a survey of electronic cash, electronic banking and ... · a survey of electronic cash, electronic...

1A Survey of Electronic Cash, Electronic Banking and Internet Gaming


TABLE OF CONTENTSPREFACE ..........................................................................................................................5FOREWORD ..........................................................................................................................7

INTRODUCTION ............................................................................................................... 11

ELECTRONIC CASH .......................................................................................................... 15

INTRODUCTION ................................................................................................... 15SMART CARDS/STORED VALUE CARDS........................................................ 15

The Basics ..................................................................................................... 15Stored-Value Card Issuers ............................................................................ 16

COMPUTER E-CASH ............................................................................................ 19The Basics ..................................................................................................... 19E-Cash Issuers ............................................................................................... 19

REGULATORY POLICY......................................................................................... 20SUMMARY OF ELECTRONIC CASH IN THE NEAR TERM ......................... 22

ELECTRONIC BANKING .................................................................................................. 25

INTRODUCTION ................................................................................................... 25TECHNOLOGY ....................................................................................................... 26

Security .......................................................................................................... 26Opening an Account .................................................................................... 26

GROWTH................................................................................................................. 27Internet Banking Websites and Growth...................................................... 27Cost of Services ............................................................................................ 30

REGULATORY OVERSIGHT................................................................................ 31Financial Crimes Enforcement Network (FinCEN) .................................. 31Federal Financial Institutions Examination Council ................................. 32Federal Reserve System ................................................................................ 33Federal Deposit Insurance Corporation ...................................................... 33Office of the Comptroller of the Currency ................................................. 34Office of Thrift Supervision ......................................................................... 35National Credit Union Administration ...................................................... 35Recent Regulatory Developments ............................................................... 35

CRIMINAL ACTIVITIES ....................................................................................... 36PROSPECTS ............................................................................................................. 37

INTERNET GAMING ......................................................................................................... 39

INTRODUCTION ................................................................................................... 39COMMERCIAL DEVELOPMENT TRENDS ....................................................... 39

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Participants ................................................................................................... 40Growth .......................................................................................................... 40Site Location ................................................................................................. 41

FINANCIAL OPERATIONS .................................................................................. 41GAMING WEBSITES.............................................................................................. 42

Design and Structure.................................................................................... 42Legal Issues .................................................................................................... 42Licensing Questions ..................................................................................... 43Site Security and Transactions..................................................................... 43

DEVELOPMENTS IN THE UNITED STATES.................................................... 44Federal Legislation ........................................................................................ 44FinCEN Survey of State Legislation ............................................................ 45Federal Civil and Criminal Cases ................................................................ 46

Indian Gaming Regulatory Act ....................................................... 46State Civil and Criminal Cases .................................................................... 47

Florida ............................................................................................... 47Indiana .............................................................................................. 48Maryland........................................................................................... 48Minnesota ......................................................................................... 48Missouri ............................................................................................ 49New York .......................................................................................... 49Wisconsin ......................................................................................... 49

Private Lawsuits ............................................................................................ 50The Interactive Gaming Council ................................................................ 51

CONCLUSION ........................................................................................................ 51

APPENDICES ....................................................................................................................... 53Appendix A. SMART CARD TECHNOLOGY AND SECURITY.................... 55Appendix B. INTERNATIONAL REGULATION OF ELECTRONIC CASH ..... 59Appendix C. LEADING U.S. INTERNET BANKS ............................................. 61Appendix D. A SAMPLE OF INTERNATIONAL INTERNET BANKS

AND WEBSITES, FEBRUARY 2000 .......................................... 63Appendix E. INTERNET BANKING AROUND THE WORLD ...................... 67Appendix F. INTERNATIONAL REGULATION OF ELECTRONIC

BANKING ....................................................................................... 71Appendix G. INTERNET GAMING REGULATORY POLICY AROUND

THE WORLD .................................................................................. 73Appendix H. INTERNET CASINOS AND SPORTSBOOKS .......................... 81Appendix I. COMPANIES RELATED TO INTERNET GAMING

OPERATIONS ................................................................................ 97

SOURCES ............................................................................................................................. 99ENDNOTES ........................................................................................................................ 107


PREFACE

Since 1995, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN)has been examining the potential regulatory and law enforcement implications of emerging

technology-driven payment mechanisms, such as smart card and Internet-based electroniccash, electronic banking, and Internet gaming. This initiative was undertaken within thecontext of FinCEN’s mission to support and strengthen domestic and international anti-money laundering efforts.

By developing and maintaining an understanding of how these products work and the role theyplay within the financial system, FinCEN is better able to make informed judgments with regardto the development of effective anti-money laundering controls. In our pursuit of this goal, wework closely with other U.S. government authorities and maintain a dialogue with key membersof the financial services industry. FinCEN’s practice is to formulate strategies and programs thatminimize the risk of money laundering and other financial crimes, without inhibiting the continuedgrowth of these new payment systems.

In order to share with others some of the findings that have resulted from our efforts in thisarea, FinCEN has produced this report on Electronic Cash, Electronic Banking, and InternetGaming. The report addresses key commercial developments with regard to these threecomponents of electronic commerce, as well as associated regulatory issues and noteworthylaw enforcement actions.

Your comments regarding the content and usefulness of this report are welcome. Anycomments or questions may be directed to Shaun W. Lonergan, Special Assistant for RegulatoryProgram Initiatives, at (202) 354-6416 or by e-mail at [email protected]. Mediainquiries should be made through FinCEN’s Office of Communications at (703) 905-3770.

James F. SloanDirector


FOREWORD

New technology-based payment systems are emerging to present dynamic opportunities forbusiness and consumers alike. Along with these opportunities, however, come challenges

for governmental authorities. In rising to meet these challenges, FinCEN, together with othercomponents of the U.S. Department of the Treasury and the Government as a whole, mustconsider various factors to determine the appropriate course of action to follow with regard topublic policy. In assessing the need for anti-money laundering controls, FinCEN takes intoaccount broad issues of financial policy but also recognizes that technology-based products maybe susceptible to money laundering and may, therefore, need to be subject to regulatory over-sight. The oversight, however, should not impede the continued growth of electronic commerce.Furthermore, while FinCEN’s efforts focus on law enforcement and regulatory issues, the agencyis sensitive to the need for balancing enforcement interests with those of customer privacy,market independence and other consumer issues.

In this context, FinCEN has been examining the potential regulatory and law enforcementchallenges that may result as electronic payment systems continue to grow. This report discussesthree distinct types of financial products and services that are technology-based: Electronic Cash,Electronic Banking, and Internet Gaming. Each of these products and services facilitates theelectronic transfer of financial value, often in an immediate and secure fashion. These technology-based financial products may also provide a degree of anonymity to the individuals conductingthe transactions. For this reason, in addition to providing various benefits for legitimate commerce,these systems may create new vulnerabilities for financial crimes.

The Institute for Technology Assessment (ITA) addressed this point in its October 1997 reportDigital Money: Industry and Public Policy Issues. According to the ITA report, “Any financialcrime— such as embezzlement, insurance fraud, or various ‘cons’— can probably be adapted todigital money. But digital money holds special appeal for money launderers.” The report notesthat, unlike bulk currency, digital money may be easily concealed, and ITA indicates that sometraditional anti-money laundering controls, which were designed to create “choke points” forphysical cash transactions, may not be effective in the cyberspace environment.

FinCEN’s approach to addressing these issues has been a two-step process: First is education,which is the primary purpose of this report. The nature and operating characteristics of thesenew financial systems must be understood; to do this, the organization maintains dialogue withmembers of the financial services industry. FinCEN’s first step in advancing this dialogueoccurred in September 1995, when it conducted a Cyberpayments Colloquium at the NewYork University School of Law. The Colloquium brought together financial service providers,software developers, academics, consumer representatives, and regulatory, policy, and lawenforcement officials to discuss advances in the design and implementation of emerging electronicpayment systems.

Since the Colloquium, FinCEN has continued to deal directly with members of the industry toexchange information and discuss issues of mutual concern. This practice is consistent with the

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mandate of the National Money Laundering Strategy of 2000, which calls on “The Departmentsof the Treasury and Justice and the federal financial regulators… to continue outreach to theprivate sector to ensure that anti-money laundering safeguards respond to new technologies.”

The second component of FinCEN’s initiative on new payment technologies deals specificallywith money laundering prevention. FinCEN relies upon its knowledge of existing moneylaundering techniques and methodologies to prevent the misuse of new payment systems forcriminal purposes. In May 1996, FinCEN, in cooperation with the National Defense University,hosted a computer-based cyber-money laundering simulation exercise in which participants usedadvanced decision-making techniques to create hypothetical money laundering scenarios. Bydrawing upon varied resources for their unique perspective or knowledge, FinCEN hopes to forecastpotential new money laundering methodologies and, where possible, to develop preventativemeasures in cooperation with industry. FinCEN’s efforts in this regard continue and thus far havegenerated a great deal of “thinking outside the box” and new information.

In June of 1997, FinCEN hosted more than 60 senior-level officials from throughout governmentand industry at a one-day exercise designed to facilitate discussion on the unique regulatory andlaw enforcement policy issues raised by emerging technology-based payment systems. Amongthe issues considered at the exercise was the application and effectiveness of existing anti-money laundering controls, such as the Bank Secrecy Act (BSA), in the cyber-space environment.Although consensus was not reached with regard to an appropriate anti-money launderingstrategy or specific action items, the participants agreed that the government should be continuallyevaluating these issues in anticipation that some regulatory and/or other policy actions couldbecome necessary as these payment technologies mature. Since that meeting, as will be discussedin this report, there has been growth in the industry, and there have been regulatory rulingsrelating to both electronic cash and electronic banking.

Internationally, technology-based payment systems have also received extensive attention. InJune, 1996, the G-7 Heads of State called for a cooperative study to investigate the implicationsof recent technological advances which enable sophisticated methods for making retail electronicpayments. Consistent with this objective, a working party was created and it produced a reportthat developed a broader understanding of the policy issues facing governments as a result ofelectronic money. In that same year, a new recommendation [No. 13] was added to the FinancialAction Task Force’s (FATF’s) “Forty Recommendations on Money Laundering;” the recommen-dation states that “countries should pay special attention to money laundering threats inherentin new or developing technologies that may favor anonymity, and take measures, if needed, toprevent their use in money laundering schemes.” During the November 1999 Experts Meetingon Money Laundering Typologies, the FATF continued to focus attention on this issue byconducting specific discussions on the money laundering risks posed by electronic banking.

The Caribbean Financial Action Task Force (CFATF), like the FATF, has begun to considerthese issues as well. In May 1998, the CFATF, together with FinCEN and the CommonwealthSecretariat, convened a meeting in Port of Spain, Trinidad, to examine and discuss the implicationsof these new payment systems. Delegates from more than 25 nations and representatives fromvarious international organizations joined with corporate officials from the financial industry


to develop a “Conclusions and Recommendations” paper, which serves as a guide to technology-related policy issues for member governments. In May 1999, the CFATF in cooperation withFinCEN conducted a follow-up seminar on electronic banking and the potential implications formoney laundering and financial fraud.

In summary, FinCEN will continue to work through organizations such as the FATF and theCFATF to develop an effective global approach for safeguarding financial systems from themoney laundering risks posed by new payment technologies. FinCEN will also maintain itsongoing efforts with the private sector to track industry growth and to raise the level ofawareness with regard to new and still emerging technology-based financial services. Finally,FinCEN will continue to work with its various government partners to continually assess U.S.regulatory and law enforcement anti-money laundering programs in order to ensure that the countryis prepared to meet any challenges that may be presented by the technology of the 21st century.


INTRODUCTION

The phenomenal growth in the use ofpersonal computers (PCs), fueled in part

by the availability of the Internet, hasspawned new industries and activities inelectronic commerce. More than half of allAmerican households owned a PC at the endof 1998. The public has taken to this electronictechnology much faster than it did to radioand television, the technologies of previouseras (see Figure 1). The U.S. CommerceDepartment reported that American consumersspent $5.3 billion (excluding sales of traveland event tickets) making online purchasesduring the 1999 Christmas season. More than50 million households have connected withthe Internet in just four years, and manyanalysts credit technology stocks for keeping thecurrent stock market boom alive. Conventionalwisdom says that the future is very bright forelectronic commerce.

Every day, businesses and services thattraditionally have required face-to-facecontact or customer travel to the businesssite are establishing themselves on theWorld Wide Web. Bookstores, newspapers,network news organizations, brokeragehouses, clothing manufacturers, cosmeticscompanies, and grocers are establishingwebsites and selling their diverse goods andservices over the Internet. Even thoseinstitutions that were once considered themost staid and conservative— banks, savingsand loans, thrifts, and credit unions— aremaking their services available via theInternet to those customers who want to dotheir banking at home. Furthermore, theentertainment industry is not standing idly onthe sidelines during this period of entrepre-neurial change: for the first time, the Inter-net has given gaming (i.e., casino and sportsgambling) entre into homes worldwide.

ELECTRONIC CASH

New technology is altering our perception ofwhat may constitute money and is alsochanging the nature of monetary transferswithin the financial system. Electronic cash, or“e-cash,” is a digital representation of moneyand may reside on a “smart card” or on acomputer hard drive. Using special readers,stored monetary value is subtracted from thecard or, in the case of computer e-cash,monetary value is deducted from the electronicaccount when a purchase is made. When themonetary value is depleted, the card is eitherdiscarded or, in some systems, value is restored

Source: Based on information obtained from Washington Post,“Internet Gets Down to Business,” June 20, 1999, A17.

Figure 1Number of Americans Connected to the

Internet, 1993 and 1999, in millions

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using specially equipped machines. Telephonecalling cards are the most widely used stored-value smart cards.

Smart cards may also employ microprocessorchips and integrated circuits (ICs). In additionto monetary value, these cards are able tostore vast quantities of data in a highly securemanner. This new smart card technology iscapable of serving many functions, includingcredit, debit, security (building or computeraccess), and storage of medical or other records.

A stored value smart card may be loaded withe-cash in several ways: at a kiosk or a vendingmachine, at a bank or automated teller machine,via personal computer over the Internet,through use of a hand-held electronic purse orwallet, or through use of a specially equippedtelephone (including mobile or cell phones).

Depending on the specifications determinedby the issuer, e-cash value stored on a smartcard may be transferred between individuals ina peer-to-peer fashion or between consumersand merchants.

Although Americans have not yet taken tothe use of stored-value smart cards and/orother types of e-cash, industry experts reportrelatively wide acceptance of such products inEurope and the Far East. In order to encourageglobal use of e-cash, analysts point to the needfor international standards that make possibleinter-operability between systems. Makingavailable multiple applications (that is, storedvalue, credit, debit, physical security access,Internet payment capability, retail loyaltyprograms, etc.) on a single smart card wouldalso increase the cards’ acceptance in theglobal marketplace, according to experts.

As such acceptance grows, many governmentsand their respective law enforcement andfinancial oversight authorities recognize their

responsibility to carefully monitor technologicaldevelopments and industry standards in orderto prevent the misuse of smart cards and otheremerging financial instruments for illicitpurposes. Although to date a cautiousapproach has been favored in most nations,concern about the potential rapidity andanonymity of certain types of e-moneytransactions has led some governments toconsider imposing regulatory controls withinthe context of their existing anti-moneylaundering programs.

ELECTRONIC BANKING

Banks have adapted to electronic technologyand to the Internet faster than many analystspredicted. Demographic changes (moreyoung people with highly developed techno-logical skills and comfort in using the technol-ogy), combined with low-cost online bankingsoftware packages, make PC and Internetbanking a dynamic growth area (see Figure 2).According to industry analysts, over 85 per-cent of financial institutions in the UnitedStates plan to introduce Internet bankingservices by the year 2003. The investment


Figure 2U.S. Adult Population Usingthe Internet Regularly, 1999


banking firm of Goldman-Sachs recentlypredicted that cyberbanking (Internet-onlybanks) will make up 20 percent of the bankingindustry in two to three years.1

Whether increases in cyberbanking will resultin genuine growth in the industry will dependto a certain extent on the adoption of industry-wide standards. Many of those who attempt tofollow the development of electronic bankingand accumulate reliable statistics are hinderedby confusing or imprecise terminology. Eventhough the terms Internet banking, web banking,PC banking, and electronic banking may refer todifferent services, banks and consumers oftenuse the terms interchangeably. Some banks,for example, advertise on a bank website butdon’t actually offer banking transactions viathe Internet. Other banks offer PC banking;that is, they offer their customers proprietarysoftware that allows home banking from thecustomer’s computer. Although PC banking iselectronic banking, it is not Internet banking.In the latter type of banking, which allowsweb-based transactions, a bank customer canuse any PC that has an Internet connection toconduct banking transactions. True Internetbanking allows customers to perform alltransactions on the Internet, with the exceptionof making cash deposits or withdrawals. Tocomprehend the fundamental differencebetween PC banking and Internet banking, oneneed only recall the necessity of direct dial-upconnection between the user and the bank (inPC banking) versus the global reach and com-plete openness of the Internet’s world wide web.

Financial regulators and law enforcementofficials in many jurisdictions are monitoringwith great interest the rapid development ofthe electronic banking industry. Inadequatelyregulated or unregulated electronic bankingsystems may be used to conduct anonymoustransactions and to obscure audit trails, actsthat may facilitate money laundering and

hinder traditional investigative techniques,especially those requiring the analysis offinancial records.

In the United States, electronic banks—whether PC or Internet operations— aresubject to the same regulations as brick-and-mortar banks. The same is not true for alljurisdictions, however. Some observers suggestthat in order to guard against widespreadcriminal misuse, international standards forelectronic banking should be established bygovernments as these systems progress andtheir consumer acceptance increases.

INTERNET GAMING

Another emerging type of technology-basedfinancial activity is Internet gaming (casinogambling, sports betting, and lottery via theInternet). The number of gaming sites on theInternet has grown rapidly in just a few years,rising from approximately six in 1996 to morethan 600 in 2000. This growth has attractedthe attention of legislators and policy makersworldwide. Officials from various law enforce-ment agencies have expressed concern thatInternet casinos could become venues formoney laundering and other types of financialcrime, particularly in light of the fact thatbrick-and-mortar casinos have been used forillegal activities in the past. This potential forcriminal misuse is compounded in jurisdictionswhere Internet gaming is legally permitted butnot subject to regulatory oversight.

Discussions regarding the legal status ofInternet gaming in the United States aretaking place both at the state and the federallevel. Most state governments consider virtualgaming sites to be within their domain (as isthe case with brick-and-mortar casinos), and,in advance of any new federal legislation,many of them have taken the position that

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Internet gaming is illegal under their existinglaws. As a result, a number of states haveinstituted criminal and civil legal proceedingsagainst individual Internet gaming operators.In 1998, 1999, and 2000, bills that wouldhave, in effect, banned Internet gaming wereintroduced in both the U.S. Senate and theHouse. No final action on this legislation hadbeen taken as of July, 2000.

This report summarizes the commercial andtechnological developments and the regula-tory policy issues associated with the emergingelectronic cash, electronic banking, andInternet gaming industries. As of 2000, allthree activities were positioned to continuegrowing at a rapid pace (see Figure 3). How-ever, lack of standardization in smart cardtechnology, concerns about security risks andlack of privacy in electronic banking, andquestions about regulation of Internet gamingmay temper the spectacular growth witnessedsince 1995.

Growth may come through other develop-ments, however. PCs are only one of manypotential Internet transport mechanisms, andtechnological changes are forecast that couldmake the PC an Internet dinosaur. Celltelephones (so-called smart cellphones),televisions, connected organizers, Internetpads, and smart telephones fitted with screensand cameras for two-way videos and rudimen-tary computing powers will allow people easierand more portable access to the Internet. As aresult, financial transactions may becomemore numerous and less dependent upon thephysical location of the parties or the interces-sion of traditional payment methods. The useof mobile phones for Internet banking, forexample, is one of the fastest developingtrends in Europe and Asia.

However, the concern for personal privacy israpidly becoming a leading worldwide issue.As people take advantage of being more inter-connected through electronic communication,they are increasingly worried about otherswho may eavesdrop on private electronicconversations, compile databases containingpersonal information, steal confidentialfinancial data, or destroy private records—either by accident or through malice. Finan-cial information that flies through cyberspaceis susceptible to theft and misuse, and untilreliable safeguards are established, the fear ofthe loss of privacy will be present in the publicconsciousness.


Figure 3Revenue Generated by the Internet,

1995 and 1998, in billions


ELECTRONIC CASH

INTRODUCTION

The terms electronic cash, e-cash, ore-money refer to electronic payment

schemes that enable consumers to store andredeem financial value. They operate via storedelectronic units of value. Paid for in advanceby conventional money and representingequivalent units in real currency, these fundscan be transferred between vendors andindividuals using compatible electronicsystems, in some cases without resort to banksor other financial intermediaries. E-cash (ore-money) comes in two basic forms: smartcard e-cash and computer e-cash.

E-cash is most often downloaded from itsrespective system through special terminals(for example, specially equipped ATMmachines, computers, or cell-phones) ontosmart cards. Such cards are called stored-valuesmart cards. E-cash can also be downloaded topersonal computer hard disks via a modem.The “money” remains stored until the userspends it. In the case of smart cards, the“money” is spent by transacting it withanother individual, in vending machines,turnstiles, toll-collecting devices, or retailers’terminals. In the case of computer e-cash, the“money” is spent over the Internet. Each e-cashtransaction reduces the amount of stored“money” (value).

SMART CARDS/STOREDVALUE CARDS

THE BASICS

A smart card consists of a specifically designedintegrated circuit chip embedded in a plasticcard. The chip contains either a set of contacts

that physically connects with an electronicreader or an aerial for contactless operation.

Because they contain one or more electronicchips or integrated circuits that can store andprotect information, smart cards are alsocalled chip cards or integrated circuit cards. If,in addition to integrated circuits, a smart cardcontains a microprocessor chip, it can calculateaddition and subtraction of value. Thecapabilities of their embedded chips are whatmake smart cards “smart.” Many so-calledsmart cards are, in fact, only memory cardsbecause their chips do not contain a micro-processor. Memory cards can store data andvalue, but they cannot perform complexcalculations. If they are used to store value,as, for example, is the case with telephonecards, they can deduct value only from thetotal available as the card is used.

Smart cards are to be distinguished from themost common form of card technology forautomatic reading— the magnetic stripe card.Based on a much older technology than thatused in smart cards, magnetic stripe cards carryencoded information in strips of magnetic tapebonded to a plastic or paper carrier. Becausethe magnetic coding resides on the outside ofthe card, the data are vulnerable to tampering.Data can also be erased or corrupted by straymagnetic fields.

Magnetic stripe cards and smart cards alsodiffer as to the amount of data that can bestored on the card. Smart cards can store upto 500 times more data than can a typicalmagnetic stripe card. They can also store itmore securely because of software installedin the chips that is designed to preventunauthorized usage. Consequently, smart cards

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Table 1.Number of Smart Cards in Circulation, 1997

Region Cards Sold Market ShareEurope 870,000,000 66.9%

Asia/Pacific 225,000,000 17.3%

Americas 165,000,000 12.7%

Rest of world 40,000,000 3.1%

Total 1,300,000,000 100.0%

Source: Based on information obtained fromCard Technology Magazine, June 1998.

offer an attractive alternative to traditionalmagnetic stripe cards, whether they are usedfor stored value, debit or credit functions,or for non-financial transactions such asbuilding access or computer access and retailloyalty schemes.

The capability to store value on a card’schip— value that can be expended as well asreplenished— is one of the major attributes ofsmart cards. The simplest stored-value smartcard is one with a single store of value issuedby a particular company and usable to buygoods and services only from that company(i.e., closed circulation). Such types of cardsfunction almost like a telephone card and areused, for example, in vending machines.W hen a stored-value card is designed to beused in open circulation (that is, when it ispossible to use the card to buy goods andservices from several different suppliers), it istermed an electronic purse, or e-purse.

Because of the limitations associated withcard readers, some of which are not able toread card computer chips, smart cards maycombine two different technologies on asingle card, coming equipped with both a

microchip and a magnetic stripe. Known ashybrids, these cards can be read by a varietyof readers of differing capabilities. Hybridsmart cards are currently being used to helpintroduce smart cards to consumers andmerchants.

Smart cards have proven much more successfulin Europe, and to a lesser extent in Asia, thanin the United States (see Table 1). Theirsuccess is in part a result of the relativelycentralized banking system in Europe, whichmakes the issuance and servicing of smartcards easier and less costly. In the UnitedStates, the banking system, although decen-tralized, has developed a highly efficientsystem of automated check processing andhas invested extensively in magnetic stripecard technology. This payment system infra-structure makes checks, credit cards, andmagnetic stripe cards more attractive andconsiderably less expensive to process thanstored-value smart cards. In addition, theU.S. telecommunications industry is capableof faster, cheaper, and more reliable servicethan is found in most other countries, includingEuropean countries.2

STORED-VALUE CARD ISSUERS

In the late 1990s, three stored-value e-cashsystems suited to the smart card form—VisaCash, Mondex, and Proton— wereprominent in international markets. Varioussmaller schemes play important roles inrestricted markets. Visa International, theworld’s largest credit card company, introducedVisaCash, its version of smart card e-cash, in1995. The card is intended to be used forsmall purchases such as a cup of coffee, anewspaper, a pay phone call, cinema tickets,or public transportation. VisaCash cardsstore units of prepayment and come in twomain types— disposable and reloadable.


Disposable cards, loaded with predeterminedvalue, typically come in denominations oflocal currency, for example, US$10. In 1999,VisaCash disposable cards were available inthe United States in $10, $20, $50, and $100denominations. When the value of the cardis used up, the user discards the card andpurchases a new one from a card dispensingmachine. Reloadable cards, which are issuedby banks, come without a predefined value,although in early trials Visa placed an upperlimit of $100 on its reloadable cards. Whenthe stored value is used up, the user can loadnew value onto the card at specializedterminals and ATMs.

