Nation & World

2006 law is ineffective against Internet gambling problems

Million-dollar prizes are now common for FanDuel and its chief rival, DraftKings. Yet unlike casinos and racetracks, fantasy sports continues to operate free of state or government regulation.
Million-dollar prizes are now common for FanDuel and its chief rival, DraftKings. Yet unlike casinos and racetracks, fantasy sports continues to operate free of state or government regulation. Bloomberg

The shadowy exchange in June 2012 was remarkable for two reasons: The bag contained $350,000 in cash, proceeds from an illegal Internet gambling ring, and the woman who took it was a New York real estate developer and prominent gay rights activist who has donated nearly a quarter of a million dollars to political candidates and causes. The previous month, the same woman — Joy Tomchin — accepted another bag with $335,000 in cash.

In both cases, Tomchin said she had taken the cash on behalf of her brother, Stanley, who prosecutors say helped run the kind of gambling operation that has proved so difficult to stop: old-style bookmakers and money collectors, assisted by modern technology that enables offshore computers to record sports bets and payouts, illegal in the United States, beyond the reach of U.S. law enforcement.

In 2006, Congress tried to help prosecutors defeat these criminal rings. With legislators rushing toward adjournment, they passed a bill just after midnight to make it more difficult to gamble on the Internet, and to preserve the integrity of college and professional sports, by prohibiting online payments for illegal bets.

By almost any measure, the law has been a spectacular failure, an investigation by The New York Times has found.

 

The law could not stem the tide of illegal betting because the industry thrives not on online payments but on an old-fashioned shadow banking system where billions of dollars pass through paper bags, car trunks, casino chips and various money laundering schemes.

At the same time, Congress failed to grasp the power of the inexorably evolving Internet, or how difficult it would be to regulate. By allowing entrepreneurs to exploit a legal, if suspect, exemption, the law unwittingly opened the way for the now-ubiquitous fantasy sports games that increasingly resemble gambling.

The Times, in collaboration with the PBS series “Frontline,” investigated illegal gambling in the Internet era, focusing on the 2006 law. Reporters interviewed regulators, prosecutors, gamblers and technology experts; visited data centers in the United States and abroad; examined thousands of pages of government records; and used advanced Internet technology to explore how offshore gambling sites serve U.S. bettors.

To satisfy a hunger for information delivered right now, offshore gambling sites have developed a powerful digital presence on United States soil, close to their U.S. customers but hidden, until now, from investigators.

While offshore betting sites say they do not solicit U.S. customers, hundreds of them have begun delivering their content from servers in the United States or setting up fast, dedicated portals that directly transmit bets to their foreign locations. Experts in gambling law said those delivery networks could also be legally responsible if they knew or should have known they were facilitating illegal gambling.

To identify the physical locations of gambling websites, The Times, with the help of several Internet research groups, employed a combination of Internet tracing tools with traditional methods of investigative reporting.

When one New Jersey company was recently asked why it hosted gambling sites, the company initially denied it, then immediately removed more than 100 of those sites from its network. Another network removed two sites after inquiries.

In defiance of U.S. law, some offshore sports books openly solicit U.S. customers with slogans such as “Because You Can.” One even helped a reporter fund an illegal wagering account, then later explained how the transaction would be falsely recorded on his credit card as a purchase from a work clothes company.

The 2006 law also failed to foresee how the developing Internet and a mania for ever-finer permutations of sports statistics would fuel a gold rush in fantasy sports.

At the time, fantasy sports was a low-key competition in which bettors assembled their own teams, then watched how their players performed over an entire season. The legal exemption for fantasy sports was based on its definition not as gambling but as a game of skill.

Today, fantasy sites offer daily contests, million-dollar prizes and bets on individual sports such as golf, mixed martial arts and NASCAR races, magnifying the element of chance and making the exemption tougher to defend.

In recognition of the riches to be mined, the fantasy sports company DraftKings became television’s No. 1 advertiser when it showed a commercial every minute and a half in the week leading up to the National Football League season, according to iSpot.tv, which tracks national television advertising.

