Internet Gambling: An Overview of the Issues (02-DEC-02,
GAO-03-89).
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.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-03-89
ACCNO: A05641
TITLE: Internet Gambling: An Overview of the Issues
DATE: 12/02/2002
SUBJECT: Internet
Money laundering
Web sites
Credit sales
Law enforcement
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GAO-03-89
Report to Congressional Requesters
United States General Accounting Office
GAO
December 2002 INTERNET GAMBLING
An Overview of the Issues
GAO- 03- 89
The global legal framework for Internet gambling is a complicated mix of
laws and regulations. In the United States, both federal and state
statutes apply. Gambling is generally regulated at the state level, with
federal law supporting state laws and regulations to ensure that
interstate and foreign commerce do not circumvent them. The Wire Act,
which prohibits gambling businesses from using interstate or international
telecommunications wires to knowingly transmit or receive bets, is the
main federal statute used to prosecute such activity. Foreign countries
and jurisdictions have taken a variety of approaches to regulating on-
line gaming, including legalizing some forms, seeking effective regulatory
approaches, and prohibiting it entirely.
The major participants in the credit card industry have tried to restrict
the use of their cards for Internet gambling by prohibiting cardholders
from using the cards to gamble on line and developing transaction codes
that banks can use to block payments at their discretion. Many large U. S.
credit card issuers also use codes to deny authorization for Internet
gambling transactions, and U. S.- based banks do not accept gambling Web
sites as merchants. Despite attempts to circumvent these efforts by using
improper coding, the success of these restrictions has caused gaming
analysts to lower their 2003 revenue projections for the on- line gaming
industry.
Representatives of law enforcement agencies told us that Internet gambling
could be used to launder money, but others viewed the threat as less
serious. Law enforcement representatives said that the anonymity and
jurisdictional issues characteristic of Internet gambling make on- line
gaming a potentially powerful tool for money launderers. They noted that
few money laundering cases involving Internet gambling had been prosecuted
but attributed the small number of cases primarily to a lack of regulation
and oversight. However, regulatory agencies and officials from the credit
card and gaming industries did not believe that Internet gambling was any
more susceptible to money laundering than other forms of e- commerce.
www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 89 To view the full report,
including the scope and methodology, click on the link above. For more
information, contact William O. Jenkins, Jr., Director, Financial Markets
and Community Investment at (202) 512- 8757 or jenkinswo@ gao. gov.
Highlights of GAO- 03- 89, a report to the
House Committee on Financial Services and Subcommittees on Financial
Institutions and Consumer Credit, and Oversight and Investigations
December 2002
INTERNET GAMBLING
AN OVERVIEW OF THE ISSUES
Internet gambling is a fast- growing industry with estimated 2003 revenues
of more than $4 billion. However, concerns have been raised about its
social and economic impacts. In light of recent recommendations by a
Congressionally appointed commission, which advocated restricting Internet
gambling within the United States, GAO was asked to examine the U. S.
payments system, particularly credit cards, as it relates to interactive
on- line gaming. We examined (1) the legal framework for Internet gambling
domestically and abroad; (2) the credit card industry*s policies regarding
the use of credit cards to pay for Internet gambling and actions taken to
restrict such usage; and (3) the views of law enforcement, banking
regulators, and the credit card and gaming industries on the vulnerability
of Internet gambling to money laundering. We issued an interim report on
these issues in September 2002. GAO makes no recommendations in this
report.
Page i GAO- 03- 89 Internet Gambling Overview Letter 1
Results in Brief 3 Background 6 The Legal Framework for Internet Gambling
Is Complex 11 Full- Service Companies and Credit Card Associations Take
Different Approaches to Restricting Internet Gambling 20 Views on the
Vulnerability of Internet Gambling to Money
Laundering Are Mixed 34 Agency Comments and Our Evaluation 38
Appendix I Scope and Methodology 40
Appendix II Interstate Horseracing Act 42
Appendix III Internet Gambling Regulation in Foreign Jurisdictions 45
Australia 45 Canada 46 Hong Kong 47 United Kingdom 48
Appendix IV Survey of Internet Gambling Web Sites 51 Sampling 51 Overview
of Results 51 Data Collection Instrument 54 Text of the Data Collection
Instrument 57
Appendix V GAO Contacts and Staff Acknowledgments 61 GAO Contacts 61
Acknowledgments 61
Tables
Table 1: Live Web Sites Listing Licensing Countries and Contacts 52 Table
2: Results of Internet Gambling Web Site Survey 53 Contents
Page ii GAO- 03- 89 Internet Gambling Overview Figures
Figure 1: Total Number of Issued Credit Cards 9 Figure 2: Blocking a
Credit Card Transaction 23 Figure 3: DCI for Electronic Web Site Survey 55
Abbreviations
DCI data collection instrument DOJ Department of Justice FATF Financial
Action Task Force FBI Federal Bureau of Investigation IGRA Indian Gaming
Regulatory Act IHA Interstate Horseracing Act NTRA National Thoroughbred
Racing Association U. K. United Kingdom
Page 1 GAO- 03- 89 Internet Gambling Overview
December 2, 2002 The Honorable Michael G. Oxley Chairman Committee on
Financial Services The Honorable John J. LaFalce Ranking Minority Member
Committee on Financial Services
The Honorable Spencer Bachus Chairman Subcommittee on Financial
Institutions and Consumer Credit Committee on Financial Services
The Honorable Sue W. Kelly Chairwoman Subcommittee on Oversight and
Investigation Committee on Financial Services House of Representatives
Internet gambling 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. 2 The social and
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).
United States General Accounting Office Washington, DC 20548
Page 2 GAO- 03- 89 Internet Gambling Overview
economic concerns about Internet gambling raised in the report included
underage gambling, pathological gambling, lack of consumer protections,
and criminal abuse. In response to these concerns, numerous bills were
introduced in Congress to prohibit Internet gambling.
To assist with your continuing deliberations on Internet gambling, you
asked that we review the use of the U. S. payments system, particularly
credit cards, to restrict illegal Internet gambling. Specifically, our
objectives were to:
examine the legal framework for Internet gambling activities, primarily
in the United States, but also in selected foreign countries;
describe the nature and scope of the policies and procedures the credit
card industry has implemented to restrict the use of credit cards as a
form of payment for Internet gambling; and
obtain views on the vulnerability of Internet gambling to money
laundering.
We issued an interim report on these issues in September 2002 and are now
issuing our final report . 3 It includes additional information on the
policies of selected foreign jurisdictions, on regulations governing horse
racing, on the policies and procedures of U. S.- based credit card banks
and third- party processors, and on alternative payment mechanisms.
To address the legal issues in the United States, we researched federal
and state laws, reviewed judicial opinions, and examined related studies.
