US BANKS REACT AGAINST UIEGEA

14 March 2008

"compliance virtually impossible," say banking experts


The controversial regulations drafted in support of the Unlawful Internet Gambling Enforcement Act continued to be the subject of debate in the media this week with a notable contribution from the information portal Poker News, which obtained a copy of a reaction by the American Banking Association (ABA) submitted to the US Treasury in December.

The 11 page document indicated concern and negativity toward the regulations in their present form as it explored problem areas and raised issues of sufficient severity as to place a question mark over the successful implementation of the UIGEA.

The document obtained by Poker News was authored by Richard R. Riese, Director of the ABA's Center for Regulatory Compliance, and Nessa Feddis, Senior Federal Counsel for the same division. And as Poker News points out, the ABA represents the lion's share of the banking market, with member banks employing over two million workers and managing over 95 percent of the $12.7 trillion in assets overseen by America's banking industry. The association is therefore clearly a major player in the introduction of any financial measure that requires banking participation.

The general tenor of the report shows that the banks have little confidence in the practical implementation of the UIGEA in its present form, but lists 9 critical issues requiring attention if any sort of "feasible program" is to be undertaken.

The report notes that: "ABA believes that the proposal, in large part due to the nature of the statute itself, will fail to create a practical process for intercepting prohibited conduct that maintains an efficiently functioning payments system," and goes on to express the fear that "....UIGEA will in the end catch more banks in a compliance trap and do greater damage to the competitiveness of the American payments system, than it will stop gambling enterprises from profiting on illegal wagering."

The ABA saw three serious flaws with the UIGEA rules:

"(1) the definition of unlawful Internet gambling in the Prohibition leaves the vague definition of the Act uncured and therefore renders compliance virtually impossible;

"(2) the intractable problem of identifying or intercepting cross-border gambling activities and tainted correspondent relationships has not been adequately solved by the proposal; and

"(3) the uncertain standard for knowledge that triggers blocking is too indefinite to be practically operative."

In similar fashion to other critiques of the UIGEA regulations, which have generated a significant critical response from some 200 interested parties, the ABA comments on the lack of specific guidance the proposed rules provide: "We maintain that the UIGEA is a fundamentally flawed response...."

The "unfunded mandate" which transfer enforcement powers to the private sector banking industry, requiring it to deputise on behalf of government also found little favour, with the ABA noting that it was "saddled with this exceptional burden" due to the federal government's own inadequacies.

"In other words, in the view of the drafters of the legislation, all the sophistication of the FBI, Secret Service, and other police computerized detection systems and investigative expertise devoted to fighting terrorism and financial crime are inadequate to the task of apprehending the unlawful gambling business or confiscating its revenues. ABA believes that punting this obligation to the participants in the U.S. payment system is an unprecedented delegation of governmental responsibility with no prospect of practical success in exchange for all the burden it imposes," the document asserts..

Adding a constructive element to its criticism, the ABA goes on to list 9 specific areas that need to be addressed by federal government drafters:

1. The exemption language (relieving financial institutions of the perils of litigation whilst acting in terms of UIGEA) in the proposed rule should be reinforced to underscore that all participants in the specified payment systems except those with a customer relationship with the Internet gambling business are exempt.

2. ABA urges the Agencies to clarify the Prohibition (of online gambling transactions) to confirm that compliance by all non-exempt participants in any designated systems can always be satisfied through procedures limited to commercial customers or merchants acting in the capacity of Internet gambling businesses.

3. Preservation of the "over-blocking" provisions of the Prohibition is essential to workability for financial institutions.

4. The definition of what constitutes "unlawful Internet gambling" is inadequate. It must be rectified.

5. The Prohibition's handling of cross-border relationships presents substantial problems for financial institutions and should be revised.

6. The Prohibition should clarify what exactly the standard is for when a bank "becomes aware" that a commercial customer has received an unlawful Internet gambling-related transaction.

7. Establishment and maintenance of a list of unlawful Internet gambling businesses by the government may be an approach to pursue, but only if certain essential conditions are met.

8. The description of compliant reasonable policies and procedures can be improved.

9. Financial Institutions should have a longer period to phase-in the new policies and procedures prior to the effective date.

Poker News examined these points in more detail, noting that Item 1 raised an important issue regarding exemption and the relationship between an "Internet gambling business" and an offshore bank. The US bank loses its exempt status when dealing with the other, offshore bank, even though the US bank might lack information on which to identify the transaction. "For all the reasons this is not feasible in a domestic banking transaction, such an arrangement is not feasible cross-border, the ABA response cautions. Only the bank with the customer relationship with the Internet gambling business can practically access sufficient information to identify the circumstances giving rise to a judgment about a restricted transaction."

The vague nature of the regulatory wording at Item 4 drew sharp criticism, too: "The Agencies need to cure the impossibly vague scope of what is meant by 'unlawful Internet gambling.'" and "The Prohibition does not specify which transactions qualify as 'unlawful Internet gambling.' In short, the ABA believes that requiring banks to be arbiters of gambling laws for all US states, as well as federal gambling laws, is unfeasible and would place a crippling processing burden and unbounded litigation risk on the nation's payments system participants.

Conflicting views on Internet gambling by federal agencies like the Department of Justice are also flagged as a problem area and summarised as bad law:

"If the federal agencies themselves cannot agree on the law, what hope is there that banks can resolve these confounding legal issues?" the ABA asks, recommending that a 'workable' definition of unlawful Internet gambling was essential. "A unified, practically workable definition of 'unlawful Internet gambling' must be included in the Prohibition. This is such a keystone element of the Prohibition and is currently so thoroughly flawed that a workable rule cannot possibly be issued in final form without re-proposal.";

The ABA's comments then exposed why expecting US banks to know everything about a foreign bank's customers wouldn't work, and also derided the UIGEA for expecting that foreign banks, in addition to domestic ones, would somehow become expert in not only US federal gambling laws, but the related laws of all 50 US states as well. It also assailed the UIGEA for its presumption that its own language should usurp that of foreign banks operating legally in their home countries.

Giving a typical example, the ABA document cites: "For instance, if a British bank has policies and procedures to identify and block transactions which qualify as 'unlawful Internet gambling' in the US, but these same transactions are legal in the UK, the bank could be subject to litigation or enforcement actions in their own country."

On the highly controversial subject of a list of unlawful Internet gambling businesses, which the federal government has previously avoided, the ABA asserted that such a list m,ight help UIGEA, but it would not participate in its creation: "Of course, ownership and upkeep responsibilities for such a list cannot and must not fall on financial institutions. To place the onus for a list on financial institutions would only exacerbate the Act's void-for-vagueness delegation flaw, converting it from impossible individual determinations of legality to impossible joint determinations of blacklisting."

The timeframe for implementation of (revised) regulations at six months was not feasible, the ABA added, suggesting at minimum a 24 month window might be realistic..

The document closes with a recommendation that the regulations are taken back to the drawing board for reworking, and then submitted once again for interested parties to comment. "Even then, major, fundamental flaws must be cured before effective implementation of the UIGEA can even be contemplated."

Kudos to Poker News for highlighting these important objections by a key player in the federal government's attempts to strangle financial transactions on Internet gambling. The expert review of the shortcomings in the UIGEA regulations will surely give everyone in the industry a snapshot of the difficulties this law faces, and will give politicians and federal drafters practical considerations to chew on.

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