an uphill battle

Web gambling fight an uphill battle
As overseas sites prosper, observers are betting Justice Department will eventually relent and regulate activity
By Julia Angwin
The Wall Street Journal
Originally published August 9, 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 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 percent of its customers are U.S. based, had a profit of $26.8 million for the year ended Jan. 31.

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 percent to 10 percent 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 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 Carruthers, “the voice of the people has spoken.”