Legal wrangling in the U.S. is clouding the prospects for the industry world-wide
Two recent arrests of online-gambling executives in the U.S. are drawing attention to a spirited but so far unsuccessful effort in Washington to clarify the legal status of Internet gambling and resolve the political and legal issues of regulating it.
Earlier this month, Peter Dicks, at the time nonexecutive chairman of Sportingbet PLC, Britain's largest publicly traded Internet-gambling company, was arrested in New York on a Louisiana warrant. That followed the July arrest of David Carruthers, then-chief executive of BetOnSports PLC on federal charges. The two cases aren't directly related but have combined to spook executives of foreign Internet-gambling companies, which are wary of entering the U.S.
The developments underscore a fundamental problem for the Internet-gambling industry: U.S. lawmakers haven't agreed on whether the practice is legal. This summer the House passed legislation that would outlaw most forms of Internet gambling, including poker and casino-style games. But similar legislation is in limbo in the Senate, despite recent efforts by Majority Leader Bill Frist to attach the measure onto a must-pass defense-authorization bill this year.
Taming Internet gambling is difficult, however, given uncertainty about which rules apply to it. The Bush administration maintains that all interstate Internet gambling is illegal, but acknowledges that enforcement is sporadic. To shut down Internet sites, prosecutors rely mostly on the 45-year-old federal Wire Act, which prohibits sports betting across state lines, but was written with telephone, not Internet, lines in mind.
But not all judges agree that Internet gambling is already illegal, and Internet-gambling companies argue the Wire Act doesn't apply to the Internet.
"It's never really been clear up to and including now, how the 1961 Wire Act applies to the Internet," says Keith Whyte, executive director of the National Council on Problem Gambling, an advocacy group that helps gambling addicts.
"There's a lot of gray area to make some arguments. There's been an utter failure of Congress to address this issue. They're relying on a pretty antiquated law to stretch over this," Mr. Whyte says.
Pressure on Congress to resolve the issue is likely to increase. Eight states have prohibited Internet gambling — a pattern that has led to calls for a unified national approach.
Lawmakers' failure to clarify the legal issues of Internet gambling has frustrated many in the industry. According to Christiansen Capital Advisors, a New Gloucester, Maine, research firm, online gambling is a $12 billion-a-year industry globally, and growing. For years, some online-gambling companies have sought U.S. legislation to regulate the industry to weed out dodgy companies and promote investor confidence.
More broadly, Congress's inability to act reflects lawmakers' ambivalence about the Internet and how to strike a balance between letting it operate without much interference and requiring it to adhere to socially desirable behavior.
Republican Rep. Bob Goodlatte, who represents a rural Virginia district, personifies the sometimes-conflicting impulses. In his seven terms in Congress, Mr. Goodlatte has built a conservative voting record faithful to free-market, small-government principles. In June he voted against a proposal, which failed, that would have prevented Internet providers from moving some traffic faster than other — in part, he said, because he was worried that "government involvement often stifles innovation in the marketplace."
A few weeks later, however, he voted for a bill to outlaw most Internet gambling in the U.S. "There are those of us who are simply opposed to gambling because of societal problems that exist," he says, adding that with the Internet, "every home in Virginia now has a wide array of casino gambling to choose from."
Mr. Goodlatte, a 53-year-old father of two, has spent years trying to impose some order on the Internet — such as preventing access to child pornography and protecting consumers' ability to encrypt emails. "We don't want it to become the Wild, Wild West," he says.
Some forms of gambling have largely avoided the U.S. government's focus. For example, the government has done nothing to stop Youbet.com, a publicly traded Internet company in Woodland Hills, Calif., that offers betting on horse racing. YouBet says it complies with state and federal gambling regulations, arguing that changes made in 2000 to the federal Interstate Horse Racing Act allow state-licensed interstate "interactive" parimutuel betting. Yet the company's financial statements note that the Justice Department says Internet gambling is prohibited in the U.S.
Justice Department officials say they launched a civil probe into Internet-gambling operations, including horse betting, last year, but say they have limited resources.
Even when the U.S. government tries to set rules for the Internet-gambling business, the global nature of the Internet gets in the way. In the United Kingdom, online gambling will be regulated and — more importantly — taxed, beginning in 2007. It is as easy for a would-be bettor to reach a gambling Web site in Athens, Greece, as one in Athens, Ga.
Indeed, the U.S. government's assertion that interstate Internet gambling is illegal has provoked an international trade fight. In March 2004, the World Trade Organization ruled the U.S. had violated global trade pacts by banning offshore firms from offering U.S. citizens some forms of Internet gambling — notably sports betting — while providing exceptions for U.S. companies that offer horse betting and state-run Internet lotteries. The U.S. says it has the right to ban imports that may be found morally objectionable.
Even if Congress agrees on tough legislation, enforcement would be difficult. The legislation pending in Congress is designed to make it more difficult for Americans to electronically transfer money to fund their online gambling. But banks already have policies that restrict customers from using credit cards at Internet-gambling sites. Online-gambling companies have been able to get around that by miscoding transactions or encouraging customers to use other types of electronic money transfers.