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March-04-2007,
Is the NETeller Money Gone?...By Hartley Henderson

For the past several weeks I've spent most of my waking time trying to get information on the NETeller situation. Based on emails I've received it is clear that the frozen funds at NETeller is the main issue on the minds of readers at MajorWager.com. I contacted NETeller representatives, the U.S. department of justice, the lawyers of Stephen Lawrence and John Lefebvre, an expert in the area of money laundering, and legal minds familiar with online gambling and U.S. bank representatives. Unfortunately, few wanted to talk about the seized money or the case against Lefevre and Lawrence, and those who did talk were not sure which way the Department of Justice was prepared to proceed. But one common refrain from all who were willing to talk was the notion that at this point the ball is clearly in the DOJ's court, and whether they return the money to the American customers is totally dependant on how they decide to treat those funds. Since the Department of Justice has seized all U.S. money in NETeller's ACH system and have essentially cut off any other money held in trust for Americans at British banks, NETeller has absolutely no say on what happens from this point on. If the DOJ consider those funds to be the proceeds of crime, it is very unlikely they will give it back. As a former DOJ agent said to me, "we don't give drug money seized from dealers back to the junkies so why would we give back this money to bettors if we deem those funds to be the proceeds of crime?" That of course is the big question. Are those funds the proceeds of a crime? This article will address that question and offer suggestions of methods Americans can use to get back the funds.

The government of the United States has contended since the Kyle bill of 1997 that the Wire Act of 1961 is applicable to the internet. It is the law under which they charged Jay Cohen, and it is the law that they cited when issuing warrants against various other offshore operators. As such, in their view, any communication that passes through U.S. air space is deemed to have taken place in the United States and there is no difference between the internet or telephone lines. Thus, if taking bets by phone or internet is against the law in the United States, then bettors were involved in the commission of a crime. Even if the bettor didn't believe what they were doing was illegal, ignorance of the law has never been an excuse. As Raymond Baker, a famous author on money laundering and corruption and a senior fellow at the Center for International Policy told me "if an electron touches New York then that activity has taken place in New York." In other words, the jurisdiction of where the business is located is irrelevant, because as far as the U.S. government is concerned, any transactions that involve the United States in any way are subject to U.S. law. The U.S. government has successfully sued foreigners in the past for violating U.S. law from jurisdictions outside of the United States and in fact have even shut down countries that they considered to be in a danger to U.S. interests. That is the view of the Department of Justice, but it is not necessarily the view of U.S. courts.

In a landmark ruling in 2002, two U.S. courts ruled that the Wire Act may not apply to the internet and more importantly only applies to sports betting. Since pretty much every sports betting site has poker and casino software as well, the bettors can argue that money sent to the sites was used for poker or casino betting and not for sports betting and hence the wire act does not apply to their funds. Nevertheless, the DOJ contends that the wire act applies to all forms of gambling, and they aren't prepared at this time to change that view regardless of court decisions to the contrary. It must be noted that the bettors themselves are really just pawns in this chess match between the DOJ and all the offshore companies. Casual betting is not a crime per the wire act and no bettor has ever been charged in the United States for wagering offshore. Nevertheless, Neil Donovan of the FBI has stated that the Department of Justice seized the NETeller funds to hold as potential evidence, so the American bettor has been dragged into this battle.

The question of course has to be asked: What kind of evidence will the DOJ get from holding a bundle of money and why is NETeller being implicated as they are only a payment processor? When the Department of Justice cut a deal with eBay to settle the case regarding PayPal, it was acknowledged that most of PayPal's business was not derived from internet betting. eBay purchases far and away outnumbered any transactions made for the purpose of online betting with PayPal, but the same cannot be said for NETeller. If NETeller had a significant amount of non-gambling related merchants, it could be argued that the DOJ seized money not intended for the purpose of betting, meaning that some of the funds indeed were not derived from the proceeds of gambling. After all, if the company was a payment processor to many non-gambling related businesses then it would be difficult to argue that NETeller was actually involved in the area of online gambling. In fact one of the reasons the government decided to cut a deal with PayPal was the difficulty in isolating gambling transactions with those intended for other purchases. As such, one of the people I spoke to, who preferred to stay anonymous, suggested that if anyone could prove that the seized NETeller funds were indeed being used for a service other than offshore gambling then it could be a significant step in getting the DOJ to release the funds. The first step, therefore, was to take an approach similar to what PayPal used when making the deal with the U.S. government. Looking at NETeller's website, there is indication that the company has other merchants who are not in the gambling business. According to Netellergroup.com, the company has over 3,500 merchants which include the following the following types of clients:

