Web casinos brace for credit card problems

David Strow

Wednesday, Nov. 24, 1999 | 10:51 a.m.

The Internet gambling industry is abuzz over media reports that credit card debts incurred at online casinos may be uncollectible -- and is moving quickly to ensure it will survive that threat.

The focus of the attention is Cynthia Haines, a California resident who sued 12 banks attempting to collect on more than $70,000 in debt she rang up on off-shore online casinos. Her charge: Since the credit card issuers had facilitated an illegal activity in California, the debts weren't legally collectible.

In an October settlement, the banks agreed to wipe out Haines' debts -- and one, Providian National Bank, banned all use of its cards at Internet casinos.

A Los Angeles Times story this week reported the fallout "could effectively kill online gambling ... by eliminating the only convenient way to pay."

Not so, says one of the industry's largest trade groups.

"What would happen if law enforcement folks were successful, is you would see other mechanisms that would come into play, that were more anonymous," said Sue Schneider, chair of the Interactive Gaming Council, a trade and lobbying group for the Internet gaming industry. "It might slow things down, but it wouldn't stop it."

At this point, Schneider acknowledges the Internet gaming industry is vulnerable. Though online casinos accept other forms of payment, such as debit cards, checks and wire transfers, more than 90 percent of bets placed at the sites are through credit cards, Schneider said -- and Internet casinos report that anywhere from 50 percent to 90 percent of their customers are Americans.

So far, only Providian has moved against credit card bets online, though pressure is building against other issuers.

In November, the Florida Attorney General's office contacted Visa and MasterCard asking them to step up efforts to stop online gambling by Florida customers. Florida has been active in its efforts to clamp down on online gambling, starting with a successful campaign in 1997 to stop Western Union from wiring funds from Florida to off-shore casinos.

That could create a chilling effect in the financial world, Schneider warns.

"Then you get into the issue of whether or not banks will disallow certain functions," Schneider said. "That really opens up a can of worms, which purchases are acceptable under their standards. I'm not sure (issuers) want to get into that business."

Though the Haines case did not set a legal precedent, other cases are pending that could possibly do just that. A class action filed in federal court in Wisconsin, for example, charges MBNA America and MasterCard with engaging in racketeering by facilitating the placement of bets with online casinos, in violation of federal laws. Though the plaintiff, Ari Jubelirer, lost just $24.95, he's demanding more than $75,000 in damages -- and is asking that figure to be tripled under racketeering laws.

The grounds for declaring the activity illegal goes back to earlier federal law, which bans the use of wires or telephones to place interstate bets. The case is still pending.

The Kyl bill, recently passed by the Senate, would extend the betting ban to the Internet -- something that would probably cause banks to move more aggressively to stop Internet wagers with credit cards.

But the Internet gaming industry is already moving on to new methods of payment in anticipation of that, Schneider said.

The strongest possibility for a new payment method is "e-cash." This involves the creation of credits that work like cash in the real world -- and are just as difficult to trace.

"These are innovations that allow for other payment methods that aren't as trackable," Schneider said. "So it's not as clear what you're using the money for."

A more pressing problem for the industry is raised by players who habitually welsh on debts occurred online, believing that there's little that can be done to collect on the debt. That's especially true for most online casinos, which operate outside of the United States.

"The risk is on the operators right now," Schneider said. "If they run into a problem with a user, (the issuers) say, 'This guy owes $50,000, if you don't clear that debt, we're going to cut off your merchant account."'

One preventative measure being developed is an online credit database, similar to the system operated by Las Vegas-based hotel-casino credit agency Central Credit Inc. Bettors who repeatedly back away on their debts to online casinos will be placed in this database and barred from establishing new accounts at participating Internet gaming sites, Schneider said.

The system is currently being tested, and should be ready by early next year.

One potential source of fallout that could threaten the traditional casino industry is the contention of plaintiffs in the Internet lawsuits that gambling debts aren't collectible in many states, a fact cited in the Times article.

That contention has been used to challenge Nevada casinos trying to collect on gaming debts in the past, but it usually doesn't work, said Nevada Deputy Attorney General Keith Kizer.

That's because gambling may be illegal in the state where a debtor lives, but it's perfectly legal in Nevada -- and the Constitution requires states to honor each others' legal decisions. Since the debts were incurred in Nevada, courts in other states have generally upheld Nevada-incurred debts, Kizer said.

"Even if they sue in Michigan, you use Nevada law, because that's where the bet was made," Kizer said. "You look at the state where the contract was performed."

But it's a different case for most online casinos, Kizer said, because they operate outside of the United States.

And that creates another risk for players at online casinos, Kizer said -- the possibility that an online casino will refuse to honor a player's winnings.

"If I lose, my card is debited; if I win, who knows whether I'll get it back," Kizer said. "As with any business, there are those that will try to take advantage of the situation."