June 1, 2010, is the new Y2K. Most payment processors, and even some Internet gaming operators, dread the date they have to start complying with the final regulations for the Unlawful Internet Gambling Enforcement Act (“UIGEA”). But just like the computers of the world did not crash on 01/01/00, online gaming will continue to flourish after American banks are required to ask their new customers whether they are involved in illegal gambling.
In fact, the regulations actually help online gaming, and not just those that are predominantly skill or have free alternative means of entry. By issuing these regs, federal agencies have now made it clear that some forms of gambling on the Internet are legal in the United States. This creates opportunities for existing or expanding legal state gaming, and for bolstering faltering state budgets. But, mostly it opens some doors for creative Internet gaming operators.
The regs were officially promulgated on January 19, 2009, the day before Barack Obama became President. They were supposed to go into effect on December 1, 2009. The Democratic leadership, led by pro-Internet gambling advocate Rep. Barney Frank (D.-MA) and Sen. Harry Reid (D.-MA), the Senate Majority Leader, who happens to be from Nevada, asked that the regs be delayed six months. Even the Republican leadership, responding to pressure from banks, joined in asking the Department of the Treasury and the Federal Reserve Board to delay the regulations for one year. The agencies agreed to six months to June 1, 2010. The current dysfunctional state of the U.S. Senate prevented another delay. Under the current Senate rules, a single Senator can bring the federal government to a halt. Sen. Jon Kyl (R.-AZ), the only strong opponent of Internet gaming in the Senate, unilaterally held up noncontroversial appointments to Treasury, until Reid and Treasury Secretary Timothy Geithner promised they would not delay the UIGEA regulations any further.
All the regulations do is require financial institutions and other payment processors to conduct “due diligence” when creating a relationship with a new commercial customer. The most important provision creates something of a safe harbor for operators and all that do business with them. The new due diligence standard is automatically met if the Internet gambling operator falls into certain categories: If it is a part of state government, has a state or tribal license, or has a “reasoned legal opinion” that it is not involved in restricted transactions. The regulations even tell the credit card companies to come up with new merchant codes for legal online gambling.
The first category — being operated by a state — allows all state lotteries to sell their tickets online using payment processors and credit cards. North Dakota and New Hampshire were quite successful selling subscriptions over the Internet, until Visa changed the category of state lottery tickets from government services to 7995, gambling. The North American Association of State and Provincial Lotteries met with Visa to get that changed.
In times of severe budget deficits, other states may initiate or expand their Internet lottery sales. At the very least, state legislatures will reexamine whether it makes sense to continue the ban on credit card purchases of lottery tickets. At present, customers can use a credit card if the store will accept it and the store codes the purchase as groceries. Soon, the credit card companies will expressly permit their cards to be used for state lottery purchases, whenever the states allow.
Having a state license means that all off-track betting operations can also use credit cards and go online. More than half the states have changed their laws to allow Advanced Deposit Wagering, where patrons deposit their money in advance to make bets on horse races. These parimutuel outlets were given licenses pursuant to the federal Interstate Horseracing Act. But many states also license parimutuel betting on dog races and jai alai, and allow bets to be placed by phone and computer. These also now are allowed under the UIGEA, even though there is no federal Interstate Dogracing or Jai Alai Acts.
There are many possibilities for other state licenses. Independent operators, approved by state racing commissions, handle big racing bets online. These will now call those approvals “licenses” so that they also automatically are cleared under the UIGEA.
The state license exemption might be a big push for states like California considering Internet poker and other online gambling, limited to residents of the state. Nevada can expand its intra-state licensed remote gaming, including bets by phone and computers on sports events.
The category of having a tribal license opens many doors. Tribes are already operating interstate games, such as wide-area progressive (“WAP”) systems for linked slot machines and networked linked bingo games. These use closed-loop and other forms of computer communications that do not involve the Internet. If the Internet is involved, it is only for the downloading of programs. Because no actual gambling takes place on the Internet, the National Indian Gaming Commission has determined that the UIGEA does not apply to existing WAPs and multi-state bingo.
But the UIGEA also authorizes true tribally operated or licensed Internet gambling. There is a lot of Indian land in the U.S., including under cities, like Palm Springs, California. It is possible tribes could set up online poker right now, without having to get compacts from their states. Online lotteries and casinos are more difficult, but not impossible.
The federal agencies stated a number of times in the commentary to the new regulations that it is up to the individual states, not the federal government, to make sure operators obey the restrictions on gambling. This is fairly easy for the state to do, when the operator is the state itself, or is licensed by that state. But how is a state government supposed to police the tribes in its state, let alone tribes in other states?
Once a tribe has issued a license to an online gaming operator, the burden is entirely on the state to make sure that bets are only taken from jurisdictions where it is legal. Financial institutions and others can rely on the operators showing they have a tribal license and don’t have to ask any more questions.
