This is the accessible text file for GAO report number GAO-03-89 
entitled 'Internet Gambling: An Overview of the Issues' which was 
released on December 02, 2002.



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Report to Congressional Requesters:



United States General Accounting Office:



GAO:



December 2002:



Internet Gambling:



An Overview of the Issues:



GAO-03-89:



GAO Highlights:



Highlights of GAO-03-89, a report to the House Committee on Financial 

Services and Subcommittees on Financial Institutions and Consumer 

Credit, and Oversight and Investigations:



Why GAO Did This Study:



Internet gambling is a fast-growing industry with estimated 2003 

revenues of more than $4 billion. However, concerns have been raised 

about its social and economic impacts. In light of recent 

recommendations by a Congressionally appointed commission, which 

advocated restricting Internet gambling within the United States, GAO 

was asked to examine the U.S. payments system, particularly credit 

cards, as it relates to interactive on-line gaming. We examined (1) 

the legal framework for Internet gambling domestically and abroad; 

(2) the credit card industrys policies regarding  the use of credit 

cards to pay for Internet gambling and actions taken to restrict such 

usage; and (3) the views of law enforcement, banking regulators, and 

the credit card and gaming industries on the vulnerability of Internet 

gambling to money laundering. We issued an interim report on these 

issues in September 2002. GAO makes no recommendations in this report.



What GAO Found:



The global legal framework for Internet gambling is a complicated mix 

of  

laws and regulations. In the United States, both federal and state 

statutes apply. Gambling is generally regulated at the state level, 

with 

federal law supporting state laws and regulations to ensure that 

interstate and foreign commerce do not circumvent them. The Wire Act, 

which prohibits gambling businesses from using interstate or 

international telecommunications wires to knowingly transmit or 

receive 

bets, is the main federal statute used to prosecute such activity.  

Foreign countries and jurisdictions have taken a variety of 

approaches 

to regulating on-line gaming, including legalizing some forms, 

seeking 

effective regulatory approaches, and prohibiting it entirely. 



The major participants in the credit card industry have tried to 

restrict 

the use of their cards for Internet gambling by prohibiting 

cardholders 

from using the cards to gamble on line and developing transaction 

codes 

that banks can use to block payments at their discretion.  Many 

large U.S. 

credit card issuers also use codes to deny authorization for 

Internet 

gambling transactions, and U.S.-based banks do not accept gambling 

Web 

sites as merchants. Despite attempts to circumvent these efforts by 

using 

improper coding, the success of these restrictions has caused 

gaming 

analysts to lower their 2003 revenue projections for the on-line 

gaming 

industry.



Representatives of law enforcement agencies told us that Internet 

gambling 

could be used to launder money, but others viewed the threat as 

less serious. 

Law enforcement representatives said that the anonymity and 

jurisdictional 

issues characteristic of Internet gambling make on-line gaming a 

potentially 

powerful tool for money launderers. They noted that few money 

laundering 

cases involving Internet gambling had been prosecuted but 

attributed the 

small number of cases primarily to a lack of regulation and 

oversight. 

However, regulatory agencies and officials from the credit card 

and gaming 

industries did not believe that Internet gambling was any more 

susceptible 

to money laundering than other forms of e-commerce.



[See PDF for image]



[End of figure]



www.gao.gov/cgi-bin/getrpt?GAO-03-89



To view the full report, including the scope and methodology, 

click on the 

link above. For more information, contact William O. Jenkins, 

Jr., Director, 

Financial Markets and Community Investment at  (202) 512-8757 

or 

jenkinswo@gao.gov.



Contents:



Letter:



Results in Brief:



Background:



The Legal Framework for Internet Gambling Is Complex:



Full-Service Companies and Credit Card Associations Take Different 

Approaches to Restricting Internet Gambling:



Views on the Vulnerability of Internet Gambling to Money Laundering Are 

Mixed:



Agency Comments and Our Evaluation:



Appendixes:



Appendix I: Scope and Methodology:



Appendix II: Interstate Horseracing Act:



Appendix III: Internet Gambling Regulation in Foreign 

Jurisdictions:



Australia:



Canada:



Hong Kong:



United Kingdom:



Appendix IV: Survey of Internet Gambling Web Sites:



Sampling:



Overview of Results:



Data Collection Instrument:



Text of the Data Collection Instrument:



Appendix V: GAO Contacts and Staff Acknowledgments:



GAO Contacts:



Acknowledgments:



Tables:



Table 1: Live Web Sites Listing Licensing Countries and Contacts:



Table 2: Results of Internet Gambling Web Site Survey:



Figures:



Figure 1: Total Number of Issued Credit Cards:



Figure 2: Blocking a Credit Card Transaction:



Figure 3: DCI for Electronic Web Site Survey:



Abbreviations:



DCI: data collection instrument:



DOJ: Department of Justice:



FATF: Financial Action Task Force:



FBI: Federal Bureau of Investigation:



IGRA: Indian Gaming Regulatory Act:



IHA: Interstate Horseracing Act:



NTRA: National Thoroughbred Racing Association:



U.K.: United Kingdom:



December 2, 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:



Internet gambling[Footnote 1] is a growing industry. Since the mid-

1990s, Internet gambling operators have established approximately 1,800 

e-gaming Web sites in locations outside the United States, and global 

revenues from Internet gaming in 2003 are projected to be $5.0 billion 

dollars. In 1996, Congress created the National Gambling Impact Study 

Commission to examine the social and economic impacts of gambling, 

including Internet gambling, by conducting a comprehensive legal and 

factual study. In its 1999 report, the commission recommended (1) that 

the federal government prohibit any Internet gambling not already 

authorized and encourage foreign governments not to harbor Internet 

gambling organizations, and (2) that Congress pass legislation 

prohibiting the collection of credit card debt for Internet 

gambling.[Footnote 2] The social and economic concerns about Internet 

gambling raised in the report included underage gambling, pathological 

gambling, lack of consumer protections, and criminal abuse. In response 

to these concerns, numerous bills were introduced in Congress to 

prohibit Internet gambling.



To assist with your continuing deliberations on Internet gambling, you 

asked that we review the use of the U.S. payments system, particularly 

credit cards, to restrict illegal Internet gambling. Specifically, our 

objectives were to:



* examine the legal framework for Internet gambling activities, 

primarily in the United States, but also in selected foreign countries;

:



* describe the nature and scope of the policies and procedures the 

credit card industry has implemented to restrict the use of credit 

cards as a form of payment for Internet gambling; and

:



* obtain views on the vulnerability of Internet gambling to money 

laundering.



We issued an interim report on these issues in September 2002 and are 

now issuing our final report.[Footnote 3] It includes additional 

information on the policies of selected foreign jurisdictions, on 

regulations governing horse racing, on the policies and procedures of 

U.S.-based credit card banks and third-party processors, and on 

alternative payment mechanisms.



To address the legal issues in the United States, we researched federal 

and state laws, reviewed judicial opinions, and examined related 

studies. We also spoke with representatives of the Department of 

Justice (DOJ) and the offices of the attorneys general for selected 

states. For the international legal framework, we contacted gaming and 

government officials and gaming lawyers in selected countries and 

researched secondary sources that describe their laws. 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, several 

third-party processors, and a number of banking trade associations. We 

conducted an electronic survey of 202 Internet gambling sites, which is 

a representative sample of the approximately 1,800 Internet gambling 

sites. We used the survey to gather information on, among other things, 

payment acceptance policies for Internet gambling Web sites. We also 

interviewed gaming industry experts, 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. Appendix I discusses our scope and 

methodology in detail.



Results in Brief:



Internet gambling is an essentially borderless activity that poses 

regulatory and enforcement challenges. The legal framework for 

regulating it in the United States and overseas is complex. U.S. law as 

it applies to Internet gambling involves both state and federal 

statutes. In general, gambling is regulated at the state level, with 

each state determining whether individuals can gamble within its 

borders and whether gaming businesses can legally operate there. Five 

states (Illinois, Louisiana, Nevada, Oregon, and South Dakota) have 

enacted laws that specifically prohibit certain aspects of Internet 

gambling, but laws in other states that prohibit some types of gambling 

activities generally apply to Internet gaming as well. Federal law 

recognizes that state laws vary and seeks to ensure that neither 

interstate nor foreign commerce is used to circumvent them. To date, 18 

U.S.C.  1084 (commonly referred to as the Wire Act) is the principal 

federal statute that has been used to prosecute Internet gambling 

activities across state lines.[Footnote 4] Although other acts appear 

to have direct applicability to on-line gambling, we are unaware of 

federal prosecutions under these statutes.[Footnote 5] However, these 

other federal statutes have been used to prosecute gambling 

establishments (often located offshore) that accept bets over the 

telephone. According to an interactive gaming industry services group, 

Internet gambling has been legalized in over 50 countries and 

jurisdictions, mostly in Europe, the Caribbean, and the Australia/

Pacific region.[Footnote 6] A few countries and jurisdictions have 

prohibited it, but we were unable to determine the exact number.



Many major credit card industry participants have attempted to restrict 

the use of credit cards for Internet gambling but have faced challenges 

in their efforts to do so. Full-service credit card companies that 

issue their own cards and license merchants to accept cards have 

implemented policies prohibiting customers from using their cards to 

pay for Internet gambling transactions and will not license Internet 

gambling sites. Credit card associations[Footnote 7] have instituted a 

different approach--a transaction coding system that enables 

association members, at their discretion, to deny authorization of 

properly coded Internet gambling transactions. Many major U.S. issuing 

banks that are members of these associations have chosen to block such 

transactions because of concerns over Internet gamblings unclear legal 

status and the high level of credit risk associated with the industry. 

These efforts are hampered, however, by Internet gambling sites that 

attempt to disguise their transactions to keep from being blocked by 

the issuing banks. In addition, some association members--primarily 

those in foreign jurisdictions where Internet gambling may be legal--

continue to acquire Internet gambling sites as merchants. Further, 

efforts to restrict the use of credit cards for Internet gambling can 

be circumvented by cardholders use of on-line payment providers to pay 

for gambling activities.[Footnote 8] With such intermediaries, issuing 

banks cannot necessarily determine the nature of the activity being 

charged. In spite of these challenges, the credit card industrys 

efforts to restrict the use of credit cards for Internet gambling 

could, according to research conducted by gaming analysts, reduce the 

projected growth of the Internet gaming industry in 2003 from 43 to 20 

percent, reducing industrywide revenues from a projected $5.0 billion 

to approximately $4.2 billion.[Footnote 9] However, as banks 

increasingly choose to restrict the use of credit cards for Internet 

gaming, Internet gambling sites are expected to emphasize newer forms 

of payment, such as e-cash, that could eventually replace credit 

cards.[Footnote 10]



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 said they believed that Internet gambling could potentially 

be a powerful vehicle for laundering criminal proceeds at the 

relatively obscure layering stage of money laundering.[Footnote 11] 

They cited several characteristics of Internet gambling that they 

believed made 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 promoted a high level of anonymity and gave rise to 

complex jurisdictional issues. Law enforcement officials acknowledged 

the lack of adjudicated cases involving money laundering through 

Internet gambling sites but cited what they believed to be contributing 

factors, including the lack of any industry regulations or oversight. 

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. 

Gaming industry officials did not believe that Internet gambling was 

any more or less susceptible to money laundering than other types of 

electronic commerce and pointed out that, in their view, the financial 

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

suited to monitoring for suspicious activity in the area than the 

gaming industry itself.



This report makes no recommendations. We provided copies of this report 

to the Departments of Justice and the Treasury for their comment. DOJ 

had no comments on it. Treasury provided technical comments, which we 

incorporated where appropriate.



Background:



Before the 1990s, individuals who wanted to place a casino-or sports-

type bet in the United States basically had two choices: they could 

travel to a legitimate brick-and-mortar gaming establishment or place 

an illegal wager through a bookmaker. However, with the emergence of 

the Internet in the mid-1990s, a new form of gambling appeared--on-line 

gaming casinos and sports wagering. Internet gambling can take place on 

any electronic device that offers Internet access anywhere on the 

globe. In 2001, some gaming analysts were projecting that gross 

revenues from Internet gambling would exceed $6 billion by 2003. 

However, analysts lowered revenue estimates for a number of reasons, 

including increased pressure from U.S. lawmakers and the blocking of 

Internet gambling transactions by many large U.S. credit card issuers. 

(U.S. customers are reported to constitute anywhere from 50 to 70 

percent of total operator revenues from Internet gambling.) And, 

despite the recent revenue reduction, the e-gaming industry continues 

to grow. In a recent report,[Footnote 12] gaming analysts estimate that 

in 2003 revenues from Internet gambling industrywide will be $5.0 

billion,[Footnote 13] or approximately 4.3 percent of the total $116 

billion in business-to-consumer global e-commerce.[Footnote 14] In the 

view of gaming analysts, the international markets (non-U.S. customers) 

represent the future of the industrys growth.



