Experts: Law won’t stop Web gamblers, but could help overseas payment services

Experts: Law won’t stop Web gamblers, but could help overseas payment services

by | Oct 24, 2006 | Firm News, Publication


By: Adam Goldman, Associated Press
(reprinted from the USA Today (NY), October 24, 2006)

NEW YORK – Gamblers may look over their shoulder now, but experts say a new Internet gambling ban won’t keep bettors from ponying up, just turn them on to overseas payment services out of the law’s reach.

“It has put a terrible scare into people,” said I. Nelson Rose, who teaches gambling law at Whittier Law School. “But it won’t by any means wipe out Internet gambling.”

The fright swept through the $12 billion industry on the heels of the recent arrests of two gambling company executives and a new law President Bush signed Oct. 13 that seeks to ban most online gambling and criminalizes Internet transfers of money for gambling purposes.

The law has wiped out billions of dollars in shareholder value of British companies, leaving the industry’s future in doubt as U.S. lawmakers initially trumpeted they had found a way to halt bets coming from the America.

But serious questions remain about whether the legislation can be effective in stopping U.S. residents from playing poker or betting on sports.

The “Unlawful Internet Gambling Enforcement Act” goes after the money, not the millions of players, which would be nearly impossible to enforce.

It will essentially try to choke off the way Americans fund their gambling habits, hoping to prevent the transfer of dollars to the popular Internet sites.

It’s also widely understood that the law has online poker in its gun sights, identifying it as a game of chance – something the poker companies dispute. They believe poker is a game of skill and therefore not subject to the new rules.

But they’re fearful nonetheless.

“Their mission is to kill the funding of online poker, and that’s what this law does,” said Mike Sexton, who hosts the popular World Poker Tour and has won millions as a professional player.

The new law comes amid an explosion in online gambling, fueled by the Texas Hold ’em craze and widespread access to the Internet. In addition, dozens of websites have sprouted up that allow any gambler with a credit card to bet on any sport they choose, for any amount of money they want.

Industry experts say there are an estimated 2,000 Internet sites that take bets for sports and poker. American players have fueled Internet gambling, supplying $6 billion of the $12 billion in revenues generated annually.

“The time has been one of rapid growth,” said Sebastian Sinclair, president of Christiansen Capital Advisors, a gambling consultant. “This industry was well on its way to becoming mainstream in a great part of the world. Capital was tripping over itself to fund these companies.”

The new law gives the U.S. Treasury and Federal Reserve, along with the Attorney General, 270 days to establish policies and procedures.

“The regulations are clearly going to prevent banks from doing electronic fund transfers to gambling sites, but that is no big deal,” Rose said.

Clamping down on the banks won’t serve as a panacea, Rose said. In some cases, banks simply move the money to payment processors, known as e-wallets. Non-U.S. payment processors such as the widely used Neteller then transfer the money to the Internet gambling sites.

The U.S. government has no authority over processors like Neteller that are operating legally.

Anthony Cabot, a well-known gambling lawyer in Las Vegas, thinks language used in the bill provides a loophole for the payment processors and the U.S. banks that want to be free to do business with them.

“Unless you have some fairly Draconian measures … the likelihood of stopping payment to them is small,” Cabot said.

Much damage has already been done to the offshore sports betting industry without the looming regulations.

British BetOnSports PLC folded after its chief executive was arrested in July by U.S. authorities. David Carruthers faces 22 counts of fraud and racketeering charges and remains under house arrest in the St. Louis area.

London-based Sportingbet’s chairman was detained last month in New York on a state fugitive warrant charging him with illegal online gambling. He was eventually freed.

Both arrests sounded serious alarm bells for those running sports wagering sites that take American bets.

The new legislation has already had a dramatic effect. It supposedly clarifies the 1961 Wire Act, explicitly outlawing Internet gambling, including online poker.

It creates new criminal penalties, which have rattled investors and executives – although Rose said it doesn’t expand the act, and there’s no indication the Justice Department is about to a huge campaign to enforce the law.

Still, the biggest publicly traded names in Internet gambling on the London Stock Exchange and AIM, the exchange’s global market for growing companies, could not afford to flout American law. When news broke earlier this month that Congress has passed the bill, Internet gambling companies traded on those exchanges lost a combined $7 billion in market capitalization.

PartyGaming PLC, once the envy of online gambling with its more than $8 billion IPO in 2005, is now trying to figure out how to save its business model. It runs what was once the world’s biggest poker site, PartyPoker, and has said it will no longer take payments from the U.S., eliminating nearly 80% of its revenue and sending its stock plunging.

Another poker company, 888 Holdings PLC, also said it would stop taking U.S. bets, ensuring its profits will fall dramatically.

Sportingbet and Leisure & Gaming both sold their U.S. operations for a dollar. Sportingbet said its exit from the U.S. market cost it nearly $400 million.

The bleeding didn’t stop there. Neteller and FireOne, which owns e-wallet FirePay, also saw their stock price plummet. On Oct. 2, FirePay announced it had stopped doing business with sites that might take U.S. bets, including PokerStars. The decision forced PokerStars, now the biggest poker site in the world and a registered business in Costa Rica, to rely on Neteller to take money for bets headed to its site.

“There are privately owned operators that will continue to take play as long as they have payment processors that will work with them,” said Sue Schneider, publisher of the online gaming magazine Interactive Gaming News. “I think the big question is whether the volume remains the same. But I don’t think any of this means there will be less people playing on the Internet.”

Neteller has said it is evaluating the law. If Neteller abandons PokerStars and other sites, their bottom lines, no doubt, will be hit hard.

But so far, Neteller’s decision to work with PokerStars has amounted to good news for sites not afraid of scorning U.S. law.

Experts say while the new law has forced the public companies out of U.S. market, it has left poker players and bettors gravitating toward private companies.

Both PartyPoker and FullTilt have already seen traffic on their websites surge, taking advantage of any short-term gain now that some of the competition has been sidelined. On its website recently, FullTilt boasted: “We’re Here to Stay!” and offered bonuses to sign up.

This isn’t the first time the industry has faced a serious setback. In 2001, Visa and MasterCard and other merchant banks stopped allowing money to be sent to Internet gambling sites.

Like then, Sinclair thinks Internet gambling will recover again. It’s simply too lucrative.

“There will be a big hit to the industry,” Sinclair said. “A big hit. But it’s not going to be long term, it’s transitory until somebody finds a solution to whatever roadblocks are put in their way. There’s too much money for it to go away.”