On January 17th the gambling world was dealt a bit of a surprise when two founders of NETeller (Stephen Lawrence and John Lefebvre) were charged in the United States for money laundering. The U.S. government demonstrated with the recent arrests of David Carruthers and Peter Dicks that all owners or CEOs of online gambling sites which catered to U.S. citizens were subject to arrest upon entering the United States. But the arrests of Stephen Lawrence and John Lefebvre were somewhat surprising because NETeller is not a casino or sportsbook. While it's true that most of the merchants that use NETeller are online gaming companies, NETeller itself is not involved in gambling. For those not familiar with e-wallet companies like NETeller and PayPal, think of them as an internet clearing house between a customer and merchant. The financial aspect of the transaction is always between the customer's bank and the internet merchant's bank and the e-wallet simply acts as an intermediary for a fee. Banks and merchants prefer to use the e-wallets since these companies have the structures in place to process the transactions online securely. But in terms of actually laundering money, it's hard to understand how the American government came to their conclusions.
Perhaps at this point it's important to look at what exactly entails money laundering per the United States Justice Department's definition. Money laundering is the conversion of money derived from criminal activity to hide its illegal origin. The practice dates back to the 1930s when Meyer Lansky transferred ill gotten gains from bootlegging in the United States to Swiss bank accounts via shell companies and holding companies. The purpose of doing so was clear - he didn't want the U.S. government to know about the money, so he shipped it out in a way that made the money appear as if it was made through legal means. Money laundering is usually associated with organized crime, although the most famous case of money laundering involved Richard Nixon's re-election campaign team who moved money to Mexico and then back to accounts in the United States to conceal its origin. Given that definition, what exactly did NETeller do that constituted money laundering?
The company operated in the open in Canada and then from Antigua and a few years later they incorporated in Great Britain and operated from the Isle of Man. They never hid the operation and were advertising in all gambling newspapers, magazines and trade shows and any internet searches of gambling websites clearly showed NETeller on their front pages. If a company is operating illegally and wants to hide their business they aren't going to flaunt their services. As well, because the company was never located in the United States, none of the assets or employees were connected to the United States and the company was incorporated in Britain; the company had no reason to report any of the transactions to United States authorities, although I'm sure they would have done so if America asked. If NETeller had to report to anyone it would have been to the Isle of Man where they operate and Britain where they are incorporated. And of course being a publicly traded company, all of their business ventures and activities are plainly visible for anyone who reads the annual reports. As for the "illegal nature" of the business, online gambling has always been and still is a grey area in the law. The Wire Act is still the only federal legislation in the United States that clearly addresses gambling and it specifically forbids bookies from taking bets from American sports bettors by telephone. The internet is still a grey area. Regardless, NETeller never tried to hide its activities from anyone.
But if the United States is determined to arrest people in relation to money laundering it would seem that the most likely targets would be the Bank of America, Citibank and JP Morgan Chase. One could easily argue that instead of Lefebvre and Lawrence appearing on indictment papers, the United States should have arrest warrants out for the bank CEOs when they were processing these transactions. Not only did these 3 banks process online transfers via ETFs for NETeller but they also had direct deposit accounts whereby customers could go into any branch of Bank of America, Citibank or Chase Manhattan, fill out a deposit slip to a specific account number and the money would instantly go to NETeller. As well, the banks happily provided wire transfers. Even a search today on the internet brings up details for making these transactions, although they are probably now cut off. But from 2002 to 2004 the ability was there. For Citigroup for example, filling out the following information, Citibank, NA, Swift Code: CitiUS33, ABA #21000084, Account #10955986 would have transferred funds from a Citibank American bank account to NETeller. So if this is somehow money laundering, then who is doing the crime?
When Meyer Lansky made the transfers from his ill gotten gains, the United States would have charged him with the crime, not the Swiss bank accounts he transferred them to. So why is the United States not going after the originators of the transfers, i.e. the U.S. banks? The answer to that question is likely found from a 2001 study initiated by the U.S. Senate Committee on Government Affairs. Money laundering has been a federal offence in the United States since 1986, and under the Annunzio-Wylie Anti Money Laundering Act of 1992 a bank could be shut down if ever convicted. The committee determined that every American bank allowed or assisted in money laundering on a regular basis. Unfortunately, as Jack Blum stated, who formerly was a U.S. Senate investigator and a money-laundering consultant to the United Nations stated: ``There's no capacity to regulate or punish them because they're too big to be threatened with failure.' In better words, shutting down banks would affect the whole economy so they are beyond the law. As well, Ian Comisky, a former federal prosecutor and author of the book "Tax Fraud and Evasion", stated: "Prosecutors don't bring money-laundering charges against the largest banks for fear of creating panic among investors and world economic turmoil."
Even in the rare instance where a financial institution does get implicated for the crime, they are usually just fined. In California, Wells Fargo & Co., overwrote two pyramid schemes and transferred more than $255 million through several accounts in money-laundering schemes from 1995 to 2002 according to the committee looking into the issue of money laundering. Yet, the company simply paid a fine when called on the carpet. And the Bank of America was indicted for being involved in a money laundering scheme involving drug kingpins according to the New York State Society of CPAs as they wrote on their website www.nysscpa.org, yet no one was ever indicted.
The U.S. government also contends that NETeller knew it was not operating legally, they stated so in the prospectus they submitted upon application for incorporation. Below is the whole text from the prospectus that the government is referring to:
In the US, the Unlawful Internet Gambling Funding Prohibition Act would, if enacted, impose civil and criminal penalties on operators for accepting credit cards, electronic fund transfers, and other banking instruments to fund Internet betting or gambling transactions from residents of the United States. The Bill has passed in the US House of Representatives and the Senate Banking Committee and is currently waiting to be put on the calendar for vote by the full Senate. A lack of legislative priority and sufficient votes among US senators coupled with lobbying efforts and civil liberty concerns (freedom of speech over the Internet) may ultimately stall or derail this Bill.
