Gambling Online:
Is It Legal?
The issues involved in legislating online gambling are a lot more complicated today than they were six years ago when Sen. Jon Kyl (R-Ariz) first introduced the bill known as the Internet Gambling Prohibition Act of 1997. At that time National News reporter David Isaacson had written that online gambling had grown into a 300 million dollar industry and there were about 32 online casino sites.
In March 2002, Andy Sullivan of Reuters reported that Christiansen Capitol Advisors estimated gambling sites took in about $2.2 billion in revenues in 2000, and would collect $6.4 billion by 2003. At the time Sullivan wrote his article, there were about 1400 online casinos. Today there are between 1800 and 2000.
Back in 1997 the American economy was still booming and dot.coms hadn't yet gone bust but today advertising revenue from offshore gambling sites fuel the Internet economy. Over the past few years, Internet businesses have been scrambling to stay afloat and the advertising revenue from these gambling sites has been too irresistible to refuse. If that revenue were to be suddenly cut off, many Internet companies would feel the crunch.
David Schepp of the BBC reported in February that online gambling had become the fifth largest advertiser online, jumping to 2.5 billion from 910 million ads last year. "Online gambling firms are now advertising on more mainstream sites, thus appealing to whole new groups of gambling enthusiasts."
He interviewed Charles Buchwalter, head of media research at Jupiter Media Metrix who said that, ""Online casinos are now competing for advertising with the most visible industries, including retail, financial services and travel…The fact that casinos are [moving] their ad-buys from niche sites to mainstream portals is proof that this sector is going mainstream," Buchwalter says.
Those "mainstream portals" include sites like Yahoo! and Excite."
Since most of these offshore gambling sites are out of the reach of US authorities and are legal in the countries where they exist, there is really little US authorities can do to stop them. Roy Mark of JupiterMedia.com reported in March that 60 percent of all offshore gambling dollars comes from Americans.
According to the Justice Department, Internet gambling is illegal for Americans. The courts have ruled that under the 1961 Wire Wager Act, which prohibits the use of phone lines for placing sports bets, Internet sports betting is illegal.
Jay Cohen, who was president of the World Sports Exchange (WSE) in Antigua, was one of the first of 22 defendants charged in March 1998 under the Wire Act.
Reporting for Yahoo Internet Life in 1999, Justin Ware described how the then 27 year old Cohen, who had been a trader on the San Francisco Stock Exchange had started one of the first online sports books in 1997 by working out of a small office suite in Antigua. "After a couple of investors agreed to back him, he persuaded two friends to join him: Steve Schillinger, an options trader with more than 18 years of experience and a head for numbers; and Haden Ware, a student Cohen had met on the trading floor. The World Sports Exchange was born."
According to Ware (no relation to Justin Ware), nearly three years after the launch of their business, Jay Cohen was in Seattle awaiting trial, and Schillinger and Ware were considered fugitives. Cohen chose to go back to the US and fight the charges; Ware and Schillinger chose to stay and run the business. Fortunately for them, and frustratingly for the FBI, as long as they stayed in Antigua, they couldn't be touched. Since extradition requires both countries to agree on the offense, and Antigua considers online gaming to be perfectly legal, Ware and Schillinger couldn't be extradited, Ware reported.
"Haden Ware was a student on his summer break when he went down to help Cohen and Schillinger, '"When I first came down here, I was going to school…Jay called me up and said, 'I'm going to the Caribbean. Are you in?' And I said, 'Yeah, I'll come down, take a summer off, have a good time.' It's turned out to be a little bit longer than that,"' He was reported as saying.
Steve Kanigher quoted Cohen in the Las Vegas Sun in March as saying that when he decided to go back to the US to fight the charges he had a conversation with Schillinger. "I said that I would come back to fight this. He said that he was staying there in Antigua. I said one of us is making the right decision."
Ware reported that the decision to work from Antigua was intended to keep things legal. He quoted Schillinger as saying, "We were very open about what we did…. If we could have done this in San Francisco, we would have. We came down here because we thought we would be licensed to do what we wanted to do."
Stephen Nover of The Prescription reported in October that Cohen didn't believe he was breaking any laws. He was accepting wagers in Antigua, where bookmaking is legal. He came back to America to fight the charges and was the only defendant of those charged who challenged the system.
Nover reported, "After losing his case in a controversial manner when the judge instructed the jury how to vote, Cohen appealed. He lost his appeal two years ago, and found out in June that the Supreme Court would not review his case.
