I'm a dog for news. Economist is one of my absolute favorite news sources. They had this on the US ban:
FORTUNE may well favour the brave, but in America it increasingly leans towards the foolhardy, reckless and criminal. On September 30th Congress rushed through a bill to stop banks and credit-card companies from processing payments to online gambling companies.
The bill, tacked onto legislation tightening port security, could be signed into law shortly by George Bush. It is aimed at choking off the flow of American funds to a fast-growing, if illegal, industry that took some $12 billion in bets worldwide last year, half of which are thought to have been placed by Americans.
The immediate effect was to send an entire industry into a spin as the share prices of online gambling firms crashed. Many now plan to concentrate on European and Asian gamblers. But America's actions are unlikely to produce the results desired by politicians. Online gambling seems unstoppable and prohibition can be easily circumvented. This could drive online gambling into darker and more dangerous corners for Americans, even as punters in other countries are protected.
The American Gaming Association, which represents the big casino groups, reckons some 4% of Americans, or about 12m people, gambled online last year. That does not seem like many when one in four Americans visited offline casinos. But the number of Americans gambling online has doubled over the past year. Some studies suggest that a quarter of male college students now play card games online at least once a month.
This burgeoning American love of internet gambling fuelled the industry. The first online casinos started taking bets in the mid-1990s and by 1999 estimates suggested there were over 400 gambling websites. It could now be 3,000.
PartyGaming (http://www.partygaming.com/), the biggest by market value, was founded in 1997 by Ruth Parasol, an American lawyer with a colourful business background. The firm took off in 2002 after it developed proprietary software that allowed punters to play poker with each other over the internet. Poker was the big breakthrough for internet gambling. The game lends itself perfectly to the spread of the internet. In much the same way that eBay found success from the networking effects of matching lots of buyers and sellers of used goods, poker sites were able to match players wanting a game at any time of the day or night.
Fish in the bathtub
The big online sites used obtrusive marketing to push playing online, while taking a cut of the pot. And the popularity of poker soared with televised events and celebrity tournaments. Participants, meanwhile, became some of the industry's best marketers. Some competed to be the most daring or outrageous by posting photographs on the web of themselves playing poker in strange settings; up mountains, in the bathtub or in the back of university lecture halls during classes.
And because this was a game of skill, rather than one dependent on the random generation of numbers, many players fancied they could make a living fleecing cash from those less adept. In some cases they did. Tales abound of experts in game theory leaving university maths departments to make their fortunes online, inspiring legions of amateurs (called “fish” by the more experienced players) to try their luck. In no time at all poker has grown into one of the most popular forms of online gambling (see chart).
PartyGaming, and its rivals, such as Cassava Corp's 888.com (http://www.888.com/) and Sportingbet (http://www.sportingbet.com/), snapped up smaller firms and also began to offer casino-style games, such as blackjack and roulette. PartyGaming went from making a slim profit of $5m in 2002 to a whopping $293m in 2005 as its revenues approached $1 billion. In June 2005 it listed on the London Stock Exchange, which put a value of £4.6 billion ($8.4 billion) on the firm. Given such companies' warnings that their main business involved breaking American laws, the brokers who listed the firms and the institutional fund managers who bought their shares now face some rather difficult questions.
The great reliance on America left the online gambling firms vulnerable to the legal uncertainty there. The big firms kept their computer servers and head offices far away from any American jurisdiction. PartyGaming and 888.com have their headquarters in Gibraltar, a European off-shore tax haven. Sportingbet moved from the Channel Islands to London in 2002 after the British government cut betting taxes. In exchange some of the big betting firms agreed to move to London under the watchful eyes of regulators and tax collectors. Next year Britain plans to go a step further and legalise online casinos, bringing them into the tax net in exchange for the respectability to be gained from being tightly regulated in a credible jurisdiction.
But as Britain's attitude has become more permissive, America's has hardened. American prosecutors have long taken action against firms that take bets on sports, a form of gambling that plainly contravenes anti-racketeering laws passed in 1961. In more recent years they have used this legislation against American internet betting businesses, including firms that sought to evade the law by operating in countries such as Costa Rica. In August 2000 Jay Cohen, an American, was sentenced by a federal court to 21 months in prison for accepting sporting bets from Americans, even though his operations were overseas.
One consequence was that much of the online gambling business moved to firms such as Sportingbet and PartyGaming that have no American operations. But the limits to that strategy became apparent in July when American federal prosecutors took aim at online gambling sites.
David Carruthers, the British chief executive of BetonSports (http://www.betonsports.com/), which is also listed in London, was detained while changing planes in Texas en route between the company's offices in London and its base in Costa Rica. He was charged with conspiracy and fraud relating to online gambling. One arrest in such an industry might be deemed bad luck, but two in quick succession looked like a losing streak.