Since the mid-1990s, important VisaCashpilots either have been concluded or arecurrently under way in the United Kingdom,Japan, and the United States. In October1995, a pilot was undertaken at Visa’sheadquarters in California. A larger and morewidely publicized trial occurred in 1996 atthe Summer Olympic Games in Atlanta.

Although results of the Atlanta test weremixed, Visa has also continued with pilots insuch locales as Hong Kong; Kobe, Japan; andLeeds, England, where 60,000 VisaCashcards were in circulation during 1998. Visais also assisting the People’s Bank of China tointroduce a chip-based payment card calledGolden Card. The bank believes two hundredmillion or more Golden Cards will be in useby 2004. Visa has also supplied the technol-ogy for the introduction of smart cards intothe bus and rail network in Seoul, SouthKorea, and, during 1998, launched aVisaCash pilot in Kobe, Japan. By late 1999,about 8 million VisaCash cards had beenissued in more than 60 VisaCash programsworldwide.

Mondex, another major smart card e-cashscheme, was created in 1993, when NationalWestminster Bank in Britain announceddevelopment of an electronic low-valuepayment system to be used for simple, everydaycash transactions. The Mondex microchipcontains a “purse” in which Mondex value isheld electronically. The purse is divided intofive separate pockets, allowing up to fivedifferent currencies to be held on the card atany one time. The microchip also containssecurity programs.

Because the value is electronic, Mondex e-cashcan be transferred over a telephone line or theInternet directly to a retailer, business outlet,or an individual, eliminating the need forintermediaries such as banks or other thirdparties. Thus, the Mondex system eliminatesthe difficult task of sending cash to remotelocations. Although a large amount of valuetheoretically can be loaded onto a Mondexe-purse card, thus far issuing banks have actedto limit Mondex value. For example, in acurrent trial in the United Kingdom, an upperlimit of electronic value has been set at 500British pounds (about US$800).

Source: Based on information obtained from Mike Hendry,Smart Cards Security and Applications, Boston, 1997, 44.

Figure 4Smart Card Sales, Selected Years, 1975-1995,

in millions of cards

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In July 1996, 17 major world financialinstitutions founded Mondex International;among the founders were its original developer,National Westminster Bank, Midland Bank,Hongkong & Shanghai Banking Corp., WellsFargo, AT&T, and 10 major banks in Australiaand New Zealand. The following November,MasterCard International acquired a majoritystake in Mondex and since then has licensedthe program worldwide on a regional basis.Mondex International is responsible formanaging the Mondex e-purse technologyand brand name as well as new productdevelopment. Multiple tests are beingconducted simultaneously in the UnitedStates, China (Hong Kong), New Zealand,Canada, and the United Kingdom. The largestpilots are in the United Kingdom (31,000cards) and Hong Kong (20,000 cards).MasterCard plans to create a multifunctioncard using Mondex technology in its creditand debit cards, which total 350 millionworldwide. In 1999 there were about twomillion Mondex-enabled cards in use aroundthe world.

Proton, a third major smart card e-cashscheme, is a rechargeable electronic pursedeveloped by Banksys, a Belgian ElectronicFunds Transfer network operator, and ismarketed by Belgian banks. Proton issimilar to VisaCash in that its value isdenominated in units of prepayment; it islikewise intended to be used for low-valuepurchases from shops or from vendingmachines. Proton cards can be reloaded atATMs, payphones, specially equipped homephones, and via the Internet in amountsranging from 100 to 5,000 Belgian francs(US$3 to US$170).

As of the end of 1999, Proton was involvedin five national rollouts. One is located inthe Netherlands, where a group of retailbanks launched a reloadable smart card chip

wallet called Chipknip in October 1995. Thenational rollout began in October 1996;within two years, more than 12 million cardswere in circulation. In addition to functioningas an electronic purse, Chipknip cards can beused for identification, retail loyalty, ticketing,and public transportation. Other rollouts areunderway in Australia, Belgium, Sweden, andSwitzerland.

In July 1998, Banksys, American Express, VisaInternational, and ERG, the card manufacturingcompany, created Proton World Internationalfor the purpose of further developing the Protonplatform and expanding its use worldwide.American Express, in particular, licenses Protonon a world-wide basis and has undertakenpilot tests of its own, including one with theU.S. Marine Corps. By late 1999, Proton-basedsystems had been licensed in 18 countries, andmore than 30 million Proton cards were incirculation around the world.

Other stored value e-cash schemes includethe GeldKarte system in Germany, developedby a group of German banks. Based on thenumber of cards issued, it is the largestelectronic purse system in current use.However, Geldkarte may be used only withinGermany. Initial tests were completed in1996, and as of late 1998, more than 50million cards had been issued in Germany.In the United States, Touch TechnologyInternational has developed a fully featuredopen electronic purse system that is beingtested in Hawaii and France. The computerfirm Hewlett Packard has also licensed anelectronic purse system, this one developedby SIBS, a Portuguese payment network.Hewlett Packard intends to market the SIBSsystem internationally, beginning in Spainand Costa Rica.

(For information on smart card technologyand security, see Appendix A.)


COMPUTER E-CASH

THE BASICS

Computer e-cash, as noted above, entails theissuance of electronic units or electronic valuethat can be used for payment in place ofcurrency. Often also called e-money, computere-cash made its appearance, primarily in theUnited States, in about 1995, and is used invirtual transactions over the Internet.Computer e-cash exists solely in cyberspace;in contrast with currency or smart cards, itdoes not exist in tangible form.

When using computer e-cash, the customerbuys value from an authorized provider, as hewould with a smart card. Computer e-cashvalue, however, is then stored either in thecustomer’s home computer or in a safe onlinerepository. When the funds are spent, thee-cash value is credited to a retailer’s e-cashaccount that must later be transferred to theretailer’s regular bank account. Computere-cash is marketed as an alternative to creditcards for normal Internet transactions.

E-CASH ISSUERS

CyberCash and DigiCash are two examplesof early computer e-cash payment systems.CyberCash, which was founded in 1994 in theUnited States, began offering CyberCoinservices in September 1996. CyberCash, Inc.touts CyberCoin as the Internet equivalent ofpocket change because payments can be madein increments as small as $.25. The upper limitof value is set at $10. CyberCoin features unitsof prepayment, as is the case with VisaCash,and operates via software installed in a personalcomputer. The payment service uses theexisting banking network system and does notrequire the opening of a new account at aspecific bank. Because payment by CyberCoininvolves the transfer of funds between

established bank accounts, such payments cangenerally be traced without great difficulty. In1997, in addition to offering CyberCoin andits credit card service, CyberCash, Inc.initiated an electronic check system calledPayNow Service.

DigiCash, Inc. was founded in 1989 in theNetherlands. In 1994 DigiCash announcede-Cash, a software-based payments systemthat allows users to send electronic paymentsfrom any personal computer to any otherpersonal computer or work station using anycomputer network, including the Internet. Touse e-Cash, a customer opens a special bankaccount with a bank that issues it. e-Cashdiffers from CyberCoin in that e-Cash is elec-tronic value itself and not units of prepayment.

e-Cash is similar to Mondex in that it can becirculated outside existing banking networks.In contrast with Mondex, however, once e-Cashis issued, the amount of expended value cannotbe divided into smaller denominations, afeature that discourages continuous transfer.In order to prevent multiple use of electronicvalue, each value amount of e-Cash is givenan encoded serial number (blind signature).When an amount of electronic value is broughtto a bank, the serial number is checked. Onlywhen the number has not been previouslyused can the value be accepted by the bank.

Four banks— three in Europe and one inAustralia— currently offer the e-Cash product.In the United States, the only bank toexperiment with e-Cash, Mark Twain Bank ofSt. Louis, Missouri, discontinued the projectin September 1998. That same year, DigiCash,Inc. moved from the Netherlands to PaloAlto, California. After filing for bankruptcy inNovember 1998, DigiCash was sold in August1999 to eCash Technologies, Inc., of Seattle,Washington, a manufacturer of Internetpayment software. eCash Technologies

20

continues to market eCash worldwide,calling it P2P, “person-2-person” Internetpayment service.

Other electronic money systems continue tobe developed. For example, in November1999, Confinity, Inc., based in Palo Alto,California, announced its PayPal service,which allows a user to send cash to anyonewith an e-mail address. The money is chargedto the user’s credit card or bank account. Itresides in an account maintained by PayPaluntil the recipient requests payment, which iseffected either by check or as a credit to therecipient’s credit card or bank account. Allpayment transactions are made throughPayPal’s central server, which ensures thesecurity of transactions. Every user is registeredby name, and, according to the company, eachtransaction is traceable.

Confinity is also developing software for ahandheld organizer called Palm Pilot thatwould allow a user to wirelessly beam moneyfrom one Palm Pilot to another. Such“beamed” transactions will also go throughPayPal’s central server. Both Confinityproducts are intended to make person-to-person payments as easy and convenient asmaking purchases from on-line businesses.Western Union has announced that it, too, isdeveloping a service to enable individuals tosend funds over the Internet.

REGULATORY POLICYAs electronic money has come into useduring the 1990s, the question of the needfor regulation has arisen. Various U.S.government agencies are tracking develop-ments associated with new electronic paymenttechnologies. Where appropriate, they areevaluating related regulatory policy issues andissuing advisories about possible measures to

inhibit the money laundering potential ofthese payment methods.

Within the Treasury Department, a department-wide effort under the leadership of theComptroller of the Currency, took an earlyand wide-ranging look at the issues confrontinggovernment by the emerging e-money tech-nologies. The Financial Crimes EnforcementNetwork (FinCEN), the Secret Service, andother Treasury law enforcement bureausparticipated in this effort, examining thepotential impact of e-cash systems on theTreasury’s law enforcement responsibilities.

In an effort to address consumer concernsarising from the new electronic paymenttechnologies, the Treasury in 1996 organizedthe Consumer Electronic Payments Task Force.Included in its membership were senior levelofficials from the Office of the Comptroller ofthe Currency (OCC), the Board of Governorsof the Federal Reserve System, the FederalDeposit Insurance Corporation (FDIC), andthe Federal Trade Commission (FTC).According to the task force’s report, “themission of the task force was to identify, inpartnership with private industry and thepublic, consumer issues raised by emergingelectronic money technologies and to explorethe extent to which innovative responses werebeing developed that are consistent with theneeds of the developing market.”

In 1997, the task force held two public hearingsand a series of information exchanges with thefinancial services industry. In April 1998, thetask force issued a report on its findings thatfocused on electronic money products andsuch issues as access for all consumers, userprivacy, and disclosure of consumer rights andresponsibilities by issuers. The task force didnot recommend new regulation at this timebut did foresee a government role in promotingresponsible self-regulation by the industry.


The cautious position of U.S. regulators isclear from a speech given by the Comptroller ofthe Currency in 1996. At a conference on therole of government and electronic money andbanking in Washington, D.C., the Comptrollerstated, after noting that the public and privatesectors should work together wherever possible:“We should avoid premature regulation. Werecognize the dangers of involving governmenttoo early in such a rapidly evolving area anddo not want to chill or unduly influence themarket by encumbering it with regulation thatmay quickly become outmoded, inappropriate,or detrimental.” However, he also noted thatregulators should be prepared to act whennecessary, because “waiting too long to addressproblems also will impede the full developmentof this promising market.”3

The Comptroller’s views are clearly repre-sentative of those across a wide spectrum offederal government opinion makers. InSeptember 1996, the FDIC issued GeneralCounsel’s Opinion Number 8, which addressedthe issue of whether stored value representsan insured deposit. Also that month, theagency held a public hearing on stored valueand electronic payment systems in whichexperts explored regulatory issues. Congresshas held a series of hearings since 1996 andhas explored various issues but has notpassed specific legislation.

The most recent regulatory action with regardto electronic cash came in August of 1999, inconnection with the Treasury Department’sissuance of a final regulation on the applicationof the Bank Secrecy Act (BSA) to those non-bank financial institutions called “moneyservices businesses” (MSBs). Investigationspreviously had revealed that certain segmentsof the MSB industry, which in 1996 accountedfor $200 billion in financial transactions, aresusceptible to money laundering. As noted bythe Treasury Secretary, “Enhancing anti-money

laundering requirements for MSBs demon-strates Treasury’s firm commitment to close offall avenues used by money launderers to movetheir illicit funds into the economy.”

Included under the rule’s definition for MSB’sare money transmitters, issuers, redeemers andsellers of money orders, traveler’s checks,stored value (electronic cash), check cashingbusinesses, and currency exchanges. Althoughissuers, sellers, and redeemers of stored valueare defined as MSBs, they, unlike the othertypes of institutions, are not required toregister with FinCEN or to maintain a list oftheir agents under the final version of the rule.This exemption for electronic cash reflectsFinCEN’s efforts to strike an appropriatebalance between law enforcement’s need foraccurate information about the owners andlocations of MSBs, and the concern that smallbusinesses and developing industries be sparedunnecessary and intrusive regulation. Issuers,sellers, and redeemers of electronic cash are,however, subject to certain BSA reportingrequirements, including currency reporting ininstances of cash transactions exceeding the$10,000 reporting threshold.

Other U.S. government regulators, such asthe OCC, have issued guidelines to banksand examiners on the handling of storedvalue products. For example, in September1996, the OCC disseminated guidelines onstored value systems to national banks,alerting them to risks and to other issuesthe banks may need to consider whendealing with such systems. This approach isin keeping with the regulators’ convictionthat, at present, it is best to allow theelectronic money industry to developwithout the hindrance of governmentregulation.

(For efforts at international regulation ofe-cash, see Appendix B.)

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SUMMARY OF ELECTRONICCASH IN THE NEAR TERM

At the end of 1999, an estimated 1.5 to 1.7billion smart cards were in worldwide circulation.Of this total, 23 million were Visa chip cards,including more than 8 million VisaCash cards.Also in circulation were about 30 millionProton cards and roughly 2 million Mondexcards. Other forms of electronic moneyworthy of mention were CyberCash and eCash.Both operated via personal computers and theInternet, although they were considerably lesssignificant in terms of volume than chip—based e-purses.

The immediate future of electronic cash wasexpected to be closely tied to smart cards, theplatforms that can carry electronic money ontheir chips. Although there was generalagreement among analysts that smart cardswere a viable technology, there was somedisagreement about the pace and size of smartcard growth.

Datamonitor, a New York firm, predicted ina 1998 report that by 2000 the number ofsmart cards issued worldwide would number3.85 billion, most of them phone cards.4

Datamonitor expected that although Europewould continue as the largest market forsmart cards, the most rapid growth wouldoccur in the United States. Growth elsewherewould be concentrated in the Asia/Pacificmarket, followed by Canada and LatinAmerican nations. The impetus behindsmart card growth was expected to be multi-application cards, which Datamonitorpredicted would number some 350 millionin 2002.

Forrester Research, another American firm,made a more cautious assessment.5 In a 1998report of their own, Forrester analysts did notanticipate widespread use of smart cards in

the U.S. and Canada until at least the turn ofthe century, and they expressed little confidencein multi-application smart cards in theimmediate future. They predicted that by2002, card totals might reach 4.7 million, upfrom 429,000 in 1997. A company spokesmancommented that although many peopleexpected the market to explode, Forresterdid not foresee that type of growth in thenext five years.

Frost & Sullivan, a third U. S. technologyresearch firm based in Mountain View,California, assessed the worldwide smart cardmarket in late 1999.6 The firm anticipated29 percent growth for 1999, mostly in thetelecommunications industry. Noting someleveling-off of growth while smart cardtechnology moved from the developmentphase to practical application, Frost &Sullivan, nonetheless, foresaw the number ofsmart cards rising steadily from 900 million in1997 to about 3.6 billion in 2002 to perhaps5.7 billion in 2004 (see Figure 5). Europewould continue to dominate the market,followed by the Asia/Pacific region, LatinAmerica, and North America.

In this country, stored value smart cards arecurrently limited to a few highly controlledpilots (including “closed systems” such ascollege campuses), and electronic moneybarely registers in terms of overall volume ofpayment transactions. The federal govern-ment remains interested, however, in thepotential of electronic means of payment. InMarch 1998, a Presidential panel expressedhope that the U.S. government would be fullycommitted to electronic commerce withinthree years.

It unveiled a plan to integrate electronicpurchasing tools, including smart cards, withcommercial electronic payment processingby 2001.


As early as 1996, the General ServicesAdministration (GSA) took the lead incoordinating an interagency managementapproach to electronic commerce, includingsmart cards.

By late 1998, GSA had prepared a set ofguidelines designed to ensure that federalagency smart card initiatives would beinteroperable and not a hodgepodge of incom-patible card programs. The guidelines areintended to encourage those federal agencieswith an interest in smart card systems todesign them with similar architecture andinterface. During 1999 GSA refined the

requirements of what it called its SmartIdentification Card, and in early January2000 released a request for proposals fromprivate vendors to produce it. GSA hopes tohave the first multi-application andinteroperable Smart Identification Cards incirculation by late 2001.

In the meantime, GSA has instituted a smartcard pilot among a group of its own employees.Beginning in May 1999, some 400 employeesreceived multi-application smart cards in atest of the technology. GSA hoped toexpand the pilot to include even moreemployees in 2000.

The GSA pilot and the Smart Identity Cardhave been of significance beyond U.S. govern-ment circles. It is possible that these initiativesmay help foster other compatible smart cardsystems in the United States if, as some industryexecutives expect, the federal governmentbecomes the catalyst for the introduction ofsmart cards to the U.S. public.

Whatever the varying assessments of thepotential of stored value smart cards ande-cash, at the end of 1999 these industrieswere still in their infancy. The basic technologywas at hand but, according to many analysts,the public acceptance and the broad appli-cations necessary to make smart cards trulyviable were still a few years away.

What was certain at the end of the 20thcentury was that electronic payment schemesand smart cards had arrived on the scene.What was uncertain was how quickly theywould be perfected and how quickly theywould gain acceptance among consumers.

Source: Based on information obtained from Frost &Sullivan, “The World Market in Review [1999].” <http://

www.smartcardcentral.com>

Figure 5Smart Card Growth, 1996-2004,

in millions of cards per year


ELECTRONIC BANKING

INTRODUCTION

Electronic banking is an umbrella term forthe process by which a customer may

perform banking transactions electronicallywithout visiting a brick-and-mortar institution.This report examines the basic technologyand applications of electronic banking, thegrowth of transactional websites, the geographicdistribution of electronic banking activities,the regulatory bodies and instrumentsconnected to electronic banking, fraudulentInternet banking institutions, and the trendsand prospects for transactional bankingactivities. An Appendix to this reportprovides a list, with websites, of selectedInternet banks.

The following terms all refer to one form oranother of electronic banking: personalcomputer (PC) banking, Internet banking,virtual banking, online banking, home banking,remote electronic banking, and phone banking.PC banking and Internet or online bankingare the most frequently used designations. Itshould be noted, however, that the terms usedto describe the various types of electronicbanking are often used interchangeably.

PC banking is a form of online banking thatenables customers to execute bank transactionsfrom a PC via a modem. In most PC bankingventures, the bank offers the customer aproprietary financial software program thatallows the customer to perform financialtransactions from his or her home computer.The customer then dials into the bank withhis or her modem, downloads data, and runsthe programs that are resident on thecustomer’s computer. Currently, many banksoffer PC banking systems that allow customers

to obtain account balances and credit cardstatements, pay bills, and transfer fundsbetween accounts.

Internet banking, sometimes called onlinebanking, is an outgrowth of PC banking.Internet banking uses the Internet as thedelivery channel by which to conduct bankingactivity, for example, transferring funds, payingbills, viewing checking and savings accountbalances, paying mortgages, and purchasingfinancial instruments and certificates ofdeposit. An Internet banking customeraccesses his or her accounts from a browser—software that runs Internet banking programsresident on the bank’s World Wide Webserver, not on the user’s PC. NetBanker definesa “true Internet bank” as one that providesaccount balances and some transactionalcapabilities to retail customers over the WorldWide Web. Internet banks are also known asvirtual, cyber, net, interactive, or web banks.

To date, more banks have established anadvertising presence on the Internet—primarily in the form of informational orinteractive websites— than have createdtransactional websites. However, a number ofbanks that do not yet offer transactionalInternet banking services have indicated ontheir websites that they will offer such bankingactivities in the future.

Although Internet banks offer many of thesame services as do traditional brick-and-mortar banks, analysts view Internet banking asa means of retaining increasingly sophisticatedcustomers, of developing a new customerbase, and of capturing a greater share ofdepositor assets.7 A typical Internet bank sitespecifies the types of transactions offered and

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provides information about account security.Because Internet banks generally have loweroperational and transactional costs than dotraditional brick-and-mortar banks, they areoften able to offer low-cost checking and high-yield certificates of deposit.

Internet banking is not limited to a physicalsite; some Internet banks exist withoutphysical branches, for example, Telebank(Arlington, Virginia) and Banknet (UK).Further, in some cases, web banks are notrestricted to conducting transactions withinnational borders and have the ability to maketransactions involving large amounts of assetsinstantaneously.8

According to industry analysts, electronicbanking provides a variety of attractive possi-bilities for remote account access, including:

• availability of inquiry and transactionservices around the clock;

• worldwide connectivity;

• easy access to transaction data, both recentand historical; and

• “direct customer control of internationalmovement of funds without intermediationof financial institutions in customer’sjurisdiction.”

TECHNOLOGY

SECURITY

Concerns over security, privacy, and reliabilityhave led consumers to take a cautious approachto electronic banking. Hence, banks seek toassuage customers’ fears about the safetyof their Internet financial transactions byproviding information about the technologyand the safeguards they employ. Banking

institutions stress that they provide safeinternal operational controls— that is,layered security.

A variety of software packages are availableto support electronic banking activities.Internet-based transactions rely on browsers asfront-end software. The transactions requirethree levels of security: first, an encryptionstandard, either a Secure Electronic Transaction(SET) or a Secure Sockets Layer (SSL)protocol that assures message integrity, allowsfor the transfer of a digital signature forauthentication procedures, and providesconfidentiality for the data that flow betweena Web server and a browser; second, firewallsand filtering routers; and third, an internaloperating system that provides protection forstored information. As an added measure ofsecurity, customers are assigned a personalidentification number (PIN) and a passwordfor accessing their accounts. SSL providesdata encryption and message integrity for anInternet connection; it can also provide serverauthentication, provided the user knows thesteps to authenticate. SSL security protocol onthe Web server and customer browser ensuresthat authenticated data have been receivedfrom the customer. Although SSL ofteninvolves very strong encryption, the bankingindustry seems to prefer the SET protocolbecause SET provides for the authentication ofall parties to the transaction and SSL does not.

OPENING AN ACCOUNT

There are several ways to open and fund anelectronic banking account in the UnitedStates. Customers who have existing accountsat brick-and-mortar banks and want to beginusing electronic banking services may simplyask their institution for the software neededfor PC banking or obtain a password forInternet banking. Either approach requiresminimal paperwork. Once they have joined


the system, customers have electronic accessto all of their accounts at the bank.

New customers can establish an accounteither by completing a PC banking applicationform and mailing it to an institution offeringsuch a service or by accessing a bank’s websiteand applying online for Internet banking. Ineither instance, the customer can fund the newonline account with a check, wire transfer,or other form of remittance. No physicalinterface between the customer and theinstitution is required.

GROWTHDespite concerns about security, reliability,and privacy, electronic banking is positionedfor dynamic expansion. Growth of theInternet, consumer comfort with technology,and demographics (younger persons inhigher income groups), combined with low-cost PC and Internet banking solutions,have made that expansion inevitable. Theformer CEO of Bank One Corporationbelieves that the demographics of Internetuse are indicative of the potential expansionof Internet banking. (In only four years, theInternet has reached 50 million households.During the 1998 Christmas season, approxi-mately $8.6 billion in retail goods was soldover the Internet, more than three timeshigher than predicted.) The former BankOne CEO notes that “there is no bankingtransaction— other than taking deposits—that can’t be done on the Internet. Youmake all your payments, you get your loans,you get your mortgages.”9

INTERNET BANKING WEBSITES ANDGROWTH

Websites of banks on the Internet may beeither information-only sites or transactionalsites. As of late 1999, most bank websites were

informational, but of those that offeredtransactional capabilities, the ability to checkaccount balances and histories, to transfermoney between accounts, and to pay billselectronically were the most common offer-ings. Many banks, however, attempted toadvance their standing by suggesting uniquevalue or services. A senior analyst with GomezAdvisors noted that in their campaigns to woocustomers, banks “will all find ways to describethemselves as being different.”10 However,over time, and as banks compete for customers,the trend is for these services to lose theiruniqueness and to become standard.

Reports on the number of institutions offeringInternet banking services vary amonggovernment, private, and trade sources. Someof this discrepancy is caused by terminology,in particular, the generic use of the termelectronic banking and the assumption that theterm Internet banking refers to a customer’sability to conduct banking on the Internet,even though it may signify nothing more thana bank’s establishment of a website. Further,reporting sources often do not specify whetherthe institutions referred to are banks, thrifts,or credit unions.

Although there appears to be no comprehensivelist of Internet banks, a number of sourcesprovide data on Internet banking. However,these sources categorize their data differently,are compiled with varying degrees ofthoroughness, and often provide conflictinginformation. Among others, the following sitesprovide information on electronic banking:

• The Bank Rate Monitor site < h ttp://w w w .bankrate.com /brm /new s /rev /rev 1.as p> onits “Bankrate.com Web site reviews” pageprovides weekly reviews of U.S. financialinstitutions’ websites and indicates whetheraccess is by Internet, the institutions’software, other software, or dial-up network.

28

The site evaluates Internet banks by websiteand assesses content, design, and interactivity.

• The Online Banking Report < h ttp://w w w .onlinebankingreport.com >, which haswebpages for “True Web Banks and CreditUnions” and “100 Largest Web Banks,”lists those institutions that provide ac-count balances and transaction details toretail customers over the Web and in-cludes the institution’s service providerand the date added. However, the list isnot complete, and relies upon banks tosubmit information if they are not onthe list.

