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Internet gambling perplexes officials

Rich Cholodofsky
| Sunday, Jan. 15, 2006

When a television poker tournament caught his attention, Jim Biss logged on to the Internet and found a site that offered free poker games.

Three months later, he was playing for money.

"It's completely different when you play for real money," said Biss, a 38-year-old Latrobe salesman. "I don't gamble to make money, I just gamble because it's fun."

Internet gambling is licensed in more than 80 nations outside the United States but caters predominantly to Americans.

This year alone, Americans will lose more than $7.2 billion online, nearly half of the total $15 billion in lost wagers with some 300 companies that operate about 2,100 sites, according to Sebastian Sinclair, a researcher who studies gambling trends for the New York consulting firm Christiansen Capital Advisers.

If the current growth continues, industry watchers predict Internet gambling revenues will reach more than $24 billion by 2010.

This weekend alone, experts predict more than $100 million will be wagered over the Internet on National Football League playoff games. The Super Bowl could generate up to $400 million in bets.

The Steelers-Bengals game drew the most betting action last week, according to officials from several Internet gambling companies. Bodog.com , a leading offshore Internet casino, reported taking in about $3.5 million in wagers on the game and expects to get about $4 million in bets for today's game against the Indianapolis Colts. BoDog is one of about 200 Internet sites taking wagers on the game.

U.S. Justice Department officials contend that online gambling is illegal and that those who take online bets are violating federal laws here. However, they concede that the operators are not breaking laws in the nations where they run their casinos and that bettors are not subject to those laws, according to Laura Parsky, deputy attorney general with the U.S. Justice Department.

So far the Justice Department has had just one successful criminal prosecution of a high-profile Internet gambling case.

Government officials say there are sufficient laws -- some more than a half-century old -- already in place that make Internet gambling illegal.

The 1961 Wire Act prohibits wagers from being taken over telephone lines. The Travel Act of 1952 outlaws distribution of proceeds from an unlawful activity across state lines or international borders, while the Illegal Gambling Business Act of 1955 says it's a crime if five people engage in criminal behavior during a 30-day period and generate more than $2,000 in a single day.

In 1998, the federal government used the Wire Act to get the first and only major Internet gambling conviction in this country in a case against Jay Cohen, a California businessman who operated a licensed off-shore casino in the Caribbean island of Antigua.

Cohen and several friends set up shop there in 1997 and established the World Sports Exchange, an Internet-based casino that took bets on professional and college sports in the United States. A year later, the government charged Cohen with violating the Wire Act. He voluntarily returned to the U.S. to fight the charges, contending that federal laws didn't apply to his offshore casino because it was licensed and regulated in Antigua.

Cohen was convicted in February 2000 and lost subsequent appeals. He served a 17-month federal sentence before he was paroled to a Las Vegas halfway house.

Nevertheless, it is still unclear whether the Wire Act can be used to prosecute all forms of online betting.

Four years ago, a Louisiana court ruled against the federal government in its attempt to shut down an online casino after finding the Wire Act applied solely to sports wagering. Although the government lost on appeal to the Fifth Circuit Court of Appeals, authorities say they'll continue efforts to prosecute Internet gambling cases.

"We're always looking at enforcing criminal actions that are on the books. Our strategy is high-profile prosecutions, education and forfeiture actions," Parsky said.

So what does this all mean to the gambler sitting at a home computer with a few bucks riding on the outcome of a sports event or a hand of cards•

Nothing.

It's up the states and local governments to enforce local anti-gambling rules, according to the justice department.

For Adam Davis, 23, of Greensburg, the Internet is a gateway to gambling when he can't get to a casino. The professional poker player said he earns about 30 percent of his income from online games.

"It's just the ease of use," Davis said. He plays several times a week on the Internet and participates in small-stakes games that he can "buy in" to for anywhere from $25 to more than $4,000.

"You don't have to go to the casinos. Right now it's legal because everything is offshore. If it's made illegal, then I'll have to look at it more and move to either Las Vegas or Atlantic

City," Davis said.

Millions of people like Davis gamble daily on the Internet with little fear of prosecution. Some state governments have tried to clamp down on Internet gambling, but so far only a few have passed laws banning the activity.

Frank Frahrenkopf, president of the American Gaming Association, which represents land-based casinos, said state initiatives to prohibit Internet gambling are about a decade old.

"Efforts to legislate Internet gambling started 10 years ago when the National Association of State Attorneys General met in St. Louis and became concerned people in their states were sitting at home, logging on and were gambling over the Internet," Frahrenkopf said. "They realized they couldn't do anything about it."

