Gaming's Tangled Web

The Justice Department says it's against the law, though operators say there's no federal law that specifically outlaws online gambling and cite a federal court decision supporting that view.

It's illegal in Nevada, which is home to one of the largest networking events for online casino marketers. Internet gambling experts say players and operators may never be prosecuted here.

Nevada began the process to legalize it, saying the state was losing potential tax dollars to offshore Web sites. But that process stopped, with regulators concerned about running afoul of the feds and jeopardizing the state's primary economic engine.

Internet gambling will generate some $12 billion in revenue this year, with more than half of those customers coming from the United States. Yet the 60 or so jurisdictions that now license Internet gambling sites are located far from the reach of the Justice Department, in countries that have legalized it.

Peter Marcus, a Londoner who represents the world's second-largest Internet casino, is well aware of these contradictions. He's one of only a few offshore operators who isn't afraid to discuss them.

"I find it very strange that a country that so much believes in freedom of expression has a problem with (Internet gambling)," Marcus said during an interview in Las Vegas last month, where he attended the Casino Affiliate Convention.

Close to 700 marketers for online casinos attended the little-known event at the Stardust, which was held the same week as the Global Gaming Expo, the world's largest convention for land-based casinos.

The casino companies that attended Global Gaming Expo didn't speak at the Casino Affiliate Conference, while the online operators at the Stardust were conspicuously absent from the Expo's trade show floor at the Las Vegas Convention Center.

Internet gambling sites continue to run television ads and host high-profile charity events in the United States, effectively thumbing their noses at the Justice Department.

And Marcus has gone public with his disagreement.

"It's very clear to us that online poker and online casinos are not covered by (U.S. law)," he said.

Marcus, like many other operators, wants legitimacy.

"I want the U.S. authorities to regulate it," he said. "I want them to make (the regulations) as strict as they want."

Hundreds of Internet casinos now on the Web are minting profits in the shadow of the Justice Department, which has called Internet gambling a potential haven for money launderers, terrorists and other criminals. The feds cite the Wire Act, a 1961 law aimed at curbing bookmaking by organized crime.

The Wire Act has received at least one major defeat in court.

In ruling against online gamblers who disputed charges for losses on their credit cards, a federal appeals court in 2001 said the Wire Act did not apply to casino-style gambling on the Internet.

The Justice Department disagrees with the 5th U.S. Circuit Court of Appeals ruling, which is widely cited by Internet casino operators. The gamblers who lost their case did not appeal the case to the U.S. Supreme Court.

Meanwhile, Nevada passed legislation in 2001 to legalize Internet gambling provided that certain conditions were met. But Nevada regulators weren't yet convinced that the Internet could be effectively policed. The effort ultimately died in 2002 when the Nevada Gaming Control Board received an opinion letter from the Justice Department stating that Internet gambling violated the Wire Act.

At least one territory has already challenged the Justice Department.

The U.S. Virgin Islands signed Internet gambling legislation into law in 2001. In a letter to the territory's Casino Control Commission in 2002, the Virgin Islands Attorney General said authorizing Internet gambling operations on the islands wouldn't violate federal law.

In January 2004, the chairman of the territory's Casino Control Commission received a letter from a U.S. attorney representing the Justice Department, threatening prosecution.

As a result, no gambling sites have set up shop in the Virgin Islands, preferring to locate in other parts of the world beyond the reach of the feds.

"Someone with deep pockets should take that license and take (the Justice Department) to court," Frank Catania, former assistant attorney general and director of the New Jersey Division of Gaming Enforcement, said at last month's Global Gaming Expo. Catania, now an Internet gambling consultant, helped draft the Virgin Islands' still-unused regulations.

By contrast, the British government has a hands-off policy.

Britain is expected to enact legislation in the next couple of years that would require Internet casinos -- which now operate freely in that country -- to be licensed in Britain or another jurisdiction that can meet British standards for blocking minors and compulsive gamblers.

London is fast becoming the Silicon Valley of online gambling. At the top of the heap is PartyGaming, a Gibraltar-based company that went public in June and soared to a market capitalization of more than $10 billion. The company owns PartyPoker.com, considered the world's largest poker site.

Marcus believes Justice Department will change its tune once Britain -- which has crafted protections for gamblers in its regulations -- is on board.

"It will send a very clear message to the U.S. that this is the way to go," Marcus said.

That may not be so easy.

Nevada regulators and Internet operators still don't see eye to eye because the mediums are so different, said Tony Cabot, a Las Vegas attorney and Internet gambling expert.

Some aspects of land-based casinos are easier to regulate than Internet casinos. The opposite is also true, Cabot said, because online transactions can be monitored and stored indefinitely.

"On the other hand, in a casino you have a physical person in front of you and you can identify the person, assure that they're a proper age and they're not intoxicated," Cabot said.

For Nevada to allow online casinos, regulators would need a major court victory for Internet gambling -- either from the 9th U.S. Circuit Court of Appeals, which includes Nevada, or from the U.S. Supreme Court, he said.

The American Gaming Association, which represents the major commercial casinos, may already be changing its skeptical position on Internet gambling.

AGA Chief Executive Frank Fahrenkopf has previously been on record opposing Internet gambling, saying the technology necessary to regulate and police it doesn't yet exist. The group's members are divided, with some attempting Internet operations abroad and others steering clear.

In an interview last month, Fahrenkopf said some members have convincingly argued recently that online gambling can become a legitimately regulated enterprise.

"We need to do some hard thinking" about the regulation issue, he said. "It's an evolving thing."

MGM Mirage Chief Executive Terry Lanni says his company was able to convince regulators in Nevada and other states that the company's fledgling online casino based on the Isle of Man would work.

But prohibiting American gamblers and making the signup process more unwieldy for European bettors hurt business. MGM Mirage closed the site inside of a year.

Internet gambling "should be regulated" rather than criminalized, Lanni said at the Global Gaming Expo. "I think it's ridiculous for the federal government to be passing laws that won't be supported."

Sen. Jon Kyl, R-Ariz., who failed in his attempt to attach an Internet gambling prohibition bill to an appropriations bill in September, still intends to push similar legislation as he has attempted to do for the past several years.

Marcus bristles at the notion that online casinos are cultivating problem gamblers or breeding criminals, saying Internet sites can keep meticulous records that can be automatically forwarded to regulators.

"It's a lot easier to follow electronic money than cash," Marcus said. "I can follow every transaction and when it was made."

InterCasino, operated from the Netherlands Antilles in the Caribbean, uses auditing giant PriceWaterhouseCoopers to review its gambling payouts and NetTeller, a service run by a Nasdaq-traded company, to process bets.

"Two to three years ago there were early adopters gambling on the Internet," Marcus said. "Today it's the mass market. The public wants to know that they're putting their money into something trustworthy."

Online gamblers at InterCasino must first register with a driver's license or passport. The site will ban players who exhibit signs of a gambling problem, Marcus said.

"If someone is using five different payment methods in two weeks, flipping from one to the other, that could be a sign," he said.

Those arguments bear little weight with the Justice Department.

"Gambling websites cannot look at their customers to assess their age and request photo identification," John Malcolm, then deputy assistant Attorney General for the Justice Department's criminal division, testified before a Senate banking committee hearing on Kyl's bill in 2003.

Marcus says U.S. regulators are misguided and that Internet gambling will continue to flourish in spite of the opposition.

"It's a coming of age," he said. "It's the bar mitzvah of Internet gaming. And I don't think the U.S. can ignore it."