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”.

When it comes to winning on Capitol Hill, poker’s got nothing on horse racing.

The horse racing industry has cultivated strong ties in Congress, which it has used over the years to pass legislation protecting its interests and to block potentially harmful bills. Last year, it won an exemption in legislation cracking down on other forms of Internet gambling.

Now, a group representing poker players is seeking to play a stronger hand in Congress, in part by replicating elements of the horse racing lobby’s strategy: convincing lawmakers to treat it not as just another form of gambling, but as popular, even wholesome, entertainment that could bolster government coffers.

“We’d like lawmakers to look at poker the same way they look at horse racing — that they’re both American traditions,” said Michael Bolcerek, president of the 135,000-member Poker Players Alliance. Formed in 2005 and funded through member dues, the group has engaged in aggressive public relations, voter education and lobbying.

Bolcerek touts a study showing regulated and taxed online poker could raise $3.3 billion a year for the U.S Treasury, plus $1 billion for states. He said 23 million Americans play poker online and 70 million play it in person, and his group is working to turn those players into a recognizable voting bloc.

In addition to hiring a top public relations firm, the alliance has spent more than $720,000 lobbying Congress, Senate records show.

But slick PR and lobbying aren’t as important to the horse racing industry’s success on Capitol Hill as its longstanding ties with politicians from horse racing and agricultural states, said Keith Furlong, deputy director of the Interactive Gaming Council, which, with the poker alliance, unsuccessfully opposed last session’s Internet gambling crackdown.

The Poker Players Alliance is hoping that grass-roots momentum can make up for its lack of institutional power. It’s recruiting local, regional and state directors to help mobilize poker players. After Rep. Jim Leach, the Iowa Republican who wrote the Internet gambling bill, lost his re-election bid in November, the association conducted a poll in his district that it says showed that his opposition to online gambling could have cost him the election.

Leach’s former spokesman, Gregory Wierzynski, called the poll “silly” and expressed doubts that the poker players could build such a potent lobby.

A powerful selling point for horse racing, which online poker lacks, is the number of agri-business jobs it supports, said Greg Means, a contract lobbyist for the National Thoroughbred Racing Association.

“We don’t really care about the poker players,” he said, nonetheless wishing them well “if they have enough political clout to go and get themselves legalized in one fashion or another.”

Gambling interests hope the Democratic takeover of Congress will mean better odds for success than last session when the Republican-controlled Congress targeted the industry in a flurry of last-minute lawmaking.

In the political maneuvering leading to last fall’s election, then-Senate Majority Leader Bill Frist, R-Tenn., inserted into an unstoppable port security bill a long-stalled provision clamping down on Internet gambling.

The Unlawful Internet Gambling Enforcement Act owed its momentum at least partly to a desire by Republican leaders to eradicate the specter of corruption lingering over their party from the gambling-tinged Jack Abramoff lobbying scandal. Still, the new law will loom over the gambling industry and its occasionally conflicting agendas this session.

The segments of the industry most impacted by the law are eager to chip away at it — if not reverse it — through rule-making and legislative lobbying. They’ll also seek to build political influence so they can head off any congressional efforts to regulate gambling.

Some parts of the gambling industry — among them lotteries, fantasy sports, horse racing and tribal gambling interests — emerged unscathed in the last session. Congress carved out exemptions for them, and they’re likely to keep a low profile this session, concentrating on initiatives primarily related to taxation and federal rule-making.

Gambling isn’t expected to be the subject of the rigorous oversight that Democratic leaders have promised of other industries. And most gambling interests generally anticipate more receptive audiences in the new Democratic-controlled Congress, thanks partly to the diminished influence of religious conservatives who oppose gambling on moral grounds.

NEW CONGRESS, NEW ATTITUDES?

Some leading gambling opponents were defeated or lost power in the Democratic takeover, including Frist, who retired from the Senate; Rep. Jim Leach, the Iowa Republican who authored the last session’s gambling law; and Rep. Richard Pombo, a California Republican who unsuccessfully pushed to prohibit Indian tribes from opening casinos off their reservations. Another powerful member who tried to restrict off-reservation gambling, Sen. John McCain, R-Ariz., lost the reigns of the Senate Committee on Indian Affairs.

