Online Gambling Goes Underground

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The private companies maintain that Internet gambling regulations in the final version of the law, unlike those in the earlier version that was passed by the House of Representatives, do not explicitly ban casino-style games. As a result, they say they are still in a legal gray area that has existed since November, 2002, when the U.S. 5th Circuit Court of Appeals ruled the 1961 Wire Act only applied to "sporting events or contests" and not wagers in general (see BusinessWeek.com, 10/3/06, "Online Gambling Still in the Cards?").

Role of E-Wallets

Whatever the legal grounds, private companies are benefiting from the role played by so-called e-wallets, which for years have been processing gambling payments credit card companies won't touch. Although the largest e-wallet, eBay's (EBAY) PayPal, does block gambling transactions, NETeller—the e-wallet of choice for PokerStars and other sites—has adopted a wait-and-see policy with regard to the law. In an Oct. 12 statement, the company said it will monitor how the U.S. government implements the act over the next 270 days. Other e-wallets include CentralCoin and Click2Pay.

As a publicly traded company on the London stock exchange, NETeller faces pressures that many other e-wallets don't. Of the $7.3 billion in transactions it processed in 2005, many were for nongambling-related purchases. NETeller does not want to lose that business or spook investors. If NETeller does block U.S. customers, however, plenty of other private e-wallets will gladly take the millions in processing fees, typically a percentage of each transaction.

Many third-party processors do not reveal how much they take in or what they do with the money. Christopher Costigan, president of Gambling911.com, a trade publication for the online betting industry, expects the withdrawal of public companies will mean more loosely regulated, foreign-based e-wallets will enter the market. "There are always third-party processors popping up that are really fly-by-nights…these are small companies in Central America, Latin America, and even the Middle East." In several cases, e-wallets have operated for a few months and suddenly disappeared with the casinos' and players' money, says Costigan.

"Vulnerable to Financial Crime"

The relative secrecy within which many private e-wallets operate has made them targets for money laundering and the transfer of funds to illegal organizations, says Molly Millerwise, director of public affairs at the Treasury Dept. "When such service providers are located in the U.S., they are subject to both state and federal controls that help against money laundering and terrorist financing. Overseas outfits, however, are not subject to U.S. laws and thus are very much on our radar screen as emerging trends that are vulnerable to financial crime," says Millerwise. The government's Financial Action Task Force will address the issue in a paper in the coming days.

Tracking who is supporting e-wallets and what they do with the money could be cost-prohibitive, if not near-impossible, for banks. Pamela Johnston, a partner with Foley & Lardner and an expert in white-collar crime, says blocking e-wallet transactions is not as simple as refusing to process payments marked "7995"—the code for online gambling transactions. Many e-wallets process a mix of gambling and other transactions, making it difficult to indiscriminately block payments. In addition, some e-wallets use foreign banks to process transactions. CentralCoin, for example, is registered in the British West Indies and handles transactions through Gateway Financial Services. Thus, the U.S. bank does not even see the name of the e-wallet when money is wired, and instead sees the name of another bank. The foreign headquarters of many e-wallets also makes it difficult for banks to demand the nature of transactions.