Feds propose rules on Internet gambling

The Federal Reserve Board and the U.S. Treasury Department have proposed rules implementing the Unlawful Internet Gambling Enforcement Act, which was signed into law last year, and initial industry responses suggested implementation would be a nonevent for acquirers and their partners.

"My read is that the entire payments industry will not have many issues with the way the regulators interpreted the law," said Rob Drozdowski, the Electronic Transactions Association Senior Director, Research and Information. "They may not like the law, but the regs seem to be about as good as one could hope for."

The rules, proposed as a new set of federal regulations (Reg. GG), set out how the government intends to enforce a 2006 law that aims to stop most forms of Internet gambling by U.S. residents by making it illegal for banks and other payments companies to process transactions tied to Internet gambling.

That law has been a contentious issue, with financial services executives arguing against having to police customer payments and some lawmakers complaining about inequities created by the law since forms of gambling exist legally in almost every state.

"By continuing to prohibit Internet gambling in the U.S., the U.S. has left Americans who choose to gamble online without meaningful consumer protections," noted a statement from the office of Rep. Barney Frank, D-Mass.

Frank, who chairs the House Financial Services Committee, introduced legislation creating exemptions to the online gambling ban.

The proposal, known as HR 2046 or the Internet Gambling Regulation and Enforcement Act of 2007, also sets forth plans for a federal regulatory and enforcement framework for licensing companies that want to accept online bets from Americans, to the extent permitted by local jurisdictions and sports leagues. No action has been taken yet on Frank's proposal, which was introduced in April.

The Reg. GG proposal, issued for public comment earlier this month, places the burden of compliance on companies that have direct relationships with Internet gaming businesses. Firms that are clearly exempt from proposal's requirements include check clearing houses and the financial institutions that clear checks, certain banks in wire transfer and automated clearing house (ACH) transactions, and all intermediary banks.

While all major payment systems are covered by the rules (ACH, card, check, money transmitting businesses and wire transfer networks), there are broad exemptions for any business that "relies and complies with the written policy and procedures of the designated payment system."

The proposed regulation also provides examples of polices and procedures that payment systems subject to the law may wish to consider. The focus: increased due diligence and knowing your customers.

For the card acquiring businesses, "following the operating regulations of the card brands and the coding system for the transaction should be adequate," Drozdowski said. "Of course, knowingly allowing someone to misclassify a transaction would be a violation of both this law and the card brand operating regs."

Copies of the proposed regulation are available online at www.federalreserve.gov/newsevents/press. Public comments are requested by Dec. 12, 2007. The authors of Reg. GG indicated a desire to have it take effect next year.

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