On Monday, the Department of the Treasury and the board of governors of the Federal Reserve System (collectively, the Agencies) announced the release of proposed regulations to implement the Unlawful Internet Gambling Enforcement Act (UIGEA).
In 52 tedious pages, the Agencies first attempt to interpret the words of the UIGEA and then suggest proposed regulations, while asking for specific feedback in areas where their knowledge is lacking.
Let's remember that the
judiciary is the only legal body whose task is interpreting the words of a statute and
they are the final authority. My guess is that the Agencies wanted to be sure they understood the UIGEA properly before promulgating rules, which is why they attempt to interpret the statute.
A Short Review
Just before Congress recessed last year, then-Senate Majority Leader Bill Frist (a Republican from Tennessee) quietly slipped the UIGEA into the Safe Port Act, a must-pass bill. Many senators claimed never to have read the final version of the bill.
As we all now know, the bill does
not make online poker illegal, nor does the bill change gaming law. What it
does do is to make it more difficult to get money onto a site by forbidding U.S. financial institutions from funding the type of online gambling that the law has previously made illegal. Precisely what that means is open to interpretation and legal analysis.
The UIGEA requires the secretary and the board of governors of the Federal Reserve System, in consultation with the attorney general, to prescribe regulations to identify and block transactions to online gaming sites within 270 days after President Bush signed the bill into law on Oct. 13, 2006. That would have resulted in a July 10, 2007 compliance date, which came and went with no word from the Treasury, the Federal Reserve or the Department of Justice.
Yesterday, the Department of the Treasury and the Federal Reserve announced proposed regulations with few references to the Department of Justice.
It is the job of the attorney general's office to investigate and prosecute crimes. They are in a unique situation to have relevant information with which to assist in the making of regulations, yet they have been silent.
Before Attorney General Alberto Gonzales was relieved of his duties, he testified at congressional hearings where Senator Jon Kyl asked him about naming online sites:
Kyl: Well, what I'm interested in, though, since the Treasury doesn't have access to the same information the Department of Justice does, and the list of these improper sites needs to come from the Department of Justice rather than the Treasury. And the regulations are to be provided by the Treasury, in consultation with the Department of Justice, whether you will agree with us that the Department of Justice should do everything it can to gather this information together and provide it to the … Department of Treasury, not just once, but on some appropriate ongoing basis.
Gonzales: Sir, what I can commit to you is that we're going to do everything we can to make sure these regulations are strong and we get them implemented as quickly as we can. That's what I can commit to you, sir. I know this is an important issue to you. It's an important issue to me, but we need to do it the right way. And I think we can - I'm not saying we can't do this list. We're still looking at this very, very hard.
No blacklist is forthcoming because it would be a nearly impossible task to undertake; it would open up Pandora's Box, to say nothing of the ensuing litigation.
Summary of the Regulations
The proposed regulations begin with a summary which states that "this notice is jointly published by the Dept. of the Treasury and the Reserve Board (the Agencies) and proposes rules to implement applicable provisions of the UIGEA." The summary goes on to state what the proposed rules do:
- Designates certain payment systems that could be used
- Requires participants in designated payment systems to establish policies and procedures designed to identify and block restricted transactions
- Exempts participants where the Agencies believe it is not reasonably practical to identify or block transactions
- Describes the types of policies and procedures non-exempt participants may adopt
- The proposed rule does not specify which gambling activities or transactions are legal or illegal
- Comments about the proposed regulations must be received by Dec. 12, 2007
Public Comments
The Agencies actually want comments relating to specific sections of the proposed rules. For example, they want to achieve the purpose of the UIGEA as soon as practical, which means the designated payment systems need sufficient time to comply. The Agencies are proposing that the final regulations will take effect six months after the final rules are published; however, the Agencies want feedback and guidance regarding whether or not that time period is sufficient.
It is almost humorous that the Agencies think that financial institutions can come up with appropriate policies and procedures in six months, when the combined effort of the Treasury, the Federal Reserve,
and the attorney general's office took nearly a year to deliver the first iteration of the proposed regulations!
Definitions
The Agencies preliminary view, in consultation with the Department of Justice, is that issues regarding the scope of gambling-related terms should be resolved by reference to state and federal gambling laws and not by general regulatory definition. In other words, Congress doesn't know what's legal or illegal, nor do the Agencies, so they won't define terms. That raises the possible issue of the statute being void for vagueness, among other legal challenges.
The Agencies clarify that an "end user customer" (gambler) is
not included in the definition of a participant in a designated payment system, and therefore not subject to the UIGEA.
Designated Payment Systems
The proposed regulations describe the types of payment systems as: (1) the automated clearing house (ACH) system (i.e., payroll direct-deposit payments); (2) credit-card systems (i.e., Visa); (3) check-collection systems (checks); (4) money-transmitting businesses (i.e., Western Union, PayPal); (5) wire-transfer systems and (6) other payment systems.
