U.S. Policymakers Push To Enforce Gambling Ban

  Proposed rules introduced recently by the United States government to enforce the 2-year-old Unlawful Internet Gambling Enforcement Act of 2006 would place responsibility on banks, card issuers, processors and card networks to block U.S. participation in the estimated $13 billion worldwide online gambling industry.
  Some experts, however, say the law may do little to eradicate Internet gambling in the U.S. And the international gaming community has questioned whether the ban is legal.
  The World Trade Organization ordered the U.S. to pay Antigua and Barbuda $21 million in trade compensation annually because of the effects the ban has had on the Caribbean country’s economy. Moreover, the London-based Remote Gambling Association contends the United States is practicing discriminatory trade practices because the U.S. Interstate Horse Racing Act allows some forms of Internet gambling.
  The U.S. has made some concessions. The European Union, Japan, Canada and Australia, for example, agreed in December to accept compensation from the U.S. for the withdrawal of access to the U.S. online gambling market, the most lucrative in the world before the ban.
  The U.S. Department of the Treasury and the Federal Reserve Board in October jointly proposed rules to implement the gambling act. The rules state that payment companies and financial institutions must create “reasonably designed” systems to block all credit card transactions, electronic funds transfers and other payments associated with Internet gambling.
  Many financial institutions responded to the agencies’ call for public comment with complaints about the rules, which many consider to be vague. The agencies expect to publish final rules by July, but they more likely will do so in 2009, say lawyers familiar with the process.
  The agencies say the final rules would go into effect six months after they are published in the Federal Register, the official record of federal agency rules.
  Payment-system participants should monitor the rules process closely because how the rules are implemented and enforced could have big implications on their operations, says Oliver I. Ireland, a partner in the financial-services practice of Washington, D.C.-based Morrison & Foerster LLP. Ireland served as associate general counsel of the Board of Governors of the Federal Reserve System for more than a decade.
  â€œI view this as an experiment by the government to see if these illegal transactions can be policed through payment systems,” Ireland says. “But my guess is this will not turn out to be a panacea to prevent Internet gambling.”
  Despite the worldwide popularity of online gambling, many U.S. lawmakers consider the industry to be a magnet for crime, fraud, money laundering and unhealthy gambling addictions.
  Online gambling technically has been illegal in the U.S. for decades, thanks to the Federal Wire Act of 1961, which forbids betting “over the wires.” Congress moved to modernize that law to specifically encompass the Internet in 2005, and the following year it approved the Unlawful Internet Gambling Enforcement Act with an overwhelming majority of votes.
  â€œThe negative consequences of online gambling can be more detrimental to the families and communities of addictive gamblers than if a bricks-and-mortar casino was built right next door,” Rep. James Goodlatte (R-Va.), who supported the gambling act, said in November during congressional testimony about enforcing the act.
  More than 2,000 Internet-gambling sites operate worldwide, according to the Washington, D.C.-based American Gaming Association, which says that when lawmakers began to crack down on Internet gambling in 2005 there was an immediate chilling effect on Internet gambling in the U.S. The association says 8 million U.S. Internet gamblers bet about $6 billion in 2005, but the current volume of U.S. online-gambling activity is unknown.
  The proposed gambling-act rules require payment-system operators, including banks and card issuers, to establish policies and procedures to identify and block transactions connected with Internet-gambling businesses. Such transactions may be sent through card systems (including credit, debit and prepaid cards), automated clearing-house systems, check-collection systems, funds-transfer businesses and wire-transfer systems.
  The primary means of blocking these transactions, the proposed rules suggest, is to flag them through merchant category and transaction codes.
  Because ACH, wire-transfer and check transactions typically have no merchant or transaction codes, the agencies exempted these payment methods from the proposed rules, except where the payment participant originates or receives a payment from a customer previously identified to be involved in illegal Internet gambling. The rules allow no exemptions for credit card trans-actions or funds transfers.
  The Fed and Treasury Department say they will continue to monitor technological developments in ACH, wire-transfer and check-collection methods. They intend to amend the gambling-act rules if systems are developed to identify and block Internet-gambling transactions made using such payment mechanisms.
  Most payment networks, including Visa Inc., MasterCard Worldwide, American Express Co. and Discover Financial Systems LLC, already have established codes to identify gambling transactions and block them in jurisdictions where they are prohibited.
  LEGAL LOOPHOLES
  But gambling-industry experts say there are many ways to circumvent the rules.
  â€œIt’s not legal, but people in the U.S. often gamble online by opening bank accounts and credit card accounts in foreign countries,” says John Pappas, executive director of the 850,000-member, Washington, D.C.-based Poker Players Alliance, which is pushing to legalize Internet poker and other games of skill in the U.S. (see story page 38).
  Although the rules do not identify specific fines for violating the gambling act, regulatory enforcement would come through the Federal Reserve and the Federal Trade Commission, according to the proposed rules.
  â€œThe bank regulators have broad enforcement powers, and sooner or later they could impose astronomical fees on violators of [the Unlawful Internet Gambling Enforcement Act],” says Ireland.
  Dozens of financial institutions and payment-industry companies contend the proposed rules are vague and lack sufficient definitions of what exactly is considered an unlawful gambling transaction and which types of payments are exempt. U.S. racing organizations argue that, although online gambling on horse and dog racing is allowed in most states, the proposed gambling act rules would cause “overblocking” of these and other types of online-gambling transactions.
  The proposed gambling act rules are a “compliance nightmare in the making,” says Linda Eagle, president of New York-based Edcomm Group and Banker’s Academy, which provides staff training for more than 1,000 banks in the U.S. and several dozen international bank clients.
  There are numerous ways for individuals around the world to circumvent the rules by using third-party banks or other intermediaries, Eagle says. “It will be very difficult to track illegal gambling payments sent through intermediaries,” she says. “Where does a payment company’s responsibility end?”
  The proposed rules present an especially steep challenge for small and mid-size companies, says Sharie Brown, chair of the corporate compliance committee at the Washington, D.C.-based law firm of Foley & Lardner. “Smaller institutions and payment companies don’t have big compliance departments, and this law could be a financial hardship for them,” she says.
  First Data Corp.’s comments on proposed enforcement of the law suggest allowing 12 to 18 months for compliance after the law is published because it would take a year to upgrade payment-processing systems to comply. The Greenwood Village, Colo.-based card processor also asked for clearer definitions of what constitutes illegal gambling on the Internet.
  The American Bankers Association noted in its comments: “We believe [the proposed rules] will in the end catch more banks in a compliance trap and do greater damage to the competitiveness of the American payments system than it will stop gambling enterprises from profiting on illegal wagering.”
  While the government digests comments on the proposed rules in upcoming months, American payment companies and financial institutions have little choice but to plan their responses to what promises to be a challenging issue.
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