BY STEVE SCHERER
(Reuters) - Legalizing gambling in Italy was supposed to help curb the mafia. Unfortunately, prosecutors say, it has only created new opportunities for the mob.
Cash-strapped Italian governments desperate for revenue have relaxed the rules on betting over the past two decades, to the point that Italians now wager $80 billion euros ($86 billion) a year - nearly equal to 5 percent of gross domestic product.
About half of that is poured into 400,000 video slot machines, twice as many as in U.S. gambling capital Nevada, which have become ubiquitous in the espresso bars where Italians stop several times a day for coffee, sandwiches and cocktails.
One of the arguments in favor of legalization was that it would help fight organized crime by bringing a mafia-run underground industry into the open. But crime fighters say it has instead provided the perfect cash-only business for mobsters, always on the lookout for legal ways to earn and launder money.
"Criminal clans earn a robust profit" from their "very diffuse" investments in legal gambling, says Diana De Martino, a magistrate at the national anti-mafia prosecutors' office.
Prosecutors say crime groups that used to invest and hide their drug or racketeering profits in agriculture or trucking are now turning to more profitable legalized gambling.
The national reach of slot machines also helps the mafia spread from traditional strongholds in Italy's poor south to the richer north, causing wider damage to an economy that has been stagnant for 15 years and is now in recession.
In one high-profile case in Milan, Italy's northern financial capital, a court convicted 13 people of extortion, loansharking, money laundering and being members of a mafia clan. Family patriarch Francesco Valle, who had relocated to Milan from Calabria in the south, and his son Fortunato were given the longest sentences of 24 years.
The court found that the Valles had run a traditional loansharking ring, threatening and beating businessmen who had borrowed money and fallen behind on payments, often taking over their debtors' real estate holdings and businesses.
Among the millions of euros in assets the group had accumulated in Milan was a legal gambling business, which included more than 1,000 slot machines.
"They started out with a few (slot) machines in three or four bars. In the space of three or four years they had created an empire," De Martino said.
The defendants have admitted some of the crimes, including usury, although they deny being members of an organized crime ring and are appealing the conviction.
"The defense argument has always been that we are not a mafia association," Amedeo Rizza, lawyer for Francesco Valle, told Reuters.
EXCESSIVE SUPPLY
Proponents of the industry say that even if the mob has infiltrated it, keeping gambling legal still reduces opportunities for criminals.
"Prohibition creates a bigger criminal market, not a smaller one," said Massimo Passamonti, president of Italy's main gambling lobby.
Legalization has also created jobs: some 25,000 people are directly employed in gambling, with another 100,000 in related activities, Passamonti said. Nevertheless, he acknowledged that rapid growth had made the industry harder to defend.
"We realized the excessive supply (of slot machines) was having a negative impact on society and could turn everyone against us," Passamonti said.
The swift proliferation of slot machines has brought a backlash from opponents, who argue that betting inflicts social costs, mainly on the poor.
Simone Feder, a psychologist, helped found an anti-gambling movement called the "No Slot Movement". He says that of Italy's 15 million regular gamblers, 800,000 are addicts. Many have lost their life savings, homes and families.
Prime Minister Matteo Renzi's government is weighing new restrictions which it says will reduce the number of slot machines by around a quarter.
According to a draft of new rules, slot machines would be banned in small coffee bars, while venues with a large number of machines would have to put them in a separate room.
"I have met many in the industry who are aware of the fact that in Italy there are too many opportunities to gamble and so there is a widespread need to rein it in order to safeguard public health," said Paolo Baretta, the government undersecretary in charge of drafting a new law.
Regulated slot machines are required to pay out 75 percent of their revenue over time in winnings. Of the remaining 25 percent, the state claims slightly more than half in taxes, leaving operators with the rest to cover costs and profit.
According to Filippo D'Albore, a major in Italy's financial police, slot machines can be rigged: they can be disconnected from the central server that monitors them, and fixed to pay out less than they should or hide revenue from taxes.
De Martino, the prosecutor, said those found guilty of misreporting slot machine transactions are usually fined rather than jailed, reducing the risk.
Although there are no official estimates for tax evasion in the gambling industry, a pressure group called the National Anti-usury Council calculates that slot machine operators evaded as much tax as the entire gambling industry paid in 2012.
(Reporting by Steve Scherer; Editing by Alessandra Galloni and Peter Graff)