This is the accessible text file for GAO report number GAO-02-1101R 
entitled 'Interim Report on Internet Gambling' which was released on 
September 23, 2002.



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Washington, DC 20548:



United States General Accounting Office:



September 23, 2002:



The Honorable Michael G. Oxley:



Chairman:



Committee on Financial Services:



The Honorable John J. LaFalce:



Ranking Minority Member:



Committee on Financial Services:



The Honorable Spencer Bachus:



Chairman:



Subcommittee on Financial Institutions and Consumer Credit:



Committee on Financial Services:



The Honorable Sue W. Kelly:



Chairwoman:



Subcommittee on Oversight and Investigation:



Committee on Financial Services:



House of Representatives:



Subject: Interim Report on Internet Gambling:



As you requested, we are conducting a study on Internet gambling and 

the U.S. payments system, specifically the use of credit cards to fund 

Internet gambling activities. This letter responds to your request for 

an interim product that summarizes results to date based on this study. 

As agreed with your office, we plan to issue a final report on our work 

in November 2002.



In your letter dated September 10, 2002, you noted plans to bring 

H.R.556, the Unlawful Internet Gambling Funding Prohibition Act, to the 

House floor for debate later this month. Thus, you asked us to provide 

this interim product to address four key issues for consideration in 

the congressional debate. We are providing information on gambling laws 

of selected states and the principal federal statutes that pertain to 

Internet gambling and courts interpretations of those statutes; and 

preliminary results on the structure of the credit card industry, the 

policies and procedures that industry participants have implemented 

relating to the use of credit cards to fund Internet gambling 

transactions, and the views of law enforcement and industry 

participants on the vulnerability of the Internet gambling industry to 

money laundering. These and other questions you asked will be answered 

more fully in a final report to be issued in November 2002.



To address the legal issues, we researched federal laws; the laws of 

five judgmentally selected states whose statutes included a wide-range 

of gambling provisions; case histories; and related studies. We also 

spoke with representatives of the Department of Justice (DOJ) and the 

offices of the attorneys general for the same five states. To obtain 

information on the credit card industrys efforts to deal with Internet 

gambling, we interviewed officials of the four major credit card 

organizations, some large issuing and acquiring member banks, third-

party processors, and a few banking trade associations. We also 

interviewed gaming industry and Internet gambling industry experts, 

knowledgeable state representatives, and law enforcement officials to 

obtain their views on the susceptibility of Internet gambling to money 

laundering and on some of the legal issues pertaining to on-line gaming 

and betting.



The information on the credit card industrys policies and procedures 

related to Internet gambling addressed in this letter focus primarily 

on those implemented in the United States and are based almost 

exclusively on statements that we could not, and did not, verify or 

corroborate. Internet gambling-related policies and procedures 

applicable to the international members or partners of the various 

credit card entities will be discussed further in the final report. We 

performed our work between March 2002 and September 2002 in accordance 

with generally accepted government auditing standards.



Results:



Currently, both state and federal laws apply to Internet gambling in 

the United States. In general, gambling legislation is a matter of 

state law and varies considerably among the states. Internet gambling 

typically occurs through interstate or international means, with a Web 

site located in one state or country and the gambler in another. 

Federal law recognizes the wide variations among state laws and seeks 

to ensure that neither interstate nor foreign commerce is used to 

circumvent state statutes. To date, 18 U.S.C.  1084, commonly referred 

to as the Wire Act, is the federal statute that has been used to 

prosecute federal Internet gambling cases. The act prohibits gambling 

businesses from using interstate or international wires to knowingly 

receive or send certain types of bets or information that would assist 

in placing bets. Although the Wire Act has been successfully used to 

prosecute gambling businesses through the Internet, the statute 

contains certain ambiguities that may limit its applicability--for 

example, uncertainty about whether its provisions apply to all types of 

betting or are limited to sporting events and contests. The DOJ 

generally takes the view that the Wire Act is not limited to sports-

related gambling activities, but case law on this issue is conflicting.



Two types of credit card organizations handle the four major credit 

cards issued in the United States. Credit card associations are owned 

by a large network of member financial institutions, which may approve 

credit card applications and issue credit cards, approve and sign up 

merchants to accept the cards, or both. The associations define the 

policies, roles, and responsibilities of their member institutions and 

provide the computer systems that transfer transaction data between 

member institutions and merchants. Full-service credit card companies 

issue their own brands of cards directly to customers and authorize 

merchants to accept those cards. Credit card associations and full-

service companies have taken different approaches to restricting the 

use of their cards for Internet gambling. Credit card associations have 

focused primarily on facilitating the blocking of Internet gambling 

transactions. Credit card companies have focused primarily on 

prohibiting Internet gambling sites from becoming credit card 

merchants.



Representatives of law enforcement agencies, regulatory bodies, and the 

credit card and gaming industries expressed mixed views regarding the 

vulnerability of Internet gambling to money laundering. Law enforcement 

officials believe that Internet gambling can be a significant money-

laundering vehicle because of the volume, speed, and international 

reach of Internet transactions and the offshore locations of Internet 

gambling sites. In their view, these characteristics can promote a high 

level of anonymity and make investigations difficult. Banking and 

gaming regulatory officials did not view Internet gambling as 

particularly susceptible to money laundering, especially when credit 

cards that create a transaction record and are subject to relatively 

low transaction limits are used for payment. Industry gaming officials 

noted that increased blocking of credit card transactions for Internet 

gambling could help promote newer forms of electronic payment methods 

that may be more susceptible to money laundering.



Internet Gambling Is Governed by Both State and Federal Law:



Although both state and federal laws apply to gambling in the United 

States, when gambling takes place within one state, state law 

predominates. Each state has laws that address whether individuals can 

legally gamble within its borders and whether gaming businesses can 

exist within the state. States where gambling is legal regulate the 

type of gambling that is permissible and the conditions under which 

gambling businesses can function. Internet gambling is typically an 

interstate or international matter, however, because the gambler and 

the Web site are in two different states or even countries. Because 

gaming over the Internet typically goes through state or international 

communication lines, such transmissions can violate a number of state 

laws, although the states may never know that such transmissions 

occurred. Federal law recognizes the wide variations among the laws of 

the states and seeks to ensure that neither interstate nor foreign 

commerce is used to circumvent states choices. The Wire Act, for 

example, has been used to prosecute Internet gambling activities when 

gambling has occurred over state lines.



A Survey of Five States Shows That State Laws Vary Widely:



We reviewed the gambling laws of five states--Massachusetts, Nevada, 

New Jersey, New York, and Utah---to determine how they affect Internet 

gambling. We selected those states because they offer a wide range of 

gambling provisions, from total prohibition to legalized land-based 

casino gambling.[Footnote 1] In summary:



Massachusetts has legalized dog and horse racing under the supervision 

of the State Racing Commission and some statewide lotteries and raffles 

by certain organizations under the supervision of the State Lottery. 

Although it prohibits most other types of gambling, including 

transmitting a bet or wager using the telephone, Massachusetts does not 

a have statute specifically addressing Internet gambling.



Nevada has legalized land-based casino gambling and has authorized the 

Nevada Gaming Commission to adopt regulations governing the licensing 

and operation of Internet gambling only when it determines that 

interactive gaming can be operated in compliance with all applicable 

laws. Until such a determination is made, Internet gambling remains 

illegal in Nevada.



