Gambling Stakes Rise

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 all-night 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. To help its partners avoid prosecution for promoting illegal gambling, online wager sites have created fun-only gambling sites with “.net” web addresses to supplement their existing .com gambling sites. The .net sites don’t outwardly promote online gambling, but once registered, participants will be asked if they would like to open an account on their pay-for-play sites, Smyth says.

Hedging Bets

The creation of .net sites provides a defense that has yet to be tested in court. Online casinos and poker sites are transitioning to promoting either just their .net sites, or promoting only the brand name, such as is the case with Bodog and PartyPoker, which operate both .net and .com sites.

Despite the potential revenue, the large networks have historically shunned online gaming, prompting the formation of gambling-specific networks. “We do not have any gambling sites within our affiliate network, nor do we allow any affiliates to link to gambling sites,” says Kristin Hall, product marketing director at Performics.

Gambling networks such as CyberSuccess Group, CasinoBlasters and MainStreet Affiliates have been happy to pick up the slack and offer generous commission programs. For example, PartyPartners.com offers signing bonuses of $75 for each new account opened, or a revenue share of 25 percent or more of gambling losses.

Christopher Shawn, vice president of business development at CyberSuccessGroup, says very few affiliates have closed because of the indictments. “Affiliates, however, have expressed concerns about sending traffic to sports books that accept telephone wagers, as this could be a violation of the United States Wire Act, which is directly related to the BetOnSPORTS Indictments.”

In addition to the potential legal penalties, affiliates could also earn nothing if the gamblers they refer win. Dave Johnson, CEO of WagerWeb.com, says his company pays commissions once a week, and any losses by the gambling sites are carried over until customers lose.

Johnson, who has been operating WagerWeb from Costa Rica for seven years, launched an affiliate network that now boasts 1,500 members. Some of his affiliates who reside in the United States told him they were nervous about continuing operations during the new climate of prosecution, but he argues that the risk of prosecution has not really changed. “The potential [of being indicted] isn’t greater now than seven years ago, there is just more exposure,” he says.

Each state has its own rules about online gambling that marketers should be aware of, Johnson says. If an affiliate were torn about the risks, he “would recommend that they go another way.”

Marketing companies are also distancing themselves from online gambling activities. Mike Shopmaker, CEO of Virtumundo, Inc., says his Overland Park, Kansas, company draws the line at gambling sites that require customers to provide credit card numbers to play. Companies such as Virtumundo client GoldenArchCasino.net, a Cyprus-based gaming site, that offer both pay-for and free gaming, are acceptable, but Virtumundo only “occasionally” markets for gaming companies.

Crapshoot

A new law that makes it illegal for financial institutions to process transactions for customers of Internet gambling sites may reduce the amount of virtual wagering. Congress surprisingly passed the Unlawful Internet Gambling Enforcement Act as part of unrelated legislation during an early hour session, and President Bush signed it into law a few days later.

While most U.S.-based banks and payment processing companies such as PayPal have not been accepting payments to gambling sites from domestic customers, the new law all but guarantees they will stay away.

In the wake of the new law, Sportingbet sold its U.S. operations for $1, and electronic transaction processing company FirePay, which along with Neteller transferred U.S. payments to many online gambling companies, said it would no longer send funds from U.S. customers.

However, Goodman says lobbyists for the online gaming industry could ensure that more restrictive laws are not enacted and may eventually use their influence to erode the current laws. The gaming industry could ask for legislation with more exemptions or challenge the existing laws in court. Also, a desire to tap in to the billions of dollars of potential tax revenue from online gambling could prompt the federal government to change its policies.

Gambling expert Eadington says U.S. lawmakers’ stance on Internet gambling will be increasingly hard to maintain. The exceptions in the law that have been “carved out” for betting on horses and pay-to-play fantasy sports leagues, as well as interest from state lotteries in accepting bets online, have opened the door for more exceptions that would ultimately doom online gambling prohibition, he says. Consumers who support gambling and don’t have a voice in the political process could also become more vocal in opposing new laws, according to Eadington.

Online gambling is growing internationally as nations including the United Kingdom, Sweden and Italy are regulating and taxing the leisure activity, Eadington says, making the current U.S. laws politically untenable. “Can the United States continue its prohibition strategy when the rest of the world is moving in another direction?”

A complaint started by a tiny nation in the World Trade Organization (WTO) could ultimately result in the United States reconsidering its position on Internet gambling. American Jay Cohen was operating an online gambling site on Antigua and Barbuda, a Caribbean nation of two islands, when he was convicted in 2001 of violating U.S. gambling laws.

Antigua complained to the WTO that the United States was violating a trade principle known as “national treatment” that requires foreign companies are treated the same as domestic organizations. Since it was legal for U.S. companies to accept online wagers for horse racing, Antigua argued that gambling websites there should also be allowed to take bets. Antigua has been victorious in nearly all aspects of their complaint through several levels of appeal.

However, the WTO lacks the authority to force governments to comply with its ruling, according to attorney Goodman, so the United States could continue to prosecute foreign gambling organizations. But Antigua is likely to ask the WTO for permission to ignore U.S. copyright laws as a penalty for its noncompliance. If the WTO grants the action, Antigua could begin selling movie DVDs and music CDs internationally, that are produced in the United States, which Goodman says could result in the entertainment industry using its extensive influence to persuade Congress to legalize online gambling.

Wagering On Mobile

The next innovation in gambling will be play-by-play gambling from mobile devices, according to Gaming Transactions’ Smyth. Companies such as LiveHive Systems are creating services that enable bets on each play, such as whether a golfer will successfully sink a putt, from mobile phones or handheld computers.

Also, if China legalizes online gambling, the demand for online gambling will skyrocket, says Smyth. “There is still so much room for growth.”

Whether or not online gambling is made legal in the United States, the industry will continue to expand, according to Smyth. If American affiliates and marketers no longer support the industry for fear of prosecution, international organizations will happily take their place.

Disclosure: Revenue magazine accepts a very limited number of advertisements from online casinos in each bimonthly issue and only if those advertisers are promoting an affiliate program and not actual gaming enterprises.

JOHN GARTNER is a freelance writer in Portland, Ore. He is a former editor at Wired News and CMP. His articles regularly appear on Wired.com, AlterNet.org and in MIT’s TechnologyReview.com.