Unlawful Internet Gambling Enforcement Act and Regulations Proposed for Its Implementation

^Pr^ep^ar^{ed f}^o^r^M^e^m^b^ers^an^d^Com^mⁱ^t^t^ees^of^C^ong^r^e^ss

The Unlawful Internet Gambling Enforcement Act (UIGEA) seeks to cut off the flow of revenue
to unlawful Internet gambling businesses. It outlaws receipt of checks, credit card charges,
electronic funds transfers, and the like by such businesses. It also enlists the assistance of banks,
credit card issuers and other payment system participants to help stem the flow. To that end, it
authorizes the Treasury Department and the Federal Reserve System (the Agencies), in
consultation with the Justice Department, to promulgate implementing regulations. Proposed
regulations have been announced with a comment period that ends on December 12, 2007, 72
Fed. Reg. 56680 (October 4, 2007).
The proposal addresses the feasibility of identifying and interdicting the flow of illicit Internet
gambling proceeds in five pay systems: cards systems, money transmission systems, wire transfer
systems, check collection systems, and the Automated Clearing House (ACH) system. It suggests
that, except for financial institutions that deal directly with illegal Internet gambling operators,
tracking the flow of revenue within the wire transfer, check collection, and ACH systems is not
feasible at this point. It proposes exempting them from the regulations’ requirements, but invites
comments that offer alternative approaches. It charges those with whom illegal Internet gambling
operators may deal directly within those three systems, and participants in the card and money
transmission systems, to adopt policies and procedures to enable them to identify the nature of
their customers’ business, to employ customer agreements barring tainted transactions, and to
establish and maintain remedial steps to deal with tainted transactions when they are identified.
Introductory remarks explain why the Agencies rejected a check-list-of-unlawful-Internet-
gambling-operators approach.
Several bills have been introduced to augment these efforts, including H.R. 2046 (Internet
Gambling Regulation and Enforcement Act), H.R. 2607 (Internet Gambling Regulation and Tax
Enforcement Act) and H.R. 2610 (Skill Game Protection Act).

Backgr ound ..................................................................................................................................... 1
Proposed Regulations......................................................................................................................2
Unlawful Internet Gambling Operators Watch List.........................................................................4
Proposals in the 110^th Congress.......................................................................................................5
Author Contact Information............................................................................................................5

Passage of the Unlawful Internet Gambling Enforcement Act (UIGEA) as Title VIII of the SAFE ¹
Port Act represented the culmination of legislative consideration that began with the ²
recommendations of the National Gambling Commission.
UIGEA prohibits gambling businesses from accepting checks, credit cards charges, electronic ³
transfers, and similar payments in connection with illegal Internet gambling. It exempts lawful
intrastate and intratribal Internet gambling operations that feature age and location verification ⁴
requirements imposed as a matter of law. It leaves in place questions as to the extent to which the ⁵
Interstate Horseracing Act curtails the reach of other federal laws, an issue at the center of World ⁶
Trade Organization (WTO) litigation. It instructs the Secretary of the Treasury and the Board of
Governors of the Federal Reserve, in consultation with the Attorney General, to issue ⁷
implementing regulations within 270 days of passage.
As a consequence of UIGEA and Department of Justice enforcement efforts, NETeller, which
reportedly processed more than $10 billion in gambling proceeds between U.S. customers and
offshore Internet gambling business from 1999 to 2007, entered into a deferred prosecution
agreement under which it agreed to discontinue U.S. operations, cooperate with investigators, and
to pay the U.S. $136 million in sanctions and to return an additional $96 million to U.S. ⁸
customers. Several offshore Internet gambling companies have apparently sought similar ⁹
agreements. A number of large banking institutions, which underwrote the initial public offers
for offshore Internet gambling companies on the London stock exchange, have been the targets of ¹⁰
grand jury subpoenas as well.