In New Jersey, gambling can be made legal only by referendum, and only 

land-based casino gambling in Atlantic City, licensed horse racing, 

state lotteries, bingo and raffles for certain groups, and amusement 

games have been approved via referendum. Thus, Internet gambling is 

illegal in New Jersey.



New York has authorized certain lotteries, certain types of pari-mutuel 

betting on horse races, and bingo, lotto games and local games of 

chance operated under certain conditions but prohibits most other types 

of gambling, such as Internet gambling.



Utah prohibits all forms of gambling, including state-run lotteries, 

and the Assistant Attorney General has stated that Utah believes that 

gambling from a computer located in Utah would constitute gambling 

within the state.



The attorneys general of New Jersey and New York have recently 

initiated actions against Internet gambling entities or institutions 

facilitating gambling over the Internet. In June 2001, New Jerseys 

Attorney General filed three separate civil cases against entities 

operating Internet gambling Web sites that accept wagers for casino-

style games, horse races, and sports games from individuals located in 

New Jersey. These cases are still pending. In addition, in June 2002 

New Jerseys Attorney General settled two of seven civil lawsuits that 

were brought in October 2001, in which the Attorney General sought to 

enjoin companies engaged in Internet gaming activities from accepting 

wagers on various sporting events from individuals or entities located 

in the state. Earlier, on March 18, 2002, a joint resolution was 

proposed in the state assembly for the formation of an Internet Gaming 

Study Commission, which would conduct a comprehensive study of the 

social and economic impact of legalizing Internet gambling in New 

Jersey. An official from the New Jersey Attorney Generals office 

advised us that this resolution has not moved through the legislature. 

New Yorks Attorney General recently initiated two separate inquiries 

into the business practices of financial institutions regarding the 

possible facilitation of on-line gambling by New York citizens. 

Settlements in these two inquiries included an agreement by the 

businesses to discontinue any facilitation of on-line gambling 

activities in New York. Enclosure I includes additional details on the 

gambling laws of these five states.



The Federal Government Regulates Gambling That Affects Interstate or 

International Activity:



Although gambling regulation is generally left to the states, the 

federal government has the authority under the Commerce Clause of the 

Constitution to regulate gambling activity that affects interstate 

commerce.[Footnote 2] With Internet gambling, bets are generally placed 

at the computer of an individual in one state and received at a server 

in either another state or another country. Three federal statues 

appear to have direct applicability to on-line gambling: the Wire Act, 

the Travel Act,[Footnote 3] and the Illegal Gambling Business 

Act.[Footnote 4] To date, only the Wire Act has been applied in the 

federal prosecution of activity relating to Internet gambling; its 

provisions are discussed below. These other federal gambling statutes 

have been used in the closely analogous situation of telephone 

wagering, including telephone calls to place wagers with offshore 

bookmakers. Enclosure II contains details on the other two federal 

statutes that could apply to Internet gambling, plus the Indian Gaming 

Regulatory Act, which affects gaming on Native American reservations.



The Wire Act prohibits gambling businesses from knowingly receiving or 

sending certain types of bets or information that assists in placing 

bets over interstate and international wires. Thus, if an Internet 

gaming Web site operating in any country (including the United States) 

receives a bet transmitted by an individual located in the United 

States, the operator has violated the Wire Act. Therefore, foreign 

entities offering gambling to U.S. citizens through the Internet would 

be subject to the Wire Act because they are soliciting business from 

the United States. Although there have been successful prosecutions 

under the Wire Act against gambling businesses operating over the 

Internet, including prosecutions of foreign entities, courts do not 

agree on the applicability of certain sections of the statute.



First, the Wire Act mandates that a wire communication facility must be 

involved in order for a violation to occur. Currently, all Internet 

communications are dependent in some way upon some type of wire 

communication, such as telephone or data lines. Depending upon how 

Internet technology develops, however, future Internet communications 

may no longer be wire communications covered under the Wire Act.



Second, individual courts have reached different conclusions about the 

types of gambling to which the act applies. The statute prohibits the 

transmission of information assisting in the placing of bets or wagers 

on any sporting event or contest. This language has led some courts to 

interpret the Wire Act as covering bets only on contests that involve 

sports. For instance, in In re MasterCard International, 132 F. Supp. 

2d 468 (E.D. La. 2001), the court held that a plain reading of the Wire 

Act clearly requires that the object of the gambling be a sporting 

event or contest. However, other courts have applied the Wire Act to 

casino-type gambling and not limited its application to sports betting. 

In People v. World Interactive Gaming, 714 N.Y.S. 2d 844 (N.Y. Sup. Ct. 

1999), a New York court enjoined an Antiguan company from operating or 

offering casino gambling over the Internet. The Wire Act was among the 

laws the court held were violated, although the gambling was casino-

type gambling and not merely sports betting. Relying in part on the 

legislative history of the Wire Act, DOJ generally takes the view that 

the act is not limited to sports-related activities.



Third, the phrase transmission of a wire communication is somewhat 

ambiguous. Depending on how the phrase is interpreted, the act might 

not apply to Internet gambling in some instances--for example, when 

information is only received over the Internet. Some courts have held 

that transmission means receiving as well as sending information, 

while others have held that it means only sending.[Footnote 5] In 

Telephone News System v. Illinois Bell Telephone Co, 220 F. Supp. 621 

(N.D. Ill. 1963), affd, 376 U.S. 782 (1964), a case involving a number 

that provided recorded horse-racing information to anyone who called, 

the court rejected the contention that the word transmission meant 

receiving as well as sending. The court in this case held that a 

professional bookmaker who used this telephone service to obtain horse 

racing-information for his bookmaking business did not violate the Wire 

Act, because the bookmaker did not send gambling information over the 

Wire but merely received it. However, another court has held that 

receiving information alone is a violation of the act. In United States 

v. Reeder, 614 F. 2d 1179 (8TH Cir. 1980), the court found violations 

of the Wire Act when a professional bookmaker located in Arkansas made 

calls to California and New York sports information services that 

provided recorded game scores. The court held that the Wire Act forbids 

the use of interstate facilities for receiving wagering information. 

Applying this interpretation to the Internet, receiving sports scores 

for use in the business of wagering could be a violation of the Wire 

Act.



Finally, some confusion exists among the courts concerning the second 

paragraph of the Wire Act, 18 U.S.C.  1084(b), which provides that 

[n]othing in this section shall be construed to prevent the 

transmission . . . of information assisting in the placing of bets or 

wagers on a sporting event or contest from a State or foreign country 

where betting on that sporting event or contest is legal into a State 

or foreign country in which such betting is legal. In other words, 

transmitting information to assist in placing bets on a certain event 

is legal if two conditions are met: (1) betting on the same event is 

legal in both the place of origin and the destination of the 

transmission; and (2) the transmission is limited to information that 

assists in the placing of bets--that is, it does not include the bets 

themselves.[Footnote 6] However, certain courts have stated that this 

language means that when the betting activity is legal in both 

jurisdictions, interstate gambling would not be a violation of the Wire 

Act.[Footnote 7] Most courts disagree with this interpretation of 

Section 1084(b), and based upon clear statements in the legislative 

history, DOJ disagrees with this interpretation of Section 1084(b) as 

well.[Footnote 8]



Two Types Of Credit Card Organizations:



Function In The U.S. Market:



Two types of credit card organizations handle the four major U.S. 

credit cards: (1) credit card associations such as VISA International 

(VISA) and MasterCard International Incorporated (MasterCard) and (2) 

full-service credit card companies such as American Express Company 

(American Express) and Discover Financial Services, Inc. (Discover). 

