Gambleing Ban

The poker face has finally cracked: US Congress’ decision to ban internet gambling has shocked the London-listed online gambling industry and knocked billions from share prices of its companies.

Many executives in the $12 billion industry had confidently faced down the growing threats from Congressmen, predicted that a ban would never make it into law and assured investors that online gambling could not be stopped.

Time to fold?
Now many in these firms are hinting they may no longer take bets from the US. The trouble is that the gambling habits of Americans account for between half and three-quarters of their business.

Industry leader Partygaming today issued a statement saying it would suspend all "real money" gaming activities in the US if President George W Bush signed the bill into law, and warned that its profits would be hard hit. Another leading player, 888 Holdings, said it would stop taking US bets once the bill becomes law.

Catch a falling star…
Following news of the passage of legislation over the weekend, shares in online gaming firms PartyGaming, Sportingbet, 888 Holdings and Empire Online immediately dropped by around two-thirds on Monday morning, before investors had any chance to sell. Sportingbet, which had been in the process of taking over rival World Gaming, abandoned the transaction.

Specialist payment service Neteller, which allows gamblers to fund their habit and make withdrawals of winnings, was 62% lower at 145p. U.S. listed Optimal Group, whose FireOne subsidiary is a rival to Neteller, is declined further on Monday after a 15% fall late on Friday.
Firms like PlayTech, which makes gaming software, were not exempt. The shares more than halved in the first few minutes of trading.
Bill Frist’s three card trick
The law was passed late on Friday night, just before Congress packed up for a month’s campaigning for mid-term elections. Senate majority leader Bill Frist managed to get the controversial legislation tacked onto the end of another bill, one which deals with port security and whose passage before the recess was seen as vital. That allowed the anti-gambling bill, which was too far down the packed legislative schedule to make it into law, to jump the queue without having to be voted on.
What the rules mean
The new rules, something of a watered-down version of a bill which passed the House of Representatives in June, do not target those who gamble nor the offshore websites who offer the service, but the domestic banks which process their payments.

Banks will no longer be allowed to route payments to these websites. President Bush has until November 7 to sign the bill into law, and the US banking and credit card industry has another 270 days to work out how to make it work.

Senator Jon Kyl, one of the architects of the bill, applauded its passage. "It's been over 10 years in the making,” he said.
“The enforcement provisions provided by this bill will go a long way to stop these illegal online operations."

Others were furious. "The American people should be outraged that Congress has hi-jacked a vital security bill with a poker prohibition that nearly three fourths of the country opposes," said Michael Bolcerek, president of the Poker Players Alliance, which has around 110,000 US-based members.

The maze of US gambling laws
US gambling rules are a mess and have been for decades. This latest law makes the morass even murkier.

Most gambling is illegal, though some states allow it in certain areas. These include Florida, New Jersey and most prominently Nevada, which hosts a huge casino industry in Las Vegas.

Other states also allow gambling where casinos are on native American land, or in specific places such as in floating casinos with all sorts of arcane rules over whether they should be moored or not when gambling starts. The upshot is that if you want to gamble, you can find legal ways to do it.

Most of the opposition to gambling comes on moral grounds: that gambling is addictive, that it corrupts individuals, ruins families and causes huge social problems. All this is true, though outlawing it has never been able to stop it entirely any more than the sale of alcohol was eradicated in the US during the prohibition era of the 1920s and 30s. Those who oppose the new law maintain that regulation is a better way of dealing with gambling’s ills than driving it underground.


Different rules, different games
Moreover, the legal framework is riven with hypocrisy. The US has a thriving state lottery industry, including scratch-card games based on poker. Horse race betting remains legal while other kinds of sports betting are not.

Any kind of betting that takes place over telephone or telegraph wires is in theory illegal under the 1961 Wire Line Act. The new law fails to clarify that Act in its application to the internet.

The Louisiana loophole
Louisiana, the state which tried and failed last month to get Sportingbet chairman Peter Dicks extradited from New York State because his company takes sports bets from its citizens, freely allows visitors to spend money at floating casinos and makes tax money from that gambling.

Supporters of a ban are mainly drawn from Christian groups, and a body of Republican legislators, led by Senator Kyl and Congressman Bob Goodlatte, on whose bills the compromise legislation is fashioned. However, it was probably the activities of Washington lobbyist Jack Abramoff that put fire in their bellies.

In a city that tolerates a huge amount of political donation and patronage, Abramoff’s free-spending activities on behalf of the gambling industry, and his defrauding of a number of Indian tribes was just too much.

It’s not quite over yet…maybe
Investors in London-listed Internet gambling companies have a few straws to grasp at. First, the US banks responsible for identifying gambling transactions have already complained that their job will be both expensive and difficult.

The Independent Community Bankers of America said in July that it there was currently no way of ‘coding’ electronic payments and personal cheques by the type of recipient in the way that credit card transaction can be.

One senior Republican politician, quoted by the gambling advocacy website Gambling911.com, said that the law as passed changed very little, because of the technical difficulties already involved in processing card payments.

"The bill affects Visa/MasterCard transactions and it is getting impossible to use these cards anyway [for online gambling transactions],” he said.

Trade rule challenge
Second, in the longer term the US may face a challenge over the discriminatory nature of its attack on gambling.

The World Trade Organisation (WTO) in 2004 backed a complaint by Antigua and Barbuda that the US was in breach of trading rules for banning credit card companies from making payments to gambling web sites based on the islands, while allowing them to make payments to US-based casinos.


The US claims that it can use the ‘moral exception’ clause allowed under WTO rules, but that may not be sustainable as the new law has failed to deal with either state lotteries or horse racing.
What’s left for investors?
While almost all online gambling companies get the bulk of their business from the US, there have been big efforts to diversify into Europe and the Far East. Most of these newer ventures are not yet mature. The two-thirds fall in stocks today is probably a fair valuation of the remaining business assets, assuming the value of the US activities to be nil.

Investors in the online gambling sector should long have been aware of the legislative risks which have fuelled the volatility in their shares. Clearly, the industry has massively overplayed its hand. But, hey, that’s poker.

posted by Sylva @ 8:13 AM