We also spoke with representatives of the Department of Justice (DOJ) and
the offices of the attorneys general for selected states. For the
international legal framework, we contacted gaming and government
officials and gaming lawyers in selected countries and researched
secondary sources that describe their laws. To obtain information on the
credit card industry*s efforts to deal with Internet gambling, we
interviewed officials of the four major credit card organizations, some
large issuing and acquiring member banks, several third- party processors,
and a number of banking trade associations. We conducted an electronic
survey of 202 Internet gambling sites, which is a representative sample of
the approximately 1,800 Internet gambling sites. We used the survey to
3 Interim Report on Internet Gambling (GAO- 02- 1101R, Sept. 23, 2002).
Page 3 GAO- 03- 89 Internet Gambling Overview
gather information on, among other things, payment acceptance policies for
Internet gambling Web sites. We also interviewed gaming industry experts,
state representatives, and law enforcement officials to obtain their views
on the susceptibility of Internet gambling to money laundering and on some
of the legal issues pertaining to on- line gaming. Appendix I discusses
our scope and methodology in detail.
Internet gambling is an essentially borderless activity that poses
regulatory and enforcement challenges. The legal framework for regulating
it in the United States and overseas is complex. U. S. law as it applies
to Internet gambling involves both state and federal statutes. In general,
gambling is regulated at the state level, with each state determining
whether individuals can gamble within its borders and whether gaming
businesses can legally operate there. Five states (Illinois, Louisiana,
Nevada, Oregon, and South Dakota) have enacted laws that specifically
prohibit certain aspects of Internet gambling, but laws in other states
that prohibit some types of gambling activities generally apply to
Internet gaming as well. Federal law recognizes that state laws vary and
seeks to ensure that neither interstate nor foreign commerce is used to
circumvent them. To date, 18 U. S. C. S: 1084 (commonly referred to as the
Wire Act) is the principal federal statute that has been used to prosecute
Internet gambling activities across state lines. 4 Although other acts
appear to have direct applicability to on- line gambling, we are unaware
of federal prosecutions under these statutes. 5 However, these other
federal statutes have been used to prosecute gambling establishments
(often located offshore) that accept bets over the telephone. According to
an interactive gaming industry services group, Internet gambling has been
legalized in over 50 countries and jurisdictions, mostly in Europe, the
Caribbean, and the
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 sportsrelated gambling activities, but case law on
this issue is conflicting.
5 These acts are the Travel Act (18 U. S. C. S: 1952) and the Illegal
Gambling Business Act (18 U. S. C. S: 1955). Results in Brief
Page 4 GAO- 03- 89 Internet Gambling Overview
Australia/ Pacific region. 6 A few countries and jurisdictions have
prohibited it, but we were unable to determine the exact number.
Many major credit card industry participants have attempted to restrict
the use of credit cards for Internet gambling but have faced challenges in
their efforts to do so. Full- service credit card companies that issue
their own cards and license merchants to accept cards have implemented
policies prohibiting customers from using their cards to pay for Internet
gambling transactions and will not license Internet gambling sites. Credit
card associations 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. 8 With such
intermediaries, issuing banks cannot necessarily determine the nature of
the activity being charged. In spite of these challenges, the credit card
industry*s efforts to restrict the use of credit cards for Internet
gambling could, according to research conducted by gaming analysts, reduce
the projected growth of the Internet gaming industry in 2003 from 43 to 20
percent, reducing industrywide revenues from a projected $5.0 billion to
approximately $4.2 billion. 9 However, as banks increasingly choose to
restrict the use of credit cards for Internet gaming, Internet gambling
sites are expected to
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).
Page 5 GAO- 03- 89 Internet Gambling Overview
emphasize newer forms of payment, such as e- cash, that could eventually
replace credit cards. 10
Representatives of law enforcement agencies, regulatory bodies, and the
credit card and gaming industries expressed mixed views regarding the
vulnerability of Internet gambling to money laundering. Law enforcement
officials said they believed that Internet gambling could potentially be a
powerful vehicle for laundering criminal proceeds at the relatively
obscure *layering* stage of money laundering. 11 They cited several
characteristics of Internet gambling that they believed made it vulnerable
to money laundering, including the volume, speed, and international reach
of Internet transactions and the offshore locations of Internet gambling
sites. In their view, these characteristics promoted a high level of
anonymity and gave rise to complex jurisdictional issues. Law enforcement
officials acknowledged the lack of adjudicated cases involving money
laundering through Internet gambling sites but cited what they believed to
be contributing factors, including the lack of any industry regulations or
oversight. Banking and gaming regulatory officials did not view Internet
gambling as being particularly susceptible to money laundering, especially
when credit cards, which create a transaction record and are subject to
relatively low transaction limits, are used for payment. Likewise, credit
card and gaming industry officials did not believe Internet gambling posed
any particular risks in terms of money laundering. Gaming industry
officials did not believe that Internet gambling was any more or less
susceptible to money laundering than other types of electronic commerce
and pointed out that, in their view, the financial industry, which is
responsible for the payments system, is better suited to monitoring for
suspicious activity in the area than the gaming industry itself.
This report makes no recommendations. We provided copies of this report to
the Departments of Justice and the Treasury for their comment. DOJ had no
comments on it. Treasury provided technical comments, which we
incorporated where appropriate.
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.
Page 6 GAO- 03- 89 Internet Gambling Overview
Before the 1990s, individuals who wanted to place a casino- or sports-
type bet in the United States basically had two choices: they could travel
to a legitimate brick- and- mortar gaming establishment or place an
illegal wager through a bookmaker. However, with the emergence of the
Internet in the mid- 1990s, a new form of gambling appeared* on- line
gaming casinos and sports wagering. Internet gambling can take place on
any electronic device that offers Internet access anywhere on the globe.
In 2001, some gaming analysts were projecting that gross revenues from
Internet gambling would exceed $6 billion by 2003. However, analysts
lowered revenue estimates for a number of reasons, including increased
pressure from U. S. lawmakers and the blocking of Internet gambling
transactions by many large U. S. credit card issuers. (U. S. customers are
reported to constitute anywhere from 50 to 70 percent of total operator
revenues from Internet gambling.) And, despite the recent revenue
reduction, the e- gaming industry continues to grow. In a recent report,
12 gaming analysts estimate that in 2003 revenues from Internet gambling
industrywide will be $5.0 billion, 13 or approximately 4.3 percent of the
total $116 billion in businessto- consumer global e- commerce. 14 In the
view of gaming analysts, the international markets (non- U. S. customers)
represent the future of the industry*s growth.
Currently, individuals wishing to gamble via the Internet can choose from
several types of payment options other than credit cards. 15 These
include:
VISA and MasterCard debit cards (also called check cards): These cards,
which carry the logo of one of the two largest credit card associations,
are tied directly to the cardholder*s bank account. Funds for all
transactions are deducted directly from the cardholder*s bank account, but
cardholders can make credit card- type transactions that do not require a
personal identification number. A personal identification number is not
required to
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).
Background
Page 7 GAO- 03- 89 Internet Gambling Overview
use this card on line, for example, since the transactions are processed
through the VISA and MasterCard systems. Check card gaming transactions
carry the same gaming merchant code as credit card transactions and thus
can also be blocked.
Private- label debit cards: These cards are similar to the check cards
described above but are issued by private companies rather than credit
card associations.
On- line payment providers (also known as payment aggregators): These
companies send and receive funds electronically for such uses as on- line
auctions and purchases.
Wire transfers: Some gaming Web sites promote this method of payment,
which allows Internet gaming customers to wire money directly from a bank
account to a gaming Web site. In some instances, bank wire information is
posted on individual gaming sites, and gaming operators frequently use
wire transfers to pay customers.
