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, gaming analysts estimate that in 2003 revenues from Internet gambling industrywide will be $5.0 billion, or approximately 4.3 percent of the total $116 billion in business- to-consumer global e-commerce. In the view of gaming analysts, the international markets (non-U.S. customers) represent the future of the industry’s growth. Currently, individuals wishing to gamble via the Internet can choose from several types of payment options other than credit cards. 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 cardholder’s bank account. Funds for all transactions are deducted directly from the cardholder’s 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,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 retailer’s e-cash account and later transferred to the retailer’s regular bank account. Internet gambling sites also offer money orders; traveler’s checks; bank drafts; cashier’s, 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 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). 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. 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 association’s 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 association’s credit cards, submit their merchants’ transactions into the association’s 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. 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. 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.