• The AAAdir Directory of Banks, CreditUnions, and Financial Information on theInternet < h ttp:w w w .aaadir.com > indicateswhether or not a bank offers Internetbanking and requests that mistakes andomissions be forwarded to the site.

• Gomez Advisors < w w w .gom ezadv is ors .com >offers an Internet Banker Scorecard thatprovides information on a given bank’swebsite, overall costs except for loans, andthe benefits and shortfalls of its services.11

Based on the expansion of sales of Internetbanking applications, it is expected thatInternet banking will continue to increaserapidly. Internet banking surpassed PC bankingactivity during 1999.12 Large banking institu-tions are spending billions of dollars to putcustomers online. Smaller institutions are alsobuying packages from software companies todeliver global corporate cash managementservices via the Internet.13

Data on Internet banking have beencollected by the Federal Government,particularly the Federal Deposit InsuranceCorporation (FDIC) and the Office of theComptroller of the Currency (OCC). As of

Source: Based on information obtained from: Kori L. Egland, Karen Furst, Daniel E. Nolle, and Douglas Robertson,“Banking over the Internet,” Quarterly Journal, [OCC] , Vol. 17, No. 4, December 1998, 30, and FDIC data.

Figure 6Growth of Transactional Bank and Thrift Web Sites, 1995-1999


late 1999, the FDIC counted 1,132 FDIC-insured banks and thrifts with transactionalwebsites out of a total of approximately3,500 banks and thrifts with websites. Thisfigure represented an increase from 368transactional sites a year earlier and from103 transactional sites in late 1997 (seeFigure 6). It also meant that out of about10,500 federally insured banks and thrifts inlate 1999, almost 11 percent offered transac-tional banking, more than a three-fold increasefrom late 1998 but still a relatively smallpercentage of banking activity. FDIC datacollection has been enhanced by a June 30,1999, request that banks and thrifts reporttheir website addresses on their quarterlyfinancial reports.

As of late 1999, at least eight U.S. banks were”branchless” or “Internet-only” banksaccording to the FDIC. By definition, thesebanks use the Internet as their primarydelivery channel, although some may alsomaintain a “token” branch office:

• CIBC National Bank< w w w .m arketplacebank.com >, headquarteredin Maitland, Florida, but owned byCanadian Imperial Bank of Commerce;operates on the Internet under the brand-name Marketplace Bank.

• CompuBank < w w w .com pubank.com >,opened for business in late 1998.

• First Internet Bank of Indiana< w w w .firs tib.com > , the only state charteredInternet bank.

• G & L Internet Bank < w w w .glbank.com >, athrift institution that opened for business inOctober 1999, in Pensacola, Florida.

• NetB@nk < w w w .netbank.com >, a formersubsidiary of Carolina First Bank.

• Principal Bank < w w w .principal.com >, asubsidiary of the Principal Financial Group.

• Security First Network Bank< w w w .s fnb.com >, operated as a U.S.subsid iary of the Royal Bank FinancialGroup (Canada).

• Telebank < w w w .telebank.com >, one of theearliest true “branchless” banks and awholly owned subsidiary of E*Trade Group,as of January 2000.

In some cases, traditional brick and mortarbanks that have added Internet capabilitieshave chosen to market their Internetbanking product under a different name,which, in some instances, makes it appear asif the Internet function is a separate bank.The following is a list of Internet bankswith different names that are actuallydivisions of FDIC-insured depositoryinstitutions as noted:

• BankCaroLine < w w w .bankcaroline.com >,Carolina First Bank, FSB, Traveler’s Rest,South Carolina.

• BankDirect < w w w .bankdirect.com >, TexasCapital Bank, Dallas, Texas;

• DirectBanking.com < w w w .directbanking.com >,Salem Five Cents Savings Bank, Salem,Massachusetts.

• Discover Card < w w w .dis cov ercard.com >,Greenwood Trust Co., Wilmington,Delaware.

• Ebank.com < w w w .ebank.com >, CommerceBank, Atlanta, Georgia.

• EverBank < w w w .ev erbank.com >, WilmingtonSavings Fund Society, FSB, Wilmington,Delaware.

30

• First National Bank of the Internet< w w w .fnbinternet.com >, First National Bankof Cherokee, Woodstock, Georgia.

• Marketplace Bank < w w w .m arketplacebank.com >CIBC National Bank, Maitland, Florida;serves as the website for CIBC NationalBank.

• Membership B@nking< w w w .am ericanexpres s .com >, AmericanExpress Centurion Bank, Oakland, California.

• NBank < w w w .nbank.com >, The FirstNational Bank of Commerce, Commerce,Georgia.

• USAccess Bank < w w w .us acces s bank.com >,Porter Bancorp, Louisville, Kentucky.

• USABanc < w w w .us abanc.com >, BankPhiladelphia, Philadelphia, Pennsylvania.

• WingspanBank < w w w .w ings panbank.com >,First USA Bank (BancOne), Wilmington,Delaware.

(For additional information on selected U.S.Internet banks, see Appendix C.)

Industry sources estimated that, in thesecond half of 1999, only about 6-7 percentof U. S. households banked online. Onlinebanking, however, holds great potential forbusinesses as well as for individuals. Amongbanks offering transactional Internet services,a sizeable number currently offer Internet-based services tailored to business. Suchservices are likely to become increasinglyimportant to businesses of all size. Industryanalysts expect that demand for businessservices will be another stimulant to growthin Internet banking, which they predict willincrease fourfold during the next four tofive years.

COST OF SERVICES

Electronic banking, both PC and Internet,costs banks less than does providing servicesin the traditional brick-and-mortar setting. In1998, Booz Allen estimated that the cost perbanking transaction was:

$1.07 branch service$0.54 telephone (average)$0.27 ATM-full service$0.02 PC banking$0.01 Internet banking

Other sources, however, point out that thecost of Internet banking is greater than theseBooz Allen figures indicate because of theoverhead cost of installing and servicingInternet transactions. The true cost possiblyranges from $.07 per transaction to as much as$0.26, according to one estimate.14 PC banking,because it is a proprietary “dial-up” systemserving individualized remote users, is moreexpensive than Internet banking, whichfeatures a centralized system that can reachan expanding number of customers at lowincremental cost.

An expert on Internet banking who is affiliatedwith Grant Thornton LLP, an internationalaccounting and management consulting firm,thinks that Internet software and serviceproviders offer community banks competitiveprices for total software and assistance pack-ages that facilitate their entry to Internetbanking. He believes that Internet start-upcosts are equivalent to the approximate cost ofone to two tellers. He views the expansion ofInternet banking as providing opportunities togain market share.15

(For a list of selected international Internetbanks and websites, see Appendix D. Appendix Ediscusses Internet banking in different regionsof the world.)


REGULATORY OVERSIGHTThe growth of electronic banking has intro-duced various challenges for financialregulatory officials. Government authoritiesmust continually evaluate commercialdevelopments in order to formulate strategiesand programs that minimize the risk forfinancial fraud and money laundering,without inhibiting the continued growth ofthe industry.

Today’s electronic bank may consist of nomore than a computer server and a telecom-munications connection and, depending on itslocation, may be subject to a wide range ofregulatory treatment— from very robust andeffective programs, to very lax or nonexistent.In addition, an electronic bank whose prac-tices come under suspicion by regulatory andlaw enforcement authorities may be difficult toinvestigate because of the remote and globalprojection capabilities of the Internet andother telecommunications technologies. Thevictims of a bank fraud and/or the perpetratorsof a money-laundering scheme may be half-a-world removed from the physical location ofan electronic bank’s computer servers. Onlinepayment technologies may also pose otherunique problems vis-à-vis concealed transactionidentities and insufficient or non-existentaudit trails.

Banking supervisory activi ties and anti-money laundering activities are closelylinked in many nations. However, as previ-ously noted, authorities around the globehave widely ranging standards for regulatoryoversight and supervision, a factor thatmay greatly influence their ability toeffectively deter money laundering and otherfinancial crimes.

On the positive side, in the mid-1990s, theInstitute of International Bankers detected a

global trend toward harmonizing supervisoryand regulatory standards and noted that“initiatives to increase coordination of regula-tory authorities continue to be undertaken,especially through the Basle Committee onBanking Supervision.”16 The Basle Committee,composed of regulatory officials from themajor financial nations of the world andheadquartered in Basle, Switzerland, issued areport in March 1998, in which it identifiedsome of the risks that banks engaging in elec-tronic banking and electronic money mayface. The Committee also considered mea-sures that banks and bank supervisors couldtake to deal with those risks.17

The committee identified three risk categoriesas most important: operational risks, whichinvolve threats to the security of bank systemsor products; legal risks, which may arise fromviolations of or non-conformance with laws,rules, and regulations; and reputational risks,which result from bank practices or productsthat may lead to a loss of public confidence.Although none of these basic risks is new inthe banking industry, the specific ways inwhich the risks arise, as well as the magnitudeof their impact on banks engaging in electronicbanking, may be new for bankers and supervisorsalike, the committee warned.

Although the committee dissolved itself afterissuing its report, a successor group has beenformed to pursue the issue of risk in elec-tronic banking. Chaired by the current U.S.Comptroller of the Currency, this electronicbanking group held its initial meeting inNovember 1999.

FINANCIAL CRIMES ENFORCEMENTNETWORK (FINCEN)

In the U.S., a number of federal agenciesoversee the financial activities of the bankingsector. FinCEN, under the Department of the

32

Treasury, is responsible for establishingpolicy and for overseeing all aspects of BankSecrecy Act (BSA) compliance by morethan 200,000 U.S. bank and non-bankfinancial institutions, as well as for coordi-nating federal and state governmentprograms relating to administration andenforcement of the BSA. This authorityincludes oversight of BSA supervisory,examination, and civil enforcement activitiesand coordination with federal and statecriminal investigators.

Regulations issued by FinCEN require banksand other financial institutions to keep andmaintain records, file reports, establish programsto guard against financial crime, and reportsuspicious transactions to the government.The Suspicious Activity Reporting (SAR)system, which is administered by FinCEN onbehalf of the participating agencies, hasdeveloped into a primary anti-moneylaundering mechanism, both in the UnitedStates and abroad.

In the context of its responsibilities andauthority under the BSA, FinCEN activelymonitors the development of the onlinebanking industry. By fully understanding thenature and functional characteristics ofbanking operations conducted in the Internetenvironment, FinCEN is better able todetermine appropriate BSA program initia-tives to prevent money laundering. FinCENuses written publications and outreachbriefings to disseminate information onindustry developments and other issuespertaining to regulatory and law enforce-ment strategies.

FEDERAL FINANCIAL INSTITUTIONSEXAMINATION COUNCIL

The Federal Financial Institutions ExaminationCouncil (FFIEC), established in 1979, is a

formal “interagency body empowered toprescribe uniform principles, standards,and report forms for the federal examina-tion of financial institutions by the Board ofGovernors of the Federal Reserve Board,the Federal Deposit Insurance Corporation(FDIC), the National Credit UnionAdministration (NCUA), the Office of theComptroller of the Currency (OCC), andthe Office of Thrift Supervision (OTS),and to make recommendations to promoteuniformity in the supervision of financialinstitutions.” The FFIEC publishes variousguides and information booklets forelectronic banking. Among these publicationsis the FFIEC Information Systems Handbook,which provides an overview of informationsystems concepts, practices, FFIEC workprograms, and information system controlsshould be be consulted prior to developinga transactional website.

Another such reference tool for planning,developing, and deploying transactionalwebsites is the Interagency Guidance onElectronic Financial Services and ConsumerCompliance, CEO Memorandum 90. Thispublication provides guidance in assessingthe implications of some of the emergingelectronic technologies for the consumerregulatory environment, an overview ofpertinent regulatory issues, and sugges-tions on how to apply existing consumerlaws and regulations to new electronicfinancial services.

During 1999, U.S. bank regulatory agenciesunder FFIEC auspices expanded theirInformation System (IS) examinationprogram to include not only banks and thriftsbut also Internet banking vendors. Thepurpose of the expansion is to improve thesecurity of on-line banking. Currently, theFFIEC IS Subcommittee is coordinating thisinteragency initiative.


FEDERAL RESERVE SYSTEM

The Federal Reserve System serves as thenation’s central bank. The system consists of aseven-member Board of Governors and twelveFederal Reserve Districts located in major U.S.cities. The mission of the Federal ReserveBoard (FRB) is to provide the nation with asafer, more flexible, and more stable monetaryand financial system. The Board is responsiblefor conducting the nation’s monetary policy;maintaining the stability of the financialsystem; protecting the credit rights of consum-ers; and providing certain financial services tothe U.S. government, the public, financialinstitutions, and foreign official institutions.The Board has supervisory and regulatoryresponsibilities over banks that are membersof the Federal Reserve System, bank holdingcompanies, international banking facilities inthe U.S., Edge Act and agreement corporations,foreign activities of member banks, and U.S.activities of foreign-owned banks.

In June 1999, commenting on a forthcomingGeneral Accounting Office report on electronicbanking, the Chairman of the Federal Reservewrote that the growth of Internet banking hasbeen fairly gradual, and “we have not seensignificant risks emerge. As Internet servicesbecome a more widespread and significantpart of banking operations, however, weexpect to devote more supervisory resourcesto examining these activities.”18 The FederalReserve has enhanced its monitoring regardingInternet banking and is developing morepowerful automation tools in order to aidmore generally in examination and review.

FEDERAL DEPOSIT INSURANCECORPORATION

The Federal Deposit Insurance Corporation(FDIC) is the government agency that insuresapproximately 10,500 savings institutions,

thrifts, and commercial banks. Whether itplans to offer only traditional physicaloperations, to offer both Internet and physicaloperations, or to be a fully virtual bank, astart-up institution follows that same applica-tion process for Federal Deposit Insurance.Although applications for Internet-based banksare reviewed more carefully with respect tosystem security and Internet-related aspects ofthe banks’ business plans, the regulations,laws, and policies for the application processare the same for all banks. A new bank mustfollow the standard application/approvalprocess in order to obtain FDIC authorizationto operate a transactional Internet bankservice. Existing banks desiring to add thiscapability may do so; however, they are subjectto review and approval during the FDIC’snext examination.

In order to advance efforts to deter fraud andother financial crimes, the FDIC maintainstwo public information systems, both of whichare available through the agency’s website.The first system, a computer search engine,allows Internet users to query an FDIC data-base to determine whether an institution has alegitimate charter and is an FDIC member.All electronic banking and InformationSystems information (for example, examprocedures, guidance letters, etc.) is availableat <www.fdic.gov/regulations/information/index.html>. From this page, bankers mayaccess all relevant exam procedures, manuals,and official statements, and consumers mayaccess an area that allows them to search foronline banks to confirm legitimacy andinsured status.

The FDIC also issues Special Alert FinancialInstitution Letters (FILs) that warn of suspiciousbanking activities by entities that may beconducting unauthorized banking operationsin the United States or abroad. These insti-tutions may be soliciting deposits on the

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Internet, offering credit card services, andso on, and may lack both FDIC insuranceand a bank charter.

In February 1997, the FDIC was the firstfederal regulator to develop and issueelectronic banking examination proceduresand to train its examiners accordingly. Theagency maintains an internal program forElectronic Banking Subject Matter Experts,who receive specialized technical training thatallows them to perform examinations of moretechnologically sophisticated institutions.

OFFICE OF THE COMPTROLLER OFTHE CURRENCY

The Office of the Comptroller of the Cur-rency (OCC), under the Department of theTreasury, charters, regulates, and supervisesnational banks, and supervises federallylicensed branches and agencies of foreignbanks. National banks, that is, banks withthe words national or national association intheir title, or the letters N.A. or N.T. follow-ing their titles, represent approximately 28percent of all insured commercial banks inthe United States. They make up about 57percent of the total assets of the bankingsystem.19 The OCC supervises more than2,500 banks.

The OCC is similar to the FDIC in itsregulatory process for net banking activities.Under the Bank Service Company Act, astatutory requirement mandates that banksnotify the OCC within 30 days if a vendor isproviding information technology processingservices— that is, an Internet banking package.The law applies equally to the FDIC and theFederal Reserve Board. If the bank is supplyingits own technology, it is not required to notifythe OCC. New banks such as CompuBankcome under the requirements governing theregular licensing process.

The OCC is taking a pro-active stance towardssupervising bank use of technology and therisks posed by that technology. The followingpublications and activities represent some ofthe measures undertaken by the agency:

Internet Banking Handbook Published in1999, this handbook provides information toexaminers and banks about the risks andexamination procedures for Internet Banking.The examination procedures were tested inseveral examinations prior to publication.

Issuances In recent years, the OCC hasissued a broad range of guidance, including:

• Certificate Authority Guidance (BB99-20);• Infrastructure Threats from Cyber-terrorists

(BB99-9):• Technology Risk Management: PC Banking

(BB98-38);• Technology Risk Management (BB98-3).

Internet Banking Survey To better guide theOCC’s activities relating to Internet banking,specialists conducted a survey of the OCC’sportfolio managers in the fourth quarter of 1999.The survey indicated that 45 percent of nationalbanks plan to have transactional web sites by theend of 2000. Approximately 90 percent of largebanks offer Internet banking today.

Internet Banking Working Group The OCCestablished this working group to coordinateits multiple efforts to ensure that the agencythoroughly evaluates its Internet licensing,regulation, and supervision responsibilities.

Technical Tools The OCC developed a seriesof internal technical tools to assist the moni-toring of risks pertaining to Internet banking.

The OCC, well aware that technology is chang-ing the banking industry, is reviewing its BankInformation System examination program to


keep pace with technology and banks’ growingreliance on vendors and service providers.

OFFICE OF THRIFT SUPERVISION

The Office of Thrift Supervision (OTS), alsounder the Department of the Treasury, is theprimary regulatory agency of all federal andmany state-chartered thrift institutions.Such institutions include savings banks andsavings and loan associations. OTS regulatesapproximately 1,120 institutions, and was thefederal banking regulatory agency to charterthe first pure Internet bank (Security FirstBank, in 1995). Since January 1, 1999, theElectronic Operations Rule has allowed U.S.savings and loan institutions to offer theirtraditional services electronically. Thisprovision authorizes thrifts to use personalcomputers, the Internet, the World WideWeb, telephones, and automated teller andloan machines to deliver banking services.Thrift institutions that intend to provideelectronic banking services must notify theOTS 30 days in advance. The 30-day noticeis required for both brick-and-mortar facilitiesand “pure” cyberbanks. Thrifts using newelectronic technologies must also follow theframework of the interagency CommunityReinvestment Act (CRA) regulations andinterpretations.20

Two reference tools available from OTSfor planning, developing, and deployingtransactional websites are:

• Thrift Activities Regulatory Handbook,Information Technology, Section 341 (describesa safety and soundness examination programto evaluate technology risk— useful forplanning, deployment, and operation ofinformation systems);

• Policy Statement on Privacy and Accuracy ofPersonal Customer information, CEO

Memorandum 97 (offers information forcustomers on privacy policies availableon websites).

NATIONAL CREDIT UNIONADMINISTRATION

The National Credit Union Administration(NCUA) is an independent federal agencythat supervises and insures more than 6,800federal credit unions and insures almost4,200 state-chartered credit unions. TheNCUA does not require that credit unionssubmit to a pre-approval and regulatoryprocess for Internet banking activities.However, examiners review such activitiesduring their onsite contacts, which areconducted at least once a year, and evaluateCall Report requirements, which arereviewed at least twice a year. NCUA esti-mates that about 250 of the approximately1,700 credit unions with websites offerinteractive services.

RECENT REGULATORYDEVELOPMENTS

In March 1999, the U.S. House Banking andFinancial Services Committee passed anamendment to H.R.10, requiring that federalbanking agencies study banking regulations“regarding the delivery of financial services,including those regulations that may assumethat there will be no person-to-personcontact during the course of a financialservices transaction, and report theirrecommendations on adapting those existingrequirements to online banking and lending.”The regulatory agencies must submit a reportto Congress on their findings and conclusionsas well as recommendations for legislative orregulatory action deemed appropriate within ayear of enactment of the Financial ServicesAct of 1999. The act was signed into law onNovember 12, 1999.

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In July 1999, the U.S. General AccountingOffice submitted a report to Congress thatevaluated the efforts of the five regulatoryagencies to investigate and supervise Internetbanking activities.21 GAO found that nearly44 percent of supervised banks had failed tofully implement regulators’ recommendationsto reduce risks associated with on-line banking.The GAO report discussed problems specificto supervising Internet banking and maderecommendations for improving examinationprocedures and for limited extension ofregulatory authority.(For Information on International Financialand Regulatory Institutions, see Appendix F.)

CRIMINAL ACTIVITIESWith the global spread of electronic bankingcomes an increased risk for criminal abuse bythose individuals engaged in money laundering,fraud, and other financial crimes. Electronicbanks, particularly those operating from tradi-tional “bank secrecy” jurisdictions, offer manyunique services that may be misused for thepurpose of laundering illicit funds. However,given that the online banking industry is as yetin the nascent stage, discussion of specific money-laundering scenarios remains hypothetical.

In contrast, investigators have documentedthat financial fraud, usually perpetrated by anonline bank against its customers, is occurring.The fraud often takes the form of unlicensedinstitutions that accept deposits in violation offederal and/or state law. Both the OCC andthe FDIC issue public alerts with regard tofinancial institutions that are thought toengage in questionable banking activities.For example, the alerts flag institutions notchartered by a recognized regulatory agency,institutions whose deposits are not properlyinsured by the FDIC, and institutions whosemanagement is not properly bonded to con-

duct such business. Customers are urged to becautious when depositing funds in flaggedinstitutions. The alerts target both brick-and-mortar and online institutions.

Netware International Bank was the subject ofthe OCC’s Suspicious Transactions Alert 97-14,issued in June 1997. The “subject entity” wassoliciting deposits on the Internet and offeringhigh interest rates. The bank’s deposits werenot insured by the FDIC, nor had the NorthCarolina Commissioner of Banking grantedthe bank a charter. After being advised by theOCC, the FDIC issued Special Alert FIL-71-97,addressing the OCC’s concerns. In July 1997,after the execution of a search warrant by theFederal Bureau of Investigation, the bankceased operations. Netware’s officers are beingprosecuted for bank fraud, mail fraud, andmoney laundering in Statesville, NorthCarolina. In May 1999, guilty pleas wereentered in two of three cases— 5:99 CR6(United States v Bear) and 5:99 CR7 (UnitedStates v Skeen). The third case, 98 CR221(United States v David Bear), was still pend-ing at the end of 1999.

The First Bank of Internet, an entity with aChicago, Illinois, mailing address, announcedin March 1995 that it was initiating transactionprocessing services for Internet electroniccommerce. Despite the use of the term bankin its title, the First Bank of Internet wasneither chartered nor a lending institution,nor was it covered by FDIC or FSLIC insur-ance or regulations. Although the bankreleased a procedures guide with instructionsfor vendors and customers and provided ane-mail address for verification purposes, inactuality it was a Visa ATM card site used forpurchasing transactions over the Internet.22

The OCC issued an alert warning of unautho-rized banking activity by this entity (OCC Alert95-11) on April 26, 1995. The “bank” is nolonger in business.


The European Union Bank, registered offshorein Antigua and Barbuda, is another bank citedfor suspicious activities. Chartered in 1995 witha $1 million investment, the bank collapsed inAugust 1997. Within one week, the bank hadfired all of its employees and its co-foundershad disappeared, allegedly absconding with $8million to $10 million in depositors’ money.The bank touted itself as an Internet institutionwith private, tax sheltered banking services.The Bank of England and the OCC (Alert 96-40)issued warnings about the bank’s operations inOctober 1996; the FDIC followed in April1997 (FIL-29-97).23 The OCC warned that thebank was soliciting deposits on the Internet,was offering high interest rates, lacked theprotection of the FDIC, and was operatingwithout authorization, supervision, or regulationby any U.S. financial institutions regulator. Thedirector of the Idaho Department of Financeordered the bank to cease soliciting depositsfrom Idaho residents over the Internet, allegingthat the bank, which was operating without astate or a federal charter, was illegal. TheAntigua and Barbuda government also issued afraud alert and was seeking the bank’sco-founders, reportedly two Russian nationalslinked to organized crime.

PROSPECTSElectronic banking is a growth industry. Aflood of “banks”— state banks, community

banks, and thrift institutions— as well asbusinesses and financial investment firms haveopened transactional banking sites. InternationalData Corporation, a research firm, notes thatsales of Internet banking applications, includingthe software to build websites, reached morethan $93 million in 1998.24 International Dataprojected sales increases of 250 percent in1999, with Internet banking applicationsaccounting for approximately 33 percent ofall U.S. banking applications on the market.The bank consulting firm of Dannenberg andKellner predicts that Internet banking willbecome more attractive and more competitivewhen institutions offering such services expandtheir distribution systems and offer personalonline financial advice over the Internet.

As the industry continues to grow and expandglobally, so too will the opportunities for fraudand money laundering, particularly in bankhavens and offshore financial services centers.Customers of facilities located in such spots areknown to exploit legislative loopholes or bankingprovisions that facilitate clandestine activity. Inthe face of this challenge, regulatory authoritieshave continued to assess their policies, toidentify flaws and, as is appropriate, take actionto minimize the risk of criminal misuse of thebanking system. Given the global nature of theInternet environment, however, this effort mustinclude multilateral consultations among con-cerned governments if it is to be successful.


INTERNET GAMING

INTRODUCTION

In the last three years, the Internet gamingindustry has undergone enormous expansion,

going from twelve websites at the beginning of1997 to an estimated 600-700 sites in early2000. (For the purpose of this report, theterm Internet gaming describes web-basedcasino gambling, sports betting, and lotteryoperations.) Although the actual amount ofcurrent or future gaming conducted via theInternet cannot be measured or predictedeasily, experts are confident that upcomingtechnology improvements and the relativeease of establishing such sites will continuethe trend of expansion.

