Rule book changes for betting firms

By Ben Richardson
Business reporter, BBC News

US regulators have decided to play a strong hand enforcing the rules

Gambling can be a risky business, especially when you decide to take on the US government.

Executives were given a sharp reminder of the dangers they face when the boss of online gaming firm Betonsports was detained in the US on charges of racketeering.

Even though internet gambling firms have been aware of US laws prohibiting taking bets over the phone, a lack of enforcement seemed to have given them the go ahead to operate, analysts said.

That "laissez faire" attitude has now ended and the prospect of stiffer regulation in the US is likely to prompt a rethink of how the online gaming industry - valued at some $12bn (£6.6bn) a year - will now be run.

Already the shares of market leaders such as Partygaming and 888 have tumbled, and traders are predicting more volatility.

'Cross-border crime'

One of the biggest worries is what the recent indictment - which charges 11 individuals and four businesses - will mean for the men and women at the helm of online gambling firms.

Previously, it was thought that all a executive had to do to avoid prosecution was not go to the US.

However, following the controversial extradition of three UK bankers to face charges in the US last week, many people are now worried by the extra length in the long arm of the US law.

Analysts said that while the indictment against Betonsports is company specific, there are real concerns that further US probes and investigations may follow should firms continue to offer their services to North American clients.

THE BETONSPORT INDICTMENT US indictment of David Carruthers and Betonsports [2.4MB] Most computers will open this document automatically, but you may need Adobe Reader Download the reader here Q&A: Gambling in the Spotlight

US attorney Catherine Hanaway of the Eastern District of Missouri seemed to back up these fears when she spoke of going after the worst offenders first.

She also laid out the US view that "illegal commercial gambling across state and international borders is a crime".

Rules needed

As well as the legal threat, the financial implications of a clampdown also could be dire as many of the industry's largest companies rely on the US for as much as three-quarters of their annual earnings, analysts said.

What has made this situation frustrating and confusing, one industry insider explained, is that many companies have been openly calling for greater regulation in order to allow safe, responsible and profitable gambling.

They argue that people are going to gamble on the internet no matter what restrictions are in place and the US administration should look to legislate in a realistic, rather than politically-expedient, manner.

The best way forward, they say, would be to put in place clear and applicable rules that everyone can abide by and clarify the "grey" areas that exist over whether or not games of skill such as poker are illegal or not.

Despite the confusion and worry, naysayers should not get too excited about the problems facing the online gambling industry because recent wobbles will probably do little to slow down the industry's rapid growth, analysts said.

A lack of clarity in US legislation has led to firms operating in riskier ways

True, there are likely to be some sleepless nights as investors count their losses and executives worry that they will be next on the arrest list

But in the end, there is still a lot of money to be made and shares in online gambling firms were cheap even before this week's tumbles, analysts said.

Investor needs

One industry insider explained that even though it was illegal to take money from clients in Japan, Hong Kong, China and Poland, companies were still doing it and would continue to do so.

He added that as long as there was a demand for gambling services, companies would find a way to service the clients, betting that in the end the weight of public demand would force legislation to be changed.

And instead of backing firms that decide to stay out of riskier "grey" markets like the US, shareholders often put pressure on executives to match the growth rates of rivals for fear of doing the right thing and being left behind, he said.

Caught between the high expectations of investors and a increasing vigilance of regulators, gambling firm executives may find the odds stacking up against them.