¹^P^.^L^.¹⁰^9-³⁴⁷^,¹²⁰^Sta^t^.¹⁹⁵²⁽³¹^U^.^S.C^.⁵³^61-⁵³⁶⁷⁾⁽²⁰⁰⁶⁾^.
²^N^a^tiona^{l G}^a^m^b^ling^I^m^pa^c^t^Study^C^o^m^m^is^sⁱ^on,^Fin^a^{l Re}^port^a^t^5-¹²⁽¹⁹⁹⁹⁾^{. Ea}^r^l^ie^r^r^e^la^te^{d C}^R^S^R^e^p^o^r^t^s^inc^l^ude^C^R^S
^R^e^por^{t R}^S²²⁴¹^8,^Iⁿ^te^rⁿ^e^t^G^a^m^b^li^ng:^Tw^{o A}^ppr^oac^he^sⁱⁿ^t^h^e¹⁰⁹^th^C^ongr^e^s^s^{, f}^r^om^w^h^ic^{h s}^o^m^e^of^this^r^e^por^t^is^dr^a^w^n,
^an^d^{CRS Re}^p^o^r^t^RS2¹⁴⁸⁷^,^Iⁿ^te^rⁿ^e^t^G^a^m^b^li^ng:^{A Sk}^e^t^c^h^of^Le^gis^l^a^t^iv^e^Pr^opos^alsⁱⁿ^the¹⁰^8t^{h a}ⁿ^d¹⁰^{9th C}^oⁿ^g^r^e^s^s^e^s^,
^w^h^ic^{h inc}^l^ude^s^a^m^o^r^e^e^x^te^ns^iv^e^dis^c^us^sⁱ^on^of^the^le^gⁱ^s^l^a^tio^n’^s^e^v^olutio^n.
³³¹^U^.^S^.^C^.⁵³⁶³^.
⁴³¹^U^.^S^.^C^.⁵³⁶²^.
⁵^{31 U}^.^S.C.⁵³⁶²⁽¹^0)(D)(iii).^T^h^e^Justic^e^De^pa^rtm^e^{nt a}^{nd c}^e^r^ta^{in m}^e^m^b^e^r^{s of}^the^horse^ra^cⁱ^ngⁱⁿ^dustr^y^disa^g^r^e^e^ov^e^r
^t^h^{e ext}^eⁿ^t^t^o^w^hⁱ^c^h^t^h^{e Ho}^rseraciⁿ^g^A^c^t^a^m^en^d^s^t^h^{e co}^verage^of^the^Wⁱ^re^A^c^t^w^h^ic^{h out}^la^w^s^the^int^e^rsta^te^traⁿ^s^m^ission
^by^wⁱ^re^of^c^e^rtaⁱ^{n inf}^o^rm^a^{tion re}^la^te^{d to g}^a^m^b^ling^.^UIG^E^A^si^m^p^l^y^de^nie^s^tha^t^{its pr}^ov^{isions a}^r^eⁱⁿ^teⁿ^d^e^d^t^o^re^solv^e^the
^dis^p^u^t^e^.
⁶^S^{ee e.}^g^.^,^Don’^{t Be}^t^on^the^Un^ite^d^Sta^t^e^s^{’s Inte}^rne^t^Gam^b^lin^{g L}^a^ws^{: The}^Te^nsion^Be^twe^eⁿ^In^te^rne^t^G^a^mbli^ng
^Le^gis^l^ati^oⁿ^a^{nd W}^o^r^l^{d Tr}^ade^O^r^g^aniz^a^tio^{n C}^o^m^m^itm^eⁿ^ts^,²⁰⁰⁷^C^OL^U^M^BI^A^B^U^S^IN^E^SS^L^AW^R^EV^IEW⁴^39.
⁷³¹^U^.^S^.^C^.⁵³⁶⁴^.
⁸^“^N^e^t^e^lle^r^to^P^a^y^D^o^lla^r^s^136m^G^a^m^b^ling^P^e^na^lty^,”^Financⁱ^a^{l Tim}^e^s^U^S^A^at¹⁶⁽^J^u^l^y¹⁹^,²⁰⁰⁷⁾^.
⁹^Id^.^;^“S^p^o^r^tⁱⁿ^gb^et^C^u^t^s^Deal^,^”^Ex^pr^e^s^s^on^Su^nd^ay^a^t^{7 (}^A^ug^us^t^{5, 2}⁰⁰⁷⁾⁽^“^Sp^or^ting^b^e^t^isⁿ^o^w^f^o^llowⁱ^ng^the^le^a^d^of
^riv^a^{ls P}^a^rty^G^a^m^ing^a^{nd 888}^Hol^d^ing^s^w^h^ic^{h sta}^r^te^{d ta}^lk^{s w}ⁱ^t^h^t^h^e^Unⁱ^t^e^d^S^t^at^{es A}^t^t^o^rn^ey^’^s^Offⁱ^{ce .}^.^.ⁱⁿ^{a bi}^d^t^o
^re^m^o^{ve t}^h^{e t}^h^reat^o^f^an^y^cri^mⁱⁿ^al^p^r^o^ceedⁱⁿ^gs.^.^.^”^).
¹⁰^“^G^am^bling^Sub^poe^na^s^on^W^a^{ll St.”}^{New Yo}^{rk Times}^a^t^C¹⁽^J^a^nua^r^y^{22, 20}⁰⁷⁾^.

