Third-party transaction processor PayPal confirmed Monday that it is the subject of a grand jury investigation for its past business ties to the Internet gambling industry. The disclosure was made in the company's 10-K annual report.
According to the report, the U.S. Attorney's Office for the Eastern District of Missouri informed the company last week that by conducting business with I-gaming merchants during a nine-month period in 2001 and 2002, it was in violation of the U.S. PATRIOT Act.
The federal legislation, passed in the wake of the terrorist attacks on the United States in September 2001, is aimed at cutting off money laundering activities to fund terrorism.
The action marks the first time the PATRIOT Act has been used to go after a U.S. company for Internet-gambling related activity.
IGN asked the experts:
Can it be argued that PayPal received funds from illegal activity and could the recent case in Missouri lead to further litigation on the same grounds?
Patrick O'Brien: What the Missouri Attorney General describes as typical money laundering would depend on PayPal knowing the funds were tainted.
That argument might work for sports book betting, but I think it is more of a stretch for casino-style gaming.
What I don't understand is the reference to the PATRIOT Act. It's one thing to allege that the PayPal violated the PATRIOT Act provisions intended to stop money laundering by terrorists; that would be typical public relations from the AG. However, the purported charges range in time from Oct. 26, 2001, the date the Act was signed, to July 31, 2002, probably the date that PayPal stopped processing wagers. That appears to indicate that there were substantive violations of the PATRIOT Act, but I can't figure out what they might be.
I have had the firm contact the AG's office to get details, but we do not yet have a response. This could be really big news or just B.S.
Patrick O’Brien spent 25 years as a Special Agent with the U.S. Customs Service prior to joining Greenberg Traurig. In those years, he occupied numerous important positions, including Special Agent in Charge of South Florida and the Caribbean, and Assistant Regional Commissioner New York, where his primary responsibilities involved combating money laundering, drug smuggling and illegal exports of arms and technology. In addition, as the Director of Internal Security for Customs he was responsible for all Customs corruption prevention programs and corruption investigations worldwide.
Among some of his clients now are offshore gaming operators and offshore banks in relation to foreign and U.S. compliance issues, and money laundering detection and prevention.
Joseph Kelly: The problem is that it (the PATRIOT Act) is so vague that no one is sure what the procedures are. They are being accused of all sorts of things, according to what EBay disclosed in their annual report.
Since the act itself is so vague, anything is feasible. One of the requirements is that something has to be illegal. And in order for something to be illegal there has to be a clear direction of its legality either through the courts or through laws.
There is still a huge gray area when it comes to casino gaming. It is much more defined in terms of sports betting, but there is no definite answer as to whether or not casino style gaming falls under the same legislation that sports betting does.
If I were a banking institution, I don't think I would want this sort of a problem.
The regulations make it clear that you have to have things in place, and very technical requirements. From the outside, it would appear that PayPal has practiced good faith measures to be in compliance with the regulations but there are still these issues with what happened during those nine months.
We won't really know the magnitude of this case until it is resolved. Obviously if the court rules against PayPal, it could open the door to a new avenue of prosecution that payment providers weren't susceptible to before, but if it is dismissed or PayPal gets a favorable ruling, it could be meaningless.
It is interesting that other payment transaction providers, mainly NETeller have already put into place "know-your-customer" policies, which include having account users provide social security numbers. The know-your-customer initiative is a big part of the PATRIOT Act.
Joseph Kelly, Ph.D., J.D. is a professor of business law at SUNY College Buffalo. He is licensed to practice law in Nevada, Illinois and Wisconsin.