Offshore Gambling on Web Targeted

ST. JOHN'S, Antigua — The unadorned office in the heart of this sleepy West Indies capital appears an unlikely beachhead in a budding “cyber war” between the U.S. government and tiny Caribbean states struggling to defend their sovereignty and economies.

When Jay Cohen opened his World Sports Exchange 18 months ago, the 29-year-old Long Island-born stockbroker didn’t even put up a sign.

But in the past year, Cohen became the most visible proponent of a new enterprise that he said was at a cutting edge of cyberspace--and, he thought, beyond the reach of U.S. law.

Cohen was among the first of dozens of U.S. gaming entrepreneurs to set up shop in the Caribbean and Central America, where they offer an innovative service for gamblers the world over to bet on their favorite sports teams, players or even Academy Award nominees via the Internet from their own homes--even from places where gambling is illegal.

Now Cohen--and, with him, Antigua--is at the vanguard of a U.S. Justice Department effort to shut down the multimillion-dollar trade. This month, Cohen was in Manhattan’s U.S. District Courthouse pleading not guilty to the first federal indictment against Internet gambling in U.S. history.

The federal charges handed down in New York on March 4 accuse six such operations and their U.S. owners in Costa Rica, the Dominican Republic, Curacao and Antigua of violating a federal law written decades before anyone even envisioned an Internet.

The case goes far beyond Cohen and the 13 other U.S. citizens now charged with breaking a 30-year-old law against using the telephone to gamble across state lines. U.S. Atty. Gen. Janet Reno casts it as a critical test case to prove that “the Internet is not an electronic sanctuary for illegal betting.”

“To Internet betting operators everywhere,” Reno said, “we have a simple message: You can’t hide online, and you can’t hide offshore.”

A different message reached Antigua and the dozen or so other cash-strapped Caribbean nations that have made millions of dollars legalizing, licensing and trying to regulate a cyber-industry that they have made no attempt to hide--an industry that analysts say brings its operators worldwide in excess of $200 million a year in revenue, mainly from U.S. gamblers.

At best, officials in the Caribbean saw the indictments as a hypocritical assault on their sovereign right to compete in a multibillion-dollar gaming industry that is legal in many places and forms in the United States. They assert that the U.S. government’s motive in the crackdown is to prevent the millions of dollars in wagers--and potential tax revenue on winnings--from leaving U.S. shores.

At worst, those Caribbean officials said they viewed it as part of a U.S. conspiracy against small island states, which they say were singled out in an Internet gambling industry that includes several large operations in Britain and Austria and soon in Australia, where Parliament is expected to legalize the trade in the next few weeks.

Federal prosecutors and law enforcement officials deny the charge. They stressed in announcing the indictments--which do not target gamblers who use the services--that the Internet gaming operators in the Caribbean and Central America, unlike their European counterparts, use the U.S. telephone system, advertise extensively in the United States and, in some cases, even have offices in America.

“Federal law clearly prohibits anyone engaged in the business of betting or wagering from using interstate and international wire communications, including the Internet and telephones,” said Mary Jo White, the U.S. attorney for New York’s Southern District.

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Legal analysts and Internet gaming advocates say the law is far from clear. In fact, legislation specifically addressing wagering on the Internet is pending in both the U.S. House and Senate, and critics here and in the U.S. chided federal prosecutors for moving against the industry before Congress votes on those new laws.

The proposed bills were introduced after U.S. law enforcement authorities concluded that the new technology had advanced beyond legal means to police it. They said operators could use it to defraud bettors and that organized crime easily could infiltrate it and then use the industry to launder vast sums of illegal profits from drug trafficking and other criminal enterprises.

But Antiguan officials see the charges as a direct challenge to their offshore industry as a whole. Most Caribbean states have sanctioned offshore companies that include everything from Internet casinos to banks and personal retirement accounts.

