Internet Gambling
An Overview of the Issues Gao ID: GAO-03-89 December 2, 2002Internet 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.
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.
GAO-03-89, Internet Gambling: An Overview of the Issues
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Report to Congressional Requesters:
United States General Accounting Office:
GAO:
December 2002:
Internet Gambling:
An Overview of the Issues:
GAO-03-89:
GAO Highlights:
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:
Why GAO Did This Study:
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.
What GAO Found:
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.
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click on the
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or
jenkinswo@gao.gov.
Contents:
Letter:
Results in Brief:
Background:
The Legal Framework for Internet Gambling Is Complex:
Full-Service Companies and Credit Card Associations Take Different
Approaches to Restricting Internet Gambling:
Views on the Vulnerability of Internet Gambling to Money Laundering Are
Mixed:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Scope and Methodology:
Appendix II: Interstate Horseracing Act:
Appendix III: Internet Gambling Regulation in Foreign
Jurisdictions:
Australia:
Canada:
Hong Kong:
United Kingdom:
Appendix IV: Survey of Internet Gambling Web Sites:
Sampling:
Overview of Results:
Data Collection Instrument:
Text of the Data Collection Instrument:
Appendix V: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Acknowledgments:
Tables:
Table 1: Live Web Sites Listing Licensing Countries and Contacts:
Table 2: Results of Internet Gambling Web Site Survey:
Figures:
Figure 1: Total Number of Issued Credit Cards:
Figure 2: Blocking a Credit Card Transaction:
Figure 3: DCI for Electronic Web Site Survey:
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:
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 gambling[Footnote 1] 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.[Footnote 2] The social and 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.[Footnote 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 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.
Results in Brief:
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.[Footnote 4] Although other acts appear
to have direct applicability to on-line gambling, we are unaware of
federal prosecutions under these statutes.[Footnote 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 Australia/
Pacific region.[Footnote 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 associations[Footnote 7] 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.[Footnote 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.[Footnote 9] 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.[Footnote 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.[Footnote 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.
Background:
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,[Footnote 12] gaming analysts estimate that
in 2003 revenues from Internet gambling industrywide will be $5.0
billion,[Footnote 13] or approximately 4.3 percent of the total $116
billion in business-to-consumer global e-commerce.[Footnote 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.[Footnote
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 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,[Footnote 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
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 Function in the U.S. Market:
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).
Figure 1: Total Number of Issued Credit Cards:
Note: Issued domestically as of December 31, 2001.
Credit Card Associations Set Policies, and Members Issue Cards and
Acquire Merchants:
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.[Footnote 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 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.
Full-Service Credit Card Companies Issue Cards and Acquire 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 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.
The Legal Framework for Internet Gambling Is Complex:
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 Federal Government Regulates Gambling That Involves Interstate or
International Activity:
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.[Footnote 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 Receiving or Sending
Bets over Interstate and International Wires:
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
well as sending information, while others have held that it means only
sending.[Footnote 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.[Footnote 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.[Footnote 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.[Footnote 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.
Other Federal Gambling Laws Apply to Internet Gambling:
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
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.[Footnote
23] The proof requirements associated with the Illegal Gambling
Business Act are minimal; the government must prove only that the
business has met the three conditions[Footnote 24]. The 30-day
requirement is satisfied if there is a ’repeated pattern of gambling
activity[Footnote 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.[Footnote 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.[Footnote 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.[Footnote 28] For more
information on IGRA, see our interim report.[Footnote 29]
Pari-mutuel wagering on state-licensed horse races takes place over the
Internet in a number of states.[Footnote 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 appropriate host racing
association, the host racing commission, the off-track 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.“ Pari-
mutuel 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.[Footnote 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.[Footnote 32] For more information
on IHA, see appendix II.
State Laws Affecting Internet Gambling Vary:
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 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.
Other Countries Face Similar Legal Challenges in Dealing with Internet
Gambling Issues:
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 four jurisdictions:
Australia, Canada, Hong Kong, and the United Kingdom (U.K.). Appendix
III contains more detailed information about each of these
jurisdictions.
Australia:
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.[Footnote 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.[Footnote 34]
Canada:
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.
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.
Hong Kong:
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).[Footnote 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.
United Kingdom:
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.
Full-Service Companies and Credit Card Associations Take Different
Approaches to Restricting Internet Gambling:
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.
Full-Service Companies Focus on Keeping Internet Gambling Sites from
Becoming Merchants:
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 credit card companies, although the cards were
advertised as a possible form of payment on 8 of the 162 we
reviewed.[Footnote 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 on-line payment providers
present a challenge to credit card companies that are trying to
restrict the use of their cards for Internet gambling.[Footnote 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.
Credit Card Associations Have Focused on Enabling Members to Block
Payments:
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.
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).
Figure 2: Blocking a Credit Card Transaction:
Most Large Association Member Banks Use Transaction Coding to Block
Internet Gambling Transactions:
Most Large Association Member Banks Use Transaction Coding to Block
Internet Gambling Transactions:
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, 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.[Footnote 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 industry from 43 to 20 percent.[Footnote 39] What was estimated
to be a $5.0 billion industry worldwide could now be reduced to $4.2
billion.[Footnote 40] In the meantime, some Internet casino operators
now estimate that four out of every five requests for credit card
payments are denied.
The Associations‘ Transaction Coding Systems Can Be Compromised:
Association and banking industry officials told us that the
effectiveness of efforts issuing banks make to block transactions
involving Internet gambling depends on the integrity of the
associations‘ coding systems as implemented by merchants and acquiring
members throughout the world. However, the coding systems can be
compromised in two ways: (1) by Internet gambling merchants that
attempt to disguise transactions by miscoding them, and (2) by
cardholders who attempt to circumvent the system by using on-line
payment providers.
Merchants May Disguise Transactions Codes:
According to an association official, Internet gambling merchants have
a strong incentive to miscode and thus try to disguise their
transactions since proper coding could result in a denial of
authorization. Circumventing the coding system in this way, according
to the issuers, presents a significant challenge. Issuers have no
control over the merchants and no way to immediately identify and block
all such transactions. Issuing bank officials emphasized the difficulty
of identifying attempts to conceal Internet gambling transactions,
regardless of any proactive efforts to find instances of miscoding. One
official noted that some disguised Internet gambling transactions are
identified only by chance, if at all. Most of the issuers acknowledged
that Internet gambling merchants have circumvented the coding system
primarily by submitting improperly coded transactions that do not
represent Internet gambling or by failing to use the electronic
commerce code. In some cases, a merchant engaged in more than one
business has a secondary merchant code available and uses it to code
what is really an Internet gambling transaction. In other cases, a
merchant moves into Internet gambling after having been accepted by the
acquirer as a different type of business. Unless the acquirer monitors
the merchant, it will not know that the merchant is actually processing
Internet gambling transactions.
Two issuers noted that Internet merchants are able to circumvent the
coding system by engaging in factoring.[Footnote 41] 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.[Footnote 42]
Using On-Line Payment Providers Can Circumvent Restrictions on Using
Credit Cards for Internet Gambling:
Issuing banks also viewed as problematic cardholders‘ use of on-line
payment providers or payment aggregators to pay for Internet gambling
activities. These entities enable consumers to use their credit cards
to set up accounts with many kinds of Internet-based merchants,
including on-line casinos. The issuers indicated that while on-line
payment providers did not circumvent the coding system, most
aggregators‘ transactions were not coded to reflect the purpose or type
of transaction such as Internet gambling. Because credit card
transaction codes can be obscured as the transactions pass through such
intermediaries, issuing banks cannot determine whether credit card
funds are being used for Internet gambling. Nevertheless, most of the
issuers said they would continue to accept credit card transactions
from payment aggregators because they believed that these transactions
were mostly legitimate or because the transactions represented a very
small percentage of their total volume of credit sales. Officials from
one major U.S. payment aggregator told us, recognizing the potential
for abuse, that they had established policies in accordance with the
U.S. Department of the Treasury‘s Suspicious Activity Reporting
requirements and file reports weekly.[Footnote 43] Additionally, one
issuer expressed confidence in conducting business with a leading U.S.
aggregator, PayPal, because this aggregator no longer does business
with Internet gambling merchants.[Footnote 44]
Our survey of Internet gambling Web sites, conducted during summer
2002, showed that four different payment providers were advertised as
payment options. The one that appeared most often, PayPal, was on two-
thirds of the sites in our survey, while the one that appeared the
least frequently, EZPay, was on about 1 percent of the sites. In some
cases, the sites suggested that gamblers use an on-line payment
provider to fund their accounts if their credit cards were blocked. We
also found instances of the sites offering bonuses to gamblers who
chose to fund their accounts through on-line payment providers.
