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Internet Gambling

Why is Washington out to stop it?
Bruce Schoenfeld
From the Print Edition:
Gene Hackman, Sep/Oct 00

(continued from page 1)

Nearly half the virtual casinos on the Web operate with an Antiguan license, which means there are plenty that don't. As of late 1999, according to several published sources, there were 40 gaming sites--including sports books, blackjack sites, electronic roulette and beyond--based in Costa Rica; 28 in Dominica; 10 in St. Kitts; 10 in Curaçao; and eight in the Dominican Republic. Australia and some small islands off the English coastline added several more. Many of these countries require no licensing application at all. Just pay a fee, and get approved.

Yet merely because an Internet casino claims to be sanctioned by Antigua doesn't mean that gamblers are necessarily safe, though winners who don't get paid or have other complaints can appeal to the Antiguan government. It promises to investigate and, if necessary, prosecute the violator. A toll-free number is provided for inquiries: 1-888-734-1919. "We pay for you to call up and tell us if our licensees are doing wrong," said Gyneth A. McAllister, who recently resigned the title of Antigua's Director of Offshore Gaming.

Sometimes, though, the money simply isn't there anymore, or the operators have fled to points unknown, although the $75,000 fee makes that less likely. Sometimes the Web site might have claimed to be licensed in Antigua, but in fact had nothing to do with the country. "People lie all the time and say that they're in Antigua," McAllister admitted. "There's nothing to stop you from doing that. All we can do is try to regulate the ones that are here." HBO's "Real Sports" traced one virtual casino that purported to be Caribbean-based to a row house in Philadelphia.

The most reputable sites provide verifiable local addresses in their country of origin and, most importantly, they stay active for years. "If we ever once stiffed a winner, you'd hear about it in chat rooms all over the Internet," says Schillinger. As with any product or service on the Web, a user's best protection is to inquire.

The Antigua sanction does carry some meaning, though perhaps not quite as much as the country might like to believe. "We have raised the standard higher than anywhere else," said McAllister. "We do background checks. We talk to the FBI, Interpol, Scotland Yard. We have one sports book on the island that was audited by PricewaterhouseCoopers. They want regulation. All those that don't meet our standards go to Costa Rica and other places, where you only have to write a check to set up an office. We're separating out the sheep from the goats."

McAllister made a name for herself and Antigua as the spokesperson for responsible Internet gaming. She appeared on numerous U.S. television shows in her immaculate suits and skirts, spreading the message of her island nation as a tiny David against the economic imperialism of the American Goliath. (Never mind that she was born in Hampstead, a posh London neighborhood, and educated in Switzerland.)

"We have understood something that is an alien concept to the U.S. government," she said in her educated London accent. "The Internet cannot be recaptured by the U.S. or any other government on this Earth. The U.S. is a power that has sought to alter, intervene and control every man-made event on this planet for the last 200 years, but this cannot be controlled and it drives the U.S. crazy."

Like any unregulated environment, the Internet runs on reputation. "If you see that there's a gaming seal from the Antiguan government, chances are pretty good that the site is OK," says Jerry Stein of mysportsbook.com. "But remember that I can put anything on my site that I want to. So do your due diligence. Go to the trusted sites. Look around. Make sure the site you're going to use is advertising in a lot of places. Don't put all your bankroll into one casino on the first try. Make sure you talk to a live person, not just communicate through e-mail. And then bet a little and see what happens. If you get paid, chances are 99 percent you'll keep getting paid."

In the past year and a half, Stein says, he hasn't heard of a single bettor getting stiffed by an Internet gambling provider. "There's no reason for any of these companies to screw players," he says. "It's no different than Vegas or Atlantic City. Gambling is a form of entertainment. If you go to the movies and you're uncomfortable in your seat, you're not going back, whether you've paid $3 or $7. And I think you'll find that, in the long run, we'll treat you better than Vegas does."

Not every Internet proprietor is as easy to track down as Stein. If you called Costa Rica-based Bali Sports Book, before they went out of business, looking for information, for example, you were told to e-mail a certain Laura. Unsurprisingly, Laura never responded. MayanSports, out of Dominica, responded to an inquiry with an information stonewall. "There's nobody here who can talk about our site," one employee said, moments before hanging up. A site called InterBet offered a telephone number in the United Kingdom that rang unanswered for minutes. That number no longer exists. Some sites, like Antigua's World Wide Tele-Sports, offer no telephone information at all.

