Bankers and others in the credit card industry now must cope with a complex, vague, bewildering set of new federal regulations related to the most fundamental form of financial risk:
More specifically, Internet gambling — described by critics as a growing danger to the young and a ruinous plague visited upon addicted, addled gamblers; seen by advocates as a worthy hobby (or even profession) and a basic personal right.
Regardless of the point of view, new regulations that require credit card companies and other financial institutions to block transactions related to “illegal Internet gambling” took effect Jan. 19, 2009.
UIGEA rules in effect Jan. 19, 2009
At the very least, the rules now attached to the Unlawful Internet Gambling Enforcement Act (UIGEA) are producing serious compliance problems for card issuers and others in the banking industry.
“It’s not a good thing for banks,” says Steve Kenneally, vice president of the American Bankers Association, which represents credit card issuers and other elements of the banking industry.
He says the rules aren’t quite as burdensome as the industry feared, but that is only modest consolation.
Instead of getting hit on the head with a telephone pole, we’re getting hit with a baseball bat. It still hurts.
|— Steve Kenneally |
vice president, American Bankers Association
“Instead of getting hit on the head with a telephone pole, we’re getting hit with a baseball bat,” Kenneally says. “It still hurts.”
Among the problems: No one in Congress or anywhere else bothered to define the “illegal” part of “illegal Internet gambling,” requiring attorneys for banks and credit card networks to navigate a nearly impenetrable thicket of ambiguous, varying and often contradictory state laws and even the rules of Native American tribes, where gambling has flourished.
Gamblers also aren’t very pleased.
Though previous enforcement efforts killed virtually all U.S.-based online gambling operations, the Internet makes it easy for Americans to find their way to foreign-based gambling sites. As a result, Internet gambling remains a $10 billion-$12 billion per year industry in the United States, according to Congressional testimony and various industry experts.
Now, the odds of gambling online are again changing. If the regulations take hold, online gamblers will not be able to use credit cards or debit cards issued by U.S. banks, and U.S. money transfers also will be blocked. Though the regulations took effect Monday, banks have until Dec. 1 to figure out how to comply with them.
Online poker players attract diverse allies
Among those likely to be most affected by the regulations are online poker enthusiasts, a rapidly growing, increasingly noisy group that has managed to attract a diverse array of allies. Among them: Democratic U.S. Rep. Barney Frank of Massachusetts and former New York Sen. Alfonse D’Amato, a conservative Republican who now serves as chairman of the Poker Players Alliance.
The Washington, D.C.-based group claims more than 1 million members. Many of them assert that poker is a game of skill rather than a game of chance. The group’s motto: “Poker Is Not A Crime.”
Just like the prohibition of alcohol in the 1920s, this prohibition 2.0 will have serious unintended consequences.
|— John Pappas|
executive director, Poker Players Alliance
“The UIGEA prohibition takes consumer protections in the wrong direction,” says John Pappas, executive director of the Poker Players Alliance. “The UIGEA will have no real impact on ensuring fairness of play and timely payout, nor will it protect vulnerable communities, like children and problem gamblers. Rather, it will drive the activity underground and force players to play on unknown sites and use less-than-reputable payment providers. Just like the prohibition of alcohol in the 1920s, this prohibition 2.0 will have serious unintended consequences.”
He says online poker playing has never been more popular than it is right now. How popular? The home page of the website Absolute Poker displays how many people are currently using its service. At one point on Jan. 13, 2008, it showed 15,543 players were using it — and it’s just one of the scores of sites that serve poker players, and one of thousands of sites that serve gamblers of all kinds.
It was not possible to determine how many of those players were Americans, but the site still was encouraging U.S. citizens to join and fund their accounts through Visa or MasterCard accounts. Credit cards from U.S.-based banks usually are rejected by online gambling sites, but Americans often have better luck with their Visa or MasterCard debit cards — and they routinely share other tricks of the trade.
Will new regulations discourage online gambling?
Is any of this likely to change even when this law is fully implemented? Will “Guys and Dolls” sinners be thwarted?
Not a chance, according to bankers and gamblers.
“I think it will discourage the casual user who says, ‘Let me try my credit card or debit card’ and finds that it’s blocked,” Kenneally says. “But for the hard core? If people want to do something badly enough, they’ll usually find a way to do it.”
Says Pappas: “We can be certain that it won’t stop Americans from finding ways to play online poker … Unfortunately, that means they, and their money, will either go to overseas operators or to shady, underground operators.”
|How many Americans|
About 2 percent of Americans report they gamble online, according to a November 2008 survey by the Annenberg Public Policy Center. The number fell off sharply after the passage of the 2006 Unlawful Internet Gambling Enforcement Act.
How online gambling act became law
All of this reaches back to the fall of 2006, when Congress passed the UIGEA.
Everything about the act was controversial, including the circumstances of its passage: At the last moment, the Republican leadership tacked the UIGEA onto the Safe Port Act, and the whole thing was passed around midnight on the day Congress adjourned for the 2006 elections.Many Democrats claimed later that most members of Congress had no real idea what they were voting for.
