Financial Transparency Coalition

In December of last year, I wrote a blog post on Gibraltar, a British Crown Dependency and tax haven, which is making a tidy profit from the growing online gambling community.  I noted that the tax haven has used its low tax rates to attract a sizeable online gambling industry.  This industry now employs 12% of Gibraltar’s 19,000 person workforce.  Online companies in the tax haven currently pay a measly 1% tax, which raising this rate to 10% to placate the EU, but has still attracted a plethora of online gambling sites, and has furnished Gibraltar with an added $12 million in taxes, which is not insignificant to the jurisdiction’s $500 million government revenue.  My conclusion was this “wasn’t much of a problem,” though the island needs more financial transparency.

In light of recent events that have brought this issue to the forefront of U.S. policy, I want to put a rather large caveat on that statement.

Some background.  In 2006, Congress passed and President Bush signed the Unlawful Internet Gambling Enforcement Act (UIGEA), which makes transactions from banks or other similar types of institutions to online gambling sites illegal.  This bill effectively makes online gambling in the United States illegal, but puts the majority of the onus of enforcement and compliance on banks, not individuals. 

In large part, the law was in response to the concerns of many officials in the federal government that internet gambling could potentially be a “powerful vehicle for laundering criminal proceeds at the relatively obscure ‘layering’ stage of money laundering.” According to a December 2002 GAO study, many officials believed several characteristics of internet gambling made it vulnerable to money laundering, including the “volume, speed, and international reach of Internet transactions and the offshore locations of Internet gambling sites.”

Unfortunately these same characteristics of online gambling also make it easy for these companies to breach the U.S. law.  Even after passage of the UIGEA, many online gambling companies continued to maintain that although half or more of their revenues came from U.S. citizens, “U.S. laws don’t apply” to them because they’re located in places like England, Costa Rica, and…you guessed it…Gibraltar.

For years, the federal government let much of this overseas business go unfettered.  That changed last week when the U.S. government came down–hard—against three overseas gambling enterprises: PokerStars, Full Tilt Poker, and Absolute Poker.  In three separate indictments, the U.S. Attorney in Manhattan, Preet Bharara, charged eleven people, shut down five websites, and issued restraining orders on more than 75 bank accounts allegedly used to process illegal payments.

Janice Fedarcyk, the head of the FBI’s New York office, noted that these defendants knew full well that their business with U.S. customers and U.S. banks was illegal, but “they lied to banks about the true nature of their business. Then, some of the defendants found banks willing to flout the law for a fee.”

So therein lies my caveat.  I have no problem with online gambling in tax havens as long as it is legal, it is not used to launder criminal proceeds, and it is not circumventing the laws of other nations.  Unfortunately, it would seem, those are not the realities in an overwhelming number of cases.  Moreover the lack of financial transparency in our international banking system reinforces the cycle of obscurity as banking institutions can use subsidiaries in tax havens to circumvent domestic laws.  The whole system is completely self-reinforcing.  The only cure is transparency.