*E- cash* or digital cash: This method of payment is a digital
representation of real money that can be placed on a computer hard drive,
smart card, 16 other devices with memory, (including cellular phones and
other electronic communication devices), or in an on- line repository.
Consumers purchase e- cash from an authorized provider. These funds can
then be transferred among vendors and individuals using compatible
electronic systems, in some cases without resorting to banks or other
financial intermediaries. When customers spend the e- cash, it is credited
to the retailer*s e- cash account and later transferred to the retailer*s
regular bank account.
Internet gambling sites also offer money orders; traveler*s checks; bank
drafts; cashier*s, certified, and personal checks; and a number of other
electronic banking systems or processors as payment options.
The House of Representatives recently passed the Leach- LaFalce Internet
Gambling Enforcement Act (H. R. 556) to further limit opportunities for
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.
Page 8 GAO- 03- 89 Internet Gambling Overview
gambling over the Internet in the United States. H. R. 556, which passed a
House vote on October 1, 2002, has been referred to the Senate Committee
on the Judiciary. If H. R. 556 is enacted, it will prohibit any person
engaged in the business of gambling from knowingly accepting bank
instruments such as credit cards, electronic fund transfers, or checks for
illegal Internet gambling. Additionally, the Comprehensive Internet
Gambling Prohibition Act of 2002 (S. 3006), introduced in the Senate in
late September 2002, would, if enacted, amend certain sections of the Wire
Act to include the use of all interstate or international communication
facilities transmitting to or from the United States and expand the
prohibited gambling activities covered by the act. H. R. 5760, introduced
in November 2002, represents a different approach. If enacted, it would
establish a commission to conduct a comprehensive study of Internet
gambling and recommend alternative means of effectively regulating such
gambling.
Two types of credit card organizations handle the four major U. S. credit
cards: (1) credit card associations such as VISA International (VISA) and
MasterCard International Inc. (MasterCard) and (2) full- service credit
card companies such as American Express Company (American Express) and
Discover Financial Services, Inc. (Discover). Credit card associations and
full- service credit card companies vary dramatically in size, market
reach, and organizational structure. As of December 31, 2001, for example,
the two major credit card associations had dramatically higher numbers of
issued credit cards than the major credit card companies (fig. 1). Two
Types of Credit Card
Organizations Function in the U. S. Market
Page 9 GAO- 03- 89 Internet Gambling Overview
Figure 1: Total Number of Issued Credit Cards
Note: Issued domestically as of December 31, 2001.
Each of the two major associations in our review is owned by its member
financial institutions. Around 21,500 member financial institutions own
VISA, and about two- thirds of them are located in the United States.
About 20,000 financial institutions participate in MasterCard worldwide.
As described in a prior GAO report, MasterCard has a two- tier membership
structure composed of principals and affiliates. 17 Principal members have
a direct membership relationship with the association and serve as
sponsors to affiliates. For example, a U. S. or foreign bank can apply to
become an affiliate member if a principal member agrees to sponsor the
bank and the bank satisfies the association*s membership criteria and
clears the approval process.
While the associations do not provide credit card services directly to
cardholders or businesses, they establish the operating standards that
define the policies, roles, and responsibilities of their member
institutions and provide the data processing and telecommunications
systems that
17 Money Laundering: Extent of Money Laundering through Credit Cards Is
Unknown
(GAO- 02- 670, July 22, 2002). Credit Card Associations
Set Policies, and Members Issue Cards and Acquire Merchants
Page 10 GAO- 03- 89 Internet Gambling Overview
transfer transaction data between members. The member institutions issue
the credit cards to customers, acquire (sign up) merchants to accept
credit cards, or both, along with providing other services directly to the
cardholders and merchants. Member institutions generally fall into two
categories:
Issuing banks that solicit potential customers, approve applications,
and issue credit cards. These banks extend credit to cardholders,
establish the terms of cardholders* accounts (for example, credit limits
and treatment of delinquent accounts), collect debts, and maintain
accounts and cardholder records.
Acquiring banks that solicit potential merchants and approve and license
merchants to accept credit cards. These banks, also known as merchant
banks, enter into agreements authorizing merchants to accept the
association*s credit cards, submit their merchants* transactions into the
association*s system for payment from issuing banks, and maintain accounts
and related records on their merchant clients.
Third- party processors are also part of the industry. They contract with
acquiring and issuing banks to provide transaction processing and other
services. As part of the services they provide for their banking clients*
members of the credit card associations* processors block Internet
gambling transactions and ensure that Internet gambling sites do not
become approved merchants.
The two full- service credit card companies in our review, American
Express and Discover, issue their own brands of cards directly to
customers and authorize merchants to accept those cards. Discover, an
affiliate of Morgan Stanley, provides primarily credit card services.
American Express, a publicly held company, also provides travel,
financial, and network services. Each company owns a U. S. bank.
American Express and Discover assume primary responsibility for providing
credit card services directly to both customers and merchants. They
perform all major aspects of issuing cards, including approving
applications from customers, mailing cards to customers, authorizing
transactions, and sending out bills. They also perform all major aspects
of acquiring merchants to accept their cards, including signing up
merchants, distributing credit card terminals, and settling merchant
accounts. By acting as both issuer and acquirer, the two companies
represent what the industry refers to as a *closed loop* system. Both
companies own and Full- Service Credit Card
Companies Issue Cards and Acquire Merchants
Page 11 GAO- 03- 89 Internet Gambling Overview
operate the electronic networks that handle all information on
transactions for cardholders and merchants.
American Express and Discover market their credit card business to
consumers and potential merchants in the United States. Both companies
issue cards to individuals, and American Express also issues cards to
businesses. In addition, American Express has arrangements in some
overseas markets to license foreign banks to issue its cards and acquire
merchants. As of December 31, 2001, American Express had arrangements with
74 institutions located in 77 countries other than the United States.
Both federal and state laws apply to Internet gambling in the United
States. In general, gambling is a matter of state law, with each state
determining whether individuals can gamble within its borders and whether
gaming businesses can legally operate there. Since Internet gambling
typically occurs through interstate or international means, with a Web
site located in one state or country and the gambler in another, federal
law is used to protect the states from having their laws circumvented. To
date, the Wire Act is the federal statute that has been used to prosecute
federal Internet gambling cases, although courts sometimes disagree on the
applicability of certain provisions of the statute. In addition, the
Travel Act and the Illegal Gambling Business Act have been used to
prosecute gambling entities that take interstate or international bets
over the telephone and would likely be applicable to Internet gambling
activity. Some states have taken specific legislative actions to address
Internet gambling, in some cases criminalizing it and in others relying on
existing gambling laws to bring actions against entities engaging in or
facilitating Internet gambling. Like the U. S. states, other countries
have enacted laws that explicitly prohibit or permit Internet gambling
under certain conditions or rely on existing laws to prosecute Internet
gaming activity. The Legal Framework
for Internet Gambling Is Complex
Page 12 GAO- 03- 89 Internet Gambling Overview
Although gambling regulation is generally left to the states, the federal
government has the authority, under the Commerce Clause of the
Constitution, to regulate gambling activity that affects interstate
commerce. 18 Internet gambling falls into this category, as bets are
generally placed at a personal computer in one state or country and
received at a server in another state or country. Of the three federal
statutes that appear to have direct applicability to on- line gambling*
the Wire Act, the Travel Act, and the Illegal Gambling Business Act* to
date only the Wire Act has been applied in the federal prosecution of
activity relating to Internet gambling. The other two federal gambling
statutes have been used in the closely analogous situation of telephone
wagering, including telephone calls made to place wagers with offshore
bookmakers.
