As briefly noted in the November 18, 2008 Alert, the FRB and the U.S. Treasury Department (together the “Agencies”) published a final rule (the “Rule”) implementing the provisions of the Unlawful Internet Gambling Enforcement Act of 2006 (the “Gambling Act”) that are applicable to financial services firms.
The Gambling Act. By way of background, the Gambling Act prohibits gambling businesses from accepting certain payments – including payments made by credit cards, electronic funds transfers, and checks – in connection with unlawful Internet gambling. For purposes of the Gambling Act, unlawful Internet gambling is defined as a bet or wager made over the Internet that is unlawful where that bet or wager is initiated, received, or made. The Gambling Act also directed the Agencies to prescribe rules requiring financial services companies participating in certain payment systems to implement policies and procedures reasonably designed to prevent or prohibit unlawful Internet gambling transactions. The Rule was promulgated pursuant to that authority.
Designated Payment Systems. The Rule generally applies to financial institutions (“Participants”) that operate, contract for, or otherwise participate in payments systems (“Designated Payment Systems”) that may be used to transfer money for purposes of unlawful Internet gambling. Specifically, the Designated Payment Systems include automated clearing house systems; systems for credit, debit, pre-paid or stored-value cards; check collection systems; wire transfer systems and certain money transmitting businesses.
Treatment of Intermediaries. The Rule’s requirements to establish policies and procedures, in most cases, affect Participants that establish and maintain a relationship with the customer. Accordingly, the intermediary services that process transactions in the Designated Payment Systems are often regarded by the Rule as exempt. This means, for example, that the Participants other than the depository bank in a check collection system will not have an obligation for a transaction under the Rule.
Focus on Commercial Customer Relationships. The Rule also makes clear that the required policies and procedures should focus on commercial – and not consumer – customer relationships. For guidance, the Rule supplies non-exclusive examples of policies and procedures that the Agencies deem to be reasonably designed to identify and block unlawful Internet gambling transactions. Participants may tailor the examples provided to their business, and the Agencies emphasize that the Rule is intended to afford Participants with the opportunity to develop flexible, risk-based procedures. In general, the policies and procedures the Rule deems satisfactory include, among other things, methods for a Participant to conduct due diligence when establishing commercial customer accounts, policies by which a Participant can conduct due diligence when in possession of actual knowledge that a commercial customer is engaged in unlawful Internet gambling, and procedures a Participant must follow on receiving an unlawful Internet gambling transaction.
Safe Harbor . The Rule provides a safe harbor for Participants that block transactions under the Rule’s requirements. Specifically, a Participant that identifies and blocks a transaction, prevents the acceptance of its products or services in connection with a transaction, or otherwise refuses to honor a transaction, is protected from being liable to any party for such action if the transaction is in fact an unlawful Internet gambling transaction, if the Participant reasonably believes the transaction to be an unlawful Internet gambling transaction, or if the Participant prevents the transaction in reliance on its policies and procedures in an effort to comply with the Rule.
Effectiveness/Compliance Dates. The Rule is effective on January 19, 2009, but the mandatory compliance date for the Rule for Participants is December 1, 2009, which is designed to give Participants ample time to develop necessary policies and procedures. We would be pleased to work with financial services firms in their compliance efforts.