May 2008
E-Commerce
The High-Stakes Bid to Stop Online
Gambling
Linda Punch
Banks and processors say regulations written to implement the Unlawful Internet
Gambling Enforcement Act of 2006 will harm them more than they will affect
online wagering. A Congressional hearing last month tried to clear things up but
only added to the uncertainty, and now some lawmakers are trying to neutralize
the law.
It may have been passed with the best of intentions, but the Unlawful Internet Gambling
Enforcement Act of 2006 (UIGEA) may pose a greater threat to U.S. financial institutions and
other payment-related entities than to its intended targets—illegal online gambling sites. That’s
the consensus of the financial industry and related parties affected by the law.
In fact, two congressmen in mid-April introduced a bill to stop the government from developing
regulations implementing the UIGEA, saying the proposed regulations are unworkable.
The UIGEA passed into law in the fall of 2006 after its sponsors attached it to an unrelated piece
of legislation, the Safe Ports Act. The law bans gaming sites from accepting money transfers of
any kind for bets deemed to be unlawful gambling. It also directs the U.S. Treasury Department
and the Federal Reserve Board to create regulations that would require banks and processors to
block payments to those sites. Horse racing, state gaming and Indian gaming are exempted.
The proposed regulations also exempt certain participants in the automated clearing house,
check-collection, and wire-transfer systems for whom it wouldn’t be “reasonably practical” to
prevent or block a transaction.
UIGEA was scheduled to take effect last July, but the Fed and the Treasury Department—which
received more than 200 comments on the law—have been struggling to create regulations. The
financial and payments industries say the law is unworkable and even Fed and Treasury officials
question whether it can be effective.
“As the comments to the proposed rule make clear, this is a challenging task,” says Louise L.
Roseman, director of the Fed’s division of Reserve Bank operations and payment systems. “The
ability of the final rule to achieve a substantial further reduction in the use of the U.S. payment
system for unlawful Internet gambling is uncertain.”
Roseman made the comments at an April 2 hearing of the U.S. House Financial Services
Subcommittee on Domestic and International Monetary Policy. The controversy over the law
was reflected in the topic for the hearing: “Proposed UIGEA Regulations: Burden Without
Benefit?”
Meanwhile, the law still has supporters. Rep. Spencer Bachus, R-Ala., the author of the
legislation, says that illegal Internet gambling among college-age youth has declined since the
law was enacted, to 1.5% in 2007 from 5.8% in 2006. At the subcommittee hearing, he said that
all forms of payment should be covered “because a single exemption leaves the law susceptible
to evasion.” (Bachus did not say where he got his statistics about college students, or against
what measure the percentages apply. His office did not reply to a call for clarification.)
“Any success (UIGEA) has had in decreasing the rate of illegal Internet gambling will be shortlived if criminals believe that the Act will not be enforced,” he said. “That is why it is critical
that the proposed regulations that are the subject of today’s hearing be done right and be
implemented without further delay.”
Bachus also read a letter from 45 state attorneys general supporting UIGEA.
‘Screwy Bank Regulation’
Critics of the UIGEA contend it will place a heavy burden on payment systems and financial
institutions and may not accomplish the goal of preventing illegal online gambling.
“It’s a just a bad law, a really bad law,” Eli Lehrer, a senior fellow at the Washington, D.C.based Competitive Enterprise Institute, tells Digital Transactions. “It was very poorly drafted and
it isn’t quite clear what it does.”
Lehrer was on the staff of former House Majority Leader Bill Frist, R-Tenn., a sponsor of the
bill, but says he didn’t play an active role in developing the law. He says the UIGEA doesn’t ban
any type of Internet gambling activity that wasn’t already illegal under state laws.
“As written, the law makes zero sense,” Lehrer says. “It isn’t actually an online gambling ban
but instead a very screwy bank regulation that if read literally could cause all kinds of banking
system chaos. It probably doesn’t by its language significantly restrict some things the authors of
the law would have liked to restrict and could restrict things nobody intended to restrict.”
In comments filed with the Treasury Department and the Federal Reserve on the proposed
regulations for implementing UIGEA, many financial-industry players said the law is
unworkable.
“We believe that UIGEA will in the end catch more banks in a compliance trap and do greater
damage to the competitiveness of the American payments system, than it will stop gambling
enterprises from profiting on illegal wagering,” say Nessa Feddis, American Bankers
Association senior federal counsel, and Richard R. Riese, director of the ABA Center for
Regulatory Compliance, in their comment.