The Wire Act prohibits gambling businesses from knowingly receiving or
sending certain types of bets or information that assists in placing bets
over interstate and international wires. Thus, if an Internet gaming Web
site operating in any country (including the United States) receives a bet
transmitted by an individual located in the United States, the operator
has violated the Wire Act. For this reason, foreign entities offering
gambling to U. S. citizens through the Internet would be subject to the
Wire Act. Although some Internet gambling businesses, including foreign
entities, have been successfully prosecuted under the Wire Act, courts do
not agree on the applicability of certain sections of the statute.
First, individual courts have reached different conclusions about the
types of gambling covered by the act. The statute prohibits the
transmission of *information assisting in the placing of bets or wagers on
any sporting event or contest.* This language has led some courts to
interpret the Wire Act as covering bets only on contests that involve
sports.
Second, the phrase *transmission of a wire communication* is somewhat
ambiguous as it applies to the Internet. Depending on how the phrase is
interpreted, the act might not apply to Internet gambling in some
instances* for example, when information is only received over the
Internet. Some courts have held that *transmission* means receiving as
18 U. S. Const., art. I, S: 8, cl. 3 states in relevant part that *The
Congress shall have Power . . . [t] o regulate Commerce with foreign
Nations, and among the several States, and with the Indian Tribes.* The
Federal Government
Regulates Gambling That Involves Interstate or International Activity
The Wire Act Prohibits Gambling Businesses from Receiving or Sending Bets
over Interstate and International Wires
Page 13 GAO- 03- 89 Internet Gambling Overview
well as sending information, while others have held that it means only
sending. 19
Third, some disagreement exists among the courts concerning the second
paragraph of the Wire Act, 18 U. S. C. S: 1084( b), which provides that:
*[ n] othing in this section shall be construed to prevent the
transmission . . . of information assisting in the placing of bets or
wagers on a sporting event or contest from a State or foreign country
where betting on that sporting event or contest is legal into a State or
foreign country in which such betting is legal.*
In other words, transmitting information to assist in placing bets on a
certain event is legal if two conditions are met: (1) betting on the event
is legal in both the place where the transmission originates and the place
where it is received, and (2) the transmission is limited to information
that assists in the placing of bets* that is, it does not include the bets
themselves. 20 Certain courts have stated that this language means that
when the betting activity is legal in both jurisdictions, interstate
gambling would not be a violation of the Wire Act. 21 Most courts disagree
with this interpretation of Section 1084( b), and based upon the language
of Section 1084( b) and clear statements in the legislative history, DOJ
disagrees with this interpretation as well. 22
Finally, the Wire Act mandates that a wire communication facility must be
involved in order for a violation to occur. Currently, all Internet
communications are dependent in some way on some type of wire
communication, such as telephone or data lines. Depending on how Internet
technology develops, however, future Internet communications may no longer
be wire communications covered under the Wire Act.
The two other federal statutes with direct applicability to Internet
gambling are the Travel Act and the Illegal Gambling Business Act. The
Travel Act provides criminal penalties for anyone who undertakes
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).
Other Federal Gambling Laws
Apply to Internet Gambling
Page 14 GAO- 03- 89 Internet Gambling Overview
interstate or foreign commerce with the intent to distribute the proceeds
of any unlawful activity. The Illegal Gambling Business Act makes it a
crime to operate an *illegal gambling business.*
The Travel Act imposes criminal penalties for those who utilize interstate
or foreign commerce with the intent to distribute the proceeds of any
unlawful activity. Under the Travel Act, unlawful activity includes any
business enterprise involving gambling in violation of the laws of the
state where the gambling takes place or of the United States. Thus,
gambling over the Internet generally would violate the Travel Act because
an interstate facility, the Internet, is used to conduct gambling.
The Illegal Gambling Business Act makes it a crime to operate an illegal
gambling business, which is defined as any gambling business that meets
three conditions:
it violates a law of the state where it takes place, it involves at
least five people (not even the same five people) at all times
during a 30- day period, and it operates for the most part continuously
for longer than 30 days or takes
in gross revenues of $2,000 in a single day. Operating a gambling Web site
for over 30 days in a state under the conditions described above would
violate this act. A Web site could easily meet these conditions, including
the requirement that at least five individuals be involved in its
operation. The five people do not need to be directly involved in the
gambling but must only be considered *necessary and helpful* to the
operation. Computer operators, computer maintenance crews, accountants,
and owners could all be included as *necessary and helpful* in the
operation of an Internet gambling Web site.
Like the Wire Act, the Illegal Gambling Business Act applies only to
gambling businesses, not individual gamblers. The Illegal Gambling
Business Act does not require that the casino operators be convicted in
state court, but the gambling activity must violate state law. 23 The
proof requirements associated with the Illegal Gambling Business Act are
minimal; the government must prove only that the business has met the
23 United States v. Murray, 928 F. 2d 1242, 1245 (1st Cir. 1991).
Page 15 GAO- 03- 89 Internet Gambling Overview
three conditions. 24 The 30- day requirement is satisfied if there is a
*repeated pattern of gambling activity.* 25
Two other statutes have some applicability to Internet gambling* the
Indian Gaming Regulatory Act (IGRA) and the Interstate Horseracing Act
(IHA). Certain types of gaming on Indian reservations are permitted under
IGRA, with the regulatory jurisdiction determining the type of gambling
that is permissible. 26 A recent case addressed some of the issues and
raised the question of whether Internet gambling takes place on tribal
lands when bettors who are not on tribal lands use their home computers to
access Internet lotteries via computer servers that are. The case involved
the question of whether the state of Missouri could prevent a Native
American tribe in Idaho from accepting money from Missouri residents via a
lottery Internet site. 27 After dismissals, removals, and appeals, the
case was eventually settled, but it is unclear whether the court resolved
the issue of whether Internet gambling takes place on tribal lands when
the Web site is located on those lands. 28 For more information on IGRA,
see our interim report. 29
Pari- mutuel wagering on state- licensed horse races takes place over the
Internet in a number of states. 30 Federal and state laws govern this
activity. In 1978, Congress passed the IHA to regulate interstate commerce
with respect to pari- mutuel wagering on horse races. The IHA provides
that no person may accept an interstate off- track wager without the
consent of the
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. S: 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.
Page 16 GAO- 03- 89 Internet Gambling Overview
appropriate host racing association, the host racing commission, the
offtrack racing commission, and nearby race tracks. An interstate off-
track wager is defined as *a legal wager placed or accepted in one State
with respect to the outcome of a horse race taking place in another
State.* Parimutuel wagers fall into this category if they are legal in
both of the states, are made by telephone or other electronic device, and
are accepted by an off- track betting system in any state, as well as the
combination of any pari- mutuel wagering interstate pools. 31 The language
of the statute appears to allow the electronic transmission of interstate
bets as long as the appropriate consent is obtained.
