Online Gambling:
the Department of Justice
flexes its muscles
The US Department of Justice (DoJ) has launched a civil and criminal claim against four
companies and eleven individuals including BetonSports Plc, its founder Gary Kaplan and
its Scottish CEO, David Carruthers. BetonSports plc is AIM-listed and provides an online
and telephone sportsbook betting service. BetonSports is reported to earn as much as
90% of its gross win from punters in the US. What are the implications of this prosecution
for online gambling?
A grand jury in the US District Court in the Eastern District
of Missouri sealed an indictment on 1 June 2006 and the
indictment was opened on 17 July 2006 after five of the
individuals had been arrested, including Mr Carruthers who
was arrested in the departure lounge of Dallas Airport en
route from the UK to Costa Rica. The criminal charges
relate to felony violations of federal laws including: the Wire
Wager Act 1961 (Wire Act), Racketeer Influenced and
Corrupt Organisations (RICO) Conspiracy, interstate
transportation of gambling paraphernalia, interference with
the administration of Internal Revenue laws and tax evasion.
The DoJ's press release in relation to the indictment focuses
on the charges against Gary Kaplan which is, perhaps,
indicative of whom it sees as the real villain.
The press release summarises the background as follows:
" The indictment alleges that Gary Kaplan started his
gambling enterprise via operation of a sportsbook in New
York City in the early 1990s. After Kaplan was arrested on
New York state gambling charges in May 1993, Kaplan
moved his betting operation to Florida and eventually offshore
to Costa Rica. According to the indictment,
BetonSports.com, the most visible outgrowth of Kaplan's
sports bookmaking enterprise, misleadingly advertised itself
as the "World's Largest Legal and Licensed Sportsbook."
The indictment also alleges that Kaplan failed to pay federal
wagering excise taxes on more than $3.3 billion in wagers
taken from the United States and seeks forfeiture of $4.5
billion from Kaplan and his co-defendants, as well as various
properties."
Nonetheless, it is interesting that the DoJ launched their
arrests at a time when Gary Kaplan was out of the country,
but David Carruthers was in the country. This certainly
sends a message to foreign executives of online gambling
companies.
The DoJ's high profile prosecution of an online gambling
company has impacted shares across the sector. Trading in
BetonSports' shares has been suspended since 18 July
2006 and the prices of other shares in the sector have fallen
sharply. Whilst companies such as Sportingbet which also
offer sportsbook betting to the US have been the hardest
hit, shares in online gaming companies which do not offer
sportsbook betting, such as PartyGaming and 888, have
also fallen.
The legality of internet gambling in the US
The DoJ takes the position that all internet gambling is a
violation of federal laws and a DoJ spokesman, Brian Sierra,
has warned that " those that conduct this business do so at
their own risk."
However, the legality of online gambling in the US is not
clear cut. The Wire Act prohibits the provision of bets or
wagers on any sporting event or contest if a wire communication
facility is involved. The Wire Act predates the internet
and it is likely, but not clear, that internet betting is covered.
It is less clear whether non-sports' betting is also prohibited.
The law in relation to internet gaming is an even greyer
area. The DoJ suggests that it is prohibited but has not yet
pressed the issue. The DoJ has focussed its efforts recently
against third parties that support internet gaming, such as
payment processing providers and organisations which
accept internet gaming advertisements. The DoJ has not
been alone in this push and Google and Yahoo! no longer
accept gambling advertisements following a large class
action brought by Californian residents under Californian
state law.
Earlier this month the US House of Representatives passed
the Leach-Goodlatte Internet Gaming bill. The bill, if
enacted, would crack down on internet gambling by:
Clarifying that the Wire Act covers all types of gambling
and all types of communication facilities including the
internet.
Regulating payment systems to prevent money being
transferred to internet gambling companies. This will prevent
American credit card providers and other financial
institutions from making payments to gambling companies.
Giving law enforcement agencies the power to seek
injunctions against people who facilitate internet gambling.
Obliging the US Government to advance international
cooperation in law enforcement against illegal gambling and
related money laundering.
The Leach-Goodlatte bill was passed with a strong majority
in the House of Representatives. However, commentators
have suggested that it is unlikely that Senate will have time
to consider the legislation in the current session and even if
it is considered passage is far from certain. The fact that the
bill was passed is seen by some as political posturing in
advance of November's elections.
Is this the start of a crackdown?
Although the DoJ has been making strong statements that
all those who conduct internet gambling do so at their own
risk, the BetonSports prosecution does not at first blush
appear to extend the companies within the DoJ's sights.
There are a number of points to note in this regard:
BetonSports is a sportsbook betting and not a gaming
company.
The prosecution reflects the DoJ's existing policy of
prosecuting internet gambling when it is part of other
criminal activity: in this case what is alleged to be mail and
wire fraud based on false advertising (in particular a claim
that the telephone services and websites were " legal and
licensed") and a claim of tax evasion.
Advertising of illegal gambling has been the focus of the
Eastern District of Missouri for several years.
There was significant activity by BetonSports in the US,
such as significant direct marketing being sent to US
addresses.
Gary Kaplan has a history with the DoJ and was arrested
on New York state gambling charges in May 1993
following which he relocated his business to Florida and
then Antigua before finally moving it to Costa Rica. It is possible
that Mr Kaplan has been in the DoJ's sights for some
time and the DoJ's press release reflects this focus.
Extradition
Following the high profile extradition of the so-called
"NatWest Three" the issue arises whether the US may seek
extradition from the UK in gambling cases.
An offence is only extraditable if the conduct on which the
offence is based is punishable under the law of both
countries by imprisonment for a term of one year or more. If
this is the case, under the Extradition Act 2003 the UK
Courts no longer need to be persuaded that there is a case
to be answered, but only that the request for extradition
contains admissible evidence for the offence sufficient to
establish a prima facia case.
Internet gambling is not illegal per se in the UK (subject, of
course, to compliance with the regulations and the fact that
an online gaming company cannot be set up in this country
until the Gambling Act 2005 comes into force next year).
It is of note that the majority of offences under the Gambling
Act 2005 are punishable by fines or imprisonment for a term
not exceeding 51 weeks. The exceptions are cheating
(punishable by two years imprisonment) and inviting or
enabling a person in a prohibited territory to participate in
remote gambling - the penalty for which will be set by the
Secretary of State by order.
The greater risk therefore lies with the DoJ also prosecuting
additional offences which would also be punishable in the
UK by imprisonment for a term of one year or more, such as
tax evasion.
Summary
The BetonSports prosecution appears to be a test case for
the DoJ. The outcome will be watched with great interest
and baited breath by the entire online gambling community.
For further information in relation to these
issues please contact:
Richard Taylor
Richard.Taylor@olswang.com
or
David Zeffman
David.Zeffman@olswang.com