The ABA says that the law puts an “exceptional burden” on banks, noting that the UIGEA
admits that even traditional law-enforcement mechanisms often are inadequate for enforcing
gambling prohibitions or regulations on the Internet, especially where such gambling crosses
state or national borders.
“In other words, in the view of the drafters of the legislation, all the sophistication of the FBI,
Secret Service, and other police computerized detection systems and investigative expertise
devoted to fighting terrorism and financial crime are inadequate to the task of apprehending the
unlawful gambling business or confiscating its revenue,” Feddis and Riese say in the comment.
“ABA believes that punting this obligation to the participants in the U.S. payment system is an
unprecedented delegation of government responsibility with no prospect of practical success in
exchange for all the burden it imposes.”
In its comment, the Consumer Financial Service Committee of the State Bar of California
echoes the ABA’s concerns: “It is curious, and quite telling, that the private sector is expected to
perform the Herculean task that government is admittedly not qualified to handle,” the
committee says.
‘Bright-Line Rules’
One common complaint about the UIGEA regulations is the vague definition of unlawful
Internet gambling. In the comment it filed, Citibank N.A. says there is no workable guideline as
to when unlawful Internet gambling activities occur. The proposed regulations state that a
transaction is considered “unlawful” if it is “unlawful under any applicable Federal or State
law…in which the bet or wager is initiated, received or otherwise made.”
Says Citibank: “We need bright-line rules that can be applied to assist us in determining what
activities are considered lawful.”
In written testimony to be presented at the April 2 hearing, Wells Fargo & Co. senior company
counsel Ted Teruo Kitada also complains about the proposed regulations’ failure to define
unlawful gambling. “By merely referencing applicable federal or state law, Congress in effect
has passed the obligation of identifying unlawful Internet activities to the financial-services
industry, the principal participants in the payment systems,” he says in his remarks.
The burden of identifying unlawful Internet activity is compounded for institutions, such as
Wells Fargo, which have retail locations in multiple states, Kitada says.
“Wells Fargo must identify, interpret, and apply the state law in all 50 states to prevent or
prohibit unlawful Internet activities, in addition to federal law,” he says, adding that Wells Fargo
processes 4.3 million automated clearing house transactions, 11 million checks, and 5,000 to
6,000 wire transactions daily.
The vague wording of the proposed regulations also means that activities such as auctions on
eBay, hedge funds, or offshore reinsurance contracts could be construed as illegal gambling, the
CEI’s Lehrer tells Digital Transactions.
“People who win money in existing offline illegal bookmaking could continue to deposit their
earnings in a bank without any repercussions so long as they pay federal taxes, as they can today,
while transactions on eBay and involving hedge funds and reinsurance become immediately
suspect, and perhaps impossible to carry out, under UIGEA,” he says.
Many of the financial institutions commenting on the proposed regulations said that the Federal
Reserve and Treasury Department should compile a list of unlawful Internet gambling businesses
rather than depend on the financial institutions to identify the illegal operations.
What’s more, the proposed regs carry a requirement that banks and related parties come into
compliance no later than six months after the rules are published in the Federal Register. This is
unrealistic, say some financial institutions, payment processors, and payment systems.
“We estimate that implementation of the proposed rules will take a minimum of 12 months due
to the time required to enhance our payment-processing systems,” says Joe Samuel, senior vice
president of public policy for First Data Corp., in comments filed with the Fed. For First Data’s
Star electronic funds transfer network, implementation could take between 12 and 18 months due
to the time it would take network financial institutions to adapt their systems, he said.
‘Extreme Burden’
MasterCard Worldwide and PayPal Inc. also object to the proposal’s requirement that payment
systems take appropriate remedial action against online gaming sites using their brands to
“promote” restricted transactions. “Even if it were possible to locate a party to hold accountable
for a trademark violation, it can be extremely costly to attempt to litigate or take other remedial
action against such a party,” MasterCard says in comments it filed. “Any suggestion that
MasterCard is expected to investigate and prosecute all Internet casinos’ unauthorized use of its
marks could divert enforcement resources from more pressing and fruitful enforcement
strategies.”
Cross-border transactions also could become problematic under the UIGEA, the Fed’s Roseman
told the subcommittee hearing. She notes that most unlawful gambling businesses are based
outside the U.S. and have accounts with foreign institutions.
“The proposed rule…places responsibility on U.S. payment system participants that send
transactions to, or receive transactions from, foreign institutions to establish policies and
procedures reasonably designed to prevent these restricted transactions,” she said in her
testimony.
Many of those commenting on the regulations said trying to identify illegal gambling
transactions from foreign institutions places an extreme burden on the U.S. payments system.
