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Kevin Smith

PayPal, DOJ Reach $10 Million Settlement

25 July 2003

Nine months after cutting its ties with online gambling merchants, third-party payment processor PayPal Inc. has reached a settlement with the U.S. federal government. The deal, pertaining to an investigation by the U.S. Attorney for the Eastern District of Missouri, was struck Friday.

"... We will continue to investigate and pursue such activity."
- Raymond W. Gruender
US Attorney

PayPal, which was bought by eBay Inc. last year, will pay $10 million to settle allegations that it aided in illegal offshore and online gaming activities.

eBay announced upon its purchase of PayPal that the transaction system would no longer be used for online gaming. Previously, the alternative payment provider had been a life saver for many online gaming operators cut off from processing credit-card transactions.

PayPal officials have never discussed the looming case publicly (aside from brief mentions in SEC filings) and declined to comment on the settlement.

Raymond W. Gruender, the U.S. Attorney who spearheaded the investigation, had little to say himself. Gruender called it a lengthy investigation, but wouldn't elaborate on whether grand jury indictments are pending.

PayPal was accused of illegally processing online gambling transactions for customers in the Eastern District of Missouri and elsewhere between June 2000 and November 2002.

In the settlement, PayPal agreed that it had illegally transmitted millions of dollars in funds derived from criminal offenses.

The group admitted to violating the federal Wire Act, a 42-year-old law that prohibits the use of phone lines for transmitting betting information, and various state statutes prohibiting online gambling.

The Wire Act has been the center of much debate regarding online wagering. Some argue the act is outdated; others want to see it expanded to include the prohibition of wagering through the Internet and other technological means. Some legal experts argue that while the law is relatively clear in regards to sports betting, there is gray area when casino gambling is concerned.

In addition to paying the Department of Justice $10 million, PayPal is required to maintain a corporate compliance program for at lest two years.

According to a statement released by Gruender, the agreement frees PayPal and eBay of any future litigation related to the transaction in question.

Gruender also said other companies could face similar investigations.

"Offshore sports books and online casino gambling operations which do business in the United States generally do so in violation of federal criminal laws," he said. "Therefore, we will continue to investigate and pursue such activity."

He said that while some lawyers argue the Wire Act is ambiguous in terms of online wagering, certain sections of it are cut and dry. Specifically, he pointed to a subsection of the law that makes it an offense for a money transmitting business in interstate or foreign commerce to transmit (a) funds derived from criminal offenses or (b) funds intended to promote or support unlawful activity.

The investigation was a collaborative effort between officials with the St. Louis Division of the Federal Bureau of Investigation and the St. Louis office of the Internal Revenue Service Criminal Investigation Division.

eBay's stock dropped from a weekly high on Thursday of near $118 a share to $112 near the end of trading on Friday (the day of the announcement).

PayPal, DOJ Reach $10 Million Settlement is republished from
Kevin Smith
Kevin Smith