INTERNET LAW - Paying Online Gambling: Complex Realities of Cyber-Funding

IBLS Editorial Staff
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Highlighted here are the peculiar financial aspects and high risk of involvement with online wagering for those who choose to flaunting the U.S. gaming laws. Those living in the U.S., especially if working or dealing with online gambling, risk prosecution much more than a casual U.S. gamer. Since Internet betting is illegal in America, anyone breaking the law could be targeted by the U.S. Federal authorities. For instance, a large gambling ring was discovered operating in U.S and has been prosecuted on RICO charges for misusing payment schemes.

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Highlighted here are the peculiar financial aspects and high risk of involvement with online wagering for those who choose to flaunting the U.S. gaming laws. Those living in the U.S., especially if working or dealing with online gambling, risk prosecution much more than a casual U.S. gamer. Since Internet betting is illegal in America, anyone breaking the law could be targeted by the U.S. Federal authorities. For instance, a large gambling ring was discovered operating in U.S and has been prosecuted on RICO charges for misusing payment schemes.

A grand jury in Salt Lake City, UT handed down indictments in early May 2007, based upon the Racketeer Influenced and Corrupt Organizations Act (RICO) and alleging "conspiracy, bank fraud, violations of the wire-wager act, and money laundering" of those involved in online gambling. Seven persons were charged with "unlawful use of credit cards to handle payments for online casinos, a felony that involved transfer of $150 million from U.S. bettors," all felonies. This case highlights the peculiar financial aspects and high risk of involvement with online wagering for those living in the U.S., especially if working or dealing with online casinos, since 'Net betting is illegal in America. This article details the legal and illegal use of payment types for Internet stakes, especially as regards credit cards.

Why were these People Prosecuted, What did they do?
Essentially, these people ran afoul of America"s ban on Internet gambling. According to the U.S. Department of Justice, they were involved with helping gambling sites process $150 million in payments from U.S. players. The charges were leveled in a 34-count indictment, accusing the defendants of running a service that helped Internet gambling sites camouflage credit card charges, and tricking credit card issuers who do not authorize such charges. The instrument alleges defendants' company aided Internet gambling sites to arrange fund transfers between U.S. bettors and online gaming sites by use of Western Union wire transfers. The companies charged are CurrenC, aka CurrenC WorldWide, located in the British Virgin Islands; Gateway Technologies, located in Draper, Utah; Hill Financial Services, also based in Draper, Utah, and Las Vegas; and BetUS, deriving from Kanawahke, Canada.

Brett Tolman, U.S. attorney for the District of Utah, said in a statement that persons facilitating Internet gambling in the U.S. break "numerous" federal and state laws; adding, "Payment processors who attempt to hide the true nature of the transactions they are conducting and the Internet gambling Web sites that use these payment processors will be prosecuted and brought to justice." The government invoked against the defendants the Racketeer Influenced and Corrupt Organizations Act (RICO) for the crimes of "conspiracy, bank fraud, violations of the wire-wager act, and money laundering." As a result, the Federal authorities seek forfeiture of $150 million, claimed gained from illegal betting, in addition to real estate and vehicles.

Creating a Web site named the Gateway, which was an "automated collector and processor of illegal Internet gambling funding transactions," the defendants used the Gateway to purposefully misstate transactions to MasterCard and Visa, stating the transactions were for something non-gambling related. After getting the miss-labeled payments, they wired customer funds through Western Union to parties in the Philippines, who were also part of the scheme. Maximum penalties for such charges are thirty years for bank fraud; twenty years for racketeering conspiracy; twenty years for money laundering; and two years for transmission of wagers/wagering information.

What is the Law of the U.S. Regarding Online Gambling?
America does allow some types of online gambling (like horse racing), a fact that helped the U.S. lose when it was brought by the Caribbean island of Antigua and Barbuda before the World Trade Organization (WTO). But as it stands, most types of online gambling are now illegal in the U.S. due to several key events. First was the National Gambling Impact Study Commission, which in 1996 was created by Congress to "examine the social and economic impacts of gambling" and advise Congress of its findings. The results, released to the public, were that the States should not make gambling any more legal than it already was. Further they suggested that credit cards be illegal for use in online wagering. So the 1964 U.S. Wire Act was updated to include online gambling payments. Then, other laws were enacted banning some types of gambling - like the Illegal Gambling Business Act (1970), and the Travel Act (1961). Lastly, a series of other new laws were passed, including the Unlawful Internet Gambling Enforcement Act of 2006.

In the WTO case, the charges were that the U.S was hampering in Antiguan and Barbuda's business by blocking Americans from playing. The U.S. had initially lost the case in 2003, and again on appeal in early 2007, in large part because while U.S. argued that gambling would damage America more than help it, all things considered, it was already allowing online gambling in the of horse racing and other similar games. So the court found that the U.S. had different standards for those outside the country than American merchants, and this duplicity helped the court favor Antigua and Barbuda. This all may be moot now that Barney Fran (Dem. MA) has drafted legislation that would legalize online gambling in the U.S., and there is every reason to believe the measure will pass, at least in some form, the Internet Gambling Regulation and Enforcement Act of 2007 (IGREA).

