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Electronic Clearing House Distressed Over Legislation

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The side effects of a little-known bill President Bush signed this month meant to curb online gambling is being felt all the way in the Valley.

The Unlawful Internet Gambling Enforcement Act of 2006, passed by Congress in September, makes it illegal for credit card companies and banks in the U.S. to handle electronic money transactions for gaming websites.

While it was designed to prevent kids from gambling online and help solidify previous wire transfer rules, the new law could be devastating for companies like Camarillo-based Electronic Clearing House Inc., which provides payment-processing services for merchants, banks and collections agencies.

About 10 percent of the company’s business is generated through a service for Internet merchants that allows customers to have online payment accounts – a sort of digital wallet. Problem is, those accounts could theoretically be used on gambling sites, which means they’re now prohibited under the new law.
 

 
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Federal regulators have 270 days to determine how the rules will be regulated, but Electronic Clearing isn’t waiting around to see what decision will be made, said Chairman and CEO Jody Barry.

“We’re all getting out before the 270 days,” he said, comparing the regulation to prohibition. “It’s just going to be onerous.”

News of the law sent stock plummeting for Electronic Clearing House Inc., which until recently was on an upward swing – its year-to-date earnings as of this month were up 40.8 percent and it reported revenue of $19.9 million in the second quarter ended June 30.

Those numbers will almost certainly change into fiscal 2007 because of the bill, Barry said.

“It is definitely coming right off the top,” he said. “It has a significant impact to the bottom line.”

Curiously, though, there is a silver lining: the law does not apply to horseracing sites, which are protected as part of the Interstate Horseracing Act of 1978.

Electronic Clearing House offers some products for horseracing, which makes Barry optimistic the company might see some up tick in coming months.

“We may benefit by seeing more activity. Those gamers have to go somewhere,” he said.

It’s also good news for Woodland Hills-based horseracing website owner Youbet.com Inc.

CEO Charles F. Champion in a letter to investors Oct. 13 said the horseracing industry has long been critical off offshore gambling sites that allow overseas bets on horse races without a cent going to equestrians or tracks.

The new law changes that, and will likely help business, he said.

“It sets a strong foundation … and is consistent with Youbet initiatives to set high standards for integrity and transparency in all facets of horseracing,” he said. “Online wagering services are to this generation what simulcasting and off-track-betting were to the previous generation.”

Still, Barry said he has fundamental problems with the legislation.

“The idea that this law tries to eliminate people from giving instructions over the Internet as to how their money will be used in another country seems a little overreaching to me,” he said. “I was definitely surprised.”
Entry #736

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