PayPal Agrees To Ban On-Line Gambling Users

by Leroy Baker, Tax-News.com, New York

22 August 2002

On-line gambling is one of the few clear success stories so far for offshore e-commerce, but access to the key US market for offshore sports betting and casino sites is being sealed off by US attacks on credit card and on-line payment sites.

During an explosion in offshore e-gaming in 2000 and 2001, it's estimated that several thousand sites were established, with Antigua, Costa Rica, Malta and Vanuatu being some of the most popular locations.

It's cheap and easy to construct a gambling site, but for a small operator the big difficulty is how to collect the money, since banks are increasingly reluctant to provide credit card merchant facilities for an activity which is illegal in the US and some other large markets. And in June the regulators scored the latest in a line of successes when Citibank, the US's largest credit card issuer, agreed to block online gambling transactions using its credit cards.

Many operators have turned instead to on-line payment services, another boom sector on the Internet. Now the New York Attorney General Eliot Spitzer has reached a settlement with PayPal Inc. that will bar state residents from using the service to gamble online. PayPal allows individuals and businesses to send and receive online payments through credit card associations or electronic transfers from and to bank accounts, but last month, after the company agreed to be acquired by Internet auction giant eBay Inc, the writing was on the wall for its gambling clients.

Under the settlement, PayPal won't process payments from New York residents to Internet casino sites beginning Sept. 1 and will pay $200,000 to the state for its profits, the cost of investigation and penalties. EBay has already said that if its planned merger with PayPal is successful, the money-transfer service would no longer be associated with online gambling.

Internet gambling generated about 8%, or $117 million, of PayPal's revenue in the first quarter. Other states are likely to follow New York's lead in trying to close off gamblers' access to on-line payment facilities. But one has to ask what prevents an offshore payment service from picking up the business left behind by PayPal and other onshore payment services?

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