Archive

FRB, Treasury: Prohibition on Funding of Unlawful Internet Gambling

ABA Contacts: Rich Riese; Nessa Feddis; Steve Kenneally
Published Proposal: 72 Federal Register 56680; October 4, 2007
Comments Due: December 12, 2007
Disposition: Filed
Final Rule: 73 Federal Register 69382; November 18, 2008
Effective Date: The Final Rule is effective on January 19, 2009. Compliance becomes mandatory on December 1, 2009.

Summary

The Department of the Treasury and the Federal Reserve Board (Agencies) have issued a joint proposed rule that would implement the Unlawful Internet Gambling Enforcement Act. The Act "prohibits any person engaged in the business of betting or wagering (as defined in the Act) from knowingly accepting payments in connection with the participation of another person in "unlawful Internet gambling."

The joint proposed rule would require U.S. financial institutions that participate in the payment systems to establish policies and procedures reasonably designed to prevent payments being made in connection with unlawful Internet gambling. Such policies and procedures would include due diligence, remedial action, monitoring, coding, and cross-border relationship components. Additionally, while recognizing problems with implementation and upkeep, the Agencies are seeking comments on the feasibility of a list of unlawful Internet gambling businesses. ABA notes that while blanket exemptions were not provided for the categories of ACH, check collection, and wire transfer systems, only the participant that possesses the customer relationship with the Internet gambling business would have responsibility to prevent or prohibit restricted transactions from being processed through the payment system. The Agencies propose the final regulation to be effective six (6) months after the joint final rules are published.

ABA Comments

In response to a joint Treasury and Federal Reserve proposal on the implementation of the Unlawful Internet Gambling Enforcement Act, ABA predicated that the Act would in the end catch more banks in a compliance trap than it would catch unlawful Internet gambling businesses. While the proposal established important exemptions in the areas of ACH, wire transfers and check processing, there remain significant flaws in the vague and overbroad nature of the definition of unlawful Internet gambling and in the expectation that banks can restrict off-shore gambling through their correspondent banking relationships.

See the ABA Comment Letter.

Generally

The Final Rule contains substantial differences from the Proposed Rule and it incorporates many of ABA's recommendations. However, two central features were not adopted in this version; a definition of "unlawful Internet gambling" and a requirement that Federal agencies create a list of banned Internet gambling businesses which financial institutions could screen against to block transactions.

The Final Rule reflects ABA's comments in several sections. As requested by ABA, the Final Rule contains new language that provides sample policies and procedures that banks may utilize when conducting due diligence when opening new commercial accounts. Further, it states that implementing the proper due diligence during the account opening process would be "deemed to be reasonably designed to identify and block or otherwise prevent or prohibit restricted transactions." This reflects the Agencies' recognition that blocking payments in "real time" is not practical and that it is more effective to stop Internet gambling businesses from establishing accounts that would enable them to make or receive any payments.

ABA strongly opposed the Proposed Rule's requirements related to cross-border transactions as unworkable for several reasons including its reliance on foreign correspondents to enforce ambiguous U.S. laws, the inability to screen and block restricted transactions, and the problems associated with transactions that flow through several banks without contractual arrangements with the U.S. bank making it impossible to rely on established agreements on payments protocol. The Final Rule exempts outbound cross-border credit transactions (ACH credits and wire transfers) processed U.S. financial institutions. This change was made in recognition that there is no practical method for blocking these transactions. However, the Final Rule does not exempt cross-border debit transactions, customers receiving ACH debits or checks.

The Final Rule contains a new definition "actual knowledge" that will be used to determine when a financial institution, upon learning of a customer conducting restricted transactions, must rely on established procedures. ABA had opposed the term used in the Proposed Rule, "becomes aware," as being too vague.

The final rule:

  • Does not contain a definition of "unlawful Internet gambling," leaving the interpretation to state and federal laws.
  • Does not "contemplate" that any federal agency will create a list of businesses known to be involved in unlawful Internet gambling for banks to use in screening transactions.
  • Contains "non-exclusive" sample policies and procedures financial institutions can use during the account opening process to be used to screen for Internet gambling businesses and meet the requirements of a "reasonably designed" system to block or prohibit restricted transactions.
  • Exempts outbound cross-border ACH credits and wire transfers, but retains coverage of inbound cross-border ACH debits and check collections. All card transactions remain subject to the rule.
  • Includes a new definition of "actual knowledge" at the request of ABA and others, replacing the proposed term "becomes aware" of a business conducting prohibited transactions.
  • Revises the definition of "restricted transaction" to cover only funds being sent to a gambling entity, not funds being sent to the gambler.
  • Clarifies that a payment system participant can rely on a written statement from a payment system operator, such as Visa or MasterCard, that they have established policies and procedures in place to block payments. This would eliminate the requirement in the proposed rule that would have required each participant to analyze the card systems procedures.
  • Allows, but does not require, that card networks create merchant codes for different gambling transactions.
  • Allows banks to "overblock" all gambling transactions.

2007 Regulations Chart
ABA's UIGEA Analysis Table
Proposed Rule
Final Rule
Comment Letter