Internet Gambling Ban Stung by European Bookies

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European Union officials will interview members of the Bush administration next month in advance of a potential trade challenge to the U.S. ban on Internet gambling.

The Remove Gambling Association (RGA) complains that a 2006 U.S. law placing new restrictions on Internet gambling has cost its members hundreds of millions of dollars in lost stock value.

The law made it illegal for banks to make payments to online gambling sites, which led companies that had been offering services to retreat from the valuable U.S. market. It also caused their stocks to plummet.

For example, the Gibraltar-based Internet gambling company Partygaming, which includes the popular partypoker.com website, had a market capitalization value of $10 billion in January 2006. It dropped to $2.4 billion after the new U.S. law was implemented, according to RGA Chief Executive Clive Hawkswood. Using today’s conversion rate, that would amount to about a $7.6 billion reduction in stock value.

“For the publicly listed companies, the immediate effect [of the law] was to wipe hundreds of millions of dollars off their share values,” Hawkswood said in an e-mail to The Hill. Almost all of the losses were the result of the suddenly closed U.S. market, he acknowledged, but Hawkswood also says his members have been harmed by the ongoing threat of enforcement actions by the U.S. Department of Justice (DoJ).

For example, David Carruthers, the former head of BetonSports, has been under house arrest in St. Louis since being detained while traveling through the U.S.

“There’s this fear. People do get arrested,” said Joseph Kelly, a professor of business law at the State University of New York at Buffalo.

The RGA thinks it is unfair for DoJ to go after its members for any services they offered in the U.S. before the 2006 Unlawful Internet Gambling Enforcement Act was signed into law by President Bush. They argue it was not clear that offering online betting services in the U.S. was illegal before the 2006 law was approved, as evidenced by the fact that several companies offered such services there.

The U.S. government has argued that it was always illegal to gamble over the Internet, and that the 2006 law was only an enforcement measure to prevent financial institutions from making payments.

Kelly said foreign Internet gambling firms have been in talks with Justice over settlements. Any firm would have an interest in reaching an agreement that would allow executives access to the U.S., he said, and if Internet gambling is every authorized, it would be good not to have a dark cloud hanging over them.

A recent report in the New York Post suggested a deal might be in the works between Partygaming and DoJ, which did not respond to requests for comment on this story. Cliveswood described the story as premature at best, and predicted it would not affect the EU investigation.

As part of its investigation, the European Commission, the EU’s executive arm, has sent questionnaires to several House and Senate committees and U.S. agencies seeking information on the 2006 law.

Answers to the questionnaires, and the interviews of U.S. officials, could be precursors to an actual World Trade Organization (WTO) challenge, although some have speculated that the effort is only intended to pressure DoJ to back off its enforcement actions. The U.S. trade official emphasized that the EU effort is only an investigation.

Hawkswood said he believed the EU would find enough evidence to bring a case, but also suggested it might prefer not to take that route.

“We would be very surprised if they did not conclude that there was still a case to answer,” said Hawkswood, who added it would be the EU’s preference to reach a negotiated settlement.

American sporting leagues, such as the NFL, supported the 2006 law, but banks were not happy about it. The say the law is difficult to implement since the U.S. allows people to place bets over the Internet on horse races. Given this fact, the RGA argues its members are suffering from selective enforcement by DoJ.

“The fact that DoJ continues to threaten enforcement action against EU companies while apparently taking no action against U.S. companies, such as those offering horserace betting, is an additional concern because the EU has identified that as discriminatory action which constitutes an unfair trade barrier,” Hawkswood said.

However, it may be difficult for the EU to bring a complaint against the U.S. because of a separate deal it made in December that essentially allows the U.S. to treat foreign gambling firms differently than U.S. businesses.

In a case brought by Antigua, the WTO ruled that the U.S. did not exclude Internet gambling from its services commitments when it joined the trade body. As a result, the WTO ruled the U.S. could not prohibit firms from Antigua and other members from offering such services in the U.S.

In response, the U.S. withdrew that commitment so that it would not have to allow firms from Antigua or anywhere else to offer gambling services. Such a withdrawal is allowed under WTO rules as long as other concessions are offered to make up for the loss of the withdrawn commitment.

The U.S. and the EU reached an agreement on these concessions late last year, and a U.S. trade official said the EU has assured the U.S. that the EU continues to accept that deal and sees the investigation as having no bearing on the concession package.