Rather than developing an audit program to address Internet gambling
issues, one association chose to focus on dealing proactively with
these on-line payment providers, which it viewed as a potential
loophole in the system. An official from one association explained that
the association had a policy of not doing business with on-line payment
providers without reaching an understanding about Internet gambling
with the provider‘s acquirer. The acquirer would have to agree that any
funds the provider obtained through the association‘s systems would not
be used for Internet gambling unless the transaction was properly
coded, so the issuing bank could deny the charge at its discretion. The
official cited an example in which such an understanding could not be
reached. The provider stopped accepting cards bearing the association‘s
brand name rather than comply with the coding requirements.
Officials of the other association noted that on-line payment providers
are responsible for ensuring that credit cards are not used to pay for
Internet gambling activities unless the funds transfer is explicitly
coded as an Internet gambling transaction at the time of the
authorization. In such cases, issuers that have decided to block
Internet gambling transactions can deny authorization for those made
through an on-line payment provider. Officials were aware that at least
one major on-line payment provider was regularly using the Internet
gambling transaction codes when they were warranted.
Issuers Rely on Fraud Monitoring to Identify Internet Gambling
Transactions and Take Action on Them:
Issuers learn from customer complaints or their own monitoring that a
credit card transaction is a disguised Internet gambling transaction.
The issuers we spoke with told us that they used their fraud monitoring
systems to identify potential Internet gambling transactions. The
systems, according to the issuers, provide initial clues by identifying
deviations from expected patterns of transactions, and the issuers
investigate these deviations for potential Internet gambling
transactions. Some issuers told us that they also periodically reviewed
and analyzed authorization logs generated by their systems for
departures from established operating rules. Several issuers noted that
they also identified Internet gambling transactions from investigating
customer disputes. Most of the issuers said that as a result of their
total monitoring effort, they ultimately were able to identify Internet
gambling merchants that miscoded transactions to disguise them and had
programmed the monitoring systems to identify, track, and block these
merchants‘ transactions. Two issuers told us that in egregious cases
they blocked the merchant‘s identification number and thus denied all
transactions from that source. But the issuers acknowledged that their
monitoring efforts did not capture all transactions involving Internet
gambling and could not always identify where the transactions took
place.
Issuers can take other actions against Internet gambling merchants that
they identify ’cloaking“ transactions. First, if they learn about the
Internet gambling activity within the time limits established by
association rules, some issuers attempt to charge the transactions back
to these merchants.[Footnote 45] One issuer said that it used a
modified chargeback procedure that required searching posted billing
transactions for indications that Internet gambling might be involved.
The issuer reportedly was able to charge back ’hundreds of thousands“
of improperly coded transactions, putting several Internet gambling
operators out of business. The issuers also told us they reported the
Internet gambling merchants to the credit card associations so that the
associations could notify the acquiring banks, which could exercise due
diligence over the merchants.
Banks that Acquire Internet Gambling Merchants Are Based Overseas:
The six acquirers in our review were all U.S.-based members of the
credit card associations. Officials from five of these acquirers told
us they do not have any overseas operations, and five indicated that,
as a matter of policy, they acquire merchants only in the United
States. Because Internet gambling merchants tend to be located
overseas, these U.S.-based acquirers would not acquire these merchants
in any case. One of the other acquirers told us it had relationships
with foreign merchants through arrangements with foreign banks but did
not acquire Internet gambling merchants overseas. According to an
association official, member banks based outside the United States
acquire Internet gambling merchants in jurisdictions where Internet
gambling may be a legal enterprise. The associations did not conduct
any additional due diligence on member banks that acquired Internet
gambling merchants. One association provided its members with
additional requirements and best practices for acquiring such
merchants.
Based on our survey of Internet gambling sites, we estimate that about
85 percent advertised MasterCard as a form of payment, with a similar
percentage of sites advertising VISA. However, although Internet
gambling sites may advertise a specific association, such as VISA or
MasterCard, transactions using the cards of issuing banks that attempt
to block Internet gambling may be denied. Some of the sites in our
survey alerted their clients to this potential problem and suggested
the use of other payment options, including on-line payment providers,
wire transfers, and checks. Some Internet gambling Web sites offer
bonuses to promote payment mechanisms such as direct wire transfers. In
our review, about 47 percent of the Internet gambling sites advertised
Western Union. Our survey also revealed that Internet gambling Web
sites encouraged the use of money orders and various forms of checks--
about 28 percent of the reviewed sites said they allowed money orders,
while 8 percent said they accepted traveler‘s checks. In addition, 40
percent of Internet gambling Web sites noted that they would recognize
bank drafts, certified checks, and cashier‘s checks. Our survey results
also showed that 79 of the sites reviewed indicated they had
established a relationship with an electronic banking system or a
processor. Appendix IV provides more information on our survey.
Acquirers Take a Variety of Actions to Identify Merchants Engaged in
Internet Gambling:
U.S.-based acquirers told us that they exercised due diligence on
Internet-based merchants to ensure that the merchants were not engaged
in Internet gambling. The acquirers‘ due diligence of Internet
merchants consisted of screening applicants and monitoring approved
merchants. In screening merchant applicants, the acquirers generally
verified applications and reviewed Web sites to ensure that the
merchants were not engaged in Internet gambling. Two acquirers also
said that they reviewed merchants‘ business plans and products to
understand the nature of the operations and determine if international
transactions would occur in the course of the business. The acquirers
in our review said they assigned approved merchants a merchant category
code identifying the type of business activity the merchant was engaged
in and required them to use the code to transmit credit card
transactions. Individual merchants engaged in more than one type of
business activity could receive more than one code.
The acquirers‘ monitoring efforts included periodic visits to the Web
sites of approved merchants to ensure that the nature and distribution
of their products had not changed. They also analyze any changes in
merchants‘ transaction volumes and transactions for all e-commerce
sites. Most of the acquirers told us that they were unable to screen
out all Internet gambling merchants despite these due diligence
efforts. Acquirers gave different reasons for not detecting all
Internet gaming merchants. For example, two acquirers cited factoring,
while others cited merchant fraud or misrepresentation of business
activity. While the acquirers in our review did not deny that Internet
gambling merchants had circumvented the coding system by entering
erroneous merchant category codes, they denied direct knowledge that
their Internet merchants had engaged in this activity. Nevertheless,
the acquirers told us that as a matter of policy they would terminate
merchants that were found repeatedly miscoding credit card transactions
or misrepresenting their activities.
Associations Impose Penalties on Acquiring Banks for Miscoded
Transactions:
Association officials told us that both of their associations monitored
transactions for fraud, looking for and investigating suspicious
activity. These monitoring efforts, which may identify miscoded
transactions from Internet gambling merchants, are designed to detect
many different types of fraudulent schemes. Association officials also
noted that consumer complaints and concerns raised by issuers had been
helpful in identifying coding errors related to Internet gambling.
Associations‘ efforts in support of issuer policies to block Internet
gambling transactions focused primarily on requiring acquiring member
banks to ensure the accuracy of merchant and commerce codes. The
associations did not monitor the adequacy of due diligence exercised by
acquiring banks in screening and monitoring merchants. They relied on
federal and state banking regulators to supervise and examine
acquirers‘ due diligence and ’expected“ the acquiring banks to comply
with association contracts, agreements, and operating regulations. The
regulations specifically impose on all acquirers the responsibility for
ensuring that their merchants properly code transactions and impose
penalties on the acquirers for improper merchant and transaction codes.
Association officials said that they shared the results of their
investigations of merchants with acquirers, enabling the acquirers to
take action against these merchants. For example, an official said that
his association had detected several instances in which merchants had
submitted false information on applications and thus had been assigned
category codes for businesses other than gambling. The association said
that it had told the acquirers about these merchants and that the
acquirers promptly terminated them.
In November 2001, one of the credit card associations implemented an
Internet gambling audit program to help minimize the extent of coding
errors related to Internet gambling. Rather than monitoring actual
transactions, the program focuses on monitoring Internet gambling Web
sites to identify merchants that may be disguising their credit card
transactions. The association‘s staff sample Internet gambling Web
sites and test the reliability of their coding efforts by submitting
’dummy“ transactions. If the testing reveals that a gambling site uses
incorrect coding, the merchant‘s acquirer is notified and given 30 days
to correct the coding with the merchant. The association then audits
the site to verify that the coding has been corrected. When an Internet
gambling merchant is cited for using incorrect codes, the responsible
acquiring bank can be fined $25,000 per merchant outlet. To date, the
association has imposed more than $100,000 in penalties on six
acquiring banks for improper coding by merchants.
Third-Party Processors Implement the Issuers‘ and Acquirers‘ Policies
on Internet Gambling:
Two of the four third-party processors in our review told us that they
blocked Internet gambling transactions for their issuing bank clients.