Currently, individuals wishing to gamble via the Internet can choose 

from several types of payment options other than credit cards.[Footnote 

15] These include:



VISA and MasterCard debit cards (also called check cards): These cards, 

which carry the logo of one of the two largest credit card 

associations, are tied directly to the cardholders bank account. Funds 

for all transactions are deducted directly from the cardholders bank 

account, but cardholders can make credit card-type transactions that do 

not require a personal identification number. A personal identification 

number is not required to use this card on line, for example, since the 

transactions are processed through the VISA and MasterCard systems. 

Check card gaming transactions carry the same gaming merchant code as 

credit card transactions and thus can also be blocked.



Private-label debit cards: These cards are similar to the check cards 

described above but are issued by private companies rather than credit 

card associations.



On-line payment providers (also known as payment aggregators): These 

companies send and receive funds electronically for such uses as on-

line auctions and purchases.



Wire transfers: Some gaming Web sites promote this method of payment, 

which allows Internet gaming customers to wire money directly from a 

bank account to a gaming Web site. In some instances, bank wire 

information is posted on individual gaming sites, and gaming operators 

frequently use wire transfers to pay customers.



E-cash or digital cash: This method of payment is a digital 

representation of real money that can be placed on a computer hard 

drive, smart card,[Footnote 16] other devices with memory, (including 

cellular phones and other electronic communication devices), or in an 

on-line repository. Consumers purchase e-cash from an authorized 

provider. These funds can then be transferred among vendors and 

individuals using compatible electronic systems, in some cases without 

resorting to banks or other financial intermediaries. When customers 

spend the e-cash, it is credited to the retailers e-cash account and 

later transferred to the retailers regular bank account.



Internet gambling sites also offer money orders; travelers checks; 

bank drafts; cashiers, certified, and personal checks; and a number of 

other electronic banking systems or processors as payment options.



The House of Representatives recently passed the Leach-LaFalce Internet 

Gambling Enforcement Act (H.R. 556) to further limit opportunities for 

gambling over the Internet in the United States. H.R. 556, which passed 

a House vote on October 1, 2002, has been referred to the Senate 

Committee on the Judiciary. If H.R. 556 is enacted, it will prohibit 

any person engaged in the business of gambling from knowingly accepting 

bank instruments such as credit cards, electronic fund transfers, or 

checks for illegal Internet gambling. Additionally, the Comprehensive 

Internet Gambling Prohibition Act of 2002 (S. 3006), introduced in the 

Senate in late September 2002, would, if enacted, amend certain 

sections of the Wire Act to include the use of all interstate or 

international communication facilities transmitting to or from the 

United States and expand the prohibited gambling activities covered by 

the act. H.R. 5760, introduced in November 2002, represents a different 

approach. If enacted, it would establish a commission to conduct a 

comprehensive study of Internet gambling and recommend alternative 

means of effectively regulating such gambling.



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 Inc. (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:



Note: Issued domestically as of December 31, 2001.



Credit Card Associations Set Policies, and 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 17] Principal members have a direct membership 

relationship with the association and serve as sponsors to affiliates. 

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 clears the approval 

process.



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 to customers, acquire (sign up) 

merchants to accept credit cards, or both, along with providing other 

services directly to the cardholders and merchants. Member institutions 

generally fall into two categories:



* Issuing banks that solicit potential customers, approve applications, 

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

establish the terms of cardholders accounts (for example, credit 

limits and treatment of delinquent accounts), collect debts, and 

maintain accounts and cardholder records.



* 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 cards, submit their merchants transactions 

into the associations system for payment from issuing banks, and 

maintain accounts and related records on their merchant clients.



Third-party processors are also part of the industry. They contract 

with acquiring and issuing banks to provide transaction processing and 

other services. As part of the services they provide for their banking 

clients--members of the credit card associations--processors block 

Internet gambling transactions and ensure that Internet gambling sites 

do not become approved merchants.



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 brands of cards directly to 

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

affiliate of Morgan Stanley, provides primarily credit card services. 

American Express, a publicly held company, also provides travel, 

financial, and network services. Each company owns 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 issuer and acquirer, the two 

companies represent what the industry refers to as a closed loop 

system. Both companies own and operate the electronic networks that 

handle all information on transactions for cardholders and merchants.



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 to license 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.



The Legal Framework for Internet Gambling Is Complex:



Both federal and state laws apply to Internet gambling in the United 

States. In general, gambling is a matter of state law, with each state 

determining whether individuals can gamble within its borders and 

whether gaming businesses can legally operate there. Since 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 is used to protect the states from having their 

laws circumvented. To date, the Wire Act is the federal statute that 

has been used to prosecute federal Internet gambling cases, although 

courts sometimes disagree on the applicability of certain provisions of 

the statute. In addition, the Travel Act and the Illegal Gambling 

Business Act have been used to prosecute gambling entities that take 

interstate or international bets over the telephone and would likely be 

applicable to Internet gambling activity. Some states have taken 

specific legislative actions to address Internet gambling, in some 

cases criminalizing it and in others relying on existing gambling laws 

to bring actions against entities engaging in or facilitating Internet 

gambling. Like the U.S. states, other countries have enacted laws that 

explicitly prohibit or permit Internet gambling under certain 

conditions or rely on existing laws to prosecute Internet gaming 

activity.



The Federal Government Regulates Gambling That Involves 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 18] Internet gambling falls into this category, as 

bets are generally placed at a personal computer in one state or 

country and received at a server in another state or country. Of the 

three federal statutes that appear to have direct applicability to on-

line gambling--the Wire Act, the Travel Act, and the Illegal Gambling 

Business Act--to date only the Wire Act has been applied in the federal 

prosecution of activity relating to Internet gambling. The other two 

federal gambling statutes have been used in the closely analogous 

situation of telephone wagering, including telephone calls made to 

place wagers with offshore bookmakers.



The Wire Act Prohibits Gambling Businesses from Receiving or Sending 

Bets over Interstate and International Wires:



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. For this reason, 

foreign entities offering gambling to U.S. citizens through the 

Internet would be subject to the Wire Act. Although some Internet 

gambling businesses, including foreign entities, have been successfully 

prosecuted under the Wire Act, courts do not agree on the applicability 

of certain sections of the statute.



First, individual courts have reached different conclusions about the 

types of gambling covered by the act. 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.



Second, the phrase transmission of a wire communication is somewhat 

ambiguous as it applies to the Internet. 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 19]



Third, some disagreement 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 

event is legal in both the place where the transmission originates and 

the place where it is received, 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 20] 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 21] Most courts disagree with this interpretation of 

Section 1084(b), and based upon the language of Section 1084(b) and 

clear statements in the legislative history, DOJ disagrees with this 

interpretation as well.[Footnote 22]



Finally, 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 on some type of wire 

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

Internet technology develops, however, future Internet communications 

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



Other Federal Gambling Laws Apply to Internet Gambling:



The two other federal statutes with direct applicability to Internet 

gambling are the Travel Act and the Illegal Gambling Business 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. The Illegal Gambling Business Act 

makes it a crime to operate an illegal gambling business.:



The Travel Act imposes criminal penalties for those who utilize 

interstate or foreign commerce with the intent to distribute the 

proceeds of any unlawful activity. Under the Travel Act, unlawful 

activity includes any business enterprise involving gambling in 

violation of the laws of the state where the gambling takes place or of 

the United States. Thus, gambling over the Internet generally would 

violate the Travel Act because an interstate facility, the Internet, is 

used to conduct gambling.



The Illegal Gambling Business Act makes it a crime to operate an 

illegal gambling business, which is defined as any gambling business 

that meets three conditions:



* it violates a law of the state where it takes place,



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

all times during a 30-day period, and:



* it operates for the most part continuously for longer than 30 days or 

takes in gross revenues of $2,000 in a single day.



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

conditions described above would violate this act. A Web site could 

easily meet these conditions, including the requirement that at least 

five individuals be involved in its operation. The 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, but the gambling activity must violate state law.[Footnote 

23] The proof requirements associated with the Illegal Gambling 

Business Act are minimal; the government must prove only that the 

business has met the three conditions[Footnote 24]. The 30-day 

requirement is satisfied if there is a repeated pattern of gambling 

activity[Footnote 25].:



Two other statutes have some applicability to Internet gambling--the 

Indian Gaming Regulatory Act (IGRA) and the Interstate Horseracing Act 

(IHA). Certain types of gaming on Indian reservations are permitted 

under IGRA, with the regulatory jurisdiction determining the type of 

gambling that is permissible.[Footnote 26] A recent case addressed some 

of the issues and raised the question of whether Internet gambling 

takes place on tribal lands when bettors who are not on tribal lands 

use their home computers to access Internet lotteries via computer 

servers that are. The case 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.[Footnote 27] After dismissals, removals, and appeals, the case 

was eventually settled, but it is unclear whether the court resolved 

the issue of whether Internet gambling takes place on tribal lands when 

the Web site is located on those lands.[Footnote 28] For more 

information on IGRA, see our interim report.[Footnote 29]



Pari-mutuel wagering on state-licensed horse races takes place over the 

Internet in a number of states.[Footnote 30] Federal and state laws 

govern this activity. In 1978, Congress passed the IHA to regulate 

interstate commerce with respect to pari-mutuel wagering on horse 

races. The IHA provides that no person may accept an interstate off-

track wager without the consent of the appropriate host racing 

association, the host racing commission, the off-track racing 

commission, and nearby race tracks. An interstate off-track wager is 

defined as a legal wager placed or accepted in one State with respect 

to the outcome of a horse race taking place in another State. Pari-

mutuel wagers fall into this category if they are legal in both of the 

states, are made by telephone or other electronic device, and are 

accepted by an off-track betting system in any state, as well as the 

combination of any pari-mutuel wagering interstate pools.[Footnote 31] 

The language of the statute appears to allow the electronic 

transmission of interstate bets as long as the appropriate consent is 

obtained.



Wagering on horses over the Internet is generally done using a closed-

loop subscriber-based system designed to limit access. In March 2000, 

DOJ officials testified that it was a violation of the Wire Act for an 

entity to offer bets on horse races over the Internet; however, to 

date, DOJ has not brought any cases against any state-licensed horse 

racing tracks for accepting wagers from out-of-state bettors using the 

Internet or any other wire communication. In addition, IHA was amended 

in December 2000, after DOJ testified in March 2000 to explicitly 

expand interstate off-track wagers to include wagers through the 

telephone or other electronic media.[Footnote 32] For more information 

on IHA, see appendix II.



State Laws Affecting Internet Gambling Vary:



Five states (Illinois, Louisiana, Nevada, Oregon, and South Dakota) 

have enacted laws that specifically prohibit aspects of Internet 

gambling. In states that have not specifically enacted legislation 

prohibiting Internet gambling, existing state gambling laws could 

apply, and new legislation would not be necessary. For example, in 

states that prohibit all types of gambling, such as Utah, Internet 

gaming also would be illegal. In some states the status of Internet 

gambling is unclear, as laws may prohibit some types of gaming, but may 

not be interpreted as applying to Internet gambling.



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

Nevada, New Jersey, New York, and Utah--to determine how their existing 

laws would affect Internet gambling. We chose these states because they 

have a wide range of gambling provisions, from total prohibition to 

allowing certain types of legalized land-based casino gambling. 

Massachusetts, for instance, has legalized dog and horse racing under 

the supervision of the state racing commission and certain statewide 

lotteries and raffles by certain organizations under the supervision of 

the State Lottery, a division of the state Treasury department. But 

Massachusetts law prohibits most other types of gambling, including 

transmitting a bet or wager using the telephone. However, Massachusetts 

does not have a statute specifically addressing Internet gambling. 

Nevada has legalized land-based casino gambling, but Internet gambling 

is illegal. However, the state has authorized the Nevada Gaming 

Commission to adopt regulations governing the licensing and operation 

of Internet gambling if the Commission determines that interactive 

gaming can be operated in compliance with all applicable laws.



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. New York has authorized 

certain lotteries, certain types of pari-mutuel betting on horse races 

and bingo, lotto games, and local games of chance that operate under 

specific conditions, but prohibits most other types of gambling. Utah 

prohibits all forms of gambling, including state-run lotteries, and the 

Assistant Attorney General has stated that Utah believed that gambling 

of any type 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 or investigations against entities that 

either engage in or facilitate Internet gambling businesses. For more 

information on the approaches these states have taken to Internet 

gambling, please see our interim report.



Other Countries Face Similar Legal Challenges in Dealing with Internet 

Gambling Issues:



Like the United States, a number of other countries have commissioned 

detailed reviews to determine the implications of gambling, including 

Internet gambling, within their countries. These countries take a 

variety of approaches to regulating Internet gambling. For a number of 

reasons, we were unable to determine how many countries explicitly 

prohibit Internet gambling. For example, gaming laws in many countries, 

like those in many U.S. states, apply to gaming in general rather than 

to Internet gambling. Although we were unable to determine the exact 

number, an interactive gaming industry services group reported that 

over 50 countries and foreign jurisdictions, mostly in Europe, the 

Caribbean, and the Australia/Pacific region, have legalized Internet 

gambling. To illustrate the different approaches countries take to 

regulating Internet gambling, we reviewed four jurisdictions: 

Australia, Canada, Hong Kong, and the United Kingdom (U.K.). Appendix 

III contains more detailed information about each of these 

jurisdictions.