On October 4, 2007, the Board of Governors of the Federal Reserve System and the Secretary of
the Treasury issued proposed regulations implementing UIGEA, 72 Fed. Reg. 56680. The
proposal invites commentators to suggest alternatives before the close of the comment period on
December 12, 2007 and explains why the two Agencies did not propose a list-of-unlawful-
Internet-gamblers approach similar to that used to deny drug dealers and terrorists access to
American financial services. It proposes to exempt substantial activities in those payment systems
in which tracking is not possible now and in which it may ultimately not be feasible. It also notes
that the two Agencies feel that they have no authority to compel payment system participants to ¹¹
serve lawful Internet gambling operators.
UIGEA calls for regulations that require “each designated payment system, and all participants
therein, to identify and block or otherwise prevent or prohibit restricted transactions through the
establishment of policies and procedures” reasonably calculated to have that result, 31 U.S.C.
5364(a). The proposal identifies five relevant payment systems: Automated Clearing House
System (ACH), cards systems, check collection systems, money transmitting business, and wire
transfer systems, proposed 12 C.F.R. §132.3.
The proposal directs participants in the designated systems, unless exempted, to “establish and
implement written policies and procedures reasonably designed to identify and block or otherwise
prevent or prohibit restricted transactions,” proposed 12 C.F.R. §132.5(a), and then provides
examples of reasonably compliant policies and procedures for each system, proposed 12 C.F.R.
§132.6. Participants may comply by adopting the policies and procedures of their payments
system or by adopting their own, proposed 12 C.F.R. §132.5(b).
Of the five systems, a “card system” as understood by the regulations is one that settles
transactions involving credit card, debit card, pre-paid card, or stored value product and in which
the cards “are issued or authorized by the operator of the system and used to purchase goods or
services or to obtain a cash advance,” proposed 12 C.F.R. §132.2(d). Merchant codes are a
standard feature of the system which permits the system to identify particular types of businesses,
71 Fed. Reg. 56684 (October 4, 2007). There are no card system exemptions. Examples of
reasonably compliant policies and procedures feature due diligence and prophylactic procedural
components. The standards involve screening merchants to determine the nature of their business,
a clause prohibiting restricted transactions within the merchant agreement, as well as maintaining
and monitoring a business coding system to identify and block restricted transactions, proposed

12 C.F.R. §132.6(c).

“Money transmitting businesses” are entities such as Western Union and PayPal that are in the
business of transmitting funds, 71 Fed. Reg. 56684 (October 4, 2007). They too are without
exemption. Examples of the UIGEA-acceptable policies and procedures for money transmitting
businesses feature procedures to identify the nature of a subscriber’s business, subscriber
agreements to avoid restricted transactions, procedures to check for suspicious payment patterns,

