Unlawful Internet Gambling Enforcement Act Final Rule Joseph Baressi June 3, 2009

2 UIGEA – The Act UIGEA does not change existing law regarding which forms of gambling are legal or illegal The Act prohibits persons engaged in the business of gambling from accepting payments for unlawful Internet gambling. The Act terms such payments “restricted transactions.”

3 UIGEA – The Act The Act instructs the Board and Treasury, in consultation with the Department of Justice, to jointly prescribe regulations that – –designate payment systems that could be used in connection with restricted transactions –require participants in designated payment systems to establish policies and procedures reasonably designed to identify and block, or otherwise prevent or prohibit, restricted transactions –provide nonexclusive examples of the policies and procedures that participants in designated payment systems should adopt –exempt restricted transactions or payment systems from the regulations if the Agencies determine it is not reasonably practical to comply

4 UIGEA – Final Rule Mandatory compliance date is December 1, 2009 The rule’s core requirement is section 5(a) – –“All non-exempt participants in designated payment systems shall establish and implement written policies and procedures reasonably designed to identify and block or otherwise prevent or prohibit restricted transactions.” Section 3 of the rule lists the designated payment systems – –ACH, card, check, and wire-transfer systems –Money transmitting businesses, solely to the extent they engage in the transmission of funds and permit customers to initiate transactions remotely

5 UIGEA – Final Rule Section 4 sets forth the exemptions from the rule – –In the ACH, check, and wire-transfer systems, non-exempt participants are those that may have a commercial customer relationship with the receiver of the funds For example, in the check system, all participants are exempt except for the depositary bank But, see cross-border discussion below –All money transmitting business participants are exempt, except the operator Section 5(b) – a participant shall be considered in compliance if it complies with policies and procedures of the system in which it participates and the system’s policies comply with the rule Section 5(c) – for purposes of 5(b), the participant may rely on a written statement by the system’s operator that its policies comply, unless it is notified otherwise by its Federal functional regulator

6 UIGEA – Final Rule Section 6 provides examples of policies and procedures reasonably designed to identify and block or otherwise prevent or prohibit restricted transactions –The focus of the examples is due diligence of commercial customers – A bank should conduct due diligence at the time a commercial account is established to determine that a prospective commercial customer presents a minimal risk of engaging in an Internet gambling business. If the bank cannot so determine, the commercial customer should either (1) certify that it does not engage in an Internet gambling business, or (2) provide (i) evidence of its legal authority to engage in an Internet gambling business, such as a state-issued license or a reasoned legal opinion and (ii) third-party certification of its age and location verification procedures. The due diligence provisions are also triggered in the event the bank has actual knowledge that an existing commercial customer engages in an Internet gambling business.

7 UIGEA – Final Rule Section 6 examples of policies and procedures, continued – –A participant should also notify its commercial customers, through provisions in the account agreement or otherwise, that restricted transactions are prohibited from being processed through the account –The participant should have in place procedures to be followed if it has actual knowledge that a commercial customer has conducted restricted transactions, such as the circumstances under which – Payment services for the customer should be denied The account should be closed –The examples do not include a provision by which card companies would create a particular merchant category code for those types of gambling that may be legal The Agencies continue to believe that the Act does not provide them with the authority to require payment system participants to process any particular type of transaction The Agencies believe that the establishment of codes for particular merchant transactions is a business decision for the card system operators and their participants

8 UIGEA – Final Rule The rule does not incorporate a list of unlawful Internet gambling businesses –The Agencies concluded such a list would not be effective or efficient –The Act provides a procedure pursuant to which officials may institute proceedings to have an unlawful Internet gambling website removed by the interactive computer service that provides access to the website Cross-border provisions –The proposed rule provided that first-in and last-out U.S. banks should modify their agreements with foreign banks to prohibit restricted transactions Commenters stated that modifying cross-border agreements would be costly and difficult because of the complexity of underlying law Commenters indicated that foreign banks may not agree to contract modification because Internet gambling is legal in their home countries –The final rule removes the cross-border agreement provision and replaces it with a notice provision if the first-in U.S. bank has actual knowledge that restricted transactions are being received from foreign senders