AND THE BEAT GOES ON Internet Gambling in the US: UIGEA Regulations and New US Congress Linda J. Shorey Sean P. Mahoney

UIGEA-Required Regulations §5364(a) “Before the end of the 270-day period beginning on the date of the enactment of this subchapter, the Secretary [of the Treasury] and the Board of Governors of the Federal Reserve System, in consultation with the Attorney General, shall prescribe regulations …”

The Statutory Deadline For Issuance JULY 9, 2007 (270 days from October 12, 2006)

The Regulatory Process The UIGEA regulations should be promulgated in under procedures required by Section 553 of the Administrative Procedure Act (“APA”), 5 U.S.C. §553.

Notice and Comment  Notice of proposed rule making is to be published in the Federal Register at least 30 days before the effective date.  The notice informs interested persons of an opportunity to participate “through submission of written data, views, or arguments.” E.g., see Exhibit 1 (Federal Register Dec. 26, 2006) Notice and Proposed Rules jointly issued by Securities Exchange Commission and Federal Reserve concerning changes made by the Graham Leach Bliley Act to the Exchange Act of 1934.

Last Date For Publication of Proposed Rules for Notice and Comment June 9, 2007

Exception to Notice and Comment An agency may avoid notice and comment “when the agency for good cause finds (and incorporates the finding and a brief statement of reasons therefore in the rules issued) that notice and [comment] are impracticable, unnecessary, or contrary to the public interest.”

Interim Rules When the “good cause” exception comes into play, agencies may issue “interim” regulations that are immediately effective but ask for comments. E.g., see Exhibit 2 (Federal Register July 23, 2002) Financial Crimes Enforcement Network; Anti-Money Laundering Programs; Special Due Diligence Programs for Certain Foreign Accounts; Final Rule.

Publication of Final Regulations Included with the publication of final regulations, agencies are to include “a concise general statement of their basis and purpose.” Typically, this is found in a “preamble” that also discusses the comments received and changes made from the proposed/interim regulations. E.g., see Exhibit 3 (Federal Register August 30, 2006) Electronic Fund Transfers; Board of Governors of the Federal Reserve System; Final rule.

When Is The Ideal Time To Have Input? As soon as possible after the proposed regulations are published

Caveat  All comments on proposed regulations are publicly available and posted on the Internet, with very limited exceptions  Comments from Internet gambling websites/operators will likely carry little weight since the purpose of the UIGEA is to put them out of business  Comments directed at how the regulations frustrate legal US transactions and otherwise create excessive burden will carry weight  Number of comments seems important

What The UIGEA Regulations Are To Do “[R]equir[e] each designated payment system, and all participants therein, to identify and block or otherwise prevent or prohibit restricted transactions through the establishment of policies and procedures reasonably designed to identify and block or otherwise prevent or prohibit the acceptance of restricted transactions in any of the following ways:”

How The Regulations Are To Do It “(1)The establishment of policies and procedures that— (A) allow the payment system and any person involved in the payment system to identify restricted transactions by means of codes in authorization messages or other means; and (B) block restricted transactions identified as a result of the policies and procedures developed pursuant to subparagraph (a). (2) The establishment of policies and procedures that prevent or prohibit the acceptance of the products or services of the payment system in connection with a restricted transaction.”

Requirements “(b) In prescribing regulations under subsection (a), the Secretary and Board of Governors of the Federal Reserve System shall – (1) identify types of policies and procedures, including nonexclusive examples, which would be deemed, as applicable, to be reasonably designed to identify and block or otherwise prevent or prohibit the acceptance of the products or services with respect to each type of restricted transactions;”

BUT the regulators also are required to …. (3) exempt certain restricted transactions or designated payment systems from any requirement imposed under such regulations, if the Secretary and the Board jointly find that it is not reasonably practical to identify and block, or otherwise prevent or prohibit the acceptance of, such transactions;” AND

“(4) Ensure that transactions in connection with any activity excluded from the definition of unlawful internet gambling in subparagraphs (B) [intrastate transactions], (C) [intratribal transactions], or (D) (i) [activity allowed under the IHA] of section 5362(10) are not blocked or otherwise prevented or prohibited by the prescribed regulations.” Of course, the regulators will also want to ensure that no legal transaction is blocked or otherwise prevented or prohibited by the prescribed regulations!

