Online gambling has been banned in the
US, in the process placing a daunting policing burden on the
payments industry. Payments processor Secure Trading’s CEO Gerald
Kitchen provided EPI with insight into efforts to overturn
the ban and the significant potential such a development holds for
his company.

The precise size of the global online gambling market is subject
to a number of estimates, all of which indicate that it is
substantial and growing at a cracking pace.

An estimate by gambling industry research firm Christiansen
Capital Advisors put the volume of gross betting payments flowing
into the online gambling market in 2008 at $21 billion, up from
$5.9 billion in 2005.

Another research firm, Global Betting and Gaming Consultants,
estimates the 2008 total to have been in excess of $20 billion. A
similar figure is arrived at by research firm H2 Gambling Capital
(H2GC) which estimates total global gambling revenue in 2008 to
have been $336 billion of which 5.8 percent was conducted
online.

Whatever the precise total of gambling conducted online may be,
a law enacted in the US, the Unlawful Internet Gambling Enforcement
Act (UIGEA) outlawing all online gambling with the exception of
horse racing and lotteries, is set to reduce it substantially.
Based on Christiansen Capital Advisors’ estimate of US consumer
spending on online gambling in 2008 the reduction could be as high
as $10 billion if the ban is totally effective.

However, despite already being on the statute books the UIGEA
faces stiff opposition and could yet be overturned this year. This
is the firm belief of UK-based online payments processor Secure
Trading which has been in the forefront of an intensive lobbying
effort aimed at overturning the legislation.

Strategic focus

“We have as a strategic focus the overturn of the ban on online
gambling in the US,” Secure Trading’s CEO, Gerald Kitchen, told
EPI. For the past two and a half years, he continued,
Secure Trading has engaged with high-profile legal firms and
lobbyists who have as a common goal the overturning of the UIGEA.
Kitchen himself testified before the Congressional Financial
Services Committee on the issue.

Secure Trading’s objective is simple. Online gambling represents
a lucrative sector for payments processing, explained Kitchen who
stressed: “Legalisation of US online gambling would provide a
significant growth opportunity for us. We want to get a meaningful
share of the US online gambling market that will emerge when it is
made legal.”

The UIGEA was long in the making, an earlier version initiated
in 1995 having failed to gain Senate approval in 1999. The UIGEA in
its present form was finally signed into law by former President
George W Bush on 14 September 2006 and came into force on 19
January 2009. Notably, the UIGEA formed part of the unrelated Safe
Port Act covering US port security and no separate vote was taken
on it.

Under rules published by the US Treasury and the Federal Reserve
Board (Fed) in December 2008 implementation and enforcement of the
online gambling ban rests full-square on the payments industry.
According to the two federal bodies regulations cover automated
clearing house systems, card systems, cheque collection systems,
money remittance businesses and wire transfer systems. Compliance
is required by 1 December 2009.

Payment industry burden

Implementation of measures to prevent online payments for
illegal gambling activities also places a heavy cost burden on the
payments industry. According to the Treasury and the Fed, the
regulation will affect 3,459 banks, 4,068 credit unions, three card
system operators and eight money transmitting business
operators.

The total cost in terms of clerical recordkeeping labour-hours
to establish the required policies and procedures is estimated at
$88.5 million. If other costs such as training, auditing and legal
expenses are included the Treasury and the Fed believe the total
first year cost will be over $100 million.

Complicating payment service providers’ task further is
vagueness in the UIGEA as to the precise definition of what
constitutes illegal and legal online gambling. In a joint
publication of rules to be adhered to by payments service providers
the Treasury and the Fed noted: “The Act does not spell out which
activities are legal and which are illegal, but rather relies on
the underlying substantive federal and state laws.”

Unsurprisingly, the payments industry strongly opposes the
UIGEA.

“Punting the enforcement obligation to the banking industry and
the other participants in the US payment system is an unprecedented
delegation of governmental responsibility with no prospect of
practical success in exchange for the burden it imposes,” Wayne
Abernathy, vice-president of the American Bankers Association told
a Congressional hearing in 2008.

Warning of negative consequences faced by the payments industry,
Abernathy stressed: “The path leads to an increased cost and
administrative burden to the banks and erosion in the performance
of the payments system, but it will not result in stopping illegal
internet gambling transactions.”

Echoing this view, Kitchen said: “The ban on online gambling
will be impossible to police.”

The only solution, believes Kitchen and other opponents of the
UIGEA, is to legalise, regulate and tax online gambling.

Benefits of such a move would be considerable, he continued. It
would provide protection to US consumers and bring in much-need tax
revenue. Indicative of the potential, professional services firm
PricewaterhouseCoopers (PWC) estimates that taxation of online
gambling in all 50 US states could raise up to $51.9 billion in
revenue during the first 10 years. PWC conducted the study in
September 2008 for UC Group, Secure Trading’s holding company under
whose banner Secure Trading’s lobbying to have the UIGA overturned
has been conducted.

Spearheading the assault on the UIGEA is Congressman Barnet
Frank, who in testimony before the Congressional Committee on
Financial Services said that Congress is putting the US financial
services industry at risk by not clarifying the regulations to
enforce the UIGEA and defining unlawful Internet gambling
activities.

“Hijacking the financial payment system at a time when it is
under major stress and giving them the job of carrying out an
unclear mandate doesn’t make sense,” stressed Frank.

