The following paper was presented Dec. 10, 2002 at the 6th Annual Internet Symposium on Internet and Wireless Gambling Law and Management.
This paper should supplement: Paul Hugel and Joseph Kelly, "Internet Gambling, Credit Cards and Money Laundering," (6)(1) Journal of Money Laundering Control, 57-65 (2002).
Credit card transactions concerning Internet gambling may be a problem in jurisdictions outside the United States. It may not matter legally in England, for example, whether the offshore transaction is legal. Richard Colbey, an English barrister, has opined that English credit card companies that accept offshore wagering transactions would be "unlikely" to recover debts "if the card companies took legal action.... An Act of Parliament passed in 1892 makes loans given for gambling purposes unenforceable. The money the card company pays to the casino on the punter's behalf amounts to an unenforceable loan. The position is different if a debit card is used. Then, unless an overdraft is run up, money that already belongs to the punter is used and cannot be recovered. The only glimmer of hope for [the] card companies is an 1842 Court of Appeal decision which held that loans to enable someone to gamble abroad, where the debts were legally enforceable, might be enforced by an English court." (Richard Colbey, "Up Front: Gambling: Debt Reform is on the Cards," The Guardian (London), June 15, 2002.)
Australia and New Zealand have also considered making Internet credit card gaming transactions unenforceable. Presently, the Australian government is considering three regulatory options:
- maintaining the status quo, under which general law possibly already voids agreements relating to illegal interactive gambling services;
- making regulations in the terms proposed in section 69A of the Act;
- making regulations in the terms proposed in section 69A of the Act, and confining the operation of those regulations in their effect on financial service providers.
("Consideration of options: Regulations about the unenforceability of agreements relating to illegal interactive gambling services. Under section 69A of the Commonwealth Interactive Gambling Act 2001 (the Act), the Minister for Communications, Information Technology and the Arts is required to take all reasonable steps by February 2002 to ensure that regulations are made about the 'unenforceability of agreements relating to illegal interactive gambling services.'")
The government of New Zealand had considered a proposal "to permit New Zealanders to repudiate, within 24 hours, a credit card debt incurred through gambling with an overseas-based remote interactive gaming operator." For many reasons, the government decided to postpone the matter until "Australia has made decisions on how to implement similar provisions under the Interactive Gambling Act 2001." (Paper 18: "Further Decisions on Remote Interactive Gaming," Cabinet, Minute of Decision, Sept. 3, 2001.)
By August 2002, the Australian government had "failed to persuade banks to decline credit cards used in overseas online casinos." A government spokesperson stated that concerning the ban on Internet credit cards: "We never said we were definitely going to put that in place" ("Online Gamblers Facing a Credit Card Ban," Sydney Morning Herald, August 2, 2002).
Denmark also is considering action against online credit card providers. In June 2001, a Report of the Danish Ministry of Taxation recommended that Danish banks
"play the role of pioneer with a view to initiating a dynamic international process whereby several countries require the banks to block payment transactions to illegal gaming providers. A situation in which an increasing number of countries impose the same requirements on the banks will probably lead to pressure on the actual credit card organizations for a global plan to deny access to use their credit cards for gaming providers who do not restrict themselves to their own national borders.
The working group thus recommends that the new gaming legislation should require issuing banks to block for Internet credit card payments when the recipient is one identified by the authorities as a foreign provider of illegal gaming." (p21 of Report, "National Internet Gaming Strategy.")
A Thai lawyer has also suggested litigation to prevent enforcement of credit card gaming transactions since Thai law
"seems to follow the U.S. law that one could avoid paying gambling debts…. Therefore, in practice, tell a consumer who has either sent a cheque (seldom) or charged money on his credit card (99.9 percent of the time) to gamble on an Internet site what to do to avoid the debt (assuming this is the law in Thailand). You will probably be helping a lot of people—they can get their money back and be barred by the Internet casino from playing there ever again. Insofar as the casino is concerned—tough luck. The casino knows the law and takes the risk anyway. Isn't that what gambling is all about?” (Title XVIII, Gambling and Betting, ss 853-855, p169; "Postbag: You Need not Pay if You're a Loser," Bangkok Post, Feb. 14, 2001, at 13, citing comments of S. Burke Chon Buri).
