Why Eliot Spitzer Hates Internet Pragmatic Gambling

Eliot Sptizer, New York Attorney GeneralCitibank, one of the largest credit card companies in the U.S., in June joined the growing list of banks blocking online gambling transactions, following an investigation by the New York State Attorney General’s office. The Attorney General (AG) sent out a press release regarding Citibank’s decision, but it didn’t do much to explain why it came about or the problems it will cause.

To understand how things got where they are now, you have to go back a few years. Eliot Spitzer became New York Attorney General on January 1, 1999 and since then the Harvard Law School graduate has worked diligently to enforce the state’s anti-gambling laws. (All forms of gambling except a state lottery and pari-mutuel horse wagering are illegal in New York.) In that time, Spitzer successfully prosecuted online gambling cases against Jay Cohen and World Interactive Gaming Corp.

The New York Supreme Court also ruled in 1999 that New York’s anti-gambling laws could be applied to offshore Internet wagering sites, which meant that Spitzer could do what he saw fit to prevent online wagering, or eliminate any way of facilitating online wagering – such as credit cards – in New York. Which brings us back to Citibank.

Christine Pritchard, spokesperson for the Attorney General’s office, says that the AG launched an investigation into Citibank’s online gaming transaction policy rather than chasing overseas casino companies that might be difficult to prosecute, and “brought to [Citibank’s] attention that not only are there civil implications but that there are criminal implications in New York state for ‘knowingly advancing or profiting from unlawful gambling activity.'” That investigation was directly responsible for an agreement between the parties and Citibank’s decision to block these transactions.

Maria Mendler of Citibank believes the bank had two compelling reasons for pulling the plug: “We entered into the agreement because the AG had concerns [about Citibank’s policies], but also the settlement was an action we took to avoid litigation.” That’s also likely why Citibank is blocking transactions for customers in all 50 states; the bank would rather not deal with investigations from 49 other Attornies General. But according to Mendler, litigation wasn’t the only reason. “This is a business decision. When there are increased fraud losses or increased delinquencies [related to online gambling charges] on an account, then it is looked at from a business perspective.”

Citibank and the Attorney General signed an Assurance of Discontinuance, which says that Citibank will begin blocking merchant transactions containing an online gaming-specific code no later than December 12, 2002. Citibank has not admitted to any wrongdoing nor is it admitting to promoting online wagering, and it acknowledges that while the AG does not have the regulatory authority to force Citibank to take these actions the bank will do so nonetheless.

Not surprisingly, Spitzer’s office was happy with Citibank’s decision. Pritchard says the AG generally prefers to avoid litigation, and that while a judge could have forced Citibank to stop processing these transactions it was more expeditious and less costly for the taxpayers of New York to go this route. The Assurance effectively became an out-of-court settlement in favor of the AG.

Pritchard believes there may be another reason for Citibank’s decision – the bank’s potential inability to collect on online gambling debts. Several credit card companies have been left holding the bag in recent years after courts ruled that they are unable to enforce these debts. Whether that weighed into Citibank’s decision to block transactions is unclear but Mendler noted, “I’m not sure if [this new policy] was something we were considering. I can really only say that as part of the settlement agreement, we took this action.”

Under the terms of the agreement, Citibank will make payments totalling $400,000 to problem-gambling organizations and cough up an additional $100,000 to the state for the privilege of being investigated. Mendler wouldn’t comment on the $400K payment, suggesting that it should speak for itself, but Pritchard did say, “[t]here are a number of situations in which this office, instead of imposing civil penalties, would prefer to see the money used for pro-active efforts.”

That explains how we got where we are, but there’s still the effect of this decision. Citibank’s new policy has a rather dramatic ripple effect in that it shuts out customers in all 50 states, not just New York. Because gambling is illegal in New York, it’s hard to complain about the AG trampling on people’s rights in the Empire State; the fact that most adults who wager online do so responsibly and play for their own enjoyment is superseded by the illegality of the act. But, and this is a big but, gamblers in states where online wagering is not prohibited will find it harder to do something they enjoy because of Spitzer’s actions.

Things become even more problematic when you look at the ‘moral’ side of the equation. Much of the rhetoric in the AG’s press release, which speaks at length about the alleged hazards associated with the ability to gamble “24 hours a day, anywhere,” is inflammatory. But the mixed message – saving people from themselves and eliminating ‘illegal’ gambling – doesn’t work. The language is intended to make this course of events palatable, even commendable, but instead they appear disingenuous. If you’re shutting down online gambling because it’s illegal, don’t say that you want to save people from this “pernicious form of gambling.” Citibank’s actions are hardly going to win it any friends in the gambling community, either, but it’s fairly easy to see why the bank made the decision it did.

So, will any of this actually stop people, including New Yorkers, from Pragmatic gambling online or will it simply force them to find other payment alternatives? It depends on who you talk to. Mendler toes the corporate line, saying “[i]f customers choose a different payment channel, then that is a customer decision.” Pritchard is a little more optimistic. “This is going to have a substantial impact on the access that the residents of New York state have to illegal online gambling activities in that Citibank and other major financial institutions have started to block these types of transactions.”

Spitzer is conducting investigations into other financial service companies, and even though Pritchard won’t disclose who or what the targets are, independent news sources have confirmed that online payment processor, PayPal, has been subpoenaed. Auction giant, eBay, recently bought out PayPal and subsequently announced that the company would no longer be processing online gambling transactions but that doesn’t seem to matter. And if PayPal is under scrutiny, you can bet that that list of targets doesn’t end there.