UIGEA LAW TOO AMBIGUOUS TO WORK SAY HEARING WITNESSES

4 April 2008

Widespread media coverage for Congressional hearings on Washington's problem law


The US and international media gave extensive coverage to April 2nd's Congressional hearings on the hopelessly bogged down Unlawful Internet Gambling Enforcement Act regulations, with the consensus across a wide cross section of witnesses appearing to be that the law was just too ambiguous to work, and could have a serious adverse impact on e-commerce.

In opening the discussions, “Proposed UIGEA Regulations: Burden without Benefit?” Congressman Luis Gutierrez, Chairman of the Subcommittee on Domestic and International Monetary Policy, Trade and Technology, said: "The focus of today's Subcommittee hearing is the proposed regulations to implement the Unlawful Internet Gambling Enforcement Act of 2006.

Gutierrez went on to summarise the status of the regulations, long delayed but finally submitted for discussion in October 2007 and the subject of over 200 formal critiques that mainly complained of the ambiguity of the regulations and the impracticalities and cost of implementing same.

"One of the most common complaints is that the proposed rules fail to sufficiently define key terms, leaving financial institutions with significant compliance difficulties," Gutierrez said. "For example, the regulation fails to adequately define what constitutes “unlawful Internet gambling” or a "restricted transaction," yet requires the financial institutions to make a determination on their own about what is lawful or unlawful.

"Consumers will be placed at risk of having lawful transactions blocked. It is easy to see how these regulations, if implemented in their current form, could wreak havoc on electronic commerce in the U.S."

The Congressman went on to give examples of the disruption the law could cause in areas of the economy such as general international remittances, and the heavy burden compliance would place on a financial services industry already labouring under overload during a time of economic and financial turmoil.

"Finally, I believe it is inappropriate to have financial institutions essentially acting as the final arbiter in determining which transactions are legal or illegal; especially when the result could be closing a consumer’s account," he said.

Feds admit to difficulties in crafting the regulations

Federal Reserve and Treasury officials gave evidence that they were struggling to craft the UIGEA rules because federal law is unclear about what type of gambling is illegal online.

"That is something we're really struggling with," Louise Roseman, the Fed's director of reserve bank operations and payment systems, said.

"The challenge we have is interpreting ... federal laws that Congress itself isn't sure what they mean," Roseman said, adding that one company that processes illegal Internet gambling transactions may also transact legitimate transfers which should not be blocked, thus making it almost impossible, or at least very difficult, to determine how to block illegal online gambling transactions.

"It will be very difficult to shut off payment systems for use of Internet gambling transactions. The implementing statute will not be iron clad at all," she concluded.

Director Roseman reiterated her comments in an interview with Talk Radio News, an service that provides information through its Washington branch to the White House, Capitol Hill and Pentagon staffed bureaus, and a New York office with a United Nations staffed bureau.

Congress passed the UIGEA late in 2006, in a rushed, late night session as the then Republican-controlled Congress was about to recess for electioneering, and after the legislation was tacked on to a totally unrelated "must pass" bill. The legislation seeks to cripple the online gambling industry in the US, conservatively estimated to be worth $8 billion annually, by prohibiting financial transactions with online gambling companies.

Congress instructed the Federal Reserve and the Treasury Department, in consultation with the Justice Department, to come up with rules to enforce the newly passed act, and government drafters have been struggling with the task ever since.

Associated Press commented on the hearings, reporting that federal officials gave evidence that Congress' ban on Internet gambling is so vague that figuring out how to enforce it is a struggle.

Whilst the Congressional ban sought to explicitly outlaw Internet gambling, it didn't offer a clear definition that everyone could agree on, instead referring to existing federal and state laws which themselves are ambiguous and provoke differing interpretations. It places the burden on financial institutions by prohibiting them from accepting payments from credit cards, checks or electronic fund transfers to settle online wagers. The regulation doesn't attempt a definition of illegal online gambling, since Congress didn't give one.

Bankers protest at the burden

Wayne Abernathy of the American Bankers Association told the committee that the law "makes financial institutions the police, prosecutors and judges in place of real law enforcement officers."

"The UIGEA and the Proposed Rule do not provide a rational path towards halting unlawful Internet gambling," Abernathy said. "The path leads to an increased cost and administrative burden to the banks and an erosion in the performance of the payments system, but it will not result in stopping illegal Internet gambling transactions.

"Imposing this enormous unfunded law enforcement mandate on banks in place of the government's law enforcement agencies is not likely to be a successful public policy."

Given that financial institutions process nearly 100 billion payments a year, according to Federal Reserve data, and given that other governments won't necessarily be cooperating, identifying which payments are gambling-related is no trivial task, said Leigh Williams, who spoke on behalf of the Financial Services Roundtable, which counts Visa, Mastercard, Bank of America, Wells Fargo, and other banks as members.

The U.S. government's "decision not to fully define unlawful Internet gambling places our members in a very difficult position," he said. "They cannot know if a transaction is restricted unless they have in hand specifics of the transaction that in almost all instances they will not have."

Williams expressed concerns that enforcement of the proposed rules "...could impose significant compliance burdens on financial institutions by increasing their role in policing illegal activities, determining whether a transaction is illegal, or by imposing ambiguous compliance requirements that could be subject to wide variations in interpretation by regulators and law enforcement agencies. We believe these functions are more appropriate for law enforcement agencies."