The Agencies comment that there may be other payment systems emerging and not represented in the list that should be considered.
Exemptions
The UIGEA directs the Agencies to exempt certain payment systems from any requirements if their participation is not reasonably practical. The proposed regulations exempt certain participants in ACH systems, check-collection systems, and wire-transfer systems. The proposed regulations are structured so that there is an obligation on some of those segments of transactions that the participants actually handle. In other words, they are not exempting entire payment systems, but rather payment systems in certain situations. Yes, it
is confusing.
The proposed regulations exempt the participants named above
except for certain exceptions, including the participant who possesses the customer relationship with the Internet gambling business. (This is one of the areas where the Agencies want feedback.) Regarding checks, if a bank receives a check deposit
from a gambling business, the depository bank is supposedly in a position where, utilizing due diligence, the bank should be able to know whether the transaction is a forbidden one. This is ridiculous, because it assumes a financial institution knows if a check comes from a gambling business in the first instance.
This reminds me of a statement made by the Banking Association after the passage of the UIGEA. "The bill sets up banks to police a social issue," said Laura Fisher, spokeswoman for the American Bankers Association. "It's not something we want to encourage … Analyzing 40 billion checks a year would be a largely manual process."
Processing of Restricted Transactions Prohibited
Section 5 of the proposed regulations expressly requires all non-exempt participants to establish and implement policies and procedures in order to identify and block restricted transactions. Such a participant will not be held liable if (1) the transaction
is a forbidden transaction, (2) such person reasonably believes the transaction is forbidden
or (3) the person relied upon the policies of the designated payment system.
What a nightmare. Suppose one receives and deposits a legitimate check which the bank rejects. The check improperly bounces, setting in motion the kind of disaster that happens once in the life of a 20-year-old who fails to properly balance his checkbook. But this time, it is the fault of the bank, which is not liable. This could get ugly.
Furthermore, there is a disingenuous provision that transactions not within the purview of the UIGEA not be blocked, followed by the recognition that some payment-system operators have indicated that, for business reasons, they do not process gambling transactions, even if legal,
and the Agencies don't have the authority to require any financial institution to process a legal gambling transaction. To their credit, the Agencies specifically ask for comment on this section.
Reasonably Designed Policies and Procedures
Section 6 of the proposed regulations sets forth examples of policies and procedures that could be utilized. This includes (1) due diligence, (2) remedial action, (3) monitoring, (4) coding, (5) cross-border relationships, and (6) the issue of a black list.
- Due diligence: Participants should use a flexible risk-based approach in that the level of due diligence performed would match the level of risk posed by the customer. The due diligence is intended to apply to a participant who has a customer, not an entity with no direct relationship.
- Remedial action: There must be policies if a participant discovers that one of its customer relationships was being used to process forbidden transactions. Such a policy could include fines, closing the account, filing a suspicious activity report, etc.
- Monitoring: This includes payment patterns, monitoring websites, etc.
- Coding: Business/merchant category codes will be utilized as they have been used. The Agencies suggest different codes for gambling transactions not restricted by the UIGEA.
- Cross-border relationships: The Agencies recognize that offshore gaming companies are not subject to the UIGEA. The act suggests that some Internet gambling sites indicate on their website how and with whom to make a wire transfer. The Agencies suggest that: "The U.S. participant should consider whether wire-transfer services should continue."
- List of unlawful Internet gambling businesses: The UIGEA doesn't specifically mention the creation of a blacklist, nor do the Agencies compile one. In sum, the Agencies comment that, although there is some interest in a blacklist, it is neither practical nor legally desirable given the risk of misidentification, the task of identifying what constitutes unlawful gambling in each jurisdiction, the ability of an unlawful site to change its name, and the cost associated with establishing and maintaining an accurate list.
Small Entities are not excluded
The proposed regulations will affect non-exempt financial transaction providers, regardless of size. This essentially hurts small businesses, because the Agencies fear that allowing an exemption for a small business would significantly diminish the usefulness of the UIGEA.
Potential Costs
The Treasury does not have sufficient information to reliably quantify the cost of developing specific policies and procedures and specifically asks for feedback on this issue. Once the policies are in place, the Treasury believes the burden of rulemaking will be relatively low. Incredibly, the Treasury estimates that the
recordkeeping per year to maintain the policies and procedures will take only one hour per year, estimating that the total cost to regulated entities to maintain the policies and procedures will be $4 million, which assumes 270,721 recordkeepers, each making $14.60 per hour.
What Does it All Mean?
Nothing is going to happen for quite a while. The Agencies want feedback until Dec. 12, 2007. Then there is Christmas and the New Year holiday. Then there is the task of digesting the comments and rewriting the regulations. That will probably take another six to nine months. Then the Agency proposes that financial institutions have six months to create policies and procedures. Six months just won't do it. Perhaps in 2009, financial institutions might have policies and procedures. Of course, by that time, Congress will have made online gambling legal in the U.S.
