Internet Gambling - The Risk of Fraud and how to Deal with It

24 March 2000
A craze is sweeping the world for investment in dot.coms. People are recognising the vast potential that the Internet offers for business. The betting gaming and lottery industries are no different. Indeed, it is expected that Richard Branson and Bill Gates are to team up together to bid to run the UK's National Lottery with the prospect of utilising the Internet in the process.

However, the Internet has also heralded a bonanza for fraudsters and both gamblers and reputable organisations looking to promote their services through the Internet should be wary.

The Internet allows the fraudster to operate cheaply. It is relatively inexpensive to set up a website. He can also conceal his identity fairly easily. The fraudster may also be based in a country across the other side of the world from his victim, posing difficulties of detection and prosecution.

In October last year, Providian Bank, the 6th largest Visa Card issuer in the US announced that it would deny approval for most on-line wagers made by customers. Vice president of corporate communications Laurie Cole said, "People who use credit cards to gamble on the Internet present a higher credit risk to a lending institution, and there also is a more significant risk of fraud"

So how is the industry vulnerable to fraud? A fraudster may set up a virtual casino. Who is to know that the odds of a particular game in that casino paying out are the same as the odds it advertises? When Cynthia Haines was sued by credit card companies after running up large e-gaming debts, her lawyers said that she believed the virtual casinos had "skewed the odds in favor of the house."

The Net gambler may find that the fraudulent virtual casino does not pay out winnings. Haines' attorney, Ira Rothken said, "There were times when her winnings just disappeared." Her lawsuit alleged that some sites simply stole from her account. The fraudster may even add insult to injury by misusing the gambler's credit card details.

The problem of bogus Internet gambling sites is a problem for the whole industry, which risks damage to consumer confidence as a result of some sites not paying out. One potential way to tackle the problem is by regulation of the Internet gambling industry. This is not a course of action that has met with universal approval with many people preferring to see a total ban imposed. Regulation would however allow a form of licensing for reputable organisations. This could take the form of digital certificates which could utilise encryption techniques to prevent forgery. Licensed sites would be checked in the same way that real world casinos are checked to, for example, determine the house advantage on games.

Alternatively the gambling operator may find itself under attack from hackers. They may hack into the operator's system and, for example, skew the odds in their favour.

On the other side of the coin there is likely to be less fraud involving dishonoured cheques or their equivalent in the cyber-world. Payment is likely to be through a transfer from a bank or credit card company to a designated account or through the use of digital cash. These are the main forms of electronic payments and should allow the gambling operator to confirm receipt of funds in advance.

These are just a few examples of the different vulnerabilities to fraud that are posed by gambling on the Internet as opposed to the real world.

Preventative measures, such as the use of firewalls, are the most effective way to tackle the potential problem of fraud. However, as can be seen from recent high profile hacks, preventative measures won't always be enough. The fraudster may still succeed in stealing money and taking action to recover it should then be considered. This may have the added advantage to a gambling operator that being seen to take action may act as a deterrent.

Once it is apparent that a fraudster has struck it is vital to use speed surprise and strategy. An analysis should be made at the earliest opportunity to assess the damage and decide whether, and how, to pursue a claim. All the while it is important to conduct matters in secrecy to prevent the fraudster gaining an inkling of the investigation.

Redress may be sought through a law enforcement agency. This may be the appropriate course of action for Internet gamblers who have lost relatively small quantities.

However, the victim may prefer to control proceedings and vigorously pursue the matter through the civil courts. Or the victim may prefer to take no action at all. The responsible lawyer should advise the victim with regard to its commercial interests. Publicity may potentially do more damage than being seen to tackle the fraudster.

In general, the commercial priority of the victim will be to find the money before the fraudster. It is important to consider assembling a quality recovery team. This may be formed from suitable lawyers, and given the global nature of the Internet, possibly in more than one jurisdiction. Forensic accountants and enquiry agents may also be instructed.

The strategy will depend on the individual circumstances of each case. For example the fraud may be on-going and it may be possible to monitor communications as part of the investigation. However, care may be needed so as not to infringe the laws of the particular state that has jurisdiction. This caveat applies to any step taken for which it may be advisable to seek the prior sanction of the Court.

There may be a remedy against someone other than the fraudster. There may be an argument that a software company that has left backdoors in a system through which a hacker has gained access should be liable for the resulting damage.

The Courts too may provide powerful tools to aid investigation. In the UK, orders can be obtained for third parties to disclose the identity of the fraudster and the whereabouts of the proceeds. These can be combined with "anti-tip off" orders to prevent that third party warning the criminal. Such orders may be sought against banks in order to follow the audit trail. This may however prove less easy in the future with the growth of forms of digital cash, not all of which create a lasting audit trail. For example some forms use smart cards and at least one such version stores transactions but only for a limited period. Once again this emphasises the need for speed to pick up the transient audit trail before it vanishes.

Orders may also be obtained to freeze a fraudster's assets or to search their premises. A freezing order is normally combined with an order requiring the fraudster to disclose assets and cross-examination on that disclosure may be allowed if there are grounds for believing disclosure is incomplete. Breach of court orders may lead to the fraudster or third party's imprisonment for contempt of court.

The nature and extent of pre-trial orders depends on the jurisdiction in question as do rights of redress against third parties. For example similar relief to that obtainable in England is available in Australia. In Canada freezing and search orders are granted exceptionally but the courts have a wide discretion to order ancillary relief to give effect to the primary relief.

In Columbia, certain lawsuits can be registered against real estate prior to service of process. This does not prevent disposition of the property but will reverse a sale if the claimant is successful. Embargoes may also be granted on assets. The court may also request a defendant to allow it inspection of premises, assets, documents and records to obtain evidence for use in a future lawsuit. The Court may also inspect the premises and documents of third parties.

In France, assets may be attached before litigation and injunctions may be granted to obtain information of assets. Attachment of assets is also available in limited circumstances in Germany where a debtor may be arrested to prevent him dissipating assets or to allow the court to examine him about their value and whereabouts.

Pre-judgment attachment orders are available in the US and they may be coupled with injunctions to assist enforcement of rights over the attached property.

Whatever the jurisdictions through which the fraudster is to be pursued, it is advisable to seek suitable legal advice.

Steven Philippsohn attained Honours in the Law Society qualifying examinations prior to being admitted as a solicitor in 1972. He soon became the litigation partner of a substantial Central London practice prior to starting his own firm in 1979. He has spoken at many conferences, both in the UK and overseas and recently gave papers at the International Bar Association on the subject of the regulation of internet gaming in Europe and developments in cyber crime in Europe.

Over the last 20 years, he has specialised in matters relating to the gaming industry. Throughout this period his firm has been retained on subjects ranging from advising gaming laws to be adopted by countries to recovery of gaming debts incurred both nationally and internationally.