Internet Gambling Regulations Delayed

Introduction

Almost two years after Congress passed the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA or the Act), the Department of Treasury and Federal Reserve Board (Agencies) finalized the regulations to implement it.  The Act called for these two agencies, in consultation with the Department of Justice, to promulgate the rules that will guide banks, credit card companies and other payment systems on the requirements of the law and how to comply by blocking certain payments made in connection with unlawful gambling transactions through the Internet. 

The new regulations were effective January 19, 2009.  However, compliance with the new rules was not required until December 1, 2009 to allow U.S. financial institutions to implement procedures to comply.

That compliance date has been delayed further until June 1, 2010.

While 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, 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.

Background on UIGEA

UIGEA does not bar Internet gambling; rather it prohibits those engaged in the business of betting or wagering from knowingly accepting payments in connection with the participation of another in unlawful Internet gambling.  The Act 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 amended.” 

Regulations Appear 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 followed that exclusion.

The supplementary information to the final rule also noted 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 recognized 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.)

New Provision on Due Diligence

Nonetheless, there is a new provision in the final rule that could result in “overblocking” of activities allowed under the IHA.  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 could 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. 

This new provision could put additional burdens on racetracks and companies offering interstate account wagering to satisfy the financial systems through which they operate that their activities, which are allowed under the IHA, are not restricted transactions under UIGEA and should not be blocked.  The new provision could shift the burden of distinguishing lawful from unlawful Internet gambling from the financial institutions to the Internet gambling businesses, including those involved in pari-mutuel wagering. 

Compliance Delayed

Last November, the Treasury and Federal Reserve Board delayed compliance with the regulations until June 1, 2010.  In announcing the delay the agencies said that it was to give financial institutions additional time to comply with the rules.

The Agencies had received a petition from the Poker Players Alliance, the National Thoroughbred Racing Association, and the American Greyhound Track Operators requesting a one-year extension of the compliance date of the regulations until December 1, 2010.  The request was prompted by concern that some banks and credit companies might overblock racing’s lawful activities under the IHA.  The delay gives the industry additional time to address such concerns.

The request for a delay was also supported by financial institutions, associations representing regulated financial institutions and members of Congress, including the entire Kentucky delegation.  All noted that the Act and the regulations did not provide a clear definition of “unlawful Internet gambling” and made compliance difficult. 

Several members of Congress, including Congressman Barney Frank (D-MA), the Chairman of the House Financial Services Committee, also indicated that they intended to consider legislation to clarify UIGEA and address these problems.  They suggested that “it would be prudent to defer the compliance date until Congress had time to act.”