Gaming websites are located in a large numberof jurisdictions, including Africa, the Asia/Pacific region, the Caribbean, and WesternEurope. In the United States, where gamblingregulation has been primarily a state responsi-bility, there are many proponents of federallegislation that would prohibit the transmissionor use of Internet gaming services. Althoughcontinued world expansion of this industry isnot hard to predict, the legislative processnecessary to establish United States policyremained unfinished in mid-2000, and theeffort to establish legal controls is ongoing.

This chapter of the report provides informationon several aspects of Internet gaming. Thefirst section evaluates the speed at whichInternet gaming is growing and factors involvedin the development of the commercial marketfor Internet gaming and the types of financialactivity possible using current systems. Thatdiscussion is followed by a description ofgambling websites as they now exist,emphasizing the types of customers that are

targeted and how the sites attempt to dealwith obstacles such as customers’ securityconcerns, legal issues unique to the UnitedStates market, and technical problems. Thenext section discusses the various approachesof national and some regional jurisdictionswhere there is a current or projected marketdemand for Internet gaming.

The fourth section discusses recent enforcementactions in the United States, focusing on civiland criminal cases that charge Internet-gaming related misconduct and on recentefforts to establish federal legislation thatcriminalizes Internet gaming. The final sectionof the chapter examines the prospects ofInternet gaming based on the conditionsdescribed in the preceding sections.

COMMERCIALDEVELOPMENT TRENDS

The rate of growth of Internet gaming is amatter of speculation, as is the total amount ofmoney spent per year. The number of gamingsites also is a matter of speculation: mostcurrent estimates range between 300 and 700,with new sites appearing constantly and othersgoing out of business. (Rolling Good TimesOnline, a source of such information, reported282 individual sites accepting real-moneywagers in February 1999.) According to reports,sites may be established with relatively lowcapitalization for equipment, software, setup,and maintenance expenses. However, finalstartup costs depend on the amount requiredfor licensing and bonding by the jurisdiction inquestion. Once a site is in operation, it mustachieve a relatively high volume of gamingtransactions to make a profit.

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One gaming expert estimates that $10 mustbe wagered for every $1 of revenue realizedby an Internet gaming operator.

PARTICIPANTS

According to the former chair of the Interac-tive Gaming Council (IGC), the growth ofInternet gaming has been fueled mainly bythe work of young computer and marketingspecialists interested in applying their tech-nology in a high-risk venture with someprospects of profitability. However, largersoftware and electronics companies, many ofwhich have connections to other, moreconventional parts of the computer andtelecommunications industries, are playingan increasing behind-the-scenes role in theInternet gaming industry. The character andlong-term prospects of this role are not clear.Some of those companies sell gaming systemsoutright to gaming operators; others take anongoing percentage-licensing fee. Accordingto the former IGC chair, the number ofcompanies with such involvement has grownslowly but steadily, with most companiesappearing to maintain the balance of theiractivity in jurisdictions with more establishedfinancial regulatory programs until govern-ments set firmer national policies.

GROWTH

Estimates of the total amount of businessdone annually by the industry range from$6 billion to $60 billion. $10 billion has beencited by one industry analyst as the mostaccurate estimate for 2000. A complicatingfactor in gauging the growth of Internetgaming is the uncertain legal status of theindustry (especially as it relates to theUnited States), which may have causedmany operators to conceal their financialsituation and sometimes their identity. Theoverall lack of clear regulation also makes

it difficult to determine how many enter-prises are entering the field and how manyare folding. For example, Antigua, whichboasts of its strict licensing regime, hasissued a list of seven or eight unlicensedgaming websites that were operating fromAntigua in 1998. Further complicatingmatters is the frequent ownership or licens-ing (the relationship often is not clear) ofmultiple sites by the same corporate entityand the tendency to change site names oruse variations of the same name in differentlevels of advertising. Online casino andsportsbook listings often give both theparent and the subsidiaries the same status,and often both levels have websites thatseem to represent a single casino orsportsbook. An example is Casino Fortuneof Trinidad, which apparently went frombeing a single casino to being the corporatename of several casinos, including one inBotswana, owned by a company called theSunny Group. Meanwhile, Casino Fortunemaintains a separate gaming website exactlylike the other casinos.

About 15 companies develop and sell turnkeyinteractive gaming software for Internet gamingoperations. Their number is growing slowly butconstantly. According to an IGC expert, thelargest volume of such sales has been producedby Atlantic International Entertainment, Inc.and Microgames. Other major players areCyberoad of Canada, Casino World Holdings ofAntigua, CyberSpace Casino Tech and HandaLopez of California, and Cryptologic ofVancouver. However, some gaming operatorshave established relationships with moreconventional software companies such asElectronic Data Systems Corporation, thesupplier of Global Internet Corporation, aDominica-based Internet operator.

Whatever the growth rate or current levelof activity, it is certain that since 1997,


those depending on the U.S. market havebeen substantially slowed by the uncertainlegal status of Internet gaming operations inthe United States. Major supplier companiessuch as Virtual Gaming of Antigua and GLC(formerly Gaming Lottery Corporation) ofGibraltar have formally declared that theywill avoid direct contact with the Americanmarket as long as state and federal laws areinterpreted as prohibiting the offering ofInternet gaming services in U.S. jurisdic-tions. Australia’s largest online operation,Centrebet, terminated all U.S. commercein 1998.

SITE LOCATION

The number of countries currently licensingInternet gaming also is a matter of specula-tion. One industry analyst estimated 20such countries in November 1998. Amongthose known to offer some form of licensingare Antigua, Australia, Austria, theBahamas, Belize, Costa Rica, Dominica,the Dominican Republic, Ecuador,Gibraltar, Grenada, the NetherlandsAntilles, St. Kitts, and Venezuela. However,the definition of “licensing” also differs byjurisdiction.

Observers of the industry have pointedout that websites often label themselveslicensed by virtue of holding only ageneral license to conduct business, asopposed to a specific license for Internetgaming. The latter license may not begranted in jurisdictions such as Costa Ricaand Venezuela, even though Internetgaming operations apparently are based inboth countries. In addition, many casinosoperate in countries that do not licenseInternet gaming. The choice of a sitelocation for Internet gaming may havenothing to do with whether or not acountry licenses the operations.

FINANCIAL OPERATIONSAn important marketing tool for the Internetgaming industry is the ability to transfermoney quickly, inexpensively, and securely—attributes that conventional casinos, lotteries,and sports betting venues offer to theircustomers. A person who enters an interactivegaming website wishing to place a bet first mustregister and deposit a prescribed minimumamount of money (most often $300) with whichto establish an account. The conventionalways of placing that money are (1) providingthe number of a credit card from which a cashadvance is taken and transferred to the casinooperator, (2) sending a check or money order,or (3) sending a wire transfer or otherremittance of funds. The bettor is able togamble at the website only when the accounthas been established. As the bettor gambles,money is added to or subtracted from theinitial amount. The bettor may request that acheck be sent for the remaining balance at anytime; most operators guarantee a short turn-around for this service.

According to one Internet gaming analyst,the conventional methods of transfer haveimpeded the growth of the industry becausethey do not provide enough security (a largesum must be forwarded or a credit card num-ber revealed), speed (the transfer of funds viawire or other remittance system takes time), oranonymity (personal information, especiallyage, also is required to establish an account).There is, in fact, a substantial record ofshadow websites collecting such deposits for aperiod of time and then disappearing, in theprocess destroying consumer confidence.

He notes that, although money order,check, and credit card transactions still arethe most frequently used payment methods forestablishing accounts, several more efficientmethods of cash transfer are either on the

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horizon or already in limited use. Theseinclude stored-value smart cards, which canstore digital information about an account, andelectronic cash (e-cash). These new paymentmechanisms have the advantages of securityand speed. However, at present, high transferfees make digital cash impractical for theinteractive gaming industry. Another problemis that several varieties of digital cash arecompeting for the market, creating a situationwhere a prospective bettor’s home computermight be equipped for a type of digital cashincompatible with a given gaming website.

Theoretically, as these problems are overcome, aconsumer will be able to use e-cash across a widerange of purchases; this marketing approach isbeing taken by both the provider companies andthe gaming companies that offer e-cash as apayment option. At present, however, a rela-tively small percentage of the Internet gamingcommunity is connected to an e-cash system.When gaming establishments offer accountestablishment via conventional credit cardwithin a five-minute period, the additional speedof e-cash does not seem to be a great advantageeven though the security and anonymity ofthe technology may prove more attractive.

GAMING WEBSITES

DESIGN AND STRUCTURE

Gaming websites vary enormously in size andstructure. Some are simple three-page siteswith no additional links, and some are elabo-rate (and often repetitive) collections of tenor more links and sublinks. Most home pagesoffer a menu of links. The most commonlistings are:

• “About Us” (which may or may not containinformation about the workings of thecompany);

• “Contact Us” (usually one or more emailaddresses with assurance that someone willbe available to address problems);

• “Frequently Asked Questions” (mostlyabout how to deal with transmission andsoftware glitches, often also addressing legalissues associated with the questioner’slocation);

• “Help” (a list of solutions to possible finan-cial and payment problems);

• “Rules” (sometimes a general statement ofhow games are to be played and moneyhandled, sometimes a detailed descriptionof how each game is to be played); and

• “Security” or “Security Features” (a list ofways in which a betting transaction with thiswebsite will be expedited and protected).

LEGAL ISSUES

The question “Is gambling on the Internetlegal?” brings a variety of responses; somesites simply fail to ask it. Some sites, such asGlobal Sports in Costa Rica, say that the onlyjurisdiction that counts is the one where thesite is located; since they are licensed in CostaRica, for example, Global Sports maintainsthat gambling is legal no matter where thecustomer is sitting. Some sites warn thecustomer to check local laws before entering.A few list states such as Indiana and Minnesotaas jurisdictions where Internet gaming hasbeen declared illegal. And many simply saythat the status of a patron’s Internet gamingactivity is a complex problem that has notbeen decided definitely or consistently. Thequestion of taxability of winnings is addressedby about half of the sites, often with theanswer that no accounting of winnings goes toany customer’s government, and that it is the


customer’s responsibility to determine taxrequirements and to comply with them. In anycase, it is clear that customers cannot andshould not rely on site operators for completeand accurate legal guidance.

LICENSING QUESTIONS

The subject of licensing and specific regula-tory requirements is omitted entirely onmany gaming websites, and in some casesthere is no mention of ownership or location.When licensing is mentioned, the terminol-ogy differs somewhat. Some sites state thecase directly and briefly (for example, “Ca-sino Money is fully licensed by the govern-ment of Venezuela.”) In a few cases, there ismention of bonding, periodic monitoring, orother regulatory activity. In other cases, theissue of licensing and location becomes split,as in “Casino Money is a fully licensedsportsbook operating in Venezuela,” a con-struction that may indicate that the locationand the licensing jurisdiction are not thesame. Compare the more specific statement,“Casino Money is fully licensed by andoperating in Venezuela.”

According to several websites that commentregularly on Internet gaming, the term licenseis commonly used by the gaming business tobolster its credibility and authenticity towould-be customers. In some jurisdictions,such as Australia, advertisement of a licenseis indicative that background checks havebeen made, that a special fee has been paid,and that the business is subject to periodicmonitoring and auditing. In other jurisdic-tions such may not be the case. The termlicense may indicate that a franchise hasbeen issued to the operator by a softwareand electronics firm that supplies it. Inother words, the business is licensed byanother firm but not necessarily by agovernment entity.

SITE SECURITY AND TRANSACTIONS

Also prominent in many (but not all) websitesare efforts to reassure the customer of thesecurity and reliability of gambling at that site.In 1998 the Bettorsworld website listed abouttwenty online casinos and sportsbooks thatwere reported not to be paying out winningsor to be chronically late in paying. Themotivation of such a list may be suspect.However, other sources also indicate that alarge number of gaming websites are of the fly-by-night variety. A fair number onBettorsworld’s list still have websites andpresumably still take bets. Because even thereportedly reputable Bettorsworld cannot berelied upon to provide information as to thecurrent status of some sites, gaming enter-prises make every effort to reassure thepotential customer.

Nearly all sites go into substantial detail abouthow financial transactions are handled,usually offering a wide variety of ways totransmit money to open an account. Methodsfor the collection of winnings are prominentlymentioned, as are encryption systems designedto improve the security of credit card use.Most sites claim to have the most excitinggames, the most sophisticated software, andthe most customers. Many sites also offer playfor fun (especially recommended by some sitesfor U.S. customers who live in states thatprohibit gambling for money).

According to one industry analyst, thetechnological level of most interactive gamingsites still is far below the expectations ofAmericans accustomed to efficient televisionand telephone transmission. Despite theadvertising emphasis on the “virtual experienceof gambling in your own home,” game playoften is slowed by long image downloadingprocesses and frequent computer crashes; thesystem works only as well as its least-efficient

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link, which often is the user’s own PC. Andthere still is no reliable way for a customer tobe sure he or she will not be cheated by riggedgames or nonpayment of winnings, will not bebreaking some law, or will not have a credit-card number misused.

DEVELOPMENTS IN THEUNITED STATES

Throughout its history, gambling regulation inthe United States has been the province ofstate governments. As such, the range of legalgaming activity in the states is quite varied.Only two states—Hawaii and Utah— prohibitgambling altogether. The other states permitan array of legalized activities, ranging frombingo, lottery, and race wagering, to full-scalecasino gambling. In addition, under authoritygranted by the Indian Gaming RegulatoryAct of 1988, native American tribes haveestablished casinos, lotteries, and bingo hallson tribal land in approximately 30 states. Intotal, more than 500 casinos exist in theUnited States today.

FEDERAL LEGISLATION

After two years of research into all aspects ofgambling in the United States, the congres-sionally mandated National Gambling ImpactStudy Commission issued its final report inJune 1999. The commission’s recommendationson Internet gaming include the following:

• that the federal government prohibit allInternet gambling that is not alreadyexplicitly permitted; that the United StatesDepartment of Justice develop enforcementstrategies against Internet service providers,credit card providers, money transferagencies, makers of wireless communicationssystems, and “others who intentionally or

unintentionally facilitate Internet gamblingtransactions”;

• that legislation be developed to prohibitwire transfers to known Internet gamblingsites or to banks that handle their accounts;

• that any credit card debts incurred in Internetgambling be made legally unrecoverable;

• and that “the federal government take stepsto encourage or enable foreign governmentsnot to permit Internet gambling organizationsthat prey on U.S. citizens.”

The Internet Gambling Prohibition Act wasfirst introduced by Senator John Kyl (R-AZ) inMarch 1997. The 1997 Kyl Bill would haveamended the Interstate Wire Act of 1961,which prohibits the use of telephone andtelegraph communications facilities for theplacing of bets on sporting events. Theamendment would include the Internet,which did not exist in 1961, among theforbidden media. The final version of thelegislation subjected individual Internetbettors as well as Internet gaming entrepreneursto a fine and/or prison.

The Kyl Bill was passed by the Senate by avote of 90 to 10 in July 1998. However, thecompanion House bill, introduced byCongressman Bill McCollum (R-FL), did notreach the House floor for a vote before thecongressional session ended in the fall of 1998.

In March 1999, Senator Kyl introduced anew Internet gaming bill that was substan-tially similar to the 1998 version. Unlike theearlier version, the new bill does not makeplacing a bet via the Internet a federalcrime; it provides exceptions for fantasysports, parimutuel betting, state lotteries,gaming activities permitted by the IndianGaming Regulatory Act and by agreements


between states and Indian tribes based onthat law, and legally placed bets on horseraces. The bill also provides federal authoritiesinjunctive powers to shut down web sites; andit requires gaming companies to comply withstate licensing and enforcement standards.

In June 1999, the Senate Judiciary Committeeapproved the 1999 version of the InternetGaming Law by a vote of 16-1, sending it to theSenate floor for consideration. The bill calls forup to four years imprisonment and up to $20,000in fines for operators of online casinos andsportsbooks, and it would extend the provisionsof the Federal Wire Act to cover gambling onthe Internet as well as by telephone and wire.On November 19, 1999, by a unanimous vote,the Internet Gaming Prohibition Act passed theSenate just prior to the start of the Congres-sional holiday recess, but the House has notyet passed any comparable legislation.

In April 1999, Congressmen Bob Goodlatte(R-VA) and Frank LoBiondo (R-NJ)announced that they would introduce theirbill in the House of Representatives after theNational Gambling Impact Study Commissionissued its final report in June 1999. OnNovember 3, the House Judiciary Committee’sSubcommittee on Crime approved theInternet Gambling Prohibition Act introducedby Congressman Goodlatte and five cosponsors.However, the bill was defeated in the fullHouse on July 17, 2000, falling 25 votes shortof the two-thirds majority necessary for passage.Following the defeat, Goodlatte indicated thathe intended to continue seeking passage of thelegislation before the end of the currentsession of Congress in December. If he fails, thebill would have to start again with committeehearings in the next session of Congress.

Another piece of legislation, the InternetGambling Funding Prohibition Act, wasintroduced in the House of Representatives on

May 10, 2000. This new bill would prohibitthe use of credit and debit cards, checks, bankdrafts, and electronic transfers to place bets,collect winnings, or otherwise conductgambling activities on the Internet. OnJune 28, 2000, the bill was approved by theHouse Banking Committee and, as of August 10,was awaiting further action.

FINCEN SURVEY OF STATELEGISLATION

Early in 1999, FinCEN sent a survey to theoffices of the attorneys general of all the statesand United States territories and the Office ofthe Corporation Council of the District ofColumbia. The survey posed three questionsrelated to the jurisdictions’ policy towardInternet gaming:

• whether the jurisdiction has statutes orregulations dealing with gaming in generaland, if so, whether any of them might applyto Internet gaming;

• whether any existing or future statutes ofthe jurisdiction apply specifically to Inter-net gaming;

• whether the jurisdiction had pursued anycriminal or civil actions pertaining toInternet gaming.

Responses were received from 19 states, theDistrict of Columbia, and Guam.25

Responses to the question of applicability ofcurrent laws or regulations to Internetgaming overwhelmingly expressed theopinion that laws designed for conventionalgambling could be interpreted to apply toInternet gaming, depending on the circum-stances of a particular case. The criterionmost often cited is legal establishment thatInternet gaming actually occurs within the

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boundaries of the state in which the gambleris physically located.

Although no responding jurisdiction cited a lawor regulation specifically enacted to addressInternet gaming, one section of the NevadaGaming Control Act lists the Internet as a“medium of communication,” giving the StateGaming Control Board official jurisdiction overInternet gaming. In New Jersey, an article of thestate constitution says that any new form ofgaming must be approved by referendum beforebeing legalized. Therefore, according to thespokesperson for the state attorney general’soffice, the current interpretation of that articlemakes Internet gaming illegal. Ohio’s interpre-tation is that any form of gambling that is illegalby state law in conventional form also is aviolation of state law when it is disseminated inthe state via a computer system. The AlabamaAttorney General’s office interprets thedefinition of gambling devices in the statecode— ”any device, machine, paraphernalia, orequipment that is normally used or usable in theplaying phases of any gambling activity”— asincluding Internet equipment. The interpretationimplicitly includes the Internet under the statelaws prohibiting conventional forms of gambling.

Alabama has taken no criminal or civil actionagainst Internet gaming, but the decision in a1999 criminal case, brought for possession ofobscene material for transmission via the Inter-net, rejected the defense that the relevant lawpreceded the development of the Internet andtherefore was not applicable. In Arizona andTennessee, the authority to prosecute such casesrests with local and district prosecutors, respec-tively, rather than the state’s attorney general.

FEDERAL CIVIL AND CRIMINAL CASES

In March 1998, the United States Attorneyfor the Southern District of New York indicted21 U.S. citizens for conspiracy to transmit bets

and wagers on sporting events via the Inter-net, in violation of the Interstate Wire Act of1961. At that time, the U.S. Attorney Generalissued a statement indicating that Internetgaming would be considered illegal underexisting federal law.

The defendants were owners, operators, andmanagers of nine offshore sports bettingcompanies based in Curaçao, Costa Rica,the Dominican Republic, and Antigua, allof whom had conducted some part of theirbusiness in the United States. All wereidentified after federal agents placedtelephone bets via an 800 number fromNew York (territory where such bets areillegal) and were paid when successful. Onedefendant, the president of SDP Global ofCosta Rica, pled guilty and promised to paya fine of $750,000 and close his operation.As of February 2000, ten other defendantshad pled guilty to the charges and reachedsettlements, and six remained officiallyfugitives because they had not answeredthe charges. As of that date, only onedefendant, Jay Cohen, had gone to trial.On February 28, 2000, the United StatesDistrict Court in Manhattan found Cohen,the owner of the Antigua-licensed WorldSports Exchange, guilty of violating theFederal Wire Act.

Indian Gaming Regulatory Act (IGRA)

As some states were testing how the IndianInternet lottery fit with state law, a case atthe federal level was expected to eventuallydetermine whether Indian tribes have specialstatus that allows them to use long-distancetelephone lines and the Internet to transmitthe lottery to customers in the 33 stateswhere lotteries are legal. In 1997 the Coeurd’Alene Tribal Court in Idaho ruled that thefederal Indian Gaming Regulatory Act(IGRA) protected the tribe’s lottery from


interference by state legal authorities andthat long-distance telephone companiescould not refuse 800 service by citing the1961 Wire Act or state laws. (The tribe alsoargued that long-distance and Internetcommunication were needed because theirdistance from population centers presented acompetitive disadvantage.) AT&T, thecompany chosen to provide this service,found itself caught between the tribal courtdecision, violation of which could lead to acontempt citation, and the possibility thatsupplying an 800 number would lead tocriminal prosecution by states whose attor-neys general had advised that such servicewould be considered a violation of state law.In August 1997, AT&T sought declaratoryrelief in federal court.

In December 1998, the United StatesDistrict Court for the District of Idahodenied a complaint brought by the Coeurd’Alene Indian tribe against AT&T forhaving refused the tribe an 800 number tobe used by customers playing its NationalIndian Lottery. The court ruled that thetribal court ruling did not require AT&T tosupply an 800 number in any state wheretransmission of gaming activities wouldviolate state law. In such states, a separateagreement must be reached to address thestate’s regulatory interests before the lotterycan be offered.

The special status granted by the IGRA wasruled to apply only to gaming activities physi-cally located on the reservation, a line ofreasoning that caused the closing of both thetelephone and Internet phases of the lottery,although the ruling itself applied only totelephone lines. If the lottery is deemed notto be entirely operated on tribal lands, theInternet phase is open to criminal prosecutionby receiving states in the same way thatoffshore websites with some operations in the

United States have been prosecuted. The tribeappealed the decision to the United StatesNinth Circuit Court, which remanded the caseto a Missouri state court in September 1999.Argument of the tribe’s legal standing continuedin that court into 2000.

STATE CIVIL AND CRIMINAL CASES

Several states have taken legal action againstindividuals and companies that have offeredoffshore Internet gaming services to individualswithin the state jurisdiction. Authorities haveinitiated civil and criminal cases, issuedofficial policy statements, and sought to restricttransmission in other ways. The followingdiscussion is a summary of some of the stateactions to date.

Florida

In December 1997, the Attorney General ofthe State of Florida signed an agreementwith Western Union to the effect that thelatter company cease providing Quick Paymoney transfer services from Florida residentsto known offshore gaming establishments.Quick Pay is a reduced-fee system normallyused to expedite collection of debts orpayment for goods. According to the FloridaState Attorney General and a WesternUnion spokesman, in 1998 the policy ofQuick-Pay restriction yielded satisfactoryresults, and the prohibition of the use ofQuick Pay accounts for gaming purposes wasupheld in the federal court case CheyenneSales Limited v. Western Union FinancialServices International. No known website,however, includes mention of the restrictionon the use of Western Union services byFlorida residents.

The state also was able to persuade themedia to stop advertising offshore gamingsites. Florida contended that the advertising

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of such sites in the state constitutes doingbusiness in the state and invokes all thelegal restrictions inherent in aiding andabetting such activity. In this case, thoserestrictions include the placing of illegalbets (i.e. a form of gambling not specificallypermitted by law), which is a misdemeanor,and running a betting operation, which is athird-degree felony.

Indiana

In 1998 Indiana’s Attorney General issued apolicy statement on Internet gaming. Thestatement was in response to concernsexpressed by the Indiana Commissioner ofHigher Education about the proliferation ofgambling on college campuses. The AttorneyGeneral noted that Indiana law prohibits allforms of gaming that are not specificallypermitted, i.e. river boat gambling, pari-mutuelbetting on horse races, charitable gambling,and the state lottery. He further asserted thata person placing a bet from Indiana with anoffshore gaming establishment was engaged inin-state gambling just as if the person engagedin conventional gambling. He then concludedthat the solicitation and acceptance ofwagers are subject to prosecution underIndiana state law.

Following the statement, the AttorneyGeneral’s office sent email messages to morethan 100 offshore Internet gaming operatorsdemanding that they cease offering theirservices in the state and that they post awarning on their websites that using them isillegal for Indiana residents. (Two suchwarnings have been discovered, on the sitesof 123 Casino and Sportsbook in Grenada,and AAA Casino, whose location is unknown.)According to the Attorney General, the mainreason for his warning was to bring atten-tion to the danger of exposing minors toInternet gaming, not to enforce a given law.

As of March 1999, Indiana had not devel-oped a policy regarding criminal sanctionsagainst Internet gaming enterprises offeringtheir services in the state.

Maryland

In 1997 the Office of the Attorney General ofMaryland reached an out-of-court agreementwith RealTIME, which offered Internet games ofchance to users and whose equipment was locatedin Maryland. RealTIME, which had argued that itshould not be prosecuted in Maryland because itwas not offering gambling to residents of Mary-land, agreed to cease its operations in Maryland.

Minnesota

In 1997 the Attorney General of Minnesotabrought suit against Granite Gate Resorts, aNevada corporation, and its president, KerryRogers, based on the defendants’ operationof a Belize-based Internet sports bettingoperation. The lawsuit alleged that GraniteGate and Rogers engaged in deceptive tradepractices, false advertising, and consumerfraud by offering Minnesotans access to sportsbetting. Such betting is illegal under state law.

