Juego por Internet: una industria en auge

Report to Congressional Requesters
United States General Accounting Office
GAO
December 2002 INTERNET
GAMBLING
An Overview of the
Issues
GAO-03-89
The global legal framework for Internet gambling is a complicated mix of
laws and regulations. In the United States, both federal and state statutes
apply. Gambling is generally regulated at the state level, with federal law
supporting state laws and regulations to ensure that interstate and foreign
commerce do not circumvent them. The Wire Act, which prohibits gambling
businesses from using interstate or international telecommunications wires
to knowingly transmit or receive bets, is the main federal statute used to
prosecute such activity. Foreign countries and jurisdictions have taken a
variety of approaches to regulating on-line gaming, including legalizing some
forms, seeking effective regulatory approaches, and prohibiting it entirely.
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 on line 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. Despite attempts to circumvent these efforts by using improper
coding, the success of these restrictions has caused gaming analysts to lower
their 2003 revenue projections for the on-line gaming industry.
Representatives of law enforcement agencies told us that Internet gambling
could be used to launder money, but others viewed the threat as less serious.
Law enforcement representatives said that the anonymity and jurisdictional
issues characteristic of Internet gambling make on-line gaming a potentially
powerful tool for money launderers. They noted that few money laundering
cases involving Internet gambling had been prosecuted but attributed the
small number of cases primarily to a lack of regulation and oversight.
However, regulatory agencies and officials from the credit card and gaming
industries did not believe that Internet gambling was any more susceptible to
money laundering than other forms of e-commerce.
www.gao.gov/cgi-bin/getrpt?GAO-03-89
To view the full report, including the scope
and methodology, click on the link above.
For more information, contact William O.
Jenkins, Jr., Director, Financial Markets and
Community Investment at (202) 512-8757 or
jenkinswo@gao.gov.
Highlights of GAO-03-89, a report to the
House Committee on Financial Services
and Subcommittees on Financial
Institutions and Consumer Credit, and
Oversight and Investigations
December 2002
INTERNET GAMBLING
AN OVERVIEW OF THE ISSUES
Internet gambling is a fast-growing
industry with estimated 2003
revenues of more than $4 billion.
However, concerns have been
raised about its social and
economic impacts. In light of
recent recommendations by a
Congressionally appointed
commission, which advocated
restricting Internet gambling within
the United States, GAO was asked
to examine the U.S. payments
system, particularly credit cards, as
it relates to interactive on-line
gaming. We examined (1) the legal
framework for Internet gambling
domestically and abroad; (2) the
credit card industry’s policies
regarding the use of credit cards to
pay for Internet gambling and
actions taken to restrict such
usage; and (3) the views of law
enforcement, banking regulators,
and the credit card and gaming
industries on the vulnerability of
Internet gambling to money
laundering. We issued an interim
report on these issues in
September 2002. GAO makes no
recommendations in this report.
Page i GAO-03-89 Internet Gambling Overview
Letter 1
Results in Brief 3
Background 6
The Legal Framework for Internet Gambling Is Complex 11
Full-Service Companies and Credit Card Associations Take
Different Approaches to Restricting Internet Gambling 20
Views on the Vulnerability of Internet Gambling to Money
Laundering Are Mixed 34
Agency Comments and Our Evaluation 38
Appendix I Scope and Methodology 40
Appendix II Interstate Horseracing Act 42
Appendix III Internet Gambling Regulation in Foreign
Jurisdictions 45
Australia 45
Canada 46
Hong Kong 47
United Kingdom 48
Appendix IV Survey of Internet Gambling Web Sites 51
Sampling 51
Overview of Results 51
Data Collection Instrument 54
Text of the Data Collection Instrument 57
Appendix V GAO Contacts and Staff Acknowledgments 61
GAO Contacts 61
Acknowledgments 61
Tables
Table 1: Live Web Sites Listing Licensing Countries and Contacts 52
Table 2: Results of Internet Gambling Web Site Survey 53
Contents
Page ii GAO-03-89 Internet Gambling Overview
Figures
Figure 1: Total Number of Issued Credit Cards 9
Figure 2: Blocking a Credit Card Transaction 23
Figure 3: DCI for Electronic Web Site Survey 55
Abbreviations
DCI data collection instrument
DOJ Department of Justice
FATF Financial Action Task Force
FBI Federal Bureau of Investigation
IGRA Indian Gaming Regulatory Act
IHA Interstate Horseracing Act
NTRA National Thoroughbred Racing Association
U.K. United Kingdom
Page 1 GAO-03-89 Internet Gambling Overview
December 2, 2002
The Honorable Michael G. Oxley
Chairman
Committee on Financial Services
The Honorable John J. LaFalce
Ranking Minority Member
Committee on Financial Services
The Honorable Spencer Bachus
Chairman
Subcommittee on Financial Institutions and Consumer Credit
Committee on Financial Services
The Honorable Sue W. Kelly
Chairwoman
Subcommittee on Oversight and Investigation
Committee on Financial Services
House of Representatives
Internet gambling1 is a growing industry. Since the mid-1990s, Internet
gambling operators have established approximately 1,800 e-gaming Web
sites in locations outside the United States, and global revenues from
Internet gaming in 2003 are projected to be $5.0 billion dollars. In 1996,
Congress created the National Gambling Impact Study Commission to
examine the social and economic impacts of gambling, including Internet
gambling, by conducting a comprehensive legal and factual study. In its
1999 report, the commission recommended (1) that the federal
government prohibit any Internet gambling not already authorized and
encourage foreign governments not to harbor Internet gambling
organizations, and (2) that Congress pass legislation prohibiting the
collection of credit card debt for Internet gambling.2 The social and
1Internet gambling involves any activity that takes place via the Internet and that includes
placing a bet or wager. The Internet is a complex web of computer networks that allows a
person in one place in the world to communicate by computer with another person located
in another place in the world. Courts generally have defined a bet or wager as any activity
that involves a prize, consideration, and chance. A prize is anything of value. Chance is
usually determined by assessing whether chance or skill predominates. Consideration is
what the person must pay to enter and must be something of value, such as money.