Australia:



In July 2001, following a year-long moratorium on the development of 

the interactive gaming industry, the Australian Parliament enacted the 

Interactive Gambling Act of 2001 that prohibits operators from 

providing an Internet gambling service to Australian residents. The act 

applies to interactive casinos and games on the Internet but does not 

apply to sports wagering or lotteries, which continue to be regulated 

by existing state and territorial legislation. It covers all 

interactive gambling service providers, including those based in 

Australia and offshore, and both Australian and foreign-owned 

businesses. The maximum penalty for violations is $220,000 AUD 

($121,000 USD) per day for individuals and $1.1 million AUD ($606,000 

USD) per day for corporate bodies.[Footnote 33] The act also makes it 

an offense to provide such services to people in a designated 

country--that is, one that has asked for and received that designation 

from the Australian Minister of Communication, Information Technology, 

and the Arts to prohibit interactive gaming operators licensed in 

Australia from offering services to its citizens.[Footnote 34]



Canada:



The Criminal Code of Canada makes it illegal to gamble or conduct any 

gaming activities within Canada unless they fall within recognized 

exceptions set out in the Criminal Code. The exceptions include 

lottery schemes that are conducted and managed by a province (such as 

casinos and electronic gambling), a narrower range of lottery schemes 

that are licensed by a province (to a charity, a fair or exhibition, 

and, rarely, to a private individual), bets made between individuals 

not engaged in the business of betting, pari-mutuel betting on horse 

races (regulated by the federal Minister of Agriculture) and some 

lottery schemes conducted in Canada on international cruise ships. 

Under the Criminal Code, only provincial governments are permitted to 

offer a lottery scheme on or through a computer and only to residents 

of that province; they may not license others to conduct one. 

Therefore, in order to offer on-line gambling in Canada, a provincial 

government would have to operate the sites itself. It would also need 

to ensure that residents of other provinces could not participate 

unless cooperative agreements existed.



In addition, commercial land-based betting on single sporting events is 

prohibited in Canada and therefore would not be permitted over the 

Internet. A recent case from the Prince Edward Island Supreme Court 

(Appeal Division) held that an Internet lottery ticket Web site 

licensed by the Province of Prince Edward Island would not be conducted 

and managed in the province as required by the Criminal Code. The court 

found that even though the server was located in the province, the 

lottery would violate the Criminal Code by offering gambling to a 

worldwide market. In addition, since it was licensed to a charity and 

not conducted by the province, it violated the Criminal Code 

requirement that only provinces conduct computerized lottery schemes. 

This case is now on appeal to the Supreme Court of Canada.



Hong Kong:



Gambling is unlawful in Hong Kong unless specifically permitted by law. 

In May 2002, the Hong Kong Legislative Council voted to ban offshore 

gambling, including offshore Internet gambling, by passing the Gambling 

(Amendment) Ordinance. This law makes both offshore betting and 

bookmaking criminal offenses and provides for criminal penalties 

against offshore gambling agents that promote, facilitate, or advertise 

their products to Hong Kong residents. The maximum punishment for 

brokers is 7 years in prison and a penalty of $5 million HKD ($641,000 

USD), while individual bettors face 9 months in prison and a penalty of 

$30,000 HKD ($3,800 USD).[Footnote 35] However, it is legal for the 

Hong Kong Jockey Club--the legal gambling monopoly--to offer its 

services on-line to Hong Kong residents.



United Kingdom:



The U.K. has several laws and regulatory schemes that apply to 

gambling, but there are no specific laws governing Internet gambling. 

Some forms of gambling can be carried out on the Internet under 

existing law, while others cannot. In July 2001, the UK Gambling Review 

Body published its report (the Budd Report), which states that 

prohibiting on-line gambling by British consumers would be an 

unrealistic objective. In response to the Budd Report, the UKs 

Department for Culture, Media, and Sport is working to develop a 

timetable for introducing new gambling legislation sometime between 

2003 and 2004. The new legislation is to contain a number of major 

gambling reforms, including legislation on Internet gambling.



Full-Service Companies and Credit Card Associations Take Different 

Approaches to Restricting Internet Gambling:



Full-service companies and credit card associations have taken 

different approaches to restricting the use of their cards for Internet 

gambling. Credit card companies have focused primarily on prohibiting 

Internet gambling sites from becoming credit card merchants. Credit 

card associations and their members have focused primarily on 

facilitating the blocking of Internet gambling transactions. Most large 

U.S. association members that issue credit cards told us that they have 

chosen to block these transactions. For a variety of reasons, however, 

they cannot always identify all Internet gambling transactions. For 

example, both association and bank officials told us that some gambling 

Web sites deliberately miscode gambling transactions. The credit card 

associations monitor transactions and take action against acquiring 

banks when they are not properly coding Internet gambling transactions. 

In addition, U.S.-based acquiring banks that belong to associations do 

not acquire Internet gambling merchants as customers, although 

association members in other countries do.



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 what 

they consider to be a high-risk industry. 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 have accurately represented the business they are in and are not 

engaged in any gambling activities. Second, existing Internet credit 

card merchants are monitored to ensure that they do not discreetly 

transform into Internet gambling sites--something that, according to 

officials, has happened. One credit card company told us that it had 

contracted with a third-party vendor to help implement an Internet 

monitoring system designed to identify improper use of its card. This 

initiative entailed identifying and testing Internet gambling sites 

attempting 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 had also 

identified several Internet gambling sites that were illegally using 

the companys logo to give the sites legitimacy. The second company 

told us that it 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. The results of 

our survey of Internet gambling Web sites showed that most do not 

promote full-service credit card companies, although the cards were 

advertised as a possible form of payment on 8 of the 162 we 

reviewed.[Footnote 36] Appendix IV provides additional information on 

our survey.



In spite of these efforts, credit card 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 

that credit cards are being used for 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 

present a challenge to credit card companies that are trying to 

restrict the use of their cards for Internet gambling.[Footnote 37] 

Officials for both companies stated that they had reached an agreement 

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

block Internet transactions using the companies technology and were 

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



Credit Card Associations Have Focused on Enabling Members to Block 

Payments:



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 developed procedures that 

enable member banks wanting to block Internet gambling transactions to 

do so. Officials from both associations explained that reaching a 

consensus on a blanket policy among members around the world would 

likely be difficult. Some members 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 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 institutions, at their discretion, 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, the 

associations refined their systems 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 are required to use a combination of a gaming 

merchant category code and an electronic commerce indicator code. These 

two codes, which are transmitted through the credit card network to the 

card issuer as part of the requested authorization message, inform the 

card issuer that the transaction is an Internet gambling transaction. 

The issuer can then deny authorization.



Officials explained that the coding system informs card issuers that 

the transaction is an Internet gambling transaction but cannot signal 

whether the particular transaction is legal or illegal. The existing 

coding system does not capture enough information to distinguish 

between legal and illegal Internet gambling transactions. Moreover, an 

official pointed out that the distinction between legal and illegal 

transactions is difficult to make because of the complexities involved 

in determining which laws govern any particular Internet transaction 

and the practical limitations of determining where a cardholder may 

actually be when engaging in the transaction. As a result, a member 

banks decision to block Internet gambling transactions may result in 

blocking all properly coded Internet gambling transactions--both in 

jurisdictions where on-line gaming is legal and illegal. For example, a 

U.S. cardholder may visit a country where Internet gambling is legal 

and, while there, attempt to 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 credit card issuer is responsible for making the policy 

decision on whether to deny authorization for Internet gambling 

transactions, actual blocking of transactions can occur at different 

points in the credit card transaction process. In some cases, the 

issuer has asked the association to block the transactions on its 

behalf. Other issuers do the blocking themselves, while still others 

instruct their third-party processors to do the blocking (fig. 2).



Figure 2: Blocking a Credit Card Transaction:



Most Large Association Member Banks Use Transaction Coding to Block 

Internet Gambling Transactions:



Most Large Association Member Banks Use Transaction Coding to Block 

Internet Gambling Transactions:



Information on the number of member institutions belonging to credit 

card associations that have opted to systematically block Internet 

gambling transactions is not readily available. However, association 

officials noted that many of the largest U.S. credit card issuers have 

chosen to follow this course of action. Officials from the eight large 

U.S.-based issuing member banks we reviewed, which represent more than 

80 percent of the purchase volume of cards issued by VISA and 

MasterCard in the United States, all indicated that they had 

implemented policies to deny payment authorization for Internet 

gambling transactions coming through their automated systems. Officials 

of a 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 had also chosen to block Internet gambling 

transactions. However, some association members--primarily those in 

foreign jurisdictions where Internet gambling may be legal--continued 

to acquire Internet gambling sites as merchants.



The eight issuing banks in our review implemented their blocking 

policies between the early months of 2000 and June 2002. Internet 

gambling transactions can be blocked in two ways: either the issuer 

blocks the payment directly, or another party, such as a third-party 

processor or an association, does it instead. Five of the eight issuers 

told us that they blocked Internet gambling transactions themselves; 

the other three relied on a major third-party processor or an 

association to block on their behalf. Issuers that do their own 

blocking stated that by doing the blocking themselves, they were able 

to maintain control over transactions. For example, they were able to 

perform their own risk management of these transactions or contact 

their customers to discuss the transactions. Officials at two issuing 

banks told us they believed that authorizing or denying all 

transactions themselves gave them a better chance of catching Internet 

gambling merchants seeking to disguise the transactions. Although 

denials of payment for Internet gambling had decreased significantly 

since the company began blocking Internet gambling transactions, an 

issuing bank official noted that, in the previous quarter, their system 

had identified eight merchants that were conducting inappropriate 

activities, including disguising Internet gambling transactions.



One of the major reasons some issuers gave for their decision to block 

Internet gambling transactions was their belief that Internet gambling 

is a high-risk industry, vulnerable to fraud and other illegal 

activities. Most of the issuing banks explained that they blocked 

Internet gambling transactions primarily because of on-line gamblings 

unclear legal status, which they believed could cause them to 

unknowingly facilitate illegal Internet gambling, and because of the 

financial impact (for example, potential legal costs and charge-offs) 

that could result if the customers refused to pay their gambling 

charges.[Footnote 38] Since the legality of Internet gambling is 

questionable, debts incurred through such activities may be 

unenforceable. Using this argument, some bettors have refused to pay 

their gambling debts, claiming that the issuing banks facilitated the 

illegal activities. In addition, in a number of lawsuits in U.S. 

courts, bettors have claimed that the credit card issuer is liable for 

allowing bettors to use its services for an illegal activity under 

state law. In one case, the bank that had issued the credit card sued 

the bettor when the bettor refused to pay the credit card bills for her 

gambling losses. In a countersuit, the bettor claimed that the bank was 

liable for letting the bettor gamble with the credit card when such 

gambling activity was illegal in her state. The case was settled before 

the trial. One of the provisions of the settlement required the 

Internet gaming sites to pay the bettors Internet gambling debts to 

the banks that issued the credit cards. Half of the issuing banks in 

our review told us that they have explicit disclosures in their 

cardholder agreements stating that their cards cannot be used for 

Internet gambling and two of these banks said they had added the 

explicit reference only recently because of these lawsuits. Other 

issuing banks said that their cardholder agreements state that their 

cards cannot be used for illegal activities but do not specifically 

mention Internet gambling.



According to gaming analysts, issuing banks efforts to block Internet 

gambling transactions could reduce the projected growth of the Internet 

gaming industry from 43 to 20 percent.[Footnote 39] What was estimated 

to be a $5.0 billion industry worldwide could now be reduced to $4.2 

billion.[Footnote 40] In the meantime, some Internet casino operators 

now estimate that four out of every five requests for credit card 

payments are denied.



The Associations Transaction Coding Systems Can Be Compromised:



Association and banking industry officials told us that the 

effectiveness of efforts issuing banks make to block transactions 

involving Internet gambling depends on the integrity of the 

associations coding systems as implemented by merchants and acquiring 

members throughout the world. However, the coding systems can be 

compromised in two ways: (1) by Internet gambling merchants that 

attempt to disguise transactions by miscoding them, and (2) by 

cardholders who attempt to circumvent the system by using on-line 

payment providers.



Merchants May Disguise Transactions Codes:



According to an association official, Internet gambling merchants have 

a strong incentive to miscode and thus try to disguise their 

transactions since proper coding could result in a denial of 

authorization. Circumventing the coding system in this way, according 

to the issuers, presents a significant challenge. Issuers have no 

control over the merchants and no way to immediately identify and block 

all such transactions. Issuing bank officials emphasized the difficulty 

of identifying attempts to conceal Internet gambling transactions, 

regardless of any proactive efforts to find instances of miscoding. One 

official noted that some disguised Internet gambling transactions are 

identified only by chance, if at all. Most of the issuers acknowledged 

that Internet gambling merchants have circumvented the coding system 

primarily by submitting improperly coded transactions that do not 

represent Internet gambling or by failing to use the electronic 

commerce code. In some cases, a merchant engaged in more than one 

business has a secondary merchant code available and uses it to code 

what is really an Internet gambling transaction. In other cases, a 

merchant moves into Internet gambling after having been accepted by the 

acquirer as a different type of business. Unless the acquirer monitors 

the merchant, it will not know that the merchant is actually processing 

Internet gambling transactions.



