Every week about 2 million players ante up at more than 1,800 virtual casinos, making Internet gambling one of the Web’s fastest-growing killer apps. It’s easy to understand why. Internet sex sites can only simulate the real thing, but online casinos are the real thing. Any hour of the day, from work, home or vacation, you can click a mouse and bet the house. But now the dizzying growth of online gambling–some $3.5 billion will be lost on Internet bets this year, about three times the revenue of porn sites–has triggered a sharp backlash that threatens to turn some of today’s thriving online casinos into tomorrow’s defunct eToys. In recent months most U.S. credit-card companies, and some Internet payment systems like PayPal, have responded to pressure from lawmakers by moving to block charges from online casinos. The House of Representatives earlier this month passed a bill making online gambling a federal crime (the bill has not yet come to a Senate vote). Perhaps the most chilling news to site operators: last week an American who ran an Internet sports-gambling site in Antigua started serving a 21-month jail sentence for violating a 1961 sports-gambling statute. “There’s big trouble ahead,” says Kjaer.
Critics of the industry say the crackdown is long overdue, considering how the Web can put dice in the hands of people who shouldn’t be rolling them. “It’s the addictive nature of online gambling, and its accessibility to children, that makes this form particularly bad,” says Eliot Spitzer, New York’s attorney general. Lawmakers also worry about accountability. Most gambling sites operate in loosely regulated countries like Costa Rica, leaving players no real protection against dirty dealers and welched winnings. “If you walk into a Las Vegas casino, the odds are against you, but there are a lot of rules that apply and there’s regulation,” says Rep. Jim Leach, an Iowa Republican who sponsored the Internet Gambling Enforcement Act. “On the Internet, there is no regulation.’’ Nor is there any safeguard to keep people from gambling with money they don’t have. Laura Harbert, a single mother in Portland, Ore., got hooked on Internet bingo two years ago. She would put her kids to bed, then start surfing and betting. “These bingo sites–there are hundreds of them–made me feel like I was going out for the evening,’’ says Harbert, who figures she blew through several thousand dollars. When she no longer had money in her checking account, the bingo sites offered to debit her phone bill to pay for her bets. “They will take it any way they can get it,” Harbert adds.
Antigambling crusaders are out to get the industry, too. Spitzer has hit virtual casinos where they are most vulnerable–by urging credit-card companies to cut off a gambler’s ability to deposit money in an account. “I said, ‘Fellas, we’ll get an injunction against you. Do you really want to be in this business? The black eye you’ll get when we get a judgment against you won’t be worth it’,” he says he told Citibank. The bank announced in June that it would no longer process Web wagers, and even donated $400,000 to agencies that help problem gamblers. Several other top card issuers have also jumped ship, including Discover Card, MBNA and American Express. “I think it’s a major problem for the industry if they can’t take any credit cards,” says I. Nelson Rose, a Whittier Law School professor who specializes in gambling law. “If making a bet gets too difficult, people aren’t going to do it.” The move has everyone’s attention, prompting online-gambling analysts at Bear, Stearns & Co. to slash its industry growth estimate for next year by more than half, to 20 percent.
If authorities like Spitzer aren’t enough to scare credit-card companies, Cynthia Haines’s story is. She racked up more than $70,000 in debt on a dozen cards before defaulting on her monthly payments. She then sued the credit-card companies, arguing that Internet gambling is technically illegal in California, and therefore the credit-card firms were accessories to a crime. They let her walk away from her debts. Since then, each of her creditors, among them Providian National Bank and First Union, decided to stop accepting Internet-gambling charges. Though fewer than a half-dozen gamblers are known to have tried Haines’s novel legal approach, several credit-card companies say that the potential exposure is enough to keep them out of the game.
Unless Leach’s bill becomes law–Antigua is lobbying against it–the only federal weapon against Internet gambling is the 1961 Wire Act, originally written to combat telephone sports betting. The U.S. Attorney’s Office in New York invoked it in 1998 to go after 21 online-casino operators. Thirteen pleaded guilty, seven are fugitives and only one stood trial: Jay Cohen, a former San Francisco options trader who launched World Sports Exchange (wsex.com), an especially popular online sports book. When Cohen opened his Antigua site six years ago, he based everything from bank accounts to computer servers on the island. “I ran a legal business in a foreign country,” Cohen says. A federal jury disagreed. Meantime, wsex.com is still operating, thanks to Cohen’s cofounders, who are fugitives in Antigua.
Shutting down Internet wagering altogether may be as difficult as keeping a teenager from downloading MP3s. Several earlier attempts to pass federal legislation banning Internet gambling have stalled, generally because the bills can’t reconcile opposition of online wagering with support for state lotteries and parimutuel betting like horse racing. And some credit-card companies, albeit inadvertently, are still processing these transactions. Just two weeks ago NEWSWEEK used a MasterCard issued by Citibank to deposit $100 at the DrHo888 site, where we quickly pocketed $50 in two winning roulette spins. The credit-card transaction was coded by DrHo as coming from a French catalog merchant. Citibank admits it was fooled. Says DrHo’s Kjaer: “There’s nothing illegal about it. We can code transactions however we want to.”
If bettors can’t make a deposit with their American credit cards, they can now wire money to the casino, use a credit card issued by an overseas bank, debit a prepaid ATM card, or use other e-cash systems besides PayPal that have stepped in to fill the credit-card void. If the Feds get a new law targeting online gambling, the casinos will struggle to find new ways of getting money, but some operators don’t seem particularly worried. They’re confident cash will still flow as freely as moonshine during Prohibition. “U.S. customers want to play, and they will find a way to play,” says David Carruthers of betonsports.com. Adds Wayne Root, CEO of Las Vegas-based GWIN Inc., the only publicly traded sports handicapping company in the United States: “You can’t stop people from having freedom of choice on the Internet. [Lawmakers like Leach] are keeping American corporations from participating in one of the most profitable businesses in the history of mankind.”
Some American land-based casinos, concerned about missing out on the action, are setting up gaming Web sites overseas. A new virtual casino operated by MGM Mirage (which does not accept bets from Americans, thanks to sophisticated software that can identify your computer’s location) went up in early October, and Park Place Entertainment is developing its own site, with a license issued by the Isle of Man. “We’ll go step by step and only where it’s legal,” says Park Place CEO Thomas E. Gallagher. “But there is demand for this form of gambling.” For the casinos, the economics are irresistible. They can spend $1 billion to build hotels and encircle them with dueling pirate ships or singing gondoliers to attract business. But any crafty croupier with a server can boot up a casino: the first Internet gambling site was launched in 1995 with an investment of just $1.5 million. There’s no need for Cirque du Soleil or $6.95 prime-rib buffets. “For a land-based casino, those are distractions” that ultimately keep gamblers away from the tables, says Kjaer of DrHo. “Here, the players will sit for eight hours.” The Web site is doing so well that Kjaer is shifting to a larger location and hiring more girls. For now, at least, the move to expand strikes Kjaer as a safe bet.