A Diverse Platform of Products for All Kinds of Businesses We transfer billions of dollars annually on behalf of thousands of merchants worldwide who span a diverse spectrum of industries and businesses, including:
* Entertainment, Gaming, and Leisure
* Financial Services
* Government and Education
* Manufacturing and Energy
* Media and Publishing
* Retail

Thusly, I contacted the company to find out the name of other merchants that allow NETeller as a payment processor. If the company, for example, was used as a payment processor for products like computer software, ITunes, ETrade etc., then lawyers could argue the government was seizing funds that could be used for legitimate purchases. NETeller did not respond to my inquiry. Searches of merchants on the internet for NETeller were all for gambling sites, and a comprehensive search indeed showed that the only merchants that NETeller has are indeed in the business of gambling. If they do have merchants in the field of retail, media or government they aren't coming forward with names. Consequently, any arguments that customers want to make stating that the money being held was intended for other merchants will not hold water. Wanting to have merchants in other services doesn't actually make it so.

Another possible avenue was to actually help out Lefevre and Lawrence by showing that NETeller was not involved in money laundering. If the DOJ was indeed holding the money as "evidence" then it can only be assumed it would be evidence for the case against the company's two founders. A review of the court documents for Lawrence and Lefevre provided little information other than bail conditions, namely $5 million in cash and property and the surrender of passports. Other than that, the documents simply stated that the proceedings were being continued in the interest of justice. Calls and emails to the lawyers of the defendents and to the prosecuting attorney to find out why the proceedings were continued and a basis of the defense that may be used were met with anger or were not acknowledged.

The DOJ's stance on how online gambling is used for money laundering was alluded to in 2002 by John Malcolm, Assistant Attorney General, when he stated the following at a conference in London. The full text is available at http://www.usdoj.gov/criminal/cybercrime/JGM_Intgambling.htm

Another major concern that the Department of Justice has about on-line gambling is that Internet gambling businesses provide criminals with an easy and excellent vehicle for money laundering, due in large part to the volume, speed, and international reach of Internet transaction and the offshore locations of most Internet gambling sites, as well as the fact that the industry itself is already cash-intensive.

It is a fact that money launderers have to go to financial institutions either to conceal their illegal funds or recycle those funds back into the economy for their use. Because criminals are aware that banks have been subjected to greater scrutiny and regulation, not surprisingly, they have turned to other non-bank financial institutions, such as casinos, to launder their money. On-line casinos are a particularly inviting target because, in addition to using the gambling that casinos offer as a way to hide or transfer money, casinos offer a broad array of financial services to their customers, such as providing credit accounts, fund transmittal services, check cashing services, and currency exchange services.

Individuals wanting to launder ill-gotten gains through an on-line casino can do so in a variety of ways. For example, a customer could establish an account with a casino using illegally-derived proceeds, conduct a minimal amount of betting or engage in offsetting bets with an overseas confederate, and then request repayment from the casino, thereby providing a new "source" of the funds. If a gambler wants to transfer money to an inside source in the casino, who may be located in another country, he can just play til he loses the requisite amount. Similarly, if an insider wants to transfer money to the gambler, perhaps as payment for some illicit activity, he can rig the game so the bettor wins.

The anonymous nature of the Internet and the use of encryption makes it difficult to trace the transactions. The gambling business may also not maintain the transaction records, in which case tracing may be impossible. While regulators in the United States can visit physical casinos, observe their operations, and examine their books and records to ensure compliance with regulations, this is far more difficult, if not impossible, with virtual casinos.

