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News analysis of Wednesday's hearing on UIGEA regulations

3 April 2008

Let's be perfectly clear here. Wednesday's congressional hearing on the Unlawful Internet Gambling Enforcement Act's (UGIEA) regulations exposed the anti-online gambling law as poorly constructed and nearly impossible to enforce. But it did not kill it by any stretch of the imagination. Instead, Congress sent regulators back to the drawing board with the hopes that they could clean up the enforcement mess that the UIGEA has created.

After the House Monetary and Technology Subcommittee heard testimony from six witnesses – two regulators and four representatives from the banking industry – three things became clear:


• The U.S. payment system is not designed to effectively identify and block online gambling transactions.

• Financial institutions need to know what unlawful internet gambling is, but the UIGEA doesn't offer any specific guidance.

• Financial institutions are highly uncomfortable being placed in the role of determining what is legal, and subsequently handing out any punishment (which also aren't specified in the UIGEA) to account holders for attempting to complete an "illegal transaction."

Federal Reserve Director Louise Roseman nicely summed up the UIGEA's problems this way:

"The construct creates ambiguity between what is legal and illegal gambling. And the intent is for the payment system to be the enforcement mechanism. But the payment system is not well designed for this task.

"(No matter what) there will be a proportion of gambling transactions that go through. The question is how much."

And the reason that online gambling transactions will be allowed through is that American banks aren't likely to receive assistance from foreign banks in enforcing the UIGEA.

"Money laundering is a global concern," Roseman said in explaining why money laundering processes can't be applied to online gambling. "Banks around the world cooperate. But the banking industries in countries where gambling is legal have no reason to work on this."

Roseman also noted that outside of credit cards, coding transactions won't work either.

"If you look at the check system, there is no code, or no capability to have such a code put in. It would be very difficult to extend the credit card concept to wires or check systems."

As difficult as identifying online gambling transactions might be, determining whether they're unlawful might prove to be more difficult.

The UIGEA doesn't specifically spell out what's legal and illegal. Instead, it directs financial institutions to determine what is legal or illegal under federal or state law. And the banking industry isn't happy with being given that responsibility.

"The UIGEA takes banks beyond the role of reporting suspicious activities," said Wayne Abernathy, executive vice president for the American Bankers Association. It "makes financial institutions the police, prosecutors, and judges in place of real law enforcement officers."

And the Federal Reserve's Roseman agrees. "It is very difficult (to enforce the regulation) without having more of a bright line on what is illegal."

One of the primary challenges in determining what's legal and illegal is betting on horse racing. The Department of Justice views any online wagering on horse racing as illegal. But the UIGEA clearly exempts wagers on horse racing from the law. But even with the UIGEA horse racing exemption, Abernathy suspects that horse racing transactions would be blocked.

"You might know where the race took place, but you might not know where the bet took place" Abernathy said. "I suspect banks would block (a horse racing) transaction, and would (generally) block more legal transactions so they wouldn't miss the illegal ones."

Given the practical constraints that regulators are facing, the odds are slim that either Federal Reserve or the Treasury Department will be able to deliver regulations that will satisfy either the banking industry or Congress by the end of the year. And that means the eventual fate of the UIGEA may lie in the hands of the next Congress, and the next administration.

News analysis of Wednesday's hearing on UIGEA regulations is republished from Online.CasinoCity.com.
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Best of Vin Narayanan
Vin Narayanan

Vin Narayanan is the managing editor at Casino City. When he's not writing or editing stories, he likes to play Chinese Poker, Badugi, Razz and any other "non-traditional" poker game. He also thinks blackjack is his best game and loves game theory.

Before joining Casino City, Vin covered (not all at the same time) sports, politics and elections, wars, technology, celebrities and the Census for USATODAY.com, USA WEEKEND and CNN.

A proud graduate of Michigan State University, Vin can be found on most nights and weekends trying to find a way to watch the Spartans play football or basketball.

Vin Narayanan
Vin Narayanan is the managing editor at Casino City. When he's not writing or editing stories, he likes to play Chinese Poker, Badugi, Razz and any other "non-traditional" poker game. He also thinks blackjack is his best game and loves game theory.

Before joining Casino City, Vin covered (not all at the same time) sports, politics and elections, wars, technology, celebrities and the Census for USATODAY.com, USA WEEKEND and CNN.

A proud graduate of Michigan State University, Vin can be found on most nights and weekends trying to find a way to watch the Spartans play football or basketball.