Two issuers noted that Internet merchants are able to circumvent the 

coding system by engaging in factoring.[Footnote 41] According to the 

issuers, factoring occurs when a merchant, possibly one engaged in 

Internet gambling, submits credit card transactions through another 

merchants terminal using that merchants identification number and 

merchant category code, and pays that merchant a percentage of the 

submitted transactions. Officials from both associations agreed that 

factoring as described by the issuers can be used to circumvent the 

coding system and violates the associations rules. They also noted 

that this type of factoring is distinguishable from legitimate 

factoring. An issuer told us that in one case a merchant circumvented 

the coding system by setting up a bogus site and processing numerous 

transactions using a telephone and rogue terminal. The issuer believed 

this situation could have been avoided if the acquirer had exercised 

adequate due diligence on the merchant.[Footnote 42]



Using On-Line Payment Providers Can Circumvent Restrictions on Using 

Credit Cards for Internet Gambling:



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

payment providers or payment aggregators to pay for 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. The issuers indicated that while on-line 

payment providers did not circumvent the coding system, most 

aggregators transactions were not coded to reflect the purpose or type 

of transaction such as Internet gambling. 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. Nevertheless, most of the 

issuers said they would continue to accept credit card transactions 

from payment aggregators because they believed that these transactions 

were mostly legitimate or because the transactions represented a very 

small percentage of their total volume of credit sales. Officials from 

one major U.S. payment aggregator told us, recognizing the potential 

for abuse, that they had established policies in accordance with the 

U.S. Department of the Treasurys Suspicious Activity Reporting 

requirements and file reports weekly.[Footnote 43] Additionally, one 

issuer expressed confidence in conducting business with a leading U.S. 

aggregator, PayPal, because this aggregator no longer does business 

with Internet gambling merchants.[Footnote 44]



Our survey of Internet gambling Web sites, conducted during summer 

2002, showed that four different payment providers were advertised as 

payment options. The one that appeared most often, PayPal, was on two-

thirds of the sites in our survey, while the one that appeared the 

least frequently, EZPay, was on about 1 percent of the sites. In some 

cases, the sites suggested that gamblers use an on-line payment 

provider to fund their accounts if their credit cards were blocked. We 

also found instances of the sites offering bonuses to gamblers who 

chose to fund their accounts through on-line payment providers.



Rather than developing an audit program to address Internet gambling 

issues, one association chose to focus on dealing proactively with 

these on-line payment providers, which it viewed as a potential 

loophole in the system. An official from one association explained that 

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

providers without reaching an understanding about Internet gambling 

with the providers acquirer. The acquirer would have to agree that any 

funds the provider obtained through the associations systems would not 

be used for Internet gambling unless the transaction was properly 

coded, so the issuing bank could deny the charge at its discretion. The 

official cited an example in which such an understanding could not be 

reached. The provider stopped accepting cards bearing the associations 

brand name rather than comply with the coding requirements.



Officials of the other association noted that on-line payment providers 

are responsible for ensuring 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. In such cases, issuers that have decided to block 

Internet gambling transactions can 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.



Issuers Rely on Fraud Monitoring to Identify Internet Gambling 

Transactions and Take Action on Them:



Issuers learn from customer complaints or their own monitoring that a 

credit card transaction is a disguised Internet gambling transaction. 

The issuers we spoke with told us that they used their fraud monitoring 

systems to identify potential Internet gambling transactions. The 

systems, according to the issuers, provide initial clues by identifying 

deviations from expected patterns of transactions, and the issuers 

investigate these deviations for potential Internet gambling 

transactions. Some issuers told us that they also periodically reviewed 

and analyzed authorization logs generated by their systems for 

departures from established operating rules. Several issuers noted that 

they also identified Internet gambling transactions from investigating 

customer disputes. Most of the issuers said that as a result of their 

total monitoring effort, they ultimately were able to identify Internet 

gambling merchants that miscoded transactions to disguise them and had 

programmed the monitoring systems to identify, track, and block these 

merchants transactions. Two issuers told us that in egregious cases 

they blocked the merchants identification number and thus denied all 

transactions from that source. But the issuers acknowledged that their 

monitoring efforts did not capture all transactions involving Internet 

gambling and could not always identify where the transactions took 

place.



Issuers can take other actions against Internet gambling merchants that 

they identify cloaking transactions. First, if they learn about the 

Internet gambling activity within the time limits established by 

association rules, some issuers attempt to charge the transactions back 

to these merchants.[Footnote 45] One issuer said that it used a 

modified chargeback procedure that required searching posted billing 

transactions for indications that Internet gambling might be involved. 

The issuer reportedly was able to charge back hundreds of thousands 

of improperly coded transactions, putting several Internet gambling 

operators out of business. The issuers also told us they reported the 

Internet gambling merchants to the credit card associations so that the 

associations could notify the acquiring banks, which could exercise due 

diligence over the merchants.



Banks that Acquire Internet Gambling Merchants Are Based Overseas:



The six acquirers in our review were all U.S.-based members of the 

credit card associations. Officials from five of these acquirers told 

us they do not have any overseas operations, and five indicated that, 

as a matter of policy, they acquire merchants only in the United 

States. Because Internet gambling merchants tend to be located 

overseas, these U.S.-based acquirers would not acquire these merchants 

in any case. One of the other acquirers told us it had relationships 

with foreign merchants through arrangements with foreign banks but did 

not acquire Internet gambling merchants overseas. According to an 

association official, member banks based outside the United States 

acquire Internet gambling merchants in jurisdictions where Internet 

gambling may be a legal enterprise. The associations did not conduct 

any additional due diligence on member banks that acquired Internet 

gambling merchants. One association provided its members with 

additional requirements and best practices for acquiring such 

merchants.



Based on our survey of Internet gambling sites, we estimate that about 

85 percent advertised MasterCard as a form of payment, with a similar 

percentage of sites advertising VISA. However, although Internet 

gambling sites may advertise a specific association, such as VISA or 

MasterCard, transactions using the cards of issuing banks that attempt 

to block Internet gambling may be denied. Some of the sites in our 

survey alerted their clients to this potential problem and suggested 

the use of other payment options, including on-line payment providers, 

wire transfers, and checks. Some Internet gambling Web sites offer 

bonuses to promote payment mechanisms such as direct wire transfers. In 

our review, about 47 percent of the Internet gambling sites advertised 

Western Union. Our survey also revealed that Internet gambling Web 

sites encouraged the use of money orders and various forms of checks--

about 28 percent of the reviewed sites said they allowed money orders, 

while 8 percent said they accepted travelers checks. In addition, 40 

percent of Internet gambling Web sites noted that they would recognize 

bank drafts, certified checks, and cashiers checks. Our survey results 

also showed that 79 of the sites reviewed indicated they had 

established a relationship with an electronic banking system or a 

processor. Appendix IV provides more information on our survey.



Acquirers Take a Variety of Actions to Identify Merchants Engaged in 

Internet Gambling:



U.S.-based acquirers told us that they exercised due diligence on 

Internet-based merchants to ensure that the merchants were not engaged 

in Internet gambling. The acquirers due diligence of Internet 

merchants consisted of screening applicants and monitoring approved 

merchants. In screening merchant applicants, the acquirers generally 

verified applications and reviewed Web sites to ensure that the 

merchants were not engaged in Internet gambling. Two acquirers also 

said that they reviewed merchants business plans and products to 

understand the nature of the operations and determine if international 

transactions would occur in the course of the business. The acquirers 

in our review said they assigned approved merchants a merchant category 

code identifying the type of business activity the merchant was engaged 

in and required them to use the code to transmit credit card 

transactions. Individual merchants engaged in more than one type of 

business activity could receive more than one code.



The acquirers monitoring efforts included periodic visits to the Web 

sites of approved merchants to ensure that the nature and distribution 

of their products had not changed. They also analyze any changes in 

merchants transaction volumes and transactions for all e-commerce 

sites. Most of the acquirers told us that they were unable to screen 

out all Internet gambling merchants despite these due diligence 

efforts. Acquirers gave different reasons for not detecting all 

Internet gaming merchants. For example, two acquirers cited factoring, 

while others cited merchant fraud or misrepresentation of business 

activity. While the acquirers in our review did not deny that Internet 

gambling merchants had circumvented the coding system by entering 

erroneous merchant category codes, they denied direct knowledge that 

their Internet merchants had engaged in this activity. Nevertheless, 

the acquirers told us that as a matter of policy they would terminate 

merchants that were found repeatedly miscoding credit card transactions 

or misrepresenting their activities.



Associations Impose Penalties on Acquiring Banks for Miscoded 

Transactions:



Association officials told us that both of their associations monitored 

transactions for fraud, looking for and investigating 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 had been 

helpful in identifying coding errors related to Internet gambling.



Associations efforts in support of issuer policies to block Internet 

gambling transactions focused primarily on requiring acquiring member 

banks to ensure the accuracy of merchant and commerce codes. The 

associations did not monitor the adequacy of due diligence exercised by 

acquiring banks in screening and monitoring merchants. They relied on 

federal and state banking regulators to supervise and examine 

acquirers due diligence and expected the acquiring banks to comply 

with association contracts, agreements, and operating regulations. The 

regulations specifically impose on all acquirers the responsibility for 

ensuring that their merchants properly code transactions and impose 

penalties on the acquirers for improper merchant and transaction codes. 

Association officials said that they shared the results of their 

investigations of merchants with acquirers, enabling the acquirers to 

take action against these merchants. For example, an official said that 

his association had detected several instances in which merchants had 

submitted false information on applications and thus had been assigned 

category codes for businesses other than gambling. The association said 

that it had told the acquirers about these merchants and that the 

acquirers promptly terminated them.



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. If the testing reveals that a gambling site uses 

incorrect coding, the merchants acquirer is notified and given 30 days 

to correct the coding with the merchant. The association then audits 

the site to verify that the coding has been corrected. 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.



Third-Party Processors Implement the Issuers and Acquirers Policies 

on Internet Gambling:



Two of the four third-party processors in our review told us that they 

blocked Internet gambling transactions for their issuing bank clients. 

Three of these processors also told us that while they acquired 

Internet merchants on behalf of their acquiring bank clients, they did 

not acquire Internet gambling sites because their clients did not want 

these merchants as customers. The processors noted that they always 

carried out the policies and procedures specified by the issuing and 

acquiring clients regarding the types of transactions to block or the 

types of merchants to acquire.



The processors provided a variety of services for their client banks. 

For example, they provided software programs, technical assistance, 

fraud monitoring, e-banking services, and services related to card 

processing, such as issuing cards, authorizing transactions, and 

billing customers. The three processors providing merchant acquisition 

services said that they conducted due diligence on the Internet 

merchants, screened merchant applicants and monitored those approved. 

The three processors said that their screening procedures required due 

diligence to ensure that the new Internet merchants were not engaged in 

Internet gambling. Officials of one of these processors underscored 

their view that Internet gambling sites represented a significant 

financial and legal risk and said that the company did complete Web 

site reviews to evaluate merchants practices and confirm the types of 

products sold. The two other processors also provided monitoring 

services, including on-going reviews of merchants Web sites and 

changes in merchants transaction activity, to verify whether these 

businesses had expanded into Internet gambling.



New Technologies Are Being Developed to Facilitate Payment for Internet 

Gambling Transactions:



With financial institutions restricting the use of credit cards, many 

gaming representatives believe that e-cash will become the currency of 

the future for Internet gambling. E-cash comes in two basic forms: 

smart card e-cash and computer e-cash.[Footnote 46] A report on 

emerging cyberspace technology outlined the four types of cyberpayment 

systems that exist; however, they are not all currently in use for 

Internet gambling. The models are the merchant issuer model, the bank 

issuer model, the nonbank issuer model, and the peer-to-peer 

model.[Footnote 47]



* The merchant issuer model. The merchant issues the smart card. An 

example of this model can be found in the subway system in Washington, 

D.C., which sells Smart Trip farecards directly to riders for use on 

the subways. Riders can simply add money to the cards and continue 

using them.



* The bank issuer model. A financial institution issues the smart card, 

and the transactions are cleared through the traditional financial 

systems.



* The nonbank issuer model. Users buy electronic cash from issuers 

using traditional money and spend the electronic cash at participating 

merchants. The issuer subsequently redeems the electronic cash for the 

merchant.



* The peer-to-peer model. A bank or other entity issues electronic 

cash, which is then transferred between users. The only points of 

contact between the traditional payments system and the electronic cash 

are the initial purchase and the redemption from the individual or 

merchant.



Representatives of the Internet gambling industry noted that while 

using e-cash is not as convenient as using credit cards, it does offer 

advantages. For example, there are no global constraints, transaction 

costs are lower, transactions are processed immediately, and the risk 

of identity theft is substantially lower. However, in their view, in 

the United States, e-cash has struggled because U.S. citizens are 

comfortable using credit cards for e-commerce and thus have not 

generally used alternative payment mechanisms. But, according to 

Internet gambling representatives, as financial institutions 

increasingly block credit card transactions for Internet gambling, they 

expect the demand for alternative payment methods will increase. 

