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What Did PartyGaming Do Wrong?

April 14, 2009 (CAP Newswire) — As we all know by now, PartyGaming has settled with the U.S. Department of Justice for $105 million, in the process acknowledging guilt of not-exactly-legal practices.

But just what did the company do that was not legal? The charges are for activities taking place before 2006 — and so, before the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA) criminalized standard online gaming business practices. Therefore, the company was admitting guilt to charges unrelated to UIGEA.

So, just what was PartyGaming guilty of?

The Sunday Times ran an article last weekend analyzing the situation. In it, Matthew Goodman writes that the settlement's legal documents show that PartyGaming used “intermediaries” to hide payments from governmental entities, and that online gamblers typically played via “virtual” credit and phone card credit.  

While not overtly illegal, these practices were obviously concocted to evade detection from U.S. authorities. The company knew it was operating in a legal “grey area”, and it was aware that the U.S. government would not approve of the activity. “It even warned potential investors in the prospectus for its 2005 flotation that this was the case,” writes Goodman.

Why would the company do this? Perhaps to accommodate nervous American players, who were by far the largest segment of the company’s market.

“The legal documents state that Party Gaming did not have a physical presence in America but set up a network of banks that were able to act as middlemen between credit-card firms and the company,” writes Goodman. “Such transactions had to be flagged-up by the banks with a special code — 7995 — which was attached to all such payments.”

The company apparently started facing trouble with these practices after the terrorist attacks of 2001, when banks, as mandated by the government, suddenly started imposing much stricter restrictions on financial transactions (especially involving overseas companies). At that point, PartyGaming changed its methodology and largely ignored the 7995 coding that the government required.

More from the article: “One technique … involved hiring third-party payment service providers ‘who misrepresented the nature of internet gambling transactions to the acquiring bank so that the acquiring bank would apply a non7995 code to the transactions’. Another method saw US customers buying ‘virtual’ credit-card accounts and phone cards, through which they could transfer money to their Party Gaming accounts without attracting the 7995 code.”

To read the full story at the Sunday Times, click here.