EMPLOYEE OF THE WEEK

January 15 2007

EMPLOYEE OF THE WEEK

January 15 2007

BOOTLEGGERS OF THE INTERNET

The U.S. war on online gaming has driven the industry underground

BUSINESS

BY JASON KIRBY • The offices of Las Vegas from Home, an Internet poker company in Vancouver, don’t quite live up to the name. No bright lights or casino bells to overwhelm the senses. Just a pungent odour, like used kitty litter and sweaty gym socks. Until recently, the company operated ActionPoker.com, a website that lets gamblers go toe to toe with other players for cold hard cash, without ever going to the trouble of putting on pants. The company was on track for revenue of $13 million this year when, in October, the U.S. government cracked down on online betting, and it all came crashing down. The company promptly sold its ActionPoker subsidiary to an outfit in Norway. For Jacob Kalpakian, the company’s genial CEO, it’s a bitter comedown. “The industry has been punched in the gut,” says Kalpakian, clad in a black sweatsuit from the Air Jordan Collection. “It’s been crippling for publicly traded companies. But for others, it’s been great.”

ABOUT 1,500 GAMBLING WEBSITES DID US$12-BILLI0N IN BUSINESS

When Congress passed the Unlawful Internet Gambling Enforcement Act, the outcome was swift and brutal. In Canada, where dozens of companies had built extensive infrastructure to service the booming market, the sector was left in tatters. But faster than you can say, “read ’em and weep,” the industry has

ABOUT 1,500 GAMBLING

morphed. Mysterious new companies have sprung up offshore and taken over popular sites. Others have scampered into the shadows but appear to remain in business. Just three months after many had written off the industry, there are signs American gamblers are back at their computers, placing bets as furiously as ever before. “Prohibition didn’t stop anybody from drinking,” says Norman Inkster, former RCMP commissioner and, until recently, a director of an online gambling company based in Toronto. “This law isn’t going to deter those who like to gamble.” And so, an industry that was on its way to becoming a significant employer and source of income for investors has scrambled underground—to the benefit of those willing to operate in legal grey zones and outside of U.S. law.

In recent years, the Internet gambling market has rocketed in size, especially in the States. Fuelled by the popularity of Texas hold’em and televised poker tournaments, an estimated 10 million Americans regularly play

online poker, and bet on sporting events. There are now anywhere from 1,500 to 2,000 gambling sites, handling an estimated US$12 billion in transactions last year. It’s a goldrush, and site operators have struck it rich. The most famous is Calvin Ayre, a Saskatchewannative-turned-international-playboy who made billions off his online poker company Bodog.com, based in Costa Rica. Others turned to the public markets, with several firms listing on the London Stock Exchange’s Alternative Investment Market—raising hundreds of millions of dollars.

But the U.S. government wasn’t happy. Politicians railed against the evils of online gambling, even as Las Vegas rolled in dough. It became clear the real issue was the lack of regulation and, perhaps more importantly, the millions in tax revenue lost to online casino operators based outside the country. Jim Leach, a former representative from Iowa, tacked the anti-online-gaming legislation onto a massive homeland security bill that sailed through Congress in late September. President George W. Bush signed off on the bill two weeks later.

From the moment the new law came to

light, there has been confusion about exactly what it means. The law doesn’t make it illegal to gamble online. Instead, it bans U.S. financial institutions and other payment processors from handling “unlawful Internet gambling” transactions. What’s an unlaw-

ful Internet gambling transaction? The law doesn’t really say. The U.S. Department of Justice argues the Wire Act makes all Internet gambling sites illegal, even though the 45-year-old law was written when the Web was barely a spark in some nerd’s eye. At least one high-level court has ruled otherwise. As a result, there’s a gaping hole for those willing to play beyond the government’s reach.