It's always wise to remember that much about the Internet isn't necessarily what it seems, and to take your risks accordingly. Many bettors are startled to learn that a single company, Antigua-based Starnet, runs or licenses software to as many as 300 different gambling sites, many of which purport to compete with each other. "If you look at actual sites out there, our licensees probably account for about 25 to 30 percent of them," says Jason King, the CEO of Inphinity Interactive, Starnet's development arm.

King doesn't argue that the huge number of gambling sites on the World Wide Web creates confusion for customers. Such confusion can only help the illegitimate operators, which hide in the fog of new and unfamiliar names.

"We're big proponents of regulation, as I think most of the legitimate people in the industry are," King says. "We want to weed out those people who aren't paying consumers or are running random-number generators that are less than random, and that will increase consumer confidence. Consolidation in the industry will lead to more recognized brands, and that will help raise consumer confidence even more. That's the goal, and we hope to be in the forefront. There are a lot of people who will only shop at Amazon because they recognize the name. There's not really anyone in Internet gambling in that situation yet, and Starnet can be that name."

Some virtual sports books and casino sites may seem to have Antiguan licenses, but they're actually fronts or dummy corporations. Their real owners may not want their identities known because they've run into trouble on the Internet, or perhaps beyond. "There's no way to definitively tell who you're dealing with," admits Stein. And the truth is, Stein isn't actually named Jerry Stein. He uses that pseudonym because he isn't Antigua-based, though his company is, and he doesn't want the Antiguan government or any other to know exactly where he happens to be located.

But despite such evasive maneuvers, Stein makes a persuasive case that he has taken safeguards to ensure consumer safety. Mysportsbook.com handles credit card betting, but only through a third party, EFSC (Electronic Financial Systems Caribbean), which issues virtual money for use on his and other sites. "They use cryptic code, and we have no access to your information," Stein says. "The idea of an 18-year-old kid taking mama's credit card and running it up is almost impossible, and that's obviously what we want. I don't want somebody's house payment. I want entertainment dollars."

In addition, he doesn't let anyone lose more than $4,000 a month on his site without submitting financial information that verifies he or she can afford to. "I don't let people get stuck who can't afford to get stuck," he says. "It's not good for me and it's not good for the industry."

Like the proprietors of other Internet sites that appear to be reputable, Stein talks a lot about what is and isn't good for his industry. As a businessman, it's his only hope for legitimacy. In that sense, the Kyl bill worries him. "He's going to bring the criminal element into the industry," Stein says. "Right now, it isn't there. Ninety-nine out of 100 are trustworthy sites. But once he starts making these people like Jay Cohen run, and making them criminals, what stops them from becoming complete criminals? What stops them from just screwing the customer?"

Stein claims to know an Internet sports book--not the biggest or the smallest, but one of about average size--making a $5 million monthly profit. Based on the industry standard of 3 to 5 percent profit, that translates into an $80 million monthly handle, which is almost $1 billion a year. "And that's just one site," he says. "And they're just doing sports. I don't know what you multiply that by to get a total number, but the amount of money involved is unbelievable. Billions and billions of dollars."

While waiting out their exile, Ware and Schillinger have become millionaires several times over. Though World Sports Exchange is privately held and isn't required to submit its books to an auditor by U.S. or Antiguan law, Schillinger, who says he made a steady $250,000 a year trading stocks, expects each of the partners will make at least four times that this year. His estimates may be stunningly low.

You might want to believe that World Sports Exchange is two guys in beach chairs, making odds with their toes curled into the sand. In reality, though, the office is set in a strip mall outside Antigua's capital. Except for the palm trees in the parking lot, it could be anywhere. To enter, you walk past a video shop and a pharmacy, up a flight of stairs, then through an unmarked door.

Along one wall is a bank of half a dozen computer terminals, manned by locals. They take phone bets and monitor online action. The system is rigged so that a tone sounds each time a bet is placed online, and the tone chatters away at the rate of about one every two seconds. Since the average bet is about $100 and the average take at the end of a week is 5 percent, each tone means about $5 profit. It is the sound of money.

Schillinger and Ware spend about eight hours a day watching sporting events, working the computers, and supervising a staff of 12. Weekend days are somewhat longer, but not too onerous. "When we first got down here, we were working 14-hour days setting the whole thing up," Ware says. "It isn't like that now. This isn't rocket science, what we're doing. We need to be around, make sure nothing goes wrong, but it's nothing that hard."

