‘‘Foreign firms that choose to operate in the United States are not free to flout the laws they don’t like simply because they can’t bear to be parted from their profits.” Preet Bharara, the U.S. attorney in Manhattan, did not mince his words on April 15 as he indicted PokerStars, Full Tilt Poker and Absolute Poker, three of the world’s biggest online gambling companies, on charges of operating illegal gambling businesses, concocting an “elaborate criminal fraud scheme,” involving tricking and bribing banks, and “massive money laundering.” At the same time, America’s Department of Justice seized and shut down the firms’ main websites and filed a civil suit for penalties of $3 billion.

On the face of it, this is a devastating blow to those who hoped that online gambling would soon be made fully legal in America and to the estimated 10 million Americans who have been gambling online even as their government has insisted that it is illegal. Americans have been significant contributors to the global online gaming industry’s booming revenues, now close to $30 billion a year. In response to the indictment, outraged poker players swiftly christened April 15 Black Friday. “Online poker is not a crime and should not be treated as such,” protested Alfonse D’Amato, a former senator who chairs the Poker Players Alliance, which claims over 1 million members.

A debate has gone on for years over whether online poker is in fact illegal in America. A 2006 law, hastily tacked onto the end of unrelated legislation, bans American banks from handling money related to Internet gambling. The indictment against the poker sites accuses them of going to great lengths to hide the flow of payments to them, such as by disguising them as purchases of jewelry or golf balls, implying that they must have known they were on the wrong side of the law.

Talk of federal legislation to make the industry legal again has so far gotten nowhere. In the absence of this, several states have moved toward legalizing and regulating online gambling within their territory. On April 7, the local government of Washington, D.C., said that, to boost its tax revenues, it would do so this summer. By confining access to residents (or at least going through the motions of doing so), it hoped not to fall afoul of federal legislation, which only applies to interstate commerce. This announcement may have triggered the indictment the following week, as a demonstration that the government remains committed to enforcing its interpretation of the law, and to send a message to the gambling industry that it should stop planning for life after prohibition.

On March 24, Wynn Resorts, a casino operator, had formed a partnership with PokerStars with a view to operating online sites jointly. Six days later, Fertitta Interactive, a business associated with the owners of Station Casinos, joined up with Full Tilt Poker. Both deals were predicated on online gambling becoming legal. The two offline firms support legislation now before lawmakers in Nevada, the home of Las Vegas, that called for the state’s gaming commission to draft regulations for online gambling, to take effect on approval from Congress or the Department of Justice. Both firms scrapped their deals within hours of their partners’ indictment.

Although it would appear that the chips are down for Internet gambling, the prosecutors’ crackdown may in fact turn out to be the last before Congress reverses itself and scraps prohibition. There are prominent supporters of legalization in both parties pressing for such a change. An attempt to pass new legislation late last year looked promising at first, but folded when Harry Reid, a senator for Nevada, misplayed a good hand. With lobbying from 10 million disconnected gamblers and the big casino companies (which have belatedly realized how much money there is to be made online) plus the enticing prospect of much-needed tax revenue, Congress has plenty of reasons to get its act together, despite the inevitable moral objections of a minority of members.

Legalization, if it happens, may not come soon enough for the three indicted websites, which are under pressure from customers demanding refunds of their fees. But things are looking far better for those sites that had refused to accept American clients. On April 19, as fears grew of a liquidity crisis at PokerStars, the privately owned market leader, the price of shares in Bwin.party Digital Entertainment (formed in March by merging Bwin, a sports betting firm, and PartyGaming, a gambling website) jumped by nearly 30 percent, restoring some of the value lost last month when Germany proposed steep taxes on online gambling.

PartyGaming had pulled out of America after the passage of the 2006 law. It has been paying off a penalty of $105 million under a non-prosecution settlement with the American authorities, for offences it admits to committing before it withdrew.

Because it has kept its nose clean of late, will its successor be one of the main beneficiaries if prohibition is ended in the near future? Investors seem to think it worth a bet. But betting on the fortunes of online gaming companies seems every bit as risky as playing their virtual tables.
From the Economist magazine.