Hearing on UIGEA Underlines Severe FlawsThe Question Persists: What Exactly is Online Gambling? |
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This morning a House subcommittee heard testimony on the proposed rules that will be used to enforce the Unlawful Internet Gambling Enforcement Act (UIGEA) and there was only one person in the room who thought the UIGEA will actually work as intended.
That person was Alabama Rep. Spencer Bachus, who described gambling as a “scourge” and played a role getting it through. Others in the room weren’t so optimistic.
Bank representatives warned that the proposed rules are so unclear and so sweeping that the UIGEA has a chance to cause “an erosion of the performance of the financial system,” according to Wayne Abernathy, the executive director of financial institution policy and regulatory affairs for the American Bankers Association.
Even employees of the Treasury Federal Reserve System and the Treasury Department, the two federal departments charged with creating the UIGEA rules banks will have to follow, politely told the Congressional members that the UIGEA and the gambling laws it references are so unclear that they doubt it will work as intended.
Not only did the Treasury Federal Reserve System and the Treasury Department have extreme difficulty writing the proposed rules, because exactly what is considered illegal online gambling isn’t defined by the UIGEA or the federal government, but they also warned that banks simply aren’t up to the task of examining every single financial transaction to make sure they are not for online gambling.
“The payment system isn’t well-designed for this task, and that’s what we’re really struggling with,” testified Louise Roseman, the director of the division of reserve bank operations and payment systems.
But it goes beyond the financial system, Roseman said: “The most prominent concern is the lack of clarity of what forms of gambling are unlawful.”
Because the UIGEA doesn’t define exactly what online gambling is, the proposed rules do not, either. And, as it stands, it will be up to the banks to arbitrarily decide which transactions to allow, and which to block. The representatives of four organizations that represent bank spelled were not confident that it could be done.
The UIGEA
The UIGEA essentially forces banks and financial institutions into the law-enforcement business. The UIGEA calls for the banks to weed out and stop electronic transactions between people in the United States and “illegal Internet gambling” sites located overseas. It also calls for the banks to punish its customers who are caught by canceling their bank accounts.
The UIGEA counts on current federal and state laws to define what constitutes online gambling, and according to Roseman, neither her employees nor even members of Congress really know exactly what, by law, should be prohibited. Most of these laws haven’t been reexamined or updated for decades. Subcommittee member Robert Wexler even described the current laws as “a totally inconsistent system of regulation.”
Because the authors of the UIGEA failed to use their bill to clarify exactly what gambling services customers in America must be denied, the UIGEA puts it to the banks to decide what is legal and what is not. If the banks get it wrong, they’re subject to punishment.
The UIGEA wasn’t passed on its own and saw little debate before drawing votes; it was added to an expansive bill designed to increase security at the nation’s ports, and it’s quite possible that many Congressional members didn’t even know the UIGEA was included. The political maneuver was pulled off during an 11th hour of debate of the Safe Port bill by former Sen. Bill Frist, Sen. Jon Kyl, and Rep. Bob Goodlatte. It passed after midnight, right before Congressional members were set to go on an extended election-year recess.
Clear Banking Burden
Today wasn’t the first time representatives of banking organizations gave Congressional members a bleak forecast for the UIGEA. In each hearing held for the UIGEA where they were invited to testify, banking representatives warned Congressional members that the burden of the UIGEA was too great and that they believed it would be ineffectual.
Four banking representatives testified today: Harriet May for the Credit Union National Association, Abernathy for the American Bankers Association, Leigh Williams for the Financial Services Roundtable, and Ted Teruo Kitada for the Senior Company.
All testified separately, but essentially had the same thing to say: They don’t believe that the banking system is an effective law-enforcement tool, and they don’t know how to interpret what exactly “unlawful Internet gambling” is.
“There is no question that prosecuting unlawful Internet gambling poses numerous law-enforcement challenges,” Abernathy said. “Therefore, during Congressional consideration of UIGEA, the ABA stated clearly that while we did not support the legislative proposal, if the Congress chose to proceed with legislation, care was needed to avoid applying burdensome unworkable regulation to insured depository institutions. Unfortunately, the statute as enacted and the regulations as proposed are both burdensome and unworkable and are unlikely to result in stopping illegal Internet gambling.”
Abernathy was asked how much the banks are expected to spend enforcing the UIGEA, but he couldn’t really say. He said banks with more than $100 million in assets have two or three employees who do nothing but collect data to weed out suspicious transactions that could be related to money laundering and terrorism. He said banks would probably need the same number for the UIGEA.
Abernathy’s ABA represents 95 percent of the banks in the United States, and a majority of those have $125 million or more in assets. The ABA doesn’t divulge how many members it carries.
May, who represented the Credit Union National Association, said the government already has called on the banking industry to police its citizens and worried that the strain of the UIGEA on credit unions will be too much.
“Credit unions and other financial institutions are already burdened with heavy policing responsibilities,” May said. “Our compliance responsibilities under the Bank Secrecy Act and Office of Foreign Assets Control (OFAC) rules are extraordinary. We do not think that the Internet gambling law could be implemented without creating a list similar to what OFAC publishes to tell financial institutions who are the ‘bad guys.’”
May went on to say that even if a list of restricted online gambling companies were made, it would be impossible for banks to ensure that every transaction is legal because there are so many different ways to transfer money online and because of how quickly the Internet changes.
And, because the question of what exactly “unlawful Internet gambling” is has gone unanswered, the banks will most likely stop transactions that could be interpreted by some as gambling, such as bridge leagues, mah jong tournaments, or just about anything else that contains a deck of cards or a die.
“I would expect that they would take a conservative approach and assume that all Net gambling is unlawful,” Roseman said.
When enacted, the UIGEA will call for banks to review every single transaction by all of its customers to ensure that no money is going to online gambling sites. The banks say that they cannot handle the burden of playing detective, judge, and jury. The government is asking the banks to do their job, said Williams.
“Our member financial institutions are very concerned that even with final adoption of our recommendations, the rule could impose significant compliance burdens on financial institutions by increasing their role in policing illegal activities, determining whether a transaction is illegal, or by imposing ambiguous compliance requirements that could be subject to wide variations in interpretation by regulators and law-enforcement agencies,” said Williams. “We believe these functions are more appropriate for law-enforcement agencies.”
The banking representatives also expressed concerns on implementing the UIGEA. May estimated that it would take up to 18 months after the rules are finalized to get all of her banks online. Abernathy gave an estimate of up to two years.
The hearing was titled “Proposed UIGEA Regulations: Burden without Benefit?” and was held for the Domestic and International Monetary Policy, Trade, and Technology committee, which is a subcommittee of the House Committee of Financial Services.
It was held specifically to go over the concerns that were raised about the proposed UIGEA rules by residents and organizations during a public comment period that went on into December. Now, the Treasury Federal Reserve System and the Treasury Department will again look at the rules and possibly revise them.
The testimony of all of today’s participants can be found in pdf form by clicking here.
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