How the U.S. Is Getting Beat in Online Gambling

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What makes the numbers more extraordinary is that online gaming is either banned or legally questionable in several of the countries where it's thriving. In the U.S., where it is hard to avoid televised poker tournaments, the DOJ is unequivocal: it deems Internet gambling illegal, period. And nearly unstoppable. The DOJ admits that it faces hurdles in bringing to heel companies not based in the U.S. But it has pressured credit-card companies to reject gaming-related transactions and "urged" Internet providers and radio stations not to air online-gambling ads. Yahoo! and Viacom's Infinity Broadcasting are just some of those that are complying rather than cross the feds.

The U.S. legal situation is "absurd," says Mark Davies, international marketing director for the firm Betfair, based in Britain. "Poker is a game played by many tens of millions of Americans. It is played by Presidents and judges. It's strange to say it's illegal just because it is online." In other places, from Hong Kong to Sweden, online wagering similarly runs up against a thicket of restrictions. In Britain, where punters regularly wager in betting shops, online gaming is now legal, which is why companies such as PartyGaming have gone public on the London Stock Exchange.

But in much of Continental Europe, online gambling is bringing unwanted competition to state-owned monopolies, which provide a hefty chunk of tax revenue to national treasuries every year. In Sweden, as much as half the nation's fixed-odds betting has moved from the state monopoly to an online firm based in Malta. The U.S. is losing about $7 billion a year by prohibiting Internet-gambling companies, says Las Vegas attorney Anthony Cabot. Says Eugene Christiansen, chief executive of Christiansen Capital Advisors, based in New Gloucester, Maine: "They have to stand by and watch British and other countries' companies eat their lunch."

That juicy meal is being shared by PartyGaming and a fast-growing number of competitors. They have names such as 888.com Betandwin.com and Empire Online, and are mainly based in exotic, low-tax jurisdictions such as Gibraltar, Malta or Canada's Kahnawakee Mohawk Indian reservation. Says Richard Segal, an experienced British casino executive who joined PartyGaming as CEO last year and sold more than $15 million worth of stock in the June IPO: "It's like bees around the honeypot."

Some gambling-industry lawyers are building up a body of international case law to bring their clients onshore. In the U.S., for example, the 5th Circuit Court of Appeals ruled in 2002 that only sports gambling is covered by the Wire Act, a 1960s law aimed mainly at mobsters that prohibits anyone in the gaming business from transmitting bets by wire communication. And in March the World Trade Organization in Geneva upheld a complaint by Antigua that U.S. restrictions on cross-border Internet gaming amounted to a breach of free-trade rules. Says lawyer Mark Mendel, who represented Antigua: "They say all Internet gaming is illegal throughout the U.S., but that simply isn't true."