Credit card associations and full-service credit card companies vary 

dramatically in size, market reach, and organizational structure. As of 

December 31, 2001, for example, the two major credit card associations 

had dramatically higher numbers of issued credit cards than the major 

credit card companies (fig. 1).



Figure 1: Total Number of Issued Credit Cards*:



[See PDF for image]



Source: The Nilson Report, Oxnard, California, Issues 756 (January 

2002) and 760 (March 2002).



[End of figure]



Credit Card Associations Set Policies, While Members Issue Cards and 

Acquire Merchants:



Each of the two major associations in our review is owned by its member 

financial institutions. Around 21,500 member financial institutions own 

VISA, and about two-thirds of them are located in the United States. 

About 20,000 financial institutions participate in MasterCard 

worldwide. As described in a prior GAO report, MasterCard has a two-

tier membership structure composed of principals and 

affiliates.[Footnote 9] Principal members have a direct membership 

relationship with the association, while an affiliates membership must 

be sponsored by a principal member. For example, a U.S. or foreign bank 

can apply to become an affiliate member if a principal member agrees to 

sponsor the bank and the bank satisfies the associations membership 

criteria and approval process. MasterCard has more than 1,500 principal 

members that, in turn, have sponsored about 13,500 affiliate members 

worldwide.



VISA is a private, nonstock, for-profit membership organization 

composed of competing members. MasterCard, also a membership 

organization composed of competing members, recently changed its 

corporate status by creating a stock holding company that substantially 

owns all the voting power and economic rights in MasterCard. The 

principal members of MasterCard are also the shareholders of this new 

stock holding company. Both associations have boards of directors that 

broadly govern their policies and rules. Member financial institutions 

elect the VISA International Board, and members are assigned votes 

based upon their sales volume. Similarly, MasterCards board is elected 

by the shareholders of the new stock holding company.



While the associations do not provide credit card services directly to 

cardholders or businesses, they establish the operating standards that 

define the policies, roles, and responsibilities of their member 

institutions and provide the data processing and telecommunications 

systems that transfer transaction data between members. The member 

institutions issue the credit cards, sign up merchants to accept credit 

cards, or both and provide other credit card-related services directly 

to the cardholders and merchants. Member institutions fall primarily 

into two categories:



Issuing banks that solicit potential customers, approve applications, 

and issue credit cards. These banks extend credit to cardholders, 

establish cardholders account terms (for example, credit limits and 

treatment of delinquent accounts), collect the debts, and maintain the 

accounts and related records on cardholders.



Acquiring banks that solicit potential merchants and approve and 

license merchants to accept credit cards. These banks, also known as 

merchant banks, enter into agreements authorizing merchants to accept 

the associations credit card, submit the card transactions of their 

merchants into the associations system to obtain payment from issuing 

banks, and maintain the accounts and related records on their merchant 

clients.



Full-Service Credit Card Companies Issue Cards and Acquire Merchants:



The two full-service credit card companies in our review, American 

Express and Discover, issue their own brand of cards directly to 

customers and authorize merchants to accept those cards. Discover, an 

affiliate of Morgan Stanley and Co., primarily provides credit card 

services. American Express, a publicly held company, also provides 

travel, financial, and network services. Both companies are affiliated 

with a U.S. bank.



American Express and Discover assume primary responsibility for 

providing credit card services directly to both customers and 

merchants. They perform all major aspects of issuing cards, including 

approving applications from customers, mailing cards to customers, 

authorizing transactions, and sending out bills. They also perform all 

major aspects of acquiring merchants to accept their cards, including 

signing up merchants, distributing credit card terminals, and settling 

merchant accounts. By acting as both the issuer and the acquirer, the 

two companies represent what is referred to in the industry as a 

closed loop system. Both companies also own and operate electronic 

networks for conducting credit card transactions that handle all 

information on transactions for cardholders and merchants alike.



American Express and Discover market their credit card business to 

consumers and potential merchants in the United States. Both companies 

issue cards to individuals, and American Express also issues cards to 

businesses. In addition, American Express has arrangements in some 

overseas markets for licensing foreign banks to issue its cards and 

acquire merchants. As of December 31, 2001, American Express had 

arrangements with 74 institutions located in 77 countries other than 

the United States.



Associations and Full-Service Companies Take Different Approaches to 

Restricting Internet Gambling:



Credit card associations and credit card companies have taken different 

approaches to restricting the use of their cards for Internet gambling. 

Credit card associations have focused primarily on facilitating the 

blocking of Internet gambling transactions. Credit card companies have 

focused primarily on prohibiting Internet gambling sites from becoming 

credit card merchants.



Credit Card Associations and Their Members Focus on Blocking:



Neither VISA nor MasterCard has issued policies to its members that 

restrict the use of the associations credit cards for Internet 

gambling. Instead, both associations have focused on developing 

procedures to block Internet gambling transactions. Officials from both 

associations explained that reaching a consensus among the members on a 

blanket policy throughout the world would likely be difficult. Some 

members, they noted, are located in countries where Internet gambling 

is legal and, according to one official, represents an expanding 

business market. Policy decisions to restrict the use of credit cards 

for Internet gambling are therefore left up to the discretion of 

individual member institutions. Association officials note, however, 

that their members agree with operating regulations for both VISA and 

MasterCard stipulating that only legal transactions may be introduced 

into the systems.



VISA and MasterCard have each developed a system of coding that allows 

member banks to block Internet gambling transactions. Both associations 

have had a long-standing uniform coding system designed to facilitate 

the processing and authorization of credit card payments for member 

banks. About 4 years ago, each association refined its system to 

include a cross-indexed scheme of merchant and commerce codes so that 

Internet gambling transactions could be identified. Internet gambling 

merchants that accept VISA or MasterCard payments must use a 

combination of a gaming merchant category code and an electronic 

commerce indicator code. These two codes are transmitted through the 

credit card network to the card issuer as part of the requested 

authorization message. They inform the card issuer that the transaction 

is an Internet gambling transaction and enable the issuer to deny 

authorization for such transactions. This refinement to the coding 

system enables member institutions to block Internet gambling 

transactions.



Officials explained that the coding system informs the card issuers 

that the transaction is an Internet gambling transaction but cannot 

tell the issuer whether the particular transaction is illegal or not. 

For example, a U.S. cardholder may visit a country where Internet 

gambling is legal and while there, use a credit card to pay for on-line 

gambling transactions. If the credit card issuer has chosen to block 

Internet gambling transactions and the transaction has been properly 

coded, authorization for payment will be denied. Although the existing 

coding system does not capture enough information to distinguish 

between legal and illegal Internet gambling transactions, an official 

pointed out that the more fundamental reasons why such distinctions 

cannot be made are the legal complexities involved in determining which 

laws govern any particular Internet transaction and the practical 

limitations of determining where a cardholder may actually be located 

when engaging in the transaction. As a result, policy decisions to 

block Internet gambling transactions will likely affect legal Internet 

gambling transactions along with those that are illegal.



While the issuer is responsible for making the policy decision on 

whether or not to deny authorization for Internet gambling 

transactions, the actual blocking of such transactions can occur at 

different points in the credit card transaction process. The credit 

card association, the issuer, or a third-party processor can do the 

actual blocking (fig. 2).



