Hearing discusses UIGEA problems

American justice

The House Subcommittee on Domestic and International Monetary Policy, Trade, and Technology held a hearing today to discuss the Unlawful Internet Gambling Enforcement Act.

Representatives from the Treasury Department and the Federal Reserve, which have been tasked to find a way to implement the UIGEA, were on hand to discuss where they were at in the process of formulating regulations and implementing the law.

There were also witnesses from a few major banking organizations there to testify on behalf of the financial institutions, which will be responsible for preventing illegal online gambling transactions and enforcing the new law when it is implemented.

Today's testimony indicates that the UIGEA has a few challenges that will have to be overcome before it can be implemented. Both the agencies having to put the law in place and the financial institutions' representatives acknowledged problems with the law that was handed down from Congress.

Defining 'unlawful Internet gambling'

One of the first major issues discussed during the hearing was the fact that unlawful Internet gambling isn't clearly defined in U.S. law, which makes it difficult to create a set of rules restricting money transfers from banks to illegal online gambling businesses.

Louise Roseman, Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors of the Federal Reserve System, was the first to bring up the issue in her prepared testimony for the subcommittee.

"The Act does not spell out which gambling activities are lawful and which are unlawful, but rather relies on the underlying substantive Federal and State laws," Roseman said.

"The Act does, however, exclude certain intrastate and intratribal wagers from the definition of 'unlawful Internet gambling,' and also excludes any activity that is allowed under the Interstate Horseracing Act of 1978."

She points out that the activities that are permissible under the various federal and state gambling laws aren't well defined and can be subject to varying interpretations.

"Congress recognized this fact when it included in the Act a 'sense of Congress' provision that states that the Interstate Horseracing Act exclusion is not intended to resolve any existing disagreements over how to interpret the relationship between the Interstate Horseracing Act and other Federal statutes," Roseman said.

Rep. Kenny Marchant (R-Texas) asked Roseman and Valerie Abend, Deputy Assistant Secretary for Critical Infrastructure Protection and Compliance Policy in the U.S. Department of the Treasury, how the financial institutions were supposed to be able to determine what was unlawful Internet gambling if the regulators are unable to do so.

"I expect they would take a conservative approach and assume that all Internet gambling is illegal," Roseman responded.

One possible solution, put forth by people who sent in comments on the proposed UIGEA regulations and brought up at the hearing by Rep. Spencer Bachus (R-Ala.), is to set up a list of companies providing illegal online gambling services.

Roseman and Abend said the two agencies have had discussions about the pros and cons of setting up such a list, and the idea hasn't been completely ruled out yet.

In this case, a list may not even be effective because only certain transactions with these companies would be considered to contravene the law. Roseman pointed out that these companies may also conduct legitimate non-gambling-related business and that there's no way to determine which transactions going to and from the companies are legitimate business and which are online gambling transactions.

Bachus, who was a co-sponsor of the UIGEA, then asked if perhaps those companies who are doing illegal business in the United States shouldn't have all their transactions banned.

Skill games

Poker Table
Games of skill should be exempt according to Rep. Wexler.

Further muddying the definition of illegal online gambling is the issue of how skill games that can be played for money online, such as poker, backgammon, mahjong and more, fall into the mix.

Rep. Robert Wexler (D-Fla.) specifically asked if poker would be exempt from the new regulations because of the skill involved in the game.

Roseman said that under their current understanding of the law, games that have an element of chance are considered illegal. Poker may be predominantly a game of skill, but because there is an element of chance, and the law doesn't say how much a game has to hinge on chance to fall under its rubric, it is illegal.

Wexler then pointed out that in some states, poker may be legal to play. For example, New Hampshire law does make poker legal, so it should therefore be legal to play online there as well.

Frank had also brought up the point that horse racing is exempt in the law, and wondered if that meant that even in states where horse racing is illegal, banks will be able to process those transactions.

Their examples highlight the difficulty that banks will have determining what is or isn't an illegal online gambling transaction: they'll have determine not only whether the activity is legal where the person placing the bet lives, but also whether it's permitted where the company providing the gaming venue is located.

Deputizing the banks

The burden of determining an illegal online gambling transaction was a concern brought up by all four panel members in attendance representing financial institutions.

Because there is no set definition of what an illegal online gambling transaction would be, the current proposed regulation would leave it up to the discretion of the bank processing the transaction to determine whether it is legal or not.

Wayne Abernathy, executive vice president, Financial Institutions Policy and Regulatory Affairs, American Bankers Association, said in his testimony that the UIGEA regulations point those affected by the law to underlying substantive state and federal gambling laws rather than to a general regulatory definition of unlawful Internet gambling.

"This is a judicial function that banks are not qualified to fill. Requiring banks to be arbiters of the actions of individuals and businesses with regard to the interaction 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," Abernathy said.

"The vagaries of what constitutes 'unlawful Internet gambling' cannot be resolved by passing the burden on to the banking industry."

The law also takes the financial institutions' role in the laws one step further. Banks have many rules and regulations they must follow and they do have experience with examining transactions for other regulations, but in those cases they just report what they find.

Abernathy said that under the UIGEA financial institutions will not only be asked to identify the illegal transactions, but they are also directed to take things a step further and impose a sentence as well by banning the transaction.

"We think that goes too far," he said.

He also pointed out that banks may take their enforcement role too far at times if they're asked to determine illegal online gambling transactions without a more clear idea of what that is.

"We would block a lot more legal transactions in the effort to not be tagged for not blocking the illegal ones," Abernathy said.

Cost for the banks

As would any business, the financial institutions will have to take into consideration what it will cost them to take on this new responsibility. It will take time, money and manpower to implement the new regulations and set up a system to monitor transactions.

Money Money Money Monaay (*Monay!*)
How much will banks have to shell out for this?

Rep. Ron Paul (R-Texas) asked what those cost estimates might be. Leigh Williams, BITS president of the Financial Services Roundtable, said that it is hard to estimate the costs involved at this time because there is so much uncertainty about what the final regulations will entail.

Abernathy was able to provide an example of what it takes for a typical bank in the American Bank Association to implement regulations the bank must follow under the Bank Secrecy Act.

The typical $100 million bank has two to three full-time employees on staff who do nothing but deal with Bank Secrecy Act issues.

He didn't mention the time and money it took to figure out what the banks had to do and get it all set up before those employees were even hired for those jobs.

There is also the issue of how the regulations will affect the banks in general. Having to examine every check that comes through the system to determine whether it is being used for illegal online gambling could bring the check-processing system to a near halt, according to Harriet May's testimony on behalf of the Credit Union National Association.

Other areas of banking may also be affected as the financial institutions work to comply with the UIGEA, and ultimately the services they need to provide to the public could be affected.


Probably the biggest question is whether or not all these efforts would even be worthwhile if the bugs can be worked out to get the UIGEA implemented.

Both Rep. Lacy Clay (D-Mo.) and Rep. Patrick McHenry (R-N.C.) questioned the Treasury and Federal Reserve representatives as to whether the law would even be effective.

Abend said that so far they've tried to adhere to Congress' intent with the UIGEA, and it is their hope that the final rule will be a strong deterrent.

Roseman was a little more forthcoming with her answer. She said she thinks it's going to be very difficult to completely shut off the payment systems to unlawful Internet gambling.

"There will be transactions that go through despite our efforts," Roseman said. "The question is what proportion goes through."

Rep. Luis V. Gutierrez (D-Ill.), chairman of the Subcommittee on Domestic and International Monetary Policy, Trade and Technology, closed the hearing by saying that there are good arguments for an online gambling ban, but he has reservations about the methods the UIGEA entails to achieve that end.

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