Online gambling sites see promise in new settlement

At the same time many states are looking to casinos as a way to increase tax revenue, millions of Americans have taken to the internet for their gambling fix. Despite efforts by Congress to stifle this controversial industry by passing a law in 2006 forbidding U.S. banks to transfer funds back and forth to such sites, the practice has continued almost unabated.

However, this week one popular site, PartyGaming PLC, reached a precedent-setting agreement with the U.S. Attorney's office in Southern New York to pay $105 million over the next three years to satisfy charges that it let U.S. residents play its games until October of 2006, when it withdrew from the market. As part of the terms, the government agreed not to prosecute PartyGaming or any of its subsidiaries.

While some states have long had regulations addressing online gambling, until the Unlawful Internet Gambling Enforcement Act of 2006 federal restrictions were few and vague. The most often-cited reg, the Wire Act, was passed way back in 1961, and specifically pertained to telephone transactions with bookies. Unfortunately, even the 2006 law seems mainly to have affected publicly traded sites like PartyGaming and driven more business to the smaller, less-reputable off-shore operators.

Given the potential for lost tax revenue and money laundering, though, the U.S. has kept at it. In 2007, the Justice Department charged Yahoo! (YHOO), Google (GOOG), and Microsoft (MSFT) with procuring participants for illegal activity by running ads for gambling sites. A settlement cost the three a cool $31.5 million.

So why do some in the online gambling industry see the PartyGaming settlement as good news? Well, first, according to the Washington Post, it's seen as something that could bring clarity to the industry and possibly lead to consolidation among the publicly traded operators. It could also give PartyGaming a leg up on licensing, if and when Congress passes a motion legalizing the industry.

A recent report concluded that in 2007 online gaming companies brought in $9 billion from 22 million players. That's a lot of money for the feds and the brick-and-mortar casinos to leave on the table. I wouldn't be surprised to see this Congress finally pass legislation that addresses this issue directly.

If I were a betting man, I'd actually wager that it will place restrictions on the industry to encourage online gambling sites by established American casino operators like Las Vegas Sands Corp. (LVS). They could sure use the help.

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