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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)."


"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...

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 Published on 10/01/2007

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