Within the United States, the 5th Circuit (In re Mastercard,2002 U S App LEXIS 25129) upheld the dismissed of a RICO-based lawsuit by unsuccessful offshore gamblers against credit card companies. The appellate court dismissed the suit partly because it agreed with the district court that the Wire Act applied only to sports betting and contests. Furthermore, none of the anti-gambling bills from the 107th Congress was passed by the U.S. Senate and therefore bill such as "the Unlawful Internet Gambling Funding Prohibition Act (UIGFPA) will have to proceed de novo in the newly elected 108th Congress."
By no means does this means a hiatus in either state or private action against credit card companies that facilitate Internet gaming transactions. The attorney general of New Jersey had filed civil law suits against 11 offshore betting or gaming operators and certain suppliers, such as Cryptologic. Absent were credit card companies as possible defendants. Two assistant attorneys general of New Jersey, however, have suggested that a short-term solution to the Internet gambling problem might be litigation against the credit card companies.
"First, it is obvious that, in order for an Internet or related telephonic gambling operation to be commercially viable, money must flow from bettors to the operator and presumably in the opposite direction as well. The mechanisms for these transfers are the financial service providers, i.e. credit card companies, banks, and other entities that provide the means for funds transfers. Control of such financial service providers can therefore constitute a very potent and effective means of enforcing--albeit indirectly—a prohibition against illegal gambling activity.
Although Internet gambling operations accept other forms of payment such as debit cards, checks, and wire transfers, it is apparent that a substantial portion of all bets placed at illegal Internet and telephonic gambling sites involve the use of credit cards. Therefore, legislation which made credit card debts, incurred for the purpose of illegal gambling void and uncollectible could significantly limit the amount of such activity.” (Thomas N. Auriemma and Gary A. Ehrlich, “Proactive State Enforcement of Internet Gambling Prohibitions: Worth the Effort or Waste of Time?" (6)(6) Gaming Law Rev. 2002, 507-513).
The New York attorney general has concentrated anti-Internet gaming activity by taking action against Citibank (which has about 12 percent of the U.S. credit card users) and PayPal. According to the New York attorney general's office: "Over the past several years, many large credit card issuers, such as Bank of America, Fleet, Direct Merchants Bank, MBNA, and Chase Manhattan Bank have begun blocking such [Internet gaming] transactions ('Financial Giant Joins Fight Against Online Gambling,' Press Release of the New York State Attorney General, June 14, 2002)."
In its settlement with Citibank ('Assurance of Discontinuance,' effective June 21, 2002), Citibank agreed to "block and decline authorizations for bankcard transactions that are coded and submitted to the Bank as online gambling transactions consistent with, and pursuant to, then-standard Visa and MasterCard rules and procedures for posting to bankcard accounts that are marketed to consumers in the United States ('Agreed Blocking')" (par.18). Citibank maintained, however, that "a cardmember's use of a general purpose credit card in connection with gambling (including paying for electronic 'chips' used in online gambling) does not mean that the credit card issuer is involved in gambling or the promotion of gambling" (par.21), and that a consumer's use of credit cards for Internet gambling "cannot be deemed the promotion or facilitation of gambling..." (par.22). Citibank agreed to pay $100,000 in costs and $400,000 additionally to organizations providing problem gambling counseling.
On August 16, 2002, the New York attorney general reached an "Assurance of Discontinuance" with PayPal, Inc., which "operates an Internet payment system that provides a means by which businesses and individuals can send and receive online payments" (par.4), and process payments for online gaming-related merchants. In its prospectus, filed with the SEC on June 28, 2002, PayPal admitted: "Some online casinos use our product to accept and make payments. If these casinos are operating illegally, we may be subject to civil or criminal prosecution for numerous laws, including but not limited to money laundering laws" (par.9).
Pursuant to the "Assurance of Discontinuance," PayPal agreed by September 1, 2002, to "cease processing any payments for online gambling merchants, where such payments involve PayPal's New York members..." (par.20) and to pay $200,000 for costs, penalties, and "disgorgement" of online gaming profits (par.23). PayPal also agreed to report violations of state and federal law, e.g., a member advertises online controlled substances without a prescription (par.22).
