Govt. issues final rule on UIGEA

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The Department of the Treasury and the Board of Governors of the Federal Reserve System have now released to the public their "final rule" for implementation of the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA).

Entitled "Prohibition on Funding of Unlawful Internet Gambling," the final rule is the result of consultations with the Department of Justice as well as of consideration of all comments received by interested parties following release of the proposed rule in October 2007.

The actual regulations set forth in the final rule take up fewer than 16 of the 66 pages comprising the final rule, with the bulk of the document addressing the various issues and concerns that have been raised about the UIGEA and its implementation. The regulations become effective on Jan. 19, 2009, the last day of the Bush Administration.

The UIGEA - which targets financial institutions and transactions - did not itself make Internet gambling illegal, but it has had a profound effect on Internet gambling since it was enacted in 2006. The Act prohibits the transfer of funds from financial institutions to companies engaged in "unlawful Internet gambling," but failed to clarify what was meant by most of the key words in the Act.

It was left to the Treasury Department and other agencies to issue rules clarifying the UIGEA and providing for its enforcement.

The final rule requires financial institutions to establish written procedures to identify and block "restricted transactions," that is, the transfer of money to an "unlawful Internet gambling" site. The responsibility lies with the banks and other payment services to prevent money from going to these sites.

Significantly, the regulations do not prohibit money flowing in the other direction; that is, there is no requirement to block payments from the sites to users. And not all payment services are covered under the UIGEA - check-cashing and money order services conducted from a physical location are exempt.

Definition of "unlawful Internet gambling"

The final rule does not define "unlawful Internet gambling," nor does it provide any guidance as to which gambling activities are legal and which are illegal under the UIGEA. Rather, it relies on underlying federal, state and tribal gambling laws, claiming that "a single, regulatory definition of 'unlawful Internet gambling' would not be practical."

The government did, however, address the issue of whether the UIGEA prohibitions extend to businesses offering games of skill or are only applicable to games of chance.

The UIGEA defined prohibited betting or wagering as the risking of something of value upon the outcome of a "game subject to chance." The government received approximately 50 comments that poker should be excluded from the UIGEA as it was a game of skill, not of chance.

This argument was not successful. First, the government reiterated its general position that the issue of what forms of "gambling" are covered under the act is determined by existing federal and state laws.

Second, the rule provides that even if chance is not the predominant factor in the outcome of a game (as it is with roulette or slot machines), if it is a significant factor, it is still a "game subject to chance" and is covered by the UIGEA. It is, therefore, up to each jurisdiction to determine if the gambling activity is legal or not, and no exemption for poker was made.

The government acknowledged that gambling laws vary widely from state to state and that an activity prohibited in one state may be permitted in another. It is this very lack of uniformity, it stated, that would make it impossible to issue a single regulatory definition of "unlawful Internet gambling." The final rule does nothing to clarify the UIGEA's vague language.

Financial institutions, therefore, may continue to have a difficult job determining whether a commercial customer engages in unlawful Internet gambling. The final rule purportedly minimizes the burden to them by setting out "due diligence" guidelines which shift the responsibility to the Internet business to prove it is not engaged in unlawful behavior, rather than putting that onus on the financial institutions themselves.

Obligations of financial institutions

Under the final rule, those engaged in "designated payment systems" (e.g., banks, credit card companies) are required to establish policies and procedures to determine whether a commercial customer is engaged in unlawful Internet gambling.

The financial institutions can ask to see licenses issued by the appropriate gambling authorities, and and can rely on them as evidence that a commercial customer's Internet gambling activities are lawful. Alternatively, if a commercial customer does not have such a license, the payment company may request that the business provide a legal opinion that it does not engage in unlawful gambling.

In practice, a designated payment system such as a credit card company must use "due diligence" to determine what type of business its customers are engaged in. If it learns that there is little to no risk of the customer engaging in an Internet gambling business, it can open the account.

If a financial institution determines the customer is engaged in an Internet gambling business, it would then ask for either proof of a license from a governmental entity or for a "reasoned legal opinion" that its business does not involve restricted transactions.

This way, the onus shifts to the consumer to obtain proof that their business is not unlawful, instead of placing it on the financial institutions.

What financial transmission systems are covered by the UIGEA? Those money-transmitting businesses that permit their customers to initiate fund transfers remotely from a location other than a physical office are covered. Therefore, money orders and cashier's checks and types of funds obtained at a physical office would be exempt, and could be deposited into an Internet gambling site.

The final rule also clarifies the definition of "restricted transaction," the final rule provides that the term does not include funds going to a gambler, and would only include funds going to an Internet gambling business. This provides some protection to consumers that money that is due them will not be blocked.

Future of the UIGEA regulations

As of now, this final rule is to take effect the day before the new administration takes over in Washington. However, in order to give the financial institutions time to implement the new due diligence requirements, compliance with the final rule is not required until Dec. 1, 2009.

Upon learning of the finalization of the UIGEA regulations, the Poker Players Alliance (PPA) issued the following statement from its chairman, Alfonse D'Amato: "Today's action finalizes a truly bad public policy - one that even the banks and Federal regulators called unworkable in Congressional testimony."

While the PPA was unable to stop the final rule from being issued, it is not giving up the fight against the UIGEA. "The PPA remains optimistic that the new Administration and the new Congress will recognize the failures of UIGEA and will act swiftly in the New Year to overturn this flawed policy."

The Interactive Media Entertainment and Gaming Association (iMEGA) is currently challenging the UIGEA in the United States Third Circuit Court of Appeals (iMEGA v. Keisler, et al), contending that the Act should be declared "void for vagueness" by the court and overturned. After reading the final rule, iMEGA Chairman Joe Brennan said, "The Treasury and Federal Reserve have essentially made our 'vagueness' argument [to the Third Circuit] for us with these regulations."

The focus now shifts back to the next Congress to pass legislation to set aside these regulations. According to an article on, the incoming Congress will have an opportunity to overturn the regulations under a clause in the Congressional Review Act of 1996, which would give Congress 60 days from the date they convene to review it and reverse it with a joint resolution that cannot be filibustered in the Senate.

In addition, Congressman Barney Frank and others supporting changes to the UIGEA will have the opportunity to reintroduce legislation after the new administration takes over next year, in what Internet poker enthusiasts hope will be a more welcoming political climate.

Those in the online poker playing community are counting on the promise of "change" to extend to the UIGEA.

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