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Friday, September 17, 2010

Unlawful Internet Gambling Enforcement Act (UIGEA) and Its Implementing Regulations

Brian T. Yeh
Legislative Attorney

Charles Doyle
Senior Specialist in American Public Law

The Unlawful Internet Gambling Enforcement Act (UIGEA) seeks to cut off the flow of revenue to unlawful Internet gambling businesses. It outlaws receipt of checks, credit card charges, electronic funds transfers, and the like by such businesses. It also enlists the assistance of banks, credit card issuers and other payment system participants to help stem the flow of funds to unlawful Internet gambling businesses. To that end, it authorizes the Treasury Department and the Federal Reserve System (the Agencies), in consultation with the Justice Department, to promulgate implementing regulations. The Agencies adopted a final rule implementing the provisions of the UIGEA, 73 Fed. Reg. 69382 (November 18, 2008); the rule was effective January 19, 2009, with a compliance date of June 1, 2010.

The final rule addresses the feasibility of identifying and interdicting the flow of illicit Internet gambling proceeds in five payment systems: card systems, money transmission systems, wire transfer systems, check collection systems, and the Automated Clearing House (ACH) system. It suggests that, except for financial institutions that deal directly with illegal Internet gambling operators, tracking the flow of revenue within the wire transfer, check collection, and ACH systems is not feasible at this point. It therefore exempts them from the regulations’ requirements. It charges those with whom illegal Internet gambling operators may deal directly within those three systems, and participants in the card and money transmission systems, to adopt policies and procedures to enable them to identify the nature of their customers’ business, to employ customer agreements barring tainted transactions, and to establish and maintain remedial steps to deal with tainted transactions when they are identified. The final rule provides non-exclusive examples of reasonably designed policies and procedures to prevent restricted transactions. The rule also explains why the Agencies rejected a check-list-of-unlawful-Internet-gambling-operators approach, asserting that such a list of businesses would not be practical, efficient, or effective in preventing unlawful Internet gambling. Rather, the Agencies argued that flexible, risk-based due diligence procedures conducted by participants in the payment systems, in establishing and maintaining commercial customer relationships, is the most effective method to prevent or prohibit the restricted transactions.

Some Members of Congress have criticized the current Internet gambling restrictions for being, in their view, ineffective at stopping Internet gambling, an infringement on individual liberty, and a lost opportunity to collect tax revenue, among other things. The 111
th Congress has held several hearings concerning legislative proposals to loosen the current restrictions on Internet gambling activities. The bill with the most action to date has been H.R. 2267 (Internet Gambling Regulation, Consumer Protection, and Enforcement Act), which would establish a licensing program under which Internet gambling companies may lawfully operate and accept bets or wagers from individuals located in the United States. The House Financial Services Committee marked up and approved H.R. 2267 on July 29, 2010. A companion bill to H.R. 2267 is H.R. 4976 (Internet Gambling Regulation and Tax Enforcement Act of 2010), which would establish a licensing fee regime within the Internal Revenue Code for Internet gambling operators. S. 1597 (Internet Poker and Game of Skill Regulation, Consumer Protection, and Enforcement Act of 2009) would create a federal licensing program somewhat similar to that of H.R. 2267, except that the permitted Internet gambling operations would be limited to those that offer online games “in which success is predominantly determined by the skill of the players, including poker, chess, bridge, mah-jong, and backgammon.”

Date of Report: August 27, 2010
Number of Pages: 15
Order Number: RS22749
Price: $29.95

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