Federal regulators have taken a first pass at creating rules to stamp out illegal online gambling via credit cards. Judging from the reaction, the Feds came up snake eyes.
The rules are an attempt to block online gambling by requiring banks and credit card companies to prevent “illegal” transactions. A public comment period on the rules ended in mid-December, and the reviews were harsh. The payment industry is up in arms, claiming the act is vague and unenforceable, while gamblers feel it is an attack on their personal freedom.
New laws, new problems
The legality of online gambling has long been debated by U.S. officials, but the latest regulation efforts have tried to shut down the money conduit — payments systems that enable online bets. In 2006, President George W. Bush signed the Unlawful Internet Gambling Enforcement Act (UIGEA). The little-noticed act, slipped in as Title VII of the controversial port security bill, prohibits businesses from accepting “illegal” payments made through credit cards, checks and electronic funds transfers. It requires U.S. firms, including credit card-issuing banks, to have policies in place to identify and prevent payments from being made to illegal gambling operations, both in America and offshore.
The problem? The act makes no attempt to define which types of gambling transactions are illegal, leaving intact the convoluted mosaic of state and tribal gambling laws.
While the act became law more than a year ago, the implementation rules are just now being crafted by federal regulators. In October, the Treasury Department and the Federal Reserve Board jointly issued a first draft of proposed rules.
They state that the payment industry will be expected to use transaction or business category codes to identify and block illegal transactions. Visa currently requires Internet gambling merchants to properly code their transactions so issuing banks can decline those transactions where gambling is illegal. Most credit card issuers use the 7995 merchant code to identify gambling operations but many merchants dodge that snare by classifying themselves under different business codes.
The rules also include suggestions for remedial actions, such as fining, restricting access or terminating the customer relationship. They require monitoring and analyzing of payments to detect suspicious patterns, and monitoring of websites to detect unauthorized use of payment systems.
Ambiguity is nothing new
Current laws are not changed under the act, leaving it up to financial institutions to sort through what’s legal and what isn’t. “There is no federal law against merely making a bet, even with an illegal bookie,” gambling law expert and Whittier Law School professor Nelson Rose says. “Half the states do have ancient laws on the books against betting, but these are never enforced. There are federal and state laws against being in the unauthorized business of gambling, but these are mostly outdated and it is unclear to what extent they apply to overseas Internet operators.” He also says there is a statutory exemption making remote betting on horse races legal in some cases, but both the bettor and operator have to be in the states which authorized the bets.
It isn’t clear how this will affect the international market. “The regulations seem to only apply to U.S. financial institutions,” Rose says. “So foreign banks can issue credit cards, and if they can get them to the U.S., they would not fall under the regs. That does not mean they would be legal. And most big foreign banks have U.S. corresponding banks and would not want to get involved with this.”
Begging for better rules
Many organizations and industries are fighting for a removal or major revision of the act. The Poker Players Alliance is a nonprofit organization created to protect poker players’ rights and fight restrictive legislation. The group of more than 800,000 members argues that billions of potential tax dollars could be generated from regulated online poker, and that appropriate federal regulation would keep minors away and provide services to problem gamblers. PPA insists prohibitions don’t work because they drive players underground, and claims that 75 percent of Americans oppose banning online poker.
|Internet gambling regulations proposed|
Federal banking regulators have proposed a new set of rules to implement the 2006 Uniform Internet Gambling Enforcement Act.
What the act does: It requires the payment industry (banks and credit card companies) to identify and block illegal online gambling transactions.
Why it’s important: It will require the payment industry to begin an unprecedented effort in policing previously content-neutral transactions. It will also greatly limit the ability of a U.S. citizen to gamble online.
|The major concerns: The payment industry says the act does not define what is illegal and is thus unenforceable, and thinks it would be more appropriate for law enforcement to do the policing. Online gamblers think the act is a major violation of privacy and freedom. Legal online gambling establishments worry their transactions will mistakenly be blocked.|
The Financial Services Roundtable, an organization representing dozens of banks and financial services firms, outlined its concerns in a letter sent to the regulators. The letter says the rule could impose significant compliance burdens on financial institutions because they would be forced to “police laws that are more appropriate for law enforcement agencies.” The Roundtable also says the term “unlawful Internet gambling” is so vague, “it is not possible for financial institutions to design policies and procedures to identify and block or otherwise prevent or prohibit restricted transactions.”
The American Bankers Association also chimed in with a letter praising the concept, but strongly criticizing the actual rules. “ABA believes that the proposal, in large part due to the nature of the statute itself, will fail to create a practical process for intercepting prohibited conduct that maintains an efficiently functioning payments system,” the letter says. The act, the association wrote, “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.”
Those letters were among about 200 sent during the public comment period, which ended Dec. 12. The vast majority opposed the rules.