Further, one gaming analyst commented that because the Internet 

gambling market is saturated, many business plans now being presented 

to Internet gaming consultants are proposals for alternative payment 

systems, including digital cash, Automated Teller Machine features, 

digital cards, affinity cards backed by acquiring banks, and automated 

clearinghouse systems and transfers.[Footnote 48] According to the 

gaming analyst, market demand is driving the industry to shift away 

from establishing Internet gambling Web sites and toward developing 

payment mechanisms.



Views on the Vulnerability of Internet Gambling to Money Laundering Are 

Mixed:



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 believed that money laundering activities could potentially 

be conducted on both legitimate and complicit Internet gambling 

sites.[Footnote 49] Representatives of the credit card and gaming 

industries believed that Internet gambling was not necessarily more 

susceptible to money laundering than any other type of on-line 

transaction. However, gaming industry representatives suggested that 

eliminating traditional forms of payment such as credit cards could 

potentially heighten money laundering concerns.



Despite Concerns about the Vulnerability of Internet Gambling to Money 

Laundering, Few Cases Have Been Prosecuted:



Law enforcement officials told us they believed that Internet gambling 

can be a significant vehicle for laundering criminal proceeds, 

especially to move illicit funds among financial institutions at the 

layering stage. The officials said that the volume, speed, and 

international reach of Internet transactions and the fact that many 

Internet gambling sites are located offshore increased the potential 

for misuse. In their view, these characteristics can promote a high 

level of anonymity and give rise to difficult jurisdictional issues.



Few Cases of Money Laundering through Internet Gambling Have Been 

Prosecuted:



Law enforcement officials acknowledged the lack of adjudicated cases 

involving money laundering but said they believed that Internet 

gambling offered many potential ways of laundering money. One U.S. law 

enforcement official attributed the lack of adjudicated cases involving 

money laundering through Internet gambling sites to several factors, 

most notably the lack of any industry regulations or oversight. 

Currently, the Federal Bureau of Investigation (FBI) has two open cases 

involving Internet gambling as a venue for money laundering activities.



In Treasury Enforcements view, one key reason that Internet gambling 

is vulnerable to money laundering and other forms of financial crime, 

including tax evasion, is that the gambling sites are frequently 

located in areas with weak or nonexistent supervisory regimes. The U.S. 

experience with all types of money laundering is that criminals will 

seek out and exploit areas of the world with ineffective supervisory 

regimes. The multinational Financial Action Task Force (FATF)[Footnote 

50] has also noted this trend and, according to Treasury, initiated the 

Non-Cooperative Countries and Territories process to help bring 

countries with weaker anti-money laundering laws and supervisory 

regimes up to international norms. Although specifics were not 

provided, a February 2001 FATF report stated that some member 

jurisdictions had evidence that criminals were using Internet gambling 

to launder their illicit funds.[Footnote 51] In a March 2002 report, 

the State Department said that Internet gambling involving credit cards 

and offshore banks was a powerful vehicle for criminals seeking to 

launder funds from illicit sources and to evade taxes.[Footnote 52]



Treasury Enforcement officials also noted with concern how certain 

gaming merchants have attempted to circumvent the credit card coding 

system through factoring. In appropriate circumstances, they believed 

the use of factoring could be a key step in facilitating money 

laundering, since factoring is used to disguise from enforcement and 

regulatory officials the true source of funds and how they were 

obtained.



Hypothetical Money Laundering Scenarios Involve Both Legitimate and 

Complicit Internet Gambling Sites:



In the FBIs view, because of the nature of Internet gambling, money 

laundering could be conducted through either legitimate or complicit 

sites. In law enforcements view, legitimate Internet gambling sites 

provide an opportunity to transfer high volumes of money in and out of 

a number of accounts within a single institution. An individual could 

potentially deposit illicit funds into a legitimate Internet gambling 

account under a false name and wager a small amount in order to make 

the account appear genuine to the site operator. After a few losses, 

the individual could withdraw the rest of the illicit funds from the 

account. The transactions paper trail would register a lawful 

Internet gambling transaction, mingling legitimate money with illicit. 

For example, a bettor who wanted to launder $100,000 could potentially 

place bets on opposing teams in a sporting event with two different 

sites, betting on both teams for $100,000. Regardless of the outcome, 

and if the bet were structured properly, the bettor would lose the bet 

wagered on the losing team but be paid double for the bet on the 

winning team. The only money that the bettor would lose would be the 

processing charges and related fees, and the money would appear to be 

legitimate winnings.



In addition, law enforcement officials believe a money launderer would 

not necessarily have to place a wager in order to clean illicit 

funds. A legitimate on-line gaming account could be used as a potential 

storehouse for illicit funds until they could be transferred to an 

offshore account. For instance, a money launderer could locate several 

legitimate Internet gambling sites that had few or no deposit 

requirements and deposit the maximum amount at one or more of them. The 

funds could later be transferred into an offshore account as 

legitimate winnings.



U.S. law enforcement officials said they also believed that money 

launderers could develop Internet gambling sites for the sole purpose 

of laundering money. An operator of a complicit site could 

theoretically program casino gaming software to react to a specific 

password or sign-on command, automatically taking a percentage of the 

deposit and cloaking it as a gaming loss. In essence, however, such a 

deduction would be the operators service fee for laundering the 

illicit funds. Such a site would also need legitimate gamblers in order 

to mask the true nature of the operation.



Financial and Gaming Industries Did Not View Internet Gambling as a 

Money Laundering Threat:



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, were 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. 

The associations, a credit card company, and a few issuers told us that 

they believed their broad anti-money laundering program or coding 

system covered potential money laundering through Internet gambling. 

Officials of one association specifically told us its transaction 

coding system for Internet gambling was designed to address risks, 

including money laundering, by allowing issuers to block any and all 

Internet gambling transactions. This system does not, however, enable 

issuers to block transactions that are not properly coded.



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 

suited to monitoring for related suspicious activity in the area than 

the gaming industry itself. A few officials commented that, in their 

view, on-line casinos should probably be subject to anti-money 

laundering requirements similar to those required of brick-and-mortar 

casinos. One U.S. gaming establishment has obtained an Internet 

gambling license and has begun offering Internet gambling from a 

jurisdiction with legalized and strictly regulated Internet gambling. 

To avoid jeopardizing the status of its U.S. state gaming license, this 

entity was trying to anticipate and address all the potential risks of 

expanding into Internet gambling, including any reputational risks that 

could be associated with money laundering.



Industry gaming officials also cautioned that, in their view, 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 newer forms of electronic payments 

that might not be subject to the same level of record keeping or 

transaction limits as credit cards and could thus be more susceptible 

to money laundering. In these analysts view, the new payment methods 

are attractive to Internet gamblers because they offer certain 

advantages: security, lower transaction costs, anonymity, and speed. 

These are important marketing tools for the Internet gambling 

industry.[Footnote 53] However, the very features that appeal to 

Internet gamblers offer the potential to bypass traditional money 

laundering controls, possibly creating an ideal vehicle for money 

laundering. In addition, officials pointed out the likelihood that some 

emerging electronic gambling schemes that made 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 

involving 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.



Agency Comments and Our Evaluation:



We requested comments on a draft of this report from the Departments of 

Justice and the Treasury. DOJ had no comments on it. Treasury provided 

technical comments on the money laundering section that we 

incorporated, where appropriate.



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. This report 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 are acknowledged in appendix V.



William O. Jenkins, Jr.

Director, Financial Markets and

Community Investment:



[End of section]



Appendix I Scope and Methodology:



To develop the legal framework for Internet gambling activities in the 

United States and our selected states, we researched federal laws, the 

laws of five judgmentally selected states whose statutes included a 

wide range of gambling provisions, court cases interpreting these laws, 

and related studies. We also spoke with representatives of the 

Department of Justice (DOJ), the Department of the Treasury and the 

offices of the attorneys general for the states of Massachusetts, 

Missouri, Nevada, New Jersey, New York, and Utah. Finally, we spoke 

with private attorneys who specialize in gaming law and with 

representatives of the gaming commission from Nevada and New Jersey. To 

develop information on the legal framework in selected foreign 

countries, we contacted gaming and government officials in those 

countries and researched secondary sources describing their laws. We 

reviewed various reports, including the Internet Gambling 

Report,[Footnote 54] policy papers, and other publications describing 

the laws of Australia, Canada, Hong Kong, and the United Kingdom to 

determine the approaches these countries and jurisdictions take to 

regulating Internet gambling. We contacted the supreme audit 

institution in each country or jurisdiction to determine whether any 

work had been done on Internet gambling there. In addition, we 

researched the Web sites of selected foreign regulators and reviewed 

available documentation on their Internet gambling regulations, 

policies, and guidelines. Information was collected solely from 

secondary sources and does not reflect our independent legal analysis.



To obtain an understanding of the nature and extent of policies and 

procedures implemented by the credit card industry to restrict the use 

of credit cards as a form of payment for Internet gambling, we 

interviewed officials from the four major credit card organizations, 

some large issuing and acquiring member banks, third-party processors, 

on-line payment providers, bank regulators, and banking trade 

associations. The criteria we used to select the entities for our 

review included the level of responsibility for significant credit card 

activity in domestic and foreign markets and oversight by the various 

federal banking regulators. Seven of the 8 issuing banks we selected 

rank among the top 10 issuers in the United States, and together with 

the credit card companies are responsible for over 71 percent of the 

credit cards issued by U.S. card issuers in 2001, according to The 

Nilson Report.[Footnote 55] Five of the 6 acquiring banks we selected 

were among the top 10 acquirers in the United States in 2001 and were 

affiliated with the issuing banks in our review. These acquiring banks 

have nearly 2 million merchant clients, representing over 40 percent of 

the outlets in the United States for 2001, according to The Nilson 

Report. We selected four major credit card processors in the United 

States, including three that provided services for issuers in our 

review. We requested documentation on Internet gambling policies and 

procedures from industry representatives; however, only three entities 

provided us with any written documentation. The others described their 

policies and procedures but were unwilling to provide documentation to 

support their descriptions because of concern about the confidentiality 

of proprietary policies.



In addition, we conducted an electronic survey of Internet gambling Web 

sites to gather data about payment options customers can use to make 

deposits to gamble, payment acceptance policies, and other topics. We 

were interested in how gaming Web sites presented information about 

payment options and how credit cards fit into that presentation.



To obtain views on the vulnerability of Internet gambling to money 

laundering, we interviewed gaming and Internet gambling industry 

experts, knowledgeable U.S. state representatives, and law enforcement 

officials (including appropriate officials in Treasurys Office of the 

Undersecretary for Enforcement and DOJs Criminal Division, the FBI, 

and the Executive Office of US Attorneys, and the state attorneys 

general listed above) 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. We conducted structured 

interviews with the credit card industry, issuing and acquiring banks, 

and Internet merchant aggregators to understand their anti-money 

laundering policies and procedures in general and as they relate to 

Internet gambling in particular. We also reviewed documentation--

correspondence, training materials, publicly released reports, and 

written statements--presented by law enforcement officials that 

highlighted their concerns about the potential for using Internet 

gambling as a vehicle for money laundering.



We performed our work in Washington, D.C.; Las Vegas, Nevada; and San 

Francisco, California, between March and October 2002 in accordance 

with generally accepted government auditing standards.



[End of section]



Appendix II Interstate Horseracing Act:



Pari-mutuel wagering on state-licensed horse races takes place over the 

Internet in a number of states.[Footnote 56] Both federal and state 

laws govern this activity. In 1978, Congress passed the Interstate 

Horseracing Act (IHA)[Footnote 57] to regulate interstate commerce with 

respect to pari-mutuel wagering on horse races. The intent of the 

statute was not only to give states primary responsibility for 

determining what forms of gambling can legally take place within their 

borders, but also to further the horseracing and legal off-track 

betting industries in the United States by regulating interstate 

wagering activities.



Pari-mutuel horse racing has been conducted in the United States under 

state authority for over 75 years. In states that allow wagering on 

horse racing,[Footnote 58] a state agency--usually a racing commission-

-regulates the betting, licenses the participants (including the track 

and horse owners, trainers, jockeys, and drivers), and promulgates and 

enforces regulations. Under the IHA, wagers may be placed or accepted 

in one state on a race taking place in another state. However, the IHA 

stipulates that no entity can accept an interstate, off-track wager 

without the consent of the track where the live race takes place (the 

host racing association), the entity regulating the host racing 

association (the host racing commission), the entity regulating the 

establishment that takes the bets, and all race tracks operating within 

60 miles of the location where the wager is accepted.[Footnote 59]



The IHA also imposes limits on the commission that interstate off-track 

betting systems can charge. The IHA is a civil statute, meaning that 

under its terms, the host state, the host racing association, or a 

neighboring race track may file a civil action against establishments 

that violate the law. These suits may seek to keep such establishments 

from accepting wagers for races at the host track without the required 

consent, and for damages resulting from such conduct. Because the IHA 

is not a criminal statute, the U.S. government cannot bring a criminal 

action against off-track establishments that violate the law.



