Penalizing Payment Providers For Illegal Gaming Could Be Difficult

One of the highlights of the beloved BBC television comedy series “Monty Python’s Flying Circus” was Eric Idle’s on-desk performance ¹ of “The Money Song.” The refrain from the song declares that “money makes the world go round.”

That’s indisputably true and superbly obvious in the gambling industry. Currency is the literal currency of that realm, as people play games to try to turn some money into more money.

Regarding gambling in the United States, regulation or the lack thereof can make a massive difference. Both licensed US online casinos and unlicensed online casino operators, though, need to be able to receive and transmit payments electronically from and to players.

Few, if any, maintain that digital infrastructure completely in-house. Rather, they rely on third parties to process payments.

As state governments continue to curtail gaming on unlicensed platforms, legal and practical challenges emerge. A suggested method to limit such gaming has been to block their money flow by sanctioning payment processors.

As with the challenge of penalizing the operators of unlicensed websites, restricting payment processors is plausible in theory but could become a challenge in practice. Those challenges are probably why law enforcement officers and regulators in various jurisdictions have yet to take on the issue.

Why unlicensed online casino play is an issue in US states

Any solution to a problem requires an understanding of the problem. In most of the United States, playing online casino games for real money remains illegal, although often not tightly enforced.

At present, seven states have a regulated system for such gaming, and another (Nevada) regulates it in a partial manner (online poker platforms only, no online slots or table games). The lack of or presence of regulation alters the issue from one jurisdiction to the next.

In the few states where online casino play is regulated, the availability of unlicensed online casino play has all the issues of the states in which there are no regulations but with an important addition. Unlicensed operators are taking action away from the parties that have gone through the licensing process and submit to regulation.

Everywhere else, the effects of unlicensed platforms are plentiful. These include a missed opportunity cost for the jurisdictions in the form of tax revenue not being collected.

Additionally, unlicensed operators pose a threat to people who struggle with gambling-related behavioral issues because there often are no resources listed for self-exclusion or other controls. In that way, such gambling is a public health concern.

Other concerns include the quality of age verification and anti-money laundering controls. These issues make a strong case for regulation to address them, and part of that regulation is dissuading gaming from taking place outside of the system.

When it comes to dissuading gaming, though, law enforcement bodies and regulators face a figurative minefield.

Shutting down unlicensed gaming websites is no easy feat

If unlicensed websites pose a threat, then the simple answer is to shut down those sites. However, that task is not as easy as strutting atop a desk while belting out a chorus.

To begin, the companies and individuals operating these websites are often not in the US. Attempts to prosecute foreign corporations and nationals for violating US standards can be a massive use of limited resources and there is no guarantee of success.

Even with success in such an endeavor, there is the hydra problem. As soon as government forces shut down one website, two more could quickly pop up in its place.

As limiting illegal gaming appears risky at best, the next possible solution becomes cutting off the cash flow. When it comes to theory, that might be more appealing.

Online casino payments connected to fraud can be curtailed

It’s not that governmental agencies in the US or individual states are powerless to shut down the processing of payments connected to illegal activity. The Federal Trade Commission did exactly that ² on Sept. 17, 2024, with illegitimate CBD and keto-related product delivery subscriptions.

On the same date, the California Department of Financial Protection & Innovation announced ³ enforcement actions against companies charging fees for processing student loans before actually doing so.

To process payments in the US, companies must work with an FDIC-registered entity like a bank, so there is always some part of the “chain of custody” for digital payments that law enforcement agents and regulators control.

If that’s the case, then can’t governments simply order those regulated financial institutions to stop working with payment processors that service unlicensed gaming websites? Absolutely, they can do so at any time.

Enforcing compliance with such orders is a loaded premise, though. Payment processors are not all scoundrels skulking in dark alleys, plotting nefarious schemes.

Complexities of targeting online casino payment processors

When it comes to companies that process payments from, to, and within the United States, diversity is a fact in many regards.

“Like in many industries, there is a significant range of payment processors,” said Chris Daniel, partner in the Corporate Department at Paul Hastings and Chair of the firm’s Global Fintech & Payments Group.

“There are the large, sophisticated, merchant acquirers who have in-house legal departments and they will be very sophisticated around this issue. These companies have to expend resources, internally or externally, to ensure they comply with the law.

“Then you’re going to have at the opposite end of the continuum a number of card processors and merchant acquirers who are maybe less well-staffed and less sophisticated. You also have a middle tier, where they may take certain actions like mandating a memo from a gaming operator which states that they are operating in compliance with law.”

It’s that variety that can pose a unique challenge when it comes to actually enforcing existing standards against payment processors.

“There is a chance that a state or the US government might press charges against firms that help process payments for online gambling websites. However this situation is complex,” added Jamie E. Wright, founder of the Wright Law Firm.

“The federal Unlawful Internet Gambling Enforcement Act (UIGEA) bans the processing of payments connected to gambling activities but enforcement has been inconsistent mainly because of difficulties in proving that financial institutions were aware of these transactions happening directly.

It’s quite a challenge for prosecutors to prove facilitation rather than just complicity considering the large number of complex transactions processed by these institutions on a daily basis.”

Furthermore, even successful actions in this regard might not produce the desired result of curtailing illegal online casino play.

Change doesn’t necessarily mean a solution

In this instance, the hydra issue again becomes a concern.

“Even if the prosecutors manage to construct a case, against them the chances of getting a conviction might not be worth the effort and resources invested,” Wright continued.

“Bringing an institution to justice usually leads to prolonged battles and potentially just ends in a significant fine or settlement instead of bringing about the essential changes needed to stop such behaviors.

When one payment provider gets shut down another pops up using loopholes or international means that escape US jurisdiction.”

Moreover, shutting down some payment processing channels might not result in an industry-wide abstention from such business.

“Do I think certain payment processors providing services to unlicensed gaming entities know the risk they are taking and they are taking that risk because of the revenues they are able to drive? Of course,” Daniel said.

“I’d like to think that most of the processors doing this are at least acquiring memos from the operators stating that their activities comply with law. With that, they arguably have a good faith basis for believing that entity is operating legally. I’m not naive, though.

I’m sure there are certain entities that make the decision that the revenue is worth the risk. That’s a decision that I tell clients that you will love until you hate it.”

With the challenges that criminal actions present, another potential course of action is civil complaints initiated by individuals or groups. That premise presents similar obstacles, though.

Could private enforcement be a viable alternative path?

The US legal system is somewhat unique in the capacity for class action lawsuits to serve as enforcement mechanisms. In theory, a group of US citizens could sue US financial institutions working with payment processors over transactions related to unlicensed gaming.

Doing so would add an additional degree of difficulty to the task, though. Not only would the claimants have to substantiate facilitation at the level of illegality, but they would also need to establish how that illegal action harmed them.

In this case, curtailing these payments may not make a difference in limiting online casino play on unlicensed platforms as a social phenomenon.

“Getting the job done wouldn’t be easy, for either law enforcement or individuals when it comes to enforcement,” Wright summated. “Any wins achieved might just be more symbolic than impactful, in reality.”

In reality, attempts by law enforcement agents, regulators, or private citizens to curtail illegal online gaming in the US can very well turn out to be a lot of dancing on a desk. It could make for good entertainment but prove to be little more than a production.