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Archive for September, 2009

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.