¹¹^“^S^om^e^pay^m^eⁿ^{t s}^y^s^t^em^ope^r^a^tor^s^ha^v^e^indic^a^t^e^d^t^h^a^t^{, f}^o^r^b^u^sⁱ^ne^s^s^r^e^a^s^ons^{, the}^y^ha^v^e^de^cⁱ^de^{d to}^a^v^oid^pr^oc^e^s^sⁱ^ng
^an^y^ga^m^b^lⁱⁿ^{g t}^r^an^sactⁱ^oⁿ^s^,^evenⁱ^f^l^a^wf^u^l^,^b^ecau^{se a}^m^oⁿ^g^o^t^h^e^{r t}^hⁱⁿ^gs,^t^h^ey^b^e^lⁱ^e^{ve t}^h^at^t^h^{ese t}^r^an^sactⁱ^oⁿ^s^{are no}^t
^s^u^f^f^ic^ie^ntl^y^pr^of^ita^ble^{to w}^a^r^r^a^{nt t}^h^e^hig^h^e^r^rⁱ^s^k^the^y^be^lie^v^e^the^s^e^tr^aⁿ^s^a^c^tions^p^o^s^e^.”^T^h^e^A^g^eⁿ^cⁱ^e^s^do^not^be^lie^v^e
^UIG^E^A^au^t^h^o^rⁱ^{zes t}^h^em^t^o^co^uⁿ^t^e^r^m^an^d^su^ch^a^d^eci^si^oⁿ^,⁷²^Fe^d.^Re^g.⁵⁶⁶⁸⁸⁽^O^c^t^obe^r^4,²⁰⁰⁷⁾^.

and an outline of remedial actions (fines, access denial, account termination) to be taken when
restricted transactions are found, proposed 12 C.F.R. §132.6(e).
The proposal contains exemptions in varying degrees for the other payment systems. In essence,
because of the difficulties of identifying tainted transactions, they limit requirements to those who
may deal directly with the unlawful Internet gambling businesses. In the case of “check collection
systems,” the coded information available to the system with respect to a particular check is
limited information identifying the bank and account upon which the check is drawn, and the
number and amount of the check, 72 Fed. Reg. 56687 (October 4, 2007). Information identifying
the payee is not coded and a “requirement to analyze each check with respect to the payee would
substantially . . . reduce the efficiency of the check collection system,” 72 Fed. Reg. 56687
(October 4, 2007). Consequently, the proposal exempts all but “the first U.S. institution to which
a check is transferred, in this case the institution receiving the check deposit from the gambling
business,”72 Fed. Reg. 56687 (October 4, 2007); proposed 12 C.F.R. §132.4(b).
Banks in which a payee deposits a check are covered by the regulations as are banks which
receive a check for collection from a foreign bank. The proposal offers examples for both
circumstances. In the case of a check received from a foreign bank, an example of reasonably
compliant policies and procedures would include methods of conducting due diligence to ensure
the prevention of tainted transactions and of remedial steps to be considered (collection services
denied or correspondent account closed) should the foreign bank be found to be presented tainted
checks, proposed 12 C.F.R. §132.6(d)(2). In the purely domestic cases, examples of reasonably
compliant policies and procedures would include (1) due diligence in establishing and
maintaining customer relations sufficient to identify the nature of a customer’s business, and to
provide for a prohibition on tainted transactions in the customer agreement, and (2) remedial
action (refuse to deposit a check; close an account) should a tainted transaction be unearthed,
proposed 12 C.F.R. §132.6(d)(1).
“Wire transfer systems” come in two forms. One involves a large volume transactions between
banks; the second, customer-initiated transfers from one bank to another, 72 Fed. Reg. 56685
(October 4, 2007). Like the check collection systems, under current practices only the recipient
bank is in a realistic position to determine the nature of the payee’s business. The Agencies
sought comments on whether additional safeguards should be required of the initiating bank in
such cases, but in the interim exempted all but the bank receiving the transfer, 72 Fed. Reg. 56687
(October 4, 2007); proposed 12 C.F.R. §132.4(c).
Banks that receive a wire transfer are covered and examples of reasonably compliant policies and
practices resemble those provided for check collection system participants: in purely domestic
cases, know your customer, have a no-tainted transaction customer agreement clause, have a
remedial procedure (transfer denied; account closed) when tainted transactions surface; in the
case of transfers from overseas, know your correspondent bank partner, have a no-tainted
transaction agreement, have a remedial procedure (transfer denied; correspondent account closed)
when tainted transactions surface, proposed 12 C.F.R. §132.6(f).
The “Automated Clearing House System” (ACH) is a system for settling batched electronic
entries for financial institutions. The entries may be recurring credit transfers such as payroll
direct deposit payments or recurring debit transfers such as mortgage payments, 72 Fed. Reg.
56683 (October 4, 2007). The entries may also include one time individual credit or debit
transfers, Id. Banks periodically package credit and debit transfers and send them to a ACH
system operator who sorts them out and assigns them to the banks in which the accounts to be

