Pioneer of Offshore Internet Gambling Pleads Guilty to RICO and Wire Act Charges

August 13, 2009. Gary Stephen Kaplan pled guilty in U.S. District Court (EDMo) to violation of the RICO Act and Wire Act in connection with his operation of an offshore and unprotected gambling business. It took bets online and via telephone.

The Federal Bureau of Investigation's (FBI) John Gillies stated in a Department of Justice (DOJ) release that Kaplan was "one of the pioneers of illegal online gambling". Gillies also boasted about taking down someone who was "making it too easy for people to gamble away their hard earned money".

Yet, while Kaplan was targeted for his gambling operation, he was taken down on RICO Act and Wire Act charges. Gambling is legal, protected, and regulated in the U.S.

The DOJ stated in its release that Kaplan's business, BetOnSports, or BOS, "was highly successful", employed as many as 1,700 people, and in 2004 had "close to one million registered customers". The DOJ added that in 2004 "Kaplan made a successful public offering of the stock of BetOnSports on the London Alternative Investment Market that netted him over $100,000,000."

Although, BOS failed following Kaplan's arrest and indictment in 2007. He has been held without bond since then.

He pled guilty on August 13 to conspiracy to violate the Racketeer Influenced and Corrupt Organizations (RICO) Act, which is codified at 18 U.S.C. §§ 1951-1960, conspiracy violate the Wire Act, which is codified at 18 U.S.C. § 1084, and violation of the Wire Act.

The DOJ added there is a plea agreement under which Kaplan will pay $43,650,000 to the government, and serve 41 to 51 months in prison. He has already served about 30 months.

The DOJ stated that Kaplan located his business first on the Caribbean islands of Aruba and Antigua, and later in the Central American nation of Costa Rica.

It continued that he provided gambling services to U.S. residents "through Internet Web sites and toll-free telephone numbers". Moreover, the DOJ explained, "BetOnSports-related entities controlled toll free numbers and domain names advertised by BetOnSports. Technologically, Kaplan’s toll-free telephone lines terminated in Houston or Miami, and then were forwarded to Costa Rica by satellite transmitter or fiber-optic cable. Some of Kaplan’s Web servers were located in Miami and were remotely controlled from Costa Rica. U.S. residents became customers of BetOnSports by depositing funds on account and placing wagers over U.S. toll-free telephone lines and via the Internet using the deposited funds. Funds were sent from the U.S. customers to BoS operations outside the United States and BoS sent winnings from outside the United States to its U.S. customers."

The Wire Act does not illegalize gambling. No federal statute illegalizes gambling. The subject is left to the states. In some states the gambling sector is a major component of the local economy, and supplies a critical part of the tax revenues. Many states and localities are providers of gambling services, which raise substantial revenues for government operations. Offshore internet gambling operations compete with these protected forms of gambling.

The Wire Act only illegalizes the use of interstate wire communications in gambling businesses. It provides, in part, that "Whoever being engaged in the business of betting or wagering knowingly uses a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers or information assisting in the placing of bets or wagers on any sporting event or contest, or for the transmission of a wire communication which entitles the recipient to receive money or credit as a result of bets or wagers, or for information assisting in the placing of bets or wagers, shall be fined under this title or imprisoned not more than two years, or both."

The U.S. has also carved out exceptions. This has resulted in a World Trade Organization (WTO) holding that the U.S. gambling regulatory regime, which carves out no exceptions for offshore gambling businesses, discriminate against foreign internet gambling businesses in violation of the U.S.'s WTO obligations. See, stories titled "WTO Panel Instructs Congress to Amend Wire Act to Legalize Internet Gambling" in TLJ Daily E-Mail Alert 1,016, November 11, 2004, and "WTO Allows Offshore Nation not to Enforce US IPR as Damages for US Protection of Onshore Internet Gambling" in TLJ Daily E-Mail Alert No. 1,692, December 21, 2007.

Some Senators and Representatives worked to enact legislation beginning in the late 1990s to illegalize internet gambling. Rep. Bob Goodlatte (R-VA) and Sen. Jon Kyl (R-AZ) were active in these efforts. They failed, even after conceding numerous limitations and exceptions in their bills.

Proponents of some form of regulation did succeed in enacting the "Unlawful Internet Gambling Enforcement Act" (UIGEA) in the 109th Congress. The UIGEA attempts to stop internet gambling by regulating the financial transactions that fund what already constitutes unlawful internet gambling. It provides that no one engaged in the "business of betting or wagering" may knowingly accept certain financial transactions, including checks, electronic fund transfers, and credit card debt, in connection with "unlawful Internet gambling". It was enacted as part of a large bill, HR 4954 (109th), the "Port Security Improvement Act of 2006".

See also, story titled "House Approves Unlawful Internet Gambling Enforcement Act" in TLJ Daily E-Mail Alert No. 1,408, July 11, 2006, and story titled "House Financial Services Committee Approves Internet Gambling Bill" in TLJ Daily E-Mail Alert No. 1,330, March 16, 2006.

With the passage of the UIGEA and the Democratic takeover of the House and Senate, all significant efforts to further limit or regulate internet gambling died. Moreover, Rep. Barney Frank (D-MA), the Chairman of the House Financial Services Committee, which has jurisdiction over bills such as the UIGEA, is an outspoken libertarian on gambling issues. Similarly, Rep. John Conyers (D-MI), the Chairman of the House Judiciary Committee (HJC), which has jurisdiction over bills related to crimes, has differed with Rep. Goodlatte (also a HJC member) on gambling issues.