FROM BUSINESSWEEK
Offshore Betting: The Feds Are Rolling Snake Eyes
They're eager to ban online gambling, but it may be beyond the reach of U.S. law
The view out Steve Schillinger's office window is vintage Caribbean: swaying palm trees and cloudless blue skies. But inside, the barefoot, blue-jeaned entrepreneur is focused on a huge Sony TV and three computer screens monitoring the British Open, half a world away. The TV shows the action on the greens, but it's not nearly as exciting as the activity on one of the computers, which show dozens of bets on the tournament streaming in from gamblers across the U.S.
Schillinger is co-owner of World Sports Exchange, an Internet gambling Web site located on the tiny island of Antigua. Last year, the company accepted $200 million in sports wagers, 95% of which came from bettors in the U.S. This year, business is expected to double. On Saturdays and Sundays during football season, the action comes in at a rate of ''100 bets a minute,'' boasts the 47-year-old former San Francisco stock trader. ''You get people betting from New York, Chicago, Atlanta, and all over the country.''
In Antigua, online gambling is perfectly legal. But to U.S. authorities, Schillinger is a fugitive. In 1998, he was one of 22 offshore gambling operators charged by the U.S. Attorney in New York with violating the 1961 Wire Wager Act. One of his partners, Jay Cohen, was convicted in February, but Schillinger still hasn't shown up for trial. So nowadays, he meets his two children, who live in the U.S., outside of the country. Despite the legal heat, Schillinger is unfazed. ''We will definitely stay open,'' says Schillinger. ''What are they going to do? Just charge us again? We've already been charged, and we're still doing business.'' (Schillinger believes that, notwithstanding his refusal to stand trial, he hasn't violated any American law, since the betting takes place in Antigua. Cohen plans to appeal his conviction.)
That brazen attitude frustrates U.S. lawmakers no end. As the online gambling business booms, a growing number of politicians and law enforcers are doing everything in their power to shut it down. They worry that unregulated offshore Internet casinos will rip off bettors, prey on compulsive gamblers, and lure minors into the betting world. And while there is a variety of state and federal laws regulating different facets of the gaming industry, most of them predate the Internet era and are insufficient to combat the online version.
Consequently, the attorneys general in Missouri, New York, and Wisconsin have filed lawsuits against online gambling sites. Meanwhile, Illinois, Louisiana, Michigan, Nevada, and South Dakota have passed laws aimed at stomping out cyber-casinos. And in Washington, the House and Senate are considering several bills that would do the same thing (table).
So far, this newly launched legal attack has done little to slow the phenomenon. Cyber-gamblers can choose from nearly 900 sites that advertise widely and offer everything from blackjack, roulette, and slot machines to baseball, basketball, and tennis wagers. Although online betting is still a small slice of the $58 billion U.S. gambling business, the growth of Web wagering has been impressive. Three years ago, it was a $300 million industry. This year, revenues--or losses from bettors--will reach $2.2 billion, up 83% from $1.2 billion last year, estimates Sebastian Sinclair, a vice-president at Christiansen Capital Advisors.
A big reason for this success is simply that online betting is so easy. At World Sports Exchange, customers can use their credit cards to open an account, which requires a minimum deposit of $300. From that point on, hundreds of different types of wagers, all funded from the same account, can be made with a mouseclick. It's a lucrative enterprise. Last year, profits at the 13-employee World Sports Exchange were about $7 million--a figure that could more than double this year.
VEXING ISSUES. It is far from clear how lawmakers can ever stop this juggernaut. Because the vast majority of cyber-casinos operate offshore, they are beyond the reach of American legal authorities. Indeed, Internet gambling exemplifies many of the problems lawmakers encounter as they try to police other vexing issues on the Net, including pornography, fraud, and intellectual- property theft. ''Physical boundaries matter a great deal in the real world,'' says David Post, a professor of Internet law at Temple University Law School. ''The challenge is that we live in a legal world that has boundaries, but the Internet has no boundaries.''
As Post suggests, the first problem with regulating Net gambling is geographic. Even if U.S. law enforcers are convinced that an operator such as Schillinger is violating the law, they have no power to punish him. Under U.S. law, offshore businessmen usually cannot be tried in absentia. Moreover, they generally can't be extradited if gambling is legal in the country where they do business. And there will always be some nations that permit online gambling. ''The reality is that [people] who are operating outside the U.S. and who have no intention of returning are basically immune from prosecution,'' says Anthony Cabot, a Las Vegas lawyer who advises the gaming industry.
Lacking the ability to punish foreign businessmen, the U.S. could try to pressure some of the countries that host the operations to shut them down. But such efforts could fall on deaf ears. In Antigua, for example, the government has openly embraced Internet gambling. Operators pay $100,000 a year for a license to operate a virtual casino and $75,000 to operate a sports betting site. They get lots of incentives in return, including income-tax exemptions. In all, nearly 90 companies are licensed by the Antiguan government.
''DISCREDIT.'' In fact, Antiguan officials prize Internet gambling as one of the few growing sectors of the economy and insist they have no fear of U.S. retaliation. The government recently rejected a plan to install black boxes on Internet gambling sites' servers to monitor their businesses more closely--after the Web site operators fiercely opposed the idea. ''The most the U.S. government can do is discredit Internet gambling and discredit Antigua as a place where you want to have a business,'' says Correne Samuel, licensing supervisor at the Directorate of Offshore Gaming.
If they can't shut down offshore sites, the only other option for the lawmakers is to try to block them from U.S. consumers. Under one proposal, submitted by Representative Bob Goodlatte (R-Va.), Internet service providers would be required to ''disable access to the material'' when they receive a written or e-mail note from a federal or state law enforcement agency about an illegal online casino. The ISP would then put the Web site's domain name on a blacklist that customers could not reach. But blocking content is, at best, only a partial solution. For one thing, the sites can regularly change their names--and then alert users through e-mail notices. Or gambling services can create innocuous-looking ''dummy'' sites that relay messages between the gamblers and the blocked sites.
So most offshore casino operators don't worry much about getting into trouble. Roger Pelamati, a Michigan native, is a manager at World Wide Tele-Sports, another sports betting site based in Antigua. Asked about U.S. antigambling legislation, he shrugs. The only way to enforce an online gambling prohibition, he says, would be to ''turn the Internet off.'' He's probably right. And, as millions of online gamblers attest, it's far too late for that.
By Aixa M. Pascual in Antigua |
