UIGEA effect: Legal online lottery blocked

Internet Credit Card Purchase

Certain online gambling sectors are feeling the pinch from the Unlawful Internet Gambling Enforcement Act - but it's not the ones you would expect.

The North Dakota Lottery and the New Hampshire Lottery both offer online lottery subscriptions, and credit card companies are now labeling those transactions online gambling.

The result is that such transactions are being denied, despite the fact that the UIGEA exempts them.

Randy Miller, North Dakota Lottery director, said the overblocking by credit card companies has "significantly impacted" revenue for the state's lottery subscription sales.

"As an example, our annual holiday subscription promotion that generally runs each December was canceled this year," Miller said.

"The holiday promotion centers around and promotes credit card payments for online subscriptions during the busiest time of the year. December 2008 subscription sales were down 54% compared to December 2007."

The problem is that the major credit card companies, such as Visa and MasterCard, have changed the lottery's MCC code from 9399 (Government Services) to 7995 (Betting, Casino & Gaming).

That is the same code that is applied to other forms of Internet gambling such as poker and sports wagering.

When asked if banks were following suit and denying online lottery sales, Miller said, "Most banks are just following the major credit card companies' rule[s] to avoid the potential liability from noncompliance, even though the state lotteries are not included in UIGEA."

He said it is the North Dakota Lottery's understanding that the UIGEA doesn't prohibit a state lottery from soliciting Internet subscription sales or from accepting credit cards as long as the sales are authorized under state law and are limited to players within the state.

"[For] which the North Dakota Lottery meets both criteria," Miller said. "By law we are allowed to conduct multistate online games, and we require subscribers to have a mailing address within the state of North Dakota."

The North Dakota Lottery has teamed up with other state lotteries that offer subscriptions over the Internet to contact MasterCard and Visa representatives in an effort to resolve the issue with their assistance.

"We are requesting that the credit card companies recognized the subscriptions as lawful transactions and implement change that will prevent such overblocking of lottery-related transactions," Miller said.

Visa offered the following statement in regard to the situation:

"Visa requires its financial institutions worldwide to ensure that their gambling merchants - including lottery tickets, casino gaming chips, off-track betting and wagers at race tracks - identify their transactions as gambling transactions when they are submitted through the Visa system for authorization by the cardholder's financial institution.

"This identification requirement enables our issuing financial institutions to block properly coded Internet gambling transactions where prohibited. The decision to block or accept a transaction lies with the cardholder's issuing bank."

The North Dakota Lottery hasn't taken the issue to the federal government, but iMEGA has attempted to bring the issue to U.S. Third Circuit Court of Appeals' attention as part of its lawsuit.

In its court challenge of the UIGEA, iMEGA asked that information on the blocking of the Internet lottery purchases be submitted to the federal appeals court as evidence the law is leading to overblocking of transactions that should be allowed.

In order for the information to be brought to the court's attention, the defense, in this case the U.S. Department of Justice, has to consent.

According to iMEGA, the U.S. Justice Department rejected the request, saying the supplement information was "inappropriate absent unusual circumstances."

"The Justice Department doesn't think that there is anything 'unusual' about credit card companies blocking purchases that are clearly allowed by the very law they're trying to defend?" said Joe Brennan Jr., iMEGA chairman.

In January, the Union Leader revealed that New Hampshire was having trouble with its online lottery sales being blocked. Internet subscriptions make up 24% of the New Hampshire Lottery sales, according to iMEGA.

"The New Hampshire Lottery is losing a quarter of its sales even though they're supposed to be protected by law. I'm not a lawyer, but that seems like 'unusual circumstances' to me."

Because the U.S. Department of Justice would not give its consent, the iMEGA legal team prepared a formal motion to ask the court's permission to add the new information to the record.

"It's our right and is consistent with the rules on supplementing the record to have this information added," Brennan said.

"Since the last brief was submitted to the court (on Nov. 14, 2008), the final regulations for UIGEA were published and have gone into effect, and as a result, state lotteries - which are exempt from the law - have been affected. The court should, and would, want to consider this."

On the flip side, Brennan isn't surprised the Department of Justice wouldn't want the court to have the information.

"It's proof of what iMEGA has said from the beginning: this law (UIGEA) is so vague the banks and credit card companies would wind up blocking every gaming transaction - even exempted ones - rather than risk violating the law," Brennan said. "It's no longer just a theory. It's a fact."

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