Gaining clout were industry allies or sympathizers, including Senate Majority Leader Harry Reid, D-Nev., a former chairman of the Nevada Gaming Commission; Senate Minority Leader Mitch McConnell, R-Ky., who represents a bastion of the horse racing industry; and Senate Minority Whip Trent Lott, R-Miss., who represents the Gulf Coast, where casinos are a major industry.

On the flip side of the partisan shift, gambling interests could face opposition from empowered liberals who oppose gambling because they believe it preys inordinately on the poor and elderly.

“It just brings it into a discussion of social morality instead of just personal morality,” said Tom Grey, spokesman for the National Coalition Against Legalized Gambling. “We don’t lose either side.”

Perhaps the most significant obstacle to action on gambling issues may be political inertia, because Congress is typically reluctant to revisit recent controversies.

“It’s going to be difficult for someone to do something on Internet gambling — or maybe gambling as a whole — because there was just major action on it,” predicted Greg Means, a lobbyist for the National Thoroughbred Racing Association.

The increasingly powerful Indian gambling lobby also survived attempts to restrict off-reservation gambling.

“The outlook is definitely better,” said Jason Giles, an attorney for the National Indian Gaming Association. He predicted that Congress would pay more attention this year to other pressing issues on the nation’s Indian reservations, such as health care and illegal drugs.

BEYOND CONGRESS

Other gambling interests will also look beyond Congress, thanks in part to disagreements over the application of the Internet Gambling Act and other federal, state and international gambling rules.

Cash-strapped states are continually eyeing new forms of gambling, as well as expansions or tighter regulations on existing forms. And there are likely to be behind-the-scenes skirmishes over the crafting of rules to implement the Internet Gambling Act. That could get tricky because the law doesn’t penalize gamblers, but rather banks and credit card companies that process online banking transactions.

The rules must be completed by mid-July. And the Department of Justice, which will help the Federal Reserve and U.S. Treasury implement the law, asserts that the horse racing, state lottery, fantasy sports and tribal exemptions are trumped by prohibitions on all Internet gambling.

Those prohibitions, it contends, are included in three laws that predate the modern Internet by more than 30 years, including the Wire Act of 1961. The horse racing industry counters it would welcome a legal challenge on those grounds, because it says the 1978 Interstate Horse Racing Act extends explicit protection for gambling.

The Internet gambling lobby would like Congress to legalize and regulate online gambling.

One of the leading groups in the lobby is the Interactive Gaming Council. It represents foreign companies, some of which abandoned U.S. markets or saw their stocks plummet after the passage of the Internet Gambling Act.

FUTURE OF INTERNET ACT

In the new Congress, the Interactive Gaming Council is expected to focus on lobbying for a narrow amendment to exempt online poker from the new law.

“You get less support when you start adding other games,” said Keith Furlong, the council’s deputy director. “Poker to me has a better chance when you sit down with legislators because the players are playing against each other, and you have the element of skill and you have the element that poker is American,” he said. “It’s like apple pie.”

The council will be joined in pushing for the poker exemption by the Poker Players Alliance. It argues that poker will proliferate even if it’s prohibited, so it’s safer and more profitable to legalize and regulate it. The group intends to take that message to state legislatures as well as Congress.

The American Gaming Association, representing large, publicly traded casino operations, is taking a more measured approach, in part because its membership is divided on Internet gambling.

The group, which has opposed Internet gambling for years, officially took no stance on the issue last year. And this year, it will ask Congress to study the feasibility of legalizing, regulating and taxing Internet gambling.

“We’ve got to be convinced that it can be regulated and it can be controlled,” said the association’s president, Frank Fahrenkopf.

In the meantime, he said, “Don’t anticipate that the gambling industry is going to be going to this new Congress asking for anything huge.”

