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

How online poker players who suspected cheating were forced to successfully ferret out the cheaters themselves. A joint investigation by CBS News's Steve Kroft and The Washington Post. Video by
By Gilbert M. Gaul
Washington Post Staff Writer
Monday, December 1, 2008

By many measures, Neteller PLC was a huge success. Founded in 1999, the financial services company signed up millions of customers and saw its market value soar to almost $2 billion.

But in 2006, Congress passed legislation that effectively banned the company from the U.S. market. Later, federal agents arrested the firm's two founders and seized their pricey Malibu beach houses and millions of dollars in other assets.

Neteller's crime: It processed payments for U.S. poker players and thousands of other Americans who were using Internet gambling sites.

Even as bettors around the world gamble millions of dollars online, confusion reigns about the legal status of those bets and the companies that handle them. According to the Justice Department, Neteller was "a colossal criminal enterprise masquerading as a legitimate business," violating a 47-year-old law aimed at organized-crime bookies. Prosecutors contend the law applies to any and all betting on the Internet, as well as the electronic money transfers enabling those bets.

For critics of online gambling, the Neteller case and a flurry of other high-profile prosecutions are welcome crackdowns on a murky and unregulated industry. "It's an underworld wrought with scams and schemes," said Kentucky Gov. Steve Beshear (D), spearheading a state effort to block online bets.

But to some legal scholars and Internet gambling proponents, the government's efforts highlight a widening disconnect between 21st-century technology and the 20th-century laws used to protect Americans from gambling. "Congress shouldn't be trying to make criminals out of people who have taken the game from the kitchen table to the computer table," said John Pappas, executive director of the Poker Players Alliance, a Washington lobbying group claiming just under 1 million members.

The alliance and other backers are pushing for the federal government to license and regulate Internet gambling. They say that the current ban leaves players vulnerable to abuse at loosely regulated offshore sites, as occurred in the AbsolutePoker and UltimateBet cheating scandals. Gambling is already widespread, with casinos, slots parlors and state lotteries. The government would be better off collecting tax revenue and creating strong laws to prevent cheating, they argue.

Until a decade ago, gamblers had limited choices. They could go to a casino or horse track in states with legalized betting, or find a private poker game. The Internet erased those borders: Players now can jump from site to site on the Web, bypassing regulators at home. When Neteller retreated from the U.S. market, Internet poker pro Serge Ravitch simply switched to another firm to handle his accounts. "It took two minutes," he said. Online poker players pay for their bets in a variety of ways, including prepaid debit cards, electronic transfers and bank wires.

Initially, most Internet gambling sites were sports books and online casinos based in Caribbean and Central American countries with low taxes and minimal regulations, according to a recent study by Canadian researchers Robert J. Williams and Robert T. Wood. In January 1996, an Internet casino in Antigua became the first to accept a wager, followed two years later by the first online poker room.

Today, there are thousands of gambling Web sites worldwide, from Antigua to Malta to the Philippines. Most are privately owned and have no connections to land-based casinos, which have been reluctant to jeopardize their U.S. licenses because of the uncertain legal status of online gambling.

A spokeswoman for the American Gaming Association, a Washington trade group, said about half of the casino companies would like to see Internet gambling legalized, while the remaining firms either oppose it or favor a federal study of the Internet's effect on compulsive gambling and other issues.

"It is doubtful whether an Internet regulation bill will ever be passed until Congress can point to an objective comprehensive study that would justify regulation," said Joseph M. Kelly, a professor of business law at the State University of New York at Buffalo, and a gambling industry consultant.

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