Electronic Payment Systems: What's Next? - Part 2

22 January 2003

On Dec. 31, 2002, IGN published Prof. Joseph Kelly's article "Electronic Payment Systems: What's Next?", an examination of worldwide legal issues pertaining to payment systems for e-gambling. Kelly has since expanded the piece. The new sections are presented in this follow-up article. The full report was presented Jan. 7 at ASROC in Costa Rica.

See Also: Part 1

Possible Ways to Minimize Litigation/Prosecution

    A. Think Carefully Before Becoming a Publicly Traded Corporation: example of PayPal.

    1. Mandatory Disclosures to the Securities and Exchange Commission.
        a. Prospectus
        b. Registration Statement
        c. Quarterly Reports

        PayPal, a Delaware corporation with its principal place of business in California and Nebraska, when it went public, made potentially damaging statements as part of a mandatory full disclosure requirement:

        "We classify merchants in industries that historically have experienced significant chargeback rates, primarily online gaming-related service providers and online gaming merchants, as 'higher risk.' ... The legal status of many of these higher risk accounts is uncertain, and these businesses could be prohibited or restricted from operating in the future. Proposed legislation has been introduced in the U.S. Congress to clarify that operation of an Internet gaming business violates federal law, and to prohibit payments processors such as PayPal from processing payments for online gaming merchants. Even if this proposed legislation is not enacted, online gaming merchants could be determined to violate existing federal and state gambling laws. In particular, on June 14, 2002, the New York State Attorney General announced an agreement under which Citibank has agreed to block online gaming transactions using its credit cards. The New York State Attorney General further stated that even under current law, the processing of known gambling transactions may lead to liability for facilitating or aiding and abetting the underlying activity. If these merchants are operating illegally, we could be subject to civil or criminal prosecution for, among other things, money laundering or for aiding and abetting violations of law. We would also lose the revenues associated with these accounts and could be subject to material penalties and fines. (emphasis added) (PayPal, Prospectus, June 28, 2002 at 66).

    2. The disclosures may become a lightening rod for regulatory officials, e.g., the New York State Attorney General in its resolution of its dispute with PayPal, Assurance of Discontinuance, August 16, 2002, relied on many of the statements. Often overlooked in the matter of PayPal is the federal action whereby PayPal

      "has received federal grand jury subpoenas dated July 24, 2002, issued at the request of the United States Attorney for the Eastern District of Missouri. These two subpoenas seek the production of documents related to online gambling activities. The Company intends to cooperate fully with the United States Attorney’s office in this matter." (PayPal, 10Q Report, filed August 6, 2002).

      This possible action by the United States Attorney would be a criminal proceeding.

    Electronic cash entity should avoid any connection with a company involved with sports betting. While federal law may be unclear as to the illegality of offshore casinos and lotteries, offshore sports operators have been found to be in violation of the Wire Act (18 U.S.C. § 1084).

    1. Aiding and Abetting

        a. Federal Law

        Federal law (18 U.S.C. § 2(a)) defines aiding and abetting as applicable to: “Whoever commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal.” Aiding and abetting requires willful participation in unlawful activity. An Internet electronic commerce provider might be liable under the Wire Act if it participates in offshore sports betting, e.g., U.S. v. Cohen (260 F.3d 68, 2nd Cir. 2001), but probably would not be liable if it engaged in a contract concerning a bettor that involved offshore casinos or lotteries. In In Re MasterCard (2002 U.S. App. LEXIS 25129), the 5th Circuit affirmed the dismissal of a civil RICO action in part because offshore casino gambling was not covered by the Wire Act, which applied only to betting. However, there is authority to the contrary, e.g., People v. World Interactive Gaming Corp. (185 Misc. 2d 852, Sup.Ct. NY 1999), where a trial court concluded that offshore gaming violated the Wire Act, the Travel Act, and various other federal and New York law.

