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U.S. Banks Offer "Due Diligence" as UIGEA Deadline approaches...By Hartley Henderson

In a couple of weeks financial institutions will be obligated to abide by the UIGEA regulations. It appears unlikely that a motion by Barney Frank and over 50 co-sponsors to postpone mandatory compliance to UIGEA regulations for a year will pass the House, so banks are getting their ducks in a row and are preparing to offer due diligence as is required under the UIGEA.

Some bettors they have received a notice with their bank statements the last month or so relating to internet gambling. The wording is slightly different for each bank, but the points being are similar. The following was the exact wording on a statement from a larger Midwest bank. The name of the bank is being withheld so as not to promote them.

"As a (fill in the blank) customer, we'd like to inform you that in accordance with the requirements of the Unlawful Gambling Enforcement Act of 2006 and Regulation GG, certain transactions are prohibited from being processed through your account

Prohibited transactions include those in which a person accepts credit, funds, or other proceeds from another person in connection with unlawful internet gambling. If you have any questions or concerns regarding this regulation, please contact us."

Apparently notices like these have been sent to bettors with accounts at big banks, as well as those at some smaller independent banks. In fact these notices have even been sent to people who don't bet online. I contacted a relative in Cincinnati who stated that he has never placed a bet online and has never opened a gambling account at any sportsbook, poker room or casino, yet he received a letter from his bank with similar wording. He does occasionally attend riverboat casinos and takes trips to Vegas, but he doesn't bet online.

So what exactly are the banks doing to adhere to the UIGEA regulations and prevent online gambling? The answer is they are doing as little as is required, and rightly so. When the UIGEA was passed banks were upset that they were going to be forced to police the internet, but they said they were willing to do so provided the Treasury and AG gave them clear guidelines and a list of transactions that were illegal, including the names of any companies considered to be operating illegally. (Most banks were already blocking credit card transactions for online gambling and many did block transactions when it was very clear they were for internet gambling). The Treasury and the discredited Attorney General took forever to write the rules, but when push came to shove the Treasury penned a bunch of rules that put the onus on the banks to identify illegal transactions, and they were set to impose heavy fines on banks that failed to do so. A House Financial Services subcommittee meeting was held the next year and was attended by the American Banking Association, who made it clear that the rules as written were impossible to adhere to and that trying to track down that elusive online gambling transaction was equivalent to looking for a needle in a haystack (not to mention that finding these transactions would be extremely costly). Nevertheless, the rules were passed and must be adhered to by December 1.

With all the rhetoric and severe threats implied within the UIGEA rules, there is one bit of comfort for financial institutions, and it is significant. The regulations states that as long as financial institutions perform "due diligence" they will be absolved of any wrongdoing should illegal gambling transactions make their way through. The question as to what constitutes due diligence is open to debate, but most experts, including Professor i. Nelson Rose, have suggested that simply informing customers about the UIGEA and asking them not to bet online is sufficient. In fact the letter posted earlier from the bank may be more due diligence than is required. I contacted a few U.S. banks and no one in authority was willing to discuss specifics on what they planned to do (probably because they weren't sure themselves), although one manager did say to me that his bank would be blocking any transactions that it easily identifies as an illegal gambling transaction. He did, however, also imply that he wasn't prepared to be led on a wild goose chase spending days and money trying to identify the source of transactions that seem out of the ordinary.

One has to suspect that at some point a State Attorney will try to take a bank to task for letting through an offshore internet deposit or withdrawal, but when this happens the attorneys and courts have to consider whether it's worth the effort before they make a major issue of it. The UIGEA's past may seem like old news now, but to date the constitutionality of this legislation has never been challenged, nor has the real purpose of the law ever really been discussed in court. And without question the last thing any government would want to do is defend the UIGEA in a court of law. Barney Frank, iMEGA and other groups have been itching to challenge the legitimacy and constitutionality of the legislation, but they have been thwarted at every turn. If the courts do agree to hear a case related to the UIGEA, then iMEGA and others will have to be given standing, and at that point the DOJ will have to defend the legislation and provide reasons why they couldn't come up with meaningful rules to enforce it. Furthermore, they will have to answer why the law was passed in the first place.

Don't forget, the UIGEA was a cynical Republican bill attached to an unrelated piece of legislation in 2006 for the sole purpose of appeasing the religious right wing lobby groups like Focus on the Family who were calling for the government to do something about the growth of gambling online. It was also passed as a present for John Kyl, Robert Goodlatte and other Republicans who had been chasing their personal agenda for years. It couldn't pass by normal means (every time similar legislation was brought forward it failed to get enough votes to pass), so Bill Frist sneakily attached it to a bill on port security (many believe on the advice of George W. Bush himself) since that piece of legislation was a sure thing to pass. Ironically, Frist likely attached the bill thinking it would bolster his bid for the presidency, but he read the public's attitude towards online gambling wrong and the legislation actually hindered his chances. In fact, Congressman Jim Leach lost to a write-in Democratic candidate in the 2006 mid term elections almost exclusively because of the efforts of gambling interests who opposed him. Several polls have been conducted in the U.S. related to online gambling, and in each one the public said it didn't want the activity criminalized. Nevertheless, the Port Bill passed both the House and the Senate easily, and the rest is history. The Republicans and some Democrats have suggested that the public wanted the UIGEA and are surprised about many of the naysayers, but nothing could further from the truth.

The UIGEA achieved one of its initial objectives of scaring off potential newcomers, along with publicly traded companies who didn't want to challenge the government on the legislation, but in the end the legislation was so poorly thought out that when it came time to write the regulations for it the Treasury threw up its hands and essentially said it wasn't possible, so they wrote a set of rules that demanded that the financial institutions do their dirty work for them. The cynical Republican government, however, couldn't be viewed as having passed an impotent piece of legislation, so it simply passed the regulations warts and all just prior to George W. Bush's departure and told the banks to deal with it. In fact this was one of the last pieces of legislation that was rammed through for the sake of George W. Bush's legacy. Barak Obama has stated that any regulations that were passed prior to Bush's departure would be scrutinized closely, but for whatever reason the UIGEA regulations don't seem to be among those being scrutinized.

That brings us back to the original purpose of the article: what due diligence the banks are doing and what they ought to be doing come December 1st. If the letter from the Midwest bank mentioned earlier, along with a couple of publicly traded banks, is any indication, then the banks are going to send out letters to all customers telling them that the UIGEA is now law and please don't bet online. Anything beyond that isn't the banks problem. If the DOJ wants to challenge the banks to do more, then they can pass better regulations with teeth and clearer guidelines and come forth with an open and honest discussion about the law as Barney Frank, Robert Wexler, iMEGA and others have demanded. More importantly, bettors shouldn't be intimidated by the letters from their financial institutions and should continue to conduct transactions as they always have. After all, the UIGEA (and in fact no federal U.S. law) does not make it illegal for an American citizen to bet online. Only the state of Washington has a law that makes it illegal for a bettor to wager online, and it seems evident that Washington only passed it as a form of intimidation.

The banks in America have been given an impossible task with a set of unworkable rules. There's an old adage in the IT and accounting fields called Garbage In, Garbage Out, which means that you get can only get out of something as good as you put into it. And the reality is that there is no bigger piece of garbage than the UIGEA and its regulations.

Hartley Henderson

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