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