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Proposed UIGEA Regulations: Prohibition on Funding of Unlawful Internet Gambling
By Joseph M. Kelly and Frank Catania
(Catania Consulting)

On October 1, 2007, the Board of Governors of the Federal Reserve System and Departmental Office (the Board) and the Department of the Treasury (Treasury) introduced proposed regulations mandated by the Unlawful Internet Gambling Enforcement Act (UIGEA) signed into law by President Bush on October 13, 2006. Anyone wishing to comment on any aspect of these rules has until December 12, 2007, to submit their comments by email, fax, or post. The Treasury and the Board are required to address all comments submitted and then, after reviewing the submitted comments, will issue regulations which the agencies hope will become effective six months after “the joint final rules are published.” In all likelihood it will be between nine months and one year before the regulations become law.

The proposed regulations repeat the UIGEA language:

“Bet or wager

(1) Means the staking or risking by any person of something of value upon the outcome or a contest of others, a sporting event, or a game subject to chance, upon an agreement or understanding that the person or another person will receive something of value in the event of a certain outcome.”

However, this does not mean that poker is illegal since there is a scholarly dispute whether UIGEA actually has made anything illegal that was not already illegal. Instead it increased penalties for any illegal gambling and aiding and abetting by financial transaction providers.

“The Act states that its provisions should not be construed to alter, limit, or extend any Federal of State law or Tribal-State compact prohibiting, permitting, or regulating gambling within the United States. The Act does not spell out which activities are legal and which are illegal, but rather relies on the underlying substantive Federal and State laws…. [Thus] the Agencies’ preliminary view is that issues regarding the scope of gambling-related terms should be resolved by reference to the underlying substantive State and Federal gambling laws and not by a general regulatory definition.(Proposed Regulations at 3-4,6)”

Therefore, it is still uncertain what types of Internet gambling are illegal. The UIGEA and the proposed Regulations are not definitive on the legal status of interstate, interactive horseracing. There is consensus among legal experts that sports wagering operators who accept U.S. bettors are committing a crime, however an offshore gaming operator who accepts U.S. customers for Fantasy Sports Leagues does not violate UIGEA (see Humphrey v. Viacom et al., 2007 U.S. Dist. Lexis, N.J. 2007).

It is interesting that the proposed regulations do not propose, as did Italy, a “List of Unlawful Internet Gambling Businesses” (pp. 24-27) that would either be confidential or open to the public. The agencies concluded the entities on the list could easily change names “with relative ease and speed” and also it is unclear which “activities are lawful and which are unlawful.” Thus, the likely costs outweigh any potential benefit (p. 27).

Second, the agencies concluded that three of the five designated systems, Automatic Clearing House (ACH), check collection systems and wire transfer systems should be exempted from regulatory “requirements for establishing written policies and procedures reasonably designed to prevent or prohibit restricted transactions”(4 Exemptions)unless it “possesses the customer relationship with the Internet gambling business [p. 13].” This is because they “currently” do not possess the means that would enable them “to reasonably identify and block, or otherwise prevent or prohibit, restricted transactions under the Act.” Card systems (credit, debit, pre-paid, etc.) and money transmitting businesses (e.g. Western Union, PayPal) are not exempt irrespective of size. The agencies estimate that 4792 small banks,420 small savings associations ,7609 small credit unions and 240,547 small money transmitting businesses ”would be affected by this rule ”.

The non-exempt participants “shall establish and implement written policies and procedures reasonably designed to identify and block or otherwise prevent or prohibit restricted transactions”.(5 Processing of Prohibited Transactions Prohibited”). The proposed regulations also state a non-exempt financial transaction provider will be in compliance if it relies on acceptable designated payment system policies to prevent restricted transfers. The proposed regulations, 6 Policies and Procedures, lists non-exclusive examples of policies that all five designated systems should consider. It is estimated the burden on the agencies would be substantial. Together the record keeping burden would be approximately 690,000 hours with an annual cost of $4 million.

The proposed regulations could have been more encompassing and prohibitive. It is crucial to remember that nothing has been finalized and the agencies could make major changes as a result of received comments. As was previously stated nothing will be final for at least nine months.

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Joseph M. Kelly, Ph.D., J.D., is a Professor of Business Law at State College at Buffalo,and an associate of Catania Consulting. He is licensed to practice law in Illinois, Nevada, and Wisconsin. He is also co-editor of Gaming Law Review.