        b. State Law

        Certain states have statutes stating that Internet gambling is illegal (five) or attorneys general have taken action against offshore entities (N.J.) or credit card companies (N.Y.) Other states, such as Massachusetts, have opined informally that concerning Internet gambling "in most matters, it’s not illegal under state law." (Boston Herald, November 27, 2002)

        PayPal in its Prospectus, June 28, 2002, admitted that if online merchants operate illegally, it could be subject to civil/criminal prosecution for aiding and abetting and money laundering. "The New York State Attorney General further stated that … under current law, the processing of known gambling transactions may lead to liability for facilitating or aiding and abetting the underlying activity. If these merchants are operating illegally, we could be subject to civil or criminal prosecution for, among other things, money laundering or for aiding and abetting violations of law." (emphasis added)

        PayPal may have violated N.Y. Gen. Oblig. Law § 5-401, which states in relevant part:

          "14. All wagers, bets or stakes, made to depend upon any race, or upon any gaming by lot or chance, or upon any lot, chance, casualty, or unknown or contingent event whatever, shall be unlawful.” N.Y. Gen. Oblig. Law § 5-411 further renders 'void' all contracts based on such wagers, bets, or stakes.

          15. The New York Constitution, art. I § 9 states, 'no … bookmaking, or any other kind of gambling [with certain exceptions pertaining to lotteries and horseracing] shall hereafter be authorized or allowed within this state.'" (Assurance of Discontinuance)

        Interestingly, according to the GAO,

        "most of the issuing banks explained that they blocked Internet gambling transactions primarily because of on-line gambling's unclear legal status, which they believed could cause them to unknowingly facilitate illegal Internet gambling, and because of the financial impact (for example, potential legal costs and charge-offs) that could result if the customers refused to pay their gambling charges." (emphasis added) (GAO Report at 24-25)

        What if in the 108th Congress the Goodlatte Bill passed (HR 3215, Combating Illegal Gambling Reform Modernization Act)? HR 3215 would have amended the Wire Act (18 U.S.C. 1084) so that if a gambling business "knowingly accepts ... (B) an electronic fund transfer or funds transmitted by or through a money transmitting business, or the proceeds of an electronic fund transfer or money transmitting service, from or on behalf of the other person," the operator shall be fined and/or imprisoned up to five years. Would an electronic money operator who knowingly transmitted funds to an offshore gaming operator be in violation of HR 3215 for having aided and abetted?

    2. Conspiracy

      Conspiracy requires the government to prove knowledge of voluntary participation in an illegal agreement. The government need not prove a corrupt motive even for a defense that is malum prohibitum rather than malum in se. In U.S. v. Cohen, (201 U.S. App. LEXIS 1700, cert. den. 2002 U.S. LEXIS 4472) the 2nd Circuit Court of Appeals rejected Cohen's argument that conspiracy "requires proof of a corrupt motive for any conspiracy to commit an offense that is malum prohibitum, rather than malum in se." It is important to stress that Cohen's conviction revolved around conspiracy and substantive violations of sports wagering under the Wire Wagering Act, 18 U.S.C. § 1084.

    3. PATRIOT Act

      The PATRIOT Act extends U.S. jurisdiction to all overseas banks that have correspondent U.S. accounts. It allows U.S. seizing/freezing of correspondent accounts if the Justice Department believes the bank is engaged in an illegal business. As one expert opined, "You risk seizure of your U.S. correspondent accounts, if you accept Internet gaming accounts, especially those involving sports books." (emphasis added) (Anne Lindner, "Is I-Gaming Within Biting Distance of the PATRIOT Act?" Interactive Gaming News, March 28, 2002).

