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

“You can always count on Americans to do the right thing – after they’ve tried everything else.”

Winston Churchill

The Unlawful Internet Gambling Enforcement Act was a statute almost nobody wanted. The regulations proposed under it were nearly universally derided. Now the final regulations have been issued. It is not surprising that the Bush Administration pushed these to go into effect on January 19, 2009, the day before Barack Obama becomes president.

What is surprising is that the Treasury Department and Federal Reserve Board abandoned their attempts to require banks to do the impossible. Apparently the Washington bureaucrats in charge of the nation’s economy felt they had to give the lobbyists in the Bush White House something. But they realized that there were a few more important things for them to be doing right now – like keeping the country from going into a second Depression. So they issued final regulations which basically require financial institutions to do very little.

The regulations the agencies first proposed would have required banks to identify and block individual transactions from their regular customers that involved illegal Internet gambling. The final regulations expressly tell banks not to look at individual transactions.

The proposed regulations would have required financial institutions to investigate whether their counterparts overseas were dealing with outlaw web operators. The final regulations take a “don’t ask, don’t tell” approach, understanding that U.S. banks can’t tell a foreign bank to conduct investigations of its customers.

And the proposed regulations would have fined credit card issuers and others who did not do enough to stop funds from going to illegal operators. The final regulations eliminate all fines, and create some safe harbors, allowing financial institutions to rely on state and tribal licensing and lawyers’ legal opinions.

The heart of the new regs is that financial institutions are required to do due diligence on their new commercial clients. The steps are about the same as what they are now required to do to prevent money laundering: A know your client approach, asking them what their business is and then doing a little investigating to make sure they’re telling the truth.

In 99.99% of the cases this should be a snap. If the new commercial client says it is not in the gambling business, and it is not, there’s nothing more to do.

If the commercial client says it is in the gambling business, the financial institutions should then ask if it takes any bets online. If the gaming client says, “No,” that should be the end of the investigation. The UIGEA and its regulations are limited to unlawful Internet transactions. It does not apply to land-based casinos, even illegal ones. Banks are not supposed to block money transferred by wire or credit card to casinos that do not take bets online.

The financial institutions are required to do a little checking to make sure the web operator does not accept money for unlawful Internet gambling transactions. But the final rules create three safe harbors: Banks and others can set up business relationships and help gaming operators receive money if the operator has a state or tribal license, if it is the state government itself, or if the operators “provide a reasoned legal opinion that it does not engage in restricted transactions.”

The reasoning behind these safe harbors is significant: These federal agencies have declared that the regulation of Internet gambling is a state problem, not a federal one, and that the states can be expected to police their own licensees.

So, this should (but probably won’t) put an end to problems land-based casinos have with patrons attempting to use credit cards to gamble. Even if the bank issuing the credit card does not understand that the UIGEA is limited to online wagers, there is now an express exception for gaming operators who have state licenses.

The new regulations do open the door for the use of credit cards for intrastate wagering, like Las Vegas sports books, or even casinos, taking online wagers from bettors in Nevada.

The only interstate Internet operators with state licenses, at the moment, are parimutuel sites, which do Advanced Deposit Wagering.

The exception for government-run gambling will help state lotteries, like those in North Dakota and New Hampshire, that sell subscriptions over the Internet.

The last safe harbor is the most interesting to me. An unlicensed operator, who might be considered, rightly or wrongly, to be conducting gambling, needs “a reasoned legal opinion.” It has to be from someone like me, a licensed attorney and an expert on gaming law, showing why it is not violating federal or state laws. I expect these will mostly go to American and foreign operators of skill contests, free games and games with free alternative means of entry, and sites that have ties with legal U.S. gambling. In a great make-work program for gaming lawyers, the financial institutions will also have to hire experts to review the legal opinions they receive to ensure they meet the regulation’s standards.

This is all a lot of unnecessary work for a problem that no longer exists. 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.”

All to catch the non-existent illegal gambling operators that still have direct ongoing business relationships with American banks.

It is important to remember what is not covered by the UIGEA. By its own terms it does not apply to individual bettors, only businesses. It does not cover money received by bettors, only funds received by online gambling businesses. And the final regulations, which only apply to financial institutions, now make it clear that payment processors should not waste their time checking on where money is sent by individuals.

The federal agencies thought about requiring banks to ask their customers if they were wiring money to illegal overseas gambling operators. But somebody in Washington had the common sense to know that very few people would answer such a question truthfully, if they were.

The new regs should also make it a lot easier to use credit cards for legal gaming, and not just land-based casinos. The agencies practically ordered the credit card companies to come up with some new merchant code numbers. Right now, all gambling is treated the same, usually given the number 7995. But if there are one or more separate numbers for the safe harbors, for example, for state licensed gaming, banks should allow their credit cards to be used at parimutuel ADW outfits, as well as in land-based casinos.

What about gambling web operators who are not governments and do not have a state license or a “reasoned legal opinion”? They will have to continue what they are doing now, have their American bettors send money by check, wire transfer, or foreign credit cards and payment processors.

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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.