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U.S. Banks Unhappy With UIGEA Regulations...By Hartley Henderson

The American Banking Association (ABA), which acts as the spokesman for most U.S. banks, recently stated its unhappiness with the UIGEA regulations released by the US Treasury and Federal Reserve last October. In particular the organization was upset that the government didn't provide clear rules on how to implement the statute and instead shifted the burden of drafting the rules to banks and other payment processing organizations. The ABA pointed out that the responsibility was shifted to the banks because the government, in spite of its sophisticated technology and secret services, could not close down offshore gambling enterprises, nor could they adequately determine a method to block transactions from those companies. The government made several failed efforts to block offshore gambling transactions but couldn't succeed, so instead they decided to put the onus on payment processors and banks via the UIGEA. Unfortunately the government failed to give the banks direction about how to do block those transactions (because they clearly didn't have a clue if and how this could be done), so they decided instead to punt the ball to the banks and have them deal with it. Regular readers of my articles shouldn't be surprised with the ABA's conclusion. In October of 2007, when the regulations were drafted I wrote the following:

"The UIGEA regulations as they are written are worthless to the banks because they do not do the two things the banks asked for - how to identify "illegal" transactions and what procedures need to be in place to show compliance with the new law. Instead, the Treasury released a 52 page report which told the banks and other payment companies what they already knew and the responsibility for writing the procedures and policies to block the internet transactions were tossed into the banks' court."

That is precisely what the ABA told the government, but instead of informing the government they would do their best to comply, the ABA had the fortitude to give the government a list of criteria that the government must provide the banks which would allow the banks to draft meaningful regulations. In particular, the ABA focused on demanding a more clear definition of what qualifies as "illegal" gambling, dropping the provision that could fine the banks for over blocking, i.e. accidentally blocking legal transactions, and most importantly they wanted to ensure that when foreign banks are involved in cross border transactions, the onus is taken off U.S. banks to somehow miraculously become aware that the transactions are for offshore gambling. Also, the banks still want a list of companies that they need to be on the lookout for, but they also understand this will be almost impossible since offshore companies use 3rd party companies that process millions of transactions for all sorts of industries. In fact the ABA suggested that if a foreign bank processes a deposit or withdrawal for Americans from an offshore gambling company, the foreign governments should go after those banks and leave the American banks out of the equation. Needless to say, that will never occur since foreign governments will not deem online gambling illegal if they allow the activity to occur in their jurisdiction. Regardless, the response by the ABA was quite direct and somewhat brazen. To quote the ABA in a letter sent to the government:

"The UIGEA will in the end catch more banks in a compliance trap and do greater damage to the competitiveness of the American payments system, than it will stop gambling enterprises from profiting on illegal wagering."

What the ABA didn't mention in its objections, but is clearly an issue, is the cost. In the guidelines drawn up by the Federal Reserve it was estimated that the cost to each bank would be no more than $4 million. However, the true cost will be astronomical. To try and track every single transaction, trace its origins and somehow determine if it breaks any individual state gambling laws would be extremely time consuming, even if it was possible to do so. Exact figures have never been officially announced, but some talk of around 100 million dollars a year has been suggested by some as a more realistic figure. The amounts certainly aren't immaterial to the banks, and are in fact quite significant given the struggles banks currently face. When the UIGEA was passed in October of 2006 the U.S. economy seemed to be holding its own, but with the sub prime mortgage fiasco combined with a struggling economy, the last thing the banks want is to be forced to part with hundreds of millions to enforce a statute that by all accounts can't achieve the objectives it was set out to accomplish. So it isn't all that surprising that the banks, which at one time would have been quite fearful of the U.S. Treasury, has returned the ball to the government's court and essentially said "this is your stupid law. Give us clear instructions on how to enforce this thing and we'll do our best to oblige. It's not our job though to do the work for you."

Furthermore, the banks are quite aware that George W. Bush will be out the door by year's end and the man who forced the bill through by attaching it to the Safe Port Act has left politics altogether. In fact even Jim Leach was voted out of office, largely due to his anti-gambling stance. It is uncertain whether Barack Obama, Hillary Clinton or for that matter even John McCain have the same interest in this bill. And if the ABA can demonstrate to the new presidential candidates how and why this law could hang a major noose around the banking industry, perhaps they could get rid of the albatross once and for all and have the UIGEA repealed. In fact the only person who will be in Congress next year that we know for certain is keen about the UIGEA's passage is Jon Kyl.

For that reason, on April 2nd a congressional hearing will be held to discuss the UIGEA in an effort to determine if it's worth the hassles. The hearing will be conducted by the Subcommittee on Domestic and International Monetary Policy, Trade, and Technology and will be chaired by Rep. Luis Gutierrez (D-IL). The meeting titled "Proposed UIGEA Regulations: Burden without Benefit" will take place at 10 am on April 2nd in Washington and speakers will likely include spokesmen from the ABA as well as Barney Frank and Robert Wexler who want their own new bills used in its place. The hearing seemed to be spearheaded by the Poker Player's Alliance with encouragement from the ABA with the goal of repealing the UIGEA. While Frank and Wexler's bills would not prove to be sports bettors friends, since both bills fail to provide options for sports betting, the repeal of the UIGEA would be welcome news to all in the betting industry including sportsbooks, since the same concerns would still be present under either of Frank or Wexler's motions. In better words, while either bill would provide for legalized gambling for skill games including poker, it doesn't change the fact that banks would still have a difficult time flagging transactions for non-skill related games or for offshore gambling that doesn't involve poker or some other new legalized form of gambling. All the same concerns that existed before would still be there with Barney Frank or Robert Wexler's bill and the banks would still argue that they can't track those transactions from sportsbooks. Furthermore, most sportsbooks have poker rooms and/or casinos. Consequently, the repeal of the UIGEA could only serve to help all online gambling interests.

MajorWager will have a detailed analysis of the hearing on April 2nd.

Hartley Henderson

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