The racketeering and fraud case against London-based Bet OnSports PLC is being watched closely by the $12 billion online gambling industry because it represents the first time that the U.S. Department of Justice is proceeding against a gambling entity that operates exclusively outside the United States.
“That has been the safety net for most operators … that as long as they stayed outside the U.S. and kept their activities outside the U.S., they were relatively safe,” said Linda Goldstein, a partner at Manatt, Phelps & Phillips LLP of Los Angeles who specializes in Internet gambling law. “This is certainly going to have a chilling effect on any operator of an offshore site.”
The case is a test of the reach of the U.S. government as it tries to clamp down on online gambling.
“It’s an extraordinarily broad exercise of jurisdiction by the Department of Justice,” Goldstein said.
On Friday, BetOnSports said it has shut down its services for gamblers in the United States.
BetOnSports spokesman Kevin Smith said the company will lay off roughly 800 workers in Costa Rica and Antigua. He said the company will remain in business although it will no longer take bets from the United States.
Smith said the company will focus on customers in Asia and South America, which together accounted for about 20 percent of BetOnSports’ total revenue before the indictment.
The company’s website, www.BetOnSports.com, has not been operational since July 19, following the arrest in Texas of its chief executive, David Carruthers, who faces 22 counts of fraud, racketeering and conspiracy. He is in jail awaiting terms of his bail.
BetOnSports’ shares were suspended on the London Stock Exchange the same day of Carruthers’ arrest. The company has pledged to refund the deposits of U.S.-based customers, which accounted for about three-quarters of the $48.3 million in deposits taken in during its first quarter.
The federal indictment seeks a $4.5 billion forfeiture from Carruthers and 10 other people associated with the operation that the government claims fraudulently took bets from U.S. residents by phone and the Internet and failed to pay excise taxes.
Under a 1961 anti-racketeering law, known as the Wire Act, it is illegal for American gambling companies to establish online-gambling sites, because the law pertains to phone-line use. But it is perfectly legal for U.S.-based customers to place wagers at any of the 2,500 gambling websites.
That situation led to a recent move by the Justice Department to prosecute offshore gambling sites that it says are skirting the Wire Act by setting up their Internet servers and credit-card operations in places such as Britain, the Caribbean and Costa Rica.
Many of these companies are mining the United States for customers, particularly those under 21, the department said.
Lawmakers in Washington were also turning up the heat. Last month, a measure passed the House 317-93 that would cut off the flow of money to Internet gambling sites from credit- card companies and banks.
The bill now goes before the Senate for consideration.
The Associated Press contributed to this report.