Figure 2: How a Credit Card Transaction Can Be Blocked:



[See PDF for image]



Source: VISA and other credit card industry officials.



[End of figure]



Information on the number of issuing member banks that have opted to 

systematically block Internet gambling transactions is not readily 

available, but association officials noted that many of the largest 

U.S. credit card issuers have chosen to follow this course of action. 

Initial contacts with the eight issuing banks we reviewed, which 

represent more than 80 percent of the purchase volume of cards issued 

by VISA and MasterCard, indicated that all eight had implemented 

policies to deny payment authorization for Internet gambling 

transactions. Officials of a key trade association for community banks 

and the processor of its members credit card transactions stated that 

most, if not all, of the small community bank issuers have also chosen 

to block Internet gambling transactions. Issuing banks explained that 

they are blocking Internet gambling transactions primarily because of 

on-line gamblings unclear legal status and the financial impact (for 

example, potential legal costs and charge-offs[Footnote 10]) that can 

result from customers refusing to pay their gambling charges.



Bank issuers efforts to block Internet gambling transactions have, 

according to research conducted by a leading management and market 

research firm, affected the projected growth of the Internet gaming 

industry. What was initially projected to be a $6 billion industry 

worldwide in 2003 is now expected to be about a $4.1 billion industry. 

In the meantime, some Internet casino operators now estimate that four 

out of every five requests for credit card payment are being denied.



The Associations Transaction Coding Systems Can Be Compromised:



Association officials stated that the effectiveness of efforts issuing 

banks make to block transactions involving Internet gambling is 

dependent upon the integrity of the associations coding systems as 

implemented by merchants and acquiring members throughout the world. We 

were told, however, that the coding systems can be compromised in two 

ways: (1) by Internet gambling merchants that attempt to disguise their 

transactions by miscoding them, and (2) by cardholders who attempt to 

circumvent the system by using on-line payment providers.[Footnote 11]



Merchants May Disguise Transaction Codes:



According to an association official, Internet gambling merchants, 

knowing that properly coding the transactions could result in a denial 

of authorization, have a strong incentive to try to disguise their 

transactions. Issuing bank officials emphasized the difficulty of 

identifying attempts to conceal Internet gambling transactions, 

regardless of any proactive efforts to find such instances of 

miscoding. One official noted that some disguised Internet gambling 

transactions can be identified only by chance, if at all. We were told 

that both associations monitor transactions for fraud, looking for and 

investigating significant changes in merchant account activity and 

other patterns of suspicious activity. These monitoring efforts, which 

may identify miscoded transactions from Internet gambling merchants, 

are designed to detect many different types of fraudulent schemes. 

Association officials also noted that consumer complaints and concerns 

raised by issuers have been helpful in identifying coding errors 

related to Internet gambling.



In November 2001, one of the credit card associations implemented an 

Internet gambling audit program to help minimize the extent of coding 

errors related to Internet gambling. Rather than monitoring actual 

transactions, the program focuses on monitoring Internet gambling Web 

sites to identify merchants that may be disguising their credit card 

transactions. The associations staff sample Internet gambling Web 

sites and test the reliability of their coding efforts by submitting 

dummy transactions. When an Internet gambling merchant is cited for 

using incorrect codes, the responsible acquiring bank can be fined 

$25,000 per merchant outlet. To date, the association has imposed more 

than $100,000 in penalties on six acquiring banks for improper coding 

by merchants.



Using On-line Payment Providers Can Obscure Transaction Codes:



Issuing banks also view as problematic cardholders use of on-line 

payment providers to pay for their Internet gambling activities. These 

entities enable consumers to use their credit cards to set up accounts 

with many kinds of Internet-based merchants, including on-line casinos. 

Because credit card transaction codes can be obscured as the 

transactions pass through such intermediaries, issuing banks cannot 

determine whether credit card funds are being used for Internet 

gambling. Rather than developing an audit program to address Internet 

gambling issues, one association has chosen to focus attention on 

dealing proactively with these on-line payment providers, which it 

views as a potential loophole in the system. An official explained that 

the association has a policy of not doing business with on-line payment 

providers without an understanding with the providers acquirer that 

any funds obtained by the provider through the associations systems 

will not be used for Internet gambling unless the transaction is 

properly coded. The official cited an example in which such an 

understanding could not be reached and the provider stopped accepting 

cards bearing the associations brand rather than comply with the 

coding requirements.



Officials of the other association noted that it is the on-line payment 

providers responsibility to ensure that credit cards are not used to 

pay for Internet gambling activities, unless the funds transfer is 

explicitly coded as an Internet gambling transaction at the time of the 

authorization. This coding enables issuers that have decided to block 

Internet gambling transactions to deny authorization for those made 

through an on-line payment provider. Officials were aware that at least 

one major on-line payment provider was regularly using the Internet 

gambling transaction codes when they were warranted.



Full-Service Companies Focus on Keeping Internet Gambling Sites from 

Becoming Merchants:



American Express and Discover have companywide policies that restrict 

the use of credit cards for Internet gambling, but officials stated 

that the restrictions apply to all gambling activities because the 

companies do not, as a matter of policy, want to do business with such 

high-risk industries. To address Internet gambling, both credit card 

companies have developed specific procedures to help ensure that 

Internet gambling sites do not become credit card merchants. First, 

Internet businesses applying to become merchants are screened, 

generally through routine visits and reviews of the applicants Web 

sites, to verify that they accurately represent the business they are 

in and that they are not engaged in any gambling activities. Second, 

the companies seek to ensure that existing Internet credit card 

merchants do not discreetly transform into Internet gambling sites--

something that, according to officials, has been known to happen. To 

this end, one of the credit card companies told us it has contracted 

with a third-party vendor to assist with the implementation of an 

Internet monitoring system to identify improper use of its card on the 

Internet. This initiative entails identifying and testing Internet 

gambling sites that attempt to secure payments using the companys 

credit card, including existing merchants that may have expanded into 

Internet gambling activities. Company officials noted that the vendor 

has also identified several Internet gambling sites that were illegally 

using the companys logo to provide legitimacy to their Web sites. We 

were told that the other company uses its own employees, rather than an 

outside vendor, to conduct similar reviews of Internet gambling sites 

in general and of the companys existing Internet merchants in 

particular.



In spite of these efforts, company officials recognize that some 

Internet gambling sites that attempt to secure credit card payments may 

still go unidentified. Thus, as part of their overall efforts to 

monitor fraud, both companies have also implemented procedures to 

monitor transactions for patterns that might indicate Internet gambling 

activity. However, like issuing bank officials, credit card company 

officials acknowledged that identifying Internet gambling transactions 

after the fact is difficult. They also agreed that on-line payment 

providers represent a challenge to credit card companies that are 

trying to restrict the use of their cards for Internet gambling. 

Officials for both companies stated that they have reached an agreement 

with one major on-line provider stipulating that the provider will 

block Internet transactions using technology the companies provide and 

are working on similar agreements with other on-line payment providers. 

According to recent news articles, the on-line payment provider that 

agreed to block Internet gambling transactions has been purchased by an 

entity that is now requiring it to stop facilitating Internet gambling 

transactions altogether.



