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Will ban end Internet gambling? Don’t bet on it

It took Congress more than a decade to pass a ban on Internet gambling. Now comes the hard part. Experts say the odds are  long that the feds will be able to come up with a set of regulations to end what has grown to become a $12 billion-a-year industry.
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It took Congress more than a decade to pass a ban on Internet gambling. Now comes the hard part.

Now that President Bush made online gambling illegal Friday by signing the port security bill containing the prohibition, federal officials have 270 days to devise a way of identifying electronic gambling transactions and preventing Americans from taking part in them.

Many experts on gambling, e-commerce and the law say the odds are extremely long that the feds will be able to come up with a set of regulations that will accomplish what the lawmakers want to impose on what has grown to become a $12 billion-a-year industry.

“The worst-case scenario is they’ll put in place some measures that will put a crimp on the industry for a while,” said Sebastian Sinclair, a gaming analyst with Christiansen Capital Advisors who has been tracking the online gambling sector almost since its inception. “I don’t think anyone — well, maybe except for those in Washington — believes that the industry won’t recover.”

The biggest obstacle to an effective federal ban is the Automated Clearing House network, or ACH, an electronic processing system used by the Federal Reserve that currently can’t tell a gambling transaction from a mortgage payment.

“At this point you can’t do that any more than you can ask Western Union to block all transactions to pet food companies,” said Ken Dreifach, an attorney with Sonnenschein, Nath & Rosenthal in New York.

Dreifach, who was chief of New York Attorney General Elliott Spitzer’s Internet bureau from 2000 until earlier this year, speaks from experience, having overseen the lawsuit that led major credit card companies to halt the use of their cards for Internet gambling transactions in 2002.

“They were relatively easy practices to enforce, because the credit card systems and issuers coded these transactions, and they were essentially just able to flick a switch and block them,” he said.

“You can’t do that with ACH payments or any other number of relatively new payment mechanisms. … When you’re dealing with what is essentially a bank-to-bank, account-to- account transaction, the bank on the sending end does not keep any record of the person behind the bank account on the receiving end.”

That has experts in the field wondering how federal financial watchdogs can enforce the ban against the offshore sites.

“People are scratching their heads at what the enforcement mechanism is going to be,” Dreifach said, “whether banks are going to have to revamp their entire system of sending funds out of the country or whether the Department of the Treasury, working with investigators, is going to compile a blacklist of specific accounts that it knows are tied to illegal practices, or whether a hybrid of both, and finally, going forward how to update this information.” 

A banking industry source, who spoke with on condition of anonymity, said industry lobbyists succeeded in getting language inserted into the legislation that will make the regulators’ job that much harder.

“If the regulation-writing authority says it’s not feasible to try and block the check and the electronic payment, the regulations can’t require the impossible,” the source said. "Also, the regulations will have to deal with language put in at the last minute that the regulations should require the credit card companies to avoid blocking legitimate transactions.”

“Let’s just say my friends at the Fed were not itching for this bill to pass,” the source added with a chuckle.

Another problematic aspect of the bill will require federal authorities to provide Internet service providers with a list of gambling sites to be blocked, a scheme that Sinclair said has previously proven futile.

When Google and Yahoo agreed to block Internet gambling ads in response to a lawsuit filed in California, the betting site operators simply changed Internet addresses and used the portals’ automated system to buy “sponsored ads” on the sites, he said.

“What happened was in the middle of the night they’d log in and pay their money for sponsored ads, and then Casino XYZ would pop up,” Sinclair said. “The sites would find them and take them down and then it would start up again the next night.”

Furthermore, he noted, existing customers will have icons on their desktops that can “dial out” to one of hundreds of phone numbers that will connect them to the overseas gambling sites.

“If I’m an existing customer, I’ll double-click on their interface and that will find a way to connect me with one of those numbers,” he said.

The biggest obstacle to enforcing the ban may turn out to be a free-trade dispute between the tiny Caribbean nation of Antigua and the United States that is pending before the World Trade Organization.

