© Copyright 2008, all rights reserved worldwide. Gambling and the Law® is a registered trademark of Professor I Nelson Rose, www.GamblingAndTheLaw.com

In 2006, the then-Majority Leader of the United States Senate, Bill Frist, a conservative Republican, rammed through the Unlawful Internet Gambling Enforcement Act. The UIGEA required that the Treasury Department and Federal Reserve Board, in consultation with the Department of Justice, enact regulations requiring financial institutions to identify and block “restricted transactions,” meaning any online gaming that violated a federal, state or even tribal law.

The federal agencies tried to do what they had been asked. The regulations they proposed were a potential nightmare for banks and other payment processors. Financial institutions would have to examine individual transactions from their regular customers. Banks would have to investigate the customers of their correspondent banks in other countries. And anyone who let through a restricted transaction would be fined.

The major problem with the proposed regulations was that there was no definition of “unlawful Internet gambling,” and no way for a financial institution to tell whether a transaction should be blocked.

With the election of Barack Obama as President, and the Democrats increasing their majorities in Congress, the regulations appeared dead. But the opponents of Internet gambling, including the NFL and its former paid lobbyist, William Wichterman, wanted these regs. Wichterman used his position in the George W. Bush White House to force the federal agencies to issue final UIGEA regulations, to take effect on January 19, 2009, the day before Obama becomes President.

So the anti’s got their regulations, and proponents of Internet gaming are looking at ways to get them undone.

But there are many good reasons for leaving well enough alone.

First, the final regulations aren’t that bad. Instead of requiring payment processors to spend enormous amounts of time and money examining everything their customers’ do, the regs expressly tell financial institutions not to look at any individual transactions. The regs now basically completely exempt all players. Banks are not going to be asking their individual customers whether they are wiring money to foreign gaming operators.

Banks and payment processors outside the U.S. are also pretty much exempt. American banks are not required to determine whether the customers of their foreign correspondent banks are involved in Internet gambling.

The final regs create a new “due diligence” standard, which merely requires financial institutions to ask their American commercial customers a few questions.

Undoing these regulations creates the risk the federal agencies will reinstate their original proposed regulations — or perhaps even some that are worse.

But an in-depth analysis of the final regs show they actually can be quite helpful for many online gaming businesses.

For example, the final regs make it very clear that “restricted transactions” can only apply to money going to a gambling website, never to a player. Even a blatantly illegal online gambling operator does not violate the UIGEA, or its regulations, when it sends funds to its regular customers.

The agencies’ have created a new standard for the role of skill, which will help some operators. The UIGEA defines a “bet or wager” as including a “game subject to chance.” This could have included virtually every game ever invented: even in chess there is usually a coin toss to see who moves first.

But in its most important statement on the issue, the agencies declare that “even if chance is not the predominant factor in the outcome of a game, but was still a significant factor, the game could still be deemed to be a ‘game subject to chance.'” This statement can easily be turned around: if chance is not a significant factor, the game is not a “game subject to chance.”

So only games where chance is a significant factor fall under the UIGEA.

Even these games will usually be legal. The regs make it clear that the game must violate some other federal or state law. Games that are predominantly skill are simply not illegal under federal laws or the laws of most states, even if chance is a significant factor.

How will this work in practice? I have given formal legal opinions that card games of skill, such as bridge, are legal under federal and most state laws. Now I would include that chance is not a significant factor, so by its own regulations, the game cannot violate the UIGEA.

And the new regulations make legal opinions very important.

The most important new provision creates something of a safe harbor for operators and all that do business with them, including affiliates. The new “due diligence” standard is automatically met if the Internet gambling operator 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 is already meeting with Visa to get that changed.

Having a state license means that all off-track betting operations can also use credit cards and go online. More than 20 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.

I have also worked with independent operators who handle big bets online. These have been approved by state racing commissions. We 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.

The category of having a tribal license opens many doors.

The federal agencies stated a number of times that it is up to the individual states, not the federal government, to make sure operators obey the restrictions on gambling. So 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 operator showing the tribal license and don’t have to ask any more questions.

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. NIGC Bulletin 2009-3 (March 9, 2009).

But the UIGEA opens the door for tribally operated or licensed true Internet gambling. The UIGEA itself says that tribes can have interstate, Internet gambling, so long as it is on Indian land and it complies with the Indian Gaming Regulatory Act. There is a lot of Indian land in the U.S., including under cities. It’s 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 last category, operators having a “reasoned legal opinion,” presents the most opportunities. Internet gambling operators both in the U.S. and abroad would be cleared to set up business with American banks, including credit cards, once a gaming attorney gives a written opinion explaining why there are no 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 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 would 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.

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 Justice.

Short of a repeal of the UIGEA, the regs are just about the best operators and their affiliates could hope for.

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© Copyright 2008. Professor I Nelson Rose is recognized as one of the world’s leading authorities on gambling law and is a consultant and expert witness for governments and industry. His latest books, Internet Gaming Law and Gaming Law: Cases and Materials, are available through his website, www.GamblingAndTheLaw.com.