Wagering on horses over the Internet is generally done using a closed-
loop subscriber- based system designed to limit access. In March 2000, DOJ
officials testified that it was a violation of the Wire Act for an entity
to offer bets on horse races over the Internet; however, to date, DOJ has
not brought any cases against any state- licensed horse racing tracks for
accepting wagers from out- of- state bettors using the Internet or any
other wire communication. In addition, IHA was amended in December 2000,
after DOJ testified in March 2000 to explicitly expand interstate off-
track wagers to include wagers through the telephone or other electronic
media. 32 For more information on IHA, see appendix II.
Five states (Illinois, Louisiana, Nevada, Oregon, and South Dakota) have
enacted laws that specifically prohibit aspects of Internet gambling. In
states that have not specifically enacted legislation prohibiting Internet
gambling, existing state gambling laws could apply, and new legislation
would not be necessary. For example, in states that prohibit all types of
gambling, such as Utah, Internet gaming also would be illegal. In some
states the status of Internet gambling is unclear, as laws may prohibit
some types of gaming, but may not be interpreted as applying to Internet
gambling.
We reviewed the gambling laws of five selected states* Massachusetts,
Nevada, New Jersey, New York, and Utah* to determine how their existing
laws would affect Internet gambling. We chose these states
31 Interstate Horseracing Act of 1978, Pub. L. 95- 515, S: 2, 92 Stat.
1811, codified at 15 U. S. C. S: S: 3001- 3007 (1994). 32 District of
Columbia Appropriations Act of 2000, Pub. L. No. 106- 553, S: 629, 114
Stat. 2762, 2762A- 108 (codified at 15 U. S. C. S: 3002( 3)). State Laws
Affecting
Internet Gambling Vary
Page 17 GAO- 03- 89 Internet Gambling Overview
because they have a wide range of gambling provisions, from total
prohibition to allowing certain types of legalized land- based casino
gambling. Massachusetts, for instance, has legalized dog and horse racing
under the supervision of the state racing commission and certain statewide
lotteries and raffles by certain organizations under the supervision of
the State Lottery, a division of the state Treasury department. But
Massachusetts law prohibits most other types of gambling, including
transmitting a bet or wager using the telephone. However, Massachusetts
does not have a statute specifically addressing Internet gambling. Nevada
has legalized land- based casino gambling, but Internet gambling is
illegal. However, the state has authorized the Nevada Gaming Commission to
adopt regulations governing the licensing and operation of Internet
gambling if the Commission determines that interactive gaming can be
operated in compliance with all applicable laws.
In New Jersey, gambling can be made legal only by referendum, and only
land- based casino gambling in Atlantic City, licensed horse racing, state
lotteries, bingo and raffles for certain groups, and amusement games have
been approved via referendum. New York has authorized certain lotteries,
certain types of pari- mutuel betting on horse races and bingo, lotto
games, and local games of chance that operate under specific conditions,
but prohibits most other types of gambling. Utah prohibits all forms of
gambling, including state- run lotteries, and the Assistant Attorney
General has stated that Utah believed that gambling of any type from a
computer located in Utah would constitute gambling within the state. The
attorneys general of New Jersey and New York have recently initiated
actions or investigations against entities that either engage in or
facilitate Internet gambling businesses. For more information on the
approaches these states have taken to Internet gambling, please see our
interim report.
Like the United States, a number of other countries have commissioned
detailed reviews to determine the implications of gambling, including
Internet gambling, within their countries. These countries take a variety
of approaches to regulating Internet gambling. For a number of reasons, we
were unable to determine how many countries explicitly prohibit Internet
gambling. For example, gaming laws in many countries, like those in many
U. S. states, apply to gaming in general rather than to Internet gambling.
Although we were unable to determine the exact number, an interactive
gaming industry services group reported that over 50 countries and foreign
jurisdictions, mostly in Europe, the Caribbean, and the Australia/ Pacific
region, have legalized Internet gambling. To illustrate the different
approaches countries take to regulating Internet gambling, we reviewed
Other Countries Face
Similar Legal Challenges in Dealing with Internet Gambling Issues
Page 18 GAO- 03- 89 Internet Gambling Overview
four jurisdictions: Australia, Canada, Hong Kong, and the United Kingdom
(U. K.). Appendix III contains more detailed information about each of
these jurisdictions.
In July 2001, following a year- long moratorium on the development of the
interactive gaming industry, the Australian Parliament enacted the
Interactive Gambling Act of 2001 that prohibits operators from providing
an Internet gambling service to Australian residents. The act applies to
interactive casinos and games on the Internet but does not apply to sports
wagering or lotteries, which continue to be regulated by existing state
and territorial legislation. It covers all interactive gambling service
providers, including those based in Australia and offshore, and both
Australian and foreign- owned businesses. The maximum penalty for
violations is $220,000 AUD ($ 121,000 USD) per day for individuals and
$1.1 million AUD ($ 606,000 USD) per day for corporate bodies. 33 The act
also makes it an offense to provide such services to people in a
*designated country** that is, one that has asked for and received that
designation from the Australian Minister of Communication, Information
Technology, and the Arts to prohibit interactive gaming operators licensed
in Australia from offering services to its citizens. 34
The Criminal Code of Canada makes it illegal to gamble or conduct any
gaming activities within Canada unless they fall within recognized
exceptions set out in the Criminal Code. The exceptions include *lottery
schemes* that are conducted and managed by a province (such as casinos and
electronic gambling), a narrower range of lottery schemes that are
licensed by a province (to a charity, a fair or exhibition, and, rarely,
to a private individual), bets made between individuals not engaged in the
business of betting, pari- mutuel betting on horse races (regulated by the
federal Minister of Agriculture) and some lottery schemes conducted in
Canada on international cruise ships. Under the Criminal Code, only
provincial governments are permitted to offer a lottery scheme on or
through a computer and only to residents of that province; they may not
license others to conduct one. Therefore, in order to offer on- line
gambling in Canada, a provincial government would have to operate the
sites itself. It would also need to ensure that residents of other
provinces could not participate unless cooperative agreements existed.
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. Australia
Canada
Page 19 GAO- 03- 89 Internet Gambling Overview
In addition, commercial land- based betting on single sporting events is
prohibited in Canada and therefore would not be permitted over the
Internet. A recent case from the Prince Edward Island Supreme Court
(Appeal Division) held that an Internet lottery ticket Web site licensed
by the Province of Prince Edward Island would not be conducted and managed
in the province as required by the Criminal Code. The court found that
even though the server was located in the province, the lottery would
violate the Criminal Code by offering gambling to a worldwide market. In
addition, since it was licensed to a charity and not conducted by the
province, it violated the Criminal Code requirement that only provinces
conduct computerized lottery schemes. This case is now on appeal to the
Supreme Court of Canada.
Gambling is unlawful in Hong Kong unless specifically permitted by law. In
May 2002, the Hong Kong Legislative Council voted to ban offshore
gambling, including offshore Internet gambling, by passing the Gambling
(Amendment) Ordinance. This law makes both offshore betting and bookmaking
criminal offenses and provides for criminal penalties against offshore
gambling agents that promote, facilitate, or advertise their products to
Hong Kong residents. The maximum punishment for brokers is 7 years in
prison and a penalty of $5 million HKD ($ 641,000 USD), while individual
bettors face 9 months in prison and a penalty of $30,000 HKD ($ 3,800
USD). 35 However, it is legal for the Hong Kong Jockey Club* the legal
gambling monopoly* to offer its services on- line to Hong Kong residents.