The United States is appealing an April 2005 decision by a WTO court in Switzerland that said while the U.S. could ban Internet gambling within its borders, it could not apply a prohibition inconsistently.

That is exactly what the ban passed by Congress does by including exemptions for horse racing, lotteries, fantasy sports that offer cash prizes and tribal gaming.

Mark Mendel, an El Paso, Texas, attorney who is representing Antigua in the WTO case, said he thinks the court will uphold its ruling on appeal sometime next year and that the U.S. can’t afford to thumb its nose at the world body.

“(Skeptics) say the U.S. is never going to follow an adverse ruling, that they’ll just tell you to forget it,” he said. “But the U.S. is the greatest user of the WTO, and they have a very large stake in the legitimacy of the organization, especially the dispute resolution process. We are gambling on the fact that … they are either going to have to satisfy us through negotiations or they are going to have to become compliant.”

Even if the ban is unlikely to be effective in the long run, the congressional action — widely seen as a bid by Sen. Bill Frist, R-Tenn., to bolster support from the Christian right in advance of a run for the White House in 2008 — has had a tremendous immediate impact on the online gambling world.

It had immediate repercussions across the Atlantic, forcing scores of publicly traded companies engaged in online gambling to announce they will no longer serve the U.S. market once the ban becomes law, including industry leaders like Party Poker, and BetonSports.

Even before the law had passed, authorities were trying to crack down on Internet gambling, arresting two British-based gambling executives on related charges as they passed through the United States.

David Carruthers, chief executive of BetOnSports, was charged with failing to pay billions of dollars in excise taxes. Sportingbet Chairman Peter Dicks was arrested on Louisiana charges of "gambling by computer" but freed after New York refused to extradite him.

The publicly traded sites have no choice but to withdraw or restructure now that Congress has eliminated ambiguity from U.S. laws, said Cory Aronovitz, founder of the Casino Law Group in Chicago and an adjunct professor at John Marshall School of Law in Chicago.

“Prior to this, attorneys could make a good faith argument that only sports books were illegal,” he said. “With the new definition, it’s hard for me to say poker or traditional casino games do not fit within a bet or a wager. … Clearly, at this point, you are violating the federal law.”

The same is true for many companies that process financial transactions for the gambling sites, though industry leader Neteller has so far only said that it is studying the legislation.

“The company is very respectful of the U.S. legal system and is awaiting developments,” spokesman Seb Hoyle said this week.

But even if Neteller follows Firepay and other e-transaction services in exiting the U.S. market, experts say it won’t be long until replacements appear.

Dreifach said he expects European banks to develop similar electronic transaction services that are more diversified and can be used to fund not just for gambling but for entertainment and retail services.

“There are mobile payment systems, smart cards, cash payment systems … systems that offer something similar to gift certificates that are encrypted,” he said. “To the extent they are products offered by European banks, there is very little that U.S. regulators can do about it.”

And there are plenty of other gambling Web site operators, including nearly all those based in the Caribbean, eager to fill the void created by the withdrawal of the publicly traded European companies from the U.S. market.

The continued presence of such sites and the difficulties in creating an airtight method of stopping U.S. players from engaging in online gambling all but ensures that serious American gamblers will continue to find the action they crave.

Michael Bolcerek, president of the Poker Players Alliance, said that many of those who consider online betting a harmless diversion probably won’t put up with the hassle.

“It’s the casual player who enjoys the game responsibly and on a casual basis who is most likely to be impacted,” he said.

His organization is pinning its hopes on winning an exemption from the ban as a “skill game” from a card player in a position of power – President Bush.

Bolcerek cited a February 2004 article in “American Thinker” magazine that reported, “By reputation, the president was a very avid and skillful poker player when he was an MBA student” at Harvard University in the early 1970s.

“We’re talking about an American tradition that is 150 years old … and is now mainstream,” he said. “We’re hoping that an old poker player would appreciate the wisdom of that argument.”