Why Don't Credit Cards Allow Online Gambling Charges?
The answer to this question has several parts. First, the practice of online gambling is illegal in the U.S., the largest economy in the world. So it is simple common sense that these cards would block such transactions, in the interest of not being prosecuted as aiding illegal activity. But there are other reasons the major credit cards do not want involvement in this business. This is a completely unregulated industry in many places in the world, and great sums of money are involved. There are many shady characters associated with some of the online casinos and so this alone makes Visa and Mastercard nervous.

For instance, what happens when a consumer refuses to pay credit card charges claiming he never gambled online or claiming he was cheated? How would the credit card companies adjudicate these disputes in a scenario involving a small, lawless country with no regulations? In fact, this is exactly what happened before the card companies cut off funding in California, where a woman was charged $80,000 for gambling debts she claimed she did not owe. When the credit card company sued the woman, the court ruled for her, saying she did not have to pay the charges. Then, there is also the issue of money laundering, and how terrorists or mafia types could so easily misuse a type of business where large sums change hand in foreign clime and are repatriated elsewhere, all by wire.

How do Credit Card Companies Block Charges?
In the first place, let's examine the difference between full credit card companies like Discover or American Express, versus Visa or Mastercard. American Express is a complete service, with much tighter control, because they license their product directly, and can directly dictate the cards not be used for "Net gambling. On the alternative, Visa and Mastercard license their credit cards associations and member financial institutions, and have much less control over their use, with 500 million of their cards in use worldwide.

Therefore, Visa and Mastercard have had to find less direct methods to reign in use by Internet wagering concerns. In doing this, they have not issued declarations that their merchant members may not allow online betting payments. Instead, as noted by the United States General Accounting Office, "The major participants in the credit card industry have tried to restrict the use of their cards for Internet gambling by prohibiting cardholders from using the cards to gamble online and developing transaction codes that banks can use to block payments at their discretion. Many large U.S. credit card issuers also use codes to deny authorization for Internet gambling transactions, and U.S.-based banks do not accept gambling Web sites as merchants. " This approach of using code identifiers to indicate and bar online gaming has not worked well.

The reason this code-block has not worked well is because of a technique called "factoring," used by the law breakers. According to the USGAO, "Two issuers noted that Internet merchants are able to circumvent the coding system by engaging in factoring. According to the issuers, factoring occurs when a merchant, possibly one engaged in Internet gambling, submits credit card transactions through another merchant's terminal using that merchant's identification number and merchant category code, and pays that merchant a percentage of the submitted transactions. Officials from both associations agreed that factoring as described by the issuers can be used to circumvent the coding system and violates the associations' rules. They also noted that this type of factoring is distinguishable from legitimate factoring. An issuer told us that in one case a merchant circumvented the coding system by setting up a bogus site and processing numerous transactions using a telephone and rogue terminal. The issuer believed this situation could have been avoided if the acquirer had exercised adequate due diligence on the merchant." In other words, much work must be done before Internet gambling illegal payments are reigned in.

What is a Legal Way to Pay Internet Casinos?
For those able to gamble, there are a number of options for buy Internet casino chips to gamble and then cashing them out, legally. According to James Duchscherer, VP Marketing of, "The secret is to provide a private digital cash system that is easy to use, secure, and fast," whose company ranks tops in an industry survey of best alternative methods of internet gaming payment systems. The methods of payment include companies like Equifax, PayPal and NETeller, for electronic payment, while other options such as bank wire transfers and Western Union are also employed, and even traditional check writing, despite being much slower, is still used.

Another very popular method of online wagering payments has become debit cards. Richard Brightling, Vice President at IQ-Ludorum, agrees that debit card use is soaring, saying "Debit cards are the way to go. Banks in Europe are starting realize the potential for this market and they are starting to look at it much more seriously." Also, a new company called "Digency," is an e-commerce solution that has a product called 'IP Check.' According to a company spokesman, it is "a secure payment platform which allows consumers to pay by online check from their local bank account. Paper checks print within our bank and are cleared through traditional check processing, while our check guarantee program insures every item."

Most importantly, the development of the new payment system integrates the alternative big three of Equifax, PayPal and NETeller, and allows the added guarantee to our Licensees in a verification of the identity of the player, helping eliminate fraud. The main fact to note is that online gambling is a tenacious business, very creative and capable of adapting to changing circumstances and laws. But then again, in an industry grossing $20 billion a year, and growing at a fantastic pace, no one should count the Internet casino operators out too easily.


IBLS Editorial Staff

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