There have also been attempts to avoid payments to credit card companies for gambling debt transactions. Debtors have been successful in California where cases settled out of court on terms advantageous to online gamblers (e.g., Providian Nat'l Bank v. Haines, Case No. CV 98-08858 (Cal. Super. Ct. 1998) and Marino v. American Express, Case No. CV 99-6166 (Super. Ct. Marino Co. 1999)). A case by an online gambler against numerous defendants, including credit card companies, is still pending in Oregon, although some defendants have settled. (Buchal v. 3748472 Canada, Inc., Oregon Circuit Court for the County of Clackamas, Case No. CCV 01-04094).
The most interesting suit against a credit card company for an Internet gambling debt based on the Statute of Anne is Reuter v. MasterCard International, et al., No. 00-L-8 (October 19, 2001 (Ill.) In Reuter a gambler lost $49,500 while wagering on the Internet using credit cards. While the gambler did not try to recover his losses, plaintiff apparently a stranger to the transaction, sued to recover three times the losses pursuant to Illinois law, which states in relevant part: "If within 6 months, such person who under the terms of Subsection 28-8(a) [720 ILCS 5/28-8] is entitled to initiate action to recover his losses does not in fact pursue his remedy, any person may initiate a civil action against the winner. The court or the jury, as the case may be, shall determine the amount of the loss. After such determination, the court shall enter a judgment of triple the amount so determined" (720 ILCS 5/28-8(b).
The court in deciding defendant's motion to dismiss stated the "primary issue involved herein is whether the statute covers the action of the [credit card] Defendants, i.e. were the Defendants involved in the gambling enterprise and were the Defendants 'winners' as is necessary to state a cause of action under the statute" (opinion 3-4). The court concluded that the credit card companies were not winners.
"There is no allegation the Defendants gained or lost based on the outcome of the wager or bet. The Defendants participation was terminated when the card holder used the card to purchase credits. At that point a charge was made for the purchase and the Defendants could profit or gain no more regardless of the outcomes of the gambling. In fact the Defendants received the same amount whether the person placing the bet won, lost or did not even place a bet. The Defendants part of the transaction was finished before the gambling took place" (opinion at 7).
The court also concluded the credit card companies were not involved in the gambling enterprise. The court stressed that the bettor's debt to the credit card company was completed prior to the gambling.
"The relationship with the casino and the bettor is a business relationship providing services to both, but taking no part in the operation or management of the casino, nor any part in the placing of bets by the bettor. To take Plaintiff"s argument to its illogical conclusion, a bettor who loses at gambling after purchasing credits on a credit card could collect his losses from the credit card company while the casino, having also dealt with the credit card company, could also collect any amount it lost to the bettor from the credit card company. The two parties actually involved in the illegal activity would be made whole, while the credit card company which did not gain or lose anything in the wager would have to reimburse both parties for their losses" (opinion at 9).
In granting the credit card company's motion to dismiss, the trial court emphasized that the statute was penal in nature and thus should be strictly construed against a third party. Moreover, the statute would be construed as remedial had the action been brought by the actual loser (Salzman v. Boeing, 304 Ill. App. 405 (1940)). It is also interesting to speculate what the result would be had the third party sued the offshore casino directly.
The New Jersey Attorney General has based one of his causes of action against offshore wagering entities on that state statute alleging anyone could sue to recover gambling losses. For example, State of New Jersey v. RoyalclubCasino.com, et al., filed June 2001: "Count III ... 33. A bettor who loses money in an unlawful gambling transaction is permitted to recover any money lost within six calendar months after payment of delivery to the winner. NJSA 2A: 40-5.34. Under NJSA 2A: 40-6, if a loser does not seek to recover within such period, any other person may due for and recover the same."
Assuming various U.S. state governments and litigants are successful in stopping online credit card gaming transactions, would this minimize drastically U.S. bettors utilizing offshore sites? Kenneth Maliga, principal of RED Consulting, Inc., commented on the results of a credit card ban: "All it will really do is drive all the revenues and profits to the European banks, who quite frankly are looking at this market very, very carefully and enthusiastically" ("Are All Bets Off for Online Gambling," (15)(6) Credit Card Management, September 2002). Citibank, in the U.K., claims blocking online gambling "is still very much a U.S. initiative" ("Will Blocks on Credit Cards Hamper Gambling Online?--Will U.K. Banks Reject Credit-Card Payments for Online Gambling..," Revolution<.I>, June 26, 2002). Other possibilities include prepaid ATM, an electronic payment service that requires punters to verify U.S. citizenship and prefund all accounts. Another company, Pacific Nakon, will launch an e-cash pad.