The UIGEA itself says that tribes can have interstate, Internet gambling, so long as both the bettor and the gambling operator are on Indian land and the wager complies with the Indian Gaming Regulatory Act. How can a state monitor whether the bettor is in a tribal betting facility in another state, especially if the tribes involved decide they don’t want to cooperate?
Although the federal agencies put the burden squarely on states, they eliminated the possibilities of fines. So what happens if a tribe is lax and allows its licensees to take interstate bets that violate the laws of the state where the bettors are located? If a state won’t, or can’t, police all its tribes’ Internet gambling, who will? There is nothing in the new regulations giving the federal government the right to impose fines or other punishments on either the states or the tribes. But there also may be little a state can do to protect its own citizens from tribal gambling originating in another state.
The last category, operators having a “reasoned legal opinion,” presents the most opportunities. Internet gambling operators both in the U.S. and abroad will be cleared to set up business with American banks, including credit cards, once a gaming attorney gives a written opinion explaining why the operator is not involved with restricted transactions.
The immediate beneficiaries of having such a legal opinion will be operators of games that are entirely free, those with free alternative means of entry and contests of skill. Owners of free bingo sites, sweepstakes, subscription blackjack and poker with no purchase necessary, tournaments and many others can now show their payment processors and potential investors that they are to be treated the same under the UIGEA as state lotteries.
But even foreign Internet poker, casinos and lotteries will benefit, as will their affiliates. Many American websites refuse to take advertising from online operators, because they are afraid of being accused of aiding and abetting violations of American law. The UIGEA regs were designed for financial institutions and payment processors. But if a bank can rely on a reasoned legal opinion, so can website operators. A site that rates poker sites, for example, could now feel more secure taking paid ads from any online poker operator who has an opinion from a gaming lawyer describing how the operator does not violate federal or state laws.
U.S. and overseas payment processors will also benefit. I have given “reasoned legal opinions” under the UIGEA for individuals and companies who help Americans and foreigners buy U.S. state lottery tickets online, and for payment processors who send money to Internet poker players in states where poker is legal.
Banks, being conservative, are even asking for “reasoned legal opinions” on forms of internet gambling that are not controversial. I have given such an opinion to a payment processor of intra-state bets on horseraces, which even the federal Department of Justice agrees are legal.
Technically, the new final regulations only apply to the UIGEA and they would not protect an online operator against prosecution by the Department of Justice under a different federal statute. But these regulations are not only the formal position of the federal government, they were written in consultations with the Department of Justice.
It took 66 pages of fine print. But in the end the federal regulators charged with making regulations to enforce the UIGEA simply gave up. They were supposed to make rules forcing financial institutions to identify and block money transfers for unlawful Internet gambling transactions. But they were defeated by the difficulty of defining what was unlawful and the impossibility of tracking individual transactions. So they told credit card companies to come up with some additional code numbers for gambling transactions and everyone else can basically continue to do what they are now doing – oh, and financial institutions have to send a notice to all their clients telling them not to be involved in illegal gambling.
As is well-known by now, the new regulations are the result of a bill rammed through Congress in 2006 by then-Senate Majority Leader Bill Frist (R.-TN), without being read. It called for the impossible: The United States Treasury and Federal Reserve Board, in consultation with the Department of Justice, were told to make regulations requiring payment processors to identify and block restricted unlawful Internet gambling transactions.
Unfortunately for these federal agencies, the UIGEA does not define what is unlawful. Whether a particular transaction is illegal depends upon the particular facts and whether it violates some other federal, state and possibly even tribal law. As the agencies themselves admit, they do not have the resources or ability to make that determination. So, in their proposed regulations, the agencies put the burden on the banks.
The proposal was met with ridicule. If the federal government could not determine whether a particular transaction involved illegal gambling, how was a bank employee supposed to make that determination? This was particularly ridiculous since banks do not know what is being bought with a credit card or money wire transfer.
The agencies, in their final rule, gave in. They call for a little due diligence on new commercial accounts, additional code numbers for credit card transactions, and not much else. And both the statute and regulations make it clear that any money sent to an individual, even by an illegal gambling site, cannot be a “restricted transaction.”
The statute does create a new crime, being a gambling business that accepts money for an illegal transaction. In the most important case construing the UIGEA, the U.S. Third Circuit Court of Appeals emphasized that this statute does not change substantive law. “It bears repeating the [UIGEA] itself does not make any gambling activity illegal.” Interactive Media Entertainment and Gaming Association (iMEGA) v. United States, 580 F.3d 113, 117 (3rd Cir. 2009).
Even the one new crime, by its own terms, does not apply to individual bettors or payment processors. Criminal penalties under the UIGEA can only be applied to gambling businesses, not financial institutions. Due to this weakness in the way the statute was written, the indictment against the first person charged under the UIGEA, Daniel Tzvetkoff, does not contain an allegation that he actually violated the UIGEA. The best the prosecutors could do was charge him with conspiracy to violate the UIGEA, which will probably not hold up in court.
