By Martin Owens
One more time on the merry go-around
"We walk in circles, so limited by our own anxieties that we can no longer distinguish between true and false...."
Treasury ducks UIGEA regs again.
Time to Punt
Philadelphia, PA (Sports Network) - On the Friday after Thanksgiving, the U.S. Treasury Department did what it had to do: it delayed the adoption of regulations for the Unlawful Internet Gambling Enforcement Act (UIGEA) until June 2010. This is quite understandable. If you knew what they knew about UIGEA, you wouldn't want to touch it either. You would do exactly what they did: kick it down the road another six months, and hope you can find a better job, or a confiding subordinate to take the blame, before it's time to deal with this radioactive mess again.
The UIGEA's shortcomings have been extensively told elsewhere, as well as the truly sleazy methods used to sneak this questionable law onto the statute books literally in the dead of night, 2:30 AM on that last day of legislative session, 2006. But that's not the real problem.
The real difficulty with the UIGEA is that it should never have been written in the first place. It is the Un-law : Unnecessary, unintelligible, unenforceable. It was meant to throttle unlicensed Internet gambling ("unlawful Internet gambling") in the USA by preventing the use of US financial instruments to pay for it. But to this day there is no definition of just what that "unlawful Internet gambling" is or is not. The first attempt at defining it, in at 31 U.S.C.. 5362(10) (A) only serves to highlight the confusion; - to place, receive, or otherwise knowingly transmit a bet or wager by any means which involves the use, at least in part, of the Internet where such bet or wager is unlawful under any applicable Federal or State law in the State or Tribal lands in which the bet or wager is initiated, received, or otherwise made?. There's clarity for you!
So like other US Federal gambling laws, it relies on an underlying violation of state ( or Tribal, or Territorial) law to trigger it. But that's exactly where the weakness lies. Only eight of the Fifty States even mention the Internet in connection with gambling at all. To this day , sixteen states and the District of Columbia haven't even got a basic definition of what gambling is, or isn't, on their statute books in the first place. The rest assert that of course their law covers Internet gambling Except that nobody can convincingly explain why contacting an Internet gaming site offshore, from State X, somehow automatically places that business under State X's jurisdiction, (when a website that advocates armed jihad against America need fear no such operation of law).
UIGEA states that U.S. Indian tribes who run gambling operations ( about 200 just now) are also exempt from the definition of "unlawful Internet gambling." None of them offer Internet gambling. The exemption also extends to horse tracks, which very definitely do offer online betting to their patrons, in about 29 states.
If you're starting to get a little confused just now, you are in very good company. The US Treasury Department, when given the task of writing the regulations to enforce the UIGEA, quite simply sent in the punting team. The proposed regulations , finally set out in November 2008, contain a preamble as long as the regs themselves ( not a good sign). And on page twelve of it, the overworked regulators tell us: "....the structure of State gambling law varies widely, as do the activities that are permitted in each State. Accordingly, the underlying patchwork legal framework does not lend itself to a single regulatory definition of unlawful Internet gambling."
English translation: "this thing is as messed up as a soup sandwich, and we ain't touching it." They not only failed to provide a definition- they flat out REFUSED, and sent in the punting team.
Due Process ? No Can Do.
Now that is important. It means that this law is not merely unwieldy. It Is Positively Unconstitutional. Why? Because the U.S. Constitution guarantees due process of law. This means, among other things, fair notice of what the law permits and what it forbids. A person of ordinary understanding should be able to read the law, you see, and figure out what the law forbids him to do- and when, where and with whom not to do it. And if the authorities forbid something on the one hand, but affirmatively state that they will not define what that is on the other- well how can you know? It's the original Catch-2. , the kind that gets thrown out of court if it ever comes to trial. Significantly, three years on, no one has been prosecuted under the UIGEA, and the betting odds are that no one ever will be.
True, there is a criminal penalty for violating it- but that only applies to gambling businesses who accept US financial instruments. Since these tend to locate themselves offshore, the trial of the century is not exactly likely anytime soon.. Financial service providers are specifically exempted from penalties under the UIGEA, unless they are involved in an actual gambling business. Nevertheless, they are supposed to write guidelines to detect and prevent the processing of financial transactions which finance "unlawful Internet gambling" - whatever the hell that is.