At the very least, Williams said, the U.S. government should provide a list of names of Internet gambling businesses that can be identified and blocked - something that the authorities are unwilling to do. Federal regulators have said it would be too expensive for them to create a list themselves, arguing that "the government must engage in an extensive legal analysis to determine whether the gambling Web site is used, at least in part, to place, receive or otherwise knowingly transmit unlawful bets or wagers" and that due process safeguards "would result in considerable added costs."

Clearly with that Federal position in mind, Williams pointed out that 'monitoring of websites' was "...inappropriate to include in a financial institution's monitoring activity."

Other groups protested that the law does not apply to them. Poker players contend they're not covered because poker is a game of skill and not chance. Horse-racing was exempted by Congress in a notorious carve-out that has created expensive World Trade Organisation hassles for the USA, yet without settling definitively whether online wagering on races breaks the law.

House Financial Services Committee Chairman Barney Frank, who has introduced a bill to overturn UIGEA that is steadily gaining co-sponsors in Washington, described the UIGEA as "...a rather bizarre piece of legislation."

The committee heard that the law has caused international disputes, including an investigation launched earlier this month by the European Union after European betting companies complained that Washington's actions against them were protectionist and infringing world trade rules.

Nevada's casino industry is reportedly neutral on the regulations, instead supporting a bill written by Nevada Democrat Shelley Berkley, that calls for a full and independent study of online gambling in its entirety.

Closing the first part of the hearings, chairman Gutierrez advised Ms. Louise Roseman from the Federal Reserve Bank, and Ms. Valerie Abend from the Department of Treasury, to tread very carefully in proceeding with the proposed regulations. He remarked that there was more heated discussion, debate, and criticism of this topic than on any other his committee has seen in the year he has presided over it; "So be careful," he said.

Anti-online gambling politician Spencer Bachus - a Republican Congressman from Alabama, was almost alone in defending the UIGEA, again presenting a letter signed by 45 Attorneys General supporting the law, and again recounting the now ageing story of a high school student who robbed a bank to pay off an online gambling debt.

“Illegal Internet gambling is a scourge on our society that leads to addiction and gambling addicts then turn to crime to support their habit,” Bachus said, adding that in his opinion US banks have no problem working with law enforcement in ferreting out money-laundering and terrorist financing.

Addressing the letter from the Attorneys General, Congressman Frank pointed out that in his new law, the Internet Gambling Enforcement and Regulation Act (IGREA), there is a stipulation that allows individual states to opt out of allowing Internet gambling anyway.

Privacy concerns

Frank later made a telling point to the committee - that in the Treasury Department and Federal Reserve's 52-page draft regulations for the UIGEA, the word "identify" appears 61 times and "monitor" 18 times, yet the important word "Privacy" appears not once. Frank told financial industry witnesses that there was "...a conflict between the obligation imposed on you by the act...and the privacy expectations of your customers."

Several witnesses voiced concern at the apparent hypocrisy of a law that allegedly existed for moral reasons, yet permitted and even encouraged extensive gambling via the Internet on horse racing, fantasy sports and lotteries through legislative carve-outs.

Congressman Ron Paul, the libertarian-minded Republican presidential candidate, criticised the UIGEA, saying "..people should make their own decisions" regarding the use of their disposable income in the privacy of their own homes.

"Though I do not endorse gambling per se, people should make their own decisions. It's a personal choice. I've always been concerned about this type of regulation and legislation - it's likely to open the door (to control and regulation) of the Internet itself," he said.

The Hill, a Washington DC publication widely read by politicians, reported on the hearings, saying that Congressman Frank and his IGREA were betting on exposing the UIGEA's "...murky language" to help overturn it altogether. The publication went on to cover the testimony of the many witnesses, most of whom were critical of the UIGEA and its impracticalities and difficulty in implementation.

Lobbyist groups such as the Poker Players’ Alliance and the American Bankers Association have spent millions of dollars fighting to repeal the law, The Hill observed.

Economic hard times, the restructuring of the Federal Reserve and the country’s monetary policy are only adding fuel to opponents’ fire, the report commented, quoting Congressman Frank, who said the Financial Services Committee as well as the banks and the Federal Reserve should be more focused on predatory lending right now instead of trying to crack down on people’s personal habits.

“Almost every sector affected by the (UIGEA) law complains about it,” said Frank, who argued the law turns banks into “gambling cops.”

Frank also said the law’s arbitrary exclusion for horse racing didn’t make any sense to him. “I thought it was gambling; perhaps it’s animal husbandry,” the politician quipped.

Ted Kitada from Wells Fargo said that his company is involved in 30 million transactions a day. Figuring out which of those could be related to Internet gambling is not only cumbersome, but it could lead to mistakes that annoy customers, especially because Internet gambling sites could disguise themselves, he opined.

Jeffrey Sandman, a spokesman for the Safe and Secure Internet Gambling Initiative, said that, "U.S. banks and credit card companies, along with every other type of U.S. company involved in payment systems, would be forced to spend substantial resources to comply with a ban on Internet gambling that can be easily circumvented by anyone in the U.S. that wants to continue to gamble online.

"Testimony from the federal regulators and representatives of the financial services community made clear today that the prohibition on Internet gambling isn't working now and will not work in the future," he added.

In summary, the Congressional hearings this week gave an opportunity for expert testimony to be heard and widely reported, providing further evidence that the ban on Internet gambling intended through the UIGEA simply won't work. Witnesses almost unanimously agreed that U.S. financial service companies would face serious regulatory burdens in attempting to enforce the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA), a law that is not likely to stop millions of Americans from gambling online.

Testimony provided at the hearing can be found at http://www.house.gov/apps/list/hearing/financialsvcs_dem/hr040208.shtml.

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