The U. K. has several laws and regulatory schemes that apply to gambling,
but there are no specific laws governing Internet gambling. Some forms of
gambling can be carried out on the Internet under existing law, while
others cannot. In July 2001, the UK Gambling Review Body published its
report (* the Budd Report*), which states that prohibiting on- line
gambling by British consumers would be an unrealistic objective. In
response to the Budd Report, the UK*s Department for Culture, Media, and
Sport is working to develop a timetable for introducing new gambling
legislation sometime between 2003 and 2004. The new legislation is to
contain a number of major gambling reforms, including legislation on
Internet gambling.
35 As of September 30, 2002, $1 USD was worth $7.80 HKD. Hong Kong
United Kingdom
Page 20 GAO- 03- 89 Internet Gambling Overview
Full- service companies and credit card associations have taken different
approaches to restricting the use of their cards for Internet gambling.
Credit card companies have focused primarily on prohibiting Internet
gambling sites from becoming credit card merchants. Credit card
associations and their members have focused primarily on facilitating the
blocking of Internet gambling transactions. Most large U. S. association
members that issue credit cards told us that they have chosen to block
these transactions. For a variety of reasons, however, they cannot always
identify all Internet gambling transactions. For example, both association
and bank officials told us that some gambling Web sites deliberately
miscode gambling transactions. The credit card associations monitor
transactions and take action against acquiring banks when they are not
properly coding Internet gambling transactions. In addition, U. S.- based
acquiring banks that belong to associations do not acquire Internet
gambling merchants as customers, although association members in other
countries do.
American Express and Discover have companywide policies that restrict the
use of credit cards for Internet gambling, but officials stated that the
restrictions apply to all gambling activities because the companies do
not, as a matter of policy, want to do business with what they consider to
be a high- risk industry. Both credit card companies have developed
specific procedures to help ensure that Internet gambling sites do not
become credit card merchants. First, Internet businesses applying to
become merchants are screened, generally through routine visits and
reviews of the applicants* Web sites, to verify that they have accurately
represented the business they are in and are not engaged in any gambling
activities. Second, existing Internet credit card merchants are monitored
to ensure that they do not discreetly transform into Internet gambling
sites* something that, according to officials, has happened. One credit
card company told us that it had contracted with a third- party vendor to
help implement an Internet monitoring system designed to identify improper
use of its card. This initiative entailed identifying and testing Internet
gambling sites attempting to secure payments using the company*s credit
card, including existing merchants that may have expanded into Internet
gambling activities. Company officials noted that the vendor had also
identified several Internet gambling sites that were illegally using the
company*s logo to give the sites legitimacy. The second company told us
that it uses its own employees, rather than an outside vendor, to conduct
similar reviews of Internet gambling sites in general and of the company*s
existing Internet merchants in particular. The results of our survey of
Internet gambling Web sites showed that most do not promote full- service
Full- Service
Companies and Credit Card Associations Take Different Approaches to
Restricting Internet Gambling
Full- Service Companies Focus on Keeping Internet Gambling Sites from
Becoming Merchants
Page 21 GAO- 03- 89 Internet Gambling Overview
credit card companies, although the cards were advertised as a possible
form of payment on 8 of the 162 we reviewed. 36 Appendix IV provides
additional information on our survey.
In spite of these efforts, credit card company officials recognize that
some Internet gambling sites that attempt to secure credit card payments
may still go unidentified. Thus, as part of their overall efforts to
monitor fraud, both companies have also implemented procedures to monitor
transactions for patterns that might indicate that credit cards are being
used for Internet gambling activity. However, like issuing bank officials,
credit card company officials acknowledged that identifying Internet
gambling transactions after the fact is difficult. They also agreed that
online payment providers present a challenge to credit card companies that
are trying to restrict the use of their cards for Internet gambling. 37
Officials for both companies stated that they had reached an agreement
with one major on- line provider stipulating that the provider would block
Internet transactions using the companies* technology and were working on
similar agreements with other on- line payment providers.
Neither VISA nor MasterCard has issued policies to its members that
restrict the use of the association*s credit cards for Internet gambling.
Instead, both associations have developed procedures that enable member
banks wanting to block Internet gambling transactions to do so. Officials
from both associations explained that reaching a consensus on a blanket
policy among members around the world would likely be difficult. Some
members are located in countries where Internet gambling is legal and,
according to one official, represents an expanding business market. Policy
decisions to restrict the use of credit cards for Internet gambling are
therefore left to the discretion of individual member institutions.
Association officials note, however, that their members agree with
operating regulations for both VISA and MasterCard stipulating that only
legal transactions may be introduced into the systems.
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. Credit Card Associations
Have Focused on Enabling Members to Block Payments
Page 22 GAO- 03- 89 Internet Gambling Overview
VISA and MasterCard have each developed a system of coding that allows
member institutions, at their discretion, to block Internet gambling
transactions. Both associations have had a long- standing uniform coding
system designed to facilitate the processing and authorization of credit
card payments for member banks. About 4 years ago, the associations
refined their systems to include a cross- indexed scheme of merchant and
commerce codes so that Internet gambling transactions could be identified.
Internet gambling merchants that accept VISA or MasterCard payments are
required to use a combination of a gaming merchant category code and an
electronic commerce indicator code. These two codes, which are transmitted
through the credit card network to the card issuer as part of the
requested authorization message, inform the card issuer that the
transaction is an Internet gambling transaction. The issuer can then deny
authorization.
Officials explained that the coding system informs card issuers that the
transaction is an Internet gambling transaction but cannot signal whether
the particular transaction is legal or illegal. The existing coding system
does not capture enough information to distinguish between legal and
illegal Internet gambling transactions. Moreover, an official pointed out
that the distinction between legal and illegal transactions is difficult
to make because of the complexities involved in determining which laws
govern any particular Internet transaction and the practical limitations
of determining where a cardholder may actually be when engaging in the
transaction. As a result, a member bank*s decision to block Internet
gambling transactions may result in blocking all properly coded Internet
gambling transactions* both in jurisdictions where on- line gaming is
legal and illegal. For example, a U. S. cardholder may visit a country
where Internet gambling is legal and, while there, attempt to use a credit
card to pay for on- line gambling transactions. If the credit card issuer
has chosen to block Internet gambling transactions and the transaction has
been properly coded, authorization for payment will be denied.
Although the credit card issuer is responsible for making the policy
decision on whether to deny authorization for Internet gambling
transactions, actual blocking of transactions can occur at different
points in the credit card transaction process. In some cases, the issuer
has asked the association to block the transactions on its behalf. Other
issuers do the blocking themselves, while still others instruct their
third- party processors to do the blocking (fig. 2).
