The Fed, Treasury Department Release Joint Final Rule Implementing UIGEA
By Linda Tieh – Edited by Dmitriy Tishyevich
Federal Reserve Board
Department of the Treasury
Federal Register Notice
On November 12, 2008, the Department of Treasury and the Federal Reserve Board, in consultation with the Department of Justice, jointly published final rule 12 C.F.R. Part 233, implementing the Unlawful Internet Gambling Enforcement Act (“UIGEA”) of 2006. The UIGEA prohibits gambling businesses from knowingly accepting payments in connection with unlawful Internet gambling, including payments made through credit cards, electronic transfers, and checks. The final rule requires U.S. financial firms participating in certain payment systems to establish and implement written due diligence policies and procedures that are reasonably designed to prevent transactions in connection with unlawful Internet gambling. The Treasury Department has said that “unlawful Internet gambling” generally covers making a bet that involves use of the Internet and is unlawful under applicable federal or state laws in the jurisdiction where the bet is initiated, received, or otherwise made. The rule is effective as of January 19, 2009, and compliance by companies is required by December 1, 2009.
The Department of the Treasury has issued a press report on the final rule.
Reuters suggests that Republican lawmakers, who controlled Congress in 2006, passed the UIGEA in hopes of having a rule issued before Bush leaves office in January, and notes that its passage cost Europe’s online gambling companies billions in lost market value as they had to withdraw from providing service to the U.S., one of their most lucrative markets. The Associated Press reports that the final regulation drew criticism from Democrats who believe financial services companies will be burdened.
Poker News Daily likewise criticizes the regulations as “midnight rule-making” by the Bush Administration, arguing that the final rule leaves unclear which gaming activities are legal and which are not. The Poker Players Allinace (PPA), a poker grassroots advocacy group, agrees the rule failed to clarify the differences between legal and illegal gambling activities.
The final rule provides a non-exclusive sample list of possible policies and procedures reasonably designed to prevent restricted transactions. These include, for example, due diligence procedures in establishing new commercial customer accounts and relationships, implementing a mandatory transaction code system that may be used to identify restricted transactions, and establishing procedures to ensure compliance with the Act upon receiving actual knowledge that a customer has engaged in an Internet gambling transaction.
During the public notice and comment period preceding the issuance of the final rule, financial institutions opposed the regulations. They argued that these rules impose an unreasonable burden, reduce the competitiveness of the U.S. payments system, and suggesting that responsibility for enforcing gambling laws should remain with federal and state authorities. Commenters had also complained that the proposed rule does not define “unlawful Internet gambling” with sufficient clarity, making compliance more burdensome.
In formulating the final rule, the agencies acknowledged the challenge financial institutions face in trying to prevent restricted transactions without burdening lawful transactions, but suggested that the flexible due diligence procedures permitted by the regulations adequately balance the interests involved. The agencies further noted that because states have taken different approaches to regulating gambling, the resulting patchwork legal framework did not lend itself to a single regulatory definition. Finally, they declined to explicitly clarify, as some commenters had requested, that the definition of “unlawful Internet gambling” excludes games of skill, concluding instead that characterization of each gaming activity is case-specific and should be resolved by reference to the applicable federal and state gambling laws.