credited or debited are found, Id. Participants are identified not according to whether they are
transferring credits or debits but according which institution initiated the transfer, i.e. originating
depository financial institutions (ODFI) and receiving depository financial institutions (RDFI), Id.
The proposal exempts the ACH system operator, the ODFI in a credit transaction and the RDFI in
a debit transaction, proposed 12 C.F.R. §132.4(a). ODFIs in a debit transaction and RDFI in a
credit transaction are not exempt under the theory that in any tainted transaction they will be in
the best position to assess the nature of the business of the beneficiary of the transfer and to
identify and block transfers to unlawful Internet gambling operators, 72 Fed. Reg. 56686
(October 4, 2007).
The examples of ACH system reasonably compliant policies and procedures are comparable to
those for check collection and wire transfer systems: in purely domestic cases, know your
customer, have a no-tainted transaction customer agreement clause, have a remedial procedure
(fines imposed; disallow origination of ACH debit transactions; account closed) when tainted
transactions surface; in the case of transfers from overseas, know your foreign gateway operator,
have a no-tainted transaction agreement, have a remedial procedure (ACH services denied;
termination of cross-border relationship) when tainted transactions surface, proposed 12 C.F.R.
§132.6(b).

The Agencies explained why they do not find a suitable model in a watch list approach similar to
that administered by the Office of Foreign Assets Control (OFAC), 72 Fed. Reg. 56690 (October

4, 2007).

The OFAC system is a product of the International Economic Emergency Powers Act (IEEPA)
which grants the President extraordinary powers to deal with foreign threats to the national ¹²
security, foreign policy or economy of the United States. The Presidents have exercised their
powers under IEEPA to bar financial dealings with various identified drug dealers and terrorists ¹³¹⁴
among others. OFAC maintains an online list of the dealers and terrorists subject to the freeze.
It might be thought that assembling a list of known unlawful Internet gambling operators and
their fiscal accomplices might work just as well.
The Agencies argue that maintaining such a list would be a time-consuming effort for which they
lack the expertise and which would be made more difficult by the complexity of the law in the
area and by the ability of gambling operators to take evasive measures, 72 Fed. Reg. 56690
(October 4, 2007). Critics might respond that the same arguments ought to apply with at least
equal force to drug dealers and terrorists. Certainly, the offshore, open and notorious, publicly
traded, Internet gambling operators that the Justice Department has prosecuted and with whom it
has entered deferred prosecution agreements might earlier have been identified without great

