By Theodore F. Monroe et al.
Attorneys at Law
Many ISOs want to know the risks involved in processing for e-wallets. Some e-wallets, like PayPal, are reputable and reliable. However, some e-wallets appear to facilitate commerce for offshore enterprises, such as online casinos and pharmacies, offering services they cannot legally provide U.S. consumers.
An e-wallet functions much like a real wallet, storing cash for e-commerce transactions. The touted advantages are security, efficiency and convenience.
E-wallet users enter personal information one time only into a secure-server database. They place a quantity of money into the wallet using a credit card or the automated clearing house (ACH).
Then they are given a password, which they key in at the checkout window when making online purchases. The e-wallet automatically enters information to complete the transaction.
Thus, e-wallets help prevent unauthorized users from viewing personal information. They also make it easier for users to shop online. And their cost to merchants is lower than the typical bankcard discount rate. As a result, e-wallets are popular among online merchants.
Certain e-wallets are extremely popular with high-risk merchants operating online casinos, online pharmacies and pornographic Web sites. These merchants generally cannot obtain conventional credit card or ACH processing because of card Association and ACH prohibitions or because they are violating U.S. law.
In July 2006, Congress enacted H.R. 4411, the Unlawful Internet Gambling Enforcement Act, which requires banks and processors to identify and block money transactions to illegal gambling sites.
Recently, Electronic Clearing House Inc. entered into a nonprosecution agreement with the federal government, settling a probe into its processing activities for questionable e-wallet clients. ECHO appears to have processed e-wallets from 2001 through October 2006.
ECHO agreed to be a witness in the government's ongoing investigation. It also terminated processing for all e-wallets. The company will disgorge the entire $2.3 million in estimated profits it gained from processing and collection services provided to such clients.
Subsequently, software giant Intuit Inc. nixed a $142 million acquisition deal with ECHO that would have greatly broadened the processor's market scope. (For more information, see "Intuit _ Echo kaput, fed crackdown afoot," The Green Sheet, April 9, 2007, issue 07:04:01.)
Regulators have 270 days from H.R. 4411's passage to formulate regulations requiring everyone connected with a "designated payment system" (virtually any system used by anyone involved in money transfers) to identify and block all restricted transactions.
All payment processors must have systems in place to prevent money from going to operators of illegal Internet gambling by July 2007. Are you prepared?
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