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The UIGEA Regulations are a Dud, Now What?...By Hartley Henderson

A few weeks back when it was announced that the Republicans were going to release final regulations for the UIGEA there was quite a bit of anger from the gambling community. Congressman Barney Frank expressed outrage that the lame duck Republican government was going to ram through the UIGEA regulations and suggested it was more appropriate to leave the bill on the table for the incoming government to deal with to see if it could come up with a strategy that would be less burdensome on the banks than the proposed regulations issued last year. Jay Lakin from was even more vocal: Isn't it sad, with all that's going on in this country, especially regarding our financial institutions, that the Bush administration is worried about whether adults should have the right to spend their own money playing poker in the privacy of their own homes?

On the one hand they're bailing out the banks to the tune of $700 billion, while with the other they're imposing rules and regulations on those same banks that are nearly impossible to enforce and will cost them greatly to implement.

Wouldn't it make much more sense to legalize and regulate the industry, as so many other countries have done, thereby generating billions of dollars in revenue and thousands of jobs?

I guess, in the end, it's whatever is best for the NFL and Horse Racing lobbies, country be damned. And the Republicans wonder why they keep losing elections.

Other gambling sites issued similar comments and the consensus in most gambling forums was that the regulations were ill timed and served nothing more than to stroke Bush's ego and support the NFL lobby and religious groups which strongly encouraged the Republicans to release the regulations before Obama took power, for fear he and his new cabinet would just scrap the whole law. After analyzing the regulations, however, it was obvious that the Treasury had no way of drafting anything meaningful, so they essentially just wrote a watered down version of the proposed regulations from last year. There is still no definition of what constitutes an illegal transaction and there certainly is no list of companies that the banks should be on the lookout for (something which the ABA demanded as essential to effectively enforce the regulations). However, the regulations were also worded in a way that frees them from prosecution so long as they do some due diligence. An example of due diligence could be as simple as asking a client if they are gambling online, with no repercussion for the bank if the clients answers "no". However, more meaningful is the fact that there is no penalty for failing to stop illegal transactions. Nothing in the legislation lists repercussions to the financial institutions if they fail to block online transactions. Consequently the rules are a dud. Gambling attorney I. Nelson Rose was clear that the rules as he sees them cannot be enforced on gambling that occurs outside the United States, which of course is the gambling that the UIEGA was implemented to stop. The following is from an analysis provided by Rose:

The federal agencies still put the burden on the financial institutions to do "due diligence." But what this means is banks have to do the same amount of "know your client" work with new commercial customers that they now do to prevent money laundering: basically ask the company owners what their business is and do a little checking to confirm they are telling the truth. If the new commercial customer proves it is not in the gambling business, there's nothing more to do. If it is in the gambling business, the bank then has to ask it for its state license. The new rule says that getting a license is enough, because it is up to the states to regulate the Internet gambling operation of their licensees.

Of course, the only operators there are in the U.S. at present who have licenses are parimutuel betting outlets. Some state lotteries also use the Internet, but they are deemed to be automatically O.K. because they are a part of state government. If California or any other state authorizes Internet poker, financial institutions will be able to do business with those online poker rooms, because they will have state licenses.

There aren't a whole lot of illegal gambling websites operating out of the U.S., so the new rule will have almost no impact.

What about licensed and unlicensed poker rooms and others overseas? If there are any left with direct business relationships with U.S. banks - and I doubt that there are - they will have to start using foreign banks, like every other foreign operator. American banks are not expected to ask their foreign respondent banks about their commercial customers.

Trade attorney and long time gambling advocate Martin Owens concurred and came to the conclusion that the sole reason for issuing these regulations as is was to take the decision out of the Democrats' hands and to "punt" the ball back to the states to decide how to handle the penalties and enforcement. The following is from Owens' written analysis:

Overall, the UIGEA regulators have performed what American football calls a punt: unable to progress further, they've kicked the ball into the other side's territory, and best of luck, lads. The regulations as finally issued concentrate on minimizing the liability and inconvenience inflicted on the financial community by a law that, in the end, has only served to increase i-gaming's chances of wide adoption in the USA. True, there is a burden: it is estimated that the administration of these regs will consume a million man-hours initially. But it could have been much worse. Financial businesses must already submit an unending stream of reports and records. A few more will not be fatal.

It has been suggested that there is Congressional precedent to overturn last-minute changes by the outgoing party, such as this one. The new Obama administration will probably have the votes for it. The question is, given UIGEA's now admittedly marginal impact, will they consider the effort worthwhile?