¹²^{50 U}^.^S.C^.¹⁷⁰¹^-¹⁷⁰^7.
¹³^S^{ee e.}^g^.^,^E.O.¹²⁹⁷^{8, Bl}^oc^kⁱ^ng^Asse^{ts a}^nd^P^r^o^h^ib^iting^T^r^aⁿ^sa^c^tion^s^W^{ith Sig}ⁿ^if^ic^aⁿ^{t Na}^rc^otic^{s T}^r^a^f^fⁱ^c^k^e^r^{s, 60}^Fe^d.
^Re^g.⁵⁴⁵⁷⁹⁽^O^c^t^obe^r²¹^{, 1}⁹⁹⁵⁾^;^E^.^O^.¹³²^19,^B^l^oc^kⁱ^ng^P^r^ope^r^t^y^of^P^e^r^s^oⁿ^s^W^{ho T}^h^r^e^a^t^eⁿ^Iⁿ^te^rⁿ^a^tⁱ^o^na^{l Sta}^bⁱ^liz^a^tion
^E^f^f^o^rt^{s i}ⁿ^t^h^{e W}^e^st^ern^Bal^k^an^s,⁶⁶^Fe^d.^Re^g.³⁴⁷^{77 (}^J^une^26,²⁰⁰¹⁾^.
¹⁴^{31 C}^.^F.R^.^c^h^.^V^{, A}^p^p^.^A⁽^J^uly^{1, 2006}⁾^,^a^v^a^ila^ble^oⁿ^N^o^v^e^m^b^e^r^{1, 2}⁰⁰⁷^a^t^h^ttp:/^/w^w^w^.tr^e^a^s^ur^y^.^g^o^v^/^of^fⁱ^c^e^s^/
^eⁿ^f^o^r^c^em^eⁿ^t/^of^a^c^/^s^dn/^t1^1s^dn^.p^df^.

difficulty or expertise. On the other hand, the effective use of such an approach would require the
participation of the Justice Department. It may be that the Department shares the reservations
voiced by the Agencies. Yet , it may also be that the Department will take advantage of the
comments period to rebut the Agencies’ claims.

At least three bills have been introduced in the 110^th Congress to augment UIGEA. The most
extensive of these, the Internet Gambling Regulation and Enforcement Act of 2007 (H.R. 2046),
introduced by Representative Frank, the Chairman of the House Financial Committee, would
establish a federal licensing regime for Internet gambling operators. The second proposal, the
Internet Gambling Regulation and Tax Enforcement Act of 2007 (H.R. 2607), introduced by
Representative McDermott, would establish a licensing fee regime within the Internal Revenue
Code for Internet gambling operators. The third, the Skill Game Protection Act (H.R. 2610),
introduced by Representative Wexler, would remove from Wire Act and UIGEA coverage games ¹⁵
such as poker, which enthusiasts consider games of skill.
^C^h^arle^s^Do^y^l^e
^Senⁱ^o^r^Sp^{ecialist i}ⁿ^Am^er^icaⁿ^P^u^b^{lic L}^a^w
^cdoy^l^e^@^c^rs^.l^oc.g^o^v^{, 7-}⁶⁹⁶⁸

¹⁵^A^p^p^a^ren^t^l^y^wⁱ^t^h^ga^m^e^{s l}ⁱ^k^{e p}^o^k^{er i}ⁿ^mⁱⁿ^d^,^w^h^en^d^e^fⁱⁿⁱⁿ^g^t^h^e^b^e^t^s^an^d^w^a^gers^wⁱ^t^hⁱⁿⁱ^t^s^reach^,^UIG^E^A^u^s^{es t}^h^e
^p^h^r^{ase “a ga}^m^e^su^b^j^ect^t^o^ch^an^ce,^{” w}^h^en^sp^eakiⁿ^{g o}^f^p^r^o^hⁱ^bⁱ^t^e^d^specu^l^a^tⁱ^oⁿ^u^p^oⁿ^coⁿ^t^est^s^,^s^p^o^r^tⁱⁿ^g^even^t^s^,^an^d^games,
³¹^U.^S^.^C.⁵³⁶²⁽¹^)(A^),^rat^h^{er t}^h^{an t}^h^{e ph}^{rase “a ga}^m^e^p^r^ed^o^mⁱⁿ^an^t^l^y^su^b^j^ect^t^o^ch^an^ge,^”^w^hⁱ^c^hⁱ^t^u^s^e^s^w^h^en^sp^eakiⁿ^g
^of^pr^ohi^bite^d^s^p^e^c^u^la^ti^on^on^lot^t^e^r^ie^s^,^{31 U}^.^S.C^.⁵³⁶²⁽^a⁾⁽^B⁾^.^A^thor^oug^{h a}ⁿ^a^l^y^s^is^of^the^the^s^e^pr^o^pos^a^l^s^is^be^y^{ond the}
^s^c^ope^of^this^r^e^p^o^r^t^.