Chapter 3 - Billions, Bans and Backdoors

A Canadian Crackdown - 1999

You can't grow from 0 to $2.2 billion within less than 4 years and not make some enemies.

While the US was going to take its time with pushbacks for the next decade, the Royal Canadian Mounted Police raided the offices of Starnet Communications International in Vancouver. Authorities argued that Starnet’s email server represented an illegal extension of internet gambling activities under the Canadian Criminal Code.

Starnet was issued a $100,000 fine, a drop in the ocean compared to the numbers the company was running. But this marked one of the earliest examples of government enforcement against an internet gambling operator in North America.

The raid sent a message: companies with partial domestic footprints could not escape scrutiny, even if most of their operations were offshore.

A US Fiasco?

By the late 1990s, the online gambling industry had become a thorn in the side of US lawmakers. American citizens were fueling the majority of internet gambling revenues. The American government had no clear legal framework for Internet gambling, creating a perfectly exploitable grey zone. 

Offshore operators licensed in small Caribbean jurisdictions were laughing straight to the bank with the money (yes, I am very sure 50 Cent got inspiration from this period). They were targeting the US and they were very effective at it.

Senator Jon Kyl of Arizona

In 1997 Republican Senator Jon Kyl of Arizona made his first stand and drafted the Internet Gambling Prohibition Act. The bill aimed to criminalize the marketing and sale of betting services to US citizens. This was the first serious legislative attempt to shut down online gambling at its root by cutting off US demand.

But it failed. The industry continued to thrive, emboldened by lawmakers' inability to establish clear prohibitions. Offshore companies saw the flop of the act as a green light to push further.

Despite this, Kyl continued pressing forward. The second version of the Internet Gambling Prohibition Act also did not pass Congress. In the House of Representatives, Virginia Republican Bob Goodlatte attempted a third version. Again, it failed.

The Federal Wire Act of 1961 became the key legal battleground where lawmakers could set their terms. This was an old law, originally targeting phone based sports betting.

By 2002, the Fifth Circuit Court of Appeals ruled that the Wire Act applied only to sports betting, not casino games. Yet the DOJ (Department of Justice) maintained that all online gambling was illegal.

Meanwhile, anti-gambling lobbyists pressured companies like Google and Yahoo to stop advertising online gambling. Casino City sued, claiming First Amendment violations, but lost.

Despite restrictions, online gambling sites found loopholes. They advertised “.net” play-money sites in the US, which funneled players toward real-money offshore sites.

There was a clear tension between political will and the technological reality: lawmakers wanted to ban internet gambling, but enforcement mechanisms were weak and the industry’s rapid growth made it difficult to implement bans effectively.

State-Level Battles: Nevada vs. Others (2001–2002)

In 2001, Nevada actually legalized internet gambling, pending regulatory approval. The Nevada Gaming Commission studied security and concluded online gambling could be regulated safely.

But in 2002, the DOJ warned Nevada that online gambling violated federal law. Nevada paused its plans, leaving the state in limbo.

Meanwhile:

• Illinois, Indiana, Louisiana, Massachusetts, Oregon, South Dakota, and Utah banned Internet gambling outright.

• Attorneys general in Florida, Kansas, Minnesota, Oklahoma, and Texas declared it illegal.

This fragmentation created uncertainty, discouraging US investment and leaving the market to offshore operators.

Australian Experiments: 1999–2001

While the US and Canada were dead set on prohibiting iGaming, Australia explored regulation.

In 1999, the Northern Territory Government granted the first online casino license to Lasseters Casino, a land based casino in Alice Springs. Thus Lasseters became the first legitimate online casino operating under government approval.

Other Australian states and territories soon followed (a trend similar to Caribbeans, as you can see) drafting their own Internet gambling legislation. By early 2000, Norfolk Island and other territories began issuing licenses to online operators.

But by late 2000, disagreements over tax sharing and responsible gaming provisions caused turmoil between states and the federal government. In the end, the government launched the Interactive Gambling Moratorium Act, prohibiting new online casinos or sportsbooks from operating after May 2000.

In 2001, the Interactive Gambling Act banned online casinos and sportsbooks from targeting Australian citizens. In a turn of events, Lasseters was grandfathered in, allowed to keep operating because it had launched before the cutoff date, remaining as the only licensed online casino in Australia.

The UK Embrace (2000 and Beyond)

While regulation was proving difficult for the likes of US and Australia, the United Kingdom positioned itself as a champion of legalization. They saw the opportunity.

In 2000, the Channel Islands legalized online betting, followed by the Isle of Man in 2001.

The Isle of Man created a credible regulatory regime, attracting MGM Mirage (later MGM Resorts International), the first US casino company to attempt online gambling legally. Although MGM withdrew because of restrictive marketing conditions, it proved that US land based casinos could operate online in a regulated manner.

The Alderney Gambling Control Commission, founded in 2000, became a gold standard for regulation, modeled after Nevada and South Africa. It attracted major licensees including BSkyB, Virgin, Paddy Power and The Rank Group plc.

In 2001, the Gambling Review Report recommended full legalization. This led to the UK Gambling Bill and eventually the Gambling Act of 2005.

The Act set three objectives:

1. Prevent gambling from fueling crime.

2. Ensure fairness and transparency.

3. Protect vulnerable players.

The UK Gambling Commission was created, overseeing licensing, enforcement, and player protection. Alderney and the Isle of Man were “white listed,” enabling their operators to market legally to the UK.

The UK’s approach stood in contrast to the US, legitimizing online gambling as part of its broader entertainment industry.

Licensed land based bookmakers such as Willaim Hill and Ladbrokes (later Ladbrokes Coral) transitioned as online operators, backed by government support and their strong existing customer bases. This divergence set the stage for the UK to become a global hub for Internet gambling.

Going Legit: Corporate Expansion (2001–2006)

Facing legal challenges, major online operators sought to earn the respect of the world. They began hiring big accounting firms like PwC to audit software and certify payout percentages. Loyalty programs, reward systems and player protections were introduced to mimic land-based casinos and build trust.

By 2005–2006, the industry had gone mainstream. Top software providers like PartyGaming, Playtech and 888.com going public.

PartyGaming, in particular, became a behemoth. At its 2005 IPO, it was valued at $8.5 billion, one of the largest IPOs in the UK that year. And the later merger with bwin created one of the most powerful global gaming companies on the planet, capable of rivaling land based operators.

A Bird's Eye View:

By the mid 2000s, iGaming stood at a huge crossroads:

The United States' ambiguity and fragmented laws pushed the industry offshore, depriving US companies of experience and revenue.

Australia's regulatory experiments gave way to ridiculously restrictive federal bans.

Canada's enforcement actions were... noticeable, but failed to halt global expansion.

United Kingdom and Europe took advantage of the above's indecisions and focused on regulation and legitimacy. This turned European online gambling into a global powerhouse industry, attracting investors, operators, and governments eager for tax revenue.

The story continues in Chapter 4 - UIGEA and Beyond.