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The online gambling "law", the banks and the gambling transactions

Ok, for months we have been hearing about that famous UIGEA (Unlawful Internet Gambling Enforcement Act) which was passed last year. This poor piece of legislation, written by people with no knowledge of the financial works, driven by "contributions" to political campaigns and hands-washing of the Abramoff scandal, this stupid and absolutely useless and unenforceable law was able to scare away most of the industry away.

Do you know what I say - Let them run! Let all of the lousy, sneaky, cheating online gambling companies run away from the US market and never come back (I pity the Europeans which would be unfortunate to play at their properties).

With a risk of being unpopular - this is the best thing to happen to our industry since the invention of the WiFi-ready toilet seat on which many Americans seem to gamble, according to some Senators who know a great deal about the Internets.

Why is this so good? Well, because it was the Laxative that cleaned up the industry. There were literally thousands of online casinos, sportsbooks, poker websites and almost all of them were in for the short run. Which became obvious after the first "real" trouble. Many of those gambling websites sold their customers' information, too. And many online gambling "entrepreneurs" would cry you a river about this law, and many advertisers would, too. But if you look at what matters - the players at those websites - they came out winners. Would any normal person knowingly give away all their personal information to a gambling website which is bound to sell it to the highest bidder? Would you play at a website which you know could disappear tomorrow? Of course not.

So let them run...and don't forget to flush. Let the real companies, which are proving to be in for the long run continue to enjoy making money, and their players to enjoy quality entertainment, high payouts and dependable service.

Because the "law" which was passed in 2006, although having the right target (the financial side of the business), would not have the means to enforce it. And any online gambling company which would care enough about what they do, and hire a financial consultant, would have know that.

The Banks and the gambling transactions fiasco:

The deal with the credit cards looks somewhat easy - the credit cards assign a merchant code which correspond to the type of service that merchant provides. This is used to evaluate the credit risk from that transaction and help some credit card issuers block transactions to high-risk merchants, such as phone cards or roving merchants. For example, the online gambling merchant code is 7995. This would of course be easily blocked, and almost all of the banks have been blocking transactions to online gambling for years by using this code method. However, it is not that hard to become a credit card processor under a different code - all the gambling websites currently allowing US players bypass the system this way and are able to accept credit cards for depositing money.

According to Steve Verdier, Senior Vice President and Director of Congressional Relations Group for the Independent Community Bankers of America, in 2004 there were 36,000,000,000 checks written and 12,000,000,000 electronic transfers (ACH) conducted. It is safe to assume that in 2007 these numbers are much higher. And the purpose of the bill was to make the banks weed out through all these transactions, find those which go to illegal Internet gambling websites, and block them. Sounds like a good plan, yeah? But if the former Senator Jim Leach would have done his homework right, he would have known that everybody on the planet with a bank account is a potential recipient of a check or ACH, and when you make a bank transaction (non-credit card related) such as ACH, all the information which the receiving bank has is the account number and the bank's own number - there is no information sent about the "type" of recipient. And there is a provision in the bill, that if it is not practical of feasible to block those transactions, they would be exempt. Also, there are exemptions which require banks to allow transactions to legal online gambling websites, such as online horse betting. And when we add the fact that if a financial institution is "over-blocking" transactions, resulting in many legal transactions being blocked as well, that financial institution holds no liability for that action, we could expect quite careless approach which may lead to blocking of batches of transactions and a lot of unhappy customers being late on their phone bills.
Mr. Verdier also says: "Court injunctions are not to apply against financial transactions providers, but what we worry about is that some clever prosecutor would come up with something outside of the bill, to use as an excuse for an injunction, then will have a federal judge, who is probably not an expert on the payment system, may be enforcing and directing that the entire payment system of the United States be transformed so we can track and block those payments."

So, after reading all these facts, can you imagine the mess which lays ahead for the banking sector once the regulations are in effect? You probably don't know much about how the payment system in the United States work (and you don't have to), but even you, after reading the basic facts, would come to the conclusion that not only you cannot block transactions to Internet gambling websites, but also that a big mess would result out of it. Don't you think that a Senator, a man elected to hammer the laws of the country would have done at least this much of a research?

But wait, it gets even better:

No financial transactions, deposits or withdrawals, are ever made directly to an online gambling site. They always go through a third-party payment processor - credit card processor, ACH processor, or an e-wallet such as Neteller, and those processors are based outside of the US jurisdiction and they are not "gambling" transactions per se, because the money goes from an US bank to a bank in Costa Rica, for example, which is perfectly legal under US laws (placing money in a third party institution by itself is not considered a bet or wager under the new law), and then the gambling website receives it from the Costa Rican bank. Flip the scenario 180 degrees for withdrawals. Basically, you can "layer-up" as many offshore banks as needed, so a transaction would not be seen as online gambling.

One thing that I see, is the end of the e-wallets as a form of funding any online gambling activity. The days of Neteller and alike are long gone, and most likely the unreliability of any future e-wallets which may come around to feel the gap would steer the gambling sites away from them and they would depend on in-house payment processing using electronic checks and credit cards.

And there will be a lot of publicity and scare tactics when the regulations come out. But the wimps are already gone, so there would be not much left to scare. Oh, I can see the PR machine wheels turning, but it's an empty mill they are running...

Anyhow, I was able to find all this information. If you are an online gambling website owner, who is dedicated to his business, wouldn't you do at least this much of research? Instead of running away just by hearing "online gambling bill"? Most of the online gambling websites left the market the day after the bill was passed. Without taking time to analyze it and see what actually it is all about - don't judge a book by its cover, and don't judge a bill by its abbreviation. They just left the next day, their luggage long time packed, and left thousands of customers and partners in the dust. Why? So they don't have to actually do some work and find the legal way around it. This would have made their "business" a little harder.
Because their business plan was "let's make as much money as we can, while it lasts" and not "let's build one of the best companies in the industry". But there are empires currently build. Next year Forbes may add a few more folks from the online gambling sector to their list.
And we all learned a valuable lesson, and the gambling industry has become as clean as it has ever been.

Congratulations, you have just went through the NASDAQ-bubble-burst of the online gambling industry!






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