    4. Horseracing

      It is uncertain what effect, if any, the December 2000 amendment to the Interstate Horseracing Act might have. It is irrelevant, however, to the Cohen case. As explained by the U.S. Government, in its opposition to Cohen’s petition for a writ of certiorari to the United States Supreme Court:

      "to the extent that the amendment suggests that certain interstate wagers with state OTB facilities might be lawful, it applies strictly to wagers on horse races; WSE [World Sports Exchange] took bets on other types of sporting events, not on horse races. Finally, any conflict between the 2000 amendment and Section 1084, which was enacted by a different Congress almost 40 years earlier, could not help petitioner, since the conduct for which he was convicted occurred before the enactment of the amendment." (U.S. brief at 15)

    C. Electronic commerce should try to avoid or minimize contact with any offshore wagering operator, e.g., if the client/bettor has total control over a virtual account, it would be more difficult to allege any type of criminal action or civil liability.

    B. Do not advertise the feasibility of Internet gaming financing in those jurisdictions especially where AGs have stated objections. Those AGs who have taken action against offshore gaming operators and those assisting offshore gaming operators have often done so because of blatant advertising within a state. For example, "Nevada Gaming Control Board member Scott Scherer says he may ask the state attorney general's office to prosecute offshore Internet casinos that place ads targeting Nevadans." ("Web Casino Ads Concern Nevada Regulator," AP, June 26, 2002).

    E. PATRIOT Act (Money Laundering)

    The GAO Report seems to de-emphasize any connection between offshore gaming and money laundering. However, should electronic money replace credit cards and offshore wagering, "the potential use of electronic money as a facilitator for money laundering is enormous." (Schopper at 325)

    The USA PATRIOT Act ("United and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism," Oct. 15, 2001, 362 pp) concentrated upon areas such as the importance of banking transactions.

    It already has had an impact on offshore gaming jurisdictions such as Curacao. "An employee in the accounting department of an online casino based in Curacao said it has been hard for I-gaming companies to open new bank accounts lately. But whether it’s due to the PARTIOT Act, he's not sure." (Interactive Gaming News, March 28, 2002)

    An electronic money merchant might minimize any liability under the PATRIOT Act by taking affirmative steps to prevent or minimize suspicious transactions, i.e., Know Your Player.

    F. It is possible that offshore wagering without sports betting might be in violation of certain other federal laws, e.g., the Travel Act (18 U.S.C. § 1952) or the Anti-Gambling Act (18 U.S.C. § 1955). One court narrowly construed the Anti-Gambling Act when it overturned the convictions of offshore gambling operators (U.S. v. Truesdale, 152 F.3d 443 (5th Cir. 1998)).

    G. RICO (Civil) (In Re MasterCard, 2002 U.S. App. LEXIS 25129)


Outside of moving to another planet, there is no certain way to avoid legal liability. As Richard Blumenthal, the Attorney General of Connecticut, stated, "'anyone associated with this industry is in legal peril.' He acknowledged that the prosecution of indirect relationships could be hard 'at best' and that businesses could offer 'a lot of defenses.'" J. P. Suarez, then the New Jersey official responsible for legal action against the offshore entities, stated, "companies doing business with overseas gambling sites could be seen as abetting an illicit activity.... [T]he United States-based business does not necessarily have to be taking the wager to be implicated." Perhaps the example of Edelman Public Relations WorldWide might be useful. Its general manager "said it was not clear that Internet gambling was illegal in the United States. Nevertheless, he said Intertops had signed a contract that [he] said indemnifies Edelman against legal action that could arise if Intertops breached the law." ("Companies in U.S. Profiting from Surge in Internet Gambling," N.Y. Times, July 6, 2001.)

Hypotheticals Involving Electronic Money

  1. Electronic money merchant contracts with customers, approximately 50 percent of whom are wagering offshore with electronic money.

  2. Electronic money merchant advertises in the State of Erehwon that electronic money is the most convenient way to wager offshore.

  3. Electronic money merchant contracts with bank outside of United States to utilize its services for offshore wagering.

  4. Electronic money merchant contracts with offshore wagering entity whereby a potential wagerer is encouraged to use services of the electronic money merchant.

  5. Electronic money merchant contracts with an offshore gaming operator whereby the contract provides that electronic money merchant will receive X percentage of profits from the offshore operation.

Joseph M. Kelly PhD, JD is a professor at State University of New York College at Buffalo.