I-Gaming: Illegal And Thriving

This story originally aired on Nov. 20, 2005.

The point of making something illegal is to stop people from doing it, and penalize them if they do.

Then there's Internet gambling. The federal government is clear: gambling on the Internet is against the law. And yet millions of Americans do it on hundreds of Web sites, to the tune of billions of dollars.

While Internet gaming is illegal in the United States, correspondent Lesley Stahl reports it is absolutely thriving.

Or take a seat at Partypoker.com.

"There'll be more online poker games per day at the end of this year than all of the casinos in the entire world put together. It's a huge business," says Nigel Payne, who runs Sportingbet, one of the world's biggest online gambling companies.

For Payne, one big reason online gaming is such a lucrative business is that because he doesn't face the costs traditional casinos do. "I don't need a hotel. I don't need any croupiers. I don't need any cocktail waitresses. I don't have to comp any drinks. I don't have to comp any hotel rooms."

Just type in a credit card or bank account number and you'll be betting within minutes.

Internet gaming companies will make $10 billion in profit this year. They're all based overseas, but as much as 80 percent of their traffic – and profit - comes from the U.S.

"I believe there's about 12 and a half million Americans today use internet gambling in its widest form. That's a hell of a lot of consumer power," says Payne.

It's so much power that America's gaming industry, which has long opposed Internet gambling, is shifting its position.

"I think the issue is very simple: that you should license it, regulate it and tax it," says Terri Lanni, the CEO of MGM/Mirage.

He says if his company could offer Internet gambling, it could instantly double its $8 billion a year revenue. "If we could add our brand, and the credibility of the publicly-traded United States gaming company, this could be a vast business," Lanni says.

But MGM/Mirage is shut out, because the government says a law banning sports betting over the phone also bans all gambling on the Internet.

Obviously, it hasn't stopped U.S. citizens from doing it, but it has stopped U.S. companies from offering it.

"The vast majority of wagers that are placed on the Internet now are done offshore and illegally. And I for one think that to enact laws that you can't enforce makes no sense whatsoever," says Lanni.

Lanni and MGM/Mirage set up their own offshore gambling Web site a few years ago, but to stay within the law, they only accepted bets from gamblers outside the U.S.

Lanni says the site didn't make any money and was eventually shut down. He calls the U.S. government's current position on online gaming odd: "There's no doubt about it. There's gaming in every state but two states in the United States. If it's legal there, and it's regulated and taxed and we're comfortable with it there, why don't we allow it also in the area of Internet where people – so much commerce is going through the Internet right now? It makes no sense."

Even so, no one in Congress is pushing for legalization. In fact, Senator Jon Kyl, Republican of Arizona, is going the other way; he has a bill designed to really crack down on what he calls a "social pathology."

"It's so easy to do. It's so easy for kids to do. It's so addictive. And it has frequently been demonstrated that there's a lot of graft and corruption in this," says Sen. Kyl.

Kyl's bill aims to choke off the money by prohibiting U.S. banks and credit card companies from handling any online gambling transactions.

The senator admits that his bill may not completely stop online gaming. "We may not be able to stop it all, but if we can stop the major part of it that's coming from offshore, I think we will have done something very, very good," he says.

At a big convention of the international gambling industry in Las Vegas, there was an entire pavilion dedicated to Internet gaming. Many of the top executives attended, despite the fact that their business is illegal in the U.S.

So why doesn't the FBI or justice department make arrests at the convention?

"The Justice Department says 'We have lots of other priorities,' and they're right," says Steve Lipscomb, the founder and CEO of the "World Poker Tour" TV show, which helped fuel the craze for Internet gambling.

Those offshore companies are so brazen, they advertise. There are banners pulled by airplanes, ads in magazines, and commercials all over cable TV.
How can a cable network air an ad for an illegal activity? It's all in the fine print.

One ad was not for paradisepoker.com, where you can gamble, but for paradisepoker.net, which they call an "educational" site.

"You can play for free on those sites and learn about how to play poker," says Lipscomb.

The .net site can advertise because there is no money involved, so it is not considered gambling. But with their identical logos and brand names, the obvious goal is to draw people from the free.net site over to the real gambling.com site.