Views Differ on the Vulnerability of Internet Gambling to Money 

Laundering:



Representatives of law enforcement agencies, regulatory bodies, and the 

credit card and gaming industries expressed mixed views regarding the 

vulnerability of Internet gambling to money laundering. Law enforcement 

officials believe that Internet gambling can be a significant vehicle 

for laundering criminal proceeds, specifically at the relatively 

obscure layering stage of money laundering.[Footnote 12] The 

officials cited several characteristics of Internet gambling that they 

believe make it vulnerable to money laundering, including the volume, 

speed, and international reach of Internet transactions and the 

offshore locations of Internet gambling sites. In their view, these 

characteristics can promote a high level of anonymity and give rise to 

difficult jurisdictional issues.



Law enforcement officials acknowledge the lack of adjudicated cases, 

but continue to believe that there are many potential ways of 

laundering money through Internet gambling sites. The Financial Action 

Task Force, an international body aimed at combating money 

laundering,[Footnote 13] expressed concerns similar to those of U.S. 

law enforcement agencies and identified Internet gambling as an area 

requiring greater regulatory scrutiny on an international as well as 

national level. Although specifics were not provided, a February 2001 

task force report stated that some member jurisdictions had evidence 

that criminals were using Internet gambling to launder their illicit 

funds.[Footnote 14]



Banking and gaming regulatory officials did not view Internet gambling 

as being particularly susceptible to money laundering, especially when 

credit cards, which create a transaction record and are subject to 

relatively low transaction limits, are used for payment. Likewise, 

credit card and gaming industry officials did not believe Internet 

gambling posed any particular risks in terms of money laundering. As 

noted earlier, the credit card industry has other reasons for 

restricting the use of credit cards in Internet gambling transactions. 

In general, gaming industry officials did not believe that Internet 

gambling was any more or less susceptible to money laundering than 

other electronic commerce businesses and noted that the financial 

industry--which is responsible for the payments system--is better 

poised to monitor for related suspicious activity in the area. A few 

officials did acknowledge that on-line casinos were basically an 

extension of brick-and-mortar casinos and should probably be subject to 

similar anti-money laundering requirements.



Industry gaming officials also cautioned that Internet gambling could 

become more susceptible to money laundering as U.S. financial 

institutions continue to block the payment of Internet gambling 

activities through credit cards. They explained that credit cards would 

likely be replaced by the promotion and use of newer forms of 

electronic payments that may not be subject to the same level of 

record-keeping or transaction limits as credit cards are thus more 

susceptible to money laundering. In addition, officials pointed out the 

likelihood that some emerging electronic gambling schemes that make 

identifying gamblers and enforcing regulations more difficult would 

become more popular. Such schemes could include, for example, player-

to-player wagering that allows individuals to place bets directly with 

other bettors without the involvement of a bookmaker or operator. 

According to gaming officials, the absence of the bookmaker or operator 

who normally assigns the odds or monitors the betting action increases 

the potential for illegal activity, including money laundering, to 

occur.:



We will issue our final report in November 2002. We obtained technical 

comments on the legal and money laundering sections of a draft of this 

letter from DOJ. Treasury reviewed the money laundering sections and 

had no technical comments. We are sending copies of this letter to the 

Chairman and Ranking Minority Member of the Senate Committee on 

Banking, Housing, and Urban Affairs and to the Ranking Minority Members 

of the House Subcommittee on Financial Institutions and the House 

Subcommittee on Oversight and Investigation, Committee on Financial 

Services. The letter will be available on GAOs Internet home page at 

http://www.gao.gov.



Please contact Barbara Keller, Assistant Director, or me at (202) 512-

8678 if you or your staff have any questions concerning this work. Key 

contributors to this work include Evelyn Aquino, Emily Chalmers, Jason 

Holsclaw, Elizabeth Olivarez, Sindy Udell, and Darleen Wall.



Sincerely yours,



William O. Jenkins, Jr.



Director, Financial Markets and Community Investment:



Signed by William O. Jenkins, Jr.:



Gambling Laws in Five States and Their Effect on Internet Gambling:



This enclosure discusses the details of the gambling laws in the five 

states--Massachusetts, Nevada, New Jersey, New York, and Utah--that we 

judgmentally selected to reflect the wide variations in state gambling 

laws.



Massachusetts: Illegal to Transmit Any Bet over the Telephone:



Massachusetts does not have a statute specifically making it illegal to 

bet over the Internet, and there have been no court cases in 

Massachusetts that the Massachusetts Attorney Generals office is aware 

of that have applied the states gambling laws to Internet gaming. 

Massachusetts law makes it illegal to transmit any bet or wager over 

the telephone.[Footnote 15] Massachusetts also prohibits the 

establishment of unauthorized lotteries, numbers games, and other games 

of chance in the state.[Footnote 16] Under this statute, chance must 

predominate over skill in the results of the game in order for gambling 

to have occurred.[Footnote 17] Further, it is criminally punishable to 

be found in Massachusetts with any apparatus, books, or device for 

registering bets.[Footnote 18] Finally, Massachusetts outlaws gaming in 

a public place[Footnote 19] and running a gaming house.[Footnote 20] 

Massachusetts does allow some forms of gambling to be run by the State 

Lottery, a division of the Massachusetts Department of the 

Treasury.[Footnote 21] The State Lottery is responsible for regulating 

statewide lotteries,[Footnote 22] scratch tickets,[Footnote 23] pull-

tabs,[Footnote 24] beano,[Footnote 25] raffles by certain 

organizations,[Footnote 26] and keno.[Footnote 27] The State Lottery 

requires every licensee of lottery games to post a notice about 

compulsive gambling.[Footnote 28] Massachusetts also has legalized dog 

and horse racing under the supervision of the state racing 

commission.[Footnote 29]



Nevada: Among the First States to Make Internet Gambling Illegal:



In 1997, Nevada became one of the first states to make Internet 

gambling illegal.[Footnote 30] The Nevada statute provides that 

operators of on-line gambling sites who accept wagers from gamblers 

located in Nevada are guilty of a misdemeanor.[Footnote 31] However, 

the statute creates an exception if the bet is transmitted to a 

licensed person or establishment in Nevada and the wager complies with 

all other applicable laws and regulations concerning 

wagering.[Footnote 32]



In June 2001, Nevada enacted legislation allowing the Nevada Gaming 

Commission to adopt regulations governing the licensing and operation 

of Internet gambling.[Footnote 33] The statute allows the Gaming 

Commission to adopt rules regulating Internet gambling only when the 

commission determines:



that interactive gaming can be operated in compliance with all 

applicable laws;



that interactive gaming systems are secure and reliable;



that the systems provide reasonable assurance that players will be of 

lawful age and communicating only from jurisdictions where it is lawful 

to make such communications; and:



that such regulations are consistent with the public policy of the 

state to foster the stability and success of gaming.



Nevada sought the DOJs guidance on federal laws that may be applicable 

to interactive gaming. In response, DOJ provided Nevada with a letter 

advising that federal law prohibits gambling over the Internet, 

including casino-style gaming. In addition, DOJ indicated that 

interactive gambling activities occur in both the jurisdiction where 

the bettor is located and the state or foreign country where the 

gambling business is located.



Nevada has declared that the states public policy is that the gaming 

industry is vitally important to the economy of the state and the 

general welfare of the inhabitants.[Footnote 34] However, all gaming 

establishments must be licensed to protect the public health, safety, 

morals, good order and general welfare of inhabitants of the 

state.[Footnote 35] It is illegal for any person to operate any 

gambling game or gaming device without being licensed.[Footnote 36] Any 

game played for money or property triggers the licensing requirement. 