Terms Of Interest

Designated Payments System “any system utilized by a financial transaction provider that the Secretary and the Board of Governors of the Federal Reserve System, in consultation with the Attorney General, jointly determine, by regulation or order, could be utilized in connection with, or to facilitate, any restricted transaction.”

Examples of Payment Systems  Automated Clearing Houses  Wire transfer networks (SWIFT, CHIPS, Fedwire)  Stored value products, including e-cash  Internet payment systems (e.g., PayPal)  Does not seem to include  Telephone (e.g. “900” numbers)  Cellular telephone payment systems

Restricted Transaction “any credit, funds, instrument, or proceeds described in any paragraph of section 5363 which the recipient is prohibited from accepting under section 5363 [(“section 5363 prohibitions)].”

The Section 5363 Prohibitions “(1) credit, or the proceeds of credit, extended to or on behalf of such other person (including credit extended through the use of a credit card); (2) an electronic fund transfer, or funds transmitted by or through a money transmitting business, or the proceeds of an electronic fund transfer or money transmitting service, from or on behalf of such other person;”

Section 5363 Prohibitions Cont. “(3) any check, draft, or similar instrument which is drawn by or on behalf of such other person and is drawn or payable through any financial institutions; or (4) the proceeds of any other form of financial transaction, as the Secretary and the Board of Governors of the Federal Reserve System may jointly prescribe by regulation, which involves a financial institution as a payor or financial intermediary on behalf of or for the benefit of such other person.”

Examples Of Possible Restricted Transactions  Credit card transactions  ACH transfers  Wire transfers  Payments from stored value cards  Internet payments (e.g. e-cash)

Electronic Fund Transfer (i) has the meaning given the term in section 903 of the Electronic Fund Transfer Act, except that such term includes transfers that would otherwise be excluded under section 903(6)(E) of that Act. i.e. “[A]ny transfer of funds, other than a transaction originated by check, draft, or similar paper instrument, which is initiated through an electronic terminal, telephonic instrument, or computer or magnetic tape so as to order, instruct, or authorize a financial institution to debit or credit an account. Such term includes, but is not limited to, point-of-sale transfers, automated teller machine transactions, direct deposits or withdrawals of funds, and transfers initiated by telephone.”

Electronic Fund Transfer Cont. (ii) includes any fund transfer covered by Article 4A of the Uniform Commercial Code, as in effect in any State, i.e. “[T]he series of transactions, beginning with the originator’s payment order, made for the purpose of making payment to the beneficiary of the order. The term includes any payment order issued by the originator’s or an intermediary bank intended to carry out the originator's payment order. A funds transfer is completed by acceptance by the beneficiary’s bank of a payment order for the benefit of the beneficiary of the originator's payment order.”

Examples of Electronic Fund Transfers (EFTs)  Wire transfers  ACH transfers  Other money transfer transactions

Financial Institution Means the same as it does in section 903 of the Electronic Fund Transfer Act, except is does not include a casino, sports book, or other business at or through which bets or wagers may be placed or received, i.e. “[A] State or National bank, a State or Federal savings and loan association, a mutual savings bank, a State or Federal credit union, or any other person who, directly or indirectly, holds an account belonging to a consumer.”

Financial Transaction Provider “a creditor, credit card issuer, financial institution, operator of a terminal at which an electronic fund transfer may be initiated, money transmitting business, or international, national, regional, or local payment network utilized to effect a credit transaction, electronic fund transfer, stored value product transaction, or money transmitting service, or a participant in such network, or other participant in a designated payment system.”