2National Gambling Impact Study Commission, “Final Report” (June 1999).
United States General Accounting Office
Washington, DC 20548
Page 2 GAO-03-89 Internet Gambling Overview
economic concerns about Internet gambling raised in the report included
underage gambling, pathological gambling, lack of consumer protections,
and criminal abuse. In response to these concerns, numerous bills were
introduced in Congress to prohibit Internet gambling.
To assist with your continuing deliberations on Internet gambling, you
asked that we review the use of the U.S. payments system, particularly
credit cards, to restrict illegal Internet gambling. Specifically, our
objectives were to:
• examine the legal framework for Internet gambling activities, primarily in
the United States, but also in selected foreign countries;
• describe the nature and scope of the policies and procedures the credit
card industry has implemented to restrict the use of credit cards as a form
of payment for Internet gambling; and
• obtain views on the vulnerability of Internet gambling to money
laundering.
We issued an interim report on these issues in September 2002 and are
now issuing our final report .3 It includes additional information on the
policies of selected foreign jurisdictions, on regulations governing horse
racing, on the policies and procedures of U.S.-based credit card banks and
third-party processors, and on alternative payment mechanisms.
To address the legal issues in the United States, we researched federal and
state laws, reviewed judicial opinions, and examined related studies. We
also spoke with representatives of the Department of Justice (DOJ) and
the offices of the attorneys general for selected states. For the
international legal framework, we contacted gaming and government
officials and gaming lawyers in selected countries and researched
secondary sources that describe their laws. To obtain information on the
credit card industry’s efforts to deal with Internet gambling, we
interviewed officials of the four major credit card organizations, some
large issuing and acquiring member banks, several third-party processors,
and a number of banking trade associations. We conducted an electronic
survey of 202 Internet gambling sites, which is a representative sample of
the approximately 1,800 Internet gambling sites. We used the survey to
3Interim Report on Internet Gambling (GAO-02-1101R, Sept. 23, 2002).
Page 3 GAO-03-89 Internet Gambling Overview
gather information on, among other things, payment acceptance policies
for Internet gambling Web sites. We also interviewed gaming industry
experts, state representatives, and law enforcement officials to obtain
their views on the susceptibility of Internet gambling to money laundering
and on some of the legal issues pertaining to on-line gaming. Appendix I
discusses our scope and methodology in detail.
Internet gambling is an essentially borderless activity that poses regulatory
and enforcement challenges. The legal framework for regulating it in the
United States and overseas is complex. U.S. law as it applies to Internet
gambling involves both state and federal statutes. In general, gambling is
regulated at the state level, with each state determining whether
individuals can gamble within its borders and whether gaming businesses
can legally operate there. Five states (Illinois, Louisiana, Nevada, Oregon,
and South Dakota) have enacted laws that specifically prohibit certain
aspects of Internet gambling, but laws in other states that prohibit some
types of gambling activities generally apply to Internet gaming as well.
Federal law recognizes that state laws vary and seeks to ensure that
neither interstate nor foreign commerce is used to circumvent them. To
date, 18 U.S.C. § 1084 (commonly referred to as the Wire Act) is the
principal federal statute that has been used to prosecute Internet gambling
activities across state lines.4 Although other acts appear to have direct
applicability to on-line gambling, we are unaware of federal prosecutions
under these statutes.5 However, these other federal statutes have been
used to prosecute gambling establishments (often located offshore) that
accept bets over the telephone. According to an interactive gaming
industry services group, Internet gambling has been legalized in over 50
countries and jurisdictions, mostly in Europe, the Caribbean, and the
4The Wire Act prohibits gambling businesses from using interstate or international wires to
knowingly receive or send certain types of bets or information that could be used to place
bets. It has been used successfully to prosecute Internet gambling businesses but contains
some ambiguities that may limit its applicability, especially concerning the types of
gambling it covers. DOJ generally takes the view that the Wire Act is not limited to sportsrelated
gambling activities, but case law on this issue is conflicting.
5These acts are the Travel Act (18 U.S.C. § 1952) and the Illegal Gambling Business Act (18
U.S.C. § 1955).
Results in Brief
Page 4 GAO-03-89 Internet Gambling Overview
Australia/Pacific region.6 A few countries and jurisdictions have prohibited
it, but we were unable to determine the exact number.
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
associations7 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.8 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.9 However, as banks increasingly choose to restrict the use of credit
cards for Internet gaming, Internet gambling sites are expected to
6We relied on secondary sources to try to determine where Internet gambling had been
legalized.
7Credit card associations, such as VISA and MasterCard, license their member banks to
issue bank cards, authorize merchants to accept those cards, or both.
8On-line payment providers send and receive funds electronically for such uses as on-line
auctions and purchases.
9Michael Tew and Jason Ader, “E-Gaming: A Giant Beyond Our Borders,” Bear, Stearns &
Co., Inc. (September 2002).
Page 5 GAO-03-89 Internet Gambling Overview
emphasize newer forms of payment, such as e-cash, that could eventually
replace credit cards. 10
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.11 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.
10Computer e-cash entails the issuance of electronic units or electronic value that can be
used for payment in place of currency.
11Money laundering can occur in three stages—the placement, layering, and integration
stages. In the placement stage, funds from illicit activity are converted to monetary
instruments or deposited in financial institutions. In the layering stage, the funds are moved
to other institutions and accounts through various activities to obscure their origins.
Finally, in the integration stage, the funds are used to acquire legitimate assets or fund
further activities.
Page 6 GAO-03-89 Internet Gambling Overview
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.
Currently, individuals wishing to gamble via the Internet can choose from
several types of payment options other than credit cards.15 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
12Tew and Ader, E-Gaming.