Three of these processors also told us that while they acquired
Internet merchants on behalf of their acquiring bank clients, they did
not acquire Internet gambling sites because their clients did not want
these merchants as customers. The processors noted that they always
carried out the policies and procedures specified by the issuing and
acquiring clients regarding the types of transactions to block or the
types of merchants to acquire.
The processors provided a variety of services for their client banks.
For example, they provided software programs, technical assistance,
fraud monitoring, e-banking services, and services related to card
processing, such as issuing cards, authorizing transactions, and
billing customers. The three processors providing merchant acquisition
services said that they conducted due diligence on the Internet
merchants, screened merchant applicants and monitored those approved.
The three processors said that their screening procedures required due
diligence to ensure that the new Internet merchants were not engaged in
Internet gambling. Officials of one of these processors underscored
their view that Internet gambling sites represented a significant
financial and legal risk and said that the company did complete Web
site reviews to evaluate merchants‘ practices and confirm the types of
products sold. The two other processors also provided monitoring
services, including on-going reviews of merchants‘ Web sites and
changes in merchants‘ transaction activity, to verify whether these
businesses had expanded into Internet gambling.
New Technologies Are Being Developed to Facilitate Payment for Internet
Gambling Transactions:
With financial institutions restricting the use of credit cards, many
gaming representatives believe that e-cash will become the currency of
the future for Internet gambling. E-cash comes in two basic forms:
smart card e-cash and computer e-cash.[Footnote 46] A report on
emerging cyberspace technology outlined the four types of cyberpayment
systems that exist; however, they are not all currently in use for
Internet gambling. The models are the merchant issuer model, the bank
issuer model, the nonbank issuer model, and the peer-to-peer
model.[Footnote 47]
* The merchant issuer model. The merchant issues the smart card. An
example of this model can be found in the subway system in Washington,
D.C., which sells Smart Trip farecards directly to riders for use on
the subways. Riders can simply add money to the cards and continue
using them.
* The bank issuer model. A financial institution issues the smart card,
and the transactions are cleared through the traditional financial
systems.
* The nonbank issuer model. Users buy electronic cash from issuers
using traditional money and spend the electronic cash at participating
merchants. The issuer subsequently redeems the electronic cash for the
merchant.
* The peer-to-peer model. A bank or other entity issues electronic
cash, which is then transferred between users. The only points of
contact between the traditional payments system and the electronic cash
are the initial purchase and the redemption from the individual or
merchant.
Representatives of the Internet gambling industry noted that while
using e-cash is not as convenient as using credit cards, it does offer
advantages. For example, there are no global constraints, transaction
costs are lower, transactions are processed immediately, and the risk
of identity theft is substantially lower. However, in their view, in
the United States, e-cash has struggled because U.S. citizens are
comfortable using credit cards for e-commerce and thus have not
generally used alternative payment mechanisms. But, according to
Internet gambling representatives, as financial institutions
increasingly block credit card transactions for Internet gambling, they
expect the demand for alternative payment methods will increase.
Further, one gaming analyst commented that because the Internet
gambling market is saturated, many business plans now being presented
to Internet gaming consultants are proposals for alternative payment
systems, including digital cash, Automated Teller Machine features,
digital cards, affinity cards backed by acquiring banks, and automated
clearinghouse systems and transfers.[Footnote 48] According to the
gaming analyst, market demand is driving the industry to shift away
from establishing Internet gambling Web sites and toward developing
payment mechanisms.
Views on the Vulnerability of Internet Gambling to Money Laundering Are
Mixed:
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 believed that money laundering activities could potentially
be conducted on both legitimate and complicit Internet gambling
sites.[Footnote 49] Representatives of the credit card and gaming
industries believed that Internet gambling was not necessarily more
susceptible to money laundering than any other type of on-line
transaction. However, gaming industry representatives suggested that
eliminating traditional forms of payment such as credit cards could
potentially heighten money laundering concerns.
Despite Concerns about the Vulnerability of Internet Gambling to Money
Laundering, Few Cases Have Been Prosecuted:
Law enforcement officials told us they believed that Internet gambling
can be a significant vehicle for laundering criminal proceeds,
especially to move illicit funds among financial institutions at the
layering stage. The officials said that the volume, speed, and
international reach of Internet transactions and the fact that many
Internet gambling sites are located offshore increased the potential
for misuse. In their view, these characteristics can promote a high
level of anonymity and give rise to difficult jurisdictional issues.
Few Cases of Money Laundering through Internet Gambling Have Been
Prosecuted:
Law enforcement officials acknowledged the lack of adjudicated cases
involving money laundering but said they believed that Internet
gambling offered many potential ways of laundering money. One U.S. law
enforcement official attributed the lack of adjudicated cases involving
money laundering through Internet gambling sites to several factors,
most notably the lack of any industry regulations or oversight.
Currently, the Federal Bureau of Investigation (FBI) has two open cases
involving Internet gambling as a venue for money laundering activities.
In Treasury Enforcement‘s view, one key reason that Internet gambling
is vulnerable to money laundering and other forms of financial crime,
including tax evasion, is that the gambling sites are frequently
located in areas with weak or nonexistent supervisory regimes. The U.S.
experience with all types of money laundering is that criminals will
seek out and exploit areas of the world with ineffective supervisory
regimes. The multinational Financial Action Task Force (FATF)[Footnote
50] has also noted this trend and, according to Treasury, initiated the
Non-Cooperative Countries and Territories process to help bring
countries with weaker anti-money laundering laws and supervisory
regimes up to international norms. Although specifics were not
provided, a February 2001 FATF report stated that some member
jurisdictions had evidence that criminals were using Internet gambling
to launder their illicit funds.[Footnote 51] In a March 2002 report,
the State Department said that Internet gambling involving credit cards
and offshore banks was a powerful vehicle for criminals seeking to
launder funds from illicit sources and to evade taxes.[Footnote 52]
Treasury Enforcement officials also noted with concern how certain
gaming merchants have attempted to circumvent the credit card coding
system through factoring. In appropriate circumstances, they believed
the use of factoring could be a key step in facilitating money
laundering, since factoring is used to disguise from enforcement and
regulatory officials the true source of funds and how they were
obtained.
Hypothetical Money Laundering Scenarios Involve Both Legitimate and
Complicit Internet Gambling Sites:
In the FBI‘s view, because of the nature of Internet gambling, money
laundering could be conducted through either legitimate or complicit
sites. In law enforcement‘s view, legitimate Internet gambling sites
provide an opportunity to transfer high volumes of money in and out of
a number of accounts within a single ’institution.“ An individual could
potentially deposit illicit funds into a legitimate Internet gambling
account under a false name and wager a small amount in order to make
the account appear genuine to the site operator. After a few losses,
the individual could withdraw the rest of the illicit funds from the
account. The transaction‘s ’paper trail“ would register a lawful
Internet gambling transaction, mingling legitimate money with illicit.
For example, a bettor who wanted to launder $100,000 could potentially
place bets on opposing teams in a sporting event with two different
sites, betting on both teams for $100,000. Regardless of the outcome,
and if the bet were structured properly, the bettor would lose the bet
wagered on the losing team but be paid double for the bet on the
winning team. The only money that the bettor would lose would be the
processing charges and related fees, and the money would appear to be
legitimate winnings.
In addition, law enforcement officials believe a money launderer would
not necessarily have to place a wager in order to ’clean“ illicit
funds. A legitimate on-line gaming account could be used as a potential
storehouse for illicit funds until they could be transferred to an
offshore account. For instance, a money launderer could locate several
legitimate Internet gambling sites that had few or no deposit
requirements and deposit the maximum amount at one or more of them. The
funds could later be transferred into an offshore account as
’legitimate“ winnings.
U.S. law enforcement officials said they also believed that money
launderers could develop Internet gambling sites for the sole purpose
of laundering money. An operator of a complicit site could
theoretically program casino gaming software to react to a specific
password or sign-on command, automatically taking a percentage of the
deposit and cloaking it as a gaming loss. In essence, however, such a
deduction would be the operator‘s service fee for laundering the
illicit funds. Such a site would also need legitimate gamblers in order
to mask the true nature of the operation.
Financial and Gaming Industries Did Not View Internet Gambling as a
Money Laundering Threat:
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, were used for payment. Likewise,
credit card and gaming industry officials did not believe Internet
gambling posed any particular risks in terms of money laundering. As
noted earlier, the credit card industry has other reasons for
restricting the use of credit cards in Internet gambling transactions.
The associations, a credit card company, and a few issuers told us that
they believed their broad anti-money laundering program or coding
system covered potential money laundering through Internet gambling.
Officials of one association specifically told us its transaction
coding system for Internet gambling was designed to address risks,
including money laundering, by allowing issuers to block any and all
Internet gambling transactions. This system does not, however, enable
issuers to block transactions that are not properly coded.
