By June 1, 2010, financial services providers must implement the compliance requirements of a final rule (the “Final Rule”) that requires policies and procedures designed to identify and prevent restricted transactions related to unlawful Internet gambling under the Unlawful Internet Gambling Enforcement Act of 2006 (the “UIGEA” or the “Act”). The U.S. Treasury Department (the “Treasury”) and the FRB (together the “Agencies”) have prescribed the Final Rule. On May 20, 2010, the Office of the Comptroller of the Currency issued interagency guidance for reviewing compliance with the Final Rule.
As more fully discussed in the December 9, 2008 Alert, the Final Rule requires, among other things, that non-exempt financial institutions that participate in payment systems that may be used to transfer money for purposes of unlawful Internet gambling “establish and implement written policies and procedures that are reasonably designed to identify and block or otherwise prevent or prohibit unlawful Internet gambling transactions restricted by the Act.” The Final Rule generally applies to financial institutions (“Participants”) that operate, contract for, or otherwise participate in payment 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.
Rather than establish an absolute prohibition on processing any and all restricted transactions, the Final Rule supplies guidance and non-exclusive examples of policies and procedures that the Agencies deem to be reasonably designed to identify and block restricted transactions. For Participants in Designated Payment Systems other than card systems, the core procedure for compliance with the Final Rule may be achieved though flexible, risk-based due diligence in account-opening procedures designed to ensure that commercial customers do not originate or receive restricted transactions. Participants in card systems may comply with the core requirement of the Final Rule by using a coding framework during processing to identify and block transactions with indicia of being restricted transactions. The Final Rule also contains provisions for when and how Participants in Designated Payment Systems may justifiably rely on the policies and procedures of the operator of a money transmitting business. It is important for Participants to understand both the extent and limits of their obligations under the Final Rule.
As discussed in the December 1, 2009 Alert, compliance with the Final Rule, which was published on November 18, 2008 and became effective January 19, 2009, was delayed from December 1, 2009 to June 1, 2010. The delay was intended to give banks and other covered financial services providers more time to comply with what the Agencies described as the “challenging” definition of “unlawful Internet gambling” and to give members of Congress, including the House Financial Services Committee and its Chairman Barney Frank, time to prepare and enact amendments to the UIGEA that would reduce the regulatory burden on financial institutions.
There are currently three pieces of legislation pending in Congress to amend the UIGEA: (i) the Reasonable Prudence in Regulation Act, H.R. 2266, which would delay mandatory compliance with the Final Rule by one year; (ii) the Internet Gambling Regulation, Consumer Protection, and Enforcement Act, H.R. 2267, which would establish a framework for licensing and regulating Internet gambling operations in the United States; (iii) the Internet Gambling Regulation and Tax Enforcement Act of 2010, H.R. 4976, which would regulate and tax Internet gambling. A hearing which had been set for April 16, 2010 to debate H.R. 2266 and H.R. 2267 before the House Financial Services Committee, has been postponed with no new hearing date scheduled. On May 19, 2010, the House Ways and Means Committee met to discuss proposals related to legalizing and taxing Internet gambling activities and the implications of such proposals. It is uncertain if and when hearings on any of the pending legislation will resume. To date, no new legislation has passed, and no changes have been made to the UIGEA or Final Rule.In March 2010, the Washington Post reported that Treasury Secretary Timothy Geithner struck a deal with Senate Minority Whip Jon Kyl, a staunch opponent of Internet gambling, not to further delay the compliance date for the Final Rule in exchange for Senator Kyl lifting a hold on Treasury nominees. June 1, 2010 is the compliance date for the Final Rule. Covered financial institutions should be prepared to comply.