This fall the House Financial Services Committee is finally expected to release its regulations for the Unlawful Internet Gambling Enforcement Act, which was signed into law in 2006; banks are anxiously awaiting clarity on a number of fronts, particularly what will entail illegal gambling and what happens if they mistakenly block legal transactions.

The issues are so thorny that House Financial Services panel Chairman Barney Frank (D-MA) and Rep. Ron Paul (R-TX) introduced legislation designed to delay the implementation of said regulations, but the committee rejected the bill during the summer.

This leaves U.S. banks in a quandary. As it stands, Internet gambling is defined as gambling done through the Internet. The problem with that broad definition is there are legal gambling venues on the Internet such as fantasy sports' sites, Off-Track Betting for thoroughbred and harness racing, and online lotteries.

But worse than the broad definition of what's illegal, is that the law deputizes the banks to police the activity. "The biggest problem with the law is that it converts banks from being providers of services into becoming law enforcement entities," says Wayne Abernathy, evp for financial institutions policy for the American Bankers Association. "Banks just aren't equipped to do that and-in particular with this law-we not only become the police force, we also become judge and jury."

This legislation is easier for credit card companies to enforce because, historically, to manage credit risk they identify the type of company involved in a transaction. That mechanism was built into their systems, says Steve Verdier, svp and director of congressional affairs for the Independent Community Bankers of America. Check and ACH systems do not have that type of capability.

"We didn't have any view on whether Internet gambling was a bad thing or not, we were just explaining to Congress that the banking system, and the payment system, is not set up to track and block individual gambling transactions," Verdier says. "The system is not set up to monitor day-to-day, hour-by-hour, how a customer is using their account."

Another issue to iron out is how banks will deal with payments to international parties; often in such cases the U.S. bank is reliant on a foreign bank for information. But U.S. banks can't count on foreign parties because "not too many folks outside of the U.S. are sympathetic to the regulation," Abernathy says.

It's also hoped the final rules will allow enough implementation time for banks to develop the services and technical systems necessary to comply.

Finally, banks are hoping for protection from possible lawsuits stemming from blocked payments. For example, if the bank cuts off a payment for what the institution thinks is Internet gambling and it's wrong, then the bank risks being sued.

"We're assuming that probably sometime in the fall there will be regulations forthcoming and hopefully they will provide that kind of safe-harbor protection that we need to at least give us the benefit of the doubt of the judgments that we make," Abernathy says. "If we're being called upon to make the judgments then give us deference in making them." (c) 2008 U.S. Banker and SourceMedia, Inc. All Rights Reserved.

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