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Gary Jackson

Sudden Washington Storm Elevates Risks - And Opportunities

15 November 2006

How to Navigate the iGaming Legal Gale With Top-Quality Geolocation

The following article was submitted to IGN by Quova, which is one of a handful of companies specializing in geolocation technology. IGN does not endorse Quova or its services.

It was a bit like having a small puffy cloud suddenly emit a bolt of lighting. The Unlawful Internet Gambling Enforcement Act had been languishing for years in Congressional backwaters, vaguely portending trouble for the iGaming industry. But the distant threat became an instant storm when it attached itself to the Port Security Bill signed by President Bush on Oct. 13. It promptly blew away the U.S. operations of over a dozen major i-gaming companies and hundreds of millions of dollars in revenues--all from a law that does not ban online gambling in the United States or even define what constitutes "unlawful" gambling.

The fact that the Act forbids only the processing of gambling payments and not online gambling itself (which is governed in the United States by the 1961 Wire Act) is both a risk and an opportunity for non-U.S.-based gambling operations. But it's important to note that the risk is essentially the same one that online casinos have been dealing with for years--the requirement that they accept bets only from legally serviceable locations. Gaming providers have always faced stiff regulations and equally stiff legal consequences for violating those regulations--Sportingbet and bwin executives were led away in handcuffs (by U.S. and French authorities respectively) before the UIGEA was passed.

What the Act has done is to raise the stakes beyond the online casinos by requiring all payment processors to have systems in place to block payments to operators of illegal Internet gambling. Should a payment processor in the United Kingdom, France or Ireland process a prohibited transaction--even inadvertently--under current extradition laws, the CEO of the processor would be subject to arrest and extradition to the United States. Congress has yet to write the regulations that detail the law's enforcement, but it's entirely possible that accepting a single wager or payment from a banned location could bring the hammer down.

The new regulatory landscape is, however, a compelling opportunity for gaming operators who understand the power of Internet geolocation, the technology that identifies the geographic location and Internet connection characteristics of an online user. Online casinos have used geolocation for years to comply with the aforementioned geographic regulations and avoid the consequences afflicting Sportingbet and bwin.

For example, the world's biggest bookmaker, Ladbrokes, was recently ordered by a Dutch court to prevent Dutch gamers from accessing its Web site. Ladbrokes is a longtime customer of Quova, which provides geolocation to the gaming industry, and complying with the Dutch court ruling is a simple matter of tuning the Quova solution to block online users from locations inside the Netherlands--a task that can be achieved with virtually 100 percent accuracy. Ergo, no handcuffs.

The coming U.S. crackdown can be dealt with in the same way. With a top-drawer geolocation solution in place, a casino or payment processor can show that it is trying, to the best of its ability, to comply. The combination of demonstrable good faith and the uncertainty of enforcement will provide more than adequate cover against American legal action.

U.K. gaming operations, many of which were early adopters of geolocation technology, understand this opportunity. With the enthusiastic support of Labour, as the Daily Mail reported recently, they're out to make the United Kingdom. the dominant player in online gambling – a potential boon for not only the casinos themselves but for the payment processors, software providers and online advertising companies who depend on them for revenue. Knowing the location of every online customer is an absolute essential to mitigate the risk of doing business for all these companies.

The "Know Your Customer" principle is one with which many Internet gambling providers are very familiar, given their commitment to geolocation and other authentication technologies to prevent not only regulatory violations but online fraud and money laundering. The most obvious application of geolocation would be to deny access to users from banned nations, like the United States and France. But high-level geolocation also reveals whether a user is attempting to hide his true location with the use of an anonymizer, a proxy server on the Internet that blocks geographic data. Detecting anonymizers is far beyond the power of most geolocation solutions--which will be an insufficient excuse if U.S. investigators come calling because an American placed a bet with a masked identity.

Top-quality geolocation also identifies the user's connection and Internet route, which creates opportunities far beyond regulatory compliance. Many online casinos automatically profile their online users to prevent being defrauded with stolen credit card numbers, for example. A previous customer logging onto a gaming site from a different location than usual, or using a different connection, can be required to provide additional ID before being allowed to bet. Visitors from known high-fraud countries like Russia or Nigeria can be automatically blocked, as can anonymizer users or customers using satellite connections--both frequent fraud indicators. The more accurate and sophisticated the geolocation data in use, the more fraud losses can be reduced--and the fewer legitimate customers will be incorrectly blocked from the site.

Getting geolocation right, therefore, is critical--because whether fraud prevention or regulatory compliance is the issue, the gaming company's reputation is on the line right alongside the balance sheet. When the regulatory pressure comes, it's safe to assume that publicly held payment processors will feel it first. The enforcement pattern in online gaming is that public companies--answerable to boards and shareholders and most vulnerable to reputational risk--have taken the headline hits. But it would be a foolish CEO indeed who considered his private company to be less at risk from either organized crime or law enforcement.

An estimated 80 percent of the worldwide $15 billion online gambling market comes, or came, from the US. It seems possible that US gamblers will be back at the table in the foreseeable future, either because the ban has holes in it or because the U.S. government eases the restrictions. (Conspiracy theorists believe the US is being protectionist on behalf of U.S. casinos, which will later be allowed to build a regulated, taxed online gambling industry.) In the interim, non-U.S. casinos will be well served to deploy technology that tells them exactly where their customers are--and keeps them out of the line of regulatory fire. At a moment in time when a single, obscure piece of legislation has put multimillion-dollar operations out of business in a matter of days, it's clear that risk has been elevated to a whole new level.

Sudden Washington Storm Elevates Risks - And Opportunities is republished from
Gary Jackson
Gary Jackson