“The responsibility for policing cross-border transactions is more complex than policing
transactions occurring completely in the U.S. because it is difficult to identify merchants offshore, and international jurisdictions often permit Internet gambling transactions,” Gregory A.
Baer, deputy general counsel for Bank of America, said in the comments filed by the bank.
“Additionally, it is unclear what a U.S. bank would be expected to do if a transaction that was
legal in the countries of the sender and recipient traveled through the U.S. prior to payment.”
The Fed’s Roseman says that detecting and preventing cross-border Internet gambling
transactions “presents challenges that differ from other criminal financial transactions, such as
money laundering and terrorist financing,” as she put it in her testimony. While other countries
require financial institutions to report suspected money laundering and terrorist financing, few
countries have similar requirements for Internet gambling, she told the subcommittee.
The U.S. already is feeling heat from abroad over the UIGEA. The European Commission in
March agreed to launch an investigation into alleged discriminatory practices by the U.S. against
European Union gambling operators. The commission is responding to a complaint filed by the
Remote Gambling Association in December.
The RGA contends that the U.S. Department of Justice is violating international trade law by
threatening and pressing enforcement actions against foreign online gaming operators while
allowing U.S. online gaming operators, primarily in horse betting, to flourish. It noted that stockmarket listed EU companies collectively lost billions in market value overnight when the UIGEA
took effect.
‘Anti-Gambling Cops’
Legal actions aside, determined gamblers already are finding ways to sidestep UIGEA. Blogs
such as UScasinos.blogspot.com post articles with titles like “How US players can still gamble
online” that direct gamblers to payment sites, including Epassporte and eWallet Xpress, that will
fund players’ poker and casino accounts.
The site also has a complete list of every casino still accepting U.S. players, with details of the
various payment processors used to deposit money. Other blogs and gambling newsletter sites
suggest using money orders and gift cards to circumvent the law.
With all the uproar over the UIGEA, it is uncertain whether the law will be altered, or repealed.
But U.S. Rep. Luis V. Gutierrez, D-Ill., subcommittee chairman, said in opening remarks at the
hearing he is “troubled that these regulations could impose significant compliance burdens on
financial institutions during a time of economic and financial turmoil.”
“I believe it is inappropriate to have financial institutions essentially acting as the final arbiter in
determining which transactions are legal or illegal,” he said.
And U.S. Rep. Barney Frank, chairman of the House Committee on Financial Services, remarked
at the hearing he is concerned the UIGEA will affect the efficiency of the U.S. payment system.
Frank and U.S. Rep. Ron Paul, R-Texas, on April 11 introduced legislation—H.R. 5767—to
prohibit the federal government from issuing the regulations called for in the UIGEA. “The
regulations and underlying bill … force financial institutions to act as law-enforcement officers,”
Paul said in a statement. “This is … deputization of private businesses to perform intrusive
enforcement and surveillance functions that the federal government is unwilling to perform on its
own.”
“Virtually every sector of the economy affected by these regulations has complained of them,”
said Frank, who is opposed to any regulation of Internet gambling, at the April 2 hearing. “We
have enlisted the payment systems and the banks of America to be our anti-gambling cops to the
detriment of their ability to carry on their important financial intermediation function.”
Gaming Sites Side with Banks And
Processors
Financial institutions and payment processors are not the only ones with complaints about the
Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA). Not surprisingly, the gaming
industry also has strong objections to the law.
In one case, the Interactive Media Entertainment & Gaming Association (iMEGA) filed suit in
the U.S. District Court in New Jersey, contending the law is unconstitutional because it violates
the rights to freedom of privacy, speech, expression, and conduct. iMEGA is a not-for-profit
trade organization.
Although the complaint was dismissed in March by Judge Mary L. Cooper, iMEGA is appealing
the decision to the Third U.S. Circuit Court of Appeals in Philadelphia.
In testimony at the April 2 hearing of a U.S. House subcommittee reviewing the proposed
UIGEA regulations, iMEGA president Edward Leyden said the law imposes “unprecedented
burdens” on financial and payment systems.
“Given the still-harsh sanctions facing any market participant falling afoul of these proposed
rules, the natural course of action for a financial intermediary…will be to deem every transaction
submitted by an Internet gaming concern to be an ‘unlawful’ one,” Leyden said.
Individual gaming sites also have raised concerns about what they consider the vague wording of
the regulations, under which games of chance are banned but not games of skill. “Banks don’t
know which transactions are legal to process and which aren’t,” says Jay Lakin, co-owner and
vice president of PokerSourceOnline.com. “Online players in the United States are forced to go
through a large number of hoops to play a game of skill right now.”