Implementation of the Unlawful Internet Gambling Enforcement Act is becoming reality

On 12th November 2008, after two years of stand by, the US Department of the Treasury along with the Federal Reserve Board finally announced the publication of the final rules ensuring the implementation of the Unlawful Internet Gambling Enforcement Act (UIGEA).

The UIGEA was enacted to stop the development of illegal internet gambling websites by means of blocking money transfers between unlawful gambling operators and consumers. Indeed, the UIGEA prohibits any person engaged in the business of betting or wagering (as defined in the Act) from knowingly accepting payments generated by unlawful internet gambling activities while financial firms are required to establish policies and procedures “reasonably” designed to identify and block or prevent such “restricted transactions”.

A final set of implementation rules was necessary in order to enforce the UIGEA. After a first draft in 2007, received with criticism by gambling law specialists, the US Department of the Treasury and the Federal Reserve Board proposed new regulations which draw up the regulatory enforcement framework.

However, the recently announced regulations are quite similar to the initial proposal, especially considering the standing committee’s decision not to define the exact meaning of “unlawful internet gambling” for the purposes of this act. Asserting that “the underlying patchwork legal framework [of gambling] does not lend itself to a single regulatory definition of unlawful Internet gambling”, drafters concluded that providing further details on what is “lawful” “would not be practical” with regards to eventual exemption from the Act (1).

In addition, the Department of the Treasury in accordance with the Department of Justice rejected the suggestion to set up a “blacklist” of unlawful internet gambling websites. Accordingly, such a measure “would not be effective or efficient” as long as gambling operators will be able to “change their payment information with relative ease and speed” and as a result “such a list would be outdated quickly.”

Instead, banks and other payment service providers will have to put into practice a “due diligence process” before opening new customers’ accounts or over account-maintenance procedure in order to control whether the commercial customer originates or receives restricted transactions through the customer relationship or not. For example, if a bank suspects a commercial customer to present more than a “minimal risk” of engaging in an Internet gambling business, the bank will have to ask for further documentation to ascertain that the Internet gambling business is lawful.

According to the Department of the Treasury the implementation of the Act will cost approximately $88,5m in staff costs, whereas further “unquantified costs” such as training, auditing and legal advice are also expected. The final bill could exceed 100m$ only for the first year and the total annual cost to regulated entities to maintain the policies and procedures will be approximately $3,3m.

Interest groups such as the American Banking Association or the Financial Services Roundtable are particularly reluctant to the implementation of the new provisions in a time of economic crisis. In an open letter addressed to US Secretary of the Treasury, Congressman Barney Frank demonstrated that enforcing the new rules at this time would “burden the financial services industry”.

While American government is enforcing the UIGEA, the European Commission is wondering about the opportunity of launching legal proceedings against United States before the World Trade Organization, considering that non American operators are specifically penalized by the implementation of the UIGEA in a restrictive and discriminatory way (2) . The European Commission should publish the conclusion of their formal investigation by the end of the year.

Despite criticisms, the final rules will officially come into effect on 19th of January 2009 and all payment service providers will have until December 2009 to comply with the new provisions.

[1] “Prohibition on funding of unlawful Internet”, Federal Register Notice, http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20081112a1.pdf

(2) The US Department of Justice is suspected of violating international trade law by threatening and pressing criminal prosecutions, forfeitures and other enforcement actions against foreign online gaming operators while allowing domestic US online gaming operators.

Sources:

Agencies Issue Final Rule to Implement Unlawful Internet Gambling Enforcement Act”, the Federal Reserve, Joint Press release, November, 12, 2008, http://www.federalreserve.gov/newsevent/

“Prohibition on funding of unlawful Internet”, Federal Register Notice, http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20081112a1.pdf

“Prohibition on funding of unlawful Internet”, regulations to the Unlawful Internet Gambling Enforcement Act ‘s proposal, http://www.treas.gov/press/releases/reports/noticeofproposedrule.pdf

“UIGEA Rules To Take Effect Hours Before Obama Inauguration”, James Kilsby, November, 14, 2008, published on http://gamblingcompliance.com/

“EU gambling firms see WTO case coming against U.S”, Doug Palmer (Reuters), September, 18, 2008, http://www.reuters.com/

“EU online gaming industry challenges US with charge of prosecutorial discrimination”, Remote Gambling Association, Press release, Brussels, 20 December, 2007