The booming offshore trade attracts businesspeople from throughout the world who are seeking to shelter income from taxes or liability in their home countries, and they bring in essential revenue to nations with few resources beyond tourism and efficient telephone lines.

“We’re not in this for the money,” said Gyneth McAllister, the Antiguan government official who oversees the nearly three dozen licensed sports betting and Internet casino operations that have mushroomed here in the past year. “We are trying to prove a point.”

A vigorous defender of Cohen and the other operators, McAllister added: “The United States is taking people operating from the Third World to court. Why? Because it can. Nobody cares. We don’t matter to them. And I find that insulting. . . . We’re not standing up for the operators. We’re standing up for our sovereignty.”

Cohen’s New York attorney, Benjamin Brafman, said he views the indictments against operations based outside the United States as an overreach of U.S. authority through “a statute that never even contemplated the technology that is being used in this activity.”

“There does have to be some regulation, but the way you do that is through some kind of compact, an international agreement or perhaps new legislation. . . . It is simply inappropriate for our government to prosecute people in the United States for activities that are perfectly legal in the place where they’re practicing these activities.”

At issue in the case, analysts say, is the technology itself.

The offshore gambling and Internet gaming boom mainly falls into two categories.

Some are sports-betting operations that use the Internet or toll-free telephone numbers to take wagers from throughout the United States and the world.

Others are “virtual casinos,” interactive Web sites that re-create the inside of a Las Vegas-style casino, offering everything from blackjack to slot machines. They are run by computers small enough to fit into the corner of a room in a small office or villa on islands like Antigua.

Gamblers create anonymous offshore accounts by wiring funds or using their credit cards. Losses are deducted and winnings are deposited--provided the operators pay.

Already, Caribbean governments have shut down several Internet gaming operations that defrauded customers by failing to pay out winnings. Others were closed for operating without licenses. And still others are being probed for links to organized crime.

For the most part, it is the Internet gaming industry itself and governments such as Antigua’s that have been the staunchest advocates for tighter controls.

“We want regulation,” said Albert Angel, a businessman based in Pompano Beach, Fla., who is the vice chairman and founder of the Interactive Gaming Council. “We view Internet gambling as something that’s inevitable. The law needs to address it.”

Battling an image as one of the Caribbean’s more corrupt and unpoliced nations, Antigua has spent hundreds of thousands of dollars in recent months on outside consultants that included several former high-ranking U.S. law enforcement officials to draft some of the world’s toughest laws and regulations for its offshore and Internet gambling industry.

“The U.S. administration and the U.S. press over the past several years took it upon themselves to create an image for Antigua that was negative, that we are the wild, wild West,” McAllister said. “We’re trying to obliterate that image. We’re trying to show we’re tough, that we show no mercy to criminals and that we are the cleanest offshore operation in the region.”

McAllister said she met with top Justice and State Department officials in Washington last year for guidance on how Antigua’s Internet gaming industry could comply with U.S. law and tighten up its regulatory authority.

Antigua uses the FBI, Interpol and Scotland Yard to run background checks on all offshore applicants. And the government used some of the proceeds from the 30 operations that each pay annual license fees of $75,000 for sports betting and $100,000 for virtual casinos to open an anti-fraud division that fields and investigates complaints from online gamblers.

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McAllister and other officials said they were even more incensed that the indictment targeted Cohen’s operation.

“We have had some very shady sports-bet operations in the past, but Cohen’s isn’t one of them, and now he’s taking the fall,” said Gary Collins, a legal consultant to the Antiguan government’s International Business Corp., which oversees the offshore industry. “It’s so ironic, it hurts.”

But in the aftermath of the indictments, McAllister added yet another irony, one that could bring a bounty to Antigua and defeat the purpose of the indictments themselves.

After learning of her government’s staunch defense of Cohen and of the new set of tough regulations Antigua’s parliament is expected to approve in the coming months, Internet gaming operators throughout the region have flooded her office with calls and applications, she said.

“They all want to move to Antigua now,” McAllister said.