Regulation and the Gambling Industry: Post 9/11

Do you remember where you were and what you were doing on the day of 9/11? I was in Langhans Brasserie, Piccadilly, London, having a good lunch with the editor of a newspaper. Just as a trio of lamb chops were being served, he received a text message to say a plane had flown into New York’s World Trade Centre.

Then came the second text, a second plane had hit the other tower. He stood up and said, “I think the world, as we know it, is about to change.” I had no idea what he meant. But as the day unfolded, another plane hit the Pentagon and flight United 933 was forced to crash after the passengers tried to take it over from the hijackers.

That evening the true horror of events unfolded on the television networks. Victims jumped from the twin towers, thousands were cut off and could not be rescued and everyone felt helpless and numb. Even today, seeing photographs or video footage, we feel the same.

Reaction to 9/11

The feelings of the public post 9/11 include anger, sorrow, pain, grief and revenge. Why would an intelligent person do such a thing? Governments responded with speed and quickly enhanced security at airports and to be fair they have done well to protect us since 9/11. The overriding question, though, is have they gone too far in enhancing their own institution as a result of the fear that exists?

I do not subscribe to all the conspiracy theories that surround 9/11. I just don’t believe elected people could be so evil. But I do believe they may be sufficiently opportunist to take full advantage of the prevailing fear that what happened on 9/11 could happen again and it could happen to you.

I have this suspicion that everything the government wanted to do but had left locked in a bottom drawer was now taken out as an opportunity to implement. The money laundering regulations are a case in example, they go way beyond the scope of stopping terrorism and are directed more towards stopping tax evasion and have caused industry and commerce huge compliance costs for no return. Ironic, when a two-page article in the Wall Street Journal cites the Al Rajhi Bank in Saudi Arabia as a main source of money laundering for Al Queda.

Compliance and the Gambling Industry

As far as the gambling industry is concerned, government has heaped regulation upon it like no tomorrow. The UK government has convinced itself that widespread money laundering is taking place.

Nothing could be further from the truth. No one has been arrested, I know of no one who has been accused. However, those that are supposed to know better have foisted upon the industry a Gambling Commission that will cost £14m in direct costs and at least double that amount in compliance costs.

As far as the consumer is concerned, there will be no benefit. The payout to customers from the UK’s gambling industry is higher than any other in the world, so no improvement will be found there.

Will the industry be cleaned up? I believe not-it is already best of class and industry managers are sought after throughout the world because of their high standards of knowledge and probity.

Cross-border Culture Clashes

The US has waged a continual battle against the online gambling industry in the last two years. Using the old Wire Act legislation they managed to arrest David Carruthers from the company Betonsports on 16 July 2006 for providing illegal gambling services to US residents. This was despite the fact that Carruthers is Scottish and lives in Kenilworth, England, where gambling is legal.

Next up was Peter Dicks, a non-executive chairman for Sportingbet, who was detained on 6 September 2006 in New York City and eventually released because of an extradition-related snag, followed by Bwin’s co-CEOS, Norbert Teufelberger and Manfred Bodner, who spent the weekend of 15-18 September in a French jail and got out on bail. The three events spooked investors and caused I-gaming executives to reconsider their travel plans to jurisdictions that don’t welcome their companies’ activities.

It isn’t only the US that is targeting online gambling. On the instructions of the French Government, the authorities in the Netherlands arrested Peter Nylander the CEO of Swedish listed betting company Unibet. Nylander was transported to France for questioning even though the European Commission and Swedish politicians opposed this, arguing that Unibet’s operations were legal under EU law.

Christofer Fjellner, a Swedish member of the European parliament, said: “A worrying fact is that the European arrest warrant, an instrument put in place to combat terrorism and organised crime, is now used by the French government to punish those who fight French protectionism.”

Fjellner continued: “What will be the next sector to be threatened with French arrests? The French are turning the European arrest warrant into a political tool.”

The penalties under the Wire Act are not severe so the US authorities, wanting to toughen the penalties on gambling companies, introduced the Unlawful Internet Gambling Enforcement Act (UIGEA) that… wait for it, they tacked onto the Safe Ports Act. Legislation designed to keep the US safe from terrorism.

UIGEA, when enforced, stopped financial companies from sending money to websites where gambling was legal. Note that the US did not seek to arrest its own citizens, probably because they would have to lock up a majority of its population! The US is the world’s biggest gambling nation. Instead, they went after the foreign websites like Sportingbet and Party Gaming who, in turn, saw an 80% drop in their share price.

One company caught retrospectively by UIGEA was Neteller, the payment processor used by many US citizens to transfer money to foreign websites. Neteller executives Stephen Lawrence and John Lefebvre were arrested in the US, in spite of the fact their company is based in the Isle of Man. Faced with the choice of a long prison term or pleading guilty they chose the latter and pleaded guilty to charges of criminal conspiracy to promote illegal gambling by providing online gambling payment services to US residents.

Meanwhile, Neteller, which was under investigation, but not charged, settled with the Department of Justice in July and agreed to pay the US government US$136m. It has been forecast that, if the executives of Party Gaming and Sportingbet wish to reach a settlement, the figure could run into billions of dollars.

Many observers conclude that the US’s real motive is money and protectionism, a motive that will no doubt change when the timing is right for their own Las Vegas based companies to move in on this lucrative industry. Currently, Senator Barney Frank is trying to put a Bill through that would partially legalise online gambling.

In the meantime, the UK’s Gambling Commission continues over-regulating an industry to the extent that no one wants to come to the UK to set up a gambling website. Of the 2,800 websites throughout the world only 14 have applied for licences in the UK. The opportunity to create an industry that could add lasting value to the UK larger than the Lloyds insurance market, with gross gaming revenue in excess on US$16bn, has been missed.