Prohibition vs. Regulation Debated As U.S. Bettors Use Foreign Sites

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The Neteller case is a prime example. In January 2007, federal agents arrested two of the company's founders, Stephen Lawrence and John Lefebvre, while they were in California and the U.S. Virgin Islands. The government charged the pair with facilitating online gambling payments of more than $10 billion.

To avoid further trouble, U.K.-based Neteller stopped accepting American clients and paid a $136 million fine.

Lawrence and Lefebvre, both Canadians, also agreed to plead guilty and forfeit $100 million, including two Malibu beach houses owned by Lefebvre, court records show. "Supporting illegal gambling is not a business risk, it is a crime," said Michael J. Garcia, the U.S. attorney for the Southern District of New York.

Later, ESI/Citadel of Canada, another well-known processor of payments, agreed to a deferred criminal prosecution and to pay $9.1 million to settle charges that it processed gambling payments. Like Neteller, it withdrew from the U.S. market.

While Neteller was prosecuted under the old Wire Act, some lawmakers were working to expand the government's legal arsenal. In 2006, Sens. Jon Kyl (R-Ariz.) and Bill Frist (R-Tenn.) spearheaded the Unlawful Internet Gambling Enforcement Act (UIGEA), aimed at stopping money transfers to Internet gambling shops.

Many lawmakers were unaware that the bill had even passed when it was attached to unrelated port security legislation in the waning minutes of the 109th Congress. "It was done in the middle of the night," said Berkley, who co-chairs the Congressional Gaming Caucus. "I tried to warn members, but many of them had already left."

Internet gambling interests want to overturn the law, arguing that regulation would protect American bettors and raise millions in tax revenue. But Kyl said the proper approach to online gambling is to stamp it out, not to try to tame it through legal oversight. "Obviously, the online gambling operators hate the fact that these laws will now effectively be enforced," he said. "It would be a tragedy if they succeeded in undoing UIGEA on the basis that regulation of this unlawful activity somehow renders it acceptable."

The law directed banks and credit card companies to identify and ban payments to offshore betting sites, but never defined illegal Internet gambling. At a congressional hearing in April, government and financial representatives testified that the UIGEA requirements wouldn't shut off payments.

"The challenge we have is interpreting something, particularly federal laws, that Congress itself isn't sure what they mean," Louise L. Roseman, head of the Federal Reserve's bank operations, told a House Financial Services subcommittee.

Wayne A. Abernathy of the American Bankers Association added: "Unlawful Internet gambling is practically undefined in the act, rendering prospects for success in controlling it unfavorable from the start." Banks and credit card companies use codes to identify transactions, but they can be confusing. "For example, while it might be legal to use a credit card at the casino, it might be illegal to use it for the same wager over the Internet," he testified.

Despite those concerns, the Bush administration recently pushed through last-minute regulations implementing the UIGEA requirements. The effort was led by William Wichterman, a former conservative Republican political aide and lobbyist for the NFL who was hired by the White House in April. A White House spokeswoman said ethics officers cleared Wichterman to work on the issue.

The uncertain legal status of online gambling also leaves the United States open to charges of unfair trade practices. Recently, Antigua contended that the U.S. ban damaged its economy by preventing gambling sites from accepting U.S. bets. A World Trade Organization judge agreed with the small island nation and ruled that it was entitled to $21.3 million in compensation.

Critics liken the overall U.S. approach to Prohibition-era efforts to stop drinking, saying that the only thing the government has accomplished is driving players away from large, legitimate gambling sites into the arms of unregulated offshore operators.

"The Volstead Act didn't stop people from drinking," said Eugene Martin Christiansen, a prominent Internet gambling analyst, "and this opposition won't stop people from gambling online. The Net is too big, the demand is too strong."