Internet Newsletter for Lawyers
November/December 2006, by Delia Venables

Summer of Woe for Online Gaming
by Lindsey Greig

Party Gaming's logo
On Friday 13 October, President Bush signed the Security and Accountability For Every (SAFE) Port Act. By the end of the day, the world’s largest online gambling website, PartyGaming, www.partygaming.com, had shed $1 billion of US business. In a terse statement Party Gaming announced, ‘The Group has suspended all real money gaming activities to customers located in the United States with immediate effect’. Their share price, which had a 52-week high of 150p, tumbled to 30p by 17 October.

The passage of the legislation had been rated a million to one shot by a leading online gambling operator just days before Senate Majority Leader, Bill Frist, R-Tenn, succeeded in a last gasp manoeuver, in the final hours before Congress adjourned for the November elections, to persuade a Committee of Conference of the United States Congress to attach The Unlawful Internet Gambling Enforcement Act to HR 4954, the Safe Port Act, which was duly passed.

The signing of the Safe Port Act marked a dramatic finale to a summer of woe for the online industry, particularly those operators who accepted bets or gaming from the US.

The first dramatic move was the US authorities arrest of David Carruthers, at the time Chief Executive of BetonSports, www.betonsports.com, as he passed through the United States in transit to Costa Rica. The arrest of Carruthers, a British citizen, Chief Executive of an Aim listed company, and a well-known figure in the UK gambling industry, who had spent most of his career with Ladbrokes, sent profound shock waves through the gaming sector.

The 22-count indictment charging 11 individuals and four corporations, including BetonSports, on various charges of racketeering, conspiracy and fraud was followed by a Department of Justice announcement that: ‘in conjunction with the indictment, the United States has filed a civil complaint in federal court to obtain an order requiring BetonSports PLC to stop taking sports bets from the United States, and to return money held in wagering accounts to account holders in the United States’. US District Judge Catherine D. Perry issued the temporary restraining order on July 17. In a matter of days BetonSports withdrew from the US market, David Carruthers contract was terminated and the company’s shares remain suspended.

On Thursday 26 September Peter Dicks, the non-executive Chairman of Sportingbet, www.sportingbet.com, a British citizen and a well known figure in the City was detained in New York, at the request of the State of Louisiana. He was subsequently released and Louisiana failed to obtain his extradition from New York.

And in Europe....

But it is not only in the US that the authorities have been taking action. In France, in another dramatic move, the co-CEOs of online gambling operator bwin, www.bwin.com, Manfred Bodner and Norbert Teufelberger, were arrested at a press conference announcing the company’s sponsorship of the AS Monaco football team.

In Germany on 10 August, the Saxon Ministry of the Interior secured a prohibition order against bwin, with immediate effect, which prohibits the operator from organising, distributing or advertising sports bets in the state of Saxony.

Where does all this leave the online gambling industry? The first answer is, certainly as far as the larger operators are concerned, still in business. Indeed Dresdner Kleinwort, in a research note dated 17 October 2006, rated online poker site PartyGaming a buy, despite the loss of its US market.

Several privately owned companies have said that they will continue to accept bets from the US, arguing that their activity is lawful, that the transactions do not take place in the US but offshore, where their activities are legal and licenced. The lure of the US market, still the largest online betting and gaming market in the world, is powerful.

However the crucial practical issue for those wishing to take bets from the US is will they find a bank that will work with them? More on that later.

Unlawful Internet Gambling Enforcement Act

There is a certain irony that the Unlawful Internet Gambling Enforcement Act has had such a powerful affect without actually changing or introducing restrictions on gambling. The drafters of the Act were at pains to make clear that the Act was about taking action against unlawful gambling and not about clarifying any of the grey areas that currently exist about what is or is not an unlawful wager.

The Rule of Construction of the Act states: ‘No provision of this subchapter shall be construed as altering, limiting or extending any federal or State law or Tribal-State compact prohibiting, permitting or regulating gambling within the United States’.

Indeed, it is the greyness of the current legal and regulatory position in the US which accounts for the dramatic impact of this legislation; for what the legislation does is to put the banks and financial institutions centre stage.

The Role of the Banks

Before the Unlawful Internet Gambling Enforcement Act came into force, the operators were the ones who primarily carried the risk of the grey turning out the wrong colour if they came before the Courts, a risk they have been prepared to take. However with the new legislation, the banks are those who run the risk. Naturally that is not a prospect, particularly for those banking institutions with substantial assets in the US, with which they are comfortable. In the UK that has meant that the Royal Bank of Scotland and Barclays have both made clear that they would be unable to provide services to companies who accepted bets or wagers from the US.

However, the exemptions to the Act point to potentially significant developments with regard to internet gambling within the US. The first exemption applies to the Interstate Horse Racing Act, which permits cross-state border sports betting (although the Department of Justice disputes this) in certain circumstances. Online companies such as Youbet, who operate within the US, will be able to continue.

Interestingly there are also carve outs for intra-state internet gambling, something for which the American Gaming Association, which represents the major US land based casinos, lobbied hard. The Act notes: ‘Intrastate transactions: The term ‘unlawful internet gambling’ shall not include placing, receiving or otherwise transmitting a bet or wager where- (i) the bet or wager is initiated and received or otherwise made exclusively within a single State’. The Act goes on to say that the wagering must be permitted under state law and that safeguards to block under-age gambling and to identify location must be in place, but clearly leaves open the door for individual States to permit online gambling.

At the moment, the Department of Justice argues that all forms of internet gambling are illegal through the Wire Act and does not accept that individual States are free to licence online operators. However, the influential American Gaming Association is already lobbying hard for Congress to launch an enquiry into online gambling with the aim of developing a regulated framework.

The major US casino operators make little secret of their desire to enter the online market as soon as they are permitted to do so.

So what of the future?

As far as the US is concerned, offshore privately owned companies, who have an appetite for the risks involved will continue to trade, finding ways to receive and pay out money to their clients. The US Department of Justice may pursue further action but may find it hard to replicate the spectacular impact of this summer’s campaign.

For publicly traded companies the US market will remain beyond reach, until there is a shift in the political, legislative and regulatory atmosphere. But these companies still have substantial businesses which they have every intention of growing. There is likely to be ever more intensive competition for the British and European market, with operators also looking to Asia for further opportunities.

For all the dramatic events of the last few months, this is not the end of the online gambling story. It might be the end of a chapter but another one is beginning and some way down the line, the US market will see regulated remote gambling. And, of course, some way not so far down the line, the UK will be offering remote gambling licences under the Gambling Act 2005.

Lindsey Greig is Managing Editor of World Online Gambling Law Report. Since its launch in 2002, this has become essential reading for regulators, operators, advisors and suppliers. Lindsey has also developed a series of key events for the industry in partnership with several blue chip clients including the London Stock Exchange, Kirkpatrick & Lockhart Nicholson Graham, BDO Stoy Hayward and leading banks. He is also Managing Editor of e-commerce law & policy, e-commerce law reports, world sports law report, data protection law & policy and e-finance & payments law & policy (see www.e-comlaw.com).
Email lindsey.greig@e-comlaw.com.

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