In general, gaming industry officials did not believe that Internet
gambling was any more or less susceptible to money laundering than
other electronic commerce businesses and noted that the financial
industry--which is responsible for the payments system--is better
suited to monitoring for related suspicious activity in the area than
the gaming industry itself. A few officials commented that, in their
view, on-line casinos should probably be subject to anti-money
laundering requirements similar to those required of brick-and-mortar
casinos. One U.S. gaming establishment has obtained an Internet
gambling license and has begun offering Internet gambling from a
jurisdiction with legalized and strictly regulated Internet gambling.
To avoid jeopardizing the status of its U.S. state gaming license, this
entity was trying to anticipate and address all the potential risks of
expanding into Internet gambling, including any reputational risks that
could be associated with money laundering.
Industry gaming officials also cautioned that, in their view, Internet
gambling could become more susceptible to money laundering as U.S.
financial institutions continue to block the payment of Internet
gambling activities through credit cards. They explained that credit
cards would likely be replaced by newer forms of electronic payments
that might not be subject to the same level of record keeping or
transaction limits as credit cards and could thus be more susceptible
to money laundering. In these analysts‘ view, the new payment methods
are attractive to Internet gamblers because they offer certain
advantages: security, lower transaction costs, anonymity, and speed.
These are important marketing tools for the Internet gambling
industry.[Footnote 53] However, the very features that appeal to
Internet gamblers offer the potential to bypass traditional money
laundering controls, possibly creating an ideal vehicle for money
laundering. In addition, officials pointed out the likelihood that some
emerging electronic gambling schemes that made identifying gamblers and
enforcing regulations more difficult would become more popular. Such
schemes could include, for example, player-to-player wagering that
allows individuals to place bets directly with other bettors without
involving a bookmaker or operator. According to gaming officials, the
absence of the bookmaker or operator who normally assigns the odds or
monitors the betting action increases the potential for illegal
activity, including money laundering.
Agency Comments and Our Evaluation:
We requested comments on a draft of this report from the Departments of
Justice and the Treasury. DOJ had no comments on it. Treasury provided
technical comments on the money laundering section that we
incorporated, where appropriate.
We are sending copies of this letter to the Chairman and Ranking
Minority Member of the Senate Committee on Banking, Housing, and Urban
Affairs and to the Ranking Minority Members of the House Subcommittee
on Financial Institutions and the House Subcommittee on Oversight and
Investigation, Committee on Financial Services. This report will be
available on GAO‘s Internet home page at http://www.gao.gov.
Please contact Barbara Keller, Assistant Director, or me at (202) 512-
8678 if you or your staff have any questions concerning this work. Key
contributors to this work are acknowledged in appendix V.
William O. Jenkins, Jr.
Director, Financial Markets and
Community Investment:
[End of section]
Appendix I Scope and Methodology:
To develop the legal framework for Internet gambling activities in the
United States and our selected states, we researched federal laws, the
laws of five judgmentally selected states whose statutes included a
wide range of gambling provisions, court cases interpreting these laws,
and related studies. We also spoke with representatives of the
Department of Justice (DOJ), the Department of the Treasury and the
offices of the attorneys general for the states of Massachusetts,
Missouri, Nevada, New Jersey, New York, and Utah. Finally, we spoke
with private attorneys who specialize in gaming law and with
representatives of the gaming commission from Nevada and New Jersey. To
develop information on the legal framework in selected foreign
countries, we contacted gaming and government officials in those
countries and researched secondary sources describing their laws. We
reviewed various reports, including the Internet Gambling
Report,[Footnote 54] policy papers, and other publications describing
the laws of Australia, Canada, Hong Kong, and the United Kingdom to
determine the approaches these countries and jurisdictions take to
regulating Internet gambling. We contacted the supreme audit
institution in each country or jurisdiction to determine whether any
work had been done on Internet gambling there. In addition, we
researched the Web sites of selected foreign regulators and reviewed
available documentation on their Internet gambling regulations,
policies, and guidelines. Information was collected solely from
secondary sources and does not reflect our independent legal analysis.
To obtain an understanding of the nature and extent of policies and
procedures implemented by the credit card industry to restrict the use
of credit cards as a form of payment for Internet gambling, we
interviewed officials from the four major credit card organizations,
some large issuing and acquiring member banks, third-party processors,
on-line payment providers, bank regulators, and banking trade
associations. The criteria we used to select the entities for our
review included the level of responsibility for significant credit card
activity in domestic and foreign markets and oversight by the various
federal banking regulators. Seven of the 8 issuing banks we selected
rank among the top 10 issuers in the United States, and together with
the credit card companies are responsible for over 71 percent of the
credit cards issued by U.S. card issuers in 2001, according to The
Nilson Report.[Footnote 55] Five of the 6 acquiring banks we selected
were among the top 10 acquirers in the United States in 2001 and were
affiliated with the issuing banks in our review. These acquiring banks
have nearly 2 million merchant clients, representing over 40 percent of
the outlets in the United States for 2001, according to The Nilson
Report. We selected four major credit card processors in the United
States, including three that provided services for issuers in our
review. We requested documentation on Internet gambling policies and
procedures from industry representatives; however, only three entities
provided us with any written documentation. The others described their
policies and procedures but were unwilling to provide documentation to
support their descriptions because of concern about the confidentiality
of proprietary policies.
In addition, we conducted an electronic survey of Internet gambling Web
sites to gather data about payment options customers can use to make
deposits to gamble, payment acceptance policies, and other topics. We
were interested in how gaming Web sites presented information about
payment options and how credit cards fit into that presentation.
To obtain views on the vulnerability of Internet gambling to money
laundering, we interviewed gaming and Internet gambling industry
experts, knowledgeable U.S. state representatives, and law enforcement
officials (including appropriate officials in Treasury‘s Office of the
Undersecretary for Enforcement and DOJ‘s Criminal Division, the FBI,
and the Executive Office of US Attorneys, and the state attorneys
general listed above) 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 and betting. We conducted structured
interviews with the credit card industry, issuing and acquiring banks,
and Internet merchant aggregators to understand their anti-money
laundering policies and procedures in general and as they relate to
Internet gambling in particular. We also reviewed documentation--
correspondence, training materials, publicly released reports, and
written statements--presented by law enforcement officials that
highlighted their concerns about the potential for using Internet
gambling as a vehicle for money laundering.
We performed our work in Washington, D.C.; Las Vegas, Nevada; and San
Francisco, California, between March and October 2002 in accordance
with generally accepted government auditing standards.
[End of section]
Appendix II Interstate Horseracing Act:
Pari-mutuel wagering on state-licensed horse races takes place over the
Internet in a number of states.[Footnote 56] Both federal and state
laws govern this activity. In 1978, Congress passed the Interstate
Horseracing Act (IHA)[Footnote 57] to regulate interstate commerce with
respect to pari-mutuel wagering on horse races. The intent of the
statute was not only to give states primary responsibility for
determining what forms of gambling can legally take place within their
borders, but also to ’further the horseracing and legal off-track
betting industries in the United States“ by regulating interstate
wagering activities.
Pari-mutuel horse racing has been conducted in the United States under
state authority for over 75 years. In states that allow wagering on
horse racing,[Footnote 58] a state agency--usually a racing commission-
-regulates the betting, licenses the participants (including the track
and horse owners, trainers, jockeys, and drivers), and promulgates and
enforces regulations. Under the IHA, wagers may be placed or accepted
in one state on a race taking place in another state. However, the IHA
stipulates that no entity can accept an interstate, off-track wager
without the consent of the track where the live race takes place (the
host racing association), the entity regulating the host racing
association (the host racing commission), the entity regulating the
establishment that takes the bets, and all race tracks operating within
60 miles of the location where the wager is accepted.[Footnote 59]
The IHA also imposes limits on the commission that interstate off-track
betting systems can charge. The IHA is a civil statute, meaning that
under its terms, the host state, the host racing association, or a
neighboring race track may file a civil action against establishments
that violate the law. These suits may seek to keep such establishments
from accepting wagers for races at the host track without the required
consent, and for damages resulting from such conduct. Because the IHA
is not a criminal statute, the U.S. government cannot bring a criminal
action against off-track establishments that violate the law.
Originally, an interstate off-track wager was defined as ’a legal wager
placed or accepted in one State with respect to the outcome of a
horserace taking place in another State.“[Footnote 60] The definition
of an interstate off-track wager was expanded in December 2000 with
amendments to the IHA to include ’pari-mutuel wagers, where lawful in
each State involved, placed or transmitted by an individual in one
State via telephone or other electronic media and accepted by an off-
track betting system in the same or another State, as well as the
combination of any pari-mutuel wagering pools.“[Footnote 61] This
provision appears to explicitly extend the provisions of IHA to the
Internet medium. Indeed, in opposing this amendment to the IHA,
Congressman Wolf of Virginia stated that it ’would legalize interstate
pari-mutuel gambling over the Internet.“[Footnote 62] However, in a
March 2000 hearing before the House Subcommittee on Crime of the
Committee on the Judiciary, in connection with a bill attempting to
prohibit Internet gambling, an official from DOJ testified that despite
the IHA, gambling businesses offering bets on horse racing over the
Internet were violating the Wire Act (18 U.S.C[Footnote 63]. § 1084).