It's not deep thinking for the consumer, either, which is why it's so enticing. In a sense, sports gambling via computer isn't too different than playing the stock market using E*Trade, Ameritrade or any of the other securities Web sites. A major difference is that E*Trade and Ameritrade are legal and advertise on television.

That's odd, in a sense, because sports betting actually has more transparency than securities trading. How many of those online traders buying 100 shares of this stock and selling off 500 shares of that really understand the fundamentals of the businesses they invest in? And balance sheets are notoriously ambiguous. A football or basketball game, on the other hand, is played in public. There's nowhere to hide.

Kyl is right that point-and-click betting is easy. So easy that it would be tempting to bet online from your hotel room even if you were staying at Caesar's Palace, an elevator ride above the most complete sports book in the world. It should come as no surprise, then, that the consumer base for online sports gambling is growing exponentially every year. "The Caribbean this year will book more sports bets than all the sports books on the Strip," Ware says. "And in another year, this island alone will take that."

All of it will happen silently, seamlessly, unobtrusively. "You're not bringing in flashing lights," Ware says. "You don't have some ugly riverboat going up and down the Charles. You have a box and an office and customers in the privacy of their own homes. Which is better?"

Today is the first day of the NCAA's Men's Basketball Tournament, so Schillinger and Ware are in early. Tip-off is half an hour away, but Schillinger can't find an unscrambled signal on the satellite dish. Normally this wouldn't be a problem because a cable hookup serves as a backup system, but today the cable is down. Every few minutes, Schillinger calls the cable company. Each time, he's told not to worry, that the repair order will be filled immediately.

The last time the television went down, Schillinger had to call his 11-year-old and ask him to describe a golf tournament to him off the television at home. Schillinger was offering stock-exchange odds on the various golfers and they'd shift with each shot. If he couldn't see the placement of the ball, he couldn't estimate the golfer's chance of gaining or losing a stroke. (For that reason, World Sports Exchange only offers such interactive betting on televised events.) "I was asking him, 'How's the putt? How far away is Tiger?'" Schillinger says with a laugh. "'Could I make that putt?'"

Schillinger couldn't do that now, at least with a local call. His wife and kids no longer live on Antigua. Last year, they returned to California, and a normal American life. For a while, his wife was traveling down once a month, but she has stopped doing that. With Schillinger in exile indefinitely, they have made plans to divorce.

Schillinger calls his children every day from Antigua. "I'm doing all of this for them, not for me," he says. "I'm not trying to make $20 million to put in my pocket or have a good time. I'm trying to make $10 million for my son and $10 million for my daughter. What I object is to Jon Kyl portraying me like I'm some kind of dangerous criminal. All I am is a businessman, like anybody else."

It turns out the cable had been turned off because the satellite temporarily went down. That and other crises are resolved by the end of the day, to the musical accompaniment of bets rolling in. Schillinger works an uneventful two-hour shift in a beachcomber shirt and bare feet, monitoring the golf tournament, shifting odds on a player several times a minute, slugging down Cokes. If these are high crimes he's committing, they're taking place in rather mundane fashion.

That hardly mollifies Kyl, who wants a message relayed to Schillinger and Ware. "What I say to these guys is, 'You come back to the United States, help us shut down all of these sites, and put your entrepreneurial skills to use in a law-abiding and productive way, and we'll say a good thing about you at the time of the sentencing,'" he says. It is hardly enough to disband this multimillion-dollar business.

No matter what Kyl might offer, Internet gaming isn't going away. "The majority of people in the game now aren't American, and they don't care about the U.S. market," said McAllister. "All the Kyl bill could possibly do is punish Americans for being American. That's what makes it so silly."

The amount of money bet on Internet gambling sites, both sports and casino games, continues to increase exponentially. As with any rapidly growing industry, virtual bookmaking attracts all types. The reputable operators fear the scam artists because only a crisis of confidence among consumers seems likely to stop the flow of money. That's why they crave regulation--and it might be precisely the reason that U.S. legislators don't want to give it to them. In a sense, the shysters and con artists who run gaming sites are Kyl's best friends. Every shafted consumer is a congressional witness waiting to happen.

That's a shame, says King. "I think there are very few operators who would want to have anything to do with problem gamblers," he says. "No one wants minors on the system. I think most people are playing by the rules because it helps their business. And once we get regulation and taxation, it will only get better. As soon as the U.S. government figures out a way to regulate this, you'll see a lot fewer operators moving offshore."


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