The trial and appellate courts rejected thedefendants’ argument that Minnesota courtslacked jurisdiction because the defendants hadmerely placed information on the Internet andMinnesotans had chosen to access it. Theappellate court concluded that “Granite Gate’sadvertising had an effect in Minnesota, that theeffect was intended, and furthermore thatInternet advertising is not different from otheradvertising forms such as telephone solicitationor radio advertising.” Minnesota courts hadpreviously concluded that such advertisingallowed sufficient contacts with potentialcustomers to establish personal jurisdiction.The Minnesota Supreme Court affirmed theappellate court’s decision in April 1999.


Missouri

In April 1997, the State of Missouri brought acivil suit against Interactive Gaming andCommunications of Pennsylvania, which ranthe Sports International Internet sportsbetting establishment of Antigua, and againstits chief executive officer, Michael Simone.As in Minnesota, the case was based onstate consumer law. The case was initiatedwhen a state law enforcement agent saw anadvertisement for the sports betting websiteand placed a wager over the company’s 800number, which was located in Pennsylvania.As a result of the state’s civil case, a restrainingorder and fine were issued. A second wager,placed after the restraining order, led to a June1997 criminal indictment against InteractiveGaming and Communications for promotinggambling by allowing Internet bets of morethan $100. Simone eventually pled guilty to alesser charge and was fined.

Consistent with its position that state lawprohibits Internet gaming, Missouri alsosought a permanent injunction against theInternet lottery run by the Coeur d’AleneIndian Tribe of Idaho. The case was removedto the federal level, where in 1999 the UnitedStates Court of Appeals rejected a districtcourt decision that the lottery was protectedby the 1988 Indian Gaming Regulation Act.The court held that the lottery would beprotected only if the gaming occurred onIndian lands. At the direction of the Court ofAppeals, the case has been remanded for adecision on the legal location of the lottery,which would be the basis of a final decision.

New York

In October 1998, the New York State AttorneyGeneral’s office brought civil charges againstCasino International, an Antigua-basedInternet gaming company, for several violations

of state gaming laws. This action was takenpursuant to New York state law forbidding allforms of gambling except the state lottery. TheAttorney General’s office alleged that CasinoInternational maintained an illegal Internetgaming site in the United States through twoInternet Service Providers (ISP) based in LongIsland, New York.

The gaming company failed to respond to thestate’s charges, and in May 1999, a defaultjudgment was issued. According to the Attor-ney General’s office, Casino Internationaldistributes its gaming website through ISPs inevery U.S. state. Although the companyclaims to be licensed by the Antiguangovernment, the Free Trade Zone Commis-sion, which is the official licensing body, doesnot support this claim.

According to the Attorney General’s office,the settlement did not hold the New YorkISPs responsible for the alleged violation.The Attorney General’s office likened theISP’s position to that of an express mailservice that unknowingly delivered illegaldrugs; as part of the injunctive relief in thecase, the New York ISPs were simply forbiddento continue the practice.

New York also brought a civil case in 1998against World Interactive Gaming Corporation,an Internet casino operator and a subsidiary ofFlorida-based Atlantic International Enter-tainment, for fraudulent solicitation of stockinvestments and for violation of several federaland state gambling laws based on operation ofan Internet casino. That case is pending.

Wisconsin

In September 1997, the State of Wisconsinfiled suit against three Internet gamingoperations: Net Bet, Online International,Inc., and the Coeur d’Alene Indian lottery.

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Net Bet, based in Nevada, operated Casinosof the South Pacific in the Cook Islands,whose website advertisement said that onlyresidents of Nevada, Minnesota, New Jersey,and the Cook Islands were prohibited fromplacing legal bets. In May 1998, the Net Betdefendants agreed to include Wisconsin in theirlist of prohibiting jurisdictions and to ceasesending betting information into Wisconsin.

Online International, Inc., a Wisconsin-basedcorporation, planned to operate an Internetgaming website from a location in that state tosupply Internet gaming to jurisdictions outsidethe United States. In late 1998, the corporationwas ordered by the court to dissolve. In thethird case, that of the Coeur d’Alene Indianlottery, the court held that the tribe wasimmune from suit but that Wisconsin doeshave jurisdiction over Unistar, the companyengaged by the tribe to run its Internet lottery.Unistar was alleged to have advertised gamingon a website aimed at Wisconsin residents (anaction that the tribe could not authorize outsideits reservation), misrepresenting the legality ofgambling in the state. In May 1999, after thetribe and Unistar had shut down their lotteryfollowing a separate court ruling in Idaho, theyagreed not to offer the lottery to Wisconsinresidents until they had obtained a specificruling on its legality from a court in Wisconsin.

PRIVATE LAWSUITS

Private lawsuits also have set precedents forthe nature and treatment of Internet gaming.In 1997 a Texas citizen, Tom Thompson, suedHanda-Lopez, Inc., operator of the Curaçao-licensed Casino Royale Internet casino, fornonpayment of winnings. In a case before theUnited States District Court, Western Districtof Texas, the company claimed it had aimedno explicit advertising at Texas, and hencehad established none of the contacts that are

necessary for a state to have jurisdiction. Theplaintiff argued (and the court agreed) thatthe act of Internet advertising implicitlyincludes everyone in the world able to accessthe website, thus automatically establishingthe minimum contact that is needed for dueprocess. Here the court confirmed whatsome Internet gaming enterprises say is afundamental principal: if they seek businessworldwide, they must be prepared to operatelawfully worldwide.

In 1998 a different type of court test challengedthe status quo of Internet gaming operations.After losing more than $70,000 in gambling onat least ten different Internet sites, Californiaresident Cynthia Haines was sued by her bankfor nonpayment of the accrued debt on severalcredit cards. Haines countersued, claimingthat the credit card companies were profitingfrom Internet gaming activity, and argued thatsuch profit taking is both illegal and unfairbecause no authority regulates Internet gaming.The defendants argued that the case wasinadequate because the plaintiff had sued onlythe credit card companies and not the Inter-net gaming companies, and that in Californiasuch a case could not be based on admittedlyillegal conduct by the plaintiff. Expertsprojected that a finding for the plaintiff couldend the credit-card option for Internet gamingcompanies, forcing them to rely on otherforms of payment. Beginning in July 1999, aseries of out-of-court settlements werereached with the companies that Haines hadsued.

As a result of the Haines case, MasterCardhas announced rules for the use of its creditcards for Internet gambling. According tothe new rules, in the future all Internetcasino merchants seeking to use MasterCardmust post on their websites a notice thatInternet gaming may not be legal in thestate where a potential participant is located,


and that it is the responsibility of the con-sumer to ascertain his/her state’s legalposition. In addition, Internet merchantsmust ascertain and record the state orcountry of each potential customer, andcard-issuing institutions such as banks mustreceive notice of all Internet gaming trans-actions. Such notification make it possibleto code records for future reference.According to MasterCard, the new rulesare an effort to accommodate the widevariations in the legal status of Internetgaming around the world and the role ofMasterCard as a payment system for indi-viduals, banks, and merchants in manydifferent countries. Visa International hasadopted similar requirements for its merchants.(See Appendix G for a discussion of Internetgaming regulation around the world.)

THE INTERACTIVE GAMINGCOUNCIL

In 1996, Internet gaming companies formedthe Interactive Gaming Council (IGC), aninternational trade group within the InteractiveServices Association (ISA). The stated goalsof the IGC are to provide a forum for legitimatecompanies to discuss problems and advancetheir interests, to establish fair industry guide-lines that will improve customer confidence,and to represent the industry in public policydiscussions and disseminate information aboutsuch issues. The IGC now has at least 55members, but only a partial membership list isavailable because some companies prefer notto be publicly identified.

The Council has pushed for an industry-wide code of conduct that would include,inter alia, truth in advertising, privacy andconfidentiality for customers, strict licensingrequirements, and observance of the gaminglaws of jurisdictions from which customersmay be placing bets. In 1998 the IGC proposed

an independent, international InternetGaming Control Board that would beoverseen by the ISA and would establish aninternational certification and regulationsystem for Internet gaming licensees.

CONCLUSIONTwo diametrically opposed regulatoryphilosophies currently exist with regard toInternet gaming: a strategy calling forlegalization and regulatory controls and astrategy prohibiting such activity.Opposition in the United States to legalizedInternet gaming is based on several factors.First, there is the fear that Internet gamingand, more specifically, the underlying finan-cial activity, offer unique opportunities formoney laundering, fraud, and other crimes.Government officials have also expressedconcerns about underage gaming andaddictive gambling, which some claim willincrease with the spread of Internet gaming.Others point to the fact that specific typesof Internet gaming may already be illegalunder state laws.

On the other side of the argument is thestrategy of legalization and regulation, which isurged by the IGC on behalf of the worldwideindustry. Many countries subscribe to thisapproach and have found that strategies otherthan prohibition are workable from their owneconomic and law-enforcement perspectives.

Regardless of which strategy is pursued,technological advances are likely to have greatimpact on the development and implementationof policy. For example, in 1998, AtlanticInternational Entertainment announced plansto develop a “portable gaming center” thatwould bring virtual casinos and sports bettingto conventional television sets via telephonelines. Such a device would make offshore

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gaming operations available to customers whodo not have computers or Internet access.

Technology is also moving the industry rapidlytoward a point where financial transactions canbe fully opaque. Although electronic cash has

not “arrived” in the commercial world atlarge, it is being mentioned with increasingfrequency by Internet gaming sites as a way toguarantee security, a factor which experts citeas one of the chief concerns of potentialInternet gaming customers.


APPENDICES


APPENDIX A

SMART CARD TECHNOLOGYAND SECURITY

TECHNOLOGY

Multi-application Operating Systems andInteroperability

Cards that contain chips capable of performingmultiple tasks are regarded as the future of thesmart card industry. Despite the fact thate-cash has proven successful as a stand-alonein Europe, it is not enough simply to offerstored value. This point was made in two pilotprograms in the United States, one withVisaCash at the 1996 Summer Olympic Gamesin Atlanta, Georgia, the other involvingVisaCash and Mondex in 1997-98 in New YorkCity, New York. The results were disappointing,according to industry executives. Usage waslow, technical glitches hindered transactionsin New York, and both trials showed that unlessthe smart card offered other applications inaddition to stored value, American consumerssaw no advantages in using it as opposed tocash, debit, or credit cards. Consequently,major smart card systems are developing andperfecting cards that combine e-cash functionswith such tasks as building access, personalcomputer access, and participation in retailloyalty programs.

Combining functions on one card presentsproblems, however. For example, “firewalls”need to be constructed between differentapplications so that one application does notinterfere with another. Many industry analystsalso caution against expecting that a single“supercard” can do everything, everywhere;they say that it might make better sense for acard to house logically connected functions.

In such a scenario, a consumer might carryone card housing personal information suchas medical and insurance data; another cardfor business authentication, including buildingaccess and travel; and yet a third card witha series of e-purse applications for cashreplacement. From a business perspective, ininstances where multiple applications resideon a single card, the companies involved inthe shared project will have to work out whichcompany owns what aspect of any givenproject and how it is to be managed.

Both MasterCard and Visa are currentlypromoting their respective operating systemsas the best standard for multi-applicationcards. MasterCard has developed and is testinga multi-application operating system calledMULTOS; the system is based on Mondextechnology and can be openly licensed. Topromote MULTOS, MasterCard created anindustry consortium in 1997 called MAOSCO(Multi-Application Operating SystemCompany) that includes American Express,Europay International, and Mondex Interna-tional. Visa has countered with the Visa OpenPlatform, Visa’s version of a Java Card thatuses the Java software language. MULTOSand the Visa Open Platform offer a pathaway from the proprietary systems that havecharacterized the smart card industry to date.

In October 1998, Microsoft Corporationannounced that it was developing a smart cardoperating system for use with its Windowssoftware. Microsoft released the new system,called Windows for Smart Cards, in mid-November 1999. Company executives saidthat the first application of the card would bein the mobile phone market, but they foresawnetwork access, loyalty, health care, debit andcredit, and cash applications in the future. At

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the end of 1999, at least 30 trials and projectswere reported underway in Europe and NorthAmerica using Windows for Smart Cards.

The quest for multi-application cards makesinteroperability among different systemsessential. Currently there are about 20 differentsystems. Interoperability involves creatingindustry standards that allow different waredevelopers to easily join a given operatingsystem and coordinating different organizationsin order to complete a common transaction.Some analysts say that designing a commonoperating system, that is, getting cards fromdifferent issuing organizations to work in eachother’s readers, is less the issue than is thedevelopment of a common set of specificationsgoverning the behavior of specific functions (suchas debiting, crediting, or e-purse transactions).26

With respect to e-purse applications andinteroperability, MasterCard stands behindits Mondex e-purse scheme. In March 1999,Visa, American Express, and Europay Inter-national countered with the release of whatthey called Common Electronic PurseSpecifications (CEPS). CEPS is intended todefine the requirements for all componentsneeded to implement a globally interoperableelectronic purse system. Visa claims thatorganizations representing more than 90percent of the world’s electronic purse cardshave agreed to implement CEPS. Visaintends to use the Proton World Internationalconsortium, which Visa joined in mid-1998,to support CEPS. In mid-November 1999,Proton World demonstrated the first e-pursebased on CEPS technology, the first step inwhat the consortium hopes will be a full-scalerollout of CEPS-enabled smart cards by 2001.

Chips

Most current research on smart card tech-nology is focusing on improvements in chip

capacity, card packaging, and readers. Smartcards may be grouped into three basic chiptypes: serial memory, protected memory, andmicroprocessor. Serial memory cards offerno protection or security. Protected memorycards are the most frequently used smartcard and are typically used to store units,tokens, or monetary value. The mostsecure smart card is the microprocessorcard. The semiconductor industry continuesto introduce new smart card chips thathave more processing power and memorythan older versions, allowing chips to storemore sophisticated operating systems andencryption data.

Card Packaging

Advances are also being made in the areasof card packaging and readers. The vastmajority of smart cards in circulation todayare “contact” smart cards. When such acard is being used, the gold contact plate onthe card must make physical contact with areader in order for information to be readfrom the chip. “Contact” smart cards with amagnetic stripe are called hybrids (seeSmart Cards).

Card Readers

In addition to developing a new generationof chips and contactless cards, terminalmanufacturers are delivering a wide varietyof smart card readers, including telephonereaders. Some leading manufacturers, forexample, are shipping computer keyboardswith built-in card readers. Most of themajor point-of-sale manufacturers, includ-ing Verifone and Hypercom, have releaseda new generation of point-of-serviceterminals, all smart card enabled. Newclasses of devices— network computers,for example— feature integrated smartcard readers.


SECURITY

Smart cards have been touted as intrinsicallysecure devices. If proper security andauthentication measures have been builtinto them, smart cards are arguably moresecure than cash, simple debit cards, ormagnetic stripe cards. They are consideredsafe places to store valuable informationsuch as account numbers, passwords,personal information such as medicalrecords, and monetary value. In the case ofmulti-application cards, before any of thecard’s applications such as e-purse can beactivated, an identity for that applicationmust be established either by the cardholderor by the terminal into which the card isinserted. When the application runs, it canonly access data and perform operationsthat have been explicitly allocated to theestablished identity.

Security is not an issue for some types ofstored-value cards. Disposable cards, forexample, available from card dispensingmachines, are not specific to the card holder.Merely a convenient substitute for cash, theydo not require authentication; their storedvalue is available to whoever happens to holdthe card. Many smart cards, however, especiallythose featuring electronic purses, often requiresome form of user identification or authenticationas protection against unauthorized access.This type of security not only protects the cardpurchaser’s “stored value,” but also the cardissuer’s investment; the latter may lose moneyif the value in the electronic purse can bemanipulated or counterfeited.

Current means of securing stored-value smartcards include passwords or personal identifi-cation numbers (PINs), and physical orbehavioral characteristic (biometric)checks.27 Each system has its advantages anddisadvantages. Although passwords allow

the user to delegate the authority to usethem, they can be learned by subterfuge,guessed, or given away. In addition, physicaland behavioral characteristics can vary oreven change outright; they are also oftendifficult to transmit via telephone lines.These identification methods may be usedindependently, or, alternatively, in combination;for example, identification may require a cardand password or card and biometric.

PINS

The most common form of personalidentification is the password or PIN. APIN’s biggest advantage is its low cost. Becausethe PIN is either right or wrong, the softwarerequired to check the PIN is quite simple.PINs are well suited to situations in which thevalue to be protected is small, such as is thecase with e-purses. They are not well suited tohigh-security applications because of thereasons cited above.

Better security results when passwords arecombined with another form of identification.An example of the latter form of authentica-tion is a new, lightweight smart card readerfor personal computers. The card readerallows a user to enter a PIN on a PC key-board, where it is validated by a smart card.However, the validation occurs without PCprocessing, which might result in a breachof security.

Digital Signatures

Signature verification, or digital signature, is anincreasingly popular form of user identification.One of its greatest advantages is portability.Smart cards using such a verification systemallow a user to carry a digital signature fromone PC to another and enable the user toconduct secure electronic transactions fromany computer.

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Biometrics

So-called biometric methods of authenticationencompass finger/thumbprint, hand geometry,eye scans (retina and iris), and even facialrecognition.28 Different biometrics use differentbody characteristics, but the principle isfundamentally the same in all cases. Using acamera, sensor, or other device, a person’sphysical trait is digitized, encrypted, and filedaway in a database.

Finger/thumbprint is the oldest form of remoteidentification test and relies upon systems thatcan capture the minutiae of a fingerprint.Depending on the system, resolution can bequite coarse. Retina scanning has been usedfor several years. It has mostly yielded to thenewer technique of iris scanning, however,which appears to be the more reliable of the twooptical scanning approaches. Such scanningmeasures the flecks in the iris of the eye,which have been found to be stable over time.

Biometrics offer great advantages in authenti-cating identity, especially if they are used inconjunction with a PIN or another identifica-tion method. They and other authenticationmethods are part of a larger concern with

security vis-à-vis stored-value smart cards.The industry is constantly searching for newand better techniques to protect stored-valuecards, especially their chips. Although thechips on cards themselves are generallysecure, they can potentially leak informationduring a transaction with a reader. To foilpotential hackers, chip makers have beensearching for both software and hardwareimprovements. Among the techniques beingconsidered is the insertion of digital “noise”into the transaction to mask voltage switchingpatterns in the chip. Such “noise” does notaffect the performance of the card but doesmake it more difficult for hackers to pinpointpatterns in the chip’s operations.29

Finally, all types of smart cards operate as partof a larger security system that includesterminals, readers, and personal computers.As industry spokesmen point out, any securitychain is only as strong as its weakest link. Thismaxim is definitely the case with smart cardsystems. Breaches can occur at any pointalong the security chain, not just in the carditself. In many cases, these spokesmen say,there may be easier ways to obtain informationor financial value than by compromising asmart card.


APPENDIX BINTERNATIONALREGULATION OF

ELECTRONIC CASH

EUROPEAN REGULATION

In contrast with the United States, Europeannations have been engaged— at least nomi-nally— in the regulation of electronic cashin its smart card guise. In July 1998, theEuropean Commission, a body that proposeslegislation for the European Community,issued new proposed regulatory directivesfor the use of electronic cash that weredesigned to “facilitate the development ofelectronic commerce within the EU” and to“[create] legal certainty for electronicmoney.”30 The directives seek to establish aregulatory framework in which minimum ruleswould strengthen confidence in electroniccash by businesses and consumers. Accordingto these minimum rules, consumers wouldbe permitted to use electronic cash to makesmall payments in euros, the new Europeancurrency in limited use as of January 1999,without having to convert national currencies;traditional credit institutions and otherfirms issuing electronic cash would beregarded as equal financial entities; andelectronic cash institutions would be able tooffer services throughout the EU providedthey were under the supervision of theirhome countries.

The first of two proposed directives wouldmodify the definition of credit institutions toinclude electronic cash firms. Such firmswould be permitted to operate throughout theEU even if they did not offer a full range ofbanking services. They would, however, besubject to EU banking regulations, includingreserve requirements.

The second directive would restrict thebusiness activities of electronic cash institu-tions to the issuance of electronic cash andclosely related financial and non-financialservices, as yet undefined. It would also requirethem to abide by a set of rules, includingauthorization by competent authorities;minimum initial capitalization of ECU500,000 (US$550,000); restriction ofinvestments to liquid, low-risk assets; soundmanagement practices; and adherence to priorEU money laundering and supervisiondirectives. The proposed directives have beensubmitted to the EU’s Council of Ministersand the European Parliament for adoption.If accepted, they would be legally bindingon all 15 states.

The European Commission regards itsproposed directives as a model framework notjust for Europe but for the entire world. At aforum in Washington, D.C., in early December1998, the Commission’s Director-General toldhis U.S. audience that Europeans regard thedirectives as entirely compatible with a globalapproach because they are limited, consumer-friendly, and flexible. He noted Europe’snatural advantages in dealing with electroniccash and commerce across national borders,given that Europeans live in an environmentwhere cross-border activity is already a reality.

Financial Action Task Force

To facilitate cooperation on the internationallevel, the Financial Action Task Force(FATF) was created in 1989 by the Group ofSeven (G-7) Heads of State to combat globalfinancial crime. FATF currently consists of 26countries plus the European Commission andthe Gulf Cooperation Council. Its membershipincludes the major financial center countriesof Europe, North America, and Asia. Its goal

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is the development and promotion of policiesto combat money laundering, specificallyrequesting that its members adopt andimplement legal, financial, and law-enforcement anti-money laundering standards.

FATF has discussed regulation of electroniccash as part of the larger issue of moneylaundering on national and internationallevels. Consequently, provisions governingelectronic cash are often grouped with otherfinancial controls pertaining to moneylaundering and even to electronic commercevia the Internet.

Basic to FATF’s work are “The Forty Recom-mendations of the Financial Action TaskForce on Money Laundering,” drafted in 1990and revised in 1996.31 These recommendationsset out a basic framework for anti-money-laundering efforts covering the criminal justicesystem and law enforcement, the financialsystem and its regulation, and internationalcooperation. All nations, not just FATFmembers, were encouraged to adopt therecommendations. By late 1998, all FATFmembers had enacted some form of anti-money-laundering legislation in accordancewith FATF’s basic directives.

Although the recommendations mostlyaddress financial regulatory and law enforce-ment controls, one recommendation alertedmember states to “pay special attention tomoney-laundering threats inherent in new or

developing technologies that might favoranonymity,” referring to developingelectronic means of payment. This concernwith new payment methods figured promi-nently in two FATF reports, “FATF-IXReport on Money LaunderingTypologies“(February 1998) and “FATF-XReport on Money Laundering Typologies”(February 1999).32 Both reports expressedconcern about the potential use by moneylaunderers of stored-value smart cards, onlinebanking, and electronic cash payments in sofar as they involve rapidity and anonymity oftransactions, broken or missing audit trails,and independence of the traditional bankingsystem. Recommendations included placinglimits on the functions and capacity ofstored-value smart cards, including maximumvalue and turnover limits; linking the newtechnologies to financial institutions andbank accounts; and standardizing record-keeping by financial institutions.

FATF experts noted in their 1999 report thatin the absence of specific national legislation,decisions to add these recommendations toelectronic payment systems had so far beenleft to system developers. They warned thatwithout consistent standards and appropriateregulatory oversight, the new paymenttechnologies would undoubtedly proveattractive to money launderers. At the sametime, they reported that there were no knowninstances of money laundering involving thenew technologies.


APPENDIX C

LEADING U.S. INTERNETBANKS

The following are among the top-rankedInternet banks cited by Gomez Advisors as oflate 1999:

• Security First Network Bank <http://www.sfnb.com> was the first United Statesbank to offer fully transactional electronic-banking services over the Internet. Thebank was granted Office of Thrift Supervision(OTS) approval on May 10, 1995, andopened to the public on October 18, 1995.33

The bank’s website offered what it calls“some pretty compelling reasons” for bankingwith it. For example, for the first sixmonths, the bank charged no monthlymaintenance fees and no required minimumbalance. After the trial period, the accountremained free so long as the customermaintained a minimum balance of $1,000or made a monthly direct deposit. The bankalso offered its customers 20 free electronicpayments monthly and a free ATM or debitcard, as well as a free first order of paperchecks. The bank promoted “some of thehighest” Money Market and CD rates(unspecified) with protection by “militarygrade” security, FDIC insurance, and itsown no-risk guarantee. In 1998 SecurityFirst sold its banking operations to theRoyal Bank of Canada and announced itwould concentrate on selling its Internetbanking technology through its subsidiary,Security First Technologies (S1).

• Netb@nk <http://www.netbank.com>, athrift institution, was granted OTS approvalon July 14, 1997. AIB became the firstapproved and regulated all-Internet bankand the second OTS-approved Internet

institution. Net.B@nk of Roswell, Georgia,is the bank’s official title.34

• CompuBank <http://www.compubank.com>, headquartered inHouston, Texas, was launched in October1998. The bank was the first virtual bankgranted a national charter from the OCC.It qualifies for FDIC insurance and alsooffers its customers insurance protectionfrom unauthorized transactions from theiraccounts.35 The bank pays a $20 finders feeper depositor for new Internet accounts.The OCC charter allows the bank toperform transactions on a nationwide basis.CompuBank is also a member of the FederalReserve Bank system.

• In November 1998, Wells Fargo Bank<http://www.wellsfargo.com> announcednew online banking initiatives. Two pilotlocations— each with five computer terminalswith Internet connections— were set up on thecampuses of the University of Washingtonin Seattle, and the University of Nevada,Las Vegas. (Each site also has two employeeson hand to answer customer questions.)College campuses were chosen becausebank officials believed that students wouldbe more open to using online bankingoptions than most bank customers. Toattract student accounts, the branchesinitiated extended hours, from 7:00 a.m. to7:00 p.m.36

• USAccess Bank <http://www.usaccess.bank.com>, a branchlessInternet bank, began operations onFebruary 1, 1999, claiming to be the firstInternet bank to provide direct Internetlending.37 The bank, a division of CentralBank USA Inc., part of the holding companystructure of Porter Bancorp, offers the usual

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online banking services, but distinguishes itselffrom its competitors because it “grantssame-day loan approvals— secured andunsecured— as well as lines of credit overthe Internet.”