The jockeying began almost immediately after the U.S. crackdown came into effect. While their stock prices tumbled, some companies unloaded businesses aimed at American customers for ridiculously low prices. At least two publicly traded companies, Sportingbet and Leisure & Gaming, sold their U.S. operations for pennies, arguing it was cheaper than shutting down. “You always hear about the great train robbery—well, this is it because assets are changing hands for $1 that were worth hundreds of millions of

dollars just days earlier,” says LVFH’s Kalpakian, whose ActionPoker fetched $12 million. “Enormous fortunes are being made. This is a junior Enron in the works.”

One company has followed a peculiar path. Shortly after the new law, the Torontobased online gaming firm Excapsa Software, which operates the popular Ultimate Bet gaming site, sold out to a mysterious Maltese outfit called Blast Off. But if U.S. authorities thought they’d shut such operations down, they were wrong. Ultimate Bet, which still has offices near Toronto, claims new accounts have skyrocketed 60 per cent since October. “Numbers are on the increase daily,” the company said in a release, “and show no signs of slowing down.”

And neither does the crackdown. In recent months, U.S. authorities handcuffed David Carruthers, the CEO of BetOnSports and Peter Dicks, chairman of Sportingbet, when they set foot on American soil. Carruthers is still behind bars. Then, in November, the RCMP questioned employees at the Vancouver marketing offices of Absolute Poker, a company registered in Costa Rica, at the request of the U.S. Department of Justice. “A decision was made by all the principals to either resign or move to Costa Rica,” says Gian Perroni, Absolute’s former vice-president of operations. “I decided I wanted to stay where I am.” The company continues to accept bets from U.S. players, however, and has seen its business grow in the wake of the crackdown, according to Poker Site Scout, which tracks industry statistics.

Perhaps the best place to glimpse the rebound of online gambling in the U.S. is the Kahnawake reserve south of Montreal. Roughly 350 sites are hosted by Mohawk Internet Technologies, which claims to be outside the reach of North American law enforcement because it is located on Aboriginal land. In the weeks following the new U.S. law, business tapered off, but only temporarily, according to Chuck Barnett, a member of the board of supervisors for MIT. After a 20 per cent drop in traffic from U.S. computers, things were back to normal in late December. “People thought it was the doomsday bell for the industry and they reacted without assessing the situation,” he says, adding MIT is planning to set up operations in Singapore and the Isle of Man to serve European and Asian gamblers, “ft hurts those companies that were public and transparent and encourages the underground, nefarious element.”

Already there are signs the law may have to be rethought. Some 85 countries and jurisdictions currently offer a safe haven for Internet gaming, rendering the U.S. regulations virtually unenforceable. “There are billions and billions of transactions each day,” says Michael Lipton, a Toronto lawyer who specializes in gaming law. “I don’t know how in the world they’re going to make sure payments aren’t to an offshore gaming site. It creates a bureaucratic nightmare.”

Even the online industry’s biggest rivals, Las Vegas casinos, have suddenly woken up to the gobs of cash flowing online and want a piece of the action. For a decade, the American Gaming Association, which represents brick and mortar casinos, opposed online gambling. The AGA changed its tune six months ago. Now it wants Congress to set up a commission to look at ways to license, regulate and tax online gaming. “The guy who goes home to bet with a computer in Antigua is not our base customer,” says Frank Fahrenkopf, president of the AGA. “Having said that, if online gaming were legal, casinos like Harrah’s and MGM are two that would clearly engage in Internet gaming.”

Winston Churchill said, “America always does the right thing, after they try everything else first.” Churchill was talking about the Second World War, but it was also the case with Prohibition. And the same pattern seems to be playing out again with those who peddle virtual casinos. The tighter U.S. authorities squeeze the industry, the more it slips through their fingers. Just last month, PlaySafe Holdings, the Norwegian company that recently bought ActionPoker, publicly thumbed its nose at authorities in the U.S. “The Action Poker Network is once again accepting deposits from around the world,” the company said. To celebrate, it offered winners of a poker tournament a trip to the real deal— a week at the Bellagio in Vegas. M