Wagering on the Web

By Robin D. Gross
February 1998

In the first federal case of its kind, the U.S. Attorney's Office in Manhattan charged 14 operators of Internet gambling sites with conspiring to illegally transmit bets over the Internet and telephone lines. Of the six companies named, two actually received bets over the Internet, while the remainder used their Web sites to promote their betting operations over toll-free phone lines. Although 14 defendants named in the March 4, 1998 complaint are U.S. citizens, all of the firms are based offshore, in Curacao, Costa Rica, Panama, Antigua, and the Dominican Republic, where gambling is legal.

According to the complaint, defendants violated Section 1084 of the federal Wire Communications Act, which prohibits the use of telephone lines to receive wagers on sporting events. This law, written before the popularization of the Web, does not specifically address legal questions arising from gambling on the Internet. Designed to aid law enforcement in prosecuting bookies, the Act only bans sports wagering and not casino-style gambling such as blackjack, roulette, and poker. Indeed, the U.S. Attorney's office commented that the prosecution's timing — one week before the start of the NCAA basketball tournament — was not coincidental.

One named defendant, Brian Janus, operations manager of Galaxy Sports said, "We're licensed by the Dutch government in Curacao, and we have an informational site only, with all our wagering done over the telephone."

The U.S. Department of Justice remains unpersuaded about the legality of the site. U.S. Attorney General Janet Reno told reporters she intended to "send a message to Internet operators everywhere. You can't hide on-line and you can't hide offshore."

Although there are no current laws specifically prohibiting Internet gambling, legislation pending in California and Connecticut could make it a crime to use the Internet to gamble. One federal statute that could apply to on-line wagering is the Amateur and Professional Act, although it does not specifically address cyberspace either.

Prior to the charges levied earlier this month, the U.S. Justice Department had taken the position that new laws specifically directed at the Internet should be enacted before it takes any action on the issue. Industry insiders have indicated that the change of policy stems from pressure applied from Senator Jon Kyl (R-Ariz), who introduced the Internet Gambling Prohibition Act that bans gambling on the Internet, and is currently pending before Congress. In 1996, a Congressional panel formed to study gambling on the Internet is expected to make recommendations to deal with the emerging industry in 1999.

In early 1997, only a dozen on-line sportsbooks, casinos, and lotteries existed on the Web, compared to over 100 by year's end. The rapid growth of the industry is staggering. Although last year's on-line wagering totaled almost $300 million, this year's number is expected to top $500 million, and industry analysts predict $8 billion by year 2000.

Government officials indicate part of the problem stems from the ease with which an Internet gambling account can be opened. Internet users simply make a deposit with their credit card and proceed to play the games, with losing wagers subtracted from the user's account and winning wages added. When a player loses all the money in his account, he or she simply starts again with another credit card deposit. Most operators charge a 10 percent surcharge on all winnings.

Among opponents of Internet gambling are large U.S. casinos, anti-gambling advocates and state governments. Established U.S. casinos do not operate Web sites that allow on-line wagering due to the legal uncertainties involved. They could easily risk losing their casino licenses in the U.S. - a $550 billion threat. Groups such as Gamblers' Anonymous oppose Internet gaming because they fear the spread of teenage gambling and gambling addiction. State governments generally oppose on-line betting because of concerns it will detract from state lottery ticket sales. Currently state governments spend over $400 million a year advertising their lotteries.

Debate exists as to whether the government should prohibit or merely regulate Internet gambling. A Kyl staffer stated, "We think Internet gambling can't be regulated, so it must be prohibited." But most industry analysts claim regulation is more likely in the end. Some states have already started down the path of regulation. New York's state senate passed legislation recently requiring foreign corporations offering Internet gambling in New York to register with the state so jilted gamblers can track down dishonest cyberbookies.

Like many new legal issues raised by the Internet, such as privacy and jurisdiction, on-line gambling will likely take shape in the courts. The federal charges levied earlier this month are expected to set precedent and more clearly delineate the murky gray-area legal issues.