Critics immediately pounced on the act’s vagueness. Among other things, it struggled to distinguish games of chance from games of skill and games that combine both skill and chance. They noted exclusions that were curious: The bill generally prohibits transfers of money from U.S. financial institutions to gambling sites, for example, but it excludes online lotteries, horse racing and fantasy sports leagues.
Nevertheless, it and the rest of the Safe Port Act were signed into law by President George W. Bush on Oct. 13, 2006.
Final online gambling regulations issued
The U.S. Treasury Department and Federal Reserve Board, required by the bill to develop specific enforcement procedures, sought comment from various stakeholders and issued the final regulations on Nov. 12, 2008.
Among those rules:
- Importantly, individual gamblers are not targeted by the law. Only the operators of online gambling sites or their intermediaries are covered.
- “Designated payment systems” that fall under the rules are defined as credit card systems, check collection systems, money transmitting businesses, wire-transfer systems and automated clearing house systems.
- Each of those systems must establish policies and procedures to identify and block transactions with “unlawful” Internet gambling sites. We’ll get to the “unlawful” part in a moment.
- Most of the payment systems must apply due diligence to the matter — basically assessing the likelihood that a new account holder is engaged in Internet gambling. If so, they must reject the business. Kenneally notes that this pre-screening of account applicants is actually an improvement. The banking industry originally feared it would have to monitor every transaction by every client.
- Credit card operators, however, must employ a different process. Credit card companies typically assign merchant category codes to each category of merchant. One code in particular — 7995 — is associated with online gambling. Banks and others involved with credit card payments will end up blocking transfers to any merchant with that code. That is not a foolproof system, though. Applicants, for instance, can claim to be opening a T-shirt store and then suddenly change their “business plan” and become an Internet gambling site. “Credit card networks have a harder job” than most banks, Kenneally says.
‘Unlawful gambling’ definition left vague
The rules were supposed to clarify other matters left vague by the law itself, but they fell short.For one thing, the regulations never got around to defining an “unlawful” online gambling operation. Time and again, rule makers copped out, saying the task was just too complex.
“The states have taken different approaches to the regulation of gambling within their jurisdictions and the structures of state gambling law vary widely, as do the activities that are permitted in each state,” the rules state at one point. “Accordingly, the underlying patchwork legal framework does not lend itself to a single regulatory definition of ‘unlawful Internet gambling.’ ”
Wait a minute, critics say. If lawmakers and rule makers can’t figure out what’s legal and what’s not, how are bankers (and gamblers) supposed to figure it out?
“To be clear, the UIGEA does not make Internet poker playing illegal,” Pappas says. “It simply says that banks must block ‘unlawful Internet gambling’ transactions, and therein lies the rub.”
Rep. Frank criticizes gambling rules
Another leading critic is Frank, the Massachusetts representative. He has become an unlikely champion of online bettors, a man who told The Boston Globe that he never gambles but believes the law is an intrusion on personal freedom.
Shortly before the rules were issued in November, Frank blasted Treasury Secretary Henry Paulson and the rest of the administration for their handling of the matter.
“I am deeply disappointed to hear that your agency is proceeding with what I consider to be unseemly haste in issuing regulations implementing the Unlawful Internet Gambling Enforcement Act,” Frank wrote to Paulson.
He noted that he and some colleagues have filed a bill that would define illegal Internet gambling, modify the UIGEA, and license and regulate online gambling, a solution that — among other things — would produce significant revenue for the federal government.
“This midnight rulemaking will tie the hands of the new administration, burden the financial services industry at a time of economic crisis, and contradict the stated intent of the Financial Services Committee,” Frank says.
Gambling opponents cheer
Not everyone feels that way, however.
Sen. Jon Kyl, a Republican from Arizona and a sponsor of the UIGEA, called the administration’s rulemaking process slow but thorough. He says the result is a genuine contribution to the protection of minors and others.
I am pleased we’ve taken an important step to thwart illegal Internet gambling.
|— Jon Kyl|
“I am pleased we’ve taken an important step to thwart illegal Internet gambling,” Kyl said when the rules were announced.
“The regulations provide the authority necessary to enforce existing federal and state laws that outlaw online gambling,” he said. “Even though the banks have a year to implement them, I would hope they will act with alacrity to begin enforcing the law.”
Poker players and other critics have other hopes for the coming year. They plan to launch an offensive in Congress and at the White House aimed at overturning the law — or at least better defining how it should work.
“We feel confident that the new Congress and administration will be taking a close look at this rule, as well as other so-called ‘midnight rules’ that the previous administration rushed through at the last minute,” Pappas says.
“Moreover, we believe that the idea of licensing and regulating this industry is ripe for action and we will continue to press the new Congress and administration to take this course of action rather than support the misguided attempts at prohibition.”
The banking industry is not … banking on that, however.
“It could be that things change,” Kenneally says. “We don’t want to say ‘never.’ But I think banks need to be focusing on the Dec. 1 deadline, making sure they’re compliant with the law rather than hoping that a white knight will ride in and save the day.”