Frank has so far made two unsuccessful attempts at overthrowing
the act. In 2007 Frank introduced a bill that if approved would
have provided for the licensing, regulation and taxation of
internet activities and safeguards against compulsive and underage
gambling, money laundering, fraud and identity theft.

Frank followed this in the same year when he introduced the
Payment Systems Protection Act which would have required federal
regulators to appoint a special Administrative Law Judge to define
unlawful internet gambling activities and conduct an economic
impact study on the costs for compliance. This bill was defeated
and was followed by an amended version in 2008 which was also
defeated, in a tie vote in the Congressional Committee on Financial
Services.

Undeterred, Frank is now preparing to introduce another bill
aimed at toppling the UIGEA and this time the odds appear to be
more in his favour.

“Sentiment is swinging dramatically in favour of Frank,” said
Kitchen.

It is not only Frank and lobbying groups representing the
payments and online gambling industries that are placing pressure
on legislators to overturn the UIGEA. Significantly, in May 2008
the European Commission (EC) launched an investigation into US
online gambling laws under the Trade Barriers Regulation framework
in response to a complaint from the Remote Gambling Association
(RGA).

In a statement, the EC noted that the RGA complaint provides
evidence showing that what the US is doing has had a serious
negative impact on the services trade between the European Union
(EU) and the US and on the EU gambling sector, “with potential
significant impact on the economy of the EU.”

Following the investigation the EC will present its findings in
a report which it noted could lead to the launch of World Trade
Organisation proceedings. The investigation is separate from an
undisclosed compensation package the EU and US agreed upon in
December 2007, following the loss of trade opportunities in the US
gambling sector.

Preparing for growth

Secure Trading has put what Kitchen termed a “massive effort”
into having the UIGEA overturned and also been readying itself for
a surge in business should this occur.

“I have been taking the company through a transition phase,”
said Kitchen. A key focus, he explained, has been on “investing
heavily” in the recruitment of “high-profile” people in the
payments industry.

Kitchen himself comes with a formidable payments industry
background having been MD of BarclayCard’s Business unit prior to
joining Secure Trading. He has also held the position of MD of
South African bank Nedbank’s card division and served on VISA and
MasterCard boards.

Established in 1997, Secure Trading has some 3,000 merchant
customers and processes about 1 million payments per month. “This
gives us a single digit [UK] market share,” said Kitchen.

Clearly, Kitchen’s objective is to achieve far more significant
volumes, particularly in the US online gambling market, and to that
end considerable focus has been placed on online security.

Kitchen’s testimony before the Congressional Financial Services
Committee provided the ideal opportunity to highlight Secure
Trading’s ability to service the online gambling industry.

In developing its online payments platform he explained to the
committee that Secure Trading worked closely with UK accounting
firm Baker Tilly (BT), an independent member of Baker Tilly
International, the eighth-largest accounting network in the world
by fees.

The objective of the joint development, Kitchen stressed, was
creation of a system specifically designed to meet the demands of
online commerce perceived to pose special risks, such as gambling
and travel reservation transactions.

Kitchen highlighted that there are five main areas of concern
with respect to online gambling transactions: underage gambling,
compulsive gambling, involvement of organised crime, money
laundering and fraud.

He stressed that countries that have legalised online gambling
such as the UK have found that these risks can be countered and
contained. The solution, he explained, is for internet gambling
payment gateway operators to adopt, or be required to adopt,
systems and processes specifically designed to address each of
these risks. Secure Trading’s platform incorporates these systems
and processes, he added.

On the issue of age and identity verification, for example,
Secure Trading’s chief security officer John Lyons, commented: “The
technology now exists that will, among other search criteria,
successfully check the age of a customer in almost every situation.
Our identity and age verification solution allows merchants to
cross reference buyer information using an array of databases to
ensure customer information such as age, identity and address are
correct.”

Should online gambling be legalised in the US the ability to
identify a customer’s location will be particularly important.
This, said Kitchen, is because gambling laws in the US are
state-specific.

Compulsive gambling may also seem to be a difficult problem to
tackle in an online environment. Not so, Kitchen told the
Congressional committee. Explaining one approach, he said that it
is relatively simple for Secure Trading’s system to detect an
unusual increase in an individual’s spending on online
gambling.

This, he continued, makes it possible to monitor compulsive
gambling much more closely than in the case of casinos, lotteries
and racetracks that normally do not know the identity or spending
pattern of most customers.

On the subject of money laundering, Kitchen referred to a study
undertaken in the UK prior to legalisation of online gambling in
2005. The study concluded that there is a “paucity of proof” that
money laundering through online gambling sites is “a significant
problem” and that “it is safe to say that gambling transactions
completed online can be more secure than cash business conducted in
traditional gambling outlets.”

Overall the odds that online gambling in the US will be
legalised appear to be in Secure Trading’s favour. Perhaps adding
weight to the efforts of Frank, Secure Trading and other lobbyists
towards this goal is news that the French government has given in
to pressure from the EC to legalise online gambling and will
surrender its current monopolistic position and open the market up
to online gambling companies.

Making the announcement at a press conference, French budget
minister Eric Woerth said there was “no use denying the reality of
online gambling and the expectations of the French people. Rather
than banning 25,000 [illegal French gambling] sites, we’d rather
give licenses to those who will respect public and social
order.”

According to Woerth the illegal French gambling websites
generate revenue of some €7 billion ($9.5 billion) a year.