Sunday, October 12, 2008

The Russian Online Casino Scam and Bank Guarantees

This post is going to be a little bit about the proposed government guarantees for deposits, interbank lending, commercial paper and mortgages.

Beyond the risk of encouraging carelessness on the part of the bankers, there is a gaping hole forming for the a truckload of fraud coming your way....which is appropriate i guess....in every postapocalypitc mad-max-type movie, you need an evil sadistic criminal overlord of some kind controlling the assets that would let people live better lives. i guess this would explain how the criminals get so loaded on the way towards armageddon. :)

But first, a story.

I was talking to a friend of mine I used to be in the online casino business with about credit card processing -- a thorn in the side of the offshore, online casino operators since 2000.

He said that a lot of credit card processors were "once bitten twice shy" because of shady operators in the recent past. I asked him what he meant, and he said, "Russians" -- I'm sure other nationalities had figured this out as well, but he made it sound like there was some degree of organized crime involved in this scam.....at first, i thought it was the players he was talking about, but as i came to find out it was actually the casinos themselves.

Here is how the simple scam works:

You set up a gambling house, and "customers" come in and buy virtual chips and gamble in your casino. Some win, some lose....you pay out to the winners and the losers are out of luck.

After about 6 months of growing the business, the casino suddenly folds up shop and disappears into the night -- miraculously, the processor is still holding a bunch of the casino's winnings -- to make good on a reasonable amount of chargebacks and fraud, etc. that usually comes in with any online enterprise -- especially casinos.

The holdback rates (typically 8-10%) and rolling reserve, which often takes as much as 6 months to completely liquidate back to the casino from the processor is usually plenty -- Unless the casino was purposely processing fraudulent cards -- duh.

After the casino disappears into the night, the chargebacks (from the losing players) start rolling in, in extraordinary numbers, and the processor is left holding the bag with a rolling reserve not adequate to payout the chargebacks.

The defaulting customer and institution were obviously "in on the scam" together and stuck it to the processor.

Now, imagine that you are of the criminal mindset and you've just been told the US, UK and EU govts are basically guaranteeing payments on pretty much anything and everything.

Do you suppose that you might be creating a "moral hazard"? Do you suppose that you're leaving the proverbial keys in the ignition of a brand new mazarati, top down, on a street where the local inhabitants have very little to lose and little compunction about swiping your auto?

How will the markets take this news? Quite probably, they will view these events as positive in the short term for equities prices. If you've been stuck in a losing retirement portfolio use the run-up to get ready to sell. I don't believe we've seen the bottom of this bear market yet, unfortunately --- however, i do believe we see *some* firming of prices over the next little while.

enjoy your sh&t sandwiches taxpayers!

1 comment:

Aaron said...

Imagine all the effort, energy and money to develop and online casino, which probably even had some legitimate customers, just to use the operation as a scam. No wonder it's getting tougher to process cards offshore.

Very interesting story.

A