Dear Washington State PPA Members,

I wanted to let you know that lawmakers in your state are taking the right steps to roll back the new Washington law that makes it a criminal offense to play poker on the Internet.  The Poker Players Alliance supports the bill introduced by State Representative Chris Strow House Bill 1243 which would remove the criminal penalties from playing games of skill online like poker.
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Michael Bolcerek would be the first to admit there are a lot of good causes out there—fighting poverty, saving the planet, curing AIDS. But he thinks he’s found one that, while not as important in the grand scheme of things, still deserves his attention: protecting the rights of poker players.

Bolcerek, 44, is the president of the Poker Players Alliance, an organization dedicated, as its slogan says, to “protecting the freedom to play America’s game.” Representatives of the group, which claims 75,000 members, lobby in Washington, D.C., and in state capitals across the country, fighting government regulations that would make it harder to play the game they so cherish.

Bolcerek, who lives in San Francisco, is himself a casual poker player, gathering with friends about once a month to play. His background is in corporate finance—he’s worked for Oracle, Nokia, and Hyundai—and only joined the PPA at the urging of a friend in 2005. He forked over his dues, but then found himself so upset about various efforts in California to regulate poker that he began to dedicate more and more of his time to the cause. He became president last February. Bolcerek sees his future in politics, but for now, he says, “I’m just trying to make the world safe for poker players.”

According to Bolcerek, “There’s a political backlash going on right now against a very popular activity . Politicians are legislating morality.”  Exhibit A, he says, is a bill recently passed by Congress and signed by President Bush that threatens to wipe out the $3 billion U.S. online gambling market. The new law prohibits banks and credit card companies from processing checks and electronic payments involving Internet gaming sites. “If the goal of Congress is to protect people from the possible dangers of gambling, a prohibition is the worst way of achieving it,” Bolcerek said in a press release issued right after the bill was passed in September. “All it will do is push poker underground, essentially creating online speakeasies.”

Then there’s the crackdown on poker at the state level. California recently shut down several casino nights hosted by charities, as officials enforced a state law that for years had gone ignored. In Cincinnati last January, Bolcerek says state agents went undercover as players at a poker tournament sponsored by local residents to raise money for a cancer patient to find out if the organizers had obtained the necessary permits. And a year earlier, in Palmer Lake, Colorado, a SWAT team of fifty-two officers raided a local restaurant where two dozen gamblers were playing Texas hold ‘em. Witnesses told the press that the cops entered with guns drawn. “Put your hands up,” they yelled, “This is a raid.”

Though the PPA is an independent nonprofit organization, it was started with contributions from the gambling industry along with annual dues payments from its members. Bolcerek also says he is “currently courting U.S. casino interests with regard to supporting other initiatives we’d like to accomplish,” though he won’t detail what those are. Nonetheless, Bolcerek insists that the PPA comes up with its positions independently of any outside influence.

“It’s a special interest,” he argues, “but so are guns, so are environmental issues. The fact is, it’s about personal freedom and the freedom to enjoy a game of skill wherever you want to play.”

Press Release
Jan. 23, 2007

In-home recreational internet gaming shouldn’t be a felony, says Strow

10th District legislator introduces bill to provide an affirmative defense to the Class C Felony created by 2006 internet gambling bill

Rep. Chris Strow, R-Whidbey Island, today announced his legislation, House Bill 1243, to quash the felony charge language in last year’s legislation addressing in-home internet gambling.

“My goal with this legislation is to correct an element from last year’s online gambling bill, Senate Bill 6613, that made it a Class C Felony to gamble recreationally in one’s own home if it is done online,” said Strow.

“While I do see the need for protecting our citizens from online gaming that may be scamming innocent victims, I do think that there is also a level of accountability, as an adult, to do as he or she chooses in his or her own home,” said Strow. “Most certainly choosing to gamble, or play a game of skill such as poker, should not have been made a crime equivalent to possessing child pornography or threatening the Governor.”

House Bill 1243 is currently awaiting a hearing in the House Commerce and Labor Committee.