13Bear, Stearns & Co. Inc. gaming analysts placed 2003 Internet gambling revenues at an
estimated $5.0 billion. However, the company indicated that it might lower that number to
$4.2 billion because of the recent setbacks the Internet gambling industry has faced in
conducting financial transactions.
14Bear, Stearns & Co. Inc. Internet analysts calculated the estimated on-line commerce
forecasts for 2003.
15Charles Crawford and Melody Wigdahl, “Internet Payment Solutions,” in Internet
Gambling Report V, ed. Anthony Cabot and Mark Balestra (St. Louis: The River City Group,
2002).
Background
Page 7 GAO-03-89 Internet Gambling Overview
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,16
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.
The House of Representatives recently passed the Leach-LaFalce Internet
Gambling Enforcement Act (H.R. 556) to further limit opportunities for
16A smart card looks much like a credit card. Consumers purchase smart cards and load
them with electronic money at a vending machine, bank, Automated Teller Machine,
personal computer (over the Internet), or through a specially equipped telephone. Once the
e-cash is loaded on the card, the money can then be spent over the Internet or through
other communication devices.
Page 8 GAO-03-89 Internet Gambling Overview
gambling over the Internet in the United States. H.R. 556, which passed a
House vote on October 1, 2002, has been referred to the Senate Committee
on the Judiciary. If H.R. 556 is enacted, it will prohibit any person engaged
in the business of gambling from knowingly accepting bank instruments
such as credit cards, electronic fund transfers, or checks for illegal
Internet gambling. Additionally, the Comprehensive Internet Gambling
Prohibition Act of 2002 (S. 3006), introduced in the Senate in late
September 2002, would, if enacted, amend certain sections of the Wire Act
to include the use of all interstate or international communication
facilities transmitting to or from the United States and expand the
prohibited gambling activities covered by the act. H.R. 5760, introduced in
November 2002, represents a different approach. If enacted, it would
establish a commission to conduct a comprehensive study of Internet
gambling and recommend alternative means of effectively regulating such
gambling.
Two types of credit card organizations handle the four major U.S. credit
cards: (1) credit card associations such as VISA International (VISA) and
MasterCard International Inc. (MasterCard) and (2) full-service credit card
companies such as American Express Company (American Express) and
Discover Financial Services, Inc. (Discover). Credit card associations and
full-service credit card companies vary dramatically in size, market reach,
and organizational structure. As of December 31, 2001, for example, the
two major credit card associations had dramatically higher numbers of
issued credit cards than the major credit card companies (fig. 1).
Two Types of Credit Card
Organizations Function in
the U.S. Market
Page 9 GAO-03-89 Internet Gambling Overview
Figure 1: Total Number of Issued Credit Cards
Note: Issued domestically as of December 31, 2001.
Each of the two major associations in our review is owned by its member
financial institutions. Around 21,500 member financial institutions own
VISA, and about two-thirds of them are located in the United States. About
20,000 financial institutions participate in MasterCard worldwide. As
described in a prior GAO report, MasterCard has a two-tier membership
structure composed of principals and affiliates.17 Principal members have a
direct membership relationship with the association and serve as sponsors
to affiliates. For example, a U.S. or foreign bank can apply to become an
affiliate member if a principal member agrees to sponsor the bank and the
bank satisfies the association’s membership criteria and clears the
approval process.
While the associations do not provide credit card services directly to
cardholders or businesses, they establish the operating standards that
define the policies, roles, and responsibilities of their member institutions
and provide the data processing and telecommunications systems that
17Money Laundering: Extent of Money Laundering through Credit Cards Is Unknown
(GAO-02-670, July 22, 2002).
Credit Card Associations
Set Policies, and Members
Issue Cards and Acquire
Merchants
Page 10 GAO-03-89 Internet Gambling Overview
transfer transaction data between members. The member institutions
issue the credit cards to customers, acquire (sign up) merchants to accept
credit cards, or both, along with providing other services directly to the
cardholders and merchants. Member institutions generally fall into two
categories:
• Issuing banks that solicit potential customers, approve applications, and
issue credit cards. These banks extend credit to cardholders, establish the
terms of cardholders’ accounts (for example, credit limits and treatment of
delinquent accounts), collect debts, and maintain accounts and cardholder
records.
• Acquiring banks that solicit potential merchants and approve and license
merchants to accept credit cards. These banks, also known as merchant
banks, enter into agreements authorizing merchants to accept the
association’s credit cards, submit their merchants’ transactions into the
association’s system for payment from issuing banks, and maintain
accounts and related records on their merchant clients.
Third-party processors are also part of the industry. They contract with
acquiring and issuing banks to provide transaction processing and other
services. As part of the services they provide for their banking clients—
members of the credit card associations—processors block Internet
gambling transactions and ensure that Internet gambling sites do not
become approved merchants.
The two full-service credit card companies in our review, American
Express and Discover, issue their own brands of cards directly to
customers and authorize merchants to accept those cards. Discover, an
affiliate of Morgan Stanley, provides primarily credit card services.
American Express, a publicly held company, also provides travel,
financial, and network services. Each company owns a U.S. bank.
American Express and Discover assume primary responsibility for
providing credit card services directly to both customers and merchants.
They perform all major aspects of issuing cards, including approving
applications from customers, mailing cards to customers, authorizing
transactions, and sending out bills. They also perform all major aspects of
acquiring merchants to accept their cards, including signing up merchants,
distributing credit card terminals, and settling merchant accounts. By
acting as both issuer and acquirer, the two companies represent what the
industry refers to as a “closed loop” system. Both companies own and
Full-Service Credit Card
Companies Issue Cards
and Acquire Merchants
Page 11 GAO-03-89 Internet Gambling Overview
operate the electronic networks that handle all information on
transactions for cardholders and merchants.
