FC: New credit card rules could imperil porn sites, from AVN Online

[Declan McCullagh <declan () well com>]

---

From: "Kathee Brewer" <cat () avnonline com>
To: "Declan@Well. Com" <declan () well com>
Cc: "Tom Hymes" <tom () avnonline com>, "Ken" <ken () avnonline com>
Subject: "New VISA/MasterCard Regulations Could Forever Change the Adult 
Internet Landscape"
Date: Thu, 10 Oct 2002 14:52:16 -0500

Declan:

Thought you might be interested in this. It just went up on the site this 
morning.

Keep up the good work with the list!

Best,
Kathee Brewer
Technology Editor
AVN Online (not Adult Video News -- we're two different print publications! 
<wink>)

http://www.avnonline.com/issues/200210/newsarchive/101002_lead.shtml

 Another Turn of the Screw
>> By Tom Hymes and Kathee Brewer

 New VISA/MasterCard Regulations Could Forever Change the Adult Internet 
Landscape

Oct. 10, 2002

LOS ANGELES ­ According to an announcement released last week by three of 
the adult Internet’s larger third-party aggregators - Epoch/Paycom, iBill, 
and CCBill - VISA and MasterCard (V/MC) have established several new 
regulations that have the potential to profoundly change the relationship 
between aggregators and adult Webmasters who do not have their own merchant 
accounts.

[text omitted.]

 AVN Online spoke with several industry attorneys regarding these 
developments, and received far more ominous assessments from them. This was 
to be expected, not only because of natural professional proclivities or 
because they have been warning for years that the industry was fatally 
vulnerable to regulatory crackdowns, but more importantly because, almost 
to a man, they believe the credit card companies (i.e. V/MC) are in the 
penultimate stage of fulfilling their part of a devilish pact they 
surreptitiously struck with the government in which they immolate the adult 
Internet industry in the United States in exchange for long-desired 
favorable bankruptcy legislation. [New U.S. legislation at the federal 
level restricts bankruptcy filings favorably for credit card companies.] 
This "theory" was first postulated more than three years ago, and now, 
according to Greg Piccionelli, an ardent believer, it is finally happening.

 Piccionelli is an attorney with Los Angeles-based Brull, Piccionelli, 
Sarno, Braun and Vradenburgh. He specializes in patent law, but also has a 
slew of the major adult Internet companies as clients, as well as a long 
history of dealing with entrenched corporate entities like V/MC. He offered 
the following remarks.

"I knew this was going to happen," he said. "We told a lot of our clients 
that this was going to happen, because we already knew about it." In fact, 
for years Piccionelli has been predicting that this policy crackdown was 
going to happen.

"In terms of the cover story," he continued, "VISA and MasterCard are 
tightening up their regulations ostensibly to further protect themselves 
from rampant credit card fraud on the Internet. That's what all of this is 
supposed to be about. (Now keep in mind the drama I've been beating for the 
last year, which is this vicarious-and-contributory, aiding-and-abetting 
conspiratorial liability. Keep that in the back of your mind throughout all 
of this.)"

According to Piccionelli, the seeds of the current situation were planted 
years ago, when the third-party aggregators took on their current role in 
the industry. "The aggregators set themselves up for this day when they 
moved into the position of being the billing entities for the adult online 
industry rather than each merchant having their own merchant relationship 
with a bank," he said. "At that point in time, they [the aggregators] were 
delighted, because they believed that this would once and for all solve the 
[industry's] problems, that they would manage things a lot more 
effectively, because that's all they did. And I remember telling them then 
that it's only a matter of time, because what is happening is that this is 
just making a smaller number of targets, and if and when the day comes that 
they [V/MC] want to bomb the industry, it's going to be a much more 
manageable endeavor.

"So that was the beginning of the process," he continued, "and the 
aggregators have set themselves up for this day. And now, either the 
federal or state government, or VISA, but somebody ­ and I have a strong 
suspicion, though I'm not going to go out on a limb and say I know, because 
I don't want to get sued - but I have a strong suspicion that somebody has 
gone to these aggregators and said, 'You know, you're liable for what goes 
on, on these sites, and we could nail you right now, but instead you're 
going to help the government clean up the Internet, and this is how you're 
going to do it. We're going to change the rules to require you to acquire 
all this information, and then you're going to get it to us. And we're 
going to give to you a series of criteria to use.'

"And if the sites don't comply with that criteria," Piccionelli continued, 
"it will be because the criteria is content oriented. In other words, it 
will have something to do with the nature of the content on the sites. Now, 
the government can't do that, because it would be content-based 
restriction, but VISA can as long as they're not doing it on behalf of the 
government. And look how nicely VISA has insulated itself from it; they've 
now gotten the third-party processors to do it. And of course, when the 
processors are finished with this process, they'll go down too.

