Rushed through Congress in the final hours of the 2005-2006 legislative
session, the Unlawful Internet Gambling Enforcement Act seems likely to fail
in its ultimate goal of prohibiting Americans from depositing and
withdrawing money from offshore-based online gambling companies. To be truly
effective, the regulations should mandate that America’s financial networks
identify every product and service that an American purchases and to whom
payment is made. If the purchase is related to online gambling then
financial institutions should be required to deny it. The Act’s
effectiveness will rely heavily upon how well the Fed and Treasury are able
to deal with “uncoded” transactions. While credit card transactions always
contain a code that identifies what type of product or service is being paid
for, paper checks, electronic checks and Automate Clearing House (ACH)
transactions do not have such a code that would allow financial institutions
to monitor and block them. As late as July the banking industry opposed an
earlier form of the legislation due to what the Independent Community
Bankers of America (ICBA) called “an impossible compliance burden for
‘uncoded’ transactions.” It appears that hurrying the bill before Congress’
adjournment at the end of September was so important to Senate sponsor Jon
Kyl (R-Ariz) that he was willing to make concessions that could seriously
jeopardize its effectiveness. “We were fortunate to be able to work with the
bill’s sponsors to minimize the burden that it could have imposed on banks,”
said Laura Fisher, the American Banking Association’s (ABA) head of public
relations on issues relating to banking legislation and regulations.
“There’s a provision in the bill that says the Treasury and the Federal
Reserve can exempt certain transactions that they deem impossible to track
and code. “The two specific transactions are checks and Automated Clearing
House payments.”
The Federal Reserve and Treasury will be tasked with devising the
regulations that will enforce the Act after it is signed into law. The
process will involve an issued statement regarding how the Fed and Treasury
propose to enforce the law, followed by a public comment period during which
interested parties may submit thoughts and concerns about the matter.
The ICBA and ABA are certain to argue for exemptions for ACH payments as
well as paper and electronic checks.
“There are 40 billion checks processed every year, and tracking those would
mean having a staffer manually review each check and review whether each
payee is an illegal gambling site or a restaurant, and that is pretty much
impossible,” said Fisher. “That would be a real compliance nightmare for
banks.”
With regard to credit card transactions, it is already virtually impossible
for Americans to use credit and debit cards to pay for online gambling
services. Internet gambling presented a number of problems for American
credit card companies in the 90s, including chargebacks, lawsuits from
gamblers attempting to have their debts ruled unenforceable, and pressure
from lawmakers seeking to ban the activity. In 2001 the major credit card
companies responded by requiring all gambling-related Internet transactions
to be coded in such a way that made using their cards to pay for such
services impossible.
The situation created an opportunity for offshore-based alternative online
payment processors like Neteller, Firepay and Citadel to fill a consumer
demand that the credit card companies had ceased to service.
Today alternative payment processors are the most commonly used method of
payment for American online gamblers. Neteller, the largest of the payment
processors, boasts close to 3 million customers and received $119 million in
revenue in the first half of this year. 86 percent of the company’s active
customer base resides in North America.
“The great unknown is how far into the Internet commerce stream federal
regulators are willing to go,” said Professor I. Nelson Rose of Whittier Law
School. “The Act requires institutions like the Bank of America and Neteller
to identify and block transactions to unlawful gambling sites, whatever they
are. But, while the Bank of America will comply, Neteller might not, because
it is not subject to U.S. regulations.”
Neteller is located in the Irish Sea between the UK and Ireland.
“The courts have the power to issue temporary restraining orders,
preliminary and permanent injunctions, to prevent restricted transactions,”
said Rose. “The only problem with this enormous power is that it is, again,
practically useless against payment processors who are entirely overseas.”
The Unlawful Internet Gambling Prohibition Act contains no provisions that
would make it illegal for a person located in the U.S. to place a bet with
an online gambling company. All provisions are directed at trying to stop
the flow of money.
It is estimated that Internet gambling will generate $12 billion in revenue
in 2006, with more than half of it coming from players based in the United
States.