American Express and Discover market their credit card business to
consumers and potential merchants in the United States. Both companies
issue cards to individuals, and American Express also issues cards to
businesses. In addition, American Express has arrangements in some
overseas markets to license foreign banks to issue its cards and acquire
merchants. As of December 31, 2001, American Express had arrangements
with 74 institutions located in 77 countries other than the United States.
Both federal and state laws apply to Internet gambling in the United
States. In general, gambling is a matter of state law, with each state
determining whether individuals can gamble within its borders and
whether gaming businesses can legally operate there. Since Internet
gambling typically occurs through interstate or international means, with a
Web site located in one state or country and the gambler in another,
federal law is used to protect the states from having their laws
circumvented. To date, the Wire Act is the federal statute that has been
used to prosecute federal Internet gambling cases, although courts
sometimes disagree on the applicability of certain provisions of the
statute. In addition, the Travel Act and the Illegal Gambling Business Act
have been used to prosecute gambling entities that take interstate or
international bets over the telephone and would likely be applicable to
Internet gambling activity. Some states have taken specific legislative
actions to address Internet gambling, in some cases criminalizing it and in
others relying on existing gambling laws to bring actions against entities
engaging in or facilitating Internet gambling. Like the U.S. states, other
countries have enacted laws that explicitly prohibit or permit Internet
gambling under certain conditions or rely on existing laws to prosecute
Internet gaming activity.
The Legal Framework
for Internet Gambling
Is Complex
Page 12 GAO-03-89 Internet Gambling Overview
Although gambling regulation is generally left to the states, the federal
government has the authority, under the Commerce Clause of the
Constitution, to regulate gambling activity that affects interstate
commerce.18 Internet gambling falls into this category, as bets are generally
placed at a personal computer in one state or country and received at a
server in another state or country. Of the three federal statutes that appear
to have direct applicability to on-line gambling—the Wire Act, the Travel
Act, and the Illegal Gambling Business Act—to date only the Wire Act has
been applied in the federal prosecution of activity relating to Internet
gambling. The other two federal gambling statutes have been used in the
closely analogous situation of telephone wagering, including telephone
calls made to place wagers with offshore bookmakers.
The Wire Act prohibits gambling businesses from knowingly receiving or
sending certain types of bets or information that assists in placing bets
over interstate and international wires. Thus, if an Internet gaming Web
site operating in any country (including the United States) receives a bet
transmitted by an individual located in the United States, the operator has
violated the Wire Act. For this reason, foreign entities offering gambling to
U.S. citizens through the Internet would be subject to the Wire Act.
Although some Internet gambling businesses, including foreign entities,
have been successfully prosecuted under the Wire Act, courts do not agree
on the applicability of certain sections of the statute.
First, individual courts have reached different conclusions about the types
of gambling covered by the act. The statute prohibits the transmission of
“information assisting in the placing of bets or wagers on any sporting
event or contest.” This language has led some courts to interpret the Wire
Act as covering bets only on contests that involve sports.
Second, the phrase “transmission of a wire communication” is somewhat
ambiguous as it applies to the Internet. Depending on how the phrase is
interpreted, the act might not apply to Internet gambling in some
instances—for example, when information is only received over the
Internet. Some courts have held that “transmission” means receiving as
18U.S. Const., art. I, § 8, cl. 3 states in relevant part that “The Congress shall have Power . . .
[t]o regulate Commerce with foreign Nations, and among the several States, and with the
Indian Tribes.”
The Federal Government
Regulates Gambling That
Involves Interstate or
International Activity
The Wire Act Prohibits
Gambling Businesses from
Receiving or Sending Bets over
Interstate and International
Wires
Page 13 GAO-03-89 Internet Gambling Overview
well as sending information, while others have held that it means only
sending.19
Third, some disagreement exists among the courts concerning the second
paragraph of the Wire Act, 18 U.S.C. § 1084(b), which provides that:
“[n]othing in this section shall be construed to prevent the transmission . . . of
information assisting in the placing of bets or wagers on a sporting event or
contest from a State or foreign country where betting on that sporting event or
contest is legal into a State or foreign country in which such betting is legal.”
In other words, transmitting information to assist in placing bets on a
certain event is legal if two conditions are met: (1) betting on the event is
legal in both the place where the transmission originates and the place
where it is received, and (2) the transmission is limited to information that
assists in the placing of bets—that is, it does not include the bets
themselves.20 Certain courts have stated that this language means that
when the betting activity is legal in both jurisdictions, interstate gambling
would not be a violation of the Wire Act.21 Most courts disagree with this
interpretation of Section 1084(b), and based upon the language of Section
1084(b) and clear statements in the legislative history, DOJ disagrees with
this interpretation as well.22
Finally, the Wire Act mandates that a wire communication facility must be
involved in order for a violation to occur. Currently, all Internet
communications are dependent in some way on some type of wire
communication, such as telephone or data lines. Depending on how
Internet technology develops, however, future Internet communications
may no longer be wire communications covered under the Wire Act.
The two other federal statutes with direct applicability to Internet
gambling are the Travel Act and the Illegal Gambling Business Act. The
Travel Act provides criminal penalties for anyone who undertakes
19United States v. Reeder, 614 F.2d 1179 (8th Cir. 1980); United States v. Stonehouse, 452
F.2d 455 (7th Cir. 1971); Telephone News Sys. v. Illinois Bell Tel. Co, 220 F. Supp. 621
(N.D. Ill. 1963), aff’d, 376 U.S. 782 (1964).
20United States v. Cohen, 260 F.3d 68, 73 (2d Cir. 2001). cert. denied, 122 S. Ct. 2587 (2002);
United States v. Ross, 1999 WL 782749 (S.D.N.Y. 1999).
21United States v. Kaczowski, 114 F. Supp. 2d 143, 153 (W.D. N. Y. 2000); Missouri v. Coeur
D’Alene Tribe. 164 F.3d 1102, 1109 n.5 (8th Cir. 1999), cert. denied, 527 U.S. 1039 (1999).
