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December 10, 2008 Almost a year after they were proposed, the Department of Treasury and Federal Reserve Board (Agencies) have finalized the regulations to implement the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA or the Act). These rules will guide banks, credit card companies and other payment systems on the requirements of the Act and how to comply by blocking payments made in connection with unlawful Internet gambling. The new regulations are effective January 19, 2009. However, compliance with the new rules is not required until December 1, 2009 to allow U.S. financial institutions to implement procedures to comply. The final rules appear to be faithful to the expressed limits of the Act and the regulatory directive to maintain the status quo for racing’s activities. But there are several new provisions in the final rule that could be troublesome for the racing industry as banks, credit card companies and other financial institutions prepare to comply with UIGEA. For a full copy of the final rule please visit: http://www.federalreserve.gov/newsevents/press/bcreg/20081112b.htm Note: UIGEA and these regulations have become quite controversial. Congressman Barney Frank (D-MA) introduced legislation in this Congress to prohibit these regulations from going effective. Other bills were introduced to regulate, license, tax or study Internet gambling or exclude certain games from UIGEA’s prohibitions. The House Financial Services Committee approved the Frank bill, but it was not considered by the House. We anticipate that similar legislation regarding Internet wagering will be introduced in the next Congress. Regulatory Enforcement Process under UIGEA UIGEA does not prohibit Internet gambling outright; rather it prohibits gambling businesses from knowingly accepting payments, including payments made through credit card, electronic fund transfers and checks, in connection with unlawful Internet gambling. Such unlawful transactions are termed "restricted transactions." The Act requires the Agencies to prescribe regulations requiring banks, credit card companies and other financial institutions to establish procedures to identify and block payments made to gambling businesses in connection with these restricted transactions. To guide financial institutions in satisfying their responsibilities, the Act requires the Agencies to identify non-exclusive procedures that could be followed to help payment systems to comply with their responsibilities under UIGEA. Although financial institutions do not have to follow the procedures set out in the final rule and can adopt their own, following the procedures in the rules would be considered a "safe harbor" for banks and other institutions in complying with the Act. UIGEA and Regulations Intended to Maintain Status Quo for Racing UIGEA protects racing’s interstate activities by excluding from the definition of unlawful Internet wagering "any activity that is allowed under the Interstate Horseracing Act of 1978 (IHA)." As did the proposed rule, the final rule follows that exclusion. The supplementary information to the final rule also notes that "the Act requires that the Agencies ensure that transactions in connection with any activity excluded from the Act’s definitions of ‘unlawful Internet gambling’ [such as activities allowed under the IHA] are not blocked or otherwise prevented or prohibited by the prescribed regulations (the ‘overblocking provision’)." As did the proposed rule, the final rule recognizes this by providing: "Nothing in this regulation requires or is intended to suggest that designated payment systems or participants therein must or should block or otherwise prevent or prohibit any transaction in connection with any activity that is excluded from the definition of ‘unlawful Internet gambling’ in the Act as an intrastate transaction, an intratribal transaction, or a transaction in connection with any activity that is allowed under the Interstate Horseracing Act of 1978." (Emphasis added.) These provisions are intended to minimize the possibility that financial institutions might overblock activities allowed under the IHA. Nonetheless, there is a new provision in the final rule that could result in "overblocking" of activities allowed under the IHA. New Provision on Due Diligence The final rule retains the focus on a "due diligence" process that financial institutions can follow to satisfy their responsibility to prevent restricted transactions. Neither UIGEA nor the proposed rule defines "unlawful Internet wagering," relying instead on underlying Federal and State law. Many of the financial institutions that commented on the proposed rule suggested that the Act puts too great a burden on banks, credit card companies, and financial institutions by requiring them to determine whether an Internet gambling activity is lawful, particularly since the Act itself does not define this activity. Many of these commenters asked the Agencies to provide more clarity regarding "unlawful Internet wagering." In the final rule, the Agencies refused to define "unlawful Internet wagering" beyond the Act’s definition, stating they did not have that authority. But in response to banks’ and other financial institutions’ desire for more certainty, the final rule includes a new "due diligence" process that was not in the proposed rule. This new due diligence process would impose the burden of proof of legality of Internet gambling activities on the gambling businesses. Under the new provision, if a bank or card company determines that a commercial customer, such as a race track or other ADW operator, is engaging in internet gambling, it could require evidence from the operator of legal authority to engage in the Internet gambling business. This would satisfy the due diligence requirements of the financial institutions under UIGEA. Such evidence would include:
The supplementary information to the final rule says "if a commercial customer has a license that expressly authorizes the customer to engage in the Internet gambling business issued by the appropriate State or Tribal authority, the participant should be able to rely on that State agency’s ability to implement its own gambling laws in a manner that does not violate the law of another State or Federal law." Nonetheless, it remains to be seen how this new provision, and indeed the final regulations, will work in practice and what effect the final rule might have on what racing is currently offering with respect to interstate wagering under the IHA. The rules could now make it more likely that financial institutions would overblock racing’s activities. Barring a legislative change to UIGE or the regulations, the industry has a year to identify and work through any new hurdles. Please call the AHC with any questions. |
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