Online gambling: Law bars processing credit card bets

See later stories: Regulations barring Internet gambling goes into effectOnline gambling action shifts to states

Preventing online gamblers from using a credit card does not mean the end of online gambling.

With the recent passage of the Unlawful Internet Gambling Enforcement Act, legislators hoped to ban most forms of online gambling in the U.S.  Instead of criminalizing online gambling, the UIGEA seeks to prohibit online gambling by requiring credit card companies and banks to stop processing transactions associated with online gambling.

Immediately after the new law went into effect on Oct. 13, 2006, most publicly traded online-gambling companies shuttered their U.S. operations -- punishing the companies' revenue and stock prices and spurring industry consolidation.

Still, it remains unclear whether the UIGEA is having, or ever will have, its desired result.  Many closely-held online gambling companies continue to service U.S. customers while operating outside the country, raising concerns about how the law can be enforced. 

Additionally, troubling questions exist regarding the viability of preventing online gambling related transactions.  Meanwhile, some closely-held operators argue that poker, the primary driver of online gambling in recent years, is not covered by the law since it is a game of skill.

Online gambling accounts can be opened in a number of ways.  Gamblers can deposit funds using electronic-fund-transfer services, cash-transfer agents, and electronic-check-processing services.  Money can also be moved to and from online-gambling sites through electronic-wallet companies, including Click2Pay, ePassporte and Neteller PLC.

The U.S. Secretary of the Treasury and the Board of Governors of the U.S. Federal Reserve have 270 days to create regulations that require financial-transaction providers to flag and prevent online-gambling transaction.  The assignment could be tough, with some bank industry representatives voicing worries during recent months.

According to a July letter the Independent Community Bankers of America sent to U.S. Senate leaders, the proposed law would promote "an impossible compliance burden" for so-called uncoded transactions.  Unlike credit cards, the letter explained, these transactions (including electronic-money transfers and check payments) do not indicate the type of business receiving a payment.

Additionally, the letter commented, with over 45 billion uncoded transactions processed in the U.S. in 2004, establishing a method to identify and prevent online-gambling transactions would necessitate a massive revamp of the payment system.

Although numerous banks no longer process credit card transactions made to and from online-gambling companies, e-wallet transactions are a separate matter.  The reason for that is e-wallets are used for more than just processing online-gambling payments, making it hard for credit card companies and banks to know which transactions to block. 

Furthermore, some e-wallet companies route transactions through offshore, third-party banks, so that credit card companies may not even be aware they are dealing with an e-wallet company.

As MasterCard's Josh Peirez, group executive, global public policy, explains, "Our system is effective in preventing the direct use of our cards for Internet gambling, but there are issues around making sure our cards don't get used indirectly for gambling."

A spokesman for Congressman Jim Leach, R-Iowa, who sponsored the UIGEA, acknowledged that the law will not eliminate gambling in the U.S., but said that when the bill was being prepared, the Treasury and the Federal Reserve raised no questions about the technical ability to enforce the law.  He added that the UIGEA has the backing of major financial groups.

This potential forthcoming support from financial groups is at least partially due to the fact the law provides the Treasury and the Federal Reserve with a high degree of latitude regarding what will and will not be viewed as a restricted transaction.  Under the Act, regulators can exempt certain restricted transactions if they discover that "it is not reasonably practical to identify and block" such transactions, providing the Treasury and Fed flexibility in order to avoid imposing severe costs on the banking industry.

See related: Europe to U.S.: Back off online gambling enforcement

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Updated: 04-18-2019