However, this hearing took place before the December 2000 amendments to
the IHA, and we were unable to obtain DOJ‘s current position on the
legality of interstate wagering on state-licensed horse races over the
Internet. But in explaining the rationale of DOJ‘s testimony to us, DOJ
officials stated that since IHA is a civil statue and the United States
would not be a party to any action brought under it, IHA could not
override the Wire Act, which is an existing criminal statute.
Many industry participants disagreed with the positions set forth in
DOJ‘s March 2000 testimony. For example, the Chairman of the Oregon
Racing Commission testified at that hearing that DOJ‘s interpretation
disregards the purpose behind the Wire Act, which is to combat
organized crime. He noted that the Wire Act was not intended to make
activities licensed and regulated by the states illegal and that the
IHA was enacted for the express purposes of ensuring proper regulation
of interstate off-track betting and furthering the horse racing and
legal off-track betting industries in the United States. He concluded
that DOJ‘s interpretation apparently disregards Congress‘s intent in
enacting the IHA and noted that DOJ has never brought an action against
a state-licensed entity offering pari-mutuel wagering on horse races
over the Internet.
Industry participants have stated that the industry has made efforts to
monitor Internet-based pari-mutuel wagering on horse races. An official
from the Oregon Racing Commission told us that such wagering is
generally conducted on a closed-loop, subscriber-based system designed
to circumvent the ’open nature“ of the Internet, to ensure adherence to
state laws, and to ensure that bettors are of legal age and qualified
to participate. Such systems operate through Internet Web sites that
are protected by passwords and are not available to the general public.
Only registered members may sign on to use a site‘s services, and those
wishing to register must provide notarized verification of age, a photo
identification, and proof of residency. To prevent identity theft, a
letter requesting verification of the information is sent to the
address used to open the account.
Despite these protections and the view that pari-mutuel wagering on
horses via the Internet is legal, officials from the National
Thoroughbred Racing Association (NTRA) told us that entities offering
online pari-mutuel wagering have encountered difficulty with banks,
which increasingly refuse to accept credit card transactions for this
type of betting. Apparently, many banks use the same coding for pari-
mutuel wagering on horses over the Internet and for other types of on-
line gambling, such as online casinos and sports betting. According to
NTRA officials, this problem is the result of current limitations in
credit card coding programs. NTRA officials have stated that they are
working with credit card issuers to create a unique transaction code
for lawful domestic pari-mutuel wagers that will distinguish them from
other forms of on-line gambling. A unique transaction code would still
allow the credit card issuers to reject payment for unlawful on-line
gambling activities, while accepting Internet wagers on horse races.
[End of section]
Appendix III: Internet Gambling Regulation in Foreign Jurisdictions:
The regulation of Internet gambling in foreign countries and
jurisdictions varies widely, with some countries permitting it, others
banning it, and others taking a mixed approach by prohibiting some
forms of Internet gambling and regulating other forms. We focused on
four countries and jurisdictions--Australia, Canada, Hong Kong, and the
United Kingdom (U.K.)--that vary in their approaches to regulating
Internet gambling. We found that Australia has a federal law that
prohibits Australian and offshore entities from providing Internet
gambling services to Australian residents. Canada allows only
provincial governments to offer gaming through a computer, and
provincial governments may not license others to conduct such gambling.
Hong Kong permits Internet gambling only if it is run by the legal
monopoly, the Hong Kong Jockey Club, in the form of pari-mutuel betting
on horse races and certain types of lotteries. Hong Kong does not allow
offshore Internet gambling in Hong Kong. The U.K. permits betting
operations to operate using the Internet, because bookmakers are
permitted to accept telephone bets (subject to licensing requirements)
and Internet betting operations have been licensed as a form of
telephone bet. Other forms of gambling, such as casino, gaming, bingo,
and lotteries, are illegal on the Internet.
Australia:
Australia has a federal law that prohibits Australian and offshore
entities from providing Internet gambling services to Australian
residents. After a year-long moratorium on the development of the
interactive gambling industry, Australia enacted federal legislation,
the Interactive Gambling Act 2001 (the Act), that prohibits operators
from providing an Internet gambling service to Australian residents.
Under the Act, an Internet gaming service is defined as an Internet
casino or interactive gaming Web site. The prohibitions of the
Interactive Gambling Act apply to all Internet gambling service
providers--Australian and offshore, whether owned by Australians or
foreigners--and carries a maximum penalty of $220,000 AUD per day for
individuals and $1.1 million AUD per day for corporate bodies. The Act
also makes it an offense to provide such services to people in a
’designated country,“ although we are not aware that any foreign
countries have received this designation.[Footnote 64]
The Act does not prohibit on-line sports wagering and lotteries.
Instead, these activities are regulated by Australian state and
territorial legislation. Generally, state and territorial legislation
prohibits on-line sports wagering and lotteries unless the operator is
licensed in the relevant jurisdiction. The Act provides both for self-
regulation and government monitoring. Internet service providers are
tasked with developing a code of practice relating to Internet gambling
matters. If the industry fails to act, the Australian Broadcasting
Authority (the Authority) may set industry standards that, among other
things, ensure that Internet service providers provide customers with
appropriate filtering software or similar devices to prevent access to
prohibited sites. The Authority is empowered to implement a complaints-
based regime aimed at further preventing interactive gambling service
providers from targeting Australian customers. The Authority can
initiate investigations of interactive gambling activities and can also
accept complaints from the public. Violations are referred to the
police. The Act also incorporates processes designed to ensure
appropriate government review and, if required, revision. The act is
scheduled to be reviewed before July 1, 2003, taking into account the
growth of interactive gambling services, their social and commercial
impact, and other matters.
Canada:
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, 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 they may not
license others to conduct one. Further, any lottery would have to be
restricted to residents of the province operating it. In order to offer
on-line gambling in Canada then, a provincial government would not only
have to operate the sites itself but also ensure that residents from
other provinces did not participate unless cooperative agreements
between the provinces were in place. 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, the lottery
violated the Criminal Code‘s requirement that provinces run
computerized lottery schemes. This case is now on appeal to the Supreme
Court of Canada.
According to an official from Canada‘s Department of Justice, the
matter of betting with an offshore betting shop or on-line casino
located offshore has not yet been before Canadian courts.[Footnote 65]
The official further stated that this situation reflected the
difficulty of conducting offshore investigations and arraigning foreign
suspects before Canadian courts, particularly when no ’dual
criminality“ exists and extradition is not possible, or when no
extradition treaty exists.
Hong Kong[Footnote 66]
Gambling is illegal in Hong Kong unless specifically permitted under
the Gambling Ordinance, which sets out the jurisdiction‘s overall
gaming policy and statutes.[Footnote 67] The ordinance permits several
forms of gambling, specifically pari-mutuel betting and lotteries,
which are conducted as a legal monopoly by the Hong Kong Jockey Club.
In May 2002, the Hong Kong Legislative Council voted to ban offshore
gambling, including offshore Internet gambling, by passing the Gambling
(Amendment) Ordinance 2002. This legislation, which criminalizes both
offshore betting and bookmaking, applies to both operators and bettors.
Hong Kong residents may legally participate in some forms of Internet
gambling. The passage of the 2002 Amendment gave the Hong Kong Jockey
Club complete control of the gaming market. The club solicits pari-
mutuel bets from around the world and operates Hong Kong‘s twice-weekly
government lottery, the Mark 6. Hong Kong residents can legally place
on-line pari-mutuel wagers with the club. The betting duty paid by the
Jockey Club accounts for about 10 percent of government revenues.
However, Hong Kong law provides for criminal penalties for any offshore
gambling agent promoting or advertising a gaming ’product“ to Hong Kong
residents or facilitating residents‘ use of such a product. The maximum
punishment for brokers is 7 years imprisonment and a penalty of
$5 million HKD ($641,000 USD), while individual bettors face 9 months
imprisonment and a penalty of $30,000 HKD ($3,800 USD) if convicted.
The bill also prohibits financial institutions, such as banks and
credit card companies based in Hong Kong, from processing betting
transactions, preventing Hong Kong residents from placing Internet
gambling bets using credit cards or similar means of payments. In
addition, Hong Kong‘s Home Affairs Bureau could potentially use the
law‘s provisions, in conjunction with anti-money laundering
legislation, to prevent local banks from providing banking services to
known operators of offshore gambling sites.
