By Ware, Viveca
Independent Banker , Vol. 58, No. 1
The banking industry's one-year wait for proposed regulations requiring financial institutions to identify and block payments between gambling customers and illegal Internet gambling companies is over. When finalized, the muchanticipated regulations will implement the Unlawful Internet Gambling Enforcement Act of 2006. The law required the Federal Reserve Board and the U.S. Treasury Department to issue regulations that set procedures for blocking illegal Internet gambling transactions in the payment system.
ICBA was the only banking trade association to actively voice concern over the slippery regulatory slope created by the then-proposed law. ICBA's concern registered with lawmakers, who, in response, added a provision to the law, granting the Federal Reserve and the Treasury the authority to exempt certain transactions when transaction tracking and blocking was not reasonably practical.
Thankfully, the agencies used this exemption authority to write a very narrow and reasonable regulatory proposal that would primarily affect only those financial institutions maintaining a direct relationship with an unlawful Internet gambling company. This approach, coupled with the fact that few of these companies maintain direct account relationships with U.S. financial institutions, substantially limits community banks' compliance burden.
The Regulation's Scope
The proposed regulation, Prohibition on Funding of Unlawful Internet Gambling (Regulation GG):
* Designates payment systems that could be used in connection with unlawful Internet gambling;
* Requires designated payment system participants to establish written policies and procedures reasonably designed to identify and block restricted transactions;
* Exempts certain payment system participants from requirements when it is not reasonably practical to identify and block transactions;
* Describes policies and procedures that non-exempt participants may adopt to comply;
* Does not specify which gambling activities or transactions are legal or illegal consistent with the law; and
* Does not alter state, local or tribal gaming laws.
Rather than exempt all participants in certain payment systems, the agencies grant exemptions based on a participant's role. Consequently, most ACH, check and wire-transfer system participants are exempt.
Payment system participants not exempt from compliance include: banks that maintain customer relationships with Internet gambling companies; card systems (debit, credit, prepaid or stored value); banks that receive cross-border transactions; banks that send transactions to foreign payment service providers; and money transmitting businesses.
All non-exempt or covered payment system participants, under the proposed regulations, must establish and implement written policies and procedures to identify and block restricted transactions. Financial institutions can establish their own policies and procedures or rely on and comply with policies and procedures established by a designated payment system