• The First Internet Bank of Indiana <http://www.firstib.com> began operations onFebruary 22, 1999. Chartered by the state’sDepartment of Financial Institutions onOctober 9, 1997, and approved by the FDICon October 27, 1998, the bank’s founders sayit is the first state-chartered virtual bank.The bank offers checking, money marketsavings, CDs, loans, credit cards, and ATMcash cards, with services provided throughVirtual Financial Services Inc.’s FiNet front-end software.38 In the future, the bank plansto offer online images of cleared checks,electronic delivery of periodic accountstatements, and mortgage loans.

• TeleBank <http://www.telebank.com>, abranchless Internet-based bank located inArlington, Virginia, that is insured by theFDIC, offers a variety of Internet bankingdeposit products, including CDs and interestchecking, and money market and savingsaccounts. As of March 1999, TeleBank didnot originate loans, but did seek to purchasesecured mortgages. Because of TeleBank’sdeal with Yahoo Finance, customers whoopen accounts through that portal arerequired to maintain a balance of $1,000 toqualify for ATM refunds. The program,ATM Refunder, seeks to win customers byautomatically refunding ATM fees— up to $6per month— imposed by other banks oncustomer accounts.39 In January 1999,TeleBank became the first virtual bank tocross the $2 billion deposit threshold, thefirst such bank to be counted among the top50 federally chartered savings banks.40 InJune 1999, Telebanc Financial Corporation,the parent company of TeleBank, and

E*Trade Group, Inc. announced that theywould merge. The merger, approved inJanuary 2000, unites the nation’s largest“pure-play Internet bank” with an onlinepersonal financial services company. InJanuary 1999, E*Trade Group, Inc. an-nounced that it would bring investmentbanking services to the Internet in a newcompany called E*Offering.

• Chase Manhattan Bank <http://www.chase.com> officially inauguratedInternet banking in February 1999— forfree. Chase Online Banking will deliverreal-time account data to consumers andsmall-business customers. Chase hasenrolled 400,000 online customers since1997 and is still adding 1,000 daily.41

• Salem Five Cents Savings <http://www.salemfive.com>, a small private bankin Salem, Massachusetts, is one of thenation’s top Internet banks. The first bankto go online in New England, and one of thefirst nationwide, Salem Five has $1 billionin assets, with more than $60 million invirtual bank deposits. Chairman and ChiefExecutive Officer William Mitchelson saysthat Internet deposits lag behind otherdelivery channels, but are growing expo-nentially as the younger customer basebecomes more affluent and more computerliterate. Mitchelson sees retaining traditionalcustomers as the new challenge inasmuch asInternet banking provides opportunities forconsumers to bank anywhere.42

• Bank of America’s interactive division<http://www.bankamerica.com> plans tooffer its online banking customers simpleaccount activity on PalmPilot. (Servicesare offered on PalmVII; testing began in1999.43) This service is another example ofbanks having to offer unique services toattract customers.


APPENDIX D

A SAMPLE OF INTERNATIONAL INTERNET BANKS ANDWEBSITES, FEBRUARY 2000

[This is by no means an exhaustive list.]

ASIA AND PACIFIC

Australia

Advance Bank http://www.stgeorge.com.auBankSA http://www.banksa.com.auSuncorp Metway http://www.suncorpmetway.com.auWestpac http://www.westpac.com.au[includes ChallengeBank andBank of Melbourne customers]

Hong Kong

Chekiang First Bank http://www.cfb.com.hk/cfb/english/intro.html

Malaysia

Southern Berhad Bank http://www.sbbgroup.com.my

New Zealand

BankDirect [ASB Bank Limited] http://www.bankdirect.co.nzNational Bank of New Zealand http://www.nationalbank.co.nz

Thailand

Thai Farmers Bank http://www.tfb.co.th

CENTRAL AND SOUTH AMERICA/CARIBBEAN

Argentina

Banco Francés http://hb.bbv.com.ar

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Brazil

Banco Boavista [BoavistaNet] http://boavista.com.brBanco Itaú http://www.itau.com.brBanco do Estado de Sao Paulo

[Banespa] http://www.banespa.com.brBradesco [BradescoNet] http://www.bradesco.com.br

Chile

Banco Santiago http://www.bsantiago.cl

Colombia

Sucursal Virtual Bancolombia http://www.bancolombia.com.co

Ecuador

Filanbanco http://www.filanbanco.com/es

Guatemala

Multibanco http://www.bancafe.com.gt

Mexico

Grupo Financiero Bital http://www.bital.com.mx

Paraguay

Interbanco http://www.infonet.com.py/interbancoBanco Real http://www.bancoreal.com.py

Peru

Banco Wiese Sudomeris http://www.wiese.com.pe

NORTH AMERICA

Canada

Bank of Montreal http://www.bmo.comToronto Dominion Bank http://www.tdaccess.com


EUROPE

Austria

Bank Austria http://www.bankaustria.comP.S.K. Telebanking http://www.psk.co.atSteiermärkische Bank und Sparkassen

http://www.bank-styria.co.at

Belgium

KBC Banque & Assurance http://www.kbc.be

Finland

Merita http://www.merita.fi

France

Banque Directe http://www.Banquedirecte.frBNP http://www.bnpgroup.comCrédit Agricole http://www.credit-agricole.frCrédit Lyonnais http://www.creditlyonnais.comCrédit Mutuel http://www.creditmutuel.fr

Germany

Dresdner Bank http://www.dresdner-bank.deNational Bank http://www.nationalbank.deRaiffeisen-Volksbank eG Mainz http://www.rvb.deStadtsparkasse Köln http://www.stadtsparkasse.de

Ireland

AIB http://www.24hour-online.ie

Italy

Banca di Roma http://www.bancaroma.itBanca Popolare Commercio

e Industria http://www.bpci.itBanca Popolare di Milano http://www.bpm.it

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Latvia

Paritate Bank http://www.paritate.com

Sweden

S-E-Banken http://www.swp4.vv.sebank.seFörenginsSparbanken http://www.foreningssparbanken.sePostbanken http://www.postbanken.seHandelsbanken http://www.handelsbanken.se

Switzerland

Banque Cantonale Vaudoise http://www.bcv.chBasler Kontonalbank http://www.bkb.chCrédit-Suisse http://www.en.credit-suisse.ch/directnetBEKB/BCBE http://www.bekbnet.chSolothurner Bank SoBa http://www.soba.chUBS http://www.ubs.com

United Kingdom

Barclays Bank http://www.is.barclays.co.ukBristol & West http://www.bristol-west.co.uk/Nationwide Building Society http://www.nationwide.co.uk

AFRICA AND MIDDLE EAST

Israel

Israel General Bank http://www.igb.co/il

Jordan

Arab Bank in Jordan http://www.bankarabi.com

Nigeria

First City Merchant Bank http://www.fcmb-ltd.com/fcmb_ebanking.htmAllstates Trust Bank http://www.allstates.com.ng/service.htm

South Africa

Nedbank http://www.nedbank.co.zaFirst National Bank http://www.fnb.co.za


APPENDIX E

ELECTRONIC BANKINGAROUND THE WORLD

Electronic banking has taken hold across theUnited States and is extending its reach intoother geographic areas of the world, especiallythose where infrastructure and demographicsare in place to support such communications.Although electronic banking is more wide-spread in parts of Europe, Central and SouthAmerica, and Asia than it is in Africa andthe Middle East, it is difficult to pinpointgeographic concentrations. In many cases,the structure and language of promotionalmaterials make it difficult to ascertain whethera particular institution offers telephone,electronic, PC banking, or Internet banking—the latter with actual transactional capabilities—or whether the website merely offers aninteractive or informational service. In general,experience with virtual banks outside theUnited States has been limited to onlinebrokerage firms and Internet divisions oftraditional financial institutions.

The paragraphs that follow are intendedsolely to provide a frame of reference forunderstanding how electronic banking activitiesare developing worldwide.

The number of overseas institutions offeringelectronic banking services continues toincrease. Some of the growth in this areacomes from banks that already have a largeinternational and domestic presence. Forexample, Citibank, which has a worldwidenetwork, offers Internet banking, but only insome of the countries in which it hasbranches, such as Belgium, Brazil, Germany,Hong Kong, and the United Kingdom.Citibank’s PC banking activities, however,are much more widespread.

There are numerous links to internationalbanking sites on the World Wide Web;however, close examination reveals thatalthough a number of sites provide somedegree of transactional capability, others areposted exclusively for advertising purposes. Inthis report, attempts were made to be asthorough as possible and to differentiatebetween the two types of sites. Examples ofnon-U.S. banks offering electronic bankingservices follow.

Caribbean/Central America/South America

Electronic banking, particularly Internetbanking, is not yet widespread in theCaribbean/Central America/South Americaregion. Branches of large international banks,for example, Citibank and ABN AMRO, aremore likely to have transactional websitesthan are indigenous banks. One notableexception is Bank Bital, a Mexican bank thatoffers full service Internet banking. SeveralBrazilian banks also offer electronic bankingservices, including Banco Boavista and BancoItaú. Other banks in South America withtransactional capabilities include: BancoFrancés <http://hb.bbv.com.ar> (withbranches in Argentina, Uruguay, Brazil, andthe Cayman Islands); Paraguay’s Interbanco<http://www.infonet.com.py/interbanco> andBanco Real <http://www.bancoreal.com.py>;Peru’s Banco Wiese Sudameris <http://www.wiese.com.pe>.

Western Europe

Electronic banking services generally areavailable throughout Western Europe.According to Forrester Research Inc.,Europe’s move to Internet banking services—mostly in the form of traditional banking

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operations— will be led by Germany andSwitzerland.44 This forecast is supported byDeutsche Bank’s February 1999 announcementthat it plans to merge Bank 24, a bankconducting business both telephonically andover the Internet, with its 1,450 retailbranches. The new bank, called DeutscheBank 24, combines branch and direct bankinginto a single entity.45

A variety of other German banks offerelectronic banking services: National-Bank<http://www.nationalbank.de>, DresdnerBank <http://www.dresdner-bank.de>, andStadtsparkasse Köln <http://www.stadtsparkasse.de>.

Numerous Swiss banks offer electronicbanking services: BEKB/BCBE <http://www.bekbnet.ch>, Solothurner Bank SoBa<http://www.soba.ch>, Banque CantonaleVaudoise <http://www.bcv.ch>, BaslerKantonalbank <http://www.bkb.ch>, UBS<http://www.ubs.com>, and Credit Suisse<http://www.en.credit-suisse.ch/directnet>.Interestingly, the latter’s website contains thefollowing disclaimer: “...the services andsecurities otherwise offered in these Web Sitesare for legal reasons not being offered in theUnited States, to U.S. residents or U.S. personsas defined under US securities law. The sameis true for residents of the UK and Japan.”None of the other Swiss banking sites containssuch a notice.

France’s Crédit Agricole <http://www.paris.credit-agricole.fr> uses a uniquestrategy to entice customers to Internetbanking: a satellite television connection.The bank’s project manager noted thatalthough computer ownership is “fairlylow” in France, almost every household hasa television set. Hence, Crédit Agricole,working with the French satellite televisionprovider TPS, introduced its own TPS

channel, CA TV, which allows TPScustomers to conduct electronic bankingactivities through their television sets.Bank management reported that if custom-ers accept TPS they will be ready to transi-tion to Internet banking once the capabilityfor satellite connection to the Internetbecomes available.46

Sweden was one of the first countries to offerInternet banking. In late 1997, it was reportedthat 11 of Sweden’s biggest banks had, or wereplanning to offer, Internet banking in 1998.47 In1998, it was noted that one of the country’slargest banks had 100,000 customers withInternet banking accounts. The Postbankennotes on its website <http://www.posten.postnet.se>, however, that aSwedish personal number or Norwegian or EUcountry citizenship is required for use of itsInternet payment service.

Banks in the United Kingdom also offer Internetservices. For example, from about mid-October1998 through the end of the year, Prudential, alife assurance company in the United Kingdom,drew about 150,000 customers with its launchof “Egg,” an Internet banking service offering aneight percent interest rate. As a result of theinflux, the company was overwhelmed and hadto double its staff to 150 persons.48

Another British institution, Barclays Bank<http://www.barclays.co.uk>, offers freeunlimited access to the Internet through itsBarclays.net service, which enables itscustomers to sign up for Internet bankingservices. The Barclays.net service is free to thebank’s customers other than for the cost of alocal telephone call while online.

Middle East and Africa

Because of under-developed communicationsinfrastructure, Internet banking does not have a


large presence in Africa and the Middle East.Nonetheless, some banks offer electronic bank-ing services. Nigeria’s First City Merchant Bank<http://www.fcmb-ltd.com/fcmb_ebanking.htm> provides telephonice-banking. Another Nigerian bank, AllstatesTrust Bank <http://www.allstates.com.ng/service.htm> offers unspecified electronicbanking services— the description fits anElectronic Smart Card Account. However, theAllstates site also describes a Unified BankingService, an independent telecommunicationssystem with satellite earthstations and a micro-wave radio link for providing online services.

South Africa has several banks with transac-tional websites. NedBank <http://www.nedbank.co.za/1.online/online_netbank.html> provides full-servicebanking for clients of its Internet banking arm,NetBank. First National Bank <http://www.fnb.co.za> also offers netbanking services.The Arab Bank in Jordan <http://www.bankarabi.com/ask/faq.html> has awebsite stating that the bank does notallow clients to use the Internet to openan account with any of its 370 Arab Bankbranches worldwide, nor does it providecustomer account information over theInternet because of concerns aboutadequate security. The bank notes, “Shouldthis change in the future, we will definitelyconsider embarking on the Internet forsuch requirements.” However, the ArabBank’s Phonebank service provides accessto accounts at any time, via PIN number,for such services as account balances,transactions, statements, and internalfunds transfer within local Arab Bankbranches.

Israeli banks began providing limited serviceover the Internet in 1997, when banksreceived approval to use it to provide accountinformation; 55,000 customers receive such

information. In fact, the website for IsraelGeneral Bank <http://www.igb.co/il/bankhtml/english/online_banking.html> notesthat its customers can access bank servicesvia the Internet, including information oncustomer accounts, but that transactions arenot yet permitted.

In March 1999, Israel’s Supervisor of Banksannounced that Israeli banks will be allowedto provide Internet banking transactions,pending approval, after examination of thesecurity of their systems. Customers will bepermitted to open savings accounts and buyand sell securities but will not be able totransfer funds from one account to anotheror to pay bills via the Internet because ofsecurity risks.49 The website for IsraelGeneral Bank notes that “once the necessarylegal steps have been taken, customers willalso be able to implement transactions viathe Internet.”

Asia and Pacific

Electronic commerce is still evolving in Asiaand the Pacific. There is conflicting evidenceon the development of electronic banking.Some analysts say it is increasing; others saygrowth is stagnant because of lack of customerconfidence. In addition, a great differenceexists among the countries of the region in thelevel of development and infrastructureneeded for electronic commerce. Electronicbanking services are currently more widelyavailable in Hong Kong than in other areas.

Chekiang First Bank [Hong Kong] <http://www.cfb.com.hk> has a Web Banking Serviceavailable to all of its Phone Banking Serviceusers. Services include time deposit instructions,account transfers, Hong Kong dollar accounttransfer to a third party account with the bank(maximum daily cycle limit HK $10,000), andbuying or selling foreign currencies during

70

office hours. The maximum limit pertransaction is HK$500,000 or equivalent.

Hong Kong’s JETCO Joint Electronic TellerServices is scheduled to provide its 49-memberbank network with Internet banking, the firstInternet Certification Authority for suchservices in Hong Kong. The integrationproject is led by Hewlett-Packard in partner-ship with CyberTrust, and will provide thebanks with digital certification for Internet-based transactions.

Malaysia’s Southern Berhad Bank’s DirectAccess (SBB Direct) <http://www.sbbgroup.com.my> promotes itself as anelectronic banking and commercial site,offering “true direct banking.” However, theservice is actually an intranet dial-up service.(Because Malaysian regulations do not allowfinancial transactions to be conducted overthe Internet, Internet banking services inMalaysia would be illegal.) Financial transac-tions must be accessed from the bank’sintranet dial-up service— with “every phone abranch...”— and branches operational around

the clock. For persons interested in the bank’sservices, the website provides phone numbersand an email address.50

In April 1998, Thai Farmers Bank <http://www.tfb.co.th> announced a move totarget corporate customers and launchThailand’s first Internet banking servicein the third quarter, 1998. The bankexpected that all of its corporate customerswould use Internet banking by 2000.51

In October 1998, however, the bankannounced that Internet banking serviceswould not be provided until early 1999.Initially, banking services will involvecustomer inquiries concerning accountbalances and statements, and then willexpand to online utility service payments.Full Internet banking services for personalaccounts are seen in the future. However,the bank intends to survey customerrequirements and patterns before increasingservices, particularly because Thailandhas “little demand...for the use of theInternet for financial transactions atthe moment.”52


APPENDIX F

INTERNATIONALREGULATION OF

ELECTRONIC BANKING

INTERNATIONAL ORGANIZATIONS

Financial Action Task Force

As noted under “Financial Action Task Forceon Money Laundering” in the “ElectronicCash” section of this report, the organizationhas expressed concern about the regulation ofInternet banking, particularly in areas wherebanking operations are protected by a highlevel of secrecy and little or no proof of identityis needed to open accounts. In its February1998 report on money laundering trends, theFATF discussed the potential implications ofemerging payment systems such as electronicmoney and Internet transactions. The FATF’sFebruary 1999 report also addressed “misuseof the Internet and other new paymenttechnologies for fraud and the transmissionof illicit funds.”53

Caribbean Financial Action Task Force

The Caribbean Financial Action Task Force(CFATF), is an organization of Caribbean basinstates that have agreed to implement commoncountermeasures to address the problem ofmoney laundering. At its October 1997meeting, the CFATF Council of Ministersendorsed a plan to develop a program aimed atsensitizing regional governments to the possi-bilities of money laundering through emerging

cyberspace technologies. Thereafter, a May1998 workshop was held to discuss “MoneyLaundering Through Emerging CyberspaceTechnology.” The workshop participantsincluded government officials and industryrepresentatives from approximately 25nations. CFATF also held a spring 1999electronic banking seminar to expose seniorgovernment officials to emerging technologiesand assorted regulatory, legal, and lawenforcement policy issues.

Offshore Group of Banking Supervisors

The Offshore Group of Banking Supervisorswas established in 1980 as a forum for super-visory cooperation between banking supervisorsin offshore financial centers.54 In “On-siteExamination Checklist,” an annex to TheSupervision of Cross Border Banking, a reportprepared by a working group of members ofthe Offshore Group of Banking Supervisorsand the Basle Committee on Banking Super-vision, 18 items of regulatory interest areenumerated as issues to be raised duringon-site examinations. Although the checklistdoes not specifically address electronic bankingissues, it does ask what requirements banksand banking groups must fulfill in order tobecome authorized in their jurisdictions;whether there are differences in types ofbanking licenses issued and conditionsimposed; and whether the home supervisoryauthorities of such entities are allowed toconduct on-site inspections. These issues area part of an overall regulatory environmentrelated to electronic banking.


APPENDIX G

INTERNET GAMINGREGULATORY POLICYAROUND THE WORLD

REGULATORY POLICY AROUND THEWORLD

In the face of a rapid increase in the Internetgaming industry and the likelihood that itwill reach new populations of users in thenear future, national governments (and, insome cases, state and regional governmentsas well) have taken a variety of approaches toregulation. Some have dealt with Internetgaming as an unmitigated threat, some asan economic opportunity, and most as adistinctly mixed blessing that brings unprec-edented legal complications. Those threeviews correspond approximately to threetypes of strategy for dealing with the newindustry: prohibition, regulation, andmaintenance of the status quo until thenature of the industry and its problemsbecomes more clear. In few cases has a finalstrategy or set of regulations been accepted asfully satisfactory; the phenomenon is too recentand its dimensions are too unlike those of otherlegal issues for most jurisdictions to have fullydetermined all the ramifications and turnedthat understanding into policy. Contributingto uncertainty is the unknown dimension ofthe industry and the actual rate at which it isgrowing; collection of industry-wide informa-tion on those subjects is obstructed becausenot all enterprises publicize their profits orbusiness transactions.

ASIA/PACIFIC

Australia

Australia has chosen to permit Internet gamingin a strictly regulated environment, at the levelof state and territory government. In the last twoyears, Australia’s efforts to develop a workablesystem of Internet gaming regulations haveattracted considerable attention. Sports andcasino betting are extremely popular in Australia;according to the Tasmanian Gaming Commission’sfigures, in 1997 and 1998 combined gamblingexpenditures were estimated at about $94billion. At the same time, use of the Internethas become a very popular activity. State andterritory governments in Australia haveconcluded that these trends will mean thatmany of their citizens will rapidly becomecustomers of whatever Internet gaming isavailable, regardless of government actions tocontrol the process.

The Australian Commonwealth governmentdoes not currently regulate the domesticgambling industry, except under the FinancialTransaction Reports Act of 1988, which waspassed to prevent money laundering, large-scale tax evasion, and certain other activitiesof organized crime. That act designatesconventional casinos and online gamingproviders as “cash dealers” and requires themto identify customers under certain circum-stances. The act also requires cash dealers toreport specified types of financial transactionsand suspicious transactions to the AustralianTransaction Reports and Analysis Centre(AUSTRAC).

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In 1997, Australia began working on a nationalset of guidelines for Internet gaming activity.In 1998 the commonwealth governmentassigned the project of researching the industryand recommending a national strategy to theProductivity Commission, an independentagency that serves as the Australiangovernment’s principal review and advisorybody on microeconomic policy and regulation.The commission’s draft report was issued inJuly 1999; the final, three-volume report wasissued in December 1999, after a round ofconsultations with government agencies andpublic hearings.

Like the report of the United States NationalGambling Impact Study Commission, theProductivity Commission report addressesInternet gaming as a segment of the overallgambling issue; the impetus for both reportscame from public concerns about gambling ingeneral. The final Australian report, however,devoted 67 pages to “Policy for NewTechnologies,” compared with the morenominal treatment of Internet gaming in theNGISC report. Among the key judgmentsof the Australian report are the followingstatements: “There are...grounds for regulationof Internet gambling, along the lines ofregulations applying to other gambling forms.The Commission considers that there are waysof controlling online gambling sufficiently toexercise such regulations...,” and “Managedliberalisation— with tight regulation of licensedsites to ensure integrity and consumerprotection— has the potential to meet mostconcerns, as long as the approach is national.”The Productivity Commission’s final report isavailable at the Internet website<www.pc.gov.au/inquiry/gambling/finalreport>.

The Select Committee on InformationTechnologies of the Australian Senate also isconducting an inquiry into domestic onlinegambling. The committee is examining the

present extent and impact of online gambling;the feasibility of limiting access, especially forminors; the adequacy of current state andterritory regulations on online gambling; andthe need for national legislation on thesubject. The committee issued a report on itsfindings in March 2000. Following the issuanceof the Productivity Commission’s final report,the Australian Prime Minister, disturbed bythe rapid growth of Internet gambling, directedthat a Ministerial Council on Gambling be formed.That council, which would be formed by thechief ministers of all the states and territories,would investigate the feasibility andconsequences of banning Internet gambling.

Regulation at the State and Territory Level

In 1998 and 1999, several Australianjurisdictions prepared or adopted legislationlegalizing and regulating Internet gaming.Those jurisdictions include Queensland; theNorthern Territory; Tasmania; Norfolk Island(a small offshore island with dependencystatus); the Australian Capital Territory,which includes Canberra; and most recentlyVictoria. A national regulatory framework(commonly referred to as the National Model),developed by gaming ministers from all thestates, has served as a model for legislation inthe states of Queensland and Victoria and inthe National Capital Territory. The statedpurpose of this framework is to minimize thenegative impact of gambling originating fromoverseas or from illegal sources by providingalternative products that are carefullymonitored and, in addition, to prohibit illegaldomestic operations that would put customersat risk.

Although several states and territories haveenacted regulatory legislation, the types ofactivity covered and the degree of regulationvary somewhat. The Queensland InteractiveGambling (Player Protection) Act went into


effect in October 1998. The most comprehen-sive of the laws currently in effect, the actstipulates the regulatory framework for inter-active gaming, provides for the issuance oflicenses to approved recipients, allows fortaxes to be levied on licensed operations,and provides a full regime of protections forcustomers and the community in general. Thelaw also provides for cooperation with otherAustralian jurisdictions that regulate inter-active gaming. Queensland is now acceptinglicense applications.

In Tasmania, legislation was passed in 1998permitting conventional casinos to offerinteractive gaming but prohibiting Tasmaniancitizens from participating. In December 1999,existing legislation was amended to permit theissuance of licenses to new interactive gamingproviders. Tasmania’s law continues toprohibit Tasmanian citizens from participating,however. Norfolk Island has reversed a long-held position against gambling by passing lawspermitting and regulating conventional andInternet gaming, but it too prohibits its citizensfrom participation in Internet wagering. Asof January 2000, four Internet license appli-cations were under consideration by theNorfolk Island Gaming Authority, and nonehad yet been granted. The Australian CapitalTerritory’s legislation, also enacted in 1998,appears aimed primarily at customer protection.License issuance began there at the end of1998. As of January 2000, New South Walesdid not yet have legislation. The NorthernTerritory has allowed and regulated conventionaland Internet gaming for several years.

Australian Regulatory Philosophy

The emphasis on protecting the consumerfirst, which seems to predominate in most ofthe Australian jurisdictions, means thatgaming sites must prove conclusively that theyare well-backed financially and intent on

providing reliable service. Among consumerprotection provisions are the prohibition ofparticipation by minors and the prohibition ofextension of credit; mandatory self-exclusionby problem gamblers; protection of customerprivacy; submission to audits; mandatorycomplaint procedures; and the licensing ofall directors, executive officers, and majorstockholders.

