Online Gambling Goes Underground

A U.S. law aimed at cracking down on Internet gambling may drive the practice more into the shadows and do little to deter bettors

by Catherine Holahan

It was getting late on Oct. 12, the night before a sweeping anti-Internet gambling bill would be signed into law. Paul McGuire was at his computer, enjoying one last hurrah on PartyPoker, a site that had pledged to kick off all U.S. users as soon as the law left President Bush's desk. "It was kind of like that last party before summer ends when you've got to go back to school," says McGuire, a 34-year-old New Yorker and author of the popular "Tao of Poker" blog. "They were playing loose because it was the last night." Maybe for some.

Not McGuire, whose online handle is "Dr. Pauly." At 11 p.m., he simply closed down his PartyPoker account, withdrawing thousands of dollars in winnings accumulated in recent weeks. He later wired the funds to an offshore account with NETeller, an Internet bank registered in the Isle of Man, and opened new accounts with two other poker sites—both of them privately owned.

So much for the U.S. crackdown on Internet gambling. The Unlawful Internet Gambling Enforcement Act is designed to halt the flow of the roughly $6 billion that flows each year from U.S. gamblers to foreign Internet casinos by officially barring credit card companies and other U.S. financial institutions from processing illegal wagers. The Justice Dept. has long maintained that online poker gambling, like sports betting, violates terms of the 1961 Wire Act.

But within hours of the new bill's signing, McGuire was back online, betting on hands of Texas Hold 'Em—and he was not alone. He's now wagering through PokerStars.com and FullTiltPoker.com, both licensed by the Canadian Mohawk territory of Kahnawake and happily taking U.S. customers. (PokerStars also has a license with the government of the Isle of Man, where it is headquartered.) Both sites saw record numbers of players the weekend following the law's adoption, according to Louisiana's Casino City, which monitors traffic on online poker sites in its trade journals.

Less Transparency

Indeed, the new law will do little to stop online gambling, say gamblers, betting companies, and industry analysts alike. Instead, the law will drive out regulated, publicly traded companies like PartyGaming, the Gibraltar-based parent of PartyPoker, and make way for private gambling companies and banks based in nations where such industries are loosely policed at best. As a result, the new law could ultimately make billions of dollars in U.S. online gambling transactions more difficult to trace, and increase the likelihood that funds end up in criminal hands. "It leaves an opening for some of the more unscrupulous companies coming in from unregulated places," says Frank Catania, past director of New Jersey's Division of Gaming Enforcement and president of Catania Consulting Group (see BusinessWeek.com, 7/12/06, "Betting Against Online Gambling").

The exodus is under way—and the companies that are on the way out are those with the most financial transparency. PartyGaming, 888Holdings, and SportingBet, all of which are traded on the London Stock Exchange, have said they're exiting the U.S. market. Roughly 70% of PartyGaming's $319 million in second-quarter sales and 50% of 888 Holdings' revenue came from the U.S (see BusinessWeek.com, 10/2/06, "Party's Over for Online Gambling").

Private online gambling companies, on the other hand, have been defiant in the face of the new law, arguing it does not apply to them and cannot be enforced. Bodog Entertainment Group, which operates a Costa Rican online gambling site, has no plans to bar U.S. customers. "We've structured our business in such a way that we'll have no problems adapting to any changes in the online gaming environment," says Bodog founder Calvin Ayre. Similarly, PokerStars released a statement saying its lawyers had "concluded that these provisions do not alter the U.S. legal situation with respect to our offering of online poker games.