Burden of Final UIGEA Rule May Not Be As Heavy As Some Expected

For a financial-services industry in the throes of economic upheaval, the final rule for implementing the controversial Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA)?issued on Nov. 12 by the U.S. Treasury Department and the Federal Reserve?represents another set of requirements with which to struggle. But for many banks and processors, the burden may not be as heavy as anticipated, says Behnam Dayanim, partner in the global banking and financial institutions practice of Paul, Hastings, Janofsky & Walker LLP. Just how much of an additional burden the rule will impose depends on how extensive a bank's or processor's existing know-your-customer requirements are, Dayanim says. If a bank or processor already has done extensive due-diligence on its commercial customers, they may feel they comply with the rule. But for those that don't know their customers' businesses or whether the customers act on behalf of third parties, the rule could impose a “substantial additional burden,” he says. “I suspect many banks don't know the answers to all those questions, at least as with respect to gambling.” The rule clarifies that banks' and processors' primary responsibility will be to ensure the legality of the commercial sites only, rather than tracking the transactions of individual gamblers. But it doesn't define what constitutes an illegal gambling site, an issue that created “a tremendous amount of angst in the financial-services community,” Dayanim says. However, the rule shifts the burden of proving legality to the site operator, rather than the financial institution. The operator is required to provide to banks a license or a “reasoned legal opinion” that the site is legal. “At the end of the day, the resolution of that issue is one that shouldn't impose a huge burden on the banks,” Dayanim says. The controversy surrounding the UIGEA delayed publishing of the rule until 16 months after the statutory deadline. Financial institutions said the law makes them an extension of law enforcement, a role they feel ill-equipped to fill. But the law was pushed by professional sport leagues and other anti-gambling interests. “There were a lot of politics at play,” Dayanim says. However, there are signs that the UIGEA may be revised. “What's very interesting about these regs is the compliance deadline isn't until December of next year, which gives the new administration and Congress plenty of time if they want to go back and try to undo the regs or revisit the UIGEA,” he says. Whatever the outcome, the rule likely will have minimal impact on unlawful Internet gambling, Dayanim says. He notes that the most reputable, publicly listed companies already exited the market. The remaining entities will use non-transparent payment mechanisms, such as miscoded credit card transactions or online phone cards. “There are a host of mechanisms designed to evade detection,” he says. “I don't think those will go away.”