The approach of Australian jurisdictions totaking bets from customers in the UnitedStates varies considerably, and little has beensaid about establishing a formal policy on thismatter. In the absence of formal regulations,individual casinos are deciding how to dealwith this issue. Sites in Tasmania and NorfolkIsland seem to welcome all patrons whileprohibiting local participation. On the otherhand, the largest individual Internet operation,Centrebet of Darwin, stopped taking bets fromcustomers in the United States in 1998 pendinglegislation or other policy determinations inthe United States.

The Anti-Gaming Movement

Australia also has a counter-movement thatadvocates prohibiting rather than regulatingInternet gaming. The rapid expansion ofconventional gambling services has drawn firefrom many politicians. In 1998, a senatorrepresenting South Australia proposed to theProductivity Commission that Australiaprohibit domestic gaming companies fromoffering their services via the Internet andprohibit foreign Internet gaming operationsfrom making their services available in Australia.The senator, whose position was supported bythe prime minister and the national treasurer,argued that children would have too muchaccess to gambling if it were on the Internet,especially considering children’s naturalattraction to sports. Coming on the heels ofthe Productivity Commission’s final report,

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which summarized the first comprehensiveinvestigation of the subject, the Prime Minister’simmediate call for continued scrutiny ofInternet gambling was widely construed as anescalation of the anti-gambling movement.The Prime Minister stressed particularly thescale of problem gambling; the ProductivityCommission reported that 290,000 Australiansare problem gamblers, whose addiction causesan estimated loss of US$2 billion annually.

EUROPE AND CANADA

Gaming Regulators European Forum

The 1998 meeting of the Gaming RegulatorsEuropean Forum in Helsinki issued a PositionStatement on Gambling on the Internet. Itheld that each country should be responsiblefor policy on such activity in its jurisdictionand that other jurisdictions should respectsuch policies. It called for full regulation ofgaming in countries deciding to allow it, withparticipation restricted to the residents of thatcountry and to individuals in other countrieswith which reciprocal agreements exist.Control measures also would address gamblingaddiction, honest gaming procedures, playerconfidentiality and security, and prevention ofmoney laundering. No punitive measureswould be taken against a bettor participatingfrom a jurisdiction prohibiting such activity.The forum suggested that cross-border controlswould have to be at the level of the Internetservice provider (ISP). Contracts betweenISPs and gaming operators might require thatthe ISP prevent access to addresses injurisdictions that are legally off-limits. (Thepractical possibility of placing such responsibilityhas been much discussed in the United Statesand elsewhere; it generally has been concludedthat ISPs do not have the capability to monitorthe nature of every transmission that passesthrough them.)

United Kingdom

In the United Kingdom, the National GamingBoard regulates about 120 conventionalcasinos, many of which are considered byindustry experts to be among the world’s mostreputable gaming companies. Some of thebest-known British casinos, such as VictorChandler, William Hill, Ladbrokes, andBlandford Betting, have used their standing inthe traditional gaming industry to move intothe Internet field. However, the GamingBoard’s most overriding policy is that commer-cial gaming shall occur only on licensedpremises and not on other private property.The board has recognized that Internetgaming inherently belongs to the lattercategory, but it also recognizes the difficulty ofenforcing a ban on such activity. One Britishgambling expert has expressed the opinionthat it likely is legal for a British citizen to beton the Internet if the host is located in anothercountry, especially if that country is in theEuropean Union. British money-launderingregulations, based on European Councilguidelines, apply mainly to financial insti-tutions; however, a Code of Practice forcasinos sets strict standards for investigationof suspicious transactions.

After delaying consideration of a ban onInternet gambling in 1999 because of therelatively low occurrence of Internet gamingin Great Britain, in early 2000 the GamingBoard began a review of that phase of theindustry. A factor in that review was the startof Internet gaming operations by the majorcompanies listed above, many of which havemoved their operations to offshore locationssuch as Gibraltar and Alderney Island, whereGreat Britain’s wagering taxes (ranging from6.75 to 9 percent) do not apply. The board isexpected to make recommendations onInternet gaming policy sometime in the firsthalf of 2000. A new Gambling Review Body,


including experts from a variety of fields, wasscheduled to begin a comprehensive review ofthe entire gambling industry in May 2000,with a final report due in mid-2001. Thatbody’s purpose is to recommend changes in theGaming Act of 1968, considered the mostimportant law covering gambling activities.

Other European Countries

Internet gaming operates in at least threeother European countries: Germany, Austria,and Liechtenstein. A government-sanctionedInternet lottery in Finland also has beenreported. In Germany, Nierfeld’s InternetCasino recently became the first such operationin that country. However, because Germanlaw does not permit gambling, eitherNierfeld’s is operating from another venueand claiming to be German, or it is an illegaloperation. Liechtenstein’s Millions 2000Internet lottery, an extension of an existingconventional lottery operation, is run directlyby the government and dedicates substantialpercentages of its revenues to charities. It isthe only such operation in the country.Austria’s Interwetten, which began operationin 1989 and established a positive reputationas a phone-betting service, opened an onlineservice in 1997 to expand its market beyondCentral Europe. Interwetten now claims tohave customers worldwide. Austria prohibitstransmission of Internet gaming into thecountry (making an exception for Millions2000) and has a strict regulatory system foroperations based in Austria.

Canada

Canada appears to be going through the sameevaluation process as Australia relative tolegalizing and regulating Internet gaming.The Canadian government has declared theimportance of gaining control over an industrythat could be dangerous to consumers and

whose products in fact already are available toCanadians without any effective controls atall. As early as 1997, legislation has beenproposed in the Canadian Parliament toregulate Internet gaming. According to thesponsors of the bill, current law prohibitssetting up a virtual casino or sportsbook onCanadian soil. Although the bill submitted in1997 received substantial support in Parliament,it was not enacted, and no legislation on thesubject had emerged as of early 1999. In 1998Canada extended its money laundering statute,which was passed before casino gamblingbecame a significant industry, to includeprivate casinos licensed by Canadian provinces.

THE CARIBBEAN

Caribbean Financial Action Task Force

In May 1998, the Caribbean Financial ActionTask Force (CFATF) sponsored an exerciseentitled “Exploring Money LaunderingThrough Emerging Cyberspace Technologies:A Caribbean Based Exercise,” in Port ofSpain, Trinidad. Representatives includedsenior-level officials from 25 countries,multinational organizations, and the bankingand casino industries. Delegates wereconfronted with a large number of uniquepolicy issues, including those that pertain toInternet gaming. Much of the focus of theexercise concerned the vulnerability ofcyberspace-based payment systems, includingInternet casinos, to money laundering andother types of financial fraud.

Several interesting perspectives were offeredduring the exercise. One such perspective wasthat different countries had reached divergentconclusions about how to conduct investigationsof persons and entities seeking to gain alicense to operate gaming establishments inCFATF jurisdictions. In the cyberspace

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context, licensing was seen as especiallycritical because of the transborder nature ofmany of the services delivered through thenetwork. One argument that emerged in thediscussions held that jurisdictions with astrong commitment to rigorous and effectiveoversight of potential Internet gaming estab-lishments could be “held hostage” by theweak enforcement and oversight policies oftheir neighboring countries. The “cascadingdownward” effect of regulatory coveragetriggered by weak enforcement in any singlejurisdiction was argued to be more severe incyberspace but hardly a unique problem inthe region.

The participants also identified the collectionof records and other data relating to suspiciousfinancial activities as another importantelement of any effective system of oversightand supervision. On this issue, it was arguedthat cyberspace presented a unique series ofchallenges because the legal status of transac-tion records was unclear in a number of thejurisdictions represented at the CFATFexercise. Added to this fact was the potentialproblem of how to share suspicious transactioninformation across transnational borders. Anumber of participants noted that evidenceobtained in a neighboring jurisdiction wouldnot necessarily be admissible in their courts.

Another subject of considerable comment atthe CFATF exercise concerned the role ofsupervision and external audit in maintainingthe integrity of government oversight. On theissue of how to execute “on-site” inspectionsof Internet gaming establishments, it wasbroadly acknowledged that new technologicalmeans would likely be required in order toestablish effective procedures for auditing andanalyzing records of these Internet operators.The exercise participants agreed that theyshould weigh the pros and cons of variousregulatory options, including how to address

the types of problems raised above, as theyconsider Internet casino gaming operations intheir jurisdictions.

Antigua

Antigua, which many refer to as the proto-typical Internet gaming base, has the largestconcentration of websites among theCaribbean nations. Prior to the expansion ofInternet gaming in the mid-1990s, Antiguahad no gaming regulatory body and hence noexperience in controlling the activities ofsuch an industry. A regulatory structure forInternet gaming has been in place since1997, when the government passed the“Standard Conditions for Licensing of VirtualCasino Wagering and Sports Book Wageringin the Antigua and Barbuda Free Trade andProcessing Zone.” That regulation enabledthe existing Free Trade and Processing ZoneCommission to license approved persons torun the sites, as it does for other types ofbusiness in the island’s tax-free zone. Ananti-fraud division exists to investigatecustomer complaints.

Among the legal restrictions included in thelaw are the prohibition of sublicensing andlicense transfer, of submitting false informationduring the licensing process, of failure tofulfill all commitments to players, and ofmaking false promotional statements. Thelaw also stipulates that software must betested and that gaming programs must complywith gaming industry standards. The annuallicense fee is $100,000 for a casino and$75,000 for a sports book; a 20 percent tax islevied on overseas telephone bills. TheCommission claims that its mandatory back-ground check has eliminated 300 applicants.The island now is considering revision of itsgaming statutes on the model ofQueensland’s 1998 Interactive Gambling(Player Protection) Act.


Dominica

The Commonwealth of Dominica, located justsouth of Antigua, has issued perhaps the mostofficial policy statement supporting gamingand other Internet activities as a part of thecountry’s economic welfare. In mid-1998 thegovernment announced its intention to openthe first government-operated Internet casino,specifically noting that no jurisdictions,implicitly including the United States, wouldbe forbidden as targets for transmission.

Dominica also grants gaming licenses bycontract with individuals; terms of the contractdiffer as to the number of nationals to be hiredand the duration of the contract, as well as thepercentage of gross revenues to be paid to thestate (usually 5 percent). If that amount comesto less than $25,000 in a given year, the latteramount is paid. The registration fee is $15,000.Licensees agree to independent auditing andare required to report the addition of any thirdparties to the enterprise. The license includesfavorable terms for international communica-tions access; concessions on work permits andequipment import; and tax exemption onincome, revenues, and winnings by non-Dominican customers. Licenses are issued bythe Ministry of Finance, Industry and Planning.The government processes license applicationswith the help of the Domini Corporation, whichadvertises itself as a government-appointedagent that can guarantee swift processing,provide consultation in developing Internet

gaming operations, and provide softwareand hardware. Domini has “associate lawoffices” in New York, London, Montreal,and Antigua.

Other Caribbean Nations

Gaming regulations in other Caribbean nationssuch as St. Kitts, Grenada, and the NetherlandsAntilles— all of which have between 10 and25 gaming sites— do not appear to have anycomprehensive provisions. The Internetgaming license in St. Kitts is issued by theMinistry of Trade, Industry, Caricom Affairs,Youth, Sports, and Community Affairs. Theone-sentence document says that the cabinethas approved the applicant’s request to engagein casino games and sports betting using theInternet.

In some Caribbean nations, the licensingprocedure is unclear. In Grenada the licensingauthority issue was put in question by adispute between a gaming site operator thatclaimed to have received exclusive licensingauthority from the government and anotheroperator bearing a license ostensibly issueddirectly by the government. In the NetherlandsAntilles, there is an understanding thatdisputes over the practices of individualgaming establishments will be resolvedaccording to existing laws, but at presentthere appear to be no regulatory provisionsspecifically designated to facilitate the resolutionof such disputes.


APPENDIX H

A REPRESENTATIVE LISTING OF INTERNET CASINOS ANDSPORTSBOOKS AS OF MID-1999

The table that follows is a compilation of approximately 200 Internet gaming operations. [Note:This list was current as of mid-1999. As the industry is in constant flux, the information shouldnot be interpreted as all-inclusive.] The data are taken from websites, online website listings,and other sources. In the “Location” column, both geographical and website location aregiven— when available. In some cases, a casino or sportbook name has been identified, but asearch has not located a website for that name. The absence of a website may mean that theoperation is no longer in business, or it may mean that the website for that operation is foundunder a different name. If there is specific information that the operation is no longer in busi-ness, that fact is noted in the “License” column. In some cases, neither the website nor otherinformation provides the geographic location of the operation. In the “License” column, a defi-nite “yes” or “no” indicates that a specific statement on the site’s license has been found; a “n.a.”means that no information on that status has been found.

The “Comments” column summarizes several types of other information about the operationthat may be of interest: legal status, change of location or status, limitations on users stated onthe website, connections with other Internet operations, parent companies or software providers,date established, and languages and games offered. In the first three categories, all such informationavailable has been included; information in the other categories is meant to be representativerather than inclusive.

COMPANY LOCATION LICENSE? COMMENTS

AAA Casino unknownwww.aaacasino.com

n.a.55 specific note to U.S. citizens: "don'tparticipate if illegal in your state(Arizona, Illinois, Indiana, Minnesota,Missouri, Nevada, Wisconsin)";specific note about Indiana

ABC Islands Costa Ricawww.abc.com

yes moved from Netherlands Antilles 1998

Ace in the HoleOnline Casino andSportsbook

Costa Rica 56 yes

Aces Casino andSportsbook

Margarita Island (Venezuela) yes; Antigua andVenezuela

est. 1998; English, German, Dutch,Spanish, French

Aces Gold Casino Curaçaowww.acesgold.com

n.a. est. Oct. 1998

Acropolis Casino Dominican Republicwww.acropoliscasinos.com

yes

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Action SportsWagering

St. Martens, V.I.www.actionsportswagering.com

n.a.

Active Gaming Curaçaowww.activegaming.com

n.a. blackjack, baccarat, poker

All-Star Sportsbook Margarita Island (Venezuela)www.allstarsportsbook.com

yes; Venezuela,Antigua

support company EFS Caribbean;also has computers in Antigua, St.Kitts, and Canada; 23 casino games

Allied Sports Curaçao out of business as of1998

Antigua Casino andSportsbook

Antiguawww.antigua.org

yes est. 1999; owned by Playstar Corp.(Canada)

Arizona Sportsbook Mexico out of business

ArrowheadSportsbook andCasino

St. Kittswww.casinolive.com

yes uses Carib F/X software

Atlantic City Casino Antiguawww.atlanticcitycasino.com

yes owned by company in Vancouver,B.C.

Atlantic InterbetCasino

Antiguawww.atlanticinterbet.com

yes

Atlantis Casino Belizewww.casino-atlantis.com

n.a. owned by Atlantis Gaming, Ltd. ofAntigua; sold in 1998 by AtlantisGaming Co. of U.S.

Avalon Casinos Dominicawww.avaloncasinos.com

yes est. 1996; states "your local laws mustpermit betting:

Avatar Casino Bahamas yes est. August 1998; owned by Canadiancompany; chat feature

Bali Casino Curaçaowww.balicasino.com

n.a. owned by Curaçao company

Best Bet Casino Dominica (no website found) n.a. bingo, lottery, slots, keno, poker

Best Bet Sports Costa Ricawww.bestbetsports.com

yes also has casino operation; est. 1996



Bid Caesar'sSportsbook

Antiguawww.bigcaesars.com

yes also called Carib Sportsbook andCaribbean Sportsbook

Big DaddySportsbook

Costa Ricawww.bigdaddy.com

yes est. 1996; only credit card and bankwire payment

Bingo of the Americas Costa Rica yes parent company Cybergames;revenues to Red Cross of theAmericas and First Lady's Charitiesagainst Cancer and Infantile Diseases

Bookies Café Curaçaowww.bookiescafe.com

n.a.

Bowman International Mauritius, Isle of Manwww.bowmans.co.uk

yes long-time U.K. operation; recentlyentered Internet

Bugsy Online Casino Antiguawww.bugsyonline.com

yes est. 1997

Canbet Australiawww.canbet.au.com

yes small operation; est. 1998, Canberra;software from eCom Solutions,Canberra

Carib Sportsbook Antiguawww.caribsports.com

yes also known as Boss's Casino (q.v.)Caribbean Sportsbook

Caribbean CyberCasino

Grenadawww.ccasino.com

yes uses MicroGaming Systems software

Caribbean Health andHousing Foundation

Antiguawww.onlinelottery.com

yes est. 1997

Caribbean Island Dominican Republicwww.caribbeanisland.com

yes est. June 1998; offers e-commerceusing credit card

Casanova's Trinidad(no website found)

n.a. one of five casinos run by SunnyGroup under name Casino Fortune

Casares Gibraltarwww.casares.com

yes began 1995 as InterKeno, expanded1996 ad Bet4ABetterWorld, renamed1998; 20% of revenues to New WorldFoundation and other charities

Casino Alitalia Dominican Republicwww.casinoalitalia.com

yes est. 1998; offers e-commerce withcredit cards

Casino Australia Curaçaowww.casinoaustralia.com

n.a. uses CryptoLogic e-cash; owned byBardanac Holdings of NetherlandsAntilles; "no gambling for money byU.S. players"

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Casino Café Casino Netherlands Antilleswww.casinocafe.com

n.a. uses Cyberbookies of North Americasoftware; also known as BookiesCasino Café and Sportsbook

Casino Caribe Dominican Republicwww.casinocaribe.com

yes Japanese and English; market listclaims U.S. customers

Casino Cash Margarita Islandwww.casinocash.net

yes

Casino Casino Dominica (possible)www.casinocasino.com

n.a. site offers software, turnkey gamingoperations, even licenses

Casino CoCo Costa Ricawww.casinococo.com

yes

Casino-Crystal Antiguawww.casinocrystal.com

n.a. connected with CasinoInn; usesCryptoLogic e-cash

Casino Fantasy location unknownwww.casinofantasy.com

n.a. Japanese, English, Chinese, German,Spanish, French; equipment fromCyber Technologies, Inc. of LasVegas; uses e-cash; site not availableto U.S. customers

Casino Fortune Trinidadwww.casinofortune.com

yes umbrella organization for five casinos(four in Trinidad, one in Botswana);est. January 1997; electronic fundstransfer

Casino Forum Trinidadwww.casinoforum.com

n.a.

CasinoInn Antiguawww.casinoinn.com

yes branch of World-Wide Telesports(WWTS); uses CryptoLogic e-cash

Casino International Antiguawww.4casino.com

no has been listed as defunct; branch ofWWTS

Casino Internationale Curaçaowww.casino-internationale.com

n.a. e-cash offered

Casino of theAmericas

St. Kitts out of business

Casino of the Kings Antiguawww.i-casino.com

n.a. uses EFS Caribbean equipment; alsoa sportsbook

Casino on Air location unknownwww.casinoonair.com

no uses EFS Caribbean software; eightlanguages



Casino-on-Net Antiguawww.casino-on-net.com

n.a. est. 1997

Casino Regal location unknownwww.casinoregal.com

n.a. uses CryptoLogic e-cash

Casino Royale Curaçaowww.funscape.com

yes est. 1995, under FunscapeInternational

Casino Royal Magic Irelandwww.aroyalmagicstreet.com

yes; Ecuador uses MonaCard encryption system(Monaco) for payment security;administered by Gertman S.A. ofLuxembourg

Casino Tokyo Antiguawww.casinotokyo.com

yes Japanese version of CasinoInn

Casino Tropicale Costa Ricawww.casinotropicale.com

yes at Hotel Barcelo, Guanacaste;licensed six years for conventionaloperations

Casino Vega InternetCasino

Costa Ricawww.casinovega.com

yes est. 1999

Casinos of the SouthPacific

Cook Islandssp.cosp.com

yes claimed huge profit first week open

Casinos of the World St. Kittswww.casinosoftheworld.com

yes

Centrebet Brisbane, Australiawww.centrebet.com.au

yes taken over by Jupiters, a largeconventional casino, 1998; no U.S.customers served

Classic Casino andSportsbook

British Virgin Islandswww.classiccasino.com

n.a. eight languages; EFS Caribbeane-cash; owned by SoftecSystems,Vancouver

Club Casino Liberia (no website found) n.a. seven languages; est. 11/96; ownedby Dutch Intercoin Co.; "licenses invarious countries"

Club Colonial Costa Ricawww.cccsportsbook.com

yes

Club Rio Casino Venezuelawww.clubrio.com

yes owner is Starnet International(Canada); uses EFS Caribbeanequipment

Constellation Casino Antiguawww.virtcasino.com

n.a. supplied by Virtual GamblingTechnologies through its Antiguabranch; sportsbook phase isInternational Sports Market (q.v.)

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Country Club Casino Tasmaniawww.murchison.com.au

yes owned by Federal Hotels of Australia

Cowboy Casino Antiguawww.cowboycasino.com

yes one of seven casinos using softwarefrom Bossmedia of Sweden, viaGlobal Network Ltd., licensee

Cryatal Palace Trinidad (no website found) n.a. under Casino Fortune group (SunnyGroup)

Cyberbetz Dominicawww.cyberbetz.com

yes owned by Global Intertainment Corp.of Vancouver; est. 8.98 after purchaseof Netbetz; casino and sportsbook

Cyberbookies Netherlands Antilleswww.cyberbookies.com

n.a. connected with Casino Café

CyberSino Netherlands Antilleswww.cybersino.com

n.a. owned by Scylinx Corp. ofNetherlands Antilles

Cyberspades (location unknown)www.cyberspades.com

n.a.

Cyber Thrill Bahamaswww.cyberthrill.com

n.a.

Darwin All Sports Darwin, Australiawww.betthe.net

yes est. Jan. 1997; is Internetarm ofInternational All Sports, advertised asAustralia's largest independentbookmaker; onto Internet 6/98;reportedly doing US$1 million permonth of business 1998

Davidson SportsBetting

Sydney, Australiawww.sportsbetting.aust.com

yes est. July 1997; will go online onlywhen New South Wales adoptsregulation laws

Dial-a-Bet Dominican Republic out of business 1998

Diamond Club Casino Antiguawww.diamondclub.com

yes one of seven casinos using softwareof Bossmedia of Sweden, via GlobalNetwork, Ltd., licensee

Emerald PalmsSportsbook

Costa Ricawww.epalms.com

yes

English HarbourCasino Online

Antiguawww.englishharbour.com

yes owned by English HarbourEntertainment, Antigua

English Sports Betting Jamaica and Antigua no on Antig ua's "no license" list 1998;site says betting illegal for U.S.customers



Eurobet Sports Gibraltarwww.eurobet.com

yes only customers outside U.K.; veryp rimitive site

First Live Casino St. Vincentwww.firstlive.com

n.a. roulette only

Five Star Casino Antiguawww.fivestar.com

yes one o f seven casinos using softwarefrom Bossmedia o f Sweden, viaGlobal Network, Ltd., l icensee

Galaxiworld St. Kittswww.galaxiworld.com

yes owned by Gaming Lotte riesCommunication Ltd. (GLC Ltd.); est.12/98; reported wagers US$3.1 mill ionthat month

Galaxy Sports andCasino

Curaçao yes p rosecuted in New York federal case,1998; bought 1998 by "group ofinternational investors," includingRoyal Technologies telecomcompany; renamed operation RoyalSports

Gamblers Palace Costa Ricawww.gamblerspalace.com

yes es t. 8/98; casino and sportsbook

Gibraltar Sports St. Kitts (no website found) yes owned by Gibraltar Sports, Inc.;spokesman: "There's no safety on theInternet; we don't do anything on it atall."

Global Casino Grenada out of business owned by Michael Simone ofPennsylvania; out of business afterMissouri civil and criminal cases of1997; sold to International Gaming o fVancouver, 12/97

Global SportsConnection

Costa Ricawww.betmaker.com

yes p rosecuted and pled gui l ty in NewYo rk federal case, 1998

Global SportsNet Antigua (no website found) no specifically named as unlicensed in1998 Antigua list of licensees

Gold Club Casinos Antiguawww.goldclubcasino.com

yes one o f seven casinos l icensed toGlobal Network Inc., using software ofBossmedia of Sweden; probablysublicensing to many other casinos inAntigua

Gold Coast Curaçaowww.gc ibe t2.com

yes also called Goldcoast Race andSportsbook

Golden HollywoodCasino

Dominican Republicwww.goldenhol lywood.com

yes es t. October 1998

Golden Jackpot Venezuelawww.goldenjackpot.com

yes licensee is U.S. Sports Casino; listswinners in U.S., but says play onlyallowed in "your particular state";English and German

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Golden Palace Casino Antiguawww.goldenpalace.com

yes links connect with Nierfeld's InternetCasino (q.v.); "Golden Palace Group,"all in Antig ua, includes 28 casinos;wholly owned by Antiguan company

Grand DominicanCasino

Dominican Republicwww.g randdominican.com

yes est. 9/97; active with U.S. customers,run by Tecnologia Co., headed byJoseph Tedeschi and group

Grand Holiday Casino Curaçao (no website found) out of business

Grand Online Casino Antiguawww.g randonline.com

yes connected with Triple Win Casino(q.v.)

Grand PrixSportsbook andCasino

Costa Ricawww.casino.grandprixsports.com

yes developed by CyberRoad of Canada;has EBanx e-cash system

Grand Riviera Antiguawww.g randriviera.com

yes under same management as TripleWin and about 25 other sites; a"private company" that would notdivulge its name

Grand Towers (location unknown)www.g randtowers.com

n.a.

Inet Sportsbook Costa Ricawww.inetsportsbook.com

yes also called Sports Bettor's Paradise;est. 1996

InterBingo Gibraltar (no website found) yes associated with InterKeno, underNetGame, Ltd.