22H.R. Rep. No. 87-967 at 3 (1961).
Other Federal Gambling Laws
Apply to Internet Gambling
Page 14 GAO-03-89 Internet Gambling Overview
interstate or foreign commerce with the intent to distribute the proceeds
of any unlawful activity. The Illegal Gambling Business Act makes it a
crime to operate an “illegal gambling business.”
The Travel Act imposes criminal penalties for those who utilize interstate
or foreign commerce with the intent to distribute the proceeds of any
unlawful activity. Under the Travel Act, unlawful activity includes any
business enterprise involving gambling in violation of the laws of the state
where the gambling takes place or of the United States. Thus, gambling
over the Internet generally would violate the Travel Act because an
interstate facility, the Internet, is used to conduct gambling.
The Illegal Gambling Business Act makes it a crime to operate an illegal
gambling business, which is defined as any gambling business that meets
three conditions:
• it violates a law of the state where it takes place,
• it involves at least five people (not even the same five people) at all times
during a 30-day period, and
• it operates for the most part continuously for longer than 30 days or takes
in gross revenues of $2,000 in a single day.
Operating a gambling Web site for over 30 days in a state under the
conditions described above would violate this act. A Web site could easily
meet these conditions, including the requirement that at least five
individuals be involved in its operation. The five people do not need to be
directly involved in the gambling but must only be considered “necessary
and helpful” to the operation. Computer operators, computer maintenance
crews, accountants, and owners could all be included as “necessary and
helpful” in the operation of an Internet gambling Web site.
Like the Wire Act, the Illegal Gambling Business Act applies only to
gambling businesses, not individual gamblers. The Illegal Gambling
Business Act does not require that the casino operators be convicted in
state court, but the gambling activity must violate state law.23 The proof
requirements associated with the Illegal Gambling Business Act are
minimal; the government must prove only that the business has met the
23United States v. Murray, 928 F.2d 1242, 1245 (1st Cir. 1991).
Page 15 GAO-03-89 Internet Gambling Overview
three conditions.24 The 30-day requirement is satisfied if there is a
“repeated pattern of gambling activity.”25
Two other statutes have some applicability to Internet gambling—the
Indian Gaming Regulatory Act (IGRA) and the Interstate Horseracing Act
(IHA). Certain types of gaming on Indian reservations are permitted under
IGRA, with the regulatory jurisdiction determining the type of gambling
that is permissible. 26 A recent case addressed some of the issues and
raised the question of whether Internet gambling takes place on tribal
lands when bettors who are not on tribal lands use their home computers
to access Internet lotteries via computer servers that are. The case
involved the question of whether the state of Missouri could prevent a
Native American tribe in Idaho from accepting money from Missouri
residents via a lottery Internet site.27 After dismissals, removals, and
appeals, the case was eventually settled, but it is unclear whether the court
resolved the issue of whether Internet gambling takes place on tribal lands
when the Web site is located on those lands.28 For more information on
IGRA, see our interim report.29
Pari-mutuel wagering on state-licensed horse races takes place over the
Internet in a number of states.30 Federal and state laws govern this activity.
In 1978, Congress passed the IHA to regulate interstate commerce with
respect to pari-mutuel wagering on horse races. The IHA provides that no
person may accept an interstate off-track wager without the consent of the
24United States v. DiMuro, 540 F.2d 503, 508 (1st Cir. 1976), cert. denied, 429 U.S. 1038
(1977).
25United States v. Nerone, 563 F.2d 836, 843 (7thCir. 1977); United States v. Allen, 588 F.2d
1100, 1104 (5th Cir. 1979), cert. denied, 441 U.S. 964 (1979).
26Pub. L. 100-497, 102 Stat. 2467 (1988) (Found at 27 U.S.C. § 2701, et. seq.).
27164 F. 3d 1102 (8th Cir), cert. denied, 527 U.S. 1039 (1999).
28However, the issue of where Internet gambling takes place has been addressed and
resolved in United States v. Cohen, 260 F.3d 68 (2d Cir. 2001), cert. denied, 122 S. Ct. 2587
(2002).
29GAO-02-1101R.
30Horse racing uses the pari-mutuel system of wagering, in which bettors bet against one
another instead of against the house. For pari-mutuel wagering, the money bet on a race is
pooled, and approximately 80 percent is returned to the winning bettors. The remaining 20
percent (the takeout) is distributed among the state government, the jockeys that race at
the track, and the racetrack owners. The amount allotted for the takeout varies among
states.
Page 16 GAO-03-89 Internet Gambling Overview
appropriate host racing association, the host racing commission, the offtrack
racing commission, and nearby race tracks. An interstate off-track
wager is defined as “a legal wager placed or accepted in one State with
respect to the outcome of a horse race taking place in another State.” Parimutuel
wagers fall into this category if they are legal in both of the states,
are made by telephone or other electronic device, and are accepted by an
off-track betting system in any state, as well as the combination of any
pari-mutuel wagering interstate pools.31 The language of the statute
appears to allow the electronic transmission of interstate bets as long as
the appropriate consent is obtained.
Wagering on horses over the Internet is generally done using a closed-loop
subscriber-based system designed to limit access. In March 2000, DOJ
officials testified that it was a violation of the Wire Act for an entity to
offer bets on horse races over the Internet; however, to date, DOJ has not
brought any cases against any state-licensed horse racing tracks for
accepting wagers from out-of-state bettors using the Internet or any other
wire communication. In addition, IHA was amended in December 2000,
after DOJ testified in March 2000 to explicitly expand interstate off-track
wagers to include wagers through the telephone or other electronic
media.32 For more information on IHA, see appendix II.
Five states (Illinois, Louisiana, Nevada, Oregon, and South Dakota) have
enacted laws that specifically prohibit aspects of Internet gambling. In
states that have not specifically enacted legislation prohibiting Internet
gambling, existing state gambling laws could apply, and new legislation
would not be necessary. For example, in states that prohibit all types of
gambling, such as Utah, Internet gaming also would be illegal. In some
states the status of Internet gambling is unclear, as laws may prohibit
some types of gaming, but may not be interpreted as applying to Internet
gambling.