Examples of Financial Transaction Providers  Banks and credit unions (including credit card banks)  Money transmitters (e.g. Western Union)  ATM networks  Automated Clearing Houses  Wire transfer networks  Internet payment providers (e.g., PayPal, Neteller)

Money Transmitting Business Means the same as in section 5330(d), i.e. “any business other than the United States Postal Service which-- (A) provides check cashing, currency exchange, or money transmitting or remittance services, or issues or redeems money orders, travelers' checks, and other similar instruments or any other person who engages as a business in the transmission of funds, including any person who engages as a business in an informal money transfer system or any network of people who engage as a business in facilitating the transfer of money domestically or internationally outside of the conventional financial institutions system;” ….

Examples of Money Transmitting Businesses  Stored value card issuers  Western Union  Foreign money transmitters (including Walmart and many supermarkets)  Check cashers (includes many supermarkets and liquor stores)  American Express (as an issuer of stored value cards and traveler’s cheques)

Money Transmitting Service [A] service that includes accepting currency or funds denominated in the currency of any country and transmitting the currency or funds, or the value of the currency or funds, by any means through a financial agency or institution, a Federal reserve bank or other facility of the Board of Governors of the Federal Reserve System, or an electronic funds transfer network.

Examples of Money Transmitting Services  Western Union  Foreign money transmitters (including Walmart and many supermarkets)  iKobo (

Stored Value Product  A card or other device that electronically stores or provides access to a specified amount of funds for making payments to others; the devise is the only means of routine access to the funds; and the issuer does not record the funds associated with the devise as an account in the name of (or credited to) the holder. Includes:  pre-funded cards  pre-funded internet e-cash accounts

Examples of Stored Value Products  American Express, VISA and MasterCard gift and traveler cards that are pre-funded  Merchant gift cards  Payroll cards  Government benefit cards  Transportation cards (e.g. transit or tolls)  Prepaid calling cards

Stored Value Cards

Industry Concerns

 Lack of Codes Automated Clearing House (“ACH”) and checks clearing processes, unlike credit (and debit) card transactions, do not use merchant codes and, consequently, lack the capability to identify the business of the payee.  Even if codes were available, assigning industry codes would require intrusive identification processes to assign.

Problems For Financial Systems Without Codes  Cost of compliance  Efficiency  Intrusive identification procedures  Risk of blocking lawful transactions

Independent Community Bankers (12/29/2006)  “While tracking credit card payments may be feasible, it's not feasible to track check and ACH payments because they don't have a merchant coding system. ICBA was successful in improving the bill so that regulators may exempt payment systems where it's not reasonably practical to identify and block transactions.”  “Regulations implementing the new law are required by July ICBA is working closely with the Federal Reserve and the Treasury to find a workable solution that adheres to the intent of the law to eradicate illegal Internet gambling, while preserving the efficient operation of the payments system. Congress may revisit this issue as the World Trade Organization has ruled that the prohibition on Internet gaming violates international trade law.”

US Congress

The Change Congress Democrat Republican Independent 109th House th House Change th Senate th Senate 50* 49 1 Change *Connecticut Senator Joseph Lieberman is designated “Independent Democrat”

WHO IN CONGRESS CARES? While there was yearly activity in the form of proposed bills and attempts to amend other bills by opponents to Internet Gambling – Senator Kyl, Rep. Leach and Rep. Goodlatte being prominent – no member of Congress stands out as taking a position that Internet gambling should be legalized and regulated. There appears to be no champion. The new Ds were not elected for their stance on Internet gambling. The old Rs did not lose because of their stance on Internet gambling.

From Whence Might Cometh Pressure On Congress?

Potential Triggers  Release of the UIGEA regulations for notice and comment  A European Country filing a complaint with the WTO  The DOJ taking action against a state-licensed off- track betting system or that accepts wagers from other states  The DOJ targets a website that only offers poker