United Kingdom[Footnote 68]
The U.K. has several different laws and regulatory schemes that apply
to gaming, betting and lotteries, but there are no specific laws
governing Internet gambling operations or making it illegal for private
citizens to gamble on-line.[Footnote 69] Some types of gambling can be
carried out legally by operators on line and others cannot. For
example, betting operations can operate via the Internet because
bookmakers have long been permitted to accept telephone bets subject to
licensing requirements and Internet betting operations fall within the
same legislative provisions. Other forms of gambling, such as casino
gaming, bingo, and most lotteries, are illegal on the Internet due to
specific legal requirements for conducting these types of gambling. The
laws applicable to casino gaming and bingo require that the persons
taking part in the gaming be present on the gaming premises. The laws
applicable to lotteries have been interpreted to prevent most Internet
sale of tickets because they cannot be sold by machine.
The Gaming Board for Great Britain (the Gaming Board) is the body that
regulates casinos, bingo clubs, gaming machines, and charity lotteries.
As part of its mandate to advise the Home Secretary on developments in
gaming, the Gaming Board did a study on Internet gambling that raised
public policy issues based on the Internet‘s potential to offer
unregulated, unlicensed, and low-or no-tax gambling.[Footnote 70]
According to the report, Internet gambling sites fall into two primary
categories: sites that offer an entry to land-based gambling, and
interactive gaming sites. Sites that serve as a means of facilitating
land-based gambling are often just alternatives to other means of entry
such as the post or telephone--that is, they use the Internet simply as
a communications tool. Examples of this type of site are football pools
and betting on horse racing and other sports. Interactive gaming,
however, is run exclusively on the Internet and includes sites offering
virtual casinos, slot machine gaming, and interactive lotteries. The
report summarized the legal status of using the Internet for each type
of gaming as follows:
* Betting. Bookmakers can accept telephone bets from clients with
credit accounts, and football pools can accept entries by post. Neither
is prevented from accepting bets by e-mail. Bookmakers have chosen
offshore locations for their telephone and Internet betting operations
because taxes are lower in those jurisdictions.
* Casinos, bingo, and gaming machines. These types of gaming are only
permitted on licensed and registered premises, and the persons taking
part in the gaming must be on the premises at the time the gaming takes
place. These stipulations effectively prevent an operator from
obtaining a license for Internet gaming in the U.K. The Gaming Board
stated that it would take action to enforce this prohibition.
* Lotteries. Tickets for lotteries can be sold in almost any location,
other than in the street, including at people‘s homes and over the
telephone, but they cannot be sold by machine. The Gaming Board has
taken the position that running a lottery entirely by computer over the
Internet amounts to selling tickets by machine and has refused to
authorize such lotteries. However, some companies that manage lotteries
have presented proposals to the Gaming Board for lotteries that would
use the Internet as a means of communication, much like a telephone.
The Gaming Board has approved two of those proposals.
Finally, the report outlined what it saw as the three main policy
options for Internet gambling regulation in the U.K.: retaining the
status quo, encouraging measures to prevent offshore Internet gambling,
and creating legislation to permit regulated and taxed Internet
gambling.
Another report, ’Gambling Review Report of 2001“ (’the Budd report“),
commissioned by the Home Office, recommended that on-line gambling be
regulated and that the activity ’be seen as just another way of
delivering a service.“[Footnote 71] According to the Budd Report, the
key objectives of gambling laws and regulations are that gambling
should be free of crime, honest, and conducted in accordance with
regulation; that players should know what to expect and be confident
that they will get it without being exploited; and that children and
other vulnerable persons should be adequately protected. The Budd
Report recommendations would potentially permit the following in the
U.K.: on-line gaming and betting (including in football pools), remote
gaming on live games, and betting on the National Lottery.
According to a U.K. government official, the U.K. is developing a
timetable for introducing new gambling legislation sometime between
2003 and 2004. The new legislation will contain a number of major
gambling reforms, including provisions covering Internet gambling.
[End of section]
Appendix IV: Survey of Internet Gambling Web Sites:
We conducted a survey of Internet gambling Web sites to gather data
about the payment options offered to those wishing to gamble. We were
primarily interested in the way these sites presented information about
credit cards and other payment options.
Sampling:
Internet gambling, as defined for this survey review, is an activity
that takes place through a non-redirected,[Footnote 72] live Web site
that allows monetary transactions in one or more of the following
categories of gaming: casinos, lotteries, sports betting, or horse and
dog racing. To conduct this survey, we reviewed a simple random sample
of Internet gambling Web sites. For our purposes, we defined the
universe of Internet gambling sites using the most recent list,
published in 2002, of Internet gaming URLs compiled and published by
the River City Group LLC, Christiansen Capital Advisors LLC, for the
gaming industry. From this list of 1,783 unique gaming Web addresses,
we selected a representative random sample of 202 for our review. This
number was based on a conservative estimate of the number of ’live“
sites as well as on a precision level.[Footnote 73] We systematically
reviewed the Web sites in our sample using an electronic data
collection instrument (DCI).
Overview of Results:
Of the Internet gambling Web sites in our sample, 162 of 202 were
’live.“ The survey also highlighted other aspects of the Internet
gambling Web site in addition to the payment options. For example, the
following table identifies two variables that demonstrate the global
reach of Internet gambling--the licensing country and a potential
contact. Not all the sites listed a licensee or a location address,
however. Other than the initial Web site review, GAO staff did not
specifically verify each individual reference of the licensing country
or the contact address. This nominal information is based on our review
of individual Web sites and is subject to error.
Table 1: Live Web Sites Listing Licensing Countries and Contacts:
Licensing Country: Antigua; # of Sites: 27; Contact Locations:
Antigua; # of Sites: 13.
Licensing Country: Australia; # of Sites: 2; Contact
Locations: Australia; # of Sites: 1.
Licensing Country: Barbuda; # of Sites: 8; Contact Locations:
Barbuda; # of Sites: 1.
Licensing Country: Canada, Kahnawake; # of Sites: 4; Contact
Locations: Belize; # of Sites: 3.
Licensing Country: Costa Rica; # of Sites: 8; Contact
Locations: Canada; # of Sites: 2.
Licensing Country: Curacao; # of Sites: 21; Contact Locations:
Costa Rica; # of Sites: 6.
Licensing Country: Dominica; # of Sites: 3; Contact Locations:
Curacao; # of Sites: 19.
Licensing Country: Grenada; # of Sites: 1; Contact Locations:
Dominican Republic; # of Sites: 1.
Licensing Country: Isle of Man; # of Sites: 1; Contact
Locations: Ireland; # of Sites: 1.
Licensing Country: Netherlands Antilles; # of Sites: 1;
Contact Locations: Isle of Man; # of Sites: 1.
Licensing Country: South Africa; # of Sites: 1; Contact
Locations: Korea; # of Sites: 1.
Licensing Country: Trinidad; # of Sites: 1; Contact Locations:
Panama; # of Sites: 1.
Licensing Country: Tobago; # of Sites: 1; Contact Locations:
Netherlands; # of Sites: 1.
Licensing Country: United Kingdom; # of Sites: 7; Contact
Locations: Netherlands Antilles; # of Sites: 2.
Licensing Country: United States; # of Sites: 1; Contact
Locations: New Zealand; # of Sites: 1.
Licensing Country: Venezuela; # of Sites: 1; Contact
Locations: St. Kitts; # of Sites: 1.
Licensing Country: Contact Locations:
South Africa; # of Sites: 1.
Licensing Country: Contact Locations:
United Kingdom; # of Sites: 13.
Licensing Country: Contact Locations:
United States; # of Sites: 3.
Licensing Country: Contact Locations: West
Indies; # of Sites: 3.
Note: Table sums were derived from the electronic survey conducted by
GAO analysts.
[End of table]
Source: GAO electronic survey.
Reliability:
In order to be sure that an analyst filling in the DCI for a particular
URL would have the same responses as another analyst, we selected a
subsample of 50 sites from the 202 original sites for recoding. We
ensured that analysts did not recode any of the same Web sites they had
coded originally. The odds of consistency were significantly higher
than those of inconsistency at a 99 percent confidence level for each
of the 11 key variables used for the reliability testing.
The inconsistencies that did occur between the original coding and the
recoding of the DCI could have resulted from changes in the content of
a Web site since the original coding. In addition, the presentation of
information in gambling Web sites may be ambiguous, potentially causing
coders to identify characteristics differently. Also, because of the
nature of our research, we were unable to determine whether an
advertised payment option was actually a viable way to pay for
gambling. Our research identified only the presence of information
about the use of payment options on a Web site.
The following table outlines the categorical variables assessed by the
DCI. The number of occurrences indicates the instance out of 162,
unless otherwise indicated. The percent is a weighted estimate. We used
normal approximations to calculate 95 percent confidence intervals
where appropriate. When the estimates approached 0 percent or 100
percent, we used asymmetric methods instead.