We reviewed the gambling laws of five selected states—Massachusetts,
Nevada, New Jersey, New York, and Utah—to determine how their
existing laws would affect Internet gambling. We chose these states
31Interstate Horseracing Act of 1978, Pub. L. 95-515, § 2, 92 Stat. 1811, codified at 15 U.S.C. §
§ 3001-3007 (1994).
32District of Columbia Appropriations Act of 2000, Pub. L. No. 106-553, § 629, 114 Stat. 2762,
2762A-108 (codified at 15 U.S.C. § 3002(3)).
State Laws Affecting
Internet Gambling Vary
Page 17 GAO-03-89 Internet Gambling Overview
because they have a wide range of gambling provisions, from total
prohibition to allowing certain types of legalized land-based casino
gambling. Massachusetts, for instance, has legalized dog and horse racing
under the supervision of the state racing commission and certain
statewide lotteries and raffles by certain organizations under the
supervision of the State Lottery, a division of the state Treasury
department. But Massachusetts law prohibits most other types of
gambling, including transmitting a bet or wager using the telephone.
However, Massachusetts does not have a statute specifically addressing
Internet gambling. Nevada has legalized land-based casino gambling, but
Internet gambling is illegal. However, the state has authorized the Nevada
Gaming Commission to adopt regulations governing the licensing and
operation of Internet gambling if the Commission determines that
interactive gaming can be operated in compliance with all applicable laws.
In New Jersey, gambling can be made legal only by referendum, and only
land-based casino gambling in Atlantic City, licensed horse racing, state
lotteries, bingo and raffles for certain groups, and amusement games have
been approved via referendum. New York has authorized certain lotteries,
certain types of pari-mutuel betting on horse races and bingo, lotto games,
and local games of chance that operate under specific conditions, but
prohibits most other types of gambling. Utah prohibits all forms of
gambling, including state-run lotteries, and the Assistant Attorney General
has stated that Utah believed that gambling of any type from a computer
located in Utah would constitute gambling within the state. The attorneys
general of New Jersey and New York have recently initiated actions or
investigations against entities that either engage in or facilitate Internet
gambling businesses. For more information on the approaches these states
have taken to Internet gambling, please see our interim report.
Like the United States, a number of other countries have commissioned
detailed reviews to determine the implications of gambling, including
Internet gambling, within their countries. These countries take a variety of
approaches to regulating Internet gambling. For a number of reasons, we
were unable to determine how many countries explicitly prohibit Internet
gambling. For example, gaming laws in many countries, like those in many
U.S. states, apply to gaming in general rather than to Internet gambling.
Although we were unable to determine the exact number, an interactive
gaming industry services group reported that over 50 countries and foreign
jurisdictions, mostly in Europe, the Caribbean, and the Australia/Pacific
region, have legalized Internet gambling. To illustrate the different
approaches countries take to regulating Internet gambling, we reviewed
Other Countries Face
Similar Legal Challenges in
Dealing with Internet
Gambling Issues
Page 18 GAO-03-89 Internet Gambling Overview
four jurisdictions: Australia, Canada, Hong Kong, and the United Kingdom
(U.K.). Appendix III contains more detailed information about each of
these jurisdictions.
In July 2001, following a year-long moratorium on the development of the
interactive gaming industry, the Australian Parliament enacted the
Interactive Gambling Act of 2001 that prohibits operators from providing
an Internet gambling service to Australian residents. The act applies to
interactive casinos and games on the Internet but does not apply to sports
wagering or lotteries, which continue to be regulated by existing state and
territorial legislation. It covers all interactive gambling service providers,
including those based in Australia and offshore, and both Australian and
foreign-owned businesses. The maximum penalty for violations is $220,000
AUD ($121,000 USD) per day for individuals and $1.1 million AUD
($606,000 USD) per day for corporate bodies.33 The act also makes it an
offense to provide such services to people in a “designated country”—that
is, one that has asked for and received that designation from the
Australian Minister of Communication, Information Technology, and the
Arts to prohibit interactive gaming operators licensed in Australia from
offering services to its citizens.34
The Criminal Code of Canada makes it illegal to gamble or conduct any
gaming activities within Canada unless they fall within recognized
exceptions set out in the Criminal Code. The exceptions include “lottery
schemes” that are conducted and managed by a province (such as casinos
and electronic gambling), a narrower range of lottery schemes that are
licensed by a province (to a charity, a fair or exhibition, and, rarely, to a
private individual), bets made between individuals not engaged in the
business of betting, pari-mutuel betting on horse races (regulated by the
federal Minister of Agriculture) and some lottery schemes conducted in
Canada on international cruise ships. Under the Criminal Code, only
provincial governments are permitted to offer a lottery scheme on or
through a computer and only to residents of that province; they may not
license others to conduct one. Therefore, in order to offer on-line gambling
in Canada, a provincial government would have to operate the sites itself.
It would also need to ensure that residents of other provinces could not
participate unless cooperative agreements existed.
33As of September 30, 2002, $1 USD was worth $1.80 AUD.
34A “designated country” is defined in Section 9A of the Interactive Gambling Act 2001. No.
84, 2001.
Australia
Canada
Page 19 GAO-03-89 Internet Gambling Overview
In addition, commercial land-based betting on single sporting events is
prohibited in Canada and therefore would not be permitted over the
Internet. A recent case from the Prince Edward Island Supreme Court
(Appeal Division) held that an Internet lottery ticket Web site licensed by
the Province of Prince Edward Island would not be conducted and
managed in the province as required by the Criminal Code. The court
found that even though the server was located in the province, the lottery
would violate the Criminal Code by offering gambling to a worldwide
market. In addition, since it was licensed to a charity and not conducted
by the province, it violated the Criminal Code requirement that only
provinces conduct computerized lottery schemes. This case is now on
appeal to the Supreme Court of Canada.
