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October-05-2007,
An Analysis of the UIGEA Regulations...By Hartley Henderson

Prior to the passing of the UIGEA last year via the Safe Port Act, banks and other U.S. payment companies were doing their best to try and block internet gambling transactions by Americans. The banks realized that there was a movement within congress that wanted to force them to ensure all transactions did not originate from offshore gambling sites, but in today's global economy that task would be enormous. Almost all transactions these days are done via ACH networks, credit cards or money transfers both locally and internationally, and to try to isolate and identify individual transactions would be a monumental task. Consequently banks took measures themselves and attempted to block gambling transactions when they could identify them to show congress that the proposed law was unnecessary and would be a major burden to the financial services industry. That didn't work. Congressman Bill Frist attached the UIGEA to the Safe Port Bill, which Senators and Congressmen had already approved and the law took effect in early October 2006. Thus the voluntary efforts by the banks were futile.

The government was given 270 days to draft regulations for the UIGEA that would tell the banks and other payment companies what they needed to do to be in compliance with the new law. The task of writing the regulations was left to the U.S. Treasury and the Attorney General's office. A few in the banking field that commented to me after the UIGEA was rammed through seemed a bit upset that this was being thrust upon them, but also said they were willing to comply with the law if possible. The only thing they required were clear instructions and procedures which would help them identify the few "restricted transactions" among the thousands of other transactions that were being processed at the same time. As someone in the industry said to me after the UIGEA was passed, "as long as the rules and procedures are clear we'll abide by them." Congressmen Barney Frank, Shelley Berkley and others tried to have the UIGEA overturned in the meantime and iMEGA was formed as a trade group to try and have the UIGEA overturned and assure the regulations were never written. But early this week, at the one year anniversary of the law being signed by President Bush (I suppose the government doesn't believe in deadlines), the regulations were released. I read through them thoroughly and discussed them with a lawyer and the following is my analysis.

The UIGEA regulations as they are written are worthless to the banks because they do not do the two things the banks asked for - how to identify "illegal" transactions and what procedures need to be in place to show compliance with the new law. Instead, the Treasury released a 52 page report which told the banks and other payment companies what they already knew and the responsibility for writing the procedures and policies to block the internet transactions were tossed into the banks' court. On the very first page of the report the following is written:

"The proposed rule requires participants in designated payment systems to establish policies and procedures reasonably designed to identify and block or otherwise prevent or prohibit transactions in connection with unlawful Internet wagering."

The regulations give the banks and other payment companies six months to do so. The next several pages of the document gives definitions of what an ACH system is, what a card system is, what a check collection system is, what a money transmitting business is and what a wire transfer system is. It then adds that there may be other methods of transmitting money to online casinos and sportsbooks and if anyone knows what they are to please notify the government.

Pages 13 to 19 of the report lists exemptions to the law. The government argues that the ACH system is vast and is absolutely necessary to day to day business. It doesn't think it's fair to require ACH operators to try and identify online gambling transactions so it exempts them from the law. This applies to the ACH systems operator, the originating depository financial institution and the receiving depository financial institution. In fact it essentially exempts all parties in the ACH system, but adds a caveat that maybe it would be a good idea to have all ACH operators identify the nature of the transaction where possible to help identify gambling activities. But it goes on to say that doing so may bog down the system which would delay transactions and defeat the whole purpose of why an ACH exists in the first place.

With regards to check collection systems, the regulations exempt all institutions except the depository bank, i.e. the first U.S. bank which accepts the check. In some bizarre logic the Treasury argues that these banks know their customers and thus would have no problem identifying gambling transactions. But other banks within the whole check clearing system would have no idea what the transactions are so forcing them to try and identify gambling transactions would be an unfair burden. So somehow the depository bank is supposed to know that a $500 check written to a gambler from say England and cleared through a U.S. bank is a gambling transaction. Of course this is precisely what the banks said was not possible and wanted instructions about how they could comply with any regulations that require them to identify gambling transactions, but the Treasury clearly doesn't provide any guidlines for this and decided to put the onus on the banks.