"They are certainly spending a lot of money to educate people about the game of poker," says Lipscomb.

Many of those being educated are kids. And many of those kids then try to play for real.

Sen. Jon Kyl says that's the biggest danger in online gambling. "Our kids have access to the Internet. They're frequently not supervised. And you can run up a huge debt on your folks' credit card very, very quickly."

To test that theory, 60 Minutes gave Alex Hartman, the 16-year-old son of this story's producer, his dad's MasterCard.

According to Nigel Payne, whose company owns paradisepoker.com, Alex isn't likely to be able to gain access to or place bets on any of his sites, despite having his dad's credit card. "That 16-year-old has got to give me four or five pieces of information about him relative to his bank account, his personal details, where he lives and other things. So I can be 99 percent comfortable that this 16-year-old doesn't even get through my front door."

And it appears that he's right. As Alex attempted to register with Paradise Poker, something made the computer suspicious about him. Warnings kept popping up – "You must be 18 or older" – and then he was rejected.

But then Alex did what most kids would: he tried another site, and another. On the third try, without any questions about his age, he was approved. In five minutes, Alex was playing roulette.

Just ten minutes later, he was $100 in the hole.

Payne agrees that the pool of potential underage gamblers is bigger than for traditional casinos. "Without doubt. Which is why we have to be 20 times better. But it's also why we HAVE to be regulated."

Payne argues that if the U.S. legalized Internet gaming, all of the problems associated with gambling could be controlled better.

Addiction to gambling, says Payne, is a huge problem both online and at traditional casinos. And he says online gambling may be better equipped to deal with the issue, since players can be tracked electronically.

"Imagine you're an addicted gambler, ok? You try to reload your account too quickly because you're playing too quickly. Stop. I've got a closed loop of data. I can actually track what you're doing," says Payne.

Sen. Kyl is skeptical. "So some outfit in Aruba decides that somebody is gambling too much on their Web site. What are they going to do? Knock on somebody's door and say, 'You know, we think you're gambling a little too much on our line here, you probably ought to knock it off.' That's not going to happen."

The senator doesn't think legalizing or regulating the industry will make a difference. "Most of this is done in foreign countries. So even if we try to create some kind of standards, it's not to say that it's going to be enforced by a foreign government."

In other words, says Kyl, anybody can put up a site.

But Payne says that ina regulated environment, disreputable companies or gambling websites won't last long, as "consumers vote with their feet."

"Trust is an immense factor. If you say to an American consumer, 'This site is trusted and licensed and this one isn't,' I promise you within 12 months the problems you're referring to will have disappeared or significantly reduced, because customers will have voted with their feet."

Sixty-four countries already license online casinos, and they're not just a bunch of banana republics.

"The United Kingdom has passed laws to enact Internet gambling. The United Kingdom expressly allows United Kingdom operators to take bets from American citizens," says Payne.

The British have legalized online gambling, even though they know our government considers it illegal. Britain has become the new center of online gaming and several companies, including Payne's, are traded on the London Stock Exchange and pay British taxes.

"We've calculated that were America to have regulated the industry in 2004, the American states would have earned $1.2 billion in tax," says Payne.

He says if the U.S. regulated the industry, he would pay the taxes owed in America by his British company. "And we have volunteered to pay it because this is an industry that has to be regulated."

MGM/Mirage's Lanni believes online gaming will be regulated, and legalized.

When? Lanni says he is not sure. "I think it's when an enlightened president with an enlightened attorney general says, 'It's legal in all these states, we tax it, we regulate it. Let's do it, and let's do it for the Internet.'"

Payne doesn't think people will ever stop gambling.

"Do you think the Internet's suddenly going to go away? So what are we going to do in ten years time, when this industry is ten times bigger than it is today?" ask Payne. "I often say to people, 'Please give me one solid plausible argument why you shouldn't regulate it.'"

And Payne rejects the argument that it is bad for you. "If you regulate it, you control it. If you regulate it, you set limits. Is that bad, when the comparator is 'Ah, just let them do what they want.' Is that really bad? I don't think it is."
By Rome Hartman