U.S. District Judge Thomas Griesa sentenced Cohen to 21 months in federal prison and a $5,000 fine." Cohen began serving his time on October 15.
Of the initial group charged in 1998, thirteen pleaded guilty and seven are still fugitives including Steve Schillinger and Justin Ware who are still in Antigua.
Today World Sports Exchange is one of the largest sports books in the world with a customer base estimated to be around 30,000.
Mark Fineman of Business 2.0 wrote an article on the World Sports Exchange and of Schillinger and Ware in October 2000.
"Meanwhile, when they're not holding epic pool parties, they're running WSE and watching the money come in -- and there's a lot of money coming in. In the two and a half hours it took U.S. District Judge Thomas P. Griesa to sentence him, Cohen's website in Antigua took in seven times his $5,000 fine in bets on the New York Yankees-Oakland A's game alone, a fraction of the tens of thousands of dollars' worth of Internet bets placed with WSE that day," Fineman reported.
He quoted Schillinger as saying, "I was a great citizen of the U.S. I coached my kids in the Little League [and the Catholic Youth Organization basketball league]. My assistant coach was an FBI agent. He knew what I was doing. I gave a lot to my community, and for them to say I'm a criminal? Don't tell me the U.S. government thinks gambling is the worst thing in the world."
Last March Kevin McCory of USA Today interviewed Sebastian Sinclair, CFO of Christiansen Capital Advisors; a New York consulting firm that studies the gaming industry. He said, "Online sports gambling is clearly illegal today…But how effective has that prohibition been so far? Not very."
In October Michael Hiestand of USA Today, quoted Joe Read, who directs customer service for a Costa Rica-based sports betting site, as saying that Cohen's conviction led "industry people to protect themselves by getting local people to front their businesses. That's the loophole. An American can run the business but no one can find out," he said.
Hiestand also interviewed industry consultant John Musch who said bettors would inevitably find their way around any ban, especially as more countries begin to allow online betting. According to Musch the U.S. needs to regulate Internet gambling. '"The legitimate operators would welcome that since they'd then seem more legitimate."'
When the authorities first used the Wire Act as the basis for their charges against online gambling sites there were questions as to how well the act would hold up under the law. The Interstate Wire Act of 1961 prohibits sports wagering between states using telephone lines or through other wired devices. Since the Internet had not been in existence in 1961 there were questions as to how that could possibly apply to the Act.
In June 1999, Tim Ito and Sharisa Staples of the Washingtonpost.com reported, "despite the Justice Department action, many legal scholars question how well existing laws can be applied to new technologies. The Wire Act, for example, does not explicitly mention the Internet. It is also unclear how well the law would apply to satellite based transmissions, which are not considered wired devices."
Ito and Staples quoted Nelson Rose, professor of law at Whittier Law School who said, "Changes in [gambling] law follow changes in society…But our society has been changing so rapidly . . . sometimes the law cannot keep up."
Kanigher reported that some legal experts believe the Wire Act applies only to sports wagering. Kanigher cited a federal ruling in Louisiana upheld in 2002 by the 5th U.S. Circuit Court of Appeals that had come to the same conclusion. "The courts ruled against two Internet gamblers who sued credit card companies and banks after accumulating gambling debts from casino-style gaming websites.
The gamblers argued that the credit card companies and banks, working in conjunction with the websites, created a worldwide gambling enterprise that facilitated illegal gaming, making their debts unenforceable. But as part of their dismissal of the lawsuit, both courts ruled that the wire act applies only to bets on sporting events or contests."
While the existing laws continue to be confusing some senators are trying to get new legislation passed to make online gambling illegal once and for all. In an attempt to stop it at the source, Sen. John Kyl's (R.-Ariz) most recent legislation wants to cut off American access to Internet gambling sites by prohibiting U.S. banks, credit card companies and other Internet payment systems from making payments to online casinos.
The bill would allow the State and Federal Attorney Generals to request injunctions against financial institutions, Internet Service Providers, or computer software providers that fail to assist in the prevention or restraint of Internet gambling. The Kyl bill, S. 627, applies criminal penalties of up to five years in prison to operators of Internet gambling sites.
The Senate Banking Committee expressed strong support for the Kyl bill during a hearing in March. The House Judiciary Committee's subcommittee on crime passed the House version of the bill authored by U.S. Rep. Jim Leach of Iowa in May. It had already won the support of the House Financial Services Committee in March. The legislation has previously passed both the Senate and the House, but never in the same session of Congress.
