Gambling Stakes Rise

November/December 2006 Issue: Page 66

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Online gambling is illegal in the U.S., but many online marketers continue to bet big.

You can't drive on the highway, watch TV or go to the supermarket without being reminded of America's obsession with betting. Casinos are popping up faster than you can say "double down," the World Series of Poker has become a prime time television spectacle and Powerball payoffs are reaching the size of state budgets.

Cashing in on a booming industry that offers some of the highest payouts around might seem like a good bet for affiliates, but not when that business is illegal. Gambling law experts say federal law makes it fairly clear that operating Internet sports books is a crime. But the law is not quite as clear regarding the issue of other Internet games, such as poker and blackjack.

Revenue from, and public support of, gambling (or "gaming" as the industry prefers) in all its forms has never been higher, but pressure from the federal government increases the odds that online gambling marketers may be putting their money and freedom on the line.

The policies of the federal government and some states are, broadly speaking, at odds with the rules governing online betting parlors in many countries, like Costa Rica and Antigua, where most casinos have their operations. The current regulations also put law enforcement in conflict with millions of Americans who place bets online, using their home computers to wager on sporting events and games like blackjack and poker.

Poker is hot right now and poker revenue at brick-and-mortar casinos in Nevada and New Jersey may have jumped 37 percent in 2005, according to the American Gaming association, but Internet gambling is the fastest-growing segment of the gambling market, according to a Pew Research report from March of 2006. Ignorance - whether real or feigned - leads to blissful betting, as nearly 20 percent of Americans surveyed by Pew denied knowing that online gambling is illegal.

More than 80 percent of Americans either support or don't object to gambling, and last year between $10 billion and $12 billion were bet online globally, according to William Eadington, director of the Institute for the Study of Gambling and Commercial Gaming and professor of economics at the University of Nevada, Reno. Even though online gambling is illegal in the United States (with the curious exceptions of state-approved horse racing and lotteries), approximately half of the total online wagering comes from inside the United States.

Despite its popularity, even those who support gambling are reticent to admit it and many recognize its addictive powers. Less than five percent of Americans admit to gambling online, while 70 percent of Americans say that legalized gambling encourages people to spend money they don't have, according to Pew Research.

Since no online bettors have been prosecuted, individuals log on without fear for allnight poker games, and some confident folks have even quit their day jobs to earn their living betting.

While online gambling may become a $25 billion annual industry by the end of the decade, legislative changes and more vigorous enforcement could prompt many U.S. gambling marketers to fold. However, some legal experts claim that online gambling will not end unless U.S. authorities prosecute every one of the 50 million Americans who bet online every year.

SPORTS BOOKED

In July, the "handcuff-click heard 'round the world" took place at a Dallas airport, where BetOnSports CEO David Carruthers was arrested following an indictment for racketeering, conspiracy, fraud and violation of the federal Wire Act. Carruthers, whose company was headquartered in Costa Rica, was charged along with BetOnSports founder Gary David Kaplan and four alleged co-conspirators who worked for U.S.-based DME Global Marketing and Fulfillment. BetOnSports later closed its Costa Rican office.

The arrest forced many companies who participate in online gaming to shuffle their strategy as they awaited trial, and to see if indictments against other organizations would follow. Proprietors of online gaming sites stopped traveling to the U.S., and a much-anticipated gaming conference in Las Vegas was scaled back.

Seven weeks later, law enforcement agents in New York arrested Peter Dicks, chairman of Sportingbet, which offers online sports betting and is traded on the London Stock Exchange. Sportingbet is one of the largest online gambling operators in the world with revenue of $193 million, for the year ended in July, with two-thirds of that coming from the United States, according to the company. Agents of the Port Authority of New York and New Jersey arrested Dicks upon his arrival at Kennedy Airport, acting on a warrant issued by the state police in Louisiana. The arrest was the first time that officials at the state level had adopted similar tactics and pursued charges against a director of a publicly held Internet gambling company.

"The best advice is to stay away from [online gambling]," says attorney Linda Goodman, founder of the Goodman Law Firm, a practice focusing on Internet compliance. Goodman, who primarily represents affiliates and advertising agencies, says this first-time indictment of a marketing company that promotes online gambling opens the door for other affiliate and ad networks to be prosecuted. "If you pick up one of those [gambling] clients on your network, they can charge you with conspiracy."

Marketers minimally need to include language on their websites stating that advertisements are not intended for American audiences, according to Goodman. Gambling websites should not accept payments if the customer who attempts to set up an account lives in the U.S., she says.

Goodman believes the federal government is more actively pursuing online gambling agencies because the potential pot for taxation is getting sweeter. "Billions of tax dollars are going out the door," she says.

Online bettors who live outside of the state of Washington probably need not fear as law enforcement's limited resources prevent targeting individuals, according to Goodman. The Washington legislature passed a law in June of 2006 that upgraded the penalty for running a gambling site from a gross misdemeanor to a felony, and provides gross misdemeanor and felony penalties for betting online in the state.

Patrick Smyth, the president of Gaming Transactions, Inc. and CEO of Keno.com, says that marketers and online gambling companies can operate without fear if they follow one rule. "As long as you don't take phone bets, you are fine," says Smyth, whose wife Kate Kozak worked as brand director at BetOnSports (Kozak has not been charged).

Smyth says the Department of Justice only pursued BetOnSports because founder Gary Kaplan was alleged to have run a sports book in New York before heading to Costa Rica.

Because gambling is illegal in the U.S., many of the proprietors who accept wagers from the United States are headquartered in Costa Rica or Antigua and may have offices in Canada, as is the case with Smyth's company. "I pay taxes in Britain, but I should be paying taxes in the United States, which is where my customers are," says Smyth.

The BetOnSports indictment accelerated a change in the marketing of online gaming sites, according to Smyth. Continued on Page 2...

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