Internet gambling, once considered a certain bet as a business with global prospects, instead finds itself in a protracted high-stakes poker game with authorities in the US – which the industry sees as unblinkingly imposing their mores on the world.

The outcome could help shape the future of online commerce, because it tests the extent to which one country can control what people outside its jurisdiction buy and sell.

The US has long had laws against internet gambling, so sites set up shop away from its shores and millions of Americans flocked to use them. All that changed last July, when the US Department of Justice ordered the first in a spate of arrests of executives from those companies who chanced to set foot on US soil.

Then, in September, Congress passed a law barring US banks and credit card issuers from processing internet gambling transactions. Suddenly, online gambling groups were locked out of the US market.

Online gambling companies are convinced the crackdown has been driven by a few Republican senators in tandem with lobbyists working for influential voices in the US leisure sector – onshore casino groups and the horse racing industry among them – seeking to protect the status quo.

US authorities say they are simply going after unlicensed gambling in every form. In New York, federal prosecutors cite half a dozen recent offline cases, including charges they have brought for operating illegal gambling parlours or Mafia-run numbers games.

But gaming executives and experts on electronic commerce say the effort should also be seen as part of a battle by various countries to restrict what happens in cyberspace. While China and Iran, for instance, try to weed out political and sexual content, other countries worry about defamation and invasion of privacy and the US fights gambling, spam e-mail and identity theft through “phishing”.

“We are creating a Balkanised internet where states are exerting more authority,” says Jonathan Palfrey, a Harvard University law professor. “The online space is getting more complicated.”

Cross-border legal clashes date back at least as far as 1999 when iCraveTV, a Canadian company, began rebroadcasting US and Canadian television signals on the internet. Though the site was legal in Canada, a US judge found it violated copyright and ordered the company to block access by US viewers. The site shut down almost immediately.

Conversely, Dow Jones, the US publisher, hit a snag when an Australian court gave Joseph Gutnick, a mining investor, the right to sue there for defamation, where winning such a claim is easier than in the US – even though the article in question had appeared in the online version of Barron’s, a US weekly it owns. Two years on, the parties settled with a clarification by Barron’s and a contribution to Mr Gutnick’s costs.

Even in a crackdown on gambling, the US is not alone. France, where the state has a monopoly on gambling, last year arrested the two leading executives of Bwin, an online gambling company based in Austria. The two, later bailed protesting their innocence, were on French territory to promote Bwin’s shirt sponsorship of AS Monaco, football team of the adjacent principality.

Bwin, listed on the Vienna Stock Exchange, was already among online gambling groups that had suffered big hits to their share prices and earnings outlook from the US clampdown. Gaming companies had blithely floated on London’s Aim and other European exchanges. Though their offer prospectuses contained clauses highlighting the dangers inherent in the existing American ban, most in the industry assumed that if the US were truly serious about online gambling, its enforcement agencies would have taken action long ago.

Then came last July’s arrest of David Carruthers, at that stage the high-profile chief executive of the UK-listed Betonsports, in the transit lounge of Fort Worth airport en route from London to Costa Rica, where the company is based.

Federal prosecutors in New York in January detained the Canadian founders of Britain’s Neteller, which processes gambling transactions. The US authorities have also issued dozens of subpoenas demanding bank records, documents and e-mails in connection with a wide-ranging investigation. Mr Carruthers as well as Stephen Lawrence and John Lefebvre, the Neteller founders, are on bail awaiting trial on charges relating to illegal online gambling – which, along with others implicated, they deny. Betonsports faces court proceedings and Gary Kaplan, its founder, is sought by US authorities.

Cases like these “will hasten the development of technologies and practices that geographically carve up the internet”, says Jonathan Zittrain, a Harvard professor of internet governance. “Innovative content distribution models might have to be negotiated one state at a time, at the risk of, say, US citizens being told, ‘Sorry, you can’t see this content that everyone else can – it’s not licensed in your jurisdiction’.”

But the experience of MGM Mirage highlights the problem of doing business without access to the lucrative US market. In 2001, the big American casino operator set up an offshore internet gambling site with security in place to screen out US residents. The site shut for lack of customers after less than two years.

Some countries are fighting back. The Caribbean island of Antigua has been pursuing a case with the World Trade Organisation that claims the US law is protectionist because it forbids foreign online gambling companies from serving US consumers.

The WTO has provisionally ruled the US law inconsistent because it allows domestic internet operations for horse racing and lotteries while banning overseas gambling sites. A final ruling is expected within weeks.

Antigua has little leverage, but the European Union has declared itself an “interested party” in the dispute. This week Charlie McCreevy, the internal market commissioner, said the “protectionist” US legislation might prompt a separate action by the EU.

As the US cracks down on internet gambling, the UK is moving to regulate it. Tessa Jowell, culture secretary, last year hosted a conference on global gambling regulation that attracted 31 nations. This September Britain will begin licensing gaming sites.

That is a position to which many in the industry expect the US will eventually move. They point to November’s congressional elections, when Democrats won the majority and Jim Leach of Iowa, a proponent of the 2006 law, was a surprise loser. Some also predict that the law will prove unworkable.

Las Vegas Sands, the biggest casino company by value, is to set up an online gaming site this year in the UK and then continental Europe. It assumes that the US will eventually permit online gaming.

Europe’s gambling industry has learnt its lesson not to be too confident about reading between the US political and judicial lines. But one UK executive, predicting that the US will at some point relent, reminds America of its own history by saying: “Prohibition won’t work.”

Instead, what is happening now could be “the start of a process that will lead to legalisation, regulation and taxation in the US”.

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Author Contact Info: Brooke Masters, Roger Blitz and Daniel Pimlott, Fi