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. 1). The Legal Framework for Internet Gambling Is Complex

Both federal and state laws apply to Internet gambling in the United States. 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. These countries take a variety of approaches to regulating Internet gambling. 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. VISA and MasterCard have each developed a system of coding that allows member institutions, at their discretion, to block Internet gambling transactions. The issuer can then deny authorization. 2). Law enforcement officials believed that money laundering activities could potentially be conducted on both legitimate and complicit Internet gambling sites.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. Treasury Enforcement officials also noted with concern how certain gaming merchants have attempted to circumvent the credit card coding system through factoring. 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. 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. 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 Treasury’s Office of the Undersecretary for Enforcement and DOJ’s 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. 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.
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 industry's 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.