U.S. crackdown on online-gambling clouds its future

MONTREAL - What a difference an arrest can make.

Last year at this time, the Internet-gambling industry's biggest event, the Global Interactive Gaming Summit & Expo, drew about 1,800 attendees. This year's event here drew about half that.

What happened? Last July, David Carruthers, the chief executive officer of BetonSports.com, was arrested in Texas and charged with 22 counts of racketeering and fraud. Carruthers is under house arrest and awaiting a trial date.

His arrest marked the beginning of a government crackdown on the $12 billion online-gambling industry. And it convinced officers of those companies that it would be wise to avoid visits to North America.

"There's a lot of fear," Robert Gustavsson, marketing director for Snowmen Solutions, an online-marketing and technology company out of Stockholm, Sweden, said of the sparse attendance. "People are stressed."

The annual conference - dubbed GIGSE - attracts online-gaming operators, regulators and technology manufacturers from around the globe. The three-day conference concludes today.

Noticeably absent this week were many foreign online-gambling companies that had relied on customers from the United States for 50 percent or more of their business.

"Because of the new law, most of the companies won't take U.S. clientele anymore, so those U.S. customers are gone now," said Mark Balestra, publishing director of River City Group, which puts together the GIGSE event. "The law is a setback for the industry."

Balestra was referring to the Unlawful Internet Gambling Enforcement Act, which Congress passed in the fall, and President Bush signed Oct. 13. The law prevents U.S. banks and credit card companies from processing payments to online-gambling businesses with headquarters outside the United States.

The problems for the online-gambling industry began last year with Carruthers' arrest and the U.S. Justice Department's shutting down his operation.

The Justice Department views such companies as skirting the 1961 Wire Act, which prohibits telephones from being used for bets or wagers and now includes online gambling. Many of those companies had mined the United States for customers, particularly those under 21, by setting up operations in places that allow Internet gambling, such as Costa Rica, the department said.

A pair of bills related to online gambling were recently introduced in Congress that could further shape the debate over the industry's future.

In April, Rep. Barney Frank (D., Mass.) introduced the Internet Gambling Regulation and Enforcement Act, which proposes establishing a licensing and regulation process for online-gambling companies that operate in the United States.

Another Democrat, Rep. Shelley Berkley of Nevada, introduced her own bill a week later, called the Internet Gambling Study Act, which proposes a congressionally funded one-year study of Internet gambling before Congress moves further.

"This is a very interesting time for those with a stake in the online-gambling industry," said Frank J. Fahrenkopf Jr., president and chief executive of the American Gaming Association, which represents U.S. commercial casino operators and equipment manufacturers. "The online-gambling community is waiting for the announcement of regulations."

This week, many at GIGSE said several operators refused to step foot in North America because of Carruthers' arrest, including going to Montreal for this week's conference.

"Those companies that are offshore and continue to take bets from the U.S. are taking a wait-and-see attitude to see what the Treasury Department, the Justice Department and Federal Trade Commission do," said Sebastian Sinclair, a gambling analyst with Christiansen Capital Advisors L.L.C., of New York. "This isn't the first time the industry's been hit with restrictions on funding accounts to fund online-gambling operations."

Sinclair said similar restrictions were put into effect in 2001 when Visa International and MasterCard Inc. stopped financing such transactions altogether. He said the industry found alternative funding mechanisms.

But some say the more rigid Unlawful Internet Gambling Enforcement Act was long overdue. Organizers of Gamblers Anonymous and other addiction-prevention groups in Pennsylvania and New Jersey say they are seeing many more teens in their meetings because of the rapid rise of online gambling in recent years. There are an estimated 2,500 gambling Web sites.

"These kids just have to punch in a credit card number, or are given access to their parents' credit cards," said Jim Pappas, executive director of the Council on Compulsive Gambling of Pennsylvania, a nonprofit agency that offers prevention, training and education. "You have college kids using their college debit cards, which they're supposed to be using to buy books, to gamble online. It gets out of control real fast."