There is an exemption for social gambling as long as no money is made 

in operating the game.



New Jersey: Internet Gambling Not Approved by Required Public 

Referendum:



In New Jersey, only gambling that has been authorized by public 

referendum is legal, and Internet gambling has not been authorized by 

public referendum. The New Jersey constitution prohibits the 

legislature from authorizing gambling unless the specific type of 

gambling, any restrictions on it, and control of it have been approved 

by public referendum.[Footnote 37] In addition, New Jerseys criminal 

code prohibits the promoting of unauthorized gambling,[Footnote 38] and 

its civil code bans any form of unauthorized gambling as well.[Footnote 

39] As an unauthorized form of gambling, Internet gambling is 

prohibited under New Jersey law. However, the New Jersey legislature 

has introduced legislation that would allow the Atlantic City casinos 

to operate Internet casinos from their own floors so that bettors could 

wager on line on real-time games being conducted at the 

casinos.[Footnote 40] However, an official from the New Jersey Attorney 

Generals office informed us that this legislation never progressed 

last term and has not been reintroduced. On March 18, 2002, a joint 

resolution was proposed in the New Jersey Assembly for the formation of 

an Internet Gaming Study Commission, which would consist of 

legislators, executive branch officials, and members of the public with 

expertise or interest in gaming in the state. The commission would 

conduct a comprehensive study of the social and economic impact of 

legalizing Internet gambling in New Jersey. An official from the New 

Jersey Attorney Generals office has informed us that this resolution 

has not yet passed.



In June 2001, New Jerseys Attorney General filed three separate civil 

cases against entities operating Internet gambling web sites that 

accept wagers for casino-style games, horse races, and sports games 

from individuals located in New Jersey. These cases are still pending. 

However, we understand that settlement discussions are under way. In 

addition, in June 2002 New Jerseys Attorney General settled two of 

seven civil lawsuits that it filed on October 16, 2001, which sought to 

enjoin companies engaged in Internet gaming activities from accepting 

wagers on various professional and collegiate sporting events from 

individuals or entities located in New Jersey. In State v. 

www.intercasino.com, New Jersey entered into a settlement agreement 

with defendants who agreed that any licensing or related agreements 

these companies may enter into in the future will contain a provision 

prohibiting licensees from accepting sports bets from persons located 

within New Jersey. In another action also filed on October 16, 2001, 

State v. www.intertops.com et al., defendants agreed to implement and 

maintain good faith measures designed to prevent individuals operating 

computers in New Jersey from placing wagers on its site.



In New Jersey, land-based casino gaming was legalized for gambling in 

Atlantic City in 1976 through voter referendum. The New Jersey 

Legislature established the Casino Control Act, which provides for the 

regulation of the casino industry.[Footnote 41] The responsibility for 

regulation rests with the Division of Gaming Enforcement and the Casino 

Control Commission. New Jersey has licensed racing under the New Jersey 

Department of Law and Public Safety. Bingo and raffles are legalized 

for certain groups,[Footnote 42] as are amusement games.[Footnote 43] 

New Jersey allows a lottery run by the state.[Footnote 44] In addition, 

New Jersey has a Council on Compulsive Gambling to address compulsive 

gambling issues that arise out of the gambling that takes place in the 

state.[Footnote 45]



New York: State Courts Have Found Internet Gambling Illegal:



Unauthorized betting and gambling are illegal in New York. With certain 

exceptions, New York has expressly prohibited betting in both its 

constitution[Footnote 46] and its General Obligations Law.[Footnote 47] 

In addition, New Yorks General Obligation Law renders void all 

contracts based on those bets and New Yorks Penal Law prohibits the 

promotion of gambling.[Footnote 48] The New York Supreme Court has 

interpreted the states prohibition against unauthorized gambling and 

its promotion as extending to Internet gambling. In People v. World 

Interactive Gaming Corp., 714 N.Y.S. 2d 844 (N.Y. Sup. Ct.1999), the 

court held that the New York Attorney General could enjoin an on-line 

gambling casino from offering gambling to residents of New York State 

over the Internet. In addition, New Yorks Attorney General recently 

initiated two separate inquiries into certain business practices of 

Citibank (South Dakota), N.A. and PayPal, Inc. regarding their 

facilitation of on-line gambling by New York citizens. These inquiries 

resulted in a settlement in which, among other things, PayPal agreed to 

stop processing any payments involving PayPals New York members for 

on-line gambling merchants. Citibank agreed to block and decline 

authorization for bank card transactions that were coded and submitted 

to Citibank as on-line gambling transactions. Officials from the 

Attorney Generals office told us that the potential claims against 

Citibank and PayPal involved the provision of New Yorks General 

Obligation Law that renders contracts based on illegal gambling void. 

Another legal theory was based on New Yorks criminal facilitation law, 

which makes it illegal to promote gambling.[Footnote 49]



New York has authorized certain types of gambling. New York has 

legalized certain lotteries operated by the state and certain types of 

pari-mutuel betting on horse races, as well as bingo, lotto games, and 

local games of chance authorized by vote of the electors in the 

jurisdiction where the activity is conducted. In addition, only bona 

fide religious, charitable, and nonprofit organizations may operate 

these games, and the net proceeds from the gambling must be exclusively 

for the charitable organization.[Footnote 50] New York also allows 

licensed pari-mutuel corporations to maintain telephone betting 

accounts for wagers placed on races offered by such corporations from 

both in-state and out-of-state residents.[Footnote 51] New York has 

created the New York State Racing and Wagering Board to regulate its 

legalized gambling activities[Footnote 52] and has executed certain 

tribal-state compacts under the Indian Gaming Regulatory Act of 

1988.[Footnote 53]



Utah: All Forms of Gambling Are Illegal:



Internet gambling is prohibited in Utah, along with all other forms of 

gambling.[Footnote 54] Utahs Assistant Attorney General has stated 

that using the Internet to gamble in Utah is illegal.[Footnote 55] 

Utahs constitution provides that the Utah legislature shall not 

authorize any game of chance, lottery or gift enterprise for any 

pretense or purpose.[Footnote 56] Gambling is defined to include 

risking anything of value for a return or risking anything of value 

upon the outcome of a contest, game, gaming scheme, or gaming device 

when the return or outcome is based upon an element of chance and is in 

accord with an agreement or understanding that someone will receive 

something of value in the event of a certain outcome, and gambling 

includes a lottery.[Footnote 57] The promotion of gambling and 

possession of gambling devices are also illegal.[Footnote 58] Utah does 

not have a state lottery.



Other Federal Gambling Laws Applicable to Internet Gambling Activity:



Three federal statutes appear to have direct applicability to online 

gambling: the Wire Act, the Travel Act, and the Illegal Gambling 

Business Act. In addition, the Indian Gaming Regulatory Act (IGRA) 

establishes the regulatory framework for gambling on Native American 

reservations. To date, only the Wire Act has been used in the federal 

prosecution of Internet gambling activity. The other federal gambling 

statutes have been used in the closely analogous situation of telephone 

wagering, including telephone calls to place wagers with offshore 

bookmakers. This enclosure discusses the applicability of the two 

remaining federal gambling statutes to Internet gambling.



