsen//NetRatings. PartyGaming says that all U.S. players visiting its site are involved in free games.

Without Neteller to process payments, the sites will have to rely more on other, smaller payment processors such as Instant eChecks and ePassporte to process U.S. transactions. However, now that the government has shown it is willing to go after payment processors, that would be risky. In addition, online gamblers may be more skittish about betting now that the state of their funds is in flux.

Eleventh-Hour Reprieve?

So far, Neteller says it has not stopped processing U.S. transactions, and it is not clear how the action against the company could affect U.S. customers. Similarly, it is not clear whether the gaming sites are considering dropping Neteller from their list of approved payment services. As of late in the evening on Jan. 16, neither PokerStars.com nor FullTiltPoker.com had taken Neteller off of their lists of approved services. There hands will be tied, however, if Neteller does in fact decide not to process U.S. gambling transactions.

Even if Neteller chooses to leave the U.S. market, however, it would not spell the end for all gambling companies. To date, U.S. law enforcement action has centered on sports betting. Other executives who have been arrested, such as BETonSPORTS Chief Executive David Carruthers, were involved in companies that processed U.S. sports bets (see BusinessWeek.com, 7/19/06, "Justice Gambles on Net Crackdown"). There is still a chance that online poker will receive a reprieve from the new law, which does not explicitly ban poker. Indeed, several U.S. land-based casinos have expressed interest in starting their own online poker sites that would be regulated by U.S. law, in a sign that not all hope is lost for the cause of U.S. online gambling.


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