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UIGEA Update: Proposed Regulations Rile American Banking Association

UIGEA Update: Proposed Regulations Rile American Banking Association 0001

A couple of weeks ago, a letter by Republican Senators John E. Sununu (NH) and Pete Domenici (NM) to the heads of the Treasury and Federal Reserve brought attention to the serious implementation concerns America's banking industry has with the Unlawful Internet Gambling Enforcement Act (UIGEA). While the American Banking Association (ABA) had originally been reported as neutral on the legislation, the organization's stance regarding the measure has grown strongly more negative. The ABA explored several significant problems with the UIGEA, raising issues so serious that the UIGEA's "successful" implementation itself is a matter for debate.

PokerNews has obtained a copy of the ABA's official response to the government's call for comments once the proposed UIGEA regulations had been published. The 11-page document was submitted in December, 2007 but received scant media attention at that time. It was authored by Richard R. Riese, Director of the ABA's Center for Regulatory Compliance, and Nessa Feddis, Senior Federal Counsel for the same division. The ABA represents the lion's share of the banking market; its member banks employ over two million workers and manage over 95% of the $12.7 trillion in assets overseen by America's banking industry.

In its comments, the ABA raised nine crucial points and urged "several changes or clarifications to the proposal to enable banks to execute some form of feasible program." However a thorough reading shows that the ABA has little hope that the UIGEA is workable in its present form. "ABA believes that the proposal, in large part due to the nature of the statute itself, will fail to create a practical process for intercepting prohibited conduct that maintains an efficiently functioning payments system." The above was shortly followed by a statement more damning: "(W)e believe that UIGEA 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."

The ABA noted that the UIGEA correctly made an attempt to exempt the US banking industry from the penalties called for within the UIGEA. However, the ABA's earlier take on the situation differs from the simplified "blanket exemption" touted in stories this week regarding the dismissal of a lawsuit by the Interactive Media Entertainment and Gambling Association (iMEGA) against the US government. That lawsuit attenpted to block the implementation of the UIGEA altogether, and was dismissed, though with continuing appeals possible. The ABA saw three serious flaws with the UIGEA rules: "(1) the definition of unlawful Internet gambling in the Prohibition leaves the vague definition of the Act uncured and therefore renders compliance virtually impossible; (2) the intractable problem of identifying or intercepting cross-border gambling activities and tainted correspondent relationships has not been adequately solved by the proposal; and (3) the uncertain standard for knowledge that triggers blocking is too indefinite to be practically operative."

The holes in the UIGEA's approach and the vagueness of its language then led the ABA to comment as follows: "We maintain that the UIGEA is a fundamentally flawed response to those challenges." The ABA then took the authors of the UIGEA to task for transferring police powers to the private banking industry, requiring them to work as deputies of sorts on behalf of the government. This was without even a mention of the "unfunded mandate" nature of the UIGEA itself. One of the most damning passages in the ABA response then followed, with the ABA noting that it was "saddled with this exceptional burden" due to the federal government's own inadequacies. The harshest part of the passage reads thus:

"In other words, in the view of the drafters of the legislation, all the sophistication of the FBI, Secret Service, and other police computerized detection systems and investigative expertise devoted to fighting terrorism and financial crime are inadequate to the task of apprehending the unlawful gambling business or confiscating its revenues. ABA believes that punting this obligation to the participants in the U.S. payment system is an unprecedented delegation of governmental responsibility with no prospect of practical success in exchange for all the burden it imposes."

The ABA's response then went on to list nine specific points that need to be addressed. The first three points sought to strengthen beneficial aspects ("beneficial" from the viewpoint of the ABA) of the UIGEA, while the last six points highlighted "deficiencies that persist in the proposal that preclude effective implementation of the Act." The nine ABA action points:

1. The exemption language in the proposed rule should be reinforced to underscore that all participants in the specified payment systems except those with a customer relationship with the Internet gambling business are exempt.
2. ABA urges the Agencies to clarify the Prohibition to confirm that compliance by all non-exempt participants in any designated systems can always be satisfied through procedures limited to commercial customers or merchants acting in the capacity of Internet gambling businesses.
3. Preservation of the "over-blocking" provisions of the Prohibition is essential to workability for financial institutions.
4. The definition of what constitutes "unlawful Internet gambling" is inadequate. It must be rectified.
5. The Prohibition's handling of cross-border relationships presents substantial problems for financial institutions and should be revised.
6. The Prohibition should clarify what exactly the standard is for when a bank "becomes aware" that a commercial customer has received an unlawful Internet gambling-related transaction.
7. Establishment and maintenance of a list of unlawful Internet gambling businesses by the government may be an approach to pursue, but only if certain essential conditions are met.
8. The description of compliant reasonable policies and procedures can be improved.
9. Financial Institutions should have a longer period to phase-in the new policies and procedures prior to the effective date.