Many credit card companies have already distanced themselves from online gambling. According to Beth Cox of Ecommerce News, as of July the list includes Bank of America, Fleet, MBNA and Chase Manhattan, as well as Citibank, which controls about 12 percent of the U.S. credit card market.
Cox further reported that credit card transactions are often coded to indicate what is being bought or sold. By blocking certain codes, banks that issue credit cards can avoid issuing credit for much of the gambling activity that occurs on the Internet.
This sounds logical in theory but according to information made available by the Australian Bankers' Association in late April, this is not always easy to do. The recommendations, which pertained to the Interactive Gambling Act that was passed in Australia in June 2001, reported a number of problems in being able to block credit card transactions.
The Association reported that the blocking of service codes, would likely be effective for credit card purchases occurring directly between the customer and the gambling merchant, provided the merchant has correctly coded the gambling transaction. However there appeared to be a number of means by which the correct identification of illegal interactive gambling transactions might be avoided. One possibility was for gambling merchants to use incorrect credit card transaction service codes in order to avoid identification of gambling transactions.
The Australian government initially promised amendments to the 2001 Interactive Gambling Act that would consider the feasibility of blocking credit card transactions for overseas gambling sites. It has since backed away from introducing such rules, warning there were many problems with that level of regulation.
The Australian Bankers' Association also pointed out that gambling sites, which are legal in their own countries, could easily set up player accounts with offshore financial institutions. They also sited the use of online payment providers as a means for individuals to make transactions with online gambling sites.
In the past companies like PayPal predominated the online gambling payment market. This is no longer the case, however, since PayPal recently decided to stop taking gambling payments due to the uncertainty of the law.
In June New York Attorney General Eliot Spitzer subpoenaed PayPal's records relating to the use of the payment service by gamblers. At that time PayPal agreed to stop online gambling companies from using the service to accept money from gamblers who resided in New York State. In August Beth Cox of InterneNews.com quoted a spokesperson from PayPal as saying, it was "taking the action in "voluntary cooperation with the attorney general and was not admitting to a violation of law.""
Cox reported that under the settlement, PayPal agreed not to process payments to online gambling sites from New York customers as of Sept. 1 and would pay $200,000 to New York State to cover costs of the investigation and penalties.
Joanna Glasner of Wired.com reported in July that under the terms of its planned purchase of PayPal (PYPL), eBay decided that it would stop offering the payment service for Internet gambling transactions. It attributed the decision to an "uncertain regulatory environment surrounding online gaming."
Under the USA Patriot Act, it is prohibited to transmit funds known to have come from a criminal offense, or that are intended to promote or support unlawful activities. Attorney for the Eastern District of Missouri told eBay that its online payment service PayPal had violated provisions in the USA Patriot Act between October 2001 and July 2002, Dawn Kawamoto reported for CNET in March.
It was alleged that PayPal violated laws regarding the processing of online gambling payments, and eBay the parent company of PayPal was asked to hand over nine months of the gambling-related earnings in the settlement.
According to Brian McWilliams of Wired.com nearly 500 gambling sites signed up to accept PayPal in the first quarter of last year, almost doubling the company's roster of such merchants, which stood at 1,022 as of March 31, 2002. McWilliams reported in June "in exchange for taking such a risk, PayPal was expected to derive more than $16 million from Internet gaming in 2002. Already this year, its revenues from such merchants -- who pay higher fees to offer the PayPal service -- have more than doubled, accounting for 8 percent of its total income."
Kawamoto reported that PayPal received 6 percent of its revenue from online gambling, according to its filing with the Securities and Exchange Commission last year.
Glasner interviewed Keith Furlong, of the Interactive Gaming Council, who said that with PayPal out of the picture, gamblers would likely turn to competing online payment services such as Neteller and Firepay. Firepay is governed under the laws of Bermuda.
Another alternative payment system being used by online gamblers and cited by the Australian Bankers' Association is the use of electronic cash or e-cash.
In March Rod Smith of The Delaware News Journal quoted gaming author Mark Schopper as saying that 'according to the Treasury Department electronic cash was "the biggest money laundering threat ever seen". Schopper said the Kyl legislation banning credit cards for online gambling would likely have "tremendous unintended consequences encouraging money laundering."
"Criminalizing online gaming, as the committee seeks to do, is a practical impossibility because operators are based offshore, beyond the reach of U.S. law, he said…. The real fly in the ointment is that the alternative payment systems being developed to get around the ban "are the most powerful and untraceable money-laundering tools ever imagined by criminals, he said.'