Thoughts on the UIGEA Enforcement Guidelines Draft

On October 1, the United States Treasury Department and the Federal Reserve jointly published a draft of the guidelines to enforce the Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006. Published late — they were due this summer — the 52-page document:

  • proposes rules to implement the UIGEA
  • designates and defines payment systems to be regulated
  • requires participants in designated payment systems to establish policies and procedures reasonably designed to identify and block or otherwise prevent or prohibit transactions in connection with unlawful Internet gambling
  • exempts certain participants in designated payment systems
  • describes the types of policies and procedures that non-exempt participants in each type of designated payment system may adopt in order to comply with the Act
  • includes examples of policies and procedures
  • does not specify which gambling activities or transactions are legal or illegal, deferring instead to underlying State and Federal gambling laws

Comments are due by December 12, 2007, and can be submitted in writing or electronically. Once the rules are finalized, the draft calls for the rules to go into effect six months after that date (although this could change based on the commenters, like the banking industry).

I’ve read this draft, and wanted to share some thoughts.

  • Individual gamblers are not targeted by the UIGEA. From page 7:

The proposed regulatory definition clarifies that an end-user customer of a financial transaction provider is not included in the definition of “participant”, unless the customer is also a financial transaction provider otherwise participating in the designated payment system on its own behalf.

  • The draft makes it clear that it will be difficult to monitor certain popular payment systems. This suggest to me that payment via these methods — particularly via check, in my opinion — will rise in popularity once these rules go into effect. From page 13:

While other systems, such as the card systems, have developed merchant category and transaction codes that identify the business line of the payee (e.g., the gambling business) and how the transfer was initiated (such as via the internet), so that the systems are able to identify and block certain types of payments in real time, the ACH systems, check collection systems, and wire transfer systems do not use such codes.

  • The draft suggests that some payment systems will, for the most part, be exempt from having to follow the rules. This is good news for US gamblers, and suggests to me that the UIGEA will only make it more difficult for US gamblers to gamble, but will fall well short of putting an end to all internet gambling by US citizens. From page 13-14:

As a result, the preliminary view of the Agencies is that it is not reasonably practical for the exempted participants in ACH systems, check collection systems, and wire transfer systems … to identify and block, or otherwise prevent or prohibit, restricted transactions under the Act.

  • Something that is troubling to me is that if a person blocks payment for the reasons in the draft (see excerpt below), then that person is not liable for any adverse results that may occur to the person that had the transaction blocked. I can imagine a scenario where a person has a legitimate transaction blocked, and that person is subsequently charged non-payment / bounced checks fees. That person would have no grounds to collect these fees from the person that blocked the legitimate transaction! From page 18:

Section 5 also imports the Act’s liability provisions, which state that a person that identifies and blocks, prevents, prohibits, or otherwise fails to honor a transaction is not liable to any party for such action if (i) the transaction is a restricted transaction; (ii) such person reasonably believes the transaction to be a restricted transaction; or (iii) the person is a participant in a designated payment system and prevented the transaction in reliance on the policies and procedures of the designated payment system in an effort to comply with the regulation.

  • Another thing that is interesting to me is the use of the term “reasonably designed” throughout the draft. This is just asking for these rules and regulations to wind up in court, because what is reasonable to one person may not be seen as reasonable to another person (or to the government). In my opinion, we’ll see a court challenge shortly after the rules go into effect that will further delay the complete implementation of the rules to enforce the UIGEA. It’ll be years before this is all sorted out.