Intercasino Antiguawww.intercasino.com

yes under WWTS group; est. 1996; offers19 games

InterKeno Gibraltar (no website found) yes InterKeno was former name ofCasares (q.v.) --current associationunknown

InterLotto Liechtensteinwww.interlotto.li

yes direct government sanction; run byInternational Lottery in LiechtensteinFoundation; also known as Millions2000

International ActionSports

St. Kittswww.international-action.com

yes

International SportsMarket

Antiguawww.virtsports.com

yes sportsbook phase of ConstellationCasino; six languages

Intertops Antiguawww.intertops.com

yes est. 1997; based in Austria;



Interwetten Austriawww.interwetten.com

yes est. 1989 as phone-betting op.; onlinein 1997; in Vienna; advertises tax-freewinnings, targeting Americans

Island Casino Costa Rica (no website found) out of business

Island Sports Curaçao (no website found) n.a. under new management 6/98

Island Superbook St. Kitts yes bought 6/98 by Gibraltar Sports

Jackpot Palace Antiguawww.jackpotpalace.com

n.a. advertised as coming in 1999;licensed to Global Network Ltd.; usingsoftware of Bossmedia of Sweden

Jupiters Casino Australiawww.broflo.com.au

yes conventional casino, Conrad Jupiter'sGold Casino on Queensland's GoldCoast, purchased Centrebet 1998 andwent online for first time, excludingU.S. customers

The King's Casino Botswana (no website found) n.a. under Casino Fortune group based inTrinidad (Sunny Group)

Kings Casino Antiguawww.kingscasino.com

n.a. no relation to Botswana operation

King's Sportsbook Grenada out of business

Ladbroke's United Kingdom(no website found)

yes a top telephone bookmaker; noreported Internat operations but doeshave U.S. customers and is potentialInternet operation

Lasseter's Australis (no website found) yes conventional casino; reportedly will goonline second half of 1999 from AliceSprings, Northern Terr.

Las VegasSportsbook

Dominican Republic(no website found)

n.a.

Loose Lines Margarita Island (Venezuela)www.looselines.com

yes advertises that its location makesbetting legal for all

Majestic Sports Costa Rica(no website found)

n.a.

90


Mapau Casino Trinidadwww.mapau.com

yes in Casino Fortune group (SunnyGroup)

Megasports Antigua(no website found)

n.a. website not complete 3/99;advertising for U.S. customers;Megasports also now has Australiansite at www.megasports.com.au

Millions 2000 (seeInterLotto)

NASA Sportsbook Costa Ricawww.betonsports.com

yes moved from Antigua 1998

NetBet (seeSportingbet)

Netbetz Dominica yes bought 1998 by Global IntertainmentCorp.; name changed to Cyberbetz

New York Casino Antiguawww.newyorkcasino.com

yes licensed to Global Network, Ltd.,using software of Bossmedia ofSweden

Nierfeld's InternetCasino

Germanywww.nierfeld.com

n.a. claims to be first Internet casino inGermany, but German law does notpermit Internet gaming; locationunknown

Oasis Casino Curaçaowww.oasiscasino.com

n.a.

Olympic Sportsbook Jamaicawww.thegreek.com

n.a.

Omni Casino Antiguawww.omnicasino.com

yes also known as Omni of theCaribbbean; in WWTS group; claimsAntigua license puts it outside U.S.jurisdiction; est. 8/97

123 Casino Grenadawww.123casino.com

yes casino and sportsbook; est. 6/97; sitesays Indiana and Missouri residentshave been warned of betting illegality

Online Sports Bet Costa Rica(no website found)

n.a.

Paradise Sports St. Kittswww.paradisesports.com

yes uses Carib F/X software



Paradise Sportsbook Costa Ricawww.paradisesportsbook.com

n.a.

Parlay Teaser Costa Ricaparlayteaser.com [sic]

n.a.

Planet Poker location unknownwww.planetpoker.com

n.a. "abides by all rules and regulations ofthe jurisdictions in which it operates,"i.e., specifically refuses to identifylocation

Playboy Sportsbook Costa Ricawww.playboysportsbook.com

n.a. est. 1996

Players Casino andSsportsbook

has several casinos with ISPs inCaribbean -- no specific locationfoundwww.playersonly.com

n.a.

Post Time Sports Antiguaww.post-time.com

yes est. 1996; affiliated with Bettorsworldlisting service

Premier League Antiguawww.premierleague.com

n.a. est. 1998

Queens Club Casino Antigua(no website found)

n.a. advertised as coming in 1999;licensed to Global Network Ltd., withsoftware from Bossmedia of Sweden

Quick Pay Sports Costa Ricawww.quickpay.com

n.a.

RKR Sports Curaçao(no website found)

out of business affiliated with Gold Coast and Top Turf;all gone by 1998

RYO International Antiguawww.twinklingstar.com

yes casisno and sportsbook; est 1997

Ramses Valley of theKings Casino

Antiguawww.thevalleyofkings.com

n.a. member of Golden Palace (q.v.)Group

Real Casino Costa Rica(no website found)

n.a. customer list purchased 1998 byCyberbetz

Rich's Sportsbook Dominican Republic(no website found)

out of business 1998

92


Ritz Casino Trinidadwww.theritzcasino.com

yes one of five under Casino Fortune,Sunny Group

Riviera Casinos location unknownwww.rivieracasinos.com

n.a. English and German versions

Rosie's Casino Costa Ricawww.rosiescasino.com

yes also known as Rosie's Chalk GardenCasino

Royal Island Casinoand Sportsbook

Costa Rica [possible]www.royalisland.com

n.a. est. 8/98, possibly as a new versionof Island Casino

Royal St. Kitts Hoteland Casino

St. Kittswww.royalstkitts.com

yes standard hotel casino for 15 years

Royal Sports Curaçaowww.royalsports.com

yes new name of Galaxy Sports; boughtby international group headed byRoyal Technologies telecom company

SBG Global Costa Ricawww.sbgglobal.com

n.a.

Safari International Antiguawww.safari-casino.com

yes est. 1997

Sands of theCaribbean

Antiguawww.thesands.com

yes under WWTS group

7by7 Casino location unknownwww.7by7.com

n.a. English and Japanese

Shamrock Sportsbook Costa Ricawww.shamrock.com

n.a.

ShoreBet Sportsbook Dominicawww.shorebet.net

yes est. 8/98

Skybook Margarita Island (Venezuela)www.skybook.com

yes Las Vegas-owned

Specfund Antigua(no website found)

yes



Specfund Antigua(no website found)

yes est. 1998

Sport Fanatik Venezuela yes ten languages; uses EFS Caribbeansoftware; sportsbook and casino

Sportbet.com Costa Ricawww.sportbet.com

n.a.

Sportingbet.com United Kingdom (Alderney Isl.)www.sportingbet.com

yes run by Blandford Betting; establishedconventional bookmakers in Englandfor 14 years

Sports Bettor'sParadise

Costa Ricawww.inetsportsbook.com

yes also known as Inetsportsbook; est.1996

Sports Interaction Dominican Republic(no website found)

out of business money transactions reportedly went toIreland

Sports International Antigua/Grenadawww.gamblenet.com

no listed by Antigua on "no license" list5/98

Sports Market Curaçaowww.sportsmarket.com (site"under construction")

n.a.

Sports Net Bet Costa Ricawww.sportsnetbet.com

yes est. 1996

Sports Offshore Antiguawww.sportsoffshore.com

yes also known as SOS

Sports State Curaçao(website temporarily down)

n.a.

Sterling Sportsbook Dominican Republicwww.wagepage.com

yes

Sunrise Casino (location unknown)www.casino-sunrise.com

n.a. uses Alesco Ltd. software

Sunset Casino Antigua(no website found)

yes advertised as coming in 1999;licensed to Global Network Ltd.; usingsoftware from Bossmedia of Sweden

94


Super Casino Dominicawww.supercasino.com

yes links also go to Casino Casino; run bySuper Casino, Ltd.

Superbet Venezuelawww.superbet.com

yes est. 6/98

TABCORP Victoria, Australia(no website found)

yes formed 1994 by privatization ofVictoria Totalizer Agency Board (TAB),which ran off track race betting for thegovenment; may move to Internetsoon (New South Wales's TAB wentonline early in 1999)

TVCCasino Costa Ricawww.tvccasino.com

n.a. est 8/97; parent company is Lucheafar(Dutch); also sportsbook

Triple Win Antiguawww.triplewin.com

yes under Gold Club Casino group

USA Casino Antiguawww.usacasino.com

yes licensed to Global Network Ltd.; usingsoftware from Bossmedia of Sweden

Ultimate SportsBetting

Costa Ricawww.ultimatesportsbetting.com

yes est. 1/97

Universal Sportsbook Dominican Republic(no website found)

n.a.

VIP Sports Netherlands Antilleswww.vipsports.com

yes

Victor Chandler United Kingdomwww.victorchandler.com

yes; Gibraltar long-time conventional bookmaker inEngland, with offices in Hong Kong,Thailand, Gibraltar; recently intoInternet; moving into U.S. market

Virtual Casino Online Antiguawww.virtcasino.com

yes run by Virtual Gambling Technologies,Inc. through Antigua subsidiary; alsoruns Constellation Casino and itsInternational Sports Market sportsbook

Wagersports Bahamas(no website found)

out of business

Wall Street Casino Dominican Republicwww.wallstreet-casino.com

yes est. 8/98 "licensed and audited"



William Hill United Kingdom (Isle of Man)www.williamhill.co.im

yes conventional bookmaker since 1934;high reputation; recently into Internet

Wild West FrontierCasino

St. Kittswww.wildwestfrontier.com

n.a. new 3/99; run by International Gaming,Ltd.; "100 percent European owned"

Winner's Way Dominican Republic(no website found)

out of business? target of 3/98 New York prosecution;owner pled guilty; website "removedfor nonpayment"

Wizard of Odds Dominical Republicwww.wizardofodds.net

yes est. 1998

World Sportsbook Antiguawww.worldsportsbook.com

yes subsidiary of Starnet CommunicationsInternational of Vancouver

World SportsExchange

Antiguawww.wsex.com

yes target of 3/98 New York prosecution;owner Jay Cohen has fought the case

World-WideTelesports (WWTS)

Antiguawww.wwts.com

yes target of 3/98 New York prosecution;owners charged but remain fugitives;sublicense numerous otheroperations; had prior solid reputation;software from Microgaming SystemsInc.

World Wide Wagering Dominicawww.wager.dm

yes sportsbook and casino

World Wide WebCasinos

Antigua(no website found)

no Antigua lists as not licensed; based inOrange County, CA; ownsconventional casino, St. James Club,in Antigua

Wrest Point Casino Tasmania(no website found)

yes owned by Federal Hotals of Australia


APPENDIX I

COMPANIES RELATED TOINTERNET GAMING

OPERATIONS

AMERICAN WAGERING, INC.—Bookmaking company in Las Vegas and ownerof Megasports, which has a casino in Antigua;opened Internet wagering operations inCanberra, early 1999, under license from theAustralian Capital Territory, in partnership withAustralian firm AWA of Sydney, a gamblinggroup so far frustrated by New South Wales’sfailure to legalize gaming in its jurisdiction;Internet name will be Megasports.

ATLANTIC INTERNATIONAL ENTER-TAINMENT, LTD.—Developer of Internetgames and parent company of World InteractiveGaming Corp. of Delaware and New York,which was sued in 1998 by the Federal TradeCommission for illegal solicitation of investorsin its Golden Chips Internet Casino, and by theState of New York for running an illegal Inter-net casino, also the Golden Chips Casino.

ATLANTIS GAMING, INC.— Recipientof first license from Softec Systems Caribbean,subsidiary of Starnet Communications Inter-national; has gaming licenses in Antigua andoperates CasinoLand; formerly owned AtlantisCasino in Belize.

AUSTRALIAN MEDIA, LTD.—Ownsexclusive franchise for online gaming onNorfolk Island, Australia, and uses softwarefrom New Discoveries (U.S.); ownership ofAustralian Media unknown.

BOSSMEDIA— Swedish firm running sixcasinos (soon to be nine, per advertising),in Antigua; licensed to Global NetworkLtd.; two branch companies in Antigua—Boss Casinos and Webdollar— employing50 people altogether.

COMMERCE AND COMMUNICATIONSINC.— In Antigua, mainly a software pro-vider; has Antigua license for Internet gamingas of 1998.

CRYPTOLOGIC— Software developmentcompany based in Toronto; operator ofvirtual casinos; developed an e-cash systemin which players establish accounts viacredit card, check, money order, or wire,with encrypted financial information. Itscasino system, Intercasino, was sold to itssubsidiary Intertainment Antigua, whichlicensed it to World Wide Telesports(WWTS), Antigua, with all bets received,processed, and stored in Antigua. WWTSuses Cryptologic’s e-cash for secure moneytransactions.

CYBEROAD GAMING CORPORATION—Vancouver; owns or supplies operations in St.Kitts and Costa Rica.

CYBERGAMES— Costa Rica; runs Bingo ofthe Americas under contract with the RedCross of the Americas, and also five casinos inDominica and Antigua, purchased in 1998;development agreements with three othercasinos and four conventional casinos inCosta Rica. Until 1998, called ProfessionalSports Holdings, Inc. Runs its Costa Rica sitesthrough RCI de Costa Rica, SA.

98

CYBER SPACE CASINO TECH, LTD.—Location unknown; specializes in Internetgaming; works with Carib F/X and othersoftware suppliers.

ELECTRONIC FINANCIAL SERVICES(EFS) CARIBBEAN— Provider of encryptionand processing systems for financial transac-tions security, using STAR-MX software, toInternet gaming operations; calls itself an“international currency converter and secureInternet transaction gateway.”

GLOBAL INTERTAINMENT INC.—Vancouver and Hong Kong; no U.S. citizensas principles; market focus Asia and Europe.Owner of Cyberbetz Internet gamingoperation, Dominica.

INATOS, LTD.— Advertises as lowest-costInternet service provider in Great Britain;designed Stopwatch Internet soccer betting site.

INTERACTIVE GAMING AND COM-MUNICATIONS— Operated throughGrenadian subsidiary, Global Casinos,beginning February 1997. Also ranWiseGuy Sports Wagering System, GlobalCasino, and Sports International, all inGrenada. Reported 1996 turnover wasUS$58.6 million. Brought to court in Mis-souri in 1997; owner Michael Simone soldthe company to International Gaming Corp.of Vancouver, December 1997.

MEGASPORTS— Division of AmericanWagering, Inc.; in mid-1998 received Austra-lian license in Canberra and plans to base newinternational operations in Australia

NTN GROUP— Australia; newly formed(2/99) company to develop, market, and

operate gaming systems of the AustralianInternet Gaming Company Coms21; shapeand activity still to be determined.

NETGAME, LTD.—Gibraltar; operates(operated?) InterKeno and InterBingo

PAN INTERNATIONAL GAMING—Seattle; owns Tropical International Sports ofAntigua (q.v.)

STARNET COMMUNICATIONS INTER-NATIONAL— Founded 1995; Antigua-based;called “the Microsoft of casino software vendors”;has numerous gaming subsidiaries, includingWorld Sportsbook, World Lotteries, WorldRacetracks, World Gaming Casino; onlinerevenues processed through Electronic FinancialServices Caribbean, based in Antigua, usingtechnology from another branch, Starnet Canada.Electronic commerce certified by Bank ofMontreal. Another subsidiary, Softec SystemsCaribbean, licenses turnkey customized Internetgaming systems, including that of Atlantis GamingInc. of Antigua, operator of CasinoLand.

TELECOMMUNICATIONS INFRA-STRUCTURE SUPPORT SERVICES(TISS)— Long Beach, CA, provides turnkeysystems and consultation for casino sites andsoftware; until 1998 owned Sports Marketgaming site, Curaçao.

TROPICAL INTERNATIONALSPORTS— Antigua, through WhitfieldHoldings of Antigua, leases hardware andsoftware from PAN International (q.v.); untilsometime in 1998, was called RSB and wasbased in Dominica.


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106

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Internet Gaming

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Rose, I. Nelson. The Law of Internet Gambling. (Manuscript), 1999.

Websites consulted:

http://www.bettorsworld.comhtp://www.lotteryinsider.com.auhttp://www.rgtonline.com (Rolling Good Times Online)


ENDNOTES

1 “More Consumers Bank on the Web,” The Washington Post, June 1, 1999, D1.

2 Scott B. Guthrey, “Smart Cards in Web-Based E-Commerce,” in Mary J. Cronin, ed., Bankingand Finance on the Internet (New York: Van Nostrand Reinhold, 1997), 147; MitsuoYamaguchi et al., Electronic Money: Its Impact on Retail Banking and Electronic Commerce(Tokyo: F.I.A. Financial Publishing Co., 1997), 20-22.

3 See “Remarks by Eugene A. Ludwig, Comptroller of the Currency,” in conference entitled“Toward Electronic Money & Banking: The Role of Government,” September 19-20, 1996.http://www.occ.treas.gov/emoney/ludwig.html

4 “Industry Analysis Firm Predicts 38 Percent Annual Growth in Smart Card Market,” Reporton Smart Cards, 12, No. 2 (February 2, 1998), 1-2, 11.

5 “Forrester Study Reassesses Smart Card Use in N. America,” Report on Smart Cards, 12,No. 3 (February 16, 1998), 3-5.

6 Frost & Sullivan, “The World Market in Review [1999],” and “A Look at the Asian PacificSmart Cards Market: 1999 and Onwards.” http://www.smartcardcentral.com.

7 “Banks Can No Longer Ignore the Internet,” Bank Investment Services Report, 7, No. 2,January 11, 1999, 5.

8 James R. Richards, Transnational Criminal Organizations, Cybercrime, and Money Laundering:A Handbook for Law Enforcement Officers, Auditors, and Financial Investigators (BocaRaton: CRC Press, 1999), 66.

9 “Bank One CEO Bets $500M on Internet’s Sales Potential,” American Banker, 164, No. 34,February 22, 1999, 5.

10 “Kentucky Gets Full-Service Internet Bank,” Lexington Herald-Leader, February 2, 1999, n.p.

11 <http://www.gomezwire.com/Finance/Banks/scorecard/index.cfm?cat=1>

12 “IDC Predicts Internet Banking Explosion.” <http://www.electronicbanker.com/html/news/020299_4.htm>.

13 Erika Morphy, “Making Cash Flow,” Export Today, July 1998, 28.

108

14 Jackie Cuevas,”The Internet Banking Horizon: Bleak or Bright for Community Banks?”Journal of Internet Banking and Commerce. [online] <http://www.arraydev.com/commerce/JIBC/9811-14.htm.>; Leisha Yerkes, “Growing with Technology: The Benefits of InternetBanking,” Bankinfo.com, October 13, 1998 <http://www.bankinfo.com/ecomm/growing.html>;“Testimony of James D. Kamihachi....” citing Stephen C. Franco and Timothy M. Klein, 1999Online Banking Report, and Piper Jaffray, February 1999, 23, who placed the cost of a cus-tomer transaction via a telephone call center at US$0.84. and the Internet cost at US$0.26.

15 “Bankers Back Two Alternatives to Tellers: Internet and ATMs,” GT Online: Industries.[from Currency, 11, No. 1, Spring 1998; <http://www.GrantThornton.com/gtonline/finance/currency/sp98b.html>

16 Institute of International Bankers. Global Survey of Regulatory and Market Developments inBanking, Securities and Insurance. <http://www.iib.org/global/1998>

17 Risk Management for Electronic Banking and Electronic Money Activities. Basle, BasleCommittee on Banking Supervision, March 1998.

18 “Comments from the Board of Governors of the Federal Reserve System,” Electronic Banking:Enhancing Federal Oversight of Internet Banking Activities. GAO Report, July 1999, GAO/GGD-99-91, 41.

19 <http://www.occ.treas.gov/customer.htm>

20 “Rule to Let S&Ls Offer Services Electronically,” Report on Smart Cards, December 14, 1998,8; Federal Register, 63, No. 156, 43327-30, August 13, 1998 (Department of the Treasury.Office of Thrift Supervision. 12 CFR Part 555, No. 98-77, RIN 1550-AB00); “OTS UpdatesElectronic Operations Rule to Help Thrifts Better Compete,” OTS 98-89, November 30, 1998;Department of the Treasury. Office of Thrift Supervision. Transmittal TR-212. Federal Register,63, No. 229, 65673-83, November 30, 1998.

21 General Accounting Office, Electronic Banking: Enhancing Federal Oversight of InternetBanking Activities. GAO Report, July 1999, GAO/GGD-99-91.

22 “Announcement,” March 20, 1995. <http://virtualschool.edu/mon/ElectronicProperty/FBOIInfo>

23 “State Business of Banking Laws and the Internet,” 21st Century Banking Alert No. 97-9-10,September 10, 1997. <http://www.ffhsj.com/bancmail/21starch/970910.htm>

24 “IDC Predicts Internet Banking Explosion,” Electronic Banker. <http://www.electronicbanker.com/html/news/020299_4.htm>

25 States participating in FinCEN Survey: Alabama, Alaska, Arizona, California, Colorado,Georgia, Hawaii, Iowa, Maryland, Minnesota, Nebraska, Nevada, New Jersey, New York,Ohio, Oklahoma, Rhode Island, South Carolina, Tennessee.

26 Lauren Bielski, “Smart Cards, Coming Up to Bat,” ABA Banking Journal, 90, No. 11(November 1998), 67-69.


27 Mike Hendry, Smart Card Security and Applications (Boston: Artech House, 1997), 67-69.

28 Ibid., 75-77.

29 Jerry Ashworth, “Researchers’ Smart Card Attack Discovery Spurs Industry to Search for Fixesto Systems,” Report on Smart Cards, 12, No. 13 (July 20, 1998), 3.

30 European Commission, “Electronic Money: Commission Proposes Clear RegulatoryFramework” (July 29, 1998). European Union website: <www.europa.eu.int>.

31 Financial Action Task Force on Money Laundering, The Forty Recommendations of theFinancial Action Task Force on Money Laundering (Paris: FATF Secretariat, OECD,June 28, 1996).

32 Financial Action Task Force on Money Laundering, FATF Annexes: Annual Report, 1997-1998 (June 1998) (Paris: FATF Secretariat, OECD, June 1998); and Financial Action TaskForce on Money Laundering, FATF 1998-1999 Report on Money Laundering Typologies(Paris: FATF Secretariat, OECD, February 1999).

33 James R. Richards, Transnational Criminal Organizations, Cybercrime, and Money Laundering:A Handbook for Law Enforcement Officers, Auditors, and Financial Investigators (BocaRaton: CRC Press, 1999), 66.

34 Richards, 66; “OTS Approves Internet Bank to Provide Range of Services,” OTS NewsRelease, July 14, 1997, OTS97-44. <http://www.ots.treas.gov/docs/7744.html>

35 Michelle Samaad, “Cyber-Banking Breaks New Ground, Expands Toward Mainstream,” BankRate Monitor, January 12, 1999. <http://www.tele-bank.com/media_bank_monitor.asp?>

36 “Wells Fargo Bank Eliminates Human Tellers in Trial,” November 6, 1998. <http://www.cnnfn.com/digitaljam/newsbytes/121028.html>

37 “New Virtual Banks Coming Online,” Electronic Banker. <http://www.electronicbanker.com/html/news/020999_3.htm>

38 “New Virtual Banks Coming Online,”Electronic Banker. <http://www.electronicbanker.com/html/news/020999_3.htm>

39 Marjanovic, Steven, “Web Bank’s Revenue up 120% in Year,” American Banker Online,February 8, 1999. <http://www.tele-bank.com/media_ambank3.asp?>

40 Michelle Samaad, “Cyber-Banking Breaks New Ground, Expands Toward Mainstream,” BankRate Monitor, January 12, 1999. <http://www.tele-bank.com/media_bank_monitor.asp?

41 Carol Power, “Chase, Playing Catch-UP, Adds Web Access to Its Online Banking Service,”American Banker, 164, No. 38, February 26, 1999, 10.

42 “Small-Fry Salem Five Cents Savings Masters Internet,” FutureBanker, 3, No. 2,February 1999, 43.

110

43 “E*Trade, BofA and Visa to Offer Wireless Web Access Via PalmPilot,” FutureBanker, 3,No. 2, February 1999, 27.

44 “Viva La Internet Banking,” Financial Service ONLINE, January 1999, 6.

45 “Deutsche Breathes Life into Retail,” Retail Banker International, No. 406, February 18, 1999, 7.

46 Margaret McKegney, “Credit Agricole to Link Web Banking to Satellite Service,” FinancialNetNews, 3, No. 43, October 26, 1998, 1ff.

47 “Sweden No 1 in Internet banking,” <http://www.tagish.co.uk/ethosub/lit5/d842.htm>.

48 “Customers Flock to New Internet Banking Business in Britain,” Evening Standard [London],January 19, 1999.

49 Benny Run, “Online Bank Transactions to Begin in Israel,” InternetNews.com. March 23, 1999.<http://www.internetnews.com/intl-news/article/0,1087,6_84871,00.html>

50 “Southern Bank Direct.” <http://www.sbbgroup.com.my/sbbdirect/index.html>

51 “Thai Farmers Bank to Launch Internet Banking in Late 1998,” April 6, 1998. <http://www.cnnfn.com/digitaljam/newsbytes/110170.html>

52 Sompit Potipattanakorn, “Electronic Banking Comes to Thai Farmers Bank,” The Nation[Bangkok], October 6, 1998. <http://www.cnnfn.com/digitaljam/newsbytes/119206.html>

53 “FATF-IX Report on Money Laundering Typologies,” February 12, 1998; “Financial ActionTask Force On Money Laundering,” 1998-1999 Report on Money Laundering Typologies. (Paris:FATF Secretariat), February 10, 1999.

54 Current members of the Group are Aruba, Bahamas, Bahrain, Barbados, Bermuda, CaymanIslands, Cyprus, Gibraltar, Guernsey, Hong Kong, Isle of Man, Jersey, Lebanon, Malta,Mauritius, Netherlands Antilles, Panama, Singapore, and Vanuatu.

55 Information was not available at the time of writing.

56 Reference was made to the existence of the casino, but no website was located.

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