CNY Business Journal (1996+): Spitzer, banks target Internet gambling via credit card

ALBANY-New York Attorney General Eliot Spitzer has signed agreements with 10 banks to block cardholders from using their credit cards for transactions identified as online gambling.

"This is a turning point in the credit card industry," Spitzer says. "The vast majority of credit card issuers-and all issuers doing significant business with New York consumers-has now recognized their legal, ethical, and business obligation to block credit-card transactions identified as online gambling."

The initiative began in June of 2002 when the Attorney General obtained Citibank's agreement to block such transactions. The 10 banks in this latest round of settlements cover a wide range of institutions. They include some of the country's largest financial institutions, with millions of cardholders across the nation, as well as smaller, regional banks. Some banks are state-chartered, while others are national banks. The 10 are:

* Cayuga Bank, based in Auburn, New York (now First Niagara Bank);

* Chemung Canal Trust Company, based in Elmira, New York;

* First Consumers National Bank, based in Beaverton, Oregon;

* First Premier Bank, based in Sioux Falls, South Dakota;

* Merrick Bank, based in South Jordan, Utah;

* Peoples Bank, based in Bridgeport, Connecticut;

* Trustco Bank, based in Schenectady, New York;

* USAA Federal Savings Bank, based in San Antonio, Texas;

* US Bank NA, based in Fargo, North Dakota;

* Wells Fargo Financial Bank, based in Des Moines, Iowa.

The credit-card transactions are "coded" by merchants and their merchant banks to indicate to credit-card-issuing banks (the lenders) what is being purchased. By blocking certain of these codes, issuing banks can avoid extending credit for much gambling activity that occurs on the Internet.

The banks have agreed to block these transactions, and have agreed to pay a combined total of $335,000 in costs to New York State. The agreements apply to all lending activities either arising in New York or affecting New Yorkers. However, the effect of the settlements is expected to carry over to the banks' operations in other states as well, as the banks will likely join the majority of credit-card issuers which already block these transactions across their entire systems.

The settlements also mark a trend in law enforcement to focus on intermediaries in combating illegal online activity. In New York, as in most states, promoting or facilitating unauthorized betting and gambling is illegal-whether it occurs online or off. However, because Internet-gambling businesses usually operate offshore in foreign locations, beyond the enforcement power of local authorities, they often avoid prosecution. Spitzer says it was therefore essential that financial entities, including banks, credit-card associations, and other payment and processing services, do everything in their power to avoid facilitating these illegal transactions.

Since the Citibank settlement, many more credit-card issuers have begun to implement blocking mechanisms against online gambling, Spitzer says. He also notes that a number of large issuers-including American Express, Providian, Bank of America, Fleet, Direct Merchants Bank, MBNA and Chase Manhattan had done so prior to that settlement, on their own initiative.

These cases were handled by Dan Feldman, Assistant Deputy Attorney General, and Ken Dreifach, the chief of the Internet Bureau.