UIGEA proposed
regulations released by the US Treasury
The long overdue regulations
to the Unlawful Internet Gambling Enforcement Act (UIGEA) were
finally released by the Treasury, but what do they mean and how
will they affect the current state of the industry?
After a long wait and way past their due date, the
regulations to the Unlawful Internet Gambling Enforcement Act (UIGEA)
were finally published by the US Treasury on Monday. You can
read all 52 pages of the original document
here (pdf). It is a pretty
lengthy document, but it's easy to read and if you have some free
time you can take a look, or you could just read our take on
what we think are the most important parts of the regulations:
But what does it all mean? Basically,
the Treasury washed its hands clean from the stupid law UIGEA is,
by placing a "responsibility framework" around the most affected
side of the anti online gambling law passed last year - the
banks and financial institutions. The Unlawful Internet Gambling
Enforcement Act passed in 2006 did nothing to make online
gambling illegal, instead, it referred to previous state and
local laws to handle the legality of gambling online. Instead,
the UIGEA made a scapegoat of the banks by making illegal the
financial transactions to and from online gambling websites
(except legal online gambling, such as betting on horse racing).
Well, the regulations released today also did
not clarify what exactly is "illegal online gambling". But they
were mandated by law, so the Treasury simply spent a bunch of
the taxpayers money to come out with the document, which at best
will affect half of the US financial institutions: "The
Agencies [Board of Governors of the Federal Reserve System and
Departmental
Offices, Department of the Treasury] estimate that 4,792 small
banks (out of a total of 8,192 banks), 420 small savings
associations (out of a total of 838), 7,609 small credit unions
(out of a total of 8,477), and 240,547 small money transmitting
businesses (out of a total of 253,208) would be affected by this
proposed rule."
Why? Because the Treasury and Fed actually
understand that it is nearly impossible (not to mention insane)
to track and identify each of the millions of financial
transactions occurring daily throughout the US financial system.
And not just within the United States, but international money
flow, as well. It's hard to imagine that anyone would authorize
spending money on weeding through 1 million transactions to find
one going to
Bodog, for example. And that's
why the following from the regulations: "With regard to an
ACH system, the proposal provides an exemption from the
regulation’s requirements for the ACH system operator, the
originating depository financial institution (ODFI) in an ACH
credit transaction, and the receiving depository financial
institution (RDFI) in an ACH debit transaction (except with
respect to certain cross-border transactions discussed below)."
In this quotation from the regulations we are more interested in
the "receiving depository financial institution (RDFI) in an ACH
debit transaction" - which is a gambler depositing money at
an online gambling website via ACH. By now it should already be
clear that the banks are exempted from regulations for this type
of transaction.
Reading down the regulations, what could
hurt the online gambling industry is the following: "With
regard to check collection systems, the proposed rule would
provide an exemption from the regulation’s requirements for a
check clearing house, the paying bank (unless it is also the
depositary bank), any collecting bank (other than the depositary
bank), and any returning bank. The proposal does not exempt the
institution serving as the depositary bank (i.e., the first U.S.
institution to which a check is transferred, in this case the
institution receiving the check deposit from the gambling
business) in a check transaction." This is worrisome,
because people may wake up and find out that the check they
received from the Internet gambling websites was marked
"restricted transaction" and will not be paid. But on the
brighter side - every other piece of the chain is exempt from
the regulations, so it should be no problem for the online
gambling companies to at least make out the checks to their
customers: "The proposal would also provide an exemption for
the paying bank (unless the paying bank is also the depositary
bank)".
If you read the regulations you will get the
sense that they target Internet gambling transactions which
originate and are designated for within the United States, i.e.
the online gambling company is based and operates within the
United States. This, of course, is hardly the case with the
actual online gambling industry, but there is little to be done
by the Treasury and the Fed to curb offshore financial
transactions. Let's take wire transfers, for example. In the
regulations one can read:
"With regard to wire transfer systems, the
proposal provides an exemption from the regulation’s
requirements for the originator’s bank (i.e., the depository
institution sending the wire transfer on behalf of the gambler)
and intermediary banks (other than the bank that sends the
transfers to a foreign respondent bank as discussed below). The
proposal does not exempt the institution serving as the
beneficiary’s bank (i.e., the institution receiving the wire
transfer on behalf of the gambling business) in a particular
wire transfer system."
And looking closely at "does not exempt the
institution serving as the beneficiary’s bank" you realize that
unless the beneficiary's bank is located in the United States
(which is not the case with almost all of the online gambling
websites), the beneficiary's bank is not obligated to block the
transaction, because US laws apply only the the US, thus making
the entire wire transfer exempt from these regulations.
"Finally, section 5 implements the Act’s
requirement that the Agencies ensure that transactions in
connection with any activity excluded from the Act’s definition
of 19 unlawful Internet gambling are not blocked or otherwise
prevented or prohibited by the regulations (the “overblocking”
provision)."
But:
"Section 5 also imports the Act’s liability
provisions, which state that a person that identifies and
blocks, prevents, prohibits, or otherwise fails to honor a
transaction is not liable to any party for such action if (i)
the transaction is a restricted transaction; (ii) such person
reasonably believes the transaction to be a restricted
transaction; or (iii) the person is a participant in a
designated payment system and prevented the transaction in
reliance on the policies and procedures of the designated
payment system in an effort to comply with the regulation."
Which means that the banks should not block
transactions not related to unlawful Internet gambling (note,
definition of this term is still missing from the regulations),
but if they do - they better have a good reason.
To put the regulations to the Unlawful
Internet Gambling Enforcement Act in a nutshell - it took some
of the burden off the banks. In our opinion, the regulations are
a positive change to the current status, mostly by exempting
banks and financial institutions from the responsibility of
regulating many parts in the payment processing between a
gambler and an online gambling website. However, the UIGEA is
still in effect and conducting financial transactions to
and from illegal online gambling websites by the banks remain
illegal. We can now call the UIGEA the "gambling Catch-22".
The proposal requests public comment by
December 12th and the real question is how willing are the
non-exempt financial institutions to strictly implement the
regulations, costing them a lot of money, time and hustle with
customers wrongfully affected. Or will they just write it of as
"done" at the end of the year an go about their real business...
Comments appreciated at
news@ogpaper.com
Published on
10/01/2007
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