Frahrenkopf conceded that efforts to prohibit Internet gambling by the federal government appears at odds with the 10th Amendment of the U.S. Constitution, which says that all powers not expressly given to the federal government lie with the states.

"Every state is different," Frahrenkopf said.

Only two states -- Utah and Hawaii -- have no forms of legalized gambling. Four states -- Illinois, Michigan, Indiana and South Dakota -- prohibit all forms of Internet gambling. Three others -- Nevada, Louisiana and Oregon -- prohibit most forms of Internet gambling but allow some online betting, such as for horse racing.

In Pennsylvania, a bill to prohibit online gambling introduced in 2003 by state Rep. Paul Clymer, of Bucks County, died in committee. Clymer, a Republican, said he would again seek to ban Internet gambling.

"It just reinforces the concept that there is an easy way to make money. It's fool's gold they are looking at," Clymer said.

Without any formal legislation, Pennsylvania prosecutors are limited to state law that addresses illegal gambling, such as unlicensed video poker machines and sports wagering, but does not specifically make Internet gambling against the law. The state Attorney General's Office has not made Internet gambling a priority.

"We have a gambling statute, so the tool exists, but we haven't found to date a Pennsylvania-based operation," said Nils Frederiksen, spokesman for Attorney General Tom Corbett. "Our focus would be on the organizers."

Jurisdiction, the biggest obstacle for the justice department, also is the biggest life raft held by Internet gambling operators.

One of the largest Internet gambling companies in the world is Sportingbet.com, based in the United Kingdom with operating licenses in England and Antigua. Nigel Payne, chief operating officer, insists the U.S. government has no legal recourse to stop his company from offering online wagering to American citizens.

"I'm not in the U.S. The transactions are not in the U.S," Payne said.

Payne called U.S. policy on Internet gambling hypocritical for allowing certain other types of gambling, such as state-sponsored lotteries, land-based casinos, slot machine parlors and horse racing, which in some states accepts bets on-line.

"Here's what the rest of the world sees: the fact that America is the largest gambling nation. Americans can't stand up and say they don't like the idea of gambling. Everything the U.S. is doing is utterly inconsistent with what Americans are doing," Payne said.

Last year, the World Trade Organization ruled the U.S. policy with regard to online betting was illegal under international trade agreements because it discriminates against businesses in foreign locales. Nevertheless, the U.S. government cast the ruling in a positive light, saying it means the United States has the authority to institute prohibitions on Internet gambling.

Since 1994, there have been unsuccessful efforts in Congress to pass laws that prohibit Internet gambling. Most recently, last Sept. 15, a proposal to prohibit online gambling was defeated when the U.S. Senate voted down an amendment to an appropriations bill, pitched by Sen. John Kyl, an Arizona Republican, that would restrict the manner by which Internet gambling debts would be paid. Kyl has vowed to continue his efforts to ban online betting.

Rep. Jim Leach, an Iowa Republican, on Nov. 18 introduced in the House a bill identical to Kyl's failed effort. That bill now sits in the House Committee on Financial Services.

Overall, Internet gambling proponents are not opposed to regulation.

Keith Furlong, deputy director for the Interactive Gaming Council, a trade group that represents on-line casino operators, said regulation could help the industry.

"We feel the government should be proactive and look for ways to regulate the industry. The government is preventing most responsible gaming companies in the U.S. from participating in the business. I don't believe most members of Congress know how much money is involved," Furlong said.

The question of how much money involved is still a guess. Sinclair said the amount of money wagered on the Internet can only be estimated, and the amount won by Americans is unknown and untaxed.

According to the IRS, all gambling winnings must be declared as revenue and losses can be deducted as long as the amount does not exceed the person's winnings.

Legal, land-based casinos in the United States are required to withhold taxes on major winnings and file reports with the IRS in those cases. Minor winnings are not reported by casinos. Those winnings must be declared in annual filings as income, according to David Stewart, spokesman for the IRS office in Philadelphia.

In 2003, 1.5 million tax returns reported more than $19 million in legal gambling winnings to the IRS. There is no way to know just how much of the $350 billion annual revenue gap can be attributed to underreported income from Internet gambling winnings, Stewart said.

BoDog.com sees regulation as a means toward legitimization and to ensure the United States sees some tax revenue from what is now an untapped source.

"At some point our brand will be strong enough to compete with U.S. land-based casinos. We're a feeder system for the land-based casinos, said BoDog founder and Chief Executive Officer Calvin Ayre. "I don't believe passing a law in the U.S. will stop it. Passing a law that is unenforceable is good for us. The genie is out of the box."

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