Point #1 explored the conflicting language of the UIGEA regarding exemption from liability for the US banking industry. The ABA duly noted that problems exist in the case of a relationship between an "Internet gambling business" and an offshore bank; in this instance, the US bank loses its exempt status when dealing with the other, offshore bank, even though the US bank might lack information on which to identify the transaction. As the ABA response noted, "For all the reasons this is not feasible in a domestic banking transaction, such an arrangement is not feasible cross-border. Only the bank with the customer relationship with the Internet gambling business can practically access sufficient information to identify the circumstances giving rise to a judgment about a restricted transaction."

It was when the ABA explained why the UIGEA won't work that the language again grew sharper, as in Point #4, which was stated bluntly: "The Agencies need to cure the impossibly vague scope of what is meant by 'unlawful Internet gambling.'" The ABA then noted the UIGEA's refusal to adequately define the problem for itself: "The Prohibition does not specify which transactions qualify as 'unlawful Internet gambling.' Instead, the Prohibition looks to 'underlying substantive State and Federal gambling laws and not . . . a general regulatory definition' to determine the scope of what unlawful Internet gambling comprises. ABA believes that requiring banks to be arbiters of gambling laws for all states, as well as federal gambling laws, is infeasible and would place a crippling processing burden and unbounded litigation risk on the nation's payments system participants.

The ABA also noted existing conflicts between the Department of Justice and other federal agencies regarding the correct interpretation of already existing laws, and essentially summed it up as bad law: "If the federal agencies themselves cannot agree on the law, what hope is there that banks can resolve these confounding legal issues?"

Of course, not only does the UIGEA not properly define the laws, it forces the banking industry to try base policy and judgment upon those inadequacies. As noted in the ABA response: "Given the different entities encompassed by the proposal as participants in the payments system who are deputized with this authority, the Prohibition seems effectively to require vigilante justice empowered by a vague and overbroad delegation of the government's police powers." In fact, the ABA found the UIGEA's standing definition of "unlawful Internet gambling" to be so lacking that it all but dismissed the law as unworkable in its present form: "A unified, practically workable definition of 'unlawful Internet gambling' must be included in the Prohibition. This is such a keystone element of the Prohibition and is currently so thoroughly flawed that a workable rule cannot possibly be issued in final form without re-proposal."

The ABA's comments then exposed why expecting US banks to know everything about a foreign bank's customers wouldn't work, and also derided the UIGEA for expecting that foreign banks, in addition to domestic ones, would somehow become expert in not only US federal gambling laws, but the related laws of all 50 US states as well. It also assailed the UIGEA for its presumption that its own language should usurp that of foreign banks operating legally in their home countries.

Said the ABA, on this point: "For instance, if a British bank has policies and procedures to identify and block transactions which qualify as 'unlawful Internet gambling' in the US, but these same transactions are legal in the UK, the bank could be subject to litigation or enforcement actions in their own country."

The ABA also noted that a list of unlawful Internet gambling businesses "might have some merit," but that it wanted no part of the list's creation. Said the ABA: "Of course, ownership and upkeep responsibilities for such a list cannot and must not fall on financial institutions. To place the onus for a list on financial institutions would only exacerbate the Act's void-for-vagueness delegation flaw, converting it from impossible individual determinations of legality to impossible joint determinations of blacklisting." The ABA also noted that a six-month period for implementation would be unworkable, in the event that some form of the rules were put into action; a 24-month period, at a minimum, would be more realistic.

In summary, the American Banking Association was not pleased with the requirements and mandates laid upon the banking industry with the passage of the UIGEA. Whether such strident opposition ultimately results in the abandonment or reworking of the UIGEA as a matter of practical law remains to be seen. In ending, the ABA noted this: "(G)iven that there are several points requiring change or clarification, including the essential component — a definition of what transactions "unlawful Internet gambling" encompasses — several revisions must be made and a new rule proposed for further comment. Even then, major, fundamental flaws must be cured before effective implementation of the UIGEA can even be contemplated."

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