MGM, Harrah's Press Congress for Piece of Online Gaming Action

26 May 2006

May 22 (Bloomberg) — MGM Mirage, Harrah’s Entertainment Inc. and other U.S. casino operators are increasing pressure on Congress to consider legalizing online gambling — at the same time lawmakers are seeking to tighten criminal penalties for it.

The companies are trying to take advantage of a congressional backlash against gambling triggered by the Jack Abramoff scandal, involving his lobbying on behalf of Indian casinos. The casinos say the best way to control the $12 billion Internet betting business — which is based overseas while drawing more than half its revenue from the U.S — is to legalize, regulate and tax it.

“The argument the industry is making is, if it is being done offshore, why not bring it in to the U.S. so it can be regulated?” says Senator John Ensign, a Nevada Republican who has discussed the issue with representatives of Las Vegas-based Harrah’s, the world’s largest casino owner. “It doesn’t look like you can ban it.”

The companies, which according to Federal Election Commission records have so far contributed more than $900,000 to congressional candidates in this fall’s elections, are pushing lawmakers to take a first step toward legalization by creating a federal commission to study it. Ensign and Senate Minority Leader Harry Reid, a Nevada Democrat, say the proposal has a chance of clearing the Senate this year.

Lawmakers have become wary of gambling issues since a federal investigation of Abramoff uncovered a web of connections between some of them and casinos. Abramoff pleaded guilty in January to fraud and conspiring to corrupt public officials on behalf of clients, including Indian-tribe casino operators and eLottery Inc., a Stamford, Connecticut-based online broker of state lottery tickets.

House Legislation

Following Abramoff’s guilty plea, two Virginia representatives, Republican Bob Goodlatte and Democrat Rick Boucher, introduced legislation to force U.S. financial institutions to cooperate with federal law-enforcement authorities in shutting down the flow of cash to illegal gambling sites based outside the U.S.

The House Judiciary Committee is scheduled to take up the measure, which has the backing of the Bush administration, on May 24, and Majority Leader John Boehner says he intends to bring it to a floor vote later this year. Abramoff in 2000 lobbied to defeat a similar measure.

Even if the measure passes the House, it would face long odds in the Senate, says Matthew Gerard, a gaming industry analyst at Investec Securities in London. “Ultimately, we think it will be very, very difficult to get any prohibitive legislation through the Senate,” he says.

`Neutral’

U.S. casino companies are “neutral” on the House measure, says Frank Fahrenkopf, chief Washington lobbyist for the American Gaming Association, which represents Harrah’s and Las Vegas-based MGM Mirage, the second-largest gaming company. Right now, the online gambling industry “is just the wild, wild West,” he says. “Why not take a hard look at it?”

That’s what the U.S casinos are seeking with their proposal for a federal study. Fahrenkopf, a former Republican national chairman, says the study’s purpose would be to determine if legalization, regulation and taxation of online gambling would reduce the risk of fraud and abuse and increase government revenue.

Fahrenkopf says the “big boys” like MGM and Harrah’s want to get into the online gaming business if Congress eventually decides to legalize it. MGM and Harrah’s declined requests for comment and referred questions to him.

15 Million Americans

The gaming association projects that the online betting business will double to about $24 billion a year in global revenue by 2010. The association says a study it conducted showed that as many as 15 million American players logged on to more than 2,600 Web sites last year; it said it also found that 81 percent of Americans are unaware of the 1961 law making it illegal to use phone lines for wagers.

The Justice Department continues to investigate and prosecute online casinos that accept funds from U.S. customers. On May 17, prosecutors in Washington announced money-laundering charges against two people, including an American, who operated an Internet betting parlor in Antigua that received $250 million in bets on professional football, baseball, hockey and college basketball from U.S. gamblers. Antigua has filed a complaint with the World Trade Organization against the U.S. ban on online gambling.

With U.S. companies shut out of the online market, the principal beneficiaries are European companies and investors and unregulated online casinos in the Caribbean.

U.K. Legalization

The U.K. legalized online gaming a year ago. Since then, two companies based in the British territory of Gibraltar — PartyGaming PLC and 888 Holdings PLC — have sold shares to the public: Partygaming, whose 2005 revenues of $977 million rose 62 percent from a year earlier, raised $1.9 billion, while 888 Holdings, with 2005 revenues of $271 million, raised $261 million.

John Shepherd, a spokesman for PartyGaming in London, says the company “advocates regulation” of online gambling and backs the proposed U.S. study. U.K. law recognizes “that the only difference between gambling in a casino and gambling online is the word `Internet,”’ he says. “The British model is going to be a model for the whole globe.”

In addition to making campaign contributions, the U.S. casino operators have retained some of Washington’s top lobbying firms, including Patton Boggs LLP and Barbour Griffith & Rogers LLC, to promote their issues. Gambling has long been a politically sensitive issue on Capitol Hill, and online betting draws opposition from evangelical Christians, an important Republican constituency. Focus on the Family and the Traditional Values Coalition, two religious-activist groups, have come out in favor of the House legislation stiffening penalties.

In the Senate, meanwhile, even Reid — a former member of the Nevada Gaming Commission who says he opposes legalization — is willing to go along with the companies’ plan for a commission to look at the issue.

“If somebody wants to study it, they can study it,” he says.

To contact the reporter on this story: William Roberts at wroberts@bloomberg.net.

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