Let's put it in layman's terms. Suppose you were a pest control contractor . Now suppose I hired you to keep rats out of my cellar , but at the same time leave the squirrels and chipmunks alone to frisk on my lawn. Well, if I never told you how to distinguish between them in the first place, how could you possibly do your job?
To comply with UIGEA, a given bank , debit card, credit card, check clearing house, money transmitting business, or wire transfer company would have to figure out what "illegal Internet gambling" across 50 states- most of which don't define it at all. And next compare a given financial transaction to that nonexistent definition, and then block the transfer, if it's wrong.. The regulators freely admit that "it is very difficult, if not impossible.... to identify restricted transactions while they are being processed."
Which in actual practice means that a bank teller has to look at a check made out to let's say, "Caribbean Sands." Well, is that an online casino? A hotel? Somebody who sells swimsuits and tanning lotion? How can the clerk possibly know? Not that she has time to look at it- literally billions of paper checks are in the system every day. Ditto the wire transfers. To say nothing of debit cards and credit card charges....
How to Stay Safe?
So if you're a US bank, how can you tell which transactions are "illegal Internet gambling/restricted transactions?" Answer: you don't have to ! These new regulations shift the burden of proof from the bankers to the Internet gambling business itself! That's right folks, all the US finance house has to do is ask a prospective customer, politely, " you're not doing wicked illegal Internet gambling, are you?" And if they answer "golly gosh, no!" then everything's just fine. Because you see, according to the UIGEA itself, financial businesses and ISPs cannot be considered as gambling businesses short of actual direct involvement in gambling.
That means , as a US financial services provider, your legal obligations are satisfied by due diligence. If you check to see that a given gaming business is licensed in its home jurisdiction, if you consult a qualified professional for a formal legal opinion ( ahem!) or get a reliable third party certification that the people you're doing business with employ reasonable prevention measures, you'll be OK. You, the U.S. participant, are not required to do multilevel due diligence, either. If, for instance, your US bank does business with a qualified corresponding bank abroad, the US bank is not required to investigate the corresponding bank's customers, merely to giver reasonable notice that the US bank cannot be asked to process "restricted" transactions.
And if you're a small financial business- say a small bank that issues VISA cards- your obligations for due diligence are discharged if you use the VISA due diligence procedures. In fact, if you are a U.S. financial services provider, there is no ban against sending money to individuals, only to companies that engage in unlawful Internet gambling. Provided you ever figure out what that is. Or spot anybody doing it.
But what happens if somebody slips through the net? The regulators have decided that they will not even levy fines. To impose penalties in these circumstances would be "potentially confusing, given the different relationships between parties within each designated payment system." And given the fact that nobody can actually define what it is you're not supposed to be doing in the first place.
The flap over the UIGEA regulations, is literally, much ado about nothing. Not only are they unenforceable: in reality it really doesn't matter whether they're actually enforced or not. The Treasury regulators admit that.... "most Internet gambling businesses that use card systems for funding do so through non-U.S. merchant acquirers that are not subject to the Act or the final rule...." That is, the so-called Bad Guys figured out a way around the rules before they were even written. As usual, the crusaders against Wicked Internet Gambling have no complaint against those they can reach, and no way to reach those of whom they complain.
So it boils down to this: if these regulations are ever actually brought to life, all that will mean is another paperwork drill for the banks. Cost of compliance has been estimated at one million man-hours nationwide. A burden to be sure,, but not the worst that could happen. The chances of actually shutting off Internet gambling are about nil- all it will do is increase the number of foreign credit cards sent through the mail.
There has been a good deal of press about Congressman Frank's attempts to repeal or at least revise the UIGEA. While these would be quite welcome developments, you have to wonder whether it would be worth the time and effort. The UIGEA is hard aground on its own contradictions, and no particular threat to anybody. It may well be that the best thing to do is simply let it rot.
Mr. Owens is a California attorney specializing in the law of Internet and interactive gaming and related issues, serving clients worldwide since 1998. He co-authored INTERNET GAMING LAW with Professor Nelson Rose, America's senior authority on gambling law (Mary Ann Liebert Publishers 2005, second edition just out, 2009), as well numerous other articles. He is an Associate Editor for "Gaming Law Review and Economics" magazine. Comments and inquiries welcome at to firstname.lastname@example.org.