ONLINE GAMING LEGAL EXPERT CRITICAL OF UIGEA REGULATIONS

19 October 2007

"The most important thing for online poker players to know is that nothing has changed," says Professor Rose


The highly respected online gambling legal expert, Professor I. Nelson Rose has strongly criticised the recently published regulations supporting the U.S. Unlawful Internet Gambling Enforcement Act, which seeks to disrupt financial transactions with online gambling companies.

Professor Rose, who's site Gambling and the Law.com is a popular venue for visitors seeking legal information and views, comments that the most important thing for online poker players to know is that nothing has changed. "And nothing will, for many, many months," he claims.

Tagging the unpopular law "Prohibition 2.0" Professor Rose recounts its highly contentious passage through the US Congress last year and the subsequent Bush Administration delays in producing regulations to give the law teeth - well over the 270 day deadline decided by Congress.

"Prohibition 2.0 is often characterized as outlawing Internet gambling in the U.S.," writes Professor Rose. "Although it scared the bejesus out of publicly traded companies, it actually does only two things: It creates one new crime, being a gambling business that accepts money for unlawful Internet gambling transactions, and it calls for new regulations for banks and other payment processors.

"What it doesn’t do is make it a crime to play poker on the Internet. It doesn’t directly restrict players from sending or receiving money. It doesn’t spell out what forms of gambling are “unlawful.” Specifically, it does not do what the federal Department of Justice (“DOJ”) wanted, which was to “clarify” that the Wire Act covers Internet casinos, lotteries and poker."

The legal expert goes on to point out that only gambling businesses can be convicted, not players.

"Bizarrely, for a law designed to prevent money transfers, the financial institutions involved in those transfers, including banks, credit card companies and e-wallets, are expressly defined as not being gambling businesses and so cannot be convicted of this new crime," Professor Rose emphasises.

Turning to the newly published regulations, which are open for comment until December 12, following which any changes will be made and a further six months allowed for setting up procedures, Professor Rose asserts that this is not going to happen.

"It took ten months just to draw up the proposed regs," he points out. "In part, this is because the agencies given the job of writing the regs don’t agree on what should be done about Internet gambling. The DOJ wants all internet gambling outlawed; Treasury, including the IRS, does not really want it outlawed, it wants to tax it; and the Federal Reserve Board is expressly against any regulations on banks that would put them at a competitive disadvantage with their foreign competitors."

The proposed regulations put the burden entirely on the payment processors to come up with procedures for identifying and blocking restricted money transfers, but Rose does not believe this can be done in six months - in fact, he doesn't believe it is achievable at all.

"The problem is defining “unlawful Internet gambling,” he says. "Even the DOJ admits that some forms of online wagers are perfectly legal. For example, I can sit in my home in Encino, and, using my credit card, make bets by computer with a California licensed racebook. The system is called Advanced Deposit Wagering (“ADW”), since I have to fund my legal bookie account in advance.
"Congress, in December 2000, amended the Interstate Horseracing Act (“IHA”) to make it legal for ADW on horse races, so long as the bets and races were legal under state laws.

"And here’s an example of why it is impossible to know what is an unlawful gambling transaction. The DOJ agrees that I can make ADW bets with a California licensed bookie on races held here or in any of the 20 other states that have legalized ADW. But everyone else who has read the IHA, including state racing commissions, believes it is perfectly legal for me to set up my ADW with a licensed bookie in another state. So, how is a credit card processor supposed to handle my request to fund an ADW in Oregon ?

"Everyone agrees that I could not make online bets on horseraces if I were in Utah . So payment processors would have to have cyber-border software to ensure that I don’t try to make a bet with my laptop from Salt Lake City . How else will a credit card company or my California bank know not to transfer the money even to a California licensed horsebook?"

Professor Rose has also considered the popular pastime of online poker in his study, and writes that California has had legal cardrooms since the Gold Rush.

"But 157 years of bad cases and obscure statutes make it a crime to participate, as a player, in any poker game where the pot is raked more than four times. If the state’s laws apply to online poker – a big if – how many payment processors even know what it means to rake a pot four times?" he asks.

He goes on to opine that the new UIGEA regulations have so many exceptions that, when they do finally get officially promulgated, Americans will still be able to play poker online for money. "For example, the federal agencies understood that banks do not, and cannot, read paper checks. So in the worst case, players can always reload or receive their winnings by snailmail!"

Other loopholes underlined by the Professor are that all parts of all payment processing systems are exempt, except the financial institution that deals directly with the gambling operation. And the regulations clearly do not directly cover financial institutions in other countries. Therefore, anyone who uses a credit card issued by a foreign bank should encounter no trouble.

"If I send a check from Bank of America to pay off my Hong Kong issued Visa, neither the B of A nor the Hong Kong bank are required to ask whether I’m using the card for gambling," Professor Rose postulates.

American payment processors are required by the UGIEA regulations to check payments going in and out of the Unikted States, implying that a clearing house is supposed to have procedures in place to check that the money it is forwarding is not used for unlawful gambling. This might be possible if the funds went directly to an online operator or even the operator’s bank. But what if the money went to a foreign clearing house, that cannot possibly know what the funds are used for?

Professor Rose says that whilst all of this may be good news for the American player community,the bad news is that US banks and other financial institutions are basically conservative. And in addition, the DOJ has been waging a war of intimidation on both operators and payment processors – he uses Neteller, PayPal and credit card companies who have voluntarily barred all gaming transactions as an example.

"The proposed regs make it clear that payment processors should not block money transfers for legal gambling. They specifically note that some Internet wagers have been declared legal under "Prohibition 2.0" and these include not only interstate horseracing, but all forms of gambling, including poker, if done correctly and conducted entirely within a single state or on tribal land," Professor Rose notes.

"But there is no real downside in telling bank customers and credit card holders that they cannot send any funds to any gambling site. The only thing the banks lose are possibly some customers. But allowing patrons to send funds to a gaming site that turns out to involve an unlawful transaction opens the banks to fines and other government punishments."

The Professor claims that US financial institutions wanted US federal authorities to give them a blacklist of who they should not send funds to. But the agencies refused, saying that such a list would be too difficult to create; plus, some operators may handle legal as well as illegal transactions.

"So, all large payment processors are going to take the least risky path and block all gambling transactions, even ones that are indisputably legal. There is no law forcing them to transmit funds for legal gambling," he concludes will be the likely outcome of this confusing situation.

"But, in the end, Prohibition 2.0 and its regulations will be as successful in preventing people from gambling and playing poker online as the first Prohibition was in preventing people from drinking," Professor Rose concludes.

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