In addition, this enclosure describes the IGRA, which recognizes the 

gaming rights of Native Americans. Certain types of gaming on Indian 

reservations are permitted under IGRA, and tribes have exclusive 

authority to regulate them. But tribes must negotiate an agreement with 

the state or states where the reservation is located in order to 

conduct casino-style gambling. One court has examined the issue of 

whether Internet gambling involving a server located on an Indian 

reservation would be considered gambling on the reservation. If so, the 

prosecution of such gaming by the state would be preempted by IGRA.



Gambling over the Internet May Violate the Travel Act:



The Travel Act provides criminal penalties for anyone who undertakes 

interstate or foreign commerce with the intent to distribute the 

proceeds of any unlawful activity.[Footnote 59] Under the Travel Act, 

unlawful activity includes any business enterprise involving gambling 

in violation of the laws of the state in which the gambling takes place 

or of the United States. Thus, gambling over the Internet violates the 

Travel Act because an interstate facility, the Internet, is used to 

conduct gambling. For instance, in People v. World Interactive Gaming 

Corp, 714 N.Y. S. 2d 844 (N.Y. Sup. Ct. 1999), the court stated that 

gambling conducted over the Internet with bets placed in New York, 

where gambling is illegal, and received in Antigua, where gambling is 

legal, violates the Travel Act. In this case, the New York Attorney 

General brought an action to enjoin an Antiguan company from offering 

gambling in New York over the Internet.



Similarly, in United States v. Kaczowski, 114 F. Supp. 2d 143, 153 

(W.D. N.Y. 2000) the court found that defendants bookmaking in New 

York violated the Travel Act when they transmitted wagers made in the 

state by telephone to the West Indies. Additionally, in United States 

v. Smith, 209 F. Supp. 907, 916 (E.D. Ill. 1962) the court held that 

the Travel Act can be used to prosecute interstate gambling conducted 

over the telephone wires because the wires transmit the data (the 

voices of the gamblers) in the same manner that physical goods are 

moved across the ground. The court found that the telephonic voice 

packets of gambling information violated the Travel Act.



The Illegal Gambling Business Act Makes It a Crime to Operate an 

Illegal Gambling Business:



The Illegal Gambling Business Act[Footnote 60] makes it a crime to 

operate an illegal gambling business, which is defined as any 

gambling business that meets three conditions:



it is in violation of the law of a State . . . in which it is 

conducted,:



it involves at least five people (not even the same five people) at all 

times during a 30-day period, and:



it has been or remains in substantially continuous operation for a 

period in excess of thirty days or has a gross revenue of $2,000 in any 

single day.:



Operating a gambling Web site for over 30 days in a state under such 

conditions would violate this act. A Web site could meet these 

conditions, including the requirement that at least five individuals be 

involved in its operation. These five people do not need to be directly 

involved in the gambling but must only be considered necessary and 

helpful to the operation. Computer operators, computer maintenance 

crews, accountants, and owners could all be included as necessary and 

helpful in the operation of an Internet gambling Web site.



Like the Wire Act, the Illegal Gambling Business Act applies only to 

gambling businesses, not individual gamblers. The Illegal Gambling 

Business Act does not require that the casino operators be convicted in 

state court,[Footnote 61] but the gambling activity must violate state 

law. The proof requirements associated with the Illegal Gambling 

Business Act are minimal. The government must prove only that the 

business met the three conditions.[Footnote 62] The 30-day requirement 

will be satisfied if there is a repeated pattern of gambling 

activity.[Footnote 63]



The Indian Gaming Regulatory Acts Application to Internet Gambling Is 

Unclear:



Certain types of gaming on Indian reservations are permitted under the 

Indian Gaming Regulatory Act,[Footnote 64] with the type of gambling 

determining the regulatory jurisdiction. Tribes have exclusive 

authority to regulate social games and traditional tribal gambling. 

With federal oversight, tribes also have authority to regulate bingo 

and nonbanking card games. However, tribes wishing to conduct casino-

style gambling must successfully negotiate an agreement with the state 

or states where the gambling will be conducted. The resulting Tribal-

State Compact will govern the specifics of the tribal casino.



Issues regarding state and federal authority over gambling on Indian 

reservations were addressed in a 1987 Supreme Court decision.[Footnote 

65] In California v. Cabazon Band of Mission Indians, the Supreme Court 

upheld the right of tribes as sovereign nations to conduct gaming on 

Indian lands. The Court limited the rights of states to regulate gaming 

on Indian lands if gaming is permitted for any other purpose. As a 

result of this Supreme Court ruling, Congress in 1988 passed IGRA, 

which recognizes Native American gaming rights and provides for a 

statutory scheme of state regulation of gaming on Indian 

lands.[Footnote 66]



IGRA divides gaming into three classes. Class I gaming, which is 

regulated exclusively by the tribes, includes traditional forms of 

Indian gaming played in connection with tribal ceremonies.[Footnote 67] 

Betting on horse racing at a tribes annual powwow qualifies as 

traditional gaming. Class II gaming includes bingo, pull-tabs, and 

nonbanking card games authorized or not explicitly prohibited by state 

law. States have no role in the regulation of Class II gaming occurring 

on Indian lands. Class III gaming includes all forms of gaming that are 

not Class I or Class II. This category includes casino games, slot 

machines, and pari-mutuel wagering. Class III gaming may be conducted 

by an Indian tribe only if the state in which the tribe is located 

permits such gambling for any purpose by any person, organization, or 

entity; if the tribe and the state have negotiated a tribal-state 

compact that has been approved by the Secretary of the Interior and the 

compact permits such gambling; and the governing body of the tribe has 

adopted a gaming ordinance that has been approved by the National 

Indian Gaming Commission.



A recent case addressed some of the issues concerning Internet Gambling 

and raised the question of whether Internet gambling takes place on 

tribal lands when bettors use their home computers to access Internet 

lotteries via computer servers. State of Missouri v. Coeur 

DAlene[Footnote 68] involved the question of whether the state of 

Missouri could prevent a Native American tribe in Idaho from accepting 

money from Missouri residents via a lottery Internet site. The tribe 

removed the case from Missouri state to federal court, where the 

complaint was dismissed because the cause of action was preempted by 

IGRA. When the case reached district court, the state asked to have it 

moved back to state court, alleging that the activities of the U.S. 

Lottery in Missouri were not on Indian lands and that the district 

court did not have jurisdiction because state, not federal, law 

determined the legality of the activity. The district court denied the 

request and dismissed the case on the grounds of the tribes sovereign 

immunity. The Eighth Circuit Court of Appeals reversed the district 

courts denial of the motion, asserting that the district court was 

first required to determine whether the gaming at issue occurred on 

Indian lands, in which case the denial was appropriate, or off Indian 

lands, in which case the denial was not appropriate. Once at district 

court, the state again moved to return the case to state court. On 

September 21, 1999, the district court granted the states motion. It 

is unclear whether the issue of where the gambling occurred was 

resolved. However, the issue of where Internet gambling takes place has 

been addressed in United States v. Cohen, 260 F.3d 68 92d Cir. (2001), 

which held that the transmission of bets and wagers from New York to a 

foreign country where such betting was legal violated both the laws of 

the United States and of the state of New York, where the bettor was 

located.:



FOOTNOTES



[1] In addition to the 5 states that we reviewed, we also researched 

the law of all 50 states to determine if any had enacted specific 

legislation regarding Internet gambling. We found that five states 

(Illinois, Louisiana, Oregon, Nevada, and South Dakota) had enacted 

laws that specifically prohibited aspects of Internet gambling. 