Page 23 GAO- 03- 89 Internet Gambling Overview
Figure 2: Blocking a Credit Card Transaction
Most Large Association Member Banks Use Transaction Coding to Block
Internet Gambling Transactions
Page 24 GAO- 03- 89 Internet Gambling Overview
Information on the number of member institutions belonging to credit card
associations that have opted to systematically block Internet gambling
transactions is not readily available. However, association officials
noted that many of the largest U. S. credit card issuers have chosen to
follow this course of action. Officials from the eight large U. S. based
issuing member banks we reviewed, which represent more than 80 percent of
the purchase volume of cards issued by VISA and MasterCard in the United
States, all indicated that they had implemented policies to deny payment
authorization for Internet gambling transactions coming through their
automated systems. Officials of a trade association for community banks
and the processor of its members* credit card transactions stated that
most, if not all, of the small community bank issuers had also chosen to
block Internet gambling transactions. However, some association members*
primarily those in foreign jurisdictions where Internet gambling may be
legal* continued to acquire Internet gambling sites as merchants.
The eight issuing banks in our review implemented their blocking policies
between the early months of 2000 and June 2002. Internet gambling
transactions can be blocked in two ways: either the issuer blocks the
payment directly, or another party, such as a third- party processor or an
association, does it instead. Five of the eight issuers told us that they
blocked Internet gambling transactions themselves; the other three relied
on a major third- party processor or an association to block on their
behalf. Issuers that do their own blocking stated that by doing the
blocking themselves, they were able to maintain control over transactions.
For example, they were able to perform their own risk management of these
transactions or contact their customers to discuss the transactions.
Officials at two issuing banks told us they believed that authorizing or
denying all transactions themselves gave them a better chance of catching
Internet gambling merchants seeking to disguise the transactions. Although
denials of payment for Internet gambling had decreased significantly since
the company began blocking Internet gambling transactions, an issuing bank
official noted that, in the previous quarter, their system had identified
eight merchants that were conducting inappropriate activities, including
disguising Internet gambling transactions.
One of the major reasons some issuers gave for their decision to block
Internet gambling transactions was their belief that Internet gambling is
a high- risk industry, vulnerable to fraud and other illegal activities.
Most of the issuing banks explained that they blocked Internet gambling
transactions primarily because of on- line gambling*s unclear legal
status, Most Large Association
Member Banks Use Transaction Coding to Block Internet Gambling
Transactions
Page 25 GAO- 03- 89 Internet Gambling Overview
which they believed could cause them to unknowingly facilitate illegal
Internet gambling, and because of the financial impact (for example,
potential legal costs and charge- offs) that could result if the customers
refused to pay their gambling charges. 38 Since the legality of Internet
gambling is questionable, debts incurred through such activities may be
unenforceable. Using this argument, some bettors have refused to pay their
gambling debts, claiming that the issuing banks facilitated the *illegal*
activities. In addition, in a number of lawsuits in U. S. courts, bettors
have claimed that the credit card issuer is liable for allowing bettors to
use its services for an illegal activity under state law. In one case, the
bank that had issued the credit card sued the bettor when the bettor
refused to pay the credit card bills for her gambling losses. In a
countersuit, the bettor claimed that the bank was liable for letting the
bettor gamble with the credit card when such gambling activity was illegal
in her state. The case was settled before the trial. One of the provisions
of the settlement required the Internet gaming sites to pay the bettor*s
Internet gambling debts to the banks that issued the credit cards. Half of
the issuing banks in our review told us that they have explicit
disclosures in their cardholder agreements stating that their cards cannot
be used for Internet gambling and two of these banks said they had added
the explicit reference only recently because of these lawsuits. Other
issuing banks said that their cardholder agreements state that their cards
cannot be used for illegal activities but do not specifically mention
Internet gambling.
According to gaming analysts, issuing banks* efforts to block Internet
gambling transactions could reduce the projected growth of the Internet
gaming industry from 43 to 20 percent. 39 What was estimated to be a $5.0
billion industry worldwide could now be reduced to $4.2 billion. 40 In the
meantime, some Internet casino operators now estimate that four out of
every five requests for credit card payments are denied.
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.
Page 26 GAO- 03- 89 Internet Gambling Overview
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.
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. 41 According to the issuers,
factoring occurs when a merchant, possibly one engaged in Internet
gambling, submits credit card transactions through another merchant*s
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. The
Associations*
Transaction Coding Systems Can Be Compromised
Merchants May Disguise Transactions Codes
Page 27 GAO- 03- 89 Internet Gambling Overview
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. 42
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
online 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. 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. 44
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. Using On- Line Payment
Providers Can Circumvent Restrictions on Using Credit Cards for Internet
Gambling
Page 28 GAO- 03- 89 Internet Gambling Overview
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 twothirds 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 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
Issuers Rely on Fraud
Monitoring to Identify Internet Gambling Transactions and Take Action on
Them
Page 29 GAO- 03- 89 Internet Gambling Overview
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. 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.
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
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. Banks that Acquire
Internet Gambling Merchants Are Based Overseas
Page 30 GAO- 03- 89 Internet Gambling Overview
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.
U. S.- based acquirers told us that they exercised due diligence on
Internetbased 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.
Acquirers Take a Variety of
Actions to Identify Merchants Engaged in Internet Gambling
Page 31 GAO- 03- 89 Internet Gambling Overview
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.
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
Associations Impose
Penalties on Acquiring Banks for Miscoded Transactions
Page 32 GAO- 03- 89 Internet Gambling Overview
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.
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 Third-
Party Processors
Implement the Issuers* and Acquirers* Policies on Internet Gambling
Page 33 GAO- 03- 89 Internet Gambling Overview
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.
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. 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. 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.
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).
New Technologies Are
Being Developed to Facilitate Payment for Internet Gambling Transactions
Page 34 GAO- 03- 89 Internet Gambling Overview
Representatives of the Internet gambling industry noted that while using
ecash 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. 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.
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. 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.
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.
Views on the
Vulnerability of Internet Gambling to Money Laundering Are Mixed
Page 35 GAO- 03- 89 Internet Gambling Overview
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.
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) 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. 51 In a March 2002
report, the State Department said that Internet gambling involving credit
cards
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. Despite Concerns about
the Vulnerability of Internet Gambling to Money Laundering, Few Cases Have
Been Prosecuted
Few Cases of Money Laundering through Internet Gambling Have Been
Prosecuted
Page 36 GAO- 03- 89 Internet Gambling Overview
and offshore banks was a powerful vehicle for criminals seeking to launder
funds from illicit sources and to evade taxes. 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.
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.
52 United States Department of State Bureau for International Narcotics
and Law Enforcement Affairs, International Narcotics Control Strategy
Report, (March 2002). Hypothetical Money
Laundering Scenarios Involve Both Legitimate and Complicit Internet
Gambling Sites
Page 37 GAO- 03- 89 Internet Gambling Overview
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.
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.
Financial and Gaming
Industries Did Not View Internet Gambling as a Money Laundering Threat
Page 38 GAO- 03- 89 Internet Gambling Overview
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. 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.
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.
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). Agency Comments
and Our Evaluation
Page 39 GAO- 03- 89 Internet Gambling Overview
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
Appendix I: Scope and Methodology Page 40 GAO- 03- 89 Internet Gambling
Overview
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, 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. 55 Five of the 6
acquiring banks we
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. Appendix I:
Scope and Methodology
Appendix I: Scope and Methodology Page 41 GAO- 03- 89 Internet Gambling
Overview
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.