Gambling is unlawful in Hong Kong unless specifically permitted by law.
In May 2002, the Hong Kong Legislative Council voted to ban offshore
gambling, including offshore Internet gambling, by passing the Gambling
(Amendment) Ordinance. This law makes both offshore betting and
bookmaking criminal offenses and provides for criminal penalties against
offshore gambling agents that promote, facilitate, or advertise their
products to Hong Kong residents. The maximum punishment for brokers
is 7 years in prison and a penalty of $5 million HKD ($641,000 USD), while
individual bettors face 9 months in prison and a penalty of $30,000 HKD
($3,800 USD).35 However, it is legal for the Hong Kong Jockey Club—the
legal gambling monopoly—to offer its services on-line to Hong Kong
residents.
The U.K. has several laws and regulatory schemes that apply to gambling,
but there are no specific laws governing Internet gambling. Some forms of
gambling can be carried out on the Internet under existing law, while
others cannot. In July 2001, the UK Gambling Review Body published its
report (“the Budd Report”), which states that prohibiting on-line gambling
by British consumers would be an unrealistic objective. In response to the
Budd Report, the UK’s Department for Culture, Media, and Sport is
working to develop a timetable for introducing new gambling legislation
sometime between 2003 and 2004. The new legislation is to contain a
number of major gambling reforms, including legislation on Internet
gambling.
35As of September 30, 2002, $1 USD was worth $7.80 HKD.
Hong Kong
United Kingdom
Page 20 GAO-03-89 Internet Gambling Overview
Full-service companies and credit card associations have taken different
approaches to restricting the use of their cards for Internet gambling.
Credit card companies have focused primarily on prohibiting Internet
gambling sites from becoming credit card merchants. Credit card
associations and their members have focused primarily on facilitating the
blocking of Internet gambling transactions. Most large U.S. association
members that issue credit cards told us that they have chosen to block
these transactions. For a variety of reasons, however, they cannot always
identify all Internet gambling transactions. For example, both association
and bank officials told us that some gambling Web sites deliberately
miscode gambling transactions. The credit card associations monitor
transactions and take action against acquiring banks when they are not
properly coding Internet gambling transactions. In addition, U.S.-based
acquiring banks that belong to associations do not acquire Internet
gambling merchants as customers, although association members in other
countries do.
American Express and Discover have companywide policies that restrict
the use of credit cards for Internet gambling, but officials stated that the
restrictions apply to all gambling activities because the companies do not,
as a matter of policy, want to do business with what they consider to be a
high-risk industry. Both credit card companies have developed specific
procedures to help ensure that Internet gambling sites do not become
credit card merchants. First, Internet businesses applying to become
merchants are screened, generally through routine visits and reviews of
the applicants’ Web sites, to verify that they have accurately represented
the business they are in and are not engaged in any gambling activities.
Second, existing Internet credit card merchants are monitored to ensure
that they do not discreetly transform into Internet gambling sites—
something that, according to officials, has happened. One credit card
company told us that it had contracted with a third-party vendor to help
implement an Internet monitoring system designed to identify improper
use of its card. This initiative entailed identifying and testing Internet
gambling sites attempting to secure payments using the company’s credit
card, including existing merchants that may have expanded into Internet
gambling activities. Company officials noted that the vendor had also
identified several Internet gambling sites that were illegally using the
company’s logo to give the sites legitimacy. The second company told us
that it uses its own employees, rather than an outside vendor, to conduct
similar reviews of Internet gambling sites in general and of the company’s
existing Internet merchants in particular. The results of our survey of
Internet gambling Web sites showed that most do not promote full-service
Full-Service
Companies and Credit
Card Associations
Take Different
Approaches to
Restricting Internet
Gambling
Full-Service Companies
Focus on Keeping Internet
Gambling Sites from
Becoming Merchants
Page 21 GAO-03-89 Internet Gambling Overview
credit card companies, although the cards were advertised as a possible
form of payment on 8 of the 162 we reviewed.36 Appendix IV provides
additional information on our survey.
In spite of these efforts, credit card company officials recognize that some
Internet gambling sites that attempt to secure credit card payments may
still go unidentified. Thus, as part of their overall efforts to monitor fraud,
both companies have also implemented procedures to monitor
transactions for patterns that might indicate that credit cards are being
used for Internet gambling activity. However, like issuing bank officials,
credit card company officials acknowledged that identifying Internet
gambling transactions after the fact is difficult. They also agreed that online
payment providers present a challenge to credit card companies that
are trying to restrict the use of their cards for Internet gambling. 37 Officials
for both companies stated that they had reached an agreement with one
major on-line provider stipulating that the provider would block Internet
transactions using the companies’ technology and were working on similar
agreements with other on-line payment providers.
Neither VISA nor MasterCard has issued policies to its members that
restrict the use of the association’s credit cards for Internet gambling.
Instead, both associations have developed procedures that enable member
banks wanting to block Internet gambling transactions to do so. Officials
from both associations explained that reaching a consensus on a blanket
policy among members around the world would likely be difficult. Some
members are located in countries where Internet gambling is legal and,
according to one official, represents an expanding business market. Policy
decisions to restrict the use of credit cards for Internet gambling are
therefore left to the discretion of individual member institutions.
Association officials note, however, that their members agree with
operating regulations for both VISA and MasterCard stipulating that only
legal transactions may be introduced into the systems.
36We were not able to test whether a customer would be able to use certain cards on these
sites.
37On-line payment providers, such as PayPal, Inc. or SureFire, send and receive funds
electronically for such uses as on-line auctions and purchases—and possibly Internet
gambling. Members of the credit card industry also refer to on-line payment providers as
payment aggregators.