There is no controversy that the actions by credit card companies have had a negative impact on offshore gaming revenue. Typical, would be the analysis in Bear Stearns "E-Gaming: A Giant Beyond our Borders," (Sept. 2002).
"Overall, we have become increasingly cautious in our outlook for the e-gaming market, given the challenges that have come to the fore within the past six months. In our view, all signs point to declining business levels for most Internet gaming operators, due to the credit card issue combined with an increasingly competitive environment, which has led to higher customer acquisition costs" (at 48).
Should credit card transactions be effectively curtailed, it would not necessarily end payments to offshore casinos. Specifically, according to Mark MacCarthy, Senior Vice President, Public Policy Visa U.S.A., there would be ways to evade or circumvent a merchant coding/blocking system:
"[T]he coding system applies only when an online gambler uses a Visa card to purchase goods and services from an online gambling merchant. But online gamblers often use the various electronic cash and account funding systems that create pools of electronically available funds which can be used for auctions, online purchases or possible Internet gambling. Thus, a cardholder could use his or her credit card to purchase e-cash on a Web site that does not itself offer gambling, but allows that e-cash to be used on another Web site that does offer gambling. The coding system described above would not capture these transactions as Internet gambling transactions. It is our belief that these alternative forms of payment will become the payment system of choice for Internet gambling, in part to avoid the coding and blocking systems that Visa and the other traditional payment systems have established" (written statement, Hearing Before the Subcomm. on Oversight and Investigations of the House Comm. Of Financial Services, 107th Cong. (2001)).
The best and most thorough analysis of electronic cash and Internet gaming is by Mark Schopper, "Internet Gambling, Electronic Cash and Money Laundering: The Unintended Consequences of a Monetary Control Scheme," (5)(1) Chap. L. Rev., 305-330 (2002). In a succinct summary, Schopper states:
"Electronic money is a digital representation of money that can be placed on a computer hard drive, smart card, or other device with memory, including cellular phones and other electronic communication devices. Electronic money payment schemes, which currently consist of smart cards and computer-based e-money, allow for the storage and redemption of financial value. Simply put, electronic money is a money replacement based on encryption technologies, which disguise the electronic information so that only the intended recipient can access its meaning. In the context of e-money, the information that forms the basis of the money can be encrypted to a level that makes it completely anonymous and untraceable--even to its issuer" (Schopper at 314).
Electronic money may be transmitted to another country "as easily as transmitting it across the street" (Id. at 315). It is cheaper than credit cards and there is minimal possibility for identity theft or fraud. "Because e-money can be encrypted and used anonymously over the Internet, it offers significantly better privacy than credit cards and even traditional cash" (Id. at 315-316).
For whatever reason, electronic money has had minimum use within the United States, perhaps because Internet users are comfortable with credit cards or alternatives such as PayPal. Should PayPal and credit cards be made unavailable to Internet gamblers, electronic money might fill the vacuum.
"Gamblers generally 'expect immediate payment of wagers' when they win. Under the current credit card model, though gamblers do not have immediate access to their deposited funds and thus have no way of knowing if the Internet gambling site has credited their account until the gamblers actually request a withdrawal of their funds. With e-money, however, 'immediacy' would no longer be an impediment to the growth of Internet gambling. A gambler would no longer have to wait for a check in the mail or a charge back to his or her credit card or debit card account. Indeed, with e-money, gamblers' winnings could be immediately transferred to their personal computers. Thus, an Internet gambling operation could configure its site to either transfer winnings to a gambler after every win, or when the gambler chooses to cash out…. With immediate payoff, better security, anonymity, and lower transaction costs, the benefits of e-money to the Internet gambler cannot be overstated" (Id. at 323).
One important side effect of credit card replacement of e-money would be "the potential for large-scale criminal use… The potential use of electronic money as a facilitator for money laundering is enormous" (Id. at 325).
Schopper's work was cited favorably by the United States Government's study "Internet Gambling: An Overview of the Issues," (GAO 0-03-89, Dec. 2002). The U.S. study also stated that: "However, as banks increasingly choose to restrict the use of credit cards for Internet gaming, Internet gambling sites are expected to emphasize newer forms of payment, such as e-cash, that could eventually replace credit cards" (at 4-5).