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Treasury Finalizes Flawed UIGEA Regulations...By Hartley Henderson

In the first act of what is expected to be a scorched earth policy by the departing Republican Party, the Treasury has issued the final regulations for the UIGEA. As expected, the Treasury couldn't come up with anything meaningful that would allow banks to identify illegal transactions. So they simply penned that all transactions that are processed for online gambling that aren't explicitly legal state-wise or federally are,, for all intents and purposes, illegal and must be banned. In April of this year the banks essentially begged the House Financial Subcommittee to have the Treasury draft something more meaningful than the original regs, which were vague and cumbersome. They stated that forcing them to police transactions and try to find all the needles in the haystack could bankrupt the industry. This, of course, was stated even before the financial meltdown, so the concerns then are even more paramount now. But those pleas seemed to fall on deaf ears, as the Treasury essentially just reissued the faulty regulations they initially published.

Last week Barney Frank asked the Treasury to delay finalizing the regulations to allow the incoming President and his cabinet the opportunity to re-examine the rules and see if the policy is relevant. However, it has been suggested by many political pundits that George Bush, in an attempt to return the favor to his friends (that include many gambling retractors, including evangelical leaders), is vowing to pass every unpopular motion on the books before Barack Obama takes over. For his part, Obama has stated that any laws that are passed or motions that are finalized in this lame duck period will be examined carefully when he does take over, and he will take action to reverse those laws, if necessary. Needless to say, the UIGEA regulations were on that list, as for some reason the Republicans deemed online gambling to be a major issue in America today. It is safe to say that most Americans wouldn't agree.

The final regulations don't actually say how the banks can identify "illegal transactions," or companies involved in illegal gambling. And the regulations don't actually attempt to justify why the regulations shouldn't be identifying what "gambling transactions" are, or the companies that are involved in "illegal" gambling. The following paragraph is in the final rule:

In addition, the Agencies do not believe that a list of businesses that engage in unlawful Internet gambling would necessarily be effective or efficient in preventing unlawful activity because the payment transactions would not necessarily be made payable to the business's listed name. Even where the business's listed name is used on the transaction, some payment systems do not process the transaction based on the payee name. Also, to the extent that Internet gambling businesses can change their payments information with relative ease and speed, such a list would be outdated quickly. Finally, the Agencies believe that appropriate due diligence conducted by participants opening accounts would be the most effective method for preventing unlawful Internet gambling businesses from gaining access to the payment system directly through U.S. accounts. The suggested due diligence procedures discussed in this final rule are designed to target that relationship.

Instead, the final regulations talk on and on about "due diligence" and how things will turn out fine if the banks just use due diligence. Of course suggesting due diligence is just a way to pass the buck without doing the hard work themselves. And, it also gives the banks an out if they fail to block transactions, simply citing they used due diligence. An example the Treasury gives of how a bank can use due diligence is that banks should question consumers about transactions they can't easily recognize. The Treasury seems to suggest that if the bank calls the person and asks what the transaction is for, that the consumer will answer honestly and will help identify something that is online gambling related. What the Treasury fails to take into account is the obvious fact that people likely won't be forthcoming if they want to gamble; people don't want the government or banks knowing about gamblings transactions. Of course, that makes the whole process the process irrelevant. More concerning, however, is that it also opens up the potential situation of identity theft and fraud. Banks make it clear that they will never contact you by email or on the phone or ask about accounts or transactions---and if someone does ask, claiming to be from the bank, it is likely a phishing expedition. Now, however, the banks have to retract those statements, which indeed could open the door for more phishing from unscrupulous individuals who will use online gambling as the catalyst to get information.

Banks have threatened to simply block all transactions they identify as gambling related to make it more likely that they will catch the illegal transactions. But the final regulations have kept the overblocking rule from the first draft, meaning that banks that block online gambling transactions for horse racing, tribal gaming, fantasy sports or lotteries (which are exempt from the UIGEA) will also be found liable for essentially being too vigilant. However, the Treasury is certain that banks will be able to identify the legal companies by using due diligence.

Lastly, it's interesting to note that the Treasury has admitted that there are many ways to get around the legislation; and that chances are that online gambling companies will find new methods to have funds transferred that they haven't even thought of yet. Thus, the Treasury created a rule in the act that essentially makes all methods to transfer funds illegal even if they don't know about them yet. So not only do banks have to identify transactions that are being processed by methods that already exist, they also have to predict the future and identify new methods that don't exist yet that companies will use to transfer funds. Of course the Treasury feels that isn't overly cumbersome, so long as the banks use due diligence.

Perhaps the most interesting and noteworthy aspect of the regulations are the number of complainants. The report talks on and on about people or companies that have expressed real concerns about the rules and the law in general, but the Treasury seems to ignore them. The report does make note of the concerns that were identified, but then it just dismisses them with a passing comment. It also, of course, suggests that the concerns can be overcome with due diligence. To say that those statments are unfair is an understatement. If someone has a real issue that can lead to devastating consequences, that issue should be treated with the respect it deserves. But, of course, it has been common practice for the Bush administration to simply wave off concerns without really addressing them, and instead telling people to trust him, or else. The first and foremost glaring example of this was Bush's refusal to provide proof to nations that questioned whether Iraq really had weapons of mass destructio---and why others should help fight a war against a country that was not a threat. Hopefully most in Congress, this time, will call his bluff and demand to know what the true ramifications will be to the banking industry when Obama takes power. What is known for certain is that this endeavour will cost at least $100 million a year, at a time when the banks can least afford it---and that's assuming the Treasury's figures are accurate, which is quite a stretch.

It is unlikely that these new regulations will do much. Offshore gambling companies are always looking for new methods to transfer funds, and no amount of due diligence will capture everything. As well, the first time a bank blocks an online horse racing transaction, it is certain that the horse racing industry will go to the government screaming foul. There is a reason the banks asked for specifics to implement this faulty law, and without that clarification they can't effectively enforce the regulations. The two groups that will probably be hurt the most by the regulations are the horse racing industry and the offshore poker companies. Fortunately for the entire gambling community, the poker industry has a huge lobby, with over 2 million people at the poker player's alliance. It's almost certain that Barney Frank, Robert Wexler and others will put the repeal of the law as a major issue to Barack Obama, due to their support of legalized online gambling. Hopefully Obama agrees to take up the fight. He certainly has the mandate for it, as well as a large majority in both the House and the Senate.

Hartley Henderson

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