“While I have requested a hearing on the bill, people need to call and write the Chairman of the House Commerce and Labor Committee, Representative Steve Conway, and ask him to schedule a hearing for House Bill 1243,” said Strow. Rep. Conway can be reached at (360) 786-7906 or Conway.steve@leg.wa.gov.

“There’s a certain point at which policy can be perceived as ‘nanny stateish.’ I think we reached that point with last year’s legislation and I’m aiming to make amends,” said Strow.

Tonight, in an annual tradition, the President of the United States will address the Congress, his cabinet and our country on the “state of the union” and the goals of the government for 2007.  It is not likely the president will include the “state of poker” among his crucial national issues.  Thus, I  would like to take this moment to provide an update on where poker sits today and examine how you and the Poker Players Alliance (PPA) can continue to work together to preserve and protect the game we love.
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LAS VEGAS — Though payment processor Neteller PLC is the latest and largest such company to pull out of the lucrative but illegal U.S. online gambling market, industry observers said other e-wallet sites would come forward to take its place.

The arrest of its founders Monday on U.S. soil on money laundering charges and the company’s delicate position as a publicly traded British company forced it to cease handling U.S. betting transfers as of Thursday.

The arrests were the latest in a series of enforcement actions by the U.S. government against the online gambling industry. The crackdown has targeted the financial middlemen who sprung up after credit card companies and PayPal gave in to pressure to stop processing online gambling transactions from U.S. customers in 2001.

Neteller processed $7 billion in transactions in 2005 and $5.1 billion in the first half of 2006, mostly from U.S. clients to and from online betting sites. By some accounts, that amounted to roughly half of the global market for online wagers.

Many observers said the market for Internet wagering was too rich for others to pass up, despite a U.S. law passed in October that prohibited financial transfers to and from such gambling sites.

“What you’re finding with the Internet gambling sites is the publicly traded ones and prominent ones are leaving,” said David Stewart, an online gambling expert and lawyer with Washington, D.C.-based firm Ropes & Gray LLP.

“The entities that are more visible and are more transparent can’t take the heat,” he said. “And all the rest of them are still in the business.”

Several British-based online gambling operations, including PartyGaming PLC, Sportingbet PLC, BetOnSports PLC and Leisure & Gaming PLC, have withdrawn from the U.S. market. Private offshore operators continue to run such sites as Bodog.com, PokerStars.com and FullTiltPoker.com.

The Federal Reserve and other bank regulators were tasked with coming up with practical measures to enforce the online gambling prohibition by July. Some firms had intended to wait until the regulations were developed before deciding what to do.

After the arrests, however, Burnaby, British Columbia-based payment processor Citadel Commerce Corp. announced Wednesday that it, too, would withdraw from the U.S. market.

“We were waiting for the regulations,” said Mark Bains, the chief financial officer of Citadel parent ESI Entertainment Systems Inc., which trades on the Toronto Stock Exchange. “Looks like we’re not going to be able to wait.”

Avid gamblers were looking for new ways to skirt the law.

UltimateBet.com, the online poker site backed by professional gambler Phil Hellmuth Jr., sent out an e-mail newsletter Thursday encouraging its players to use other “safe, secure and similar banking methods already available,” listing such brands as ePassporte, ATMonline and CLICK2PAY.

“So get UB to the top of your list and let’s make some MONEY!” it reads.

Internet blogs also lit up with players discussing the best ways to keep funding their online gambling accounts.

“Just set up both a click2pay account and a Epassporte one. We’ll see how long this lasts,” wrote Bacaluk on poker forum PocketFives.com.

Michael Bolcerek, president of the online poker lobby group, Poker Players Alliance, said the withdrawal of brand name providers would encourage the emergence of less trustworthy money dealers.

“People are going to migrate to nonpublic, less transparent methodologies,” he said.

Poker magazine publisher Eric Morris of Bluff Media LLC said the withdrawal of PayPal and major credit card companies from the U.S. online gambling business in 2001 caused a panic that didn’t last.

“The industry took a bit of a dive and came back stronger than ever before,” he said. “The bottom line is that people are going to find a way.”

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