And the final regulations, which only apply to U.S. financial institutions, now make it clear that payment processors should not waste their time checking on where money is sent by individuals.
The agencies thought about requiring banks to ask their patrons whether they were wiring money to illegal overseas gaming operators. But someone at Treasury or the Federal Reserve had the brains to realize that the answer the banks were going to get would always be “No.”
The final regs are a great improvement over those originally proposed. The first set would have impacted 253,368 small businesses and an unknown number of large companies. The final rule has been so cut back that only 12,267 small businesses, or less than five percent of the original estimated number, are subject to the regulations. It is still an enormous waste of time. The agencies estimated that the recordkeeping burden on financial institutions “to develop and establish the policies and procedures required by the Act and this final rule” will add up to “approximately one million hours.” And how many illegal operators with those one million hours catch?
The federal agencies still put the burden on the financial institutions to investigate their clients. But what this means is banks have to do the same amount of “know your customer” work with new commercial accounts that they now do to prevent money laundering: basically ask the company owners what their business is and do a little checking to confirm they are telling the truth. If the new commercial customer proves it is not in the gambling business, there’s nothing more to do. If it is in the gambling business, the bank then has to ask questions to see if it falls into one of the safe harbor categories.
There aren’t a whole lot of illegal gambling websites operating out of the U.S., so the new rule will have almost no impact, other than opening opportunities for states, tribes and gaming operators.
What about licensed and unlicensed overseas gambling operators? If there are any left with direct business relationships with U.S. banks – and I doubt that there are – they will have to start using foreign banks, like every other foreign operator. American banks are not expected to ask their foreign correspondent banks about their commercial customers.
The one change that will affect online operators, and therefore players, is the addition of new transaction codes for credit card companies. For illegal and gray market operators, there is probably going to be little change. Credit card companies already have a merchant code for gambling, 7995, and American banks already refuse to let their credit cards be used for 7995 purchases.
Overseas banks are not subject to the UIGEA. The agencies admit companies issuing cards in other countries are not about to ask their merchants if they are illegally taking bets from Americans.
But the bright spot for this new rule is that it calls for new credit card codes for legal online gaming. The federal agencies repeatedly and emphatically refused to create a list of websites that were to be avoided, because they conducted illegal Internet gambling. The agencies also would not provide a list of sites that were deemed to be legal. But the new safe harbors and the call for new credit card codes will have the effect of letting everyone know that a gaming operation is being conducted by a state, or licensed by a state or tribe, or has a reasoned legal opinion declaring that it is not involved in restricted transactions.
The result will be a major expansion of Internet gambling. The major obstacles facing legal online gaming are the customers’ fear that they might be breaking the law and their difficulty in getting money to sites they trust. Individual patrons will now be able to use their credit cards to make bets. And they will know that they are not breaking the law and the gaming operation is honest when the gambling site is operated by a state lottery or licensed by a state racing or gaming board, or has a reasoned legal opinion.
END
I. NELSON ROSE
Professor I. Nelson Rose is a Distinguished Senior Professor at Whittier Law School and a Visiting Professor at the University of Macau. He is an internationally known scholar, author and public speaker, and is recognized as one of the world’s leading experts on gaming law.
Prof. Rose is best known for his internationally syndicated column and 1986 landmark book, “Gambling and the Law®.” He is the co-author of Internet Gaming Law (2nd edition published last year), Blackjack and the Law, and the first casebook on the subject, Gaming Law: Cases and Materials (LexisNexis). Prof. Rose is co-editor-in-chief of the Gaming Law Review and Economics.
Harvard Law School educated, Prof. Rose is a consultant to governments and industry. He has testified as an expert witness in administrative, civil and criminal cases throughout the United States, in Australia and New Zealand, including the first NAFTA tribunal on gaming issues. Prof. Rose has acted as a consultant to major law firms, international corporations, licensed casinos, Indian tribes, and local, state and national governments, including the province of Ontario and Québec, the states of Arizona, California, Delaware, Florida, Illinois, Michigan, New Jersey, Texas, and the federal governments of Canada, Mexico and the United States.
With the rising interest in gambling throughout the world, Prof. Rose has addressed such diverse groups as the National Conference of State Legislatures, Congress of State Lotteries of Europe and the National Academy of Sciences. He has taught classes on gaming law to the F.B.I., at Whittier Law School, the University of Ljubljana in Slovenia, Sun Yat-sen University in China, the Universidad de Cantabria in Spain, Université de Toulouse in France, University of Macau and as a Visiting Scholar for the University of Nevada-Reno’s Institute for the Study of Gambling and Commercial Gaming. Prof. Rose has presented scholarly papers on gambling in Nevada, New Jersey, Puerto Rico, Canada, England, Australia, Antigua, Portugal, Italy, Argentina and the Czech Republic.
Prof. Rose can be reached through his website: www.GamblingAndTheLaw.com.
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