Credit Union Magazine: Members' online gambling habits put CUs at risk

How can you protect your credit union from Internet gambling losses and lawsuits? Internet, or online, gambling has been the subject of an increasing number of lawsuits by bettors against credit card processors and card issuers.

While only three states (Illinois, Louisiana, and Nevada) currently have laws specifically banning Internet gambling, it's considered illegal elsewhere based on a 1961 federal law banning interstate sports betting over the telephone and numerous state laws banning gambling in general. The collection of gambling debts is also considered unenforceable in most states.

The typical situation credit unions may encounter involves an individual that places bets at a online casino using a credit card and, over time, loses a substantial amount of money. Next, the individual either files a lawsuit against the card processor and card issuer to recover the debt or files bankruptcy to discharge the debt.

One northern California woman used 12 different credit cards to run up a $115,000 gambling debt on the Internet. When the banks that issued the 12 credit cards tried to recover the debt, the woman sued. Based on an old law (Federal Wire Act of 1961) that makes gambling debts legally uncollectable in all 50 states, the woman had her debt wiped out and $225,000 in attorney fees paid when her case settled last October.

THE CASE OF ON-SITE GAMBLING

Although the following case is an example of onsite gambling rather than Internet gambling, such cases indicate credit unions also can experience losses when traditional gambling is involved.

In a case decided by the Sixth U.S. Circuit Court of Appeals in Cincinnati in 1998 (In re: B. Rembert), a Michigan woman incurred gambling losses of nearly $24,000 at a Canadian casino between June 1994 and January 1995. Rembert withdrew thousands of dollars in cash advances at ATMs located at the casino using various credit cards. She then borrowed $28,000 by placing a second mortgage on her home in November 1994 and used a significant portion of the loan proceeds to pay her credit card debts.

Rembert continued to gamble and by January 1995 again owed substantial amounts on her credit card accounts. Several months later she filed bankruptcy and, despite objections from her creditors, was able to obtain a discharge of the gambling debts. This case is similar to Anastas v American Savings, a 1996 Ninth U.S. Circuit Court of Appeals case in San Francisco.

RICO AND ONLINE GAMBLING

In a number of recent cases filed across the country, plaintiffs' attorneys argue banks, credit unions, and credit card companies are engaged in racketeering and violating the Racketeer Influenced and Corrupt Organizations (RICO) Act by allowing the cards they issue to be used for Internet gambling.

An East Coast credit union is engaged in this conflict. It's being sued along with MasterCard by a member in the U.S. District Court in New York. It recently was sued by the same member in a case involving Visa in the U.S. District Court in California.

HOW CAN CUs AVOID LAWSUITS?

While it's still too early to determine the outcome in either case, the credit union is taking immediate steps to reduce its risk and to avoid similar lawsuits in the future. The credit union has amended its basic membership agreement to provide for the termination or withdrawal of any product or service when used in an illegal manner or for an illegal transaction. Additionally, an indemnification and hold-harmless provision has been added to the agreement that would require a member to reimburse the credit union for any losses incurred as a result of illegal transactions by the member.

Credit unions that might face the situations described previously should consider adding similar language to their basic membership agreements and to their credit and debit card disclosures and agreements to minimize the risk of loss.

Visa and MasterCard have taken steps to reduce potential liability for themselves as well as card issuers. MasterCard changed its online gambling rules to require Internet casinos to keep track of where online gamblers live and to provide on-screen warnings that engaging in any form of gambling could be illegal in their jurisdiction.

Visa's operating regulations allow cardholders to use their cards for Internet gambling services or purchases providing they're legal. Visa recently revised its operating regulations to require card issuers to include in their cardholder agreements a provision specifying that a Visa card may not be used for any illegal transaction. This provision must be incorporated into cardholder agreements by Dec. l, 2000.

Credit unions should consider incorporating Visa's required provision into their credit and debit card disclosures and agreements now rather than waiting until the December deadline.

CONGRESS TO ADDRESS PROBLEM

Congress may provide a solution to the problems caused by Internet gambling. Legislation is currently pending (S. 692 and H.R. 3125) that would prohibit Internet gambling in general and would provide for fines and prison sentences for any gambling business that knowingly uses the Internet for gambling purposes.

Credit unions are encouraged to contact their local representatives, leagues, or CUNA in support of this legislation.

By Mike Mclain

Assistant general counsel and senior compliance counsel CUNA & Affiliates