Peter Dicks, the British non-executive chairman of Sportingbet, was arrested after arriving in America in September. Louisiana, which outlaws “gambling by computer”, had issued a warrant for his arrest and promised to nab other managers too if they came within reach. Mr Dicks was detained in New York, but scored a minor victory when his extradition to Louisiana failed on a technicality.
Problems loomed in Europe, too. In August several German states told Bwin (https://www.bwin.com/splash.aspx?), an Austrian internet gambling firm, to cease operations in an effort to maintain gambling monopolies. This was followed by the arrests in September of two of its bosses in France, which also maintains a monopoly over gambling.
Turning off the money
If the American arrests were intended to deter, they quickly achieved their goal. BetonSports stopped taking bets from Americans, as did William Hill (http://www.willhill.com/iibs/EN/sportsbook.asp), Britain's second-largest bookmaker, which barred players with American credit cards or addresses. The new bill aims to choke off the payment systems, although in many respects it is largely symbolic. “This does not affect the question of whether internet gambling is illegal,” says John Carroll, of Clifford Chance, a law firm. “It is plainly illegal. This law merely puts another weapon in the prosecutors' arsenal.”
Most large credit-card companies already refuse to process online gambling payments, not because of high-minded morality, but because customers can legally renege on gambling debts. And many intermediaries have already abandoned this market, some in the face of prosecution. In 2003 PayPal, an online payments firm owned by eBay, paid a $10m fine to settle such allegations.
Still, gamblers and those who service them are a wily lot and are by definition risk takers. Previous efforts to stop the flow of money to gambling sites did little more than divert it, creating a new offshore industry of financial intermediaries beyond the reach of American legislators.
One such firm is Neteller (http://www.neteller.com/home/index.jsf), a company based in the Isle of Man, a tax-haven in the Irish Sea. Neteller takes credit-card payments or bank transfers from its customers who can then use these to pay their gambling bills. Demand for its services has been booming. Last year it processed some $7.3 billion in online payments. In just the first six months of this year it processed more than $5 billion in payments, most of which are from gamblers in America.
Blocking American users is not hard because gambling sites can know with a fair degree of accuracy the geographic location of users from their internet protocol addresses, the unique numbers assigned to people online. It was the rationale behind a French court's decision in 2000 to require Yahoo! to block French users from part of its site that auctioned Nazi memorabilia, which is illegal in that country.
But it is harder to get banks to stop determined gamblers from using their money to pay online firms. The most glaring gap in the law is that it is based on the fiction that most payments are made using credit-card systems, which can easily identify where payments are going using existing merchant and transaction codes. Although banks can use these codes to identify online gambling firms and their intermediaries, they cannot readily do the same for other sorts of transactions, many of which are likely to be exempted from the final regulations.
“Banks have no way now of reading who the payee is on paper cheques,” according to Nelson Rose, a gambling expert at the Whittier Law School in California. “Banks tried to defeat this bill, not because they cared about patrons' privacy, but because they knew that it would cost them billions of dollars to set up systems to read paper cheques.”
Staying out of jail
Even if the new legislation is largely symbolic, it proved enough to cripple an industry already reeling from the earlier arrests. PartyGaming, which generates nearly 80% of its revenue from America, said it would suspend gambling for Americans. Its shares tumbled by almost 60% overnight. Sportingbet, which makes 60% of its gross profit in America, said its business could be affected if financial intermediaries declined to take deposits from American customers. Neteller, meanwhile, gave warning that the legislation would have a “material adverse effect” on its business. “This law has a tremendous chilling effect,” says Ed Morse, a law professor at Creighton University. “White-collar executives don't want to go to jail.”
In prompting a rush for the exits by the most visible—and arguably the best behaved—online gambling operators, the law seems instead to have cleared the field for dodgy operators. “You will quickly see a flight of gamblers to unregulated sites,” says Leighton Vaughan Williams, head of the betting research unit at Britain's Nottingham Business School. “I can't see it having a big effect in stopping gambling.”
Even America's casinos, which long campaigned for the prohibition of online gambling for fear it would cannibalise their business, have begun to lean towards legalisation because they see attempts at prohibition as futile. Many now think that online offerings may help them attract customers. That realisation seems to be reflected in the valuations of American casinos: a group of private equity investors is offering just over $15 billion to buy Harrah's, the world's largest casino operator.
One of the more ironic consequences of the new law is that it may have made British-based online gambling companies vulnerable to takeover by America's casino groups. Not only have the firms' share prices fallen heavily, but their withdrawal from the United States has legitimised them as prey to American operators seeking to quickly obtain online expertise and knowledge of overseas markets.
If such acquisitions come to pass, it seems more than likely that American online gambling firms would begin to lobby American politicians to legalise online gambling. Thus, America's prohibition may ultimately have the unexpected consequence of moving the country one step closer to legalising online gambling