Originally, an interstate off-track wager was defined as a legal wager 

placed or accepted in one State with respect to the outcome of a 

horserace taking place in another State.[Footnote 60] The definition 

of an interstate off-track wager was expanded in December 2000 with 

amendments to the IHA to include pari-mutuel wagers, where lawful in 

each State involved, placed or transmitted by an individual in one 

State via telephone or other electronic media and accepted by an off-

track betting system in the same or another State, as well as the 

combination of any pari-mutuel wagering pools.[Footnote 61] This 

provision appears to explicitly extend the provisions of IHA to the 

Internet medium. Indeed, in opposing this amendment to the IHA, 

Congressman Wolf of Virginia stated that it would legalize interstate 

pari-mutuel gambling over the Internet.[Footnote 62] However, in a 

March 2000 hearing before the House Subcommittee on Crime of the 

Committee on the Judiciary, in connection with a bill attempting to 

prohibit Internet gambling, an official from DOJ testified that despite 

the IHA, gambling businesses offering bets on horse racing over the 

Internet were violating the Wire Act (18 U.S.C[Footnote 63].  1084). 

However, this hearing took place before the December 2000 amendments to 

the IHA, and we were unable to obtain DOJs current position on the 

legality of interstate wagering on state-licensed horse races over the 

Internet. But in explaining the rationale of DOJs testimony to us, DOJ 

officials stated that since IHA is a civil statue and the United States 

would not be a party to any action brought under it, IHA could not 

override the Wire Act, which is an existing criminal statute.



Many industry participants disagreed with the positions set forth in 

DOJs March 2000 testimony. For example, the Chairman of the Oregon 

Racing Commission testified at that hearing that DOJs interpretation 

disregards the purpose behind the Wire Act, which is to combat 

organized crime. He noted that the Wire Act was not intended to make 

activities licensed and regulated by the states illegal and that the 

IHA was enacted for the express purposes of ensuring proper regulation 

of interstate off-track betting and furthering the horse racing and 

legal off-track betting industries in the United States. He concluded 

that DOJs interpretation apparently disregards Congresss intent in 

enacting the IHA and noted that DOJ has never brought an action against 

a state-licensed entity offering pari-mutuel wagering on horse races 

over the Internet.



Industry participants have stated that the industry has made efforts to 

monitor Internet-based pari-mutuel wagering on horse races. An official 

from the Oregon Racing Commission told us that such wagering is 

generally conducted on a closed-loop, subscriber-based system designed 

to circumvent the open nature of the Internet, to ensure adherence to 

state laws, and to ensure that bettors are of legal age and qualified 

to participate. Such systems operate through Internet Web sites that 

are protected by passwords and are not available to the general public. 

Only registered members may sign on to use a sites services, and those 

wishing to register must provide notarized verification of age, a photo 

identification, and proof of residency. To prevent identity theft, a 

letter requesting verification of the information is sent to the 

address used to open the account.



Despite these protections and the view that pari-mutuel wagering on 

horses via the Internet is legal, officials from the National 

Thoroughbred Racing Association (NTRA) told us that entities offering 

online pari-mutuel wagering have encountered difficulty with banks, 

which increasingly refuse to accept credit card transactions for this 

type of betting. Apparently, many banks use the same coding for pari-

mutuel wagering on horses over the Internet and for other types of on-

line gambling, such as online casinos and sports betting. According to 

NTRA officials, this problem is the result of current limitations in 

credit card coding programs. NTRA officials have stated that they are 

working with credit card issuers to create a unique transaction code 

for lawful domestic pari-mutuel wagers that will distinguish them from 

other forms of on-line gambling. A unique transaction code would still 

allow the credit card issuers to reject payment for unlawful on-line 

gambling activities, while accepting Internet wagers on horse races.



[End of section]



Appendix III: Internet Gambling Regulation in Foreign Jurisdictions:



The regulation of Internet gambling in foreign countries and 

jurisdictions varies widely, with some countries permitting it, others 

banning it, and others taking a mixed approach by prohibiting some 

forms of Internet gambling and regulating other forms. We focused on 

four countries and jurisdictions--Australia, Canada, Hong Kong, and the 

United Kingdom (U.K.)--that vary in their approaches to regulating 

Internet gambling. We found that Australia has a federal law that 

prohibits Australian and offshore entities from providing Internet 

gambling services to Australian residents. Canada allows only 

provincial governments to offer gaming through a computer, and 

provincial governments may not license others to conduct such gambling. 

Hong Kong permits Internet gambling only if it is run by the legal 

monopoly, the Hong Kong Jockey Club, in the form of pari-mutuel betting 

on horse races and certain types of lotteries. Hong Kong does not allow 

offshore Internet gambling in Hong Kong. The U.K. permits betting 

operations to operate using the Internet, because bookmakers are 

permitted to accept telephone bets (subject to licensing requirements) 

and Internet betting operations have been licensed as a form of 

telephone bet. Other forms of gambling, such as casino, gaming, bingo, 

and lotteries, are illegal on the Internet.



Australia:



Australia has a federal law that prohibits Australian and offshore 

entities from providing Internet gambling services to Australian 

residents. After a year-long moratorium on the development of the 

interactive gambling industry, Australia enacted federal legislation, 

the Interactive Gambling Act 2001 (the Act), that prohibits operators 

from providing an Internet gambling service to Australian residents. 

Under the Act, an Internet gaming service is defined as an Internet 

casino or interactive gaming Web site. The prohibitions of the 

Interactive Gambling Act apply to all Internet gambling service 

providers--Australian and offshore, whether owned by Australians or 

foreigners--and carries a maximum penalty of $220,000 AUD per day for 

individuals and $1.1 million AUD per day for corporate bodies. The Act 

also makes it an offense to provide such services to people in a 

designated country, although we are not aware that any foreign 

countries have received this designation.[Footnote 64]



The Act does not prohibit on-line sports wagering and lotteries. 

Instead, these activities are regulated by Australian state and 

territorial legislation. Generally, state and territorial legislation 

prohibits on-line sports wagering and lotteries unless the operator is 

licensed in the relevant jurisdiction. The Act provides both for self-

regulation and government monitoring. Internet service providers are 

tasked with developing a code of practice relating to Internet gambling 

matters. If the industry fails to act, the Australian Broadcasting 

Authority (the Authority) may set industry standards that, among other 

things, ensure that Internet service providers provide customers with 

appropriate filtering software or similar devices to prevent access to 

prohibited sites. The Authority is empowered to implement a complaints-

based regime aimed at further preventing interactive gambling service 

providers from targeting Australian customers. The Authority can 

initiate investigations of interactive gambling activities and can also 

accept complaints from the public. Violations are referred to the 

police. The Act also incorporates processes designed to ensure 

appropriate government review and, if required, revision. The act is 

scheduled to be reviewed before July 1, 2003, taking into account the 

growth of interactive gambling services, their social and commercial 

impact, and other matters.



Canada:



The Criminal Code of Canada makes it illegal to gamble or conduct any 

gaming activities within Canada unless they fall within recognized 

exceptions set out in the Criminal Code. The exceptions include 

lottery schemes that are conducted and managed by a province (such as 

casinos and electronic gambling), a narrower range of lottery schemes 

that are licensed by a province (to a charity, fair, or exhibition, 

and, rarely, to a private individual), bets made between individuals 

not engaged in the business of betting, pari-mutuel betting on horse 

races (regulated by the federal Minister of Agriculture) and some 

lottery schemes conducted in Canada on international cruise ships. 

Under the Criminal Code, only provincial governments are permitted to 

offer a lottery scheme on or through a computer and they may not 

license others to conduct one. Further, any lottery would have to be 

restricted to residents of the province operating it. In order to offer 

on-line gambling in Canada then, a provincial government would not only 

have to operate the sites itself but also ensure that residents from 

other provinces did not participate unless cooperative agreements 

between the provinces were in place. In addition, commercial land-based 

betting on single sporting events is prohibited in Canada and therefore 

would not be permitted over the Internet. A recent case from the Prince 

Edward Island Supreme Court (Appeal Division) held that an Internet 

lottery ticket Web site licensed by the Province of Prince Edward 

Island would not be conducted and managed in the province as required 

by the Criminal Code. The court found that even though the server was 

located in the province, the lottery would violate the Criminal Code by 

offering gambling to a worldwide market. In addition, since it was 

licensed to a charity and not conducted by the province, the lottery 

violated the Criminal Codes requirement that provinces run 

computerized lottery schemes. This case is now on appeal to the Supreme 

Court of Canada.



According to an official from Canadas Department of Justice, the 

matter of betting with an offshore betting shop or on-line casino 

located offshore has not yet been before Canadian courts.[Footnote 65] 

The official further stated that this situation reflected the 

difficulty of conducting offshore investigations and arraigning foreign 

suspects before Canadian courts, particularly when no dual 

criminality exists and extradition is not possible, or when no 

extradition treaty exists.



Hong Kong[Footnote 66]



Gambling is illegal in Hong Kong unless specifically permitted under 

the Gambling Ordinance, which sets out the jurisdictions overall 

gaming policy and statutes.[Footnote 67] The ordinance permits several 

forms of gambling, specifically pari-mutuel betting and lotteries, 

which are conducted as a legal monopoly by the Hong Kong Jockey Club. 

In May 2002, the Hong Kong Legislative Council voted to ban offshore 

gambling, including offshore Internet gambling, by passing the Gambling 

(Amendment) Ordinance 2002. This legislation, which criminalizes both 

offshore betting and bookmaking, applies to both operators and bettors.



Hong Kong residents may legally participate in some forms of Internet 

gambling. The passage of the 2002 Amendment gave the Hong Kong Jockey 

Club complete control of the gaming market. The club solicits pari-

mutuel bets from around the world and operates Hong Kongs twice-weekly 

government lottery, the Mark 6. Hong Kong residents can legally place 

on-line pari-mutuel wagers with the club. The betting duty paid by the 

Jockey Club accounts for about 10 percent of government revenues.



However, Hong Kong law provides for criminal penalties for any offshore 

gambling agent promoting or advertising a gaming product to Hong Kong 

residents or facilitating residents use of such a product. The maximum 

punishment for brokers is 7 years imprisonment and a penalty of 

$5 million HKD ($641,000 USD), while individual bettors face 9 months 

imprisonment and a penalty of $30,000 HKD ($3,800 USD) if convicted. 

The bill also prohibits financial institutions, such as banks and 

credit card companies based in Hong Kong, from processing betting 

transactions, preventing Hong Kong residents from placing Internet 

gambling bets using credit cards or similar means of payments. In 

addition, Hong Kongs Home Affairs Bureau could potentially use the 

laws provisions, in conjunction with anti-money laundering 

legislation, to prevent local banks from providing banking services to 

known operators of offshore gambling sites.



United Kingdom[Footnote 68]



The U.K. has several different laws and regulatory schemes that apply 

to gaming, betting and lotteries, but there are no specific laws 

governing Internet gambling operations or making it illegal for private 

citizens to gamble on-line.[Footnote 69] Some types of gambling can be 

carried out legally by operators on line and others cannot. For 

example, betting operations can operate via the Internet because 

bookmakers have long been permitted to accept telephone bets subject to 

licensing requirements and Internet betting operations fall within the 

same legislative provisions. Other forms of gambling, such as casino 

gaming, bingo, and most lotteries, are illegal on the Internet due to 

specific legal requirements for conducting these types of gambling. The 

laws applicable to casino gaming and bingo require that the persons 

taking part in the gaming be present on the gaming premises. The laws 

applicable to lotteries have been interpreted to prevent most Internet 

sale of tickets because they cannot be sold by machine.



The Gaming Board for Great Britain (the Gaming Board) is the body that 

regulates casinos, bingo clubs, gaming machines, and charity lotteries. 

As part of its mandate to advise the Home Secretary on developments in 

gaming, the Gaming Board did a study on Internet gambling that raised 

public policy issues based on the Internets potential to offer 

unregulated, unlicensed, and low-or no-tax gambling.[Footnote 70] 

According to the report, Internet gambling sites fall into two primary 

categories: sites that offer an entry to land-based gambling, and 

interactive gaming sites. Sites that serve as a means of facilitating 

land-based gambling are often just alternatives to other means of entry 

such as the post or telephone--that is, they use the Internet simply as 

a communications tool. Examples of this type of site are football pools 

and betting on horse racing and other sports. Interactive gaming, 

however, is run exclusively on the Internet and includes sites offering 

virtual casinos, slot machine gaming, and interactive lotteries. The 

report summarized the legal status of using the Internet for each type 

of gaming as follows:



* Betting. Bookmakers can accept telephone bets from clients with 

credit accounts, and football pools can accept entries by post. Neither 

is prevented from accepting bets by e-mail. Bookmakers have chosen 

offshore locations for their telephone and Internet betting operations 

because taxes are lower in those jurisdictions.



* Casinos, bingo, and gaming machines. These types of gaming are only 

permitted on licensed and registered premises, and the persons taking 

part in the gaming must be on the premises at the time the gaming takes 

place. These stipulations effectively prevent an operator from 

obtaining a license for Internet gaming in the U.K. The Gaming Board 

stated that it would take action to enforce this prohibition.