Credit Card Associations
Have Focused on Enabling
Members to Block
Payments
Page 22 GAO-03-89 Internet Gambling Overview
VISA and MasterCard have each developed a system of coding that allows
member institutions, at their discretion, to block Internet gambling
transactions. Both associations have had a long-standing uniform coding
system designed to facilitate the processing and authorization of credit
card payments for member banks. About 4 years ago, the associations
refined their systems to include a cross-indexed scheme of merchant and
commerce codes so that Internet gambling transactions could be
identified. Internet gambling merchants that accept VISA or MasterCard
payments are required to use a combination of a gaming merchant
category code and an electronic commerce indicator code. These two
codes, which are transmitted through the credit card network to the card
issuer as part of the requested authorization message, inform the card
issuer that the transaction is an Internet gambling transaction. The issuer
can then deny authorization.
Officials explained that the coding system informs card issuers that the
transaction is an Internet gambling transaction but cannot signal whether
the particular transaction is legal or illegal. The existing coding system
does not capture enough information to distinguish between legal and
illegal Internet gambling transactions. Moreover, an official pointed out
that the distinction between legal and illegal transactions is difficult to
make because of the complexities involved in determining which laws
govern any particular Internet transaction and the practical limitations of
determining where a cardholder may actually be when engaging in the
transaction. As a result, a member bank’s decision to block Internet
gambling transactions may result in blocking all properly coded Internet
gambling transactions—both in jurisdictions where on-line gaming is legal
and illegal. For example, a U.S. cardholder may visit a country where
Internet gambling is legal and, while there, attempt to use a credit card to
pay for on-line gambling transactions. If the credit card issuer has chosen
to block Internet gambling transactions and the transaction has been
properly coded, authorization for payment will be denied.
Although the credit card issuer is responsible for making the policy
decision on whether to deny authorization for Internet gambling
transactions, actual blocking of transactions can occur at different points
in the credit card transaction process. In some cases, the issuer has asked
the association to block the transactions on its behalf. Other issuers do the
blocking themselves, while still others instruct their third-party processors
to do the blocking (fig. 2).
Page 23 GAO-03-89 Internet Gambling Overview
Figure 2: Blocking a Credit Card Transaction
Most Large Association
Member Banks Use
Transaction Coding to Block
Internet Gambling Transactions
Page 24 GAO-03-89 Internet Gambling Overview
Information on the number of member institutions belonging to credit
card associations that have opted to systematically block Internet
gambling transactions is not readily available. However, association
officials noted that many of the largest U.S. credit card issuers have
chosen to follow this course of action. Officials from the eight large U.S.-
based issuing member banks we reviewed, which represent more than 80
percent of the purchase volume of cards issued by VISA and MasterCard in
the United States, all indicated that they had implemented policies to deny
payment authorization for Internet gambling transactions coming through
their automated systems. Officials of a trade association for community
banks and the processor of its members’ credit card transactions stated
that most, if not all, of the small community bank issuers had also chosen
to block Internet gambling transactions. However, some association
members—primarily those in foreign jurisdictions where Internet
gambling may be legal—continued to acquire Internet gambling sites as
merchants.
The eight issuing banks in our review implemented their blocking policies
between the early months of 2000 and June 2002. Internet gambling
transactions can be blocked in two ways: either the issuer blocks the
payment directly, or another party, such as a third-party processor or an
association, does it instead. Five of the eight issuers told us that they
blocked Internet gambling transactions themselves; the other three relied
on a major third-party processor or an association to block on their behalf.
Issuers that do their own blocking stated that by doing the blocking
themselves, they were able to maintain control over transactions. For
example, they were able to perform their own risk management of these
transactions or contact their customers to discuss the transactions.
Officials at two issuing banks told us they believed that authorizing or
denying all transactions themselves gave them a better chance of catching
Internet gambling merchants seeking to disguise the transactions.
Although denials of payment for Internet gambling had decreased
significantly since the company began blocking Internet gambling
transactions, an issuing bank official noted that, in the previous quarter,
their system had identified eight merchants that were conducting
inappropriate activities, including disguising Internet gambling
transactions.
One of the major reasons some issuers gave for their decision to block
Internet gambling transactions was their belief that Internet gambling is a
high-risk industry, vulnerable to fraud and other illegal activities. Most of
the issuing banks explained that they blocked Internet gambling
transactions primarily because of on-line gambling’s unclear legal status,
Most Large Association
Member Banks Use
Transaction Coding to Block
Internet Gambling Transactions
Page 25 GAO-03-89 Internet Gambling Overview
which they believed could cause them to unknowingly facilitate illegal
Internet gambling, and because of the financial impact (for example,
potential legal costs and charge-offs) that could result if the customers
refused to pay their gambling charges. 38 Since the legality of Internet
gambling is questionable, debts incurred through such activities may be
unenforceable. Using this argument, some bettors have refused to pay
their gambling debts, claiming that the issuing banks facilitated the
“illegal” activities. In addition, in a number of lawsuits in U.S. courts,
bettors have claimed that the credit card issuer is liable for allowing
bettors to use its services for an illegal activity under state law. In one
case, the bank that had issued the credit card sued the bettor when the
bettor refused to pay the credit card bills for her gambling losses. In a
countersuit, the bettor claimed that the bank was liable for letting the
bettor gamble with the credit card when such gambling activity was illegal
in her state. The case was settled before the trial. One of the provisions of
the settlement required the Internet gaming sites to pay the bettor’s
Internet gambling debts to the banks that issued the credit cards. Half of
the issuing banks in our review told us that they have explicit disclosures
in their cardholder agreements stating that their cards cannot be used for
Internet gambling and two of these banks said they had added the explicit
reference only recently because of these lawsuits. Other issuing banks said
that their cardholder agreements state that their cards cannot be used for
illegal activities but do not specifically mention Internet gambling.
According to gaming analysts, issuing banks’ efforts to block Internet
gambling transactions could reduce the projected growth of the Internet
gaming ind

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