Appendix II: Interstate Horseracing Act Page 42 GAO- 03- 89 Internet
Gambling Overview
Pari- mutuel wagering on state- licensed horse races takes place over the
Internet in a number of states. 56 Both federal and state laws govern this
activity. In 1978, Congress passed the Interstate Horseracing Act (IHA) 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, 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. 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
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, S: 2, 92 Stat.
1811, codified at 15 U. S. C.S: S: 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. S:
3004 (b)( 1( B). Appendix II: Interstate Horseracing Act
Appendix II: Interstate Horseracing Act Page 43 GAO- 03- 89 Internet
Gambling Overview
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.* 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.* 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
parimutuel gambling over the Internet.* 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. S: 1084). 63 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
statelicensed 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
60 IHA, 15 U. S. C. S: 3002( 3) (1994). 61 District of Columbia
Appropriations Act of 2000, Pub. L. No. 106- 553, S: 629, 114 Stat. 2762,
2762A- 108 (codified at 15 U. S. C. S: 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).
Appendix II: Interstate Horseracing Act Page 44 GAO- 03- 89 Internet
Gambling Overview
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.
Appendix III: Internet Gambling Regulation in Foreign Jurisdictions
Page 45 GAO- 03- 89 Internet Gambling Overview
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 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. 64
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. Appendix III: Internet Gambling
Regulation
in Foreign Jurisdictions Australia
Appendix III: Internet Gambling Regulation in Foreign Jurisdictions
Page 46 GAO- 03- 89 Internet Gambling Overview
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.
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 Canada
Appendix III: Internet Gambling Regulation in Foreign Jurisdictions
Page 47 GAO- 03- 89 Internet Gambling Overview
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. 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.
Gambling is illegal in Hong Kong unless specifically permitted under the
Gambling Ordinance, which sets out the jurisdiction*s overall gaming
policy and statutes. 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 parimutuel bets
from around the world and operates Hong Kong*s twiceweekly government
lottery, the Mark 6. Hong Kong residents can legally
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. Hong Kong 66
Appendix III: Internet Gambling Regulation in Foreign Jurisdictions
Page 48 GAO- 03- 89 Internet Gambling Overview
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.
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. 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.
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. United Kingdom 68
Appendix III: Internet Gambling Regulation in Foreign Jurisdictions
Page 49 GAO- 03- 89 Internet Gambling Overview
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. 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
70 *Internet Gambling: Report to the Home Secretary by the Gaming Board
for Great Britain,* www. gbgb. org. uk.
Appendix III: Internet Gambling Regulation in Foreign Jurisdictions
Page 50 GAO- 03- 89 Internet Gambling Overview
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.* 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.
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.*
Appendix IV: Survey of Internet Gambling Web Sites
Page 51 GAO- 03- 89 Internet Gambling Overview
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.
Internet gambling, as defined for this survey review, is an activity that
takes place through a non- redirected, 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. 73
We systematically reviewed the Web sites in our sample using an electronic
data collection instrument (DCI).
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.
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.
Appendix IV: Survey of Internet Gambling
Web Sites Sampling
Overview of Results
Appendix IV: Survey of Internet Gambling Web Sites
Page 52 GAO- 03- 89 Internet Gambling Overview
Table 1: Live Web Sites Listing Licensing Countries and Contacts Licensing
Country # of Sites Contact Locations # of Sites
Antigua 27 Antigua 13 Australia 2 Australia 1 Barbuda 8 Barbuda 1 Canada,
Kahnawake 4 Belize 3 Costa Rica 8 Canada 2 Curacao 21 Costa Rica 6
Dominica 3 Curacao 19 Grenada 1 Dominican Republic 1 Isle of Man 1 Ireland
1 Netherlands Antilles 1 Isle of Man 1 South Africa 1 Korea 1 Trinidad 1
Panama 1 Tobago 1 Netherlands 1 United Kingdom 7 Netherlands Antilles 2
United States 1 New Zealand 1 Venezuela 1 St. Kitts 1
South Africa 1 United Kingdom 13 United States 3 West Indies 3 Note: Table
sums were derived from the electronic survey conducted by GAO analysts.
Source: GAO electronic survey.
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. Reliability
Appendix IV: Survey of Internet Gambling Web Sites
Page 53 GAO- 03- 89 Internet Gambling Overview
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 Percentage of Sites Number of Sites 95% Confidence Interval
Casino 79.6% 129 72.6% - 85.5% Sportsbook 49.4% 80 42.1% - 56.7% Lottery
6.8% 11 3.4% - 11.8% Bets on horse/ dog racing 22.8% 37 16.6% - 30.1%
Internet Gambling Payment Options Credit Cards:
Visa 85.8% 139 79.5% - 90.8% MasterCard a 85.1% 137 78.1% - 89.8% American
Express 4. 9% 8 2.2% - 9.5% Discover 1. 2% 2 0.1% -4.4%
3rd- Party Payment Transfer Services:
PayPal 66.7% 108 59.8% - 73.5% FirePay 21.0% 34 15.0% - 28.1% NETeller
32.7% 53 25.9% - 39.5% EZPay 1. 2% 2 0.1% -4.4% Equifax 0. 0% 0 0.0% -1.8%
Direct Wire Transfer:
Bank wires 59.3% 96 52.1% - 66.4% Western Union 46.9% 76 39.7% - 54.2%
Money Orders and Various Checks:
Money orders 27.8% 45 21.3% - 34.3% Traveler*s checks 8.0% 13 4.3% -13.3%
Bank drafts, cashier*s checks, certified checks 40.1% 65 33.0% - 47.3%
Personal checks 29.6% 48 23.0% - 36.3%
Electronic Banking Systems or Processors:
Idollar b 5.6% 9 2. 6% - 10.3% Electronic Financial Services a 15.5% 25
10.3% -20.8% Other banking systems a 28.0% 45 21.4% - 34.5%
a (out of 161) b (out of 160) Source: Results of GAO electronic survey.
Appendix IV: Survey of Internet Gambling Web Sites
Page 54 GAO- 03- 89 Internet Gambling Overview
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. Data
Collection
Instrument
Appendix IV: Survey of Internet Gambling Web Sites
Page 55 GAO- 03- 89 Internet Gambling Overview
Figure 3: DCI for Electronic Web Site Survey
Appendix IV: Survey of Internet Gambling Web Sites
Page 56 GAO- 03- 89 Internet Gambling Overview
Continued from Previous Page
Appendix IV: Survey of Internet Gambling Web Sites
Page 57 GAO- 03- 89 Internet Gambling Overview
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): Text of the Data
Collection Instrument
Appendix IV: Survey of Internet Gambling Web Sites
Page 58 GAO- 03- 89 Internet Gambling Overview
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?
Appendix IV: Survey of Internet Gambling Web Sites
Page 59 GAO- 03- 89 Internet Gambling Overview
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:
Appendix IV: Survey of Internet Gambling Web Sites
Page 60 GAO- 03- 89 Internet Gambling Overview
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:
Appendix V: GAO Contacts and Staff Acknowledgments
Page 61 GAO- 03- 89 Internet Gambling Overview
William O. Jenkins, Jr. (202) 512- 8757 Barbara I. Keller (202) 512- 9624
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. Appendix V: GAO Contacts and Staff
Acknowledgments GAO Contacts Acknowledgments
(250072)
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