[2] U.S. Const., art. I,  8, cl. 3 states in relevant part that The 

Congress shall have Power ... [t]o regulate Commerce with foreign 

Nations, and among the several States, and with the Indian Tribes.



[3] 18 U.S.C.  1952.



[4] 18 U.S.C.  1955.



[5] United States v. Reeder, 614 F.2d 1179 (8th Cir. 1980); United 

States v. Stonehouse, 452 F.2d 455 (7TH Cir. 1971); Telephone News Sys. 

V. Illinois Bell Tel. Co, 220 F. Supp. 621 (N.D. Ill. 1963), affd, 376 

U.S. 782 (1964).



[6] United States v. Cohen, 260 F.3d 68, 73 (2d Cir. 2001). cert. 

denied, 122 S. Ct. 2587 (2002); Unites States v. Ross, 1999 WL 782749 

(S.D.N.Y. 1999). 



[7] United States v. Kaczowski, 114 F. Supp. 2d 143, 153 (W.D. N. Y. 

2000); Missouri v. Coeur DAlene Tribe. 164 F.3d 1102, 1109 n.5 (8TH 

Cir. 1999), cert. denied, 527 U.S. 1039 (1999). 



[8] H.R. Rep. No. 87-967 at 3 (1961). 



[9] Money Laundering: Extent of Money Laundering through Credit Cards 

Is Unknown (GAO-02-670, July 22, 2002).



[10] Charge-offs represent the losses incurred by issuing banks when 

outstanding credit card debts are not paid.



[11] On-line payment providers, such as PayPal, Inc. or SureFire send 

and receive funds electronically for such uses as on-line auctions and 

purchases--and possibly Internet gambling. On-line payment providers 

are also referred to as payment aggregators by members of the credit 

card industry.



[12] Money laundering can occur in three stages--the placement, 

layering, and integration stages. In the placement stage, funds 

generated from illicit activity are converted to monetary instruments 

or deposited into financial institutions. In the layering stage, the 

funds are moved to other institutions and accounts through various 

activities to obscure their origins. Finally, in the integration stage 

the funds are used to acquire legitimate assets or fund further 

activities. 



[13] The Financial Action Task Force is considered the largest and most 

influential intergovernmental body seeking to combat money laundering. 

Established in 1989, the task force has 31 members, including the 

United States. Its activities include monitoring members progress in 

implementing anti-money laundering measures, identifying current 

trends and techniques in money laundering, and promoting the adoption 

of the organizations standards. 



[14] FATF--XII: Report on Money Laundering Typologies (2000-2001), 

February 2001.



[15] Mass. Ann. Laws. ch. 271, 17A (2002).



[16] Mass. Ann. Laws. ch. 271,  7 (2002).



[17] United States v. Marder, 48 F. 3d 564, (1ST Cir. 1995), cert. 

denied, 514 U.S. 1056 (1995).



[18] Mass. Ann. Laws. Ch. 271,  17 (2002). 



[19] Mass. Ann. Laws. ch. 271,  2 (2002).



[20] Mass. Ann. Laws. ch. 271,  5 (2002).



[21] Mass. Ann. Laws. ch. 10,  22-58 (2002) (state lottery law).



[22] Id.



[23] Id.



[24] Id.



[25] Mass. Ann. Laws. ch. 10,  37 (2002).



[26] Mass. Ann. Laws. ch. 271,  7A (2002).



[27] Mass. Ann. Laws. ch. 10,  27A (2002).



[28] Mass. Ann. Laws. ch. 10,  38A (2002)



[29] Mass. Ann. Laws ch. 6,  48 (2002).



[30] Nev. Rev. Stat. Ann. 465.091-465.094 (1997).



[31] Id.



[32] Nev. Rev. Stat. Ann. 465.094. 



[33] Nev. Rev. Stat. 463.750. 



[34] Nev. Rev. Stat. Ann.  463.0129 (2002).



[35] Id. at 1(d).



[36] Nev. Rev. Stat. Ann.  463.160 (2002).



[37] N.J. Const., Art. 4, Sec. VII, Para. 2. (No gambling of any kind 

shall be authorized by the Legislature unless the specific kind, 

restrictions and control thereof have been heretofore submitted to, and 

authorized by a majority of the votes cast by, the people at a special 

election or shall hereafter be submitted to, and authorized by a 

majority of the votes cast thereon by, the legally qualified voters of 

the State voting at a general election, except that, without any such 

submission or authorization.).



[38] N.J. Code  2C:37-2.



[39] N.J. Code  2A:40-1.



[40] 2002 New Jersey Assembly Bill No. 568.



[41] N.J. Stat.  5:12-1 et. seq.  (2001).



[42] N.J. Stat.  5: 8-1 - 8-77  (2001).



[43] N.J. Stat.  5: 8-78 - 8-118  (2001).



[44] N.J. Stat.  5: 9-1et. seq.  (2001).



[45] N.J. Stat.  5: 5-159  (2001).



[46] N.Y. Const. art. I,  9.



[47] N.Y. Gen. Oblig. L.  5-401 (All wagers, bets or stakes, made to 

depend on 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.).



[48] N.Y. Penal Law  225 et seq.



[49] NY Penal Code  225.05 & 225.10.



[50] N.Y. Const. art. I,  9.; McKinneys Exec. Law  430-439-a 

(bingo) and McKinneys Gen. Mun. Law  185 et seq. (local games of 

chance).



[51] McKinneys Rac., Pari-Mut. Wag. & Breed.Law  1012.



[52] McKinneys Rac., Pari-Mut. Wag. & Breed.Law  101.



[53] McKinneys Exec. Law  12. 



[54] Utah Code Ann.  76-10-1102 (2001). 



[55] Steven Oberbeck, Gambling in Utah: Are Cybercasinos on a Roll? 

Salt Lake Tribune (May 24, 1998).



[56] UT Const. Art. VI,  27 (2001).



[57] Utah Code Ann.  76-10-1101 (1) (2001).



[58] Utah Code Ann.  76-10-1104 & 1105 (2001).



[59] 18 U.S.C.  1952 (1994). 



[60] 18 U.S.C.  1955 (1994).



[61] United States v. Murray, 928 F.2d 1242, 1245 (1ST Cir. 1991). 



[62] United States v. DiMuro, 540 F.2d 503, 508 (1ST Cir. 1976), cert. 

denied, 429 U.S. 1038 (1977).



[63] United States v. Nerone, 563 F.2d 836, 843 (7thCir. 1977); United 

States v. Allen, 588 F.2d 1100, 1104 (5TH Cir. 1979), cert. denied, 441 

U.S. 964 (1979).



[64] Pub. L. 100-497, 102 Stat. 2467 (1988) (Found at 27 U.S.C.  2701, 

et. seq.).



[65] California v. Cabazon Band of Mission Indians, 480 U.S. 202 

(1987). 



[66] Gary C. Anders, Indian Gaming: Financial and Regulatory Issues, 

556 Annals Am. Acad. Pol. & Soc. Sci. 98, 99 (1998) (citation omitted).



[67] 25 U.S.C.  2703 (6), 2710.



[68] 164 F. 3d 1102 (8TH Cir), cert. denied, 527 U.S. 1039 (1999).