Banks Rebuff Online Gambling - Even Where It's Legal

Article excerpt

Byline: Kevin Wack

Nevada, New Jersey and Delaware were the first states to legalize Internet gambling and it's likely that they won't be the last.

A market forecast by H2 Gambling Capital projects that by 2017, 16 states will have legalized online gambling, as they all vie for their piece of the action in a business that by then is projected to generate more than $7 billion in annual revenue.

But if the legal Internet gaming industry is to realize its big dreams, it needs the help of the banking sector. And that relationship is off to a shaky start.

Many of the nation's largest financial institutions say they won't process online gambling payments on their credit cards, even in the three states where Internet poker and, in some cases, other casino games became legal in 2013. That list includes JPMorgan Chase (JPM), Wells Fargo (WFC), Bank of America (BAC), Capital One Financial (COF), American Express (AXP) and Discover Financial Services (DFS).

The banking industry's caution is the result of several factors, including worries about anti-money laundering rules, a fear of negative press, and the fact that only a small amount of revenue is at stake right now, according to observers.

"If I was a financial-services provider, being ultra-cautious, I would want to sit back and wait a little bit," says Joseph Kelly, a business law professor at the State University of New York in Buffalo who has helped write online gambling laws in other countries.

The banks' stance carries a whiff of irony, given that during the woolly early days of online gambling, when the entire market was unregulated, U.S. gamblers commonly used their credit cards to make payments.

The more conservative approach to Internet gambling can be traced to 2006, when Congress enacted a law aimed at preventing offshore betting sites from accessing the U.S. banking system. The Federal Bureau of Investigation's April 2011 crackdown on the biggest online poker websites -- an event known as Black Friday -- added to the banks' wariness.

Until recently, there was little hope for legalized U.S. online gambling, due to the prevailing interpretation of a decades-old federal law called the Wire Act. But in September 2011, the Justice Department determined that the law should be interpreted more narrowly, paving the way for states to begin allowing Internet wagering.

Still, banks were caught off guard by the rather sudden legislative actions in New Jersey, Delaware and Nevada, says Ryan Rasske, president of Risk Gap Advisors, a bank consulting firm.

The banks' current attitude, he says, is: "We're not sure if we are properly prepared for this, number one. And two, we don't really know what this means" with respect to compliance with anti-money laundering rules.

Under current federal regulations, banks are allowed to block legal gambling transactions, if they so choose. Moreover, Visa (NYSE: V) and MasterCard (MA) leave the decision up to the banks that issue their cards.

"So it's up to the banks to decide, 'is this worth it or not?'" says Steve Kenneally, vice president at the American Bankers Association. "And each bank makes that decision differently."

At large banks that are wary of state-licensed online gambling, officials didn't want to speak about the reasons why. But interviews with industry consultants revealed five major concerns at banks.

First, banks have potential liability if they process illegal transactions, so in order to become comfortable with the online gambling business they need to be confident in their ability to distinguish state-licensed operators from unlicensed offshore firms.

Second, because Nevada, New Jersey and Delaware prohibit online gambling by children and people located in other states, banks need to become comfortable with the technology that's being used to restrict access to gambling websites. …