Unjust Ban on Online Gambling

It is quite amusing to find the United States so intent on banning gambling on the Internet. While living abroad in the UK, the use of online betting sites is quite popular and provides a more immediate access for customers to use Ladbrokes, 888.com, PartyGaming, and SportingBet to place wagers on all sports and unique competitions.

The notion that revenues from online gambling are going to criminal or terrorist elements is an easy excuse to make the public fearful of them. I would not disagree that there are some gambling sites that may have links to unlawful groups, but there are also legitmate sites out there which are providing a lawful service to their customers. One thing for sure, certain criminal elements within the United States are pleased with the law. It means more customers resorting to local and street bookies to continue to wager on sports and you know who controls them.

I have to also thank the 109th Congress and the Republicans for inserting the legislation, the Unlawful Internet Gambling Enforcement Act of 2006 as a rider to the port security bill. It would seem they wanted to avoid any explicit mention of their official position on the gambling bill. With the new law and using the flexible clauses in the Patriot Act, they are now labelling online gambling as a threat to the national security of the United States. Somehow, I have to wonder about the happiness emanating from Atlantic City, NJ and Las Vegas, NV. Are they happy because this means Americans citizen must travel to their cities to gamble their money away and placed their sports wagers at their gaming arenas? Are they ecstatic that they do not have to worry about gamblers using the Internet to play table games, slots, or sports wagering and the loss of revenue from it? You can bet on that! =)

With the exit of online gambling companies (many of them based in London, United Kingdom) from the US market, they and their financial backers thought that they would not have to worry about the U.S. authorities anymore. This turned out to be a huge mistake.

On January 15, 2007, shares in popular payment processor, Neteller PLC were suspended when their founders, Stephen Lawrence and John Lefebvre were detained by U.S. authorities. The two men were charged with laundering billions of dollars in gambling proceeds. This was the beginning of a crackdown by the U.S. on the financial middlemen that sprung up after credit card companies and Paypal gave into pressure to stop processing online gambling transactions from U.S. customers in 2001. Neteller handled $7 billion in transactions in 2005, $5.1 billion in the first half of 2006, mostly from U.S. clients to and from online betting sites. The Assistant Director-in-Charge of the New York Office of the Federal Bureau of Investigation (FBI) stated:

"Internet gambling is a multibillion-dollar industry. A significant portion of that is the illegal handling of Americans' bets with offshore gaming companies, which amounts to a colossal criminal enterprise masquerading as legitimate business. There is ample indication these defendants knew the American market for their services was illegal. The FBI is adamant about shutting off the flow of illegal cash."

After the arrests, British Columbia-based (Canada) payment processor Citadel Commerce Corp. announced Wednesday (Jan 17) that it, too, would withdraw from the U.S. market. Another company, Instadebit also pulled out. With the loss of Neteller, Citadel, and Instadebit as well as Paypal and major credit card companies, gambling users are finding other "safe, secure, and similar banking methods." Remaining payment processors are ePassporte, ATMonline, and CLICK2PAY. We do not know how long these payment methods will last, but the crackdown will lead to a rise of less trustworthy money dealers.

But it gets better. TimesOnline has now reported that the Southern District Court of New York has issued subpoenas to at least 16 banks, including HSBC, Dresdner Kleinwort, Credit Suisse, and Deutsche Bank demanding e-mails, telephone records, and documents on their involvement with online gaming in the U.S.

It would seem the Department of Justice is going after the banks which helped float the online gaming companies over the last few years. With the passage and signing of the gambling ban last October, the DoJ has a valid law behind its actions. Here is one example:

Bettingmarket.com has a running blog on the latest events in the U.S. about online gambling. It mentions about a U.S. law, the Prohibition of Illegal Gambling Businesses Act of 1955. It clearly states that:

(a) Whoever conducts, finances, manages, supervises, directs, or owns all or part of an illegal gambling business shall be fined under this title or imprisoned not more than five years, or both.

In the past, there was debate on whether online gambling fell under the jurisdiction of this law. Prior to the passing of the Internet Gambling Enforcement Act of 2006, Fidelity, Blue Ridge Capital, Morgan Stanley, Prudential, and Merrill Lynch, all U.S. firms were all main institutional investors in SportingBet PLC. Are these companies now liable for prosecution?

It would seem so.

With the Unlawful Internet Gambling Enforcement Act of 2006, the DoJ is now going after any company or individual that has ever accepted a bet from a U.S. citizen, every bank that has promoted or invested in a US-facing online gambling company, every bank or payment processor company that ever faciliated a financial transaction to a US-facing online gambling web site, and every gambling portal that has ever advertised US-facing online gambling companies. (from an anonymous gambling industry analyst)

What about European banks such as HSBC and Deutsche Bank? They and other City banks in London are upset about the actions from the U.S. DoJ. The UK Treasury Ministry is monitoring the situation.

Some quotes from UK politicians:

Alan Duncan, Shadow Trade and Industry Secretary, said: “There is growing suspicion that the US Department of Justice is using its muscle in a highly unpleasant manner, and is targeting financial institutions beyond their own shores in a way that cannot be justified. I hope the Department will stop and review its approach so that its behaviour doesn’t sour relations between us.”

Vince Cable, the Liberal Democrat Treasury spokesman and a former chief economist for Shell, said: “This appears to be another case of extra-territorial and retrospective action from the US authorities that goes against two basic principles of justice.”

Deutsche was co-broker to PartyGaming, the largest online gaming company. PartyGaming was advised by Dresdner on its IPO in 2005, which raised £5 billion and propelled the company into the FTSE 100. HSBC advised 888.com on its £590 million IPO later in the same year. Credit Suisse had advised the company’s former shareholders.

The UK Home Office has not commented on whether it had received a request from the United States for "mutual legal assistance," a statutory precursor to the U.S. authorities conducting an investigation in the UK.

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It may seem quite unfair for the federal government to go after U.S. banks and financial companies over their involvement in the online gambling industry before the passage of the 2006 law. Now it looks like everything before 2006 is now liable for prosecution.

As for targeting banks like Deutsche, HSBC, and Credit Suisse for their involvement in the IPO of several popular online gaming companies, it seems to be an overreach of U.S. jurisdiction and extra-territorial arrogance. Quite a difference when online gambling is illegal in America, but legal in Great Britain and pretty much the rest of Europe. It will be quite interesting to see how it plays out. Will the UK government cooperate with U.S. authorities?

Here is one site keeping tabs on what is available for gambling users with regards to online financing. No matter how many companies are closed or forced to cease their U.S. activities, there is always someone else to take over.

Here is another interesting article. It would seem Las Vegas casinos are looking into mobile gaming devices so customers in Nevada can still enjoy their gambling addiction wherever they are. It is not yet considered in New Jersey.

Also, government bureaucracy on the federal and state level need to be standardised. During the time when online gambling was vague on the federal law books, it was subject to intepretation by the 50 state attorney generals. I could assume that with the 2006 law, the federal can prosecute, but what about the states? How many potential lawsuits can be made out there?

A blanket ban on online gambling will not be the ideal solution in the long term. Regulate it, not ban it. You are forcing them to go underground with no legitmate tracing mechanisms in place. Bringing forth evidence will be a lot harder and no one will be following rules. Honestly, the ban will promote an underground gambling industry. The mob and crime syndicates will have a field day with this one.

A repeal of the gambling ban must be introduced as soon as possible.