* Lotteries. Tickets for lotteries can be sold in almost any location, 

other than in the street, including at peoples homes and over the 

telephone, but they cannot be sold by machine. The Gaming Board has 

taken the position that running a lottery entirely by computer over the 

Internet amounts to selling tickets by machine and has refused to 

authorize such lotteries. However, some companies that manage lotteries 

have presented proposals to the Gaming Board for lotteries that would 

use the Internet as a means of communication, much like a telephone. 

The Gaming Board has approved two of those proposals.



Finally, the report outlined what it saw as the three main policy 

options for Internet gambling regulation in the U.K.: retaining the 

status quo, encouraging measures to prevent offshore Internet gambling, 

and creating legislation to permit regulated and taxed Internet 

gambling.



Another report, Gambling Review Report of 2001 (the Budd report), 

commissioned by the Home Office, recommended that on-line gambling be 

regulated and that the activity be seen as just another way of 

delivering a service.[Footnote 71] According to the Budd Report, the 

key objectives of gambling laws and regulations are that gambling 

should be free of crime, honest, and conducted in accordance with 

regulation; that players should know what to expect and be confident 

that they will get it without being exploited; and that children and 

other vulnerable persons should be adequately protected. The Budd 

Report recommendations would potentially permit the following in the 

U.K.: on-line gaming and betting (including in football pools), remote 

gaming on live games, and betting on the National Lottery.



According to a U.K. government official, the U.K. is developing a 

timetable for introducing new gambling legislation sometime between 

2003 and 2004. The new legislation will contain a number of major 

gambling reforms, including provisions covering Internet gambling.



[End of section]



Appendix IV: Survey of Internet Gambling Web Sites:



We conducted a survey of Internet gambling Web sites to gather data 

about the payment options offered to those wishing to gamble. We were 

primarily interested in the way these sites presented information about 

credit cards and other payment options.



Sampling:



Internet gambling, as defined for this survey review, is an activity 

that takes place through a non-redirected,[Footnote 72] live Web site 

that allows monetary transactions in one or more of the following 

categories of gaming: casinos, lotteries, sports betting, or horse and 

dog racing. To conduct this survey, we reviewed a simple random sample 

of Internet gambling Web sites. For our purposes, we defined the 

universe of Internet gambling sites using the most recent list, 

published in 2002, of Internet gaming URLs compiled and published by 

the River City Group LLC, Christiansen Capital Advisors LLC, for the 

gaming industry. From this list of 1,783 unique gaming Web addresses, 

we selected a representative random sample of 202 for our review. This 

number was based on a conservative estimate of the number of live 

sites as well as on a precision level.[Footnote 73] We systematically 

reviewed the Web sites in our sample using an electronic data 

collection instrument (DCI).



Overview of Results:



Of the Internet gambling Web sites in our sample, 162 of 202 were 

live. The survey also highlighted other aspects of the Internet 

gambling Web site in addition to the payment options. For example, the 

following table identifies two variables that demonstrate the global 

reach of Internet gambling--the licensing country and a potential 

contact. Not all the sites listed a licensee or a location address, 

however. Other than the initial Web site review, GAO staff did not 

specifically verify each individual reference of the licensing country 

or the contact address. This nominal information is based on our review 

of individual Web sites and is subject to error.



Table 1: Live Web Sites Listing Licensing Countries and Contacts:



Licensing Country: Antigua; # of Sites: 27; Contact Locations: 

Antigua; # of Sites: 13.



Licensing Country: Australia; # of Sites: 2; Contact 

Locations: Australia; # of Sites: 1.



Licensing Country: Barbuda; # of Sites: 8; Contact Locations: 

Barbuda; # of Sites: 1.



Licensing Country: Canada, Kahnawake; # of Sites: 4; Contact 

Locations: Belize; # of Sites: 3.



Licensing Country: Costa Rica; # of Sites: 8; Contact 

Locations: Canada; # of Sites: 2.



Licensing Country: Curacao; # of Sites: 21; Contact Locations: 

Costa Rica; # of Sites: 6.



Licensing Country: Dominica; # of Sites: 3; Contact Locations: 

Curacao; # of Sites: 19.



Licensing Country: Grenada; # of Sites: 1; Contact Locations: 

Dominican Republic; # of Sites: 1.



Licensing Country: Isle of Man; # of Sites: 1; Contact 

Locations: Ireland; # of Sites: 1.



Licensing Country: Netherlands Antilles; # of Sites: 1; 

Contact Locations: Isle of Man; # of Sites: 1.



Licensing Country: South Africa; # of Sites: 1; Contact 

Locations: Korea; # of Sites: 1.



Licensing Country: Trinidad; # of Sites: 1; Contact Locations: 

Panama; # of Sites: 1.



Licensing Country: Tobago; # of Sites: 1; Contact Locations: 

Netherlands; # of Sites: 1.



Licensing Country: United Kingdom; # of Sites: 7; Contact 

Locations: Netherlands Antilles; # of Sites: 2.



Licensing Country: United States; # of Sites: 1; Contact 

Locations: New Zealand; # of Sites: 1.



Licensing Country: Venezuela; # of Sites: 1; Contact 

Locations: St. Kitts; # of Sites: 1.



Licensing Country: Contact Locations: 

South Africa; # of Sites: 1.



Licensing Country: Contact Locations: 

United Kingdom; # of Sites: 13.



Licensing Country: Contact Locations: 

United States; # of Sites: 3.



Licensing Country: Contact Locations: West 

Indies; # of Sites: 3.



Note: Table sums were derived from the electronic survey conducted by 

GAO analysts.



[End of table]



Source: GAO electronic survey.



Reliability:



In order to be sure that an analyst filling in the DCI for a particular 

URL would have the same responses as another analyst, we selected a 

subsample of 50 sites from the 202 original sites for recoding. We 

ensured that analysts did not recode any of the same Web sites they had 

coded originally. The odds of consistency were significantly higher 

than those of inconsistency at a 99 percent confidence level for each 

of the 11 key variables used for the reliability testing.



The inconsistencies that did occur between the original coding and the 

recoding of the DCI could have resulted from changes in the content of 

a Web site since the original coding. In addition, the presentation of 

information in gambling Web sites may be ambiguous, potentially causing 

coders to identify characteristics differently. Also, because of the 

nature of our research, we were unable to determine whether an 

advertised payment option was actually a viable way to pay for 

gambling. Our research identified only the presence of information 

about the use of payment options on a Web site.



The following table outlines the categorical variables assessed by the 

DCI. The number of occurrences indicates the instance out of 162, 

unless otherwise indicated. The percent is a weighted estimate. We used 

normal approximations to calculate 95 percent confidence intervals 

where appropriate. When the estimates approached 0 percent or 100 

percent, we used asymmetric methods instead.



Table 2: Results of Internet Gambling Web Site Survey:



Types of Gambling on Site: Casino; Percentage of Sites: 79.6%; Number 

of Sites: 129; 95% Confidence Interval: 72.6% - 85.5%.



Types of Gambling on Site: Sportsbook; Percentage of Sites: 49.4%; 

Number of Sites: 80; 95% Confidence Interval: 42.1% - 56.7%.



Types of Gambling on Site: Lottery; Percentage of Sites: 6.8%; Number 

of Sites: 11; 95% Confidence Interval: 3.4% - 11.8%.



Types of Gambling on Site: Bets on horse/dog racing; Percentage of 

Sites: 22.8%; Number of Sites: 37; 95% Confidence Interval: 16.6% - 

30.1%.



Types of Gambling on Site: Internet Gambling Payment Options; 

Percentage of Sites: Number of Sites: 95% Confidence 

Interval: [Empty].



Types of Gambling on Site: Credit Cards; Percentage of Sites; 

Number of Sites: 95% Confidence Interval



Types of Gambling on Site: Visa; Percentage of Sites: 85.8%; Number of 

Sites: 139; 95% Confidence Interval: 79.5% - 90.8%.



Types of Gambling on Site: MasterCard[A]; Percentage of Sites: 85.1%; 

Number of Sites: 137; 95% Confidence Interval: 78.1% - 89.8%.



Types of Gambling on Site: American Express; Percentage of Sites: 4.9%; 

Number of Sites: 8; 95% Confidence Interval: 2.2% - 9.5%.



Types of Gambling on Site: Discover; Percentage of Sites: 1.2%; Number 

of Sites: 2; 95% Confidence Interval: 0.1% -4.4%.



Types of Gambling on Site: 3rd-Party Payment Transfer Services:; 

Percentage of Sites:  ; Number of Sites:  ; 95% Confidence Interval:  .



Types of Gambling on Site: PayPal; Percentage of Sites: 66.7%; Number 

of Sites: 108; 95% Confidence Interval: 59.8% - 73.5%.



Types of Gambling on Site: FirePay; Percentage of Sites: 21.0%; Number 

of Sites: 34; 95% Confidence Interval: 15.0% - 28.1%.



Types of Gambling on Site: NETeller; Percentage of Sites: 32.7%; Number 

of Sites: 53; 95% Confidence Interval: 25.9% - 39.5%.



Types of Gambling on Site: EZPay; Percentage of Sites: 1.2%; Number of 

Sites: 2; 95% Confidence Interval: 0.1% -4.4%.



Types of Gambling on Site: Equifax; Percentage of Sites: 0.0%; Number 

of Sites: 0; 95% Confidence Interval: 0.0% -1.8%.



Types of Gambling on Site: Direct Wire Transfer:; Percentage of Sites: 

 ; Number of Sites:  ; 95% Confidence Interval:  .



Types of Gambling on Site: Bank wires; Percentage of Sites: 59.3%; 

Number of Sites: 96; 95% Confidence Interval: 52.1% - 66.4%.



Types of Gambling on Site: Western Union; Percentage of Sites: 46.9%; 

Number of Sites: 76; 95% Confidence Interval: 39.7% - 54.2%.



Types of Gambling on Site: Money Orders and Various Checks; Percentage 

of Sites; Number of Sites; 95% Confidence Interval: 



Types of Gambling on Site: Money orders; Percentage of Sites: 27.8%; 

Number of Sites: 45; 95% Confidence Interval: 21.3% - 34.3%.



Types of Gambling on Site: Travelers checks; Percentage of Sites: 

8.0%; Number of Sites: 13; 95% Confidence Interval: 4.3% -13.3%.



Types of Gambling on Site: Bank drafts, cashiers checks, certified 

checks; Percentage of Sites: 40.1%; Number of Sites: 65; 95% Confidence 

Interval: 33.0% - 47.3%.



Types of Gambling on Site: Personal checks; Percentage of Sites: 29.6%; 

Number of Sites: 48; 95% Confidence Interval: 23.0% - 36.3%.



Types of Gambling on Site: Electronic Banking Systems or Processors; 

Percentage of Sites; Number of Sites; 95% Confidence Interval:  



Types of Gambling on Site: Idollar[B]; Percentage of Sites: 5.6%; 

Number of Sites: 9; 95% Confidence Interval: 2.6% - 10.3%.



Types of Gambling on Site: Electronic Financial Services[A]; Percentage 

of Sites: 15.5%; Number of Sites: 25; 95% Confidence Interval: 10.3% -

20.8%.



Types of Gambling on Site: Other banking systems[A]; Percentage of 

Sites: 28.0%; Number of Sites: 45; 95% Confidence Interval: 21.4% - 

34.5%.



[A] (out of 161):



[B] (out of 160):



[End of table]



Source: Results of GAO electronic survey.



Data Collection Instrument:



The following is the DCI that GAO analysts developed to capture the 

information presented on individual Internet gambling Web sites. GAO 

analysts used Microsoft Access to construct the electronic survey. 

Therefore, in order to show all categories represented in the drop-down 

tabs on the electronic form (reproduced in figure 3). We also have 

provided all the text from the form on the following pages.



Figure 3: DCI for Electronic Web Site Survey:





Text of the Data Collection Instrument:



* Please enter the name of the site:



Please check here if there is no Web site found at this URL:



* Is this a gambling site?



Yes or No:



* Please indicate the type of gambling available on this Web site:



Casino

Sportsbook

Lottery Bets on Horse/Dog Racing:



* Are other types of gambling available on this Web site?



If yes, please specify.



* Is the geographic location of the host identified?



If yes, please specify.



* Is the license location of the site specified?



If yes, please specify.



* Please indicate whether the following disclaimers are posted on the 

Web site:



Legality of gambling?

Tax on winnings?



* Please check any credit cards that may be used to pay for gambling 

directly:



VISA

MasterCard

American Express

Discover:



* If the allowable issuing banks are named for any credit cards, please 

enter the bank name and address below:



VISA

MasterCard

American Express

Discover:



* If the site has information about any other credit cards, enter their 

name(s):



* If allowable issuing banks are named for the other credit cards, 

please enter the bank name and address here:



* Are there any monetary limits on credit card deposits posted on the 

Web site?



If yes, please describe any limits here:



* Does the site provide information about when credit card deposits are 

available?



If yes, when?

Provide details if credit card deposits are not available immediately.

Please enter any further information about the use of credit cards on 

the Web site for direct payment in the box below.



* Are any of the following third-party payment transfer services 

indicated as acceptable payment options on this Web site?



PayPal

Firepay

NETeller

EZPay

Equifax:



* Please enter any additional third-party payment transfer services 

that are indicated on this Web site:



-Information about these payment systems.



