Justice Gambles on Net Crackdown
Many in the online gambling industry weren't too worried when the U.S. flexed its legislative muscle earlier this month and passed a bill in the House of Representatives that would explicitly outlaw Internet betting. Some viewed it as a clarification of a law already on the books, while others said it had little chance of being signed into law. Shares in some online gaming companies barely budged on the news (see BusinessWeek.com, 7/12/2006, "Betting Against Online Gambling").
But a display of U.S. law enforcement bravado that hit newswires on July 18 gave the industry plenty to fret about and spooked investors in a big way. U.S. prosecutors in St. Louis had charged BETonSPORTS CEO David Carruthers with racketeering and fraud for allowing U.S. citizens to gamble on his site. London-based Sportingbet (SBT.L) saw a 35% drop in shares, and shares of Vienna-based BETandWIN plunged (BWIN.VI) 24%. Shares of Gibraltar-based PartyGaming (PRTY), owner of the popular Party Poker, Party Casino, and StarLuck sites, fell 17%.
U.S. supporters of the $12 billion-a-year Internet betting industry were defiant in the face of the government's latest act, which specifically targets sports betting and not casino betting. Though the U.S. Justice Dept. considers most types of online betting illegal, wagering on sports is more clearly outlawed by the 1961 Wire Act. Until the House bill or similar legislation becomes law, online casino betting is in a gray area legally.
"The Department of Justice has said all online gambling is illegal; however, the only ones they have prosecuted are sports betting organizations," says Frank Catania, president of New Jersey-based Catania Consultancy, which specializes in gaming. "I don't think the people who bet online are going to be nervous at all. I think the people who will be nervous are the people who own the companies."
In fact, many British executives are already incensed about the U.S. government's recent willingness to target British citizens and executives. Last month, 100 executives gathered in the streets of London to protest a treaty between the U.S. and Britain that was originally intended to aid in the prosecution of terrorism suspects. The treaty was used this month to extradite three NatWest bankers involved in the Enron scandal (see BusinessWeek.com, 7/24/06, "Handcuffs Across the Water").
According to BETonSPORTS, U.S. law enforcement detained Carruthers as he changed planes in Dallas on a trip from the U.K. to Costa Rica. The U.S. has also issued a warrant for BETonSPORTS founder Gary Kaplan, who lives in Costa Rica, according to press reports.
This latest action signals that the U.S. wants to prohibit online gambling rather than merely regulate it, which is what many other countries do, including Britain. On July 18, the day after Carruthers was detained, regulators in Britain decided to allow gambling Web sites to advertise on television by 2007.
Whether the moves against Carruthers and Kaplan are harbingers of further law enforcement actions against online betting shop operators is unclear. Investors, however, have reason to be concerned. U.S. citizens account for more than half of the online gambling industry's revenue. A crackdown could scare off American gamblers, many of whom may view the U.S.'s latest action as showing the government is increasingly willing to prosecute people who break anti-gambling laws. Some U.S. gamblers are already sweating the House bill which, if passed, would give credit card companies added cause to decline wagering transactions.
Still, there are those who warn that a more serious U.S. crackdown could have an opposite effect: fueling the popularity of online gambling. "Will it scare people away? I don't know," says Keith Furlong, deputy director of the Interactive Gaming Council, a Canada-based organization that advocates for gambling regulation. "Or is it giving an awareness that this type of gaming is available online?"