Online under siege!

Jul 25, 2006 4:19 AM

The future of online sports betting was thrown into doubt last week after the U.S. Department of Justice launched a criminal case against Costa Rica-based BetonSports and its top officials.

BetonSports founder Gary Kaplan, CEO David Carruthers and nine others were indicted on racketeering, conspiracy, mail fraud, tax evasion, transmission of wagers and other charges in a 22-count indictment.

Carruthers was taken into custody while on a layover in Dallas while traveling from his native United Kingdom to Costa Rica.

Since Carruthers arrest and unsealing of the indictment (which was obtained June 1), BetonSports has ceased trading its stock on the London Stock Exchange, and has shut down its sports betting web site, as well as its online poker and casino operations.

Kaplan, who has a criminal history in the United States, was charged with failing to pay federal wagering excise taxes on more than $3.3 billion in U.S. wagers. He is reportedly still in Costa Rica and a warrant has been issued for his arrest.

BetonSports raked in more than $1.7 billion in sports bets last year, two-thirds of which came from U.S. bettors.

Even if BetonSports shuts down permanently, there are plenty of sites to take its place. Costa Rica has become a haven for online sports books and casinos because of its easy approach to regulation.

"There are probably at least 140 sports books operating down there," said Sue Schneider, president of the Interactive Gaming Council.

Some online sports books may stop taking bets from U.S. residents, but not if they rely heavily on the U.S. for the bulk of their business, Schneider said.

Even if they continue to operate unabated, the operators of off-shore betting operations are concerned about the DOJ extending its "dragnet."

Bodog’s international marketing conference, scheduled for this week in Las Vegas, was hurriedly canceled upon fears that U.S. authorities could widen its crackdown on Internet gambling operators.

Guests at the conference included a "who’s who" of online betting, including senior executives from SportsDirect, OffshoreBettor, Casino City, GamesandCasino, Smart Interactive and PokerAffiliateWorld.

The organizer of the conference, Bodog founder Calvin Ayre, said the "high level of concern" surrounding the Department of Justice’s actions forced the cancellation of the conference.

"I would be surprised if there’s any executive who isn’t sitting down with their lawyers trying to work out the implications," he said.

The Department of Justice made it clear that its investigation was solely based on the BetonSports operation.

However, a DOJ spokesman in Washington, Brian Sierra, warned: "We don’t comment on potential targets. We view Internet gambling to be in violation of federal laws. Those that conduct this business do so at their own risk."

Analysts who follow the industry say U.S. authorities are relying on the Wire Act for jurisdiction over sports bets transmitted by phone or the Internet, but that other forms of gambling such as poker and lotteries are more ambiguous.

In fact, a federal appeals court in Louisiana has ruled that the Wire Act does not cover other types of casino betting, leaving doubt whether prosecutors can shut down poker and other casino games that target American players.

"The Justice Department has said (all) Internet gambling is prohibited, but most legal experts would say they are wrong, that this only applies to sports betting," said Joseph Kelly, a legal scholar at the State University of New York at Buffalo, who has consulted the government of Antigua and others on U.S. law.

Kelly said it was an unusual coincidence that the indictment came shortly after the House of Representatives passed a new bill banning most forms of web gambling in the U.S.

"Why would Congress try to make something illegal if it is already illegal?" he said.

Although the DOJ has obtained its indictment, some observers believe getting a conviction won’t be as easy.

First, the BetonSports executives and their operation were physically located in Costa Rica or other countries, where Internet gambling is legal.

In the indictment, the U.S. alleges BetonSports committed fraud because it represented itself as "legal and licensed," but they were not legal and licensed inside the U.S. However, BetonSports says on its web site that it is licensed by the Antigua and Barbuda Division of Gaming.

The money laundering charge alleges that company executives laundered money received as illegal wagers. But if the wagers were legal, the money laundering collapses.

The indictment says BetonSports failed to pay a U.S. wagering tax. But BetonSports doesn’t have offices in the U.S. and its listed on the London Stock Exchange.

The strongest allegations against BetonSports, according to some experts, is that it advertised its off-shore betting operation inside the United States.

On the outside chance that the U.S. prevails in all charges against BetonSports, the entire sports betting industry in Costa Rica will be in jeopardy because nearly all do what the U.S. says BetonSports did.

Some in the off-shore industry have expressed cynicism for the latest U.S. crackdown.

"The U.S. will never catch Osama Bin Laden, but they got their big fish, David Carruthers, CEO of the previously unknown terrorist group, BetonSports," wrote eog.com’s Joe Duffy. "Thank you, Department of Justice, for making the world a safer place."