Money-laundering scandals feared in Internet gambling industry

David Strow

Monday, May 15, 2000 | 11:58 a.m.

MONTREAL -- Internet gambling received bad news last week as several congressmen introduced legislation designed to cut off the financial lifeblood of the industry and suggested it's ripe for money-laundering scandals.

Frank Fahrenkopf, president of the American Gaming Association, discussed with delegates to the Global Interactive Gaming Summit & Expo the introduction of H.R. 4419 -- a bill designed to ban the use of virtually any kind of bank instrument for the use of gambling over the Internet.

"This is a very, very serious bill," Fahrenkopf said Friday.

Introduced by Rep. Jim Leach, R-Iowa, the "Internet Gambling Funding Prohibition Act" would make it a criminal offense to use credit cards, electronic fund transfers, checks or "any other form of financial transaction" for the purposes of gambling on the Internet. Violations of the proposed act would result in fines and up to 5 years in prison.

The vast majority of gambling over the Internet occurs through the use of credit cards; and, by some estimates, a majority of Internet casino visitors come from the United States and Canada.

Fahrenkopf said the legislation should be taken particularly seriously because of the congressmen introducing the bill. Leach is chairman of the House Banking and Financial Services Committee, while co-sponsor Rep. Jim LaFalce, D-N.Y., is the ranking minority member of the committee. LaFalce has previously launched unsuccessful efforts to ban the use of ATMs on casino floors.

However, this bill, as proposed, would have no effect on the use of such payment methods at traditional casinos.

Fahrenkopf said the AGA has not taken a position on the bill, though he said he expects banking interests to come out in opposition.

An e-commerce attorney speaking at the conference wasted no time in ripping the bill.

"This is a very dangerous bill and precedent," said Anita Boomstein, partner in the Washington D.C. law firm Hughes Hubbard & Reed. "It effectively puts (banks) in the position of being the policemen (for enforcing) how their payment solutions are used."

The bill's language argues that restrictions are necessary because Internet gambling "is a major cause of debt collection problems for the consumer credit industry" and calls off-shore Internet casinos "a significant money laundering vulnerability."

It is the second serious challenge faced in the U.S. Congress by the Internet gambling industry -- Sen. Jon Kyl, R-Ariz., introduced legislation that would bar gambling over the Internet within the United States. The Senate passed a version of this bill late last year, but the House has not acted on its version of the bill -- and only about one month remains for action.

But the Kyl bill leaves U.S. law enforcement officials somewhat powerless to move against violators. American-based Internet casinos could be shut down, but the only method for cutting off access to an off-shore casino is to order Internet service providers to block access to gambling sites for their American customers. The bill also contains no provisions for prosecuting American gamblers.

Leach's bill, however, attempts to use American financial might to bring an end to Americans gambling at off-shore casinos. According to the bill, those nations that "permit a high level of participation in, and the use of the financial payment and transfer systems to facilitate, Internet gambling by United States citizens and residents" could face a cut-off of all funds from international financial organizations influenced by the United States, such as the International Monetary Fund. Moreover, banks in the targeted country would be barred from accessing the U.S. banking system.

Most Internet casinos are based in small Caribbean island nations, though some are based or licensed by major industrial nations such as the United Kingdom or Australia.

Despite the new challenges, Fahrenkopf repeated a position most in attendance didn't want to hear -- the AGA won't ally itself with the Internet gambling industry, and still will not oppose the Kyl legislation.

Though Internet casino proponents suggested this was merely an effort by casinos to protect their franchises, Fahrenkopf insisted this was not the case. Instead, Fahrenkopf said, the casino industry is trying to protect its reputation -- and the AGA isn't convinced the industry is sufficiently regulated at this time.

"If a little mud splashes up on one corner of our industry ... we all get dirty," Fahrenkopf said. "All it would take is one major money laundering case (through an Internet casino) ... and it would be used by industry opponents as ammunition against legalized gaming.

"We are concerned about the question of illegal activity that embarrasses the industry."

Still, Fahrenkopf acknowledged a split may be forming in the casino industry.

"There's no question some of our companies would love to get involved," Fahrenkopf said. "Some are opposed. I would doubt you would see a united front (among casino companies).

"But I have my marching orders. My board of directors opposes Internet gaming."