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I did a little more thinking, and while I'm totally not a lawyer, for US banks or payment processors on the hook with UIGEA, it really does seem to be a case of "know your customer's customer". But it also provides a theoretical, but unlikely, way for a bank to go legit with payment processing in the US.
Let's look at it from the perspective of the US bank that's accepting transactions from the foreign correspondent bank or payment processor. They are going to need a contract from that bank saying that they will not be sending over any restricted gambling transactions.
Now, neither bank can be reasonably expected to determine which transactions are legal, and which are illegal. There's too much confusion over which types of betting are restricted, and it also depends on where the gambler is, and where the casino is.
So, the foreign correspondent bank is going to need a contract with their client, the casino, guaranteeing that the casino will not use them for any restricted transactions for US customers. This means that the casino has the onus of figuring out which bets are legal, and which are restricted. Which would be a huge pain for casino and their software provider.
However, if a casino went in, dropped sports betting from US customers, ensured that customers from restricted states were not allowed, then they'd have a reasonable guarantee of ensuring that they would not originate any restricted transactions, so they could guarantee their own bank, who could guarantee the US bank, who would then not have a problem handling the transactions.
But the additional problem is why would any US bank bother with this, when instead they could just refuse any gambling transactions and make their lives easier?
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