The US Federal Interstate Wire Act 1961 prohibits the use of telephone lines to place bets. This legislation has been used to criminally prosecute and imprison an offshore online sports betting operator. The view of the US Department of Justice is that the legislation also can be applied to customers engaged in online gambling.
The US Patriot Act of 2001 was originally enacted to combat terrorism, and prohibits the transmission of funds that are known to have been derived from a criminal offence or are intended to be used to promote or support unlawful activity. The Patriot Act was recently applied in a civil claim against a US based online payment services company which was providing payments on behalf of offshore online gambling operators. The Patriot Act purports to have extraterritorial jurisdiction, but this has yet to be tested.
With regard to specific products supplied by the NETeller Group, the distribution of a NETeller card in the US, which enables Members to withdraw funds accredited to their accounts by Merchants, may constitute an infringement of the Interstate Transportation of Wagering Paraphernalia Act (18U.S.C. § 1953) which makes it an offence to supply any 'device' for wagering. This Act has been interpreted widely in previously successful prosecutions.
It is the Directors' understanding that there has been only a small number of cases/prosecutions in relation to online gambling and that most of these have been where there have been assets or relevant individuals located in the US. The Group does not maintain offices, nor are any of its assets located, in the US. The Group has contractual arrangements with two US companies (which are related to two of the Directors as described in paragraph 7.6 of Part VI of this document) and which both clear monies through the ACH system on the Group's behalf. There can be no assurance that the US will not threaten or try to prosecute the NETeller Group under federal law at some stage under existing or future regulation. NETeller continues to monitor the position carefully.
Obviously, the United States has read something in that prospectus statement that is not clear to everyone, including myself. From what I see, it appears as if NETeller stated that the United States could be a concern to the company if the Unlawful International Gambling Prohibition Act were to pass, as that would enact penalties on anyone who provides transfers from American citizens to offshore betting companies. It also states that another online payment service (PayPal) paid off the government so as not to be charged under the Patriot Act, although everyone knows that PayPal paid the fine so there would not be a delay in the $1.9 billion buyout by eBay. But neither of PayPal's founders, Peter Thiel and Max Levchin who had similar positions to Lawrence and Lefebvre, and who made the same transactions to the same companies through the same banks as Lawrence and Lefebvre, were ever criminally charged. Instead their company paid a minimal fine. The option of paying a fine was never given to Lawrence or Lefebvre. And if one thinks that Paypal didn't realize what was going on, at all GIGSE conferences up to 2002, Paypal was a vendor and happily pedaled their services.
Reading further into that prospectus, NETeller concluded by essentially saying that the United States is so unpredictable that it can't be assured that the United States would not come after them in the future, although in their own views they were doing nothing illegal under U.S. law and had no assets or workers located in the United States. The Unlawful Internet Gambling Enforcement Act was only passed in October of 2006, long after the two individuals charged had left the company. So even if it can be argued that the UIGEA made money transfers to gambling establishments through an intermediary illegal, the government has gone after the wrong individuals since Lefebvre and Lawrence weren't in the company when that law was shoved through.
The U.S. government will argue that even if Lefebvre and Lawrence weren't aware that what they were doing was illegal, that isn't relevant since ignorance of the law isn't an excuse. But Comisky may argue differently. As Comisky wrote in his book: "To convict a bank of money laundering, prosecutors must prove the bank knew or was 'willfully blind' to the illegal source. Even if a bank launders money, its officers can't be found criminally liable unless prosecutors can prove the officers knew the money came from criminal activity." So it seems clear that the U.S. banks operate under a different set of rules than other companies. But can it be argued that the 3 banks really didn't know what they were doing? Consider this: In 2001 Visa forced all banks to label any gambling transactions with merchant code 7995. This code identified the transaction as internet betting and gave them an audit trail. In the reasoning for this, Visa stated the following as one of the concerns:
While legal in many countries, some jurisdictions regulate, prohibit, or impose special taxes on Internet gambling. In the United States, legislation has been proposed that would make Internet gambling illegal for U.S. Cardholders and place the responsibility for monitoring Internet gaming on the Issuer. Media attention surrounding recent lawsuits brought against Visa, the possibility of brand compromise, and added costs resulting from dispute resolution make it necessary to proactively enforce the Operating Regulations relating to Online Gambling Merchants.
The wording is as clear as day. Visa was worried that online gambling may at some point be declared illegal in the United States and that the responsibility for the transaction is on the Visa issuer, i.e. the bank. Upon this news, 3 banks almost immediately cut off their credit cards for use at online casinos and sportsbooks, namely Bank of America, Citibank and Chase Manhattan. Yet the same year all 3 started the direct deposit option for NETeller at their banks. Hmm... Maybe there was indeed some attempt to hide financial transactions from the U.S. government, but it certainly wasn't by NETeller.
This is clearly a case of selective prosecution by the American government against two non American individuals who have done nothing more than any U.S. bank CEO does on a daily basis. It seems pretty evident that the lame duck U.S. government is looking for scapegoats to blame for its current unpopularity. Unfortunately, for online gamblers, we are the catch of the day and it appears that the American government is prepared to do anything to convince Americans that it is foreigners like David Carruthers, Peter Dicks, Nigel Payne, John Lefebvre and Stephen Lawrence that are responsible for America's current problems. That's truly unfortunate, but foreigners don't vote in American elections. Oh, did I mention that land based casinos are the easiest source for money laundering? Of course that's an issue for another day.