A Closer Look at the Proposed UIGEA Regs

9 November 2008

This article originally appeared in IGamingNews on Oct. 1, 2007.

Around a year ago, President George W. Bush signed into law the Unlawful Internet Gambling Enforcement Act, seemingly ending Congress's long pursuit of a ban on Internet Gambling. But in some respects, this was merely the advancement to the next stage of the process.

The new law, which bans financial institutions from processing money transactions, calls upon the Treasury Department and the Federal Reserve Board to prescribe procedures for enforcement. The law was enacted on Oct. 13, 2006 and is effective as of this date -- with or without the enforcement mechanisms.

Twelve weeks past the deadline for completing the regulations, the agencies jointly released their proposals this morning, and at a glance, it appears that the burden on financial institutions won't be as heavy as what might have been expected. The most notable aspect in this sense is the proposed rule's inclusion of exemptions pertaining to certain types of transactions. It should also be noted, however, that the agencies have indicated that they will rely heavily on comments from involved parties when drafting the final version of the rule, so the language of the rule could change considerably.

As for the timeline, it will be at least nine months before any rule is finalized.

Following are highlights and interesting points taken from the proposal:

Further Delay Is Certain

The next step is a 90-day consultation period in which interested parties have been asked to submit comments. This will lead to the submission of joint final rules, and the agencies have recommended that the final regulations take effect six months after the joint final rules are published.

No Liability for the Casual Bettor

The agencies in their proposal reemphasize the UIGEA's intent to criminalize the act of facilitating transactions for online gambling and not the act of participating in online gambling as a consumer.

Exemptions Abound

For starters, the proposal acknowledges that certain activities -- specifically qualifying intrastate transactions, intratribal transactions and interstate horseracing transactions -- are exempt under the UIGEA. This has been a point of contention, as Rep. Bob Goodlatte, Republican of Virgina and the bill's primary House sponsor, has argued on several occasions that despite the common interpretation that betting on horse racing is exempt under the act, it is indeed not exempt. The agencies' contrary interpretation is neutralized, however, by the agencies' stated position that "issues regarding the scope of gambling-related terms should be resolved by reference to the underlying substantive state and federal gambling laws and not by a general regulatory definition. The solution to the racing argument, therefore, ultimately remains within the interpretation of the Interstate Horseracing Act (as amended in 2000).

The most interesting aspect of the proposal, as it relates to exemptions, is the agencies' view that certain payment systems should be exempt under the UIGEA because the operators of these systems have no adequate and/or practical means of enforcing the ban. The agencies identify five types of payment systems: automated clearing house (ACH) systems; card systems (including credit, debit, and pre-paid cards or stored value products); check collection systems; money transmitting businesses; and wire transfer systems. Among these systems, the agencies suggest that only card systems and money transmitting businesses are equipped to effectively block I-gaming transactions. The document states, "The agencies are proposing to exempt all participants in the ACH systems, check collection systems, and wire transfer systems, except for the participant that possesses the customer relationship with the Internet gambling business (and certain participants that receive certain cross-border transactions from, or send certain such transactions to, foreign payment service providers, as discussed further below). The exemptions for these participants reflect the fact that these systems currently do not enable the exempted."

It should be noted that the agencies are asking for guidance from interested parties on the exemptions and all other aspects of the proposal, so their suggestions could change significantly. Further, the agencies would consider amending the exemptions if, in the future, "the technology prevalent in these payment systems permits such participants to identify and block, or otherwise prevent and prohibit, those restricted transactions."

Small Entities on the Hook

The agencies have proposed that no financial transaction provider will be exempt based on its size. While smaller institutions will likely have more difficulty implementing the rules than larger ones would have, the agencies have determined that "an exemption for small entities would significantly diminish the usefulness of the policies and procedures required by the act by permitting unlawful Internet gambling operations to evade the requirements by using small financial transaction providers."

Coding Is Here to Stay

Credit card banks have for several years used a system through which gambling-related transactions are identified by a merchant code and subsequently blocked. The agencies recognize this system as an effective means of isolating gambling transactions. Additionally, they suggest that creating new codes to identify legal transactions (for example, those related to licensed race betting) be considered. This would be a noteworthy shift from the card processors' current approach, which is to not distinguish among legal and illegal transactions and instead block all gambling transactions.

Blacklist Not Likely

The agencies acknowledge the interest on the part of some in exploring the creation of a blacklist of Internet gambling businesses, but do not support the idea. The proposal states, "While the Treasury understands that interest exists in such a list, we have tentatively concluded that the benefits of the list as an effective tool for use by regulated entities to identify and block or otherwise prevent or prohibit unlawful Internet gambling transactions is uncertain relative to the likely costs involved in creating such a list." They also point out that Internet gambling businesses can very easily change their names and/or mask their identities.

The Price of Enforcement

The Treasury estimates that it will cost regulated entities a total of approximately $4 million per year to maintain the policies and procedures recommended in the proposal.

The Full Proposal

Click here to view the proposed rule in its entirety.

Mark Balestra

Mark Balestra is the Managing Director at BolaVerde Media Group. He previously worked at Clarion Gaming and the River City Group where he was the publisher of iGamingNews. He lives in St. Louis, Missouri.