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Archive for September, 2009

Currently, individuals wishing to gamble via the Internet can choose from several types of payment options other than credit cards. These include:

VISA and MasterCard debit cards (also called check cards): These cards, which carry the logo of one of the two largest credit card associations, are tied directly to the cardholder’s bank account. Funds for all transactions are deducted directly from the cardholder’s bank account, but cardholders can make credit card-type transactions that do not require a personal identification number. A personal identification number is not required to use this card on line, for example, since the transactions are processed through the VISA and MasterCard systems. Check card gaming transactions carry the same gaming merchant code as credit card transactions and thus can also be blocked.

Private-label debit cards: These cards are similar to the check cards described above but are issued by private companies rather than credit card associations. On-line payment providers (also known as payment aggregators): These companies send and receive funds electronically for such uses as on-line auctions and purchases.

Wire transfers: Some gaming Web sites promote this method of payment, which allows Internet gaming customers to wire money directly from a bank account to a gaming Web site. In some instances, bank wire information is posted on individual gaming sites, and gaming operators frequently use wire transfers to pay customers.

“E-cash” or digital cash: This method of payment is a digital representation of real money that can be placed on a computer hard drive, smart card, other devices with memory, (including cellular phones and other electronic communication devices), or in an on-line repository. Consumers purchase e-cash from an authorized provider. These funds can then be transferred among vendors and individuals using compatible electronic systems, in some cases without resorting to banks or other financial intermediaries. When customers spend the e-cash, it is credited to the retailer’s e-cash account and later transferred to the retailer’s regular bank account.

Internet gambling sites also offer money orders; traveler’s checks; bank drafts; cashier’s, certified, and personal checks; and a number of other electronic banking systems or processors as payment options.

Before the 1990s, individuals who wanted to place a casino- or sports-type bet in the United States basically had two choices: they could travel to a legitimate brick-and-mortar gaming establishment or place an illegal wager through a bookmaker. However, with the emergence of the Internet in the mid-1990s, a new form of gambling appeared—on-line gaming casinos and sports wagering. Internet gambling can take place on any electronic device that offers Internet access anywhere on the globe. In 2001, some gaming analysts were projecting that gross revenues from Internet gambling would exceed $6 billion by 2003.

However, analysts lowered revenue estimates for a number of reasons, including increased pressure from U.S. lawmakers and the blocking of Internet gambling transactions by many large U.S. credit card issuers. (U.S. customers are reported to constitute anywhere from 50 to 70 percent of total operator revenues from Internet gambling.) And, despite the recent revenue reduction, the e-gaming industry continues to grow. In a recent report,12 gaming analysts estimate that in 2003 revenues from Internet gambling industrywide will be $5.0 billion,13 or approximately 4.3 percent of the total $116 billion in businessto-consumer global e-commerce.14 In the view of gaming analysts, the international markets (non-U.S. customers) represent the future of the industry’s growth.

Representatives of law enforcement agencies, regulatory bodies, and the credit card and gaming industries expressed mixed views regarding the vulnerability of Internet gambling to money laundering. Law enforcement officials said they believed that Internet gambling could potentially be a powerful vehicle for laundering criminal proceeds at the relatively obscure “layering” stage of money laundering. They cited several characteristics of Internet gambling that they believed made it vulnerable to money laundering, including the volume, speed, and international reach of Internet transactions and the offshore locations of Internet gambling sites.

In their view, these characteristics promoted a high level of anonymity and gave rise to complex jurisdictional issues. Law enforcement officials acknowledged the lack of adjudicated cases involving money laundering through Internet gambling sites but cited what they believed to be contributing factors, including the lack of any industry regulations or oversight. Banking and gaming regulatory officials did not view Internet gambling as being particularly susceptible to money laundering, especially when credit cards, which create a transaction record and are subject to relatively low transaction limits, are used for payment. Likewise, credit card and gaming industry officials did not believe Internet gambling posed any particular risks in terms of money laundering.

Gaming industry officials did not believe that Internet gambling was any more or less susceptible to money laundering than other types of electronic commerce and pointed out that, in their view, the financial industry, which is responsible for the payments system, is better suited to monitoring for suspicious activity in the area than the gaming industry itself.

This report makes no recommendations. We provided copies of this report to the Departments of Justice and the Treasury for their comment. DOJ had no comments on it. Treasury provided technical comments, which we incorporated where appropriate.

Many major credit card industry participants have attempted to restrict the use of credit cards for Internet gambling but have faced challenges in their efforts to do so. Full-service credit card companies that issue their own cards and license merchants to accept cards have implemented policies prohibiting customers from using their cards to pay for Internet gambling transactions and will not license Internet gambling sites. Credit card associations have instituted a different approach a transaction coding system that enables association members, at their discretion, to deny authorization of properly coded Internet gambling transactions.

Many major U.S. issuing banks that are members of these associations have chosen to block such transactions because of concerns over Internet gambling’s unclear legal status and the high level of credit risk associated with the industry. These efforts are hampered, however, by Internet gambling sites that attempt to disguise their transactions to keep from being blocked by the issuing banks. In addition, some association members—primarily those in foreign jurisdictions where Internet gambling may be legal—continue to acquire Internet gambling sites as merchants. Further, efforts to restrict the use of credit cards for Internet gambling can be circumvented by cardholders’ use of on-line payment providers to pay for gambling activities. With such intermediaries, issuing banks cannot necessarily determine the nature of the activity being charged.

In spite of these challenges, the credit card industry’s efforts to restrict the use of credit cards for Internet gambling could, according to research conducted by gaming analysts, reduce the projected growth of the Internet gaming industry in 2003 from 43 to 20 percent, reducing industrywide revenues from a projected $5.0 billion to approximately $4.2 billion. However, as banks increasingly choose to restrict the use of credit cards for Internet gaming, Internet gambling sites are expected to emphasize newer forms of payment, such as e-cash, that could eventually replace credit cards.