While the regulations are clearly a dud and cannot possibly stop Americans from gambling online, this has not resulted in much discussion or excitement for gambling companies, or for that matter to anyone connected with online gambling. In fact the silence since the passing of the final rules (just over 2 weeks now) has almost been deafening. When the UIGEA was passed in October of 2006 there was almost a stampede of European and Australian based companies running for the exits. Party Poker, 888 Gaming, Sportingbet to name just a few dropped American clients almost immediately after the law was signed. Furthermore, gambling stalwarts like WWTS and Bowman's International sold their operations outright. Within the next few months, Pinnacle Sports closed its operations to American bettors and various payment processors stopped catering to the U.S. market, including but not limited to NETeller, Citadel, and Firepay. NETeller's decision, of course was, helped along by the arrest of the company's founders. But the lack of meaningful regulations doesn't seem to have inspired any payment companies from overseas to come into the U.S. market. I spoke to a director of a European payment processor and asked him if the new developments concerning the final regulations caused the company to reconsider catering to Americans. He stated:

"We'd love to offer our services to Americans," the director replied, "but in the current climate that isn't feasible. The U.S. government has proven to be very fickle and many of the proponents of the UIGEA are still in office. We would consider entering the U.S. market only if there was a full repeal of the UIGEA or other legislation that deemed our services legal in all respects. We aren't prepared to be in a grey area. Our service is totally legal and welcomed in all countries where we operate and we intend to keep it that way."

Sportsbook owners and directors that don't cater to the U.S. market anymore tend to agree. One that spoke to me off the record stated bluntly:

"Although the laissez-faire situation may no doubt continue, you are unlikely to see any new or re-entrants to the U.S. market until the present legislation drastically changes. Simply because the law is found to be unenforceable will not be grounds enough for the Party Pokers, Sportingbets, Pokerrooms, Playtechs etc. of this world to return."

Most gambling operators that left the U.S. market took a big initial hit, and some eventually did have to close shop. The majority, however, simply shifted the focus of their operations to other markets in Asia and Europe and to a smaller degree to Canada and parts of Africa and are well on their way back to respectable profits. None are willing to sacrifice those advancements and come into the U.S. without the blessing of the government by way of legislation that specifically legalizes their operations. If Barney Frank, Robert Wexler and others are successful in getting the congressional votes to repeal the UIGEA this may indeed come to pass, but it seems likely that will only occur for poker and other "skill games". Sports betting and casinos will still be on the outside looking in since there seems to be no will by anyone in government (including Frank) to look at legalizing sports betting and challenging the 1961 federal wire act.

The news for American online gamblers, however, including sports bettors may still be positive. It was feared that had the Treasury drafted strict regulations that imposed huge penalties on financial entities, that could have resulted in the banks imposing draconian measures to ensure that no online gambling transactions were ever processed. Furthermore, there was great fear that the few payment processors that do process transactions for U.S. facing online gaming companies would back out as well, for fear that the U.S. Department of Justice would come after them in the same manner they attacked NETeller---i.e. arresting its directors and seizing funds in transit. With the new rules, however, which makes the UIGEA a toothless tiger, there really isn't anything to fear. In fact the new rules which clearly exempt American banks from seeking information about transactions from overseas banks may actually open up some new avenues for transactions. To date many gambling sites will only process withdrawals by check written on a foreign account because those are far harder to track. As well, the DOJ can't seize ACH transactions as they did with NETeller if a payment is by check. But the new rules and a new justice department taking over in January will likely convince some payment processors to look at offering bank wires and EFT transactions once again. The banks have no reason to really track those transactions as they are foreign in nature and the new regulations releases the banks from culpability since the rules acknowledge trying to track the nature of those transactions is virtually impossible. As well, some new payment processors which had plans for entering the U.S. market, but were sitting on the sidelines waiting to see what the Treasury and DOJ were going to produce by way of UIGEA regulations, may be encouraged to now come forth with their new payment ideas. But most encouraging of all to American bettors is that the new rules change absolutely nothing for current payment processing. As such, bettors who can get money in and out of offshore gambling sites will still be able to do so in the same manner because nothing in the new rules will scare away any of those payment processors from continuing their operations as they have been.

So, in summary, the new rules are good news and bad news. The good news is that American gamblers will still be able to get money in and out of their favourite gambling sites without much change, and in fact it could open a few more avenues. The bad news is that short of a total repeal of the UIGEA or a new law that legalizes offshore gambling there is nothing in the regulations that will compel the likes of Pinnacle Sports, Party Poker or NETeller to return to American gamblers. As long as Americans can continue to bet with their favourite sites, however, without fear of arrest or having their funds stolen from them, I suppose it is all good news.

Hartley Henderson

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