Can the U.S. Win Its Bet Against Online Gambling?

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The high-profile arrest of the head of a online gambling firm may be just the beginning of a major U.S. crackdown, but the legal case against the increasingly popular offshore-based betting sites is far from a sure thing.

On Monday, federal prosecutors announced the indictment of BETonSPORTS CEO David Carruthers, who was charged with racketeering conspiracy, along with the indictment of 10 others connected to the Costa Rica-based company. Carruthers, 48, was nabbed a day earlier by FBI and IRS agents in Dallas, as he headed for Costa Rica from London, where the company is listed.

The U.S. Attorney in St. Louis — where the undercover investigation began when a Western Union office reported to the feds that customers were sending large sums of cash to offshore gambling services — accused BETonSPORTS founder Gary Kaplan, 47, of tax evasion, and issued a warrant for his arrest. The firm was also ordered to suspend sports betting from the U.S., and return money held by its U.S. account holders. The company said it was reviewing the indictment, and has since shut down its website, BETonSPORTS.com.

If BETonSPORTS got too comfy in a legally gray area — its practice of taking bets over the telephone, insists one London-based industry analyst, falls outside U.S. law — it has perhaps not been alone. Shares in rival operators PartyGaming and 888 Holdings plunged on news of the indictments.

But it may be too early to bet against these sites. The sharpest tool available to prosecutors against online gambling firms is the the U.S. Wire Act, which was conceived in the 1960s, long before the world went digital, and prohibits bets by wire communication. But since a U.S. appeals court ruled in 2002 that the act applied only to sports gambling, poker operators have denied that poker is a sport. (Those taking sports bets argue too that the Internet has changed the rules of the game and claim that the Wire Act is not applicable to such digital wagers.)

Federal authorities, who also allege such other crimes not related to the Wire Act as failure to pay U.S. gambling excise taxes and mail fraud, aren't buying those arguments, however. "Illegal commercial gambling across state and international borders is a crime," U.S. Attorney Catherine L. Hanaway of the Eastern District of Missouri said Monday. "This indictment is but one step in a series of actions designed to punish and seize the profits of individuals who disregard federal and state laws."

That the BETonSPORTS case is just the opening salvo in a much bigger anti-online gambling campaign is one thing everyone agrees on. And it's a campaign that seems to many to be as much political as legal. The timing of the arrest and announcement even struck some skeptical industry observers as curious.

Proposals banning banks and credit card companies from processing online gaming payments won backing in the House last week, but Senate passage is far from certain. Ahead of a Senate vote, authorities are "trying to build up a head of steam against the industry," says Warwick Bartlett, head of the U.K.-based Global Betting and Gaming Consultants. He credits the Justice Department with good p.r. Following the indictments, "the average person in the U.S. will think something needs to be done" about online gaming.

Unless, of course, they are already among the growing number of Americans patronizing sites like BETonSports.com. After all, for something considered illegal by the U.S. Department of Justice, online gambling has done pretty well against stiff odds. U.S. wagerers last year poured around $5.4 billion into the kind of offshore Internet gaming sites that the DOJ has been struggling to bring to heel. As one British online gaming firm boasted in a recent Times Square billboard: "EVERYBODY BETS." That may well be true, but the Justice Department is out to show that the luck of longtime winners like Carruthers and his firm can change overnight.

—With reporting by Brian Bennett/Washington