The New Internet Gaming Regulations: Nothing Changes

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It took 66 pages of fine print. But in the end the federal regulators charged with making regulations to enforce the Unlawful Internet Gambling Enforcement Act (“UIGEA”) simply gave up. They were supposed to make rules forcing financial institutions to identify and block money transfers for unlawful Internet gambling transactions. But they were defeated by the difficulty of defining what was unlawful and the impossibility of tracking individual transactions. So they told credit card companies to come up with some additional code numbers for gambling transactions and everyone else can basically continue to do what they are now doing – oh, and financial institutions have to send a notice to all their clients telling them not to be involved in illegal gambling.

How it affects US players

Only a very few online poker players will be affected. Anyone who uses paper checks, wire transfers, foreign bank credit cards, or overseas payment processors to load, reload or cash out can continue to do so. The only players who might face some difficulties are those using U.S. bank debit cards or U.S. money transfer firms like Western Union.

Brief review of the UIGEA

As is well-known by now, the new regulations are the result of a bill rammed through Congress in 2006 by then Senate Majority Leader Bill Frist (R.-TN), without being read. It called for the impossible: The United States Treasury and Federal Reserve Board, in consultation with the Department of Justice, were told to make regulations requiring payment processors to identify and block restricted unlawful Internet gambling transactions.

Unfortunately for these federal agencies, the UIGEA does not defines what is unlawful. Whether a particular transaction is illegal depends upon the particular facts and whether it violates some other federal, state and possibly even tribal law. As the agencies themselves admit, they do not have the resources or ability to make that determination. So, in their proposed regulations, the agencies put the burden on the banks.

The proposal was met with ridicule. If the federal government could not determine whether a particular transaction involved illegal gambling, how was a bank employee supposed to make that determination? This was particularly ridiculous since banks do not know what is being bought with a credit card or money wire transfer.

Agencies give in, not much changes

The agencies, in their final rule, gave in. Except for calling for additional code numbers for credit card transactions, the regulations expressly tell financial institutions to not spend any time looking at individual transactions. And they make it clear that any money sent to an individual, even by a gambling site, is not a “restricted transaction” under the statute or regulations.

It’s not a crime to gamble online

I have received emails from online poker players worried that they might be violating the UIGEA. The statute does create a new crime, being a gambling business that accepts money for an illegal transaction. But by its own terms it does not apply to individual bettors. And the regulations, which only apply to financial institutions, now make it clear that payment processors should not waste their time checking on where money is sent by individuals, and money received by individuals is not even covered by the UIGEA.

Federal Reserve smartens up

Why not require banks to see if their patrons are wiring money to illegal overseas gaming operators? The agencies admitted “there are no reasonably practical steps that a U.S. participant [financial institution] could take to prevent their consumer customers from sending restricted transactions cross-border.” They thought about requiring banks to ask their customers, “Are you sending money for illegal Internet gambling?” But someone at Treasury or the Federal Reserve had the brains to realize that the answer the banks were going to get would always be “No.”

The final rule becomes effective January 19, 2009. If there is any doubt that this is one of those last minute regulations being pushed through by the Bush White House, look at the date. When Barack Obama is sworn in as president the next day he may or may not be able to undo these regs.

Banks and credit card companies are required to put some new procedures into place. They have until December 1, 2009. The original proposed regs would have impacted 253,368 small businesses and an unknown number of large companies. The final rule has been so cut back that only 12,267 small businesses, or less than five percent of the original estimated number, are subject to the regulations. Although very few companies will spend much time with these new regulations, it’s still an enormous waste of time. The agencies estimated that the recordkeeping burden on financial institutions “to develop and establish the policies and procedures required by the Act and this final rule” will add up to “approximately one million hours.”

The federal agencies still put the burden on the financial institutions to do “due diligence.” But what this means is banks have to do the same amount of “know your client” work with new commercial customers that they now do to prevent money laundering: basically ask the company owners what their business is and do a little checking to confirm they are telling the truth. If the new commercial customer proves it is not in the gambling business, there’s nothing more to do. If it is in the gambling business, the bank then has to ask it for its state license. The new rule says that getting a license is enough, because it is up to the states to regulate the Internet gambling operation of their licensees.

Of course, the only operators there are in the U.S. at present who have licenses are parimutuel betting outlets. Some state lotteries also use the Internet, but they are deemed to be automatically O.K. because they are a part of state government. If California or any other state authorizes Internet poker, financial institutions will be able to do business with those online poker rooms, because they will have state licenses.

There aren’t a whole lot of illegal gambling websites operating out of the U.S., so the new rule will have almost no impact.

What about licensed and unlicensed poker rooms and others overseas? If there are any left with direct business relationships with U.S. banks – and I doubt that there are – they will have to start using foreign banks, like every other foreign operator. American banks are not expected to ask their foreign respondent banks about their commercial customers.

What’s really interesting

The most interesting part of the new rule, for me, is that unlicensed Internet gaming operators can set up business relations with U.S. financial institutions, if the operators “provide a reasoned legal opinion that it does not engage in restricted transactions.” That means if I, as a licensed attorney and an expert on gaming law, give a legal opinion that a gambling operator is not violating federal or state laws, that should be good enough.

This is important for games, including poker, that have free alternative means of entry or are otherwise lacking in consideration. It would also cover contests that are primarily skill – including poker tournaments.

The federal agencies went out of their way to say that they don’t believe that poker involves enough skill to take it out of the definition of gambling under the UIGEA. They declared that there are two separate standards. A lottery or other drawing involves a “bet or wager” only if winning is predominantly subject to chance. But, a “game subject to chance” can still be gambling “even if chance is not the predominant factor in the outcome of a game, but was still a significant factor.”

Of course even if a poker tournament or other game involves some element of chance, it would only fall under the UIGEA if it violated some other federal or state laws. I have given legal opinions, and will undoubtedly now give more, that games that are predominantly skill are legal under federal law and the laws of most of the states.

Credit Card deposit changes for US players

The one change that will affect online operators, and therefore players, is the addition of new transaction codes for credit card companies. For illegal and gray market operators, including overseas Internet poker sites, there is probably going to be little change. Credit card companies already have a merchant code for gambling, 7995, and American banks already refuse to let their credit cards be used for 7995 purchases.

Overseas banks are not subject to the UIGEA. The agencies admit companies issuing cards in other countries are not about to ask their merchants if they are illegally taking bets from Americans.

Conclusion and “Legal Gambling”

But the bright spot for this new rule is that it calls for new credit card codes for legal online gaming. U.S. licensed parimutuel outlets that do Advanced Deposit Wagering should lobby for their own special code with Visa, MasterCard, American Express, etc., so that banks will know that this is a legal form of online gaming. Gambling that is conducted on Indian land pursuant to federal and tribal laws is also legal and should get a code number. There should be additional codes created for other forms of gambling, including games of skill and games with free alternative means of entry. These all would be limited to operators who are licensed or have obtained “a reasoned legal opinion” that they are not involved in unlawful Internet gambling transactions. American banks should then feel free to allow their credit cards to be used for these legal Internet gaming.

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© Copyright 2008. Professor I Nelson Rose is recognized as one of the world’s leading experts on gambling law. His latest books, Internet Gaming Law and Gaming Law: Cases and Materials, are available through his website, www.GamblingAndTheLaw.com