#138 © Copyright 2007, all rights reserved worldwide. Gambling and the Law® is a registered trademark of Professor I Nelson Rose, www.GamblingAndTheLaw.com
Federal regulators, given the impossible job of enforcing an unworkable law, have punted, issuing proposed regulations that tell banks, credit card companies, e-wallets and other payment processors, basically, “You take care of it.”
The law in question is the Unlawful Internet Gambling Enforcement Act, which I call Prohibition 2.0. This is the statute rammed through by the failed politician, former U.S. Senate Majority Leader Bill Frist (R.-TN). Frist wanted to be president. Instead, he had to slink out of Washington, D.C., after contributing to the Republican Party’s humiliating loss of both houses of Congress in November 2006.
Prohibition 2.0 actually does only two things. It creates a new crime: being a gambling business that accepts money for unlawful transactions. And it requires that new regulations be written by the U.S. Treasury and Federal Reserve Board, in consultation with the Department of Justice (“DOJ”).
The new crime, although a felony, turns out to be much less than it seems. I have argued (see http:www.GamblingAndTheLaw.com/columns/2006_act.htm ) that the Act requires that the gambling already be illegal under some other federal or state law. There has been some discussion that Prohibition 2.0 greatly expanded the reach of anti-gambling laws, to cover overseas operators who were not violating any American law. The comments accompanying the proposed regulations make it clear that the federal agencies, including, most importantly, the DOJ, agree with my analysis. Here’s their discussion of whether the government should draw up a list of websites conducting illegal gambling:
“The Act does not comprehensively or clearly define which activities are lawful and which are unlawful, but rather relies on underlying substantive law. In order to compile a list of businesses engaged in unlawful Internet gambling under the Act, the Agencies would have to formally interpret the various Federal and State gambling laws in order to determine whether the activities of each business that appears to conduct some type of gambling-related function are unlawful under those statutes.”
The regulations were supposed to be promulgated by mid-June. The agencies have finally issued proposed regulations, four months late. The delay was caused not only by having to enforce an unenforceable law, requiring all payment processors to identify and block all unlawful gambling transactions. The other problem is that the three agencies have conflicting goals. Ben S. Bernanke, Chair of the Federal Reserve Board, expressly stated that he opposes any new regulations that would put U.S. financial institutions at a competitive disadvantage with their foreign counterparts. The DOJ wants all Internet gambling outlawed. And Treasury doesn’t want it outlawed, it wants it taxed.
It looks like the Treasury and the Board won most of the fights.
There is, of course, something bizarre about requiring financial institutions to i.d. and block only unlawful Internet gambling transactions. There is no similar law dealing with importing cocaine or selling kiddie porn. But, it was clear from the day Prohibition 2.0 passed that there would be loopholes for banks.
Banks do not now read the face of paper checks. Requiring all banks to read 40 billion paper checks each year would cost the industry billions of dollars. Banks lobbied Frist. He added a provision to the Act, allowing Treasury and the Board to decide when it would not be “reasonably practical” to i.d. and block transactions. The DOJ was given no say. So, almost all paper checks are exempt.
In fact, almost all financial transactions are exempt. The agencies were worried about trying to regulate foreign companies. So, it is clear that the regulations apply only to U.S. payment processors. There are some requirements that American financial institutions make inquiries of their foreign partners. But those restrictions will be easy to get around, since an overseas automated clearing house, like its American counterpart, has no way of knowing what transmitted funds are used for.
Significantly, almost everyone involved in the transfer of money is exempt from the requirements of identifying and blocking “restricted transactions.” Players are always exempt, whether they are sending money by check or wire, using their credit or debit cards, or getting paid. But all financial intermediaries are also exempt.
The federal agencies understood that it would be impossible for the financial intermediaries that transfer trillions of dollars a day around the globe to identify any single transaction. The systems work because the intermediaries know what they need to know and no more: that the bank wiring the funds actually has those funds and the bank requesting the funds is who it says it is. Trying to get any more information, such as whether the wire is for funds to be used for gambling, would cause the entire system to slow down to the point that it would collapse.
Similar thinking went into the other exemptions. The regs “exempt all participants in the Automated clearing house systems, check collection systems, and wire transfer systems, except for the participant that possesses the customer relationship with the Internet gambling business.” So, only if an online gaming company is the customer of an American bank will the bank have to ask questions. U.S. financial institutions are supposed to ask foreign payment service providers if the cross-border funds are going to an illegal gambling operator. But what sort of answer do you think they’ll get?
More importantly, the regs expressly recognize that there is no way the federal government can tell in advance whether a particular transactions involves unlawful gambling. More than once, the federal agencies expressly turned down the idea of coming up with a list of web operators operating illegal gambling. Banks, being basically conservative, wanted the list so that they would simply not do business with those companies. But even the DOJ acknowledges, as it has to, that not every online wager is illegal.
So the regs put the burden on the credit card companies, banks, e-wallets and other payment processors to come up with their own procedures for checking on whether money is being transferred for unlawful Internet gambling. And there is no way to do that.
Even remote sports betting is sometimes legal, for example intra-state in Nevada. Are bets made with foreign licensed Internet casinos “unlawful gambling transactions?” Show me the state or federal law that you think make them illegal and I will show you the reasons why that law may not apply.
Even when we have a clear statute, there is disagreement. The DOJ believes the Interstate Horseracing Act only allows patrons to bet from their home with horsebooks in their own states. Everyone else, including the World Trade Organization, believes that Act allows cross-border bets. What should a payment processor do?
The answer shows what will happen. Banks and credit card companies can only get into trouble if they permit a transaction that turns out to involve unlawful gambling. They face no penalties for refusing to transfer funds for legal gambling. So, all major American financial institutions will refuse to transfer funds from their patrons to any company that they know is involved with online gaming.
This will open the door to foreign financial operators. Expect to see many more patron solicitations for overseas credit cards and bank accounts.
I just hope that they all will be trustworthy.
© Copyright 2007. Professor I Nelson Rose is recognized as one of the world’s leading experts on gambling law. His latest books, Internet Gaming Law and Gaming Law: Cases and Materials, are available through his website, www.GamblingAndTheLaw.com.