So essentially the government is going to suggest that NETeller is guilty of money laundering because criminals and/or terrorists could deposit large amounts of ill gotten money at the payment processor, transfer it to a casino, make small bets and withdraw the majority of it back to NETeller. They in turn would send the money back to the banks making the money appear legal. Needless to say it's a stretch, and since no country other than the United States has shown this concern in spite of Malcolm's comments, it is clear that the argument is a leap in logic to say the least. Nevertheless, when I asked Raymond Baker how the government could link online gambling to crime or terrorism he responded "It's the ability to use any form of money laundering that can facilitate terrorists financing, which can parade as some other form of illicit proceeds. That's why I encourage Congress to bar all forms of illicit money coming from abroad. At least close the doors even if enforcement is problematic."

So what did Mr. Baker mean by this? Well apparently there are 200 classes of money laundering, but only 15 are deemed predicate offenses that would make it illegal for U.S. banks to accept money from foreign companies engaged in those activities. They include: drug trafficking, gambling, crimes of violence, official corruption, bank fraud and certain treaty violations. Any other forms of money laundering can legally be handled by the banks without fear of prosecution for aiding and abetting criminals. Included in those are moneys gained from counterfeiting, contraband, alien smuggling, slave trading, trafficking of women and tax evasion. So the U.S. government actually has, in essence, made offshore gambling out to be a more heinous crime than slave trading, even though the U.S. Civil war was in part fought as a result of the slave trade and gambling occurs everywhere in the United States. Further, money laundering at land based casinos is still the main source of hiding funds for criminals. Unreal!

One other possible solution that has been mentioned for Americans to recover their funds, provided NETeller was cooperative, is for Americans to set up a residence outside of the United States and take back the funds from the U.S. account in a different form of currency addressed to the new address. Obviously this is easier said than done. There have been cases reported on some internet forums where Americans did indeed set up a Canadian residence, but they were unable to have the funds forwarded to that new address. This shouldn't be overly surprising. When it was clear that NETeller was going to close their operations to American account holders, many Americans tried to send peer to peer transfers to people outside of the United States. This was done so that the non Americans could get the money out for their American peers. The company not only stopped the peer to peer transfers, but also suspended accounts of the non Americans who helped their American counterparts. So why would NETeller be helpful for Americans in other ways? From what sources have said, any communication from Americans with funds seized by the DOJ or with funds in NETeller's trust will have to prove that they were indeed residents of their "new" country prior to the accounts being cut off. This could involve passports, utility bills etc. Needless to say this option thus is not feasible.

So that brings us back to the original question, are the NETeller funds gone? From the sources I have spoken to it seems highly unlikely that the DOJ will be sending back much of the money and FBI agent Neil Donovan's comment to the media that "some people may get their money back" is hardly encouraging. Regardless, one can only imagine the paperwork Americans will be involved in to see any of the money. And as for NETeller, in spite of CEO Ron Miller's comment that getting customers' back their money was a priority, it would seem from the way they are cooperating with the Department of Justice means they have undertaken to ensure all loopholes are closed for Americans to get their money back by any means. American customers are hardly a priority for the company at this time.

What other options exist for Americans? Two solutions which have been suggested are suing NETeller themselves or hoping for a change of heart by the DOJ. Suing NETeller could prove quite difficult since they are not located in the United States, and in the view of the United Kingdom where the company operates and is incorporated, the company has not committed any crime. It's safe to say that no NETeller management will come to the United States to face charges so they certainly won't come to defend a civil suit. Also, in 2002, two U.S. citizens tried to sue Mastercard for aiding offshore casinos in helping them lose money, similar to what NETeller would likely be sued for. The judge dismissed those charges against Mastercard and would likely do the same for NETeller. Don't forget, gambling is not a crime per the wire act, taking bets is. Besides, it's uncertain at this time how much in U.S. assets NETeller actually has anyway.

So the news is not good. It is possible that the DOJ will give back some of the funds, but if they do so it will not be for quite a while. At this point, the best option would be for Americans to write their representatives, including district attorneys, and demand that the funds be released. Since Americans vote for judges, district attorneys, etc., if there is enough groundswell, the government may take action if they sense it is an issue that could cause them to lose an election. It's clearly not the best solution, but it couldn't hurt. In any case, I will keep talking to officials at all levels and make NETeller an ongoing priority in future articles until a resolution is reached.

03-04-2007
Hartley Henderson
Majorwager.com
henderson@majorwager.com



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