Connie Johnson of the First National Bank of Morgan, Utah, wrote, “I am having some trouble reconciling the idea that a government that supports state lotteries and collects trillions in taxes from casinos has decided financial institutions need to police Internet gambling.”
The corporate counsel for Compass Bank writes that there are two fundamental problems with the regulation: First, it does not define what a “restricted transaction” is. Second, “it requires a specific kind of functionality within the payment systems that simply does not exist.” He says the first issue may be resolved by revisions, but cannot see the second issue being resolved. Bank of America and Wells Fargo also wrote in with similar concerns and many pages of recommendations.
Daniel A. Luciano, president of American Greyhound Racing Inc., expressed concern for the livelihood of his company, which has been in business for over 50 years. Congress stated that legal greyhound pari-mutuel betting was beyond the scope of the act, and that Internet use in connection with state-approved dog racing does not violate federal law. Luciano is worried, however, that because the regulation does not mention what is and isn’t legal, the banking institutions will mistakenly block legal transactions, such as those involving his company.
Eddward Leyden, the president of the Interactive Media Entertainment and Gaming Association, wrote a letter objecting to both the principles and the details of the act, saying it will “exert a harshly chilling effect on innovation surrounding the Internet.” By imposing unprecedented burdens on financial systems, “which has up until now been universally recognized as being inherently content-neutral, these proposed regulations run the grave risk of sharply stifling the growth of electronic commerce.”
Rolling the dice on plastic
Professor Rose says many credit card companies have already voluntarily left the gambling business as the questionable legality opens doors to potential liability. In 2000, a class action lawsuit was filed against Visa and MasterCard by players who lost money and weren’t happy about paying off their debt. They argued that the institutions were guilty of racketeering for engaging in a worldwide illegal gambling system. Although the lawsuit was eventually dismissed, it scared many credit card issuers out of the gambling arena.
Blocking gambling transactions is really up to the card issuer, Rose says. “The big banks are going to stay away from the U.S. market, but there is just so much money here that smaller credit card companies are going to take the opportunity.”
While many online gambling sites have shut down in response to the crackdown, determined U.S. gamblers can still roll the dice. Bodoglife.com, for example, accepts payments through Stratham Finance Ltd. in Malta and bills its clients under alternate business names. Full Tilt Poker, which is licensed by the Canadian Mohawk tribe, is up and running. Poker Stars and Absolute Poker are also still open to U.S. players. This page on Poker-Strategy.org lists poker rooms still available to U.S. players in addition to statements from various poker rooms regarding the act and what they plan to do in light of it.
Michael Dillard, a 22-year-old online poker player in Austin, Texas, has felt the effects of the new act. He used to primarily play on a small site, but it, along with many of the other smaller poker sites, shut down. “It’s the bigger ones that have stayed in the game,” he says. “I liked the smaller sites because I was mostly playing in higher-limit games with the same people, and for someone who’s trying to make money, there’s a big advantage to knowing your opponents. These bigger sites have 10 times as many people, and when I switched over it took me a while to adjust to playing with people I don’t know.”
Dillard has noticed many casual poker players drop off the map, for several reasons. “Online poker players get very familiar with a specific program — each site looks and navigates differently. Starting on a new site, you don’t feel as comfortable. Also, even though some sites aren’t illegal, many people think it’s illegal now and stay away. These rules have drastically decreased the number of people playing for fun, which are the people most regular players make their money off of.” Dillard’s debit card works for the site he uses now, but many people on the same site can’t get their debit cards to work. He says most of the alternative payment methods have been shut down, but one frequently used right now is ePassporte. “You have to go through a lot of trouble to set it up,” Dillard says. “It’s a hassle for people, which is detracting from the people who play for fun. But those who play for a living will do whatever they have to do.”
Rose says gambling at the established sites is generally safe, but there is a risk of money being trapped in accounts if there is a legal dispute. Many gamblers have also found ways around the credit card bans, such as using credit cards issued from foreign banks.
It has become harder for American players to find credit cards that work, Rose says. “You’d go through seven of them and maybe your eighth one would work,” Rose says.
The future of online gambling
While authorities have gone after the gambling operations, they have yet to go after individual gamblers. Gambling is among the most widely regulated activities, but what’s illegal in one jurisdiction may be fine in the next. In 2006, a new law in Washington state even made wagering on the Internet a Class C felony that could carry up to five years in prison and a $10,000 fine. Yet Rose says online gamblers have a better chance of winning the World Poker Tour than being arrested.
“Merely being an online poker player does, theoretically, run a risk of a felony conviction, but I have yet to find anyone who has been arrested, let alone convicted, for playing Internet poker,” Rose says.
A spokeswoman from the Treasury said the government is reviewing all the comments and feedback on the proposed implementation rules and taking them into consideration. It is a joint process between the Treasury, Federal Reserve and the Department of Justice. There is no time line set, but once the three agencies have read through the flurry of rants, they will consider making changes.
Freelance writer Craig Guillot contributed to this story.