Impact of Online-Gaming Law Seen As Mixed for Processors, Banks

Three days after Congress passed a law restricting payments for Internet wagers, what seems clear is that the implications for banks and transaction processors are mixed. Observers say the new law will likely prevent most U.S. banks or third-party companies that still process online gambling payments from continuing to do so, but the long-term impact is harder to discern. Overseas processors, many of which have sprung up in the past few years to specialize in this business, are beyond the reach of U.S. regulation, and both domestic and foreign companies could handle certain payment types that might end up falling outside the scope of the legislation. “It's a very complex issue politically,” says Steve Mott, who runs BetterBuyDesign, an electronic-payments consultancy in Stamford, Conn. Online gambling has long been illegal in the U.S., but the prohibition is widely flouted, leaving legislators seeking ways to enforce the ban. With the Unlawful Internet Gambling Enforcement Act of 2006, they hope to enforce earlier law by shutting down the payment systems that are gaming sites' lifeblood. Already, passage of the law has had an immediate impact on major gaming sites, all of which operate offshore, as well as on some processors. Sites that are publicly traded saw sharp drops in share value on Monday, and one popular online casino, Gibraltar-based PartyGaming PLC, was among several that said it would stop taking payments from U.S. players if, as expected, President Bush signs the law. Meanwhile, Optimal Group Inc., a Montreal-based operator of online and point-of-sale processing businesses, said Monday the new law will hurt results for FireOne Group PLC, a U.K. gaming-transaction processor that is 76% owned by Optimal. Aimed at a $6 billion U.S. market–which includes the fast-growing online-poker business, which now attracts some 23 million players–the bill passed into law after its sponsors attached it to an unrelated piece of legislation, the Safe Ports Act, over the weekend. The bill bans gaming sites from accepting money transfers of any kind for bets it deems to be unlawful gambling. It also directs the U.S. Treasury Department and the Federal Reserve Board to create regulations that would direct banks and processors to block payments to these sites. Under the law, these regs are to go into effect within nine months, or by July 2007. Horse racing and certain lotteries are exempted. Still, how the law will affect offshore processors and financial institutions, and perhaps some domestic ones, is far from clear, experts say. For one thing, the legislation contains a provision allowing Treasury and the Fed to exempt transactions that are hard to identify as wagers or other gambling-related payments. Some industry observers interpret this to mean paper checks and e-checks on the automated clearing house, since, unlike card processing, these systems lack an automated method to identify merchants by code. Another hurdle could be the reach of U.S. law, given that virtually all sites, and many processors, are located overseas. “The great unknown is how far into the Internet commerce stream federal regulators are willing to go,” says I. Nelson Rose, a gaming-law expert and professor at Whittier Law School, Costa Mesa, Calif., in an analysis of the new law he posted yesterday. For example, it is unclear whether U.S. regulators would ban U.S. banks from sending funds to either banks or processors overseas, since the foreign entities are “beyond regular U.S. regulatory control,” says Rose. Under the law, the Federal Trade Commission will be expected to enforce the regulations with non-banks. As a result, processors may shortly find ways around the law. “The history of the [gaming-transaction] business has very few precipitous drops based on legislation,” says Mott. “They'll figure out a way to get [payments] into the system.” A more effective measure, he suggests, would be a sort of “bad-actors” list, similar to bad-check negative files, that would identify unscrupulous gaming sites.