Saturday, October 14, 2006
New Law Cripples Internet Gambling
Banks Are Barred From Handling Transactions

By Frank Ahrens
Washington Post Staff Writer
Saturday, October 14, 2006; A01

Placing bets over the Internet was effectively criminalized by the federal government yesterday, as lawmakers work to eliminate an activity enjoyed by as many as 23 million Americans who wagered an estimated $6 billion last year.

Attached to a port-security bill signed by President Bush yesterday was the Unlawful Internet Gambling Enforcement Act, which prohibits online gamblers from using credit cards, checks and electronic fund transfers to place and settle bets. The law puts enforcement on the shoulders of banks and other U.S. financial institutions, some of which fought the legislation.

The bill's sponsor, Rep. Robert W. Goodlatte (R-Va.), said he opposes all gambling, citing its "ill effects on society," but particularly Internet gambling, which led him to draft the legislation in the summer. Senate Majority Leader Bill Frist (R-Tenn.) attached Goodlatte's bill to the port-security measure to ensure its passage and Bush's signature.

While proponents decried the effects of gambling on society, opponents pointed to the enormous popularity of Internet gambling and compared the new law to the Prohibition amendment of 1919, which led to the rise of illegal speak-easies and organized crime.

"We're going to have Prohibition, and what happened then?" said champion poker player Annie Duke, a former University of Pennsylvania doctoral candidate who began playing professionally in 1994. "We had people running around with tommy guns and drinking moonshine because they weren't given a safe product."

The new law is potentially crippling to a worldwide industry whose biggest customer has been the United States. Already, several online wagering businesses have pulled their operations out of the United States and some have collapsed, including publicly traded companies in Britain, where online betting is legal and regulated. International online gambling businesses have been watching closely as U.S. regulatory and law enforcement officials stepped up their campaign against online wagering in recent months.

Gambling, along with pornography, was one of the earliest businesses on the Internet, and one of the few profitable ones. The first Internet gambling site appeared in 1995, according to the American Gaming Association, the trade group of big casinos. Over the past decade, online gambling has caught fire, especially among men in their 20s, and crossed into the mainstream to include poker and fantasy sports leagues.

Nevertheless, online gambling has been a legally gray area, equally populated by legitimate, publicly traded overseas corporations and fly-by-night predators who, like music pirates, can shut down and move their computer servers overnight to stay ahead of the law.

In the United States, the Justice Department and federal courts are unable to agree on whether Internet gambling is illegal. The Justice Department maintains that the 1961 Wire Act, written to prohibit betting transactions via telephone, applies to the Internet. Courts have disagreed, saying that betting on sports teams over the Internet is illegal, but wagering on casino games, such as poker, is not. And though the Justice Department thinks that off-track and online wagering on horse races is illegal, it has never prosecuted a case.

Internet gamblers typically set up accounts at offshore businesses, and place and settle bets using credit cards and checks that are converted in electronic currency, much as eBay users buy and sell items using the PayPal system.

Instead of targeting specific games, such as criminalizing blackjack but not fantasy sports leagues, the new law seeks to block the financial transactions that fuel them.

The Poker Players Alliance, a lobbying group that opposes the new law, said it would ask Congress to exempt poker from the statute. The group considers poker a game of skill, not chance.

The new law is shaking up the worldwide Internet gambling industry, with some comparing it to Congress banning the sale of Toyotas, BMWs and all other foreign vehicles here. Britain's Sportingbet PLC, for example, said 62 percent of winning bets on its site came from the United States.

A major offshore e-currency company, FirePay of Britain, said it no longer will accept payments from U.S. customers. Sportingbet sold its U.S. online operations to an Antiguan company yesterday for $1, five weeks after former company chairman Peter Dicks was arrested in New York when customs officials found he was wanted in Louisiana on charges of illegal online gambling. New York Gov. George E. Pataki (R) refused to extradite Dicks to Louisiana, and a federal judge cleared his return to England.

Former BetOnSports PLC chief executive David Carruthers was arrested in the Dallas airport in July. BetOnSports founder Gary Stephen Kaplan, also wanted by U.S. authorities, is a fugitive. BetOnSports said yesterday it would pull out of the United States and repay balances to customers here.

Most online wagering and e-currency Web sites posted releases yesterday commenting on the law and its impact on customers.

"After taking extensive legal advice, the board of PartyGaming PLC has concluded that the new legislation . . . will make it practically impossible to provide U.S. residents with access to its real money poker and other real money gaming sites," the company said.

The World Trade Organization even has a stake in the game. The organization has ruled that the United States violates trade treaties by outlawing offshore online gambling while tolerating some forms of U.S.-based online gambling, citing the horse-racing ambiguity.

The major casinos in Las Vegas and Atlantic City and on Indian reservations did not take a position on the new law, said Frank J. Fahrenkopf Jr., president of the American Gaming Association. The group's reasoning: Less casino revenue comes from gambling, as entertainment, retail and other non-wagering spending now makes up 55 percent of the cash streaming into resorts such as Harrah's and Bellagio.

"The guy who comes home and goes to his den and cracks open a can of beer and bets on the Internet is not really our customer," Fahrenkopf said. "We never viewed the Internet as being competitive."

The association wants Congress to authorize an independent study of whether a legalized, nationwide, taxed and regulated online gambling system would work in the United States, as it does in Britain.

"Would we like to get into that business?" Fahrenkopf said. "Yeah, some of our guys would."

Goodlatte said he would press to update the Wire Act to conclusively extend its authority to the Internet. That part of his bill was dropped in the Senate.

"All the problems that manifest themselves with gambling, even in heavily regulated states, are even worse on the Internet," Goodlatte said yesterday. "There are family problems, bankruptcy problems, gambling addiction, gambling by minors, using gambling to launder money for criminal and terrorist organizations and organized crime. It does not help our society."

For poker advocates such as Duke, the new law is the wrong way to cure social problems.

"We've proven in history that trying to protect the minority and punish the majority never works," Duke said. "The fact is, there is a certain percentage of people who have addictive personalities [and gamble online]. Are you going to pass a law outlawing online shopping? Or day trading?"