How protectionism and puritanism put paid to online gaming industry

'It undermines the family, dashes dreams and frays the fabric of society'

In the end, it was a powerful midnight alliance between two Presbyterian politicians that achieved what a decade of posturing and pushing in the US Congress had previously failed to manage: a devastating legislative blow to the online gambling industry.

For months, the executives of giant internet companies such as Sportingbet and Party Gaming and the City bankers who have become rich off London's position as the financial centre of the industry have all been saying the same thing. There is no political will to prioritise a clampdown against the industry. The congressional effort to lock out the offshore gambling firms will run out of time.

Their complacency was misplaced. In the small hours of Saturday, tacked on to the last bill before senators on this last day of Congress, the Unlawful Internet Gambling Enforcement Act was approved. It was one of more than 150 measures passed in those last hours before senators hit the congressional election campaign trail, cannily designed by the Republican majority leader, Bill Frist, to shore up the party's core support and to progress the pet projects of specific lawmakers who face tight votes.

Both Senator Frist and the bill's author, Jon Kyl, are Presbyterians with a strong anti-gambling streak to their morality, in a country whose religious right has been given increasing voice through the current Republican leadership.

Senator Kyl has described online gambling as a unique threat, where "players can gamble 24 hours a day from the comfort of their home; children may play without sufficient age verification; betting with a credit card can undercut a player's perception of the value of cash, leading to possible addiction and, in turn, to bankruptcy, crime, and suicide; and there is no enforcement commission, such as those that exist in Las Vegas or Atlantic City, to protect consumers from excessive losses or fraud."

A triumphant Senator Frist said at the weekend that the new act would tackle a mushrooming scourge, "a serious addiction that undermines the family, dashes dreams, and frays the fabric of society".

The Senate has traditionally been less inclined to prohibitionism than the lower House of Representatives, where this and an even more belligerent piece of legislation passed with a two-thirds majority earlier this year, but online gambling has been nixed by a combination of political philosophies. Frank Fahrenkopf, president of the American Gaming Association, which represents bricks-and-mortar gambling business in the US, said: "It is a strange meeting of the Republican party's religious right, which feels it has an obligation to stop people living with the Devil in Hell, and the far left of the Democrats, which think that some people are not smart enough to spend their own money and need to be protected."

There has been a prohibitionist streak in American society from the day the first Puritans came ashore, and there have been more bills across federal and state legislatures to ban gambling than there ever have been to legalise it. The temperance movement of the 19th century was at one point triumphant - in the narrow legal sense, although gambling continued underground and became the preserve of the Mob. Sports betting, racecourse casinos and state lotteries have only been spottily legalised since Nevada became the first state to break the Prohibition-era blanket ban on gambling, with a casino licence granted in 1931 to spur its Depression economy.

Even today, commercial casinos are only licensed by 11 states, and in some of those they are restricted to giant riverboats. On top of this, Native Americans have been granted the right to build casinos on reservations, as a means of economic empowerment and to provide revenue for self-government - some 260 tribes do so.

In these heavily regulated circumstances it should be no surprise that Congress has become exercised by the emergence of the World Wide Web as a tool for wannabe gamblers to access the ethereal casinos based not just outside their state but also outside the country, away from the oversight of US authorities.

From practically nothing when the issue first appeared on the political radar a decade ago, Americans now gamble more than $6bn a year over the internet. The figure has been increasing by a fifth every year. The 1961 Wire Act - which outlaws telephone bets over state lines, and which the Department of Justice believes makes online gambling illegal - is a joke that just keeps getting funnier.

Until now. By attempting to cut the chain of financial transfers from gamblers' bank accounts, through "electronic wallets", to the offshore internet site, the Unlawful Internet Gambling Enforcement Act gives federal authorities a powerful new tool for a crackdown that has so far been limited to sporadic arrests of online gambling industry executives.

The arrest of David Carruthers, then the chief executive of London-listed BetonSports, while he was changing planes in Dallas in July, was a reminder that the Department of Justice can and will use the Wire Act to go after some operators, but all it did - apart from sinking BetonSports - was change a few executive travel plans. The act passed on Saturday, and expected to be signed into law by President George Bush within the fortnight, will hit internet gambling companies hard in the e-wallet.

Proponents of the new crackdown have practical and financial, as well as moral, justifications.

The National Football League and college sports associations are among those who have backed a ban, citing research that 5 per cent of college athletes have accepted money for inside information on their games or for agreeing to play poorly. The worry that the integrity of sports games might be threatened harks back to the scandals of the past, most notoriously the 1919 World Series baseball tournament, when eight members of the favourites White Sox were charged with trying to throw the games.

And then there are the states who claim a significant portion of their revenues from betting duties, such as Louisiana, where Peter Dicks, the former chairman of Sportingbet, is wanted for running an illegal sports betting operation. Louisiana's attorney general, Charles Foti, may have gained his interest in online gambling because of the desperate crimes he saw addicts commit when he was a criminal sheriff, but his authority's attempt to shut down Sportingbet would eliminate one of the most potent growing threats to the state's 14 riverboat and four on-land casinos, which contribute half a billion dollars annual to state coffers.

With states, federal authorities, sports and God on the opposite side, London's online gambling groups face a daunting lobbying task to gain legitimacy in the world's biggest potential market.