In wire transfer systems the regulations exempt the originating bank and any intermediaries, but not the receiving bank. Of course it acknowledges that most betting is done offshore so the regulations are meaningless in this regard, but it suggests that perhaps the bank should require all persons making wire transfers to sign a waver that the transaction is not for gambling purposes which would discourage gamblers. At the same time it acknowledges that doing so would be a pain for both banks and customers that rely on bank wires for their business and it could also prove quite costly, so the regulations state that maybe that's not a great idea and the government wants feedback on this issue.

The bank doesn't list any exemptions for money transmitting companies, although Western Union and Moneygram have already essentially blocked all gambling transactions when they can identify them.

To make matters worse for the banks, however, the government not only fails to give instructions on how banks can actually carry out the requirements in the regulations, but actually ties their hands as well. The Treasury acknowledges that because of the confusion over what are legal and what are illegal gambling transactions (which by the way the Treasury conveniently states it has no intention of clearing up for the payment systems), that many banks have decided to just block all gambling transactions to avoid any confusion and headaches. But in the regulations, the Treasury has told the banks that this is "overblocking" and they can't do so. Hence, while banks have tried to come up with a solution they can live by, the U.S. government has told them that they will be held accountable if they block what they consider legitimate online gambling transactions, i.e. to interstate or intertribal online gambling sites or to horse racing tracks which are exempted under the Interstate Horseracing Act of 1978.

The rest of the document talks about due diligence and establishing a good customer relationship with clients, remedial action such as fines or closing accounts of customers that try and circumvent the new "rules", monitoring by the banks to try and somehow magically identify these transactions, coding of gambling transactions, (which of course is already being done) and cross border relationships.

The last point needs discussion. In the regulations the Treasury states the following:

"In the case of incoming cross-border ACH debit and check collection transactions, the proposed rule places responsibility on the first participant in the United States that receives the incoming transaction from a foreign institution to take reasonable steps to ensure their cross-border relationship is not used to facilitate restricted transactions."

So somehow places like Bank of America that has thousands of ACH transactions coming through every hour from Citibank branches worldwide is supposed to identify the one gambling transaction among the thousands of others and block it. But again the Treasury expects the banks to figure out how to do so.

So let's put this in perspective. Payment companies were told to abide by a new law that they didn't agree with and didn't believe was feasible. The U.S. government essentially told them not to worry and that in 270 days they would be given policies and instructions that would show them what they need to do be in compliance. A year later the government came back, and instead of giving them the promised instructions, they instead told the banks what the definition was of an ACH system, a check system and a bank wire system and informed the bank that if they were the first U.S. receiving bank in a transaction, that they needed to ensure all transactions are not "illegal" internet gambling related transations and that it was the banks' responsibility to come up with policies and methods on how to do so. And more so, the banks are not allowed to simply block all gambling transactions because the government made a deal with the horse racing industry and native tribes.

The government later argued that this should only cost banks about $4 million a year and while that is peanuts to commercial banks it could bankrupt smaller banks, credit unions and small money transmitting companies. However, it stated the smaller institutions need not worry as they could "rely on policies and procedures established and implemented by the designated payment systems of which they are participants of other existing systems."

So what exactly has the government achieved with the released regulations other than passing the buck? Clearly when given the responsibility of drafting regulations the Treasury threw up its hands and said "We don't know how to enforce this." After a year of doing nothing to address the issue, the Treasury department realized it had to release something, so it stated a bunch of definitions and then told the banks to do the work for them and gave them a six month deadline to achieve a task the Treasury clearly couldn't accomplish in nine months. And the banks, consequently, are put in the exact position they dreaded prior to the UIGEA, simply because the likes of Bill Frist, Jim Leach and John Kyl wanted a law passed that forbade Americans from spending money in ways they see fit.

Thus far the banks have not released any statements on the so called regulations. When statements are made you'll read about them on MajorWager.

10-05-2007
Hartley Henderson
MajorWager.com
henderson@majorwager.com

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