“Why wait until the end of the season to see who was going to win? Let’s do it every day,” said Jeffrey Derevensky, a psychiatry professor at McGill University who runs an international center that treats problem gamblers. “To bet on something with the potential to win more money or lose money is gambling.”

Seeking a solution

Concerned that organized crime was reaping huge profits from sports gambling, Congress in 1961 prohibited the use of telecommunications to transmit betting information. Another law specifically prohibited most forms of sports betting in all states except Nevada.

Over time, bookies circumvented federal law against taking bets over the telephone by setting up shop overseas. The arrival of the Internet greatly expanded their overseas business because it was quicker and cheaper, said Steve Budin, a sports handicapper who ran one of the early offshore sites.

That combination of technology and geography, Budin said, “took away the ability of the U.S. government to control it.”

Congress tried anyhow. “It’s a fallacy that people think you can stop Internet gambling,” said Mario Galea, a gambling consultant from Malta. “So you try to cut around it, to make sure that funds don’t reach the operation.”

After nearly 10 years of maneuvering, compromises and ultimately anger, the House of Representatives in its last official act before adjourning on Sept. 30, 2006, passed a bill at 12:32 a.m. that proponents believed would deflate the expanding Internet gambling industry by prohibiting credit card payments or electronic fund transfers for any illegal Internet wager.

Chris Grove, who writes the Legal Sports Report blog, questioned whether the bill’s authors even knew what they hoped to accomplish. “You’re talking about a law that was passed with no input, that was passed with no consideration, no deliberation, no debate,” he said.

To avoid illegal credit card transactions, wagered money usually remains in the United States, creating the need for the shadow banking system. Bettors settle up in person with the ring’s agents or money collectors.

When the police confronted Joy Tomchin with pictures of her receiving the cash, she said she was merely a conduit for her brother.

Joy Tomchin was not indicted, but the Queens district attorney charged 25 people, including Tomchin’s brother, who was identified as a senior operative of Pinnacle Sports, the website at the core of the vast gambling ring. Pinnacle was not indicted; Stanley Tomchin forfeited $1.7 million and pleaded guilty to a misdemeanor. Joy Tomchin did not respond to requests for comment.

Target: Millennials

In 2009, a new company, FanDuel, entered the picture. “Despite fantasy being a large market, it was an aging market,” said Matt King, FanDuel’s chief financial officer. To shake up this “stagnant” business model, the company decided to focus on the millennial generation, he said.

By far the biggest change has been the introduction of daily fantasy sports. “We have several million paid players, and that’s growing every day,” King said. “Right now we are signing up (20,000) to 30,000 players every day.”

Million-dollar prizes are now common, not just for FanDuel but also for its chief rival, DraftKings. Yet unlike casinos and racetracks, fantasy sports continues to operate free of state or government regulation.

In an interview before the fantasy sports scandal broke, King said he saw no need for regulation. “Our product is all about entertainment value,” he said.

Last week, after questions were raised about bettors using inside information, the company said it was taking steps “to ensure the integrity of our site and our games.”

DraftKings is even more aggressive in venturing away from the original fantasy concept. Run largely by poker players and gamblers, DraftKings has started expanding into nonteam sports. It has also begun offering fantasy sports contests in the Hooters restaurant chain.

DraftKings declined to be interviewed for this article.

The price paid

Jeffrey Derevensky is not anti-gambling.

“Personally, I don’t object to gambling,” said Derevensky, the McGill psychiatry professor who runs a center for problem gamblers. “I object to young people gambling, because they don’t have the ability to set limits both in terms of time and money.”

Which is why youth gambling in the Internet era so concerns him. Young people, particularly young men, are greater risk-takers, while access to gambling has never been easier, he said. From 2 to 4 percent of young people have gambling problems, Derevensky said.

Young men, he said, tend to believe that by playing and watching sports they can better predict the outcome.

“I dealt with a sports announcer who lost $100,000 on one Sunday playing football,” he said. “He came to me, and he said, ‘If a monkey was throwing darts at a board, the monkey would have done better than I did. How could I lose 12 out of 13 games when I know all the statistics?’”

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