* Are any of the following direct wire transfers indicated as direct 

payment options on the Web site?



Bank Wires

Western Union:



* Is a name or address provided for sending bank wires or Western Union 

deposits?



Yes or No

If so, please enter the name and address shown here:



* Are there any monetary limits to the wire transfer deposits posted on 

the site?



If yes, please specify any limits here:



* Does the site provide any information about when wire deposits are 

available?



If yes, when?

Provide details if wire deposits are not available immediately:



* Are any of the following types of checks or money orders indicated as 

acceptable for deposits for gambling?



Money orders?

Travelers checks?

Bank drafts/Cashiers checks, or certified checks?

Personal checks?



* Is a payee name/address for check/money order deposits identified?



If yes for payee name and address, please list either or both of them 

here:



* Are there any monetary limits to check deposits identified on the 

site?



If yes, please specify any limits here:



* Does the site provide information about when check deposits are 

available?



If yes, when?

Please provide details if check deposits arent available immediately:



* Are there any other forms of payment identified on the Web site?



If yes, please enter the information here:



* Does the Web site promote any particular form of payment over other 

options?



Bonus for bank wires/Western Union deposits

Bonus for credit card direct deposits

Bonus for third party (PayPal, NETeller, etc.)

Bonus for some other payment option

Bonus for some combination of the above options

No bonus for particular payment options:



* If so, please provide information on the nature of such promotions:



* Please enter any reviewer comments or other noteworthy payment 

information:



* Please review the Web site for any information about banking systems 

or processors:



Electronic Financial Services (EFS)?

iDollar?

Other banking systems?



* Please enter any information on the site about other banking systems:



* Please enter your assessment of how clearly the Web site presented 

information about payment options:



Very clearly presented

Fairly clearly presented

Not very clearly presented

If information was not clear, please specify:



[End of section]



Appendix V: GAO Contacts and Staff Acknowledgments:



GAO Contacts:



William O. Jenkins, Jr. (202) 512-8757

Barbara I. Keller (202) 512-9624:



Acknowledgments:



In addition to those named above, Evelyn Aquino, Kriti Bhandari, Emily 

Chalmers, Edda Emmanuelli-Perez, Jason Holsclaw, Ron La Due Lake, 

Elizabeth Olivarez, Sindy Udell, and Darleen Wall made key 

contributions to this report.



FOOTNOTES



[1] Internet gambling involves any activity that takes place via the 

Internet and that includes placing a bet or wager. The Internet is a 

complex web of computer networks that allows a person in one place in 

the world to communicate by computer with another person located in 

another place in the world. Courts generally have defined a bet or 

wager as any activity that involves a prize, consideration, and chance. 

A prize is anything of value. Chance is usually determined by assessing 

whether chance or skill predominates. Consideration is what the person 

must pay to enter and must be something of value, such as money.



[2] National Gambling Impact Study Commission, Final Report (June 

1999). 



[3] Interim Report on Internet Gambling (GAO-02-1101R, Sept. 23, 2002).



[4] The Wire Act prohibits gambling businesses from using interstate or 

international wires to knowingly receive or send certain types of bets 

or information that could be used to place bets. It has been used 

successfully to prosecute Internet gambling businesses but contains 

some ambiguities that may limit its applicability, especially 

concerning the types of gambling it covers. 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. 



[5] These acts are the Travel Act (18 U.S.C.  1952) and the Illegal 

Gambling Business Act (18 U.S.C.  1955).



[6] We relied on secondary sources to try to determine where Internet 

gambling had been legalized.



[7] Credit card associations, such as VISA and MasterCard, license 

their member banks to issue bank cards, authorize merchants to accept 

those cards, or both.



[8] On-line payment providers send and receive funds electronically for 

such uses as on-line auctions and purchases. 



[9] Michael Tew and Jason Ader, E-Gaming: A Giant Beyond Our Borders, 

Bear, Stearns & Co., Inc. (September 2002).



[10] Computer e-cash entails the issuance of electronic units or 

electronic value that can be used for payment in place of currency. 



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

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

illicit activity are converted to monetary instruments or deposited in 

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. 



[12] Tew and Ader, E-Gaming. 



[13] Bear, Stearns & Co. Inc. gaming analysts placed 2003 Internet 

gambling revenues at an estimated $5.0 billion. However, the company 

indicated that it might lower that number to $4.2 billion because of 

the recent setbacks the Internet gambling industry has faced in 

conducting financial transactions. 



[14] Bear, Stearns & Co. Inc. Internet analysts calculated the 

estimated on-line commerce forecasts for 2003. 



[15] Charles Crawford and Melody Wigdahl, Internet Payment Solutions, 

in Internet Gambling Report V, ed. Anthony Cabot and Mark Balestra (St. 

Louis: The River City Group, 2002). 



[16] A smart card looks much like a credit card. Consumers purchase 

smart cards and load them with electronic money at a vending machine, 

bank, Automated Teller Machine, personal computer (over the Internet), 

or through a specially equipped telephone. Once the e-cash is loaded on 

the card, the money can then be spent over the Internet or through 

other communication devices. 



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

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



[18] 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. 



[19] 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). 



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

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

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



[21] 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). 



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



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



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

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



[25] 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). 



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

et. seq.).



[27] 164 F. 3d 1102 (8th Cir), cert. denied, 527 U.S. 1039 (1999). 



[28] However, the issue of where Internet gambling takes place has been 

addressed and resolved in United States v. Cohen, 260 F.3d 68 (2d Cir. 

2001), cert. denied, 122 S. Ct. 2587 (2002). 



[29] GAO-02-1101R. 



[30] Horse racing uses the pari-mutuel system of wagering, in which 

bettors bet against one another instead of against the house. For pari-

mutuel wagering, the money bet on a race is pooled, and approximately 

80 percent is returned to the winning bettors. The remaining 20 percent 

(the takeout) is distributed among the state government, the jockeys 

that race at the track, and the racetrack owners. The amount allotted 

for the takeout varies among states. 



[31] Interstate Horseracing Act of 1978, Pub. L. 95-515,  2, 92 Stat. 

1811, codified at 15 U.S.C.   3001-3007 (1994). 



[32] District of Columbia Appropriations Act of 2000, Pub. L. No. 106-

553,  629, 114 Stat. 2762, 2762A-108 (codified at 15 U.S.C.  

3002(3)). 



[33] As of September 30, 2002, $1 USD was worth $1.80 AUD. 



[34] A designated country is defined in Section 9A of the Interactive 

Gambling Act 2001. No. 84, 2001. 



[35] As of September 30, 2002, $1 USD was worth $7.80 HKD. 



[36] We were not able to test whether a customer would be able to use 

certain cards on these sites.



[37] 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. Members of the credit card 

industry also refer to on-line payment providers as payment 

aggregators. 



[38] Charge-offs represent the losses issuing banks incur when 

outstanding debts are not paid. 



[39] Tew and Ader, E-Gaming. 



[40] Tew and Ader, E-Gaming. 



[41] This type of factoring differs from legitimate factoring, in which 

accounts receivable are sold at a discount or at full price to a third 

party known as a factoring company. The factoring company advances 

money to its client, the seller of the receivables, and may assume 

responsibility for collections. Factoring is used in various industries 

and can be done on different terms. For example, factoring is usually 

done without recourse, meaning that the factoring company assumes the 

risk of nonpayment or without notice to the debtors of the factors 

clients. 



[42] Acquirer due diligence for on-line merchants is similar to 

standard know your customer practices. In exercising due diligence, 

acquirers apply verification procedures designed to authenticate the 

purpose or nature of a business, including its legitimacy. 



[43] For more information on reporting requirements, see GAO-02-670. 



[44] In July 2002, eBay announced that it was acquiring PayPal and that 

under the terms of the purchase PayPal would stop doing business with 

on-line gaming merchants. 



[45] According to an association official, association rules provide 

that when fraudulent transactions are suspected, issuers have 90 days 

to seek a chargeback from a merchant. 



[46] Computer e-cash exists solely in cyberspace and is used for 

virtual transactions. It consists of the issuance of electronic units 

or electronic value that can be used in place of currency and is 

marketed as an alternative to credit cards for normal Internet 

transactions. 



[47] David Mussington, Peter Wilson, Roger Molander, Exploring Money 

Laundering Vulnerabilities Through Emerging Cyberspace Technologies: A 

Caribbean Based Exercise. (RAND: Critical Technologies Institute, 

1998).



[48] Affinity credit cards are provided by tax-exempt organizations 

that contract with a financial institution to issue cards to members or 

supporters of the organization. Each time a sale is made with the card, 

the organization receives a percentage of the total charges at no 

additional charge to the cardholder. If the exempt organization is 

large enough, it may qualify to have its own name and logo embossed on 

the card. 



[49] A legitimate site is one that conducts gaming operations through 

an interactive device and is unaware that the site is being used to 

launder illicit funds. A complicit site is one that is established for 

the purpose of laundering money or is aware that it is being used for 

this purpose. 



[50] 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. 



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

February 2001. 



[52] United States Department of State Bureau for International 

Narcotics and Law Enforcement Affairs, International Narcotics Control 

Strategy Report, (March 2002).



[53] Mark D. Schopper, Internet Gambling, Electronic Cash and Money 

Laundering: The Unintended Consequences of a Monetary Control Scheme, 

Chapman Law Review 5, no. 1 (Spring 2002).



[54] Tony Cabot and Mark Balestra, eds., Internet Gambling Report V: An 

Evolving Conflict Between Technology, Policy, and Law (St. Louis: The 

River City Group, LLC, 2002). 



[55] The Nilson Report, Oxnard, California, Issues 756 (January), 758 

(February), and 760 (March) 2002.



[56] Horse racing uses the pari-mutuel system of wagering, in which 

bettors bet against one another instead of against the house. For pari-

mutuel wagering, the money bet on a race is pooled, and approximately 

80 percent is returned to the winning bettors. The remaining 20 percent 

(the takeout) is distributed among the state government, the jockeys 

that race at the track, and the racetrack owners. The amount allotted 

for the takeout varies among states. 



[57] Interstate Horseracing Act of 1978, Pub. L. 95-515,  2, 92 Stat. 

1811, codified at 

15 U.S.C.  3001-3007 (1994).



[58] According to officials from the National Thoroughbred Racing 

Association, the only states where interstate pari-mutuel wagering on 

horse races is not legal are Alaska, Hawaii, Mississippi, Missouri, 

North Carolina, South Carolina, Tennessee, and Utah. 



[59] If there are no race tracks within 60 miles of the off -track 

betting facility, consent must be obtained from the closest track. 15 

U.S.C.  3004 (b)(1(B). 



[60] IHA, 15 U.S.C.  3002(3) (1994).



[61] District of Columbia Appropriations Act of 2000, Pub. L. No. 106-
553,  

629, 114 Stat. 2762, 2762A-108 (codified at 15 U.S.C.  3002(3).



[62] 146 Cong. Rec. H11232.



[63] Internet Gambling Prohibition Act of 1999: Hearing On H.R. 3125 

Before the Subcomm. On Crime of the House Comm. On the Judiciary, 106th 

Cong. 59 (March 9, 2000) (Testimony of Kevin V. DiGregory, Deputy 

Assistant Attorney General, Criminal Division).



[64] A designated country is one that has legislation in force 

corresponding to the main offense provision of the Act and has 

requested this designation from the Australian Minister of 

Communication, Information Technology, and the Arts.



[65] However, the Supreme Court of Canada has indicated that if an 

offense takes place in whole or in part in Canada, a Canadian court may 

be the proper forum to hear the case.



[66] Hong Kong Special Administrative Region, Peoples Republic of 

China.



[67] Hong Kongs legal system is based on English common law. Under the 

constitutional document---the Basic Law of the Hong Kong Special 

Administrative Region of the Peoples Republic of China (April 4, 

1990)--all laws in place before July 1, 1997, continue in place 

unaffected and are independent of the laws that apply to mainland 

China. 



[68] For purposes of our research, the U.K. includes only England, 

Northern Ireland, Scotland, and Wales. Other protectorates, such as the 

Isle of Man, have established their own laws for gambling, and some 

allow on-line gaming. 



[69] While many of the laws discussed in this section apply throughout 

England, Wales and Scotland, there are several differences that are not 

set out here. Similarly, this section does not address the laws 

applying in Northern Ireland. 



[70] Internet Gambling: Report to the Home Secretary by the Gaming 

Board for Great Britain, www.gbgb.org.uk. 



[71] In 2000, Great Britain commissioned an independent review body to 

analyze all gambling regulations throughout the realm, including on-

line gambling. Sir Alan Budd chaired the review body, and the report is 

frequently referred to as the Budd Report. 



[72] A redirected Web site is a site that acts as a portal to other 

Web sites. Many gaming directory Web sites have links to individual 

gaming sites. For this survey, we reviewed the individual gambling 

sites and not the portal sites. 



[73] A live gambling site is a Web site that is currently in 

operation and offers on-line gambling services. The sites were live 

when GAO analysts reviewed the URL for the survey. Those sites 

considered not live displayed an error message noting that the Web site 

was no longer in operation. 



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