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UIGEA: What Impact If Any?

Written by:
C Costigan
Published on:
Sep/07/2010
Dave Behr, Out Of The Storm News In late May, 70,000 poker players converged on the Rio Convention Center in Las Vegas for the 41st annual World Series of Poker. Kevin Kelly was one of many amateurs “taking a shot” at the WSOP. He emptied out all of the money in his online poker accounts to do so, not because he was feeling lucky, but because he was worried that online poker was over. “Nobody was sure what was going to happen on June 1,” said Kelly. “I didn’t want to be in a position where my money was stuck online.” Kelly’s worries stemmed from the Unlawful Internet Gambling Enforcement Act of 2006 – UIGEA – a murky and mystifying piece of legislation signed into law by President Bush in October 2006. The UIGEA was supposed to be a master stroke by the “click a mouse, lose your house” opponents of online gambling. The idea was to choke off online gambling money by prohibiting the transfer of funds from financial institutions to internet gambling sites. Financial institutions were required to comply with the UIGEA and its regulations by June 1, 2010. June 1 came and went. Not only was there no cataclysm in the online poker world, there wasn’t even so much as a tremor. Those poker sites that didn’t abandon the U.S. when the UIGEA was enacted continued to operate largely as they had since 2006. Why didn’t the UIGEA have any impact? The first reason that UIGEA isn’t changing much in Vegas is that even though everyone knows UIGEA is supposed to stop unlawful internet gambling, no one knows what the term unlawful internet gambling really means. The UIGEA’s regulations create a class of “restricted transactions” that financial institutions are supposed to block. They include transactions in which an online gambling operator knowingly accepts funds from another person for purposes of participating in unlawful internet gambling. The definition of unlawful internet gambling, however, is an outstanding example of circularity: “to place, receive, or otherwise knowingly transmit a bet or wager by any means which involves the use, at least in part, of the Internet where such bet or wager is unlawful under any applicable Federal or State law in the State or Tribal lands in which the bet or wager is initiated, received, or otherwise made.” In other words: it’s unlawful if it’s unlawful. The Treasury and the Federal Reserve Board – the enforcement arms of the UIGEA – refused to provide any further clarity or guidance as to what constitutes “unlawful internet gambling” in their draft regulations. In fact, in the initial proposed version of the regulations, it was the financial institutions themselves who were required to determine at the time of each individual transaction whether or not it was a restricted transaction. ”Know Your Customer” became “Know Your Customer’s Unlawful Internet Gambling Transaction” – without a single sign post to mark the way. The financial institutions responded to these restrictions with laughter (or maybe it was a nervous chuckle). What was a New York bank supposed to do if a Florida account holder wanted to make a deposit into an Isle of Man poker site? More to the point, how was a bank supposed to determine the purpose of a wire transfer or a credit card purchase – ask the customer? “Excuse me customer, will you be using the proceeds of this wire to engage in unlawful internet gambling?” Many well-trained and highly paid experts would be out of jobs if it were so easy to determine whether certain types of gambling are unlawful. Decades of overlapping and sometimes conflicting tribal, state and federal gaming regulation have made it impossible to point at any specific instance of gambling and say, “Unlawful!” The cross-jurisdictional nature of online gambling transactions further blurs the issue. When the UIGEA regulations were finalized, the Treasury and the Federal Reserve relented. They allowed financial institutions to rely on each other’s reasonably designed written policies and procedures, implemented as part of the new-customer due diligence process, in order to prevent restricted transactions. The final, enacted version of the UIGEA regulations also notes the impossibility of determining the purpose of a transaction while in transit. As such, the regulations provide that financial institutions are not required to spend any time investigating the details of any individual transaction between an account holder and an outside party. That concession instantly got financial institutions off the hook for the player side of any questionable online gambling transactions. For online poker operators and payment processors, the situation wasn’t so easily resolved. Know Your Customer best practices, and the UIGEA and its regulations, still require that financial institutions determine whether or not a new commercial customer is in the online gambling business. Further due diligence is required of those that are. For the most part, financial institutions have erred on the side of caution and refused to process transactions with such businesses. This state of affairs has led some payment processors and online poker operators to play a shell game. They move transactions through a complex structure of subsidiary and holding companies. With so many onion layers to peel back, determining the original destination or source of an online poker deposit or withdrawal is virtually impossible, allowing money to continue to flow on and off of the online poker sites. If the gambling underlying such transfers is “unlawful,” the actions of these payment processors and online poker sites would fit the classic definition of money laundering. Because the UIGEA and its regulations provide scant guidance as to what constitutes unlawful internet gambling, federal prosecutors aren’t any more capable of untangling that Gordian Knot than anyone else is. So they’ve started arresting payment processors for violations of the good, old-fashioned Wire Act of 1961. So far this year two payment processors have forfeited a combined $30 million in respect of Wire Act violations. One was alleged to have processed more than $350 million for internet gaming companies by transferring funds through Cyprus into the U.S. The other used a bank in Arizona to process funds that were alleged to be traceable to PokerStars, the world’s largest online poker site with estimated annual profits of $500 million on revenues of $1.4 billion. Prosecutors in the Southern District of New York also are reported to have convened a grand jury to investigate the financial transactions of Full Tilt Poker, an online poker site with revenues and profit almost as great as those of PokerStars. If the case moves forward, most industry insiders believe the charges against Full Tilt will include wire fraud, money laundering and Wire Act violations. But even with these sites coming into prosecutors’ sights, not much changed on June 1, 2010. Financial institutions were required to begin complying with the UIGEA at that time, but online poker players didn’t see or feel any change from their side. The biggest effect that the UIGEA had was an initial chilling effect that started back in 2006 when UIGEA was first passed, and hasn’t really changed much since then. About a third of the online poker sites that were operating at the time pulled out of the U.S., including the market leader, PartyPoker. Those sites have refused all American customers ever since and quickly lost market share to the sites that remained in the U.S. Some American customers stopped playing on sites that continued to accept U.S. players, for fear they were involved in something illegal. Those poker sites that didn’t abandon the U.S. continue to operate as they have for the last four years: with a good deal of confusion and uncertainty. Still, they offer a variety of deposit options that allow American customers to play real-money online poker. The Kevin Kellys of the U.S. continue to deposit to, withdraw from and play on those sites. Ironically, mandatory compliance with the UIGEA by financial institutions arrived just as cash-strapped state and federal governments started taking a second look at online gambling as a revenue generator. A bill currently on the floor of the House of Representatives would provide for the licensing, regulation and taxation of internet gambling. It would also provide a safe harbor for payment processors that process transactions on behalf of licensed internet gambling businesses. The bill, H.R. 2267, is sponsored by Rep. Barney Frank (D-MA) and has attracted seventy co-sponsors. The payment processors and the online poker sites are firmly in favor of Frank’s bill. They would gladly give up a piece of their profits to get out from under the confusion caused by the UIGEA. They would also welcome legal certainty in the U.S. regarding the legitimacy of online poker and its associated financial transactions. Players wouldn’t mind seeing Frank’s bill become law either. “The games are tougher than they used to be,” said Kelly, who re-deposited money into his online poker accounts after the WSOP was over. “We need some new blood.”

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