Table 2: Results of Internet Gambling Web Site Survey:
Types of Gambling on Site: Casino; Percentage of Sites: 79.6%; Number
of Sites: 129; 95% Confidence Interval: 72.6% - 85.5%.
Types of Gambling on Site: Sportsbook; Percentage of Sites: 49.4%;
Number of Sites: 80; 95% Confidence Interval: 42.1% - 56.7%.
Types of Gambling on Site: Lottery; Percentage of Sites: 6.8%; Number
of Sites: 11; 95% Confidence Interval: 3.4% - 11.8%.
Types of Gambling on Site: Bets on horse/dog racing; Percentage of
Sites: 22.8%; Number of Sites: 37; 95% Confidence Interval: 16.6% -
30.1%.
Types of Gambling on Site: Internet Gambling Payment Options;
Percentage of Sites: Number of Sites: 95% Confidence
Interval: [Empty].
Types of Gambling on Site: Credit Cards; Percentage of Sites;
Number of Sites: 95% Confidence Interval
Types of Gambling on Site: Visa; Percentage of Sites: 85.8%; Number of
Sites: 139; 95% Confidence Interval: 79.5% - 90.8%.
Types of Gambling on Site: MasterCard[A]; Percentage of Sites: 85.1%;
Number of Sites: 137; 95% Confidence Interval: 78.1% - 89.8%.
Types of Gambling on Site: American Express; Percentage of Sites: 4.9%;
Number of Sites: 8; 95% Confidence Interval: 2.2% - 9.5%.
Types of Gambling on Site: Discover; Percentage of Sites: 1.2%; Number
of Sites: 2; 95% Confidence Interval: 0.1% -4.4%.
Types of Gambling on Site: 3rd-Party Payment Transfer Services:;
Percentage of Sites: ; Number of Sites: ; 95% Confidence Interval: .
Types of Gambling on Site: PayPal; Percentage of Sites: 66.7%; Number
of Sites: 108; 95% Confidence Interval: 59.8% - 73.5%.
Types of Gambling on Site: FirePay; Percentage of Sites: 21.0%; Number
of Sites: 34; 95% Confidence Interval: 15.0% - 28.1%.
Types of Gambling on Site: NETeller; Percentage of Sites: 32.7%; Number
of Sites: 53; 95% Confidence Interval: 25.9% - 39.5%.
Types of Gambling on Site: EZPay; Percentage of Sites: 1.2%; Number of
Sites: 2; 95% Confidence Interval: 0.1% -4.4%.
Types of Gambling on Site: Equifax; Percentage of Sites: 0.0%; Number
of Sites: 0; 95% Confidence Interval: 0.0% -1.8%.
Types of Gambling on Site: Direct Wire Transfer:; Percentage of Sites:
; Number of Sites: ; 95% Confidence Interval: .
Types of Gambling on Site: Bank wires; Percentage of Sites: 59.3%;
Number of Sites: 96; 95% Confidence Interval: 52.1% - 66.4%.
Types of Gambling on Site: Western Union; Percentage of Sites: 46.9%;
Number of Sites: 76; 95% Confidence Interval: 39.7% - 54.2%.
Types of Gambling on Site: Money Orders and Various Checks; Percentage
of Sites; Number of Sites; 95% Confidence Interval:
Types of Gambling on Site: Money orders; Percentage of Sites: 27.8%;
Number of Sites: 45; 95% Confidence Interval: 21.3% - 34.3%.
Types of Gambling on Site: Traveler‘s checks; Percentage of Sites:
8.0%; Number of Sites: 13; 95% Confidence Interval: 4.3% -13.3%.
Types of Gambling on Site: Bank drafts, cashier‘s checks, certified
checks; Percentage of Sites: 40.1%; Number of Sites: 65; 95% Confidence
Interval: 33.0% - 47.3%.
Types of Gambling on Site: Personal checks; Percentage of Sites: 29.6%;
Number of Sites: 48; 95% Confidence Interval: 23.0% - 36.3%.
Types of Gambling on Site: Electronic Banking Systems or Processors;
Percentage of Sites; Number of Sites; 95% Confidence Interval:
Types of Gambling on Site: Idollar[B]; Percentage of Sites: 5.6%;
Number of Sites: 9; 95% Confidence Interval: 2.6% - 10.3%.
Types of Gambling on Site: Electronic Financial Services[A]; Percentage
of Sites: 15.5%; Number of Sites: 25; 95% Confidence Interval: 10.3% -
20.8%.
Types of Gambling on Site: Other banking systems[A]; Percentage of
Sites: 28.0%; Number of Sites: 45; 95% Confidence Interval: 21.4% -
34.5%.
[A] (out of 161):
[B] (out of 160):
[End of table]
Source: Results of GAO electronic survey.
Data Collection Instrument:
The following is the DCI that GAO analysts developed to capture the
information presented on individual Internet gambling Web sites. GAO
analysts used Microsoft Access to construct the electronic survey.
Therefore, in order to show all categories represented in the drop-down
tabs on the electronic form (reproduced in figure 3). We also have
provided all the text from the form on the following pages.
Figure 3: DCI for Electronic Web Site Survey:
Text of the Data Collection Instrument:
* Please enter the name of the site:
Please check here if there is no Web site found at this URL:
* Is this a gambling site?
Yes or No:
* Please indicate the type of gambling available on this Web site:
Casino
Sportsbook
Lottery Bets on Horse/Dog Racing:
* Are other types of gambling available on this Web site?
If yes, please specify.
* Is the geographic location of the host identified?
If yes, please specify.
* Is the license location of the site specified?
If yes, please specify.
* Please indicate whether the following disclaimers are posted on the
Web site:
Legality of gambling?
Tax on winnings?
* Please check any credit cards that may be used to pay for gambling
directly:
VISA
MasterCard
American Express
Discover:
* If the allowable issuing banks are named for any credit cards, please
enter the bank name and address below:
VISA
MasterCard
American Express
Discover:
* If the site has information about any other credit cards, enter their
name(s):
* If allowable issuing banks are named for the ’other“ credit cards,
please enter the bank name and address here:
* Are there any monetary limits on credit card deposits posted on the
Web site?
If yes, please describe any limits here:
* Does the site provide information about when credit card deposits are
available?
If yes, when?
Provide details if credit card deposits are not available immediately.
Please enter any further information about the use of credit cards on
the Web site for direct payment in the box below.
* Are any of the following third-party payment transfer services
indicated as acceptable payment options on this Web site?
PayPal
Firepay
NETeller
EZPay
Equifax:
* Please enter any additional third-party payment transfer services
that are indicated on this Web site:
-Information about these payment systems.
* Are any of the following direct wire transfers indicated as direct
payment options on the Web site?
Bank Wires
Western Union:
* Is a name or address provided for sending bank wires or Western Union
deposits?
Yes or No
If so, please enter the name and address shown here:
* Are there any monetary limits to the wire transfer deposits posted on
the site?
If yes, please specify any limits here:
* Does the site provide any information about when wire deposits are
available?
If yes, when?
Provide details if wire deposits are not available immediately:
* Are any of the following types of checks or money orders indicated as
acceptable for deposits for gambling?
Money orders?
Traveler‘s checks?
Bank drafts/Cashier‘s checks, or certified checks?
Personal checks?
* Is a payee name/address for check/money order deposits identified?
If yes for payee name and address, please list either or both of them
here:
* Are there any monetary limits to check deposits identified on the
site?
If yes, please specify any limits here:
* Does the site provide information about when check deposits are
available?
If yes, when?
Please provide details if check deposits aren‘t available immediately:
* Are there any other forms of payment identified on the Web site?
If yes, please enter the information here:
* Does the Web site promote any particular form of payment over other
options?
Bonus for bank wires/Western Union deposits
Bonus for credit card direct deposits
Bonus for third party (PayPal, NETeller, etc.)
Bonus for some other payment option
Bonus for some combination of the above options
No bonus for particular payment options:
* If so, please provide information on the nature of such promotions:
* Please enter any reviewer comments or other noteworthy payment
information:
* Please review the Web site for any information about banking systems
or processors:
Electronic Financial Services (EFS)?
iDollar?
Other banking systems?
* Please enter any information on the site about other banking systems:
* Please enter your assessment of how clearly the Web site presented
information about payment options:
Very clearly presented
Fairly clearly presented
Not very clearly presented
If information was not clear, please specify:
[End of section]
Appendix V: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
William O. Jenkins, Jr. (202) 512-8757
Barbara I. Keller (202) 512-9624:
Acknowledgments:
In addition to those named above, Evelyn Aquino, Kriti Bhandari, Emily
Chalmers, Edda Emmanuelli-Perez, Jason Holsclaw, Ron La Due Lake,
Elizabeth Olivarez, Sindy Udell, and Darleen Wall made key
contributions to this report.
FOOTNOTES
[1] Internet 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.
