Could U.S. Bid to Curb Gambling on the Web Go Way of Prohibition?

[R. A. Hettinga]

<http://online.wsj.com/article_print/0,,SB109139863475079918,00.html>

The Wall Street Journal


 August 2, 2004

 PORTALS



Could U.S. Bid to Curb
 Gambling on the Web
 Go Way of Prohibition?

By JULIA ANGWIN
Staff Reporter of THE WALL STREET JOURNAL
August 2, 2004


David Carruthers, a 46-year-old executive with thinning gray hair, is an
unlikely outlaw. Recently, a wild moment for him was drinking a champagne
toast in his banker's office after his company went public on the
Alternative Investment Market, a London stock exchange.

Nonetheless, many U.S. lawmakers and regulators would like to shut down Mr.
Carruthers's London-based BetonSports, along with other operations that run
Web gambling sites catering to Americans. Under the 1961 Federal Wire Act,
betting on sports via telephone or the Internet is illegal in the U.S.

But online gambling is legal in many other countries, and the U.S. can't do
much to prevent companies operating abroad from accepting wagers from U.S.
citizens. As a result, a gigantic online gambling market has sprung up
overseas. Last year, world-wide revenue from online gambling totaled $5.7
billion, and a majority of the gamblers were American, according to
Christiansen Capital Advisors, a market-research firm. BetonSports, which
says 98% of its customers are U.S. based, had a profit of $26.8 million for
the year ended Jan. 31.

Mr. Carruthers and many other Internet gambling executives are betting that
the U.S. will eventually have to drop its online-gambling prohibition.
"What happened with alcohol was a disaster," he says. "Nobody wants this
business, which is flourishing offshore, being pushed back onto the streets
and the back alleys of the U.S." He also argues that "there's a huge missed
opportunity here" to collect revenue.

So far, the U.S. government isn't convinced. But that could change as the
result of talks that will start this month between the tiny twin-island
Caribbean nation of Antigua and Barbuda and the U.S.

U.S. opposition to Web gambling has hurt Antigua and Barbuda. Until 1999,
the island nation was a favorite spot for online companies catering to U.S.
gamblers. The industry employed 3,000 people and was responsible for 8% to
10% of the nation's GDP.

But then the U.S. cracked down. In 2000, the Justice Department
successfully prosecuted Jay Cohen, a U.S. citizen who was running a betting
operation called the World Sports Exchange from Antigua. In 2002, after New
York Attorney General Eliot Spitzer went after Citibank and PayPal for
processing credit-card payments for online gambling, both agreed to stop.
Now, most U.S. credit-card issuers won't process online gambling payments.

Last year, the Justice Department notified the National Association of
Broadcasters that accepting money from Web gambling advertisers could be
considered "aiding and abetting" an illegal activity, and it issued
subpoenas to such media companies as radio giant Clear Channel
Communications. Then, in April, U.S. marshals seized $3.2 million that
Discovery Communications had accepted for ads from Tropical Paradise, a Web
casino operation based in Costa Rica. The result: Online gambling ads
vanished from Google, Yahoo and Howard Stern's radio show, among other
venues.

In part because of U.S. actions, Antigua and Barbuda says, its gambling
industry has shrunk to only 31 licensed companies from a peak of 112, and
it now employs fewer than 500 people.

In response, Antigua and Barbuda took the highly unusual step last year of
challenging the U.S. at the World Trade Organization. The island nation
claimed that by permitting U.S. operators to offer gambling services in the
U.S. but prohibiting offshore operations from doing so, the U.S. was
violating the General Agreement on Trade in Services.

In March, a WTO court sided with Antigua and Barbuda; the two sides have
said they hope to negotiate a settlement by Aug. 23. Many in the
online-gambling industry worry that the islands will cave in to U.S.
pressure. But Mr. Carruthers, whose BetonSports has an Antigua subsidiary,
says the island government has assured his company that it is sticking by
the industry.

If Antigua wins, other countries could bring similar charges against the
U.S. Already, the U.K. has been working on a set of laws -- which could
pass by the end of this year -- that will regulate and license online
gambling operations. And the Australian government last month announced it
had completed a review of online gambling and had decided not to ban the
practice.

In the face of such pressure, U.S. law-enforcement efforts are "like trying
to empty the ocean with a teaspoon," says Joseph Kelly, a law professor who
studies Internet gambling at the State University of New York College at
Buffalo.

Even if Antigua loses, the reality of the Internet is that no one
government can control it. Despite world-wide crackdowns, spammers and
pornographers continue to find dark corners of the world where they can
operate. And fly-by-night online casinos occasionally shut down without
paying out their winnings.

In such a world, the best hand the U.S. can play may well be regulation. By
legalizing and regulating online gambling, the U.S. government would make
it safer for the 5.3 million Americans who are already gambling in offshore
online casinos. After all, says Mr. Carruthers, "the voice of the people
has spoken."

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R. A. Hettinga <mailto: rah at ibuc.com>
The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'