"These are the most ominous signs that there have been yet that the war is 
coming," he said, "because reading between the lines, this is what's going 
on: One, the aggregators are going to become the parties that accumulate 
the information that will probably through some means be passed on to the 
government for evaluation for prosecution. If the aggregators say [to a 
Webmaster], 'We're not going to process for you anymore,' they may not even 
give a reason why, because if they do, such as, 'Well, we've been told that 
the kind of material you have on your site could subject you to criminal 
liability, and therefore us to criminal liability,' that would basically be 
an admission that they know that they've been processing for somebody that 
could have criminal liability. So they probably won't say that, but if, 
seemingly for no reason, the third party processors just say, 'We've done 
an evaluation, and we've decided not to take your business anymore,' start 
sweating bullets, because that probably means that that information about 
your site has now been turned over, either directly or indirectly, to 
somebody else."

The next piece of the Piccionelli puzzle has to do with the new geographic 
restrictions. "The territoriality thing is really a little bit brilliant," 
he said, "because it takes the argument that if you tighten the noose too 
much in the United States they're just going to go offshore, and turns it 
all on its head; which actually may be the government's intent. I think the 
whole idea is to shut down the adult entertainment business online in the 
United States; actually get it offshore, because then they can say to the 
conservatives, 'Look, we cleaned [the Internet] up to the extent that we 
could, and it will be up to some future Republican administration to come 
up with some sort of treaty,' and they'll just blame it on the Europeans, 
and everyone will just go, 'Well, of course, the Europeans.'"

To Piccionelli, one big nail in the adult industry's coffin is the fact 
that data is being requested by VISA down to the individual URL. "I think 
this should be a tremendous shot across the bow for the industry," he said, 
"because [typically] you bomb the enemy before you send in troops, and the 
equivalent of that here is that you do an investigation, you acquire all 
the information you need, and then you get indictments. And what we have 
here is that, Website by Website, they're going to know what's going on. 
Now, you have to understand that knowing what's going on Website by Website 
should be immaterial, because if you were going to take a look at the 
recurring billing situation of, say, a gym, would VISA and MasterCard care 
how many chargebacks come from the Westlake Village branch of 24 Hour 
Fitness versus the Van Nuys branch? No, they don't care. They just say it's 
one corporation and want to know what the chargebacks are for the 
corporation. So why would they be interested in chargebacks Website by 
Website? Well, because for criminal prosecutions based on content, it's 
Website by Website."

But that's not the only motive, according to Piccionelli. "[Another] reason 
why they [VISA] want [to receive data] Website by Website is because then 
they can say, 'New rule: Since the way that these sites acquire the 
customers that generate these chargebacks is through an affiliate program, 
we want to know who the affiliates are that are sending the traffic to that 
site.' Then they will say that if you are a merchant that affiliates with 
one of these people that have been known to send traffic that generates 
high chargebacks, they're going to terminate you. That's the 2003 turn of 
the screw, where all member sites that are in the crosshairs [will be faced 
with] the decision: Are we going to turn over to the IPSP our list of 
affiliates?

"In fact, I predict it'll go one more step down," continued Piccionelli, 
"and one day one of these IPSPs will knock on the door of one of the 
[sponsors] and say, 'We've been told by VISA that we have to terminate you, 
but they did give us an alternative. If you could clean up your act and try 
to identify where the traffic is coming from that produced the chargebacks, 
they'll give you three months to try and fix the situation.' And of course, 
some of these guys will say, 'No thank you; I've got processing offshore.' 
But others will [give them] the list, and those guys, when they're dealing 
with their IPSPs, will think, 'Great; saved again, thank you very much.' 
They won't know that when the three months elapse and they've given away 
all the information, the map, that they're doomed, along with their affiliates.

"By the way," added Piccionelli, "you should also notice that the merchants 
will now be called Sponsored Merchants. [What that means] is that if you 
are one of these new IPSPs, VISA can now say to you, 'If you want to stay 
in business you have to do it this way; you have to sponsor the merchant, 
which means that you are going to be responsible for these guys, and we're 
going to hold you accountable.' Now, what if 'hold you accountable' means 
that VISA lets these guys know that there are all these criminal laws out 
there, but 'we're not going to evaluate the sites that you're sponsoring, 
but maybe you should?'

"Now that you have a nice tight system where you know the affiliates of 
each one of the people who actually have the money," said Piccionelli, 
bringing the scheme full circle, "that's when you start going to the 
affiliates and saying, 'You have this harmful matter and all this obscene 
material on your site. We're going to prosecute you unless you go out of 
business and admit that you've been getting it from this [sponsor] and that 
they knew perfectly well [what was on your site], despite their terms and 
conditions.' After they do five, six, or 10 of these people, now they have 
all they need for a RICO action against the [sponsor], and then they go 
after them. And remember, it has to happen relatively quickly, because 
they've got to get [the Internet] cleaned up for the 2004 election."

In such a scenario, where an unsupervised para-governmental entity can 
potentially stage-manage the exile of an entire industry, one has to wonder 
why any company would allow itself to be manipulated toward its own 
banishment, not to mention to turn over on members of its own community. 
"Because the affiliate program Webmasters [sponsors] have made so much 
money they'll do anything to stay in business," explained Piccionelli, 
"just like these aggregators will also do anything to stay in business."  ....




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