[2] National Gambling Impact Study Commission, ’Final Report“ (June
1999).
[3] Interim Report on Internet Gambling (GAO-02-1101R, Sept. 23, 2002).
[4] The 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 sports-related gambling
activities, but case law on this issue is conflicting.
[5] These acts are the Travel Act (18 U.S.C. § 1952) and the Illegal
Gambling Business Act (18 U.S.C. § 1955).
[6] We relied on secondary sources to try to determine where Internet
gambling had been legalized.
[7] Credit card associations, such as VISA and MasterCard, license
their member banks to issue bank cards, authorize merchants to accept
those cards, or both.
[8] On-line payment providers send and receive funds electronically for
such uses as on-line auctions and purchases.
[9] Michael Tew and Jason Ader, ’E-Gaming: A Giant Beyond Our Borders,“
Bear, Stearns & Co., Inc. (September 2002).
[10] Computer e-cash entails the issuance of electronic units or
electronic value that can be used for payment in place of currency.
[11] Money 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.
[12] Tew and Ader, E-Gaming.
[13] Bear, 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.
[14] Bear, Stearns & Co. Inc. Internet analysts calculated the
estimated on-line commerce forecasts for 2003.
[15] Charles 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).
[16] A 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.
[17] Money Laundering: Extent of Money Laundering through Credit Cards
Is Unknown (GAO-02-670, July 22, 2002).
[18] U.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.“
[19] United 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).
[20] United 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).
[21] United 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).
[22] H.R. Rep. No. 87-967 at 3 (1961).
[23] United States v. Murray, 928 F.2d 1242, 1245 (1st Cir. 1991).
[24] United States v. DiMuro, 540 F.2d 503, 508 (1st Cir. 1976), cert.
denied, 429 U.S. 1038 (1977).
[25] United 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).
[26] Pub. L. 100-497, 102 Stat. 2467 (1988) (Found at 27 U.S.C. § 2701,
et. seq.).
[27] 164 F. 3d 1102 (8th Cir), cert. denied, 527 U.S. 1039 (1999).
[28] However, 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).
[29] GAO-02-1101R.
[30] Horse 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.
[31] Interstate Horseracing Act of 1978, Pub. L. 95-515, § 2, 92 Stat.
1811, codified at 15 U.S.C. § § 3001-3007 (1994).
[32] District 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)).
[33] As of September 30, 2002, $1 USD was worth $1.80 AUD.
[34] A ’designated country“ is defined in Section 9A of the Interactive
Gambling Act 2001. No. 84, 2001.
[35] As of September 30, 2002, $1 USD was worth $7.80 HKD.
[36] We were not able to test whether a customer would be able to use
certain cards on these sites.
[37] On-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.
[38] Charge-offs represent the losses issuing banks incur when
outstanding debts are not paid.
[39] Tew and Ader, E-Gaming.
[40] Tew and Ader, E-Gaming.
[41] This type of factoring differs from legitimate factoring, in which
accounts receivable are sold at a discount or at full price to a third
party known as a factoring company. The factoring company advances
money to its client, the seller of the receivables, and may assume
responsibility for collections. Factoring is used in various industries
and can be done on different terms. For example, factoring is usually
done without recourse, meaning that the factoring company assumes the
risk of nonpayment or without notice to the debtors of the factor‘s
clients.
[42] Acquirer due diligence for on-line merchants is similar to
standard ’know your customer“ practices. In exercising due diligence,
acquirers apply verification procedures designed to authenticate the
purpose or nature of a business, including its legitimacy.
[43] For more information on reporting requirements, see GAO-02-670.
[44] In July 2002, eBay announced that it was acquiring PayPal and that
under the terms of the purchase PayPal would stop doing business with
on-line gaming merchants.
[45] According to an association official, association rules provide
that when fraudulent transactions are suspected, issuers have 90 days
to seek a chargeback from a merchant.
[46] Computer e-cash exists solely in cyberspace and is used for
virtual transactions. It consists of the issuance of electronic units
or electronic value that can be used in place of currency and is
marketed as an alternative to credit cards for normal Internet
transactions.
[47] David Mussington, Peter Wilson, Roger Molander, ’Exploring Money
Laundering Vulnerabilities Through Emerging Cyberspace Technologies: A
Caribbean Based Exercise.“ (RAND: Critical Technologies Institute,
1998).
[48] Affinity credit cards are provided by tax-exempt organizations
that contract with a financial institution to issue cards to members or
supporters of the organization. Each time a sale is made with the card,
the organization receives a percentage of the total charges at no
additional charge to the cardholder. If the exempt organization is
large enough, it may qualify to have its own name and logo embossed on
the card.
[49] A legitimate site is one that conducts gaming operations through
an interactive device and is unaware that the site is being used to
launder illicit funds. A complicit site is one that is established for
the purpose of laundering money or is aware that it is being used for
this purpose.
[50] The Financial Action Task Force is considered the largest and most
influential intergovernmental body seeking to combat money laundering.
Established in 1989, the task force has 31 members, including the
United States. Its activities include monitoring members‘ progress in
implementing anti-money laundering measures, identifying current
trends and techniques in money laundering, and promoting the adoption
of the organization‘s standards.
[51] FATF--XII: Report on Money Laundering Typologies (2000-2001),
February 2001.
[52] United States Department of State Bureau for International
Narcotics and Law Enforcement Affairs, International Narcotics Control
Strategy Report, (March 2002).
[53] Mark D. Schopper, ’Internet Gambling, Electronic Cash and Money
Laundering: The Unintended Consequences of a Monetary Control Scheme,“
Chapman Law Review 5, no. 1 (Spring 2002).
[54] Tony Cabot and Mark Balestra, eds., Internet Gambling Report V: An
Evolving Conflict Between Technology, Policy, and Law (St. Louis: The
River City Group, LLC, 2002).
[55] The Nilson Report, Oxnard, California, Issues 756 (January), 758
(February), and 760 (March) 2002.
[56] Horse 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.
[57] Interstate Horseracing Act of 1978, Pub. L. 95-515, § 2, 92 Stat.
1811, codified at
15 U.S.C.§ § 3001-3007 (1994).
[58] According to officials from the National Thoroughbred Racing
Association, the only states where interstate pari-mutuel wagering on
horse races is not legal are Alaska, Hawaii, Mississippi, Missouri,
North Carolina, South Carolina, Tennessee, and Utah.
[59] If there are no race tracks within 60 miles of the off -track
betting facility, consent must be obtained from the closest track. 15
U.S.C. § 3004 (b)(1(B).
[60] IHA, 15 U.S.C. § 3002(3) (1994).
[61] District 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).
[62] 146 Cong. Rec. H11232.
[63] Internet Gambling Prohibition Act of 1999: Hearing On H.R. 3125
Before the Subcomm. On Crime of the House Comm. On the Judiciary, 106th
Cong. 59 (March 9, 2000) (Testimony of Kevin V. DiGregory, Deputy
Assistant Attorney General, Criminal Division).
[64] A ’designated country“ is one that has legislation in force
corresponding to the main offense provision of the Act and has
requested this designation from the Australian Minister of
Communication, Information Technology, and the Arts.
[65] However, the Supreme Court of Canada has indicated that if an
offense takes place in whole or in part in Canada, a Canadian court may
be the proper forum to hear the case.
[66] Hong Kong Special Administrative Region, People‘s Republic of
China.
[67] Hong Kong‘s legal system is based on English common law. Under the
constitutional document---the Basic Law of the Hong Kong Special
Administrative Region of the People‘s Republic of China (April 4,
1990)--all laws in place before July 1, 1997, continue in place
unaffected and are independent of the laws that apply to mainland
China.
[68] For purposes of our research, the U.K. includes only England,
Northern Ireland, Scotland, and Wales. Other protectorates, such as the
Isle of Man, have established their own laws for gambling, and some
allow on-line gaming.
[69] While many of the laws discussed in this section apply throughout
England, Wales and Scotland, there are several differences that are not
set out here. Similarly, this section does not address the laws
applying in Northern Ireland.
[70] ’Internet Gambling: Report to the Home Secretary by the Gaming
Board for Great Britain,“ www.gbgb.org.uk.
[71] In 2000, Great Britain commissioned an independent review body to
analyze all gambling regulations throughout the realm, including on-
line gambling. Sir Alan Budd chaired the review body, and the report is
frequently referred to as the ’Budd Report.“
[72] A ’redirected“ Web site is a site that acts as a portal to other
Web sites. Many gaming directory Web sites have links to individual
gaming sites. For this survey, we reviewed the individual gambling
sites and not the portal sites.
[73] A ’live“ gambling site is a Web site that is currently in
operation and offers on-line gambling services. The sites were live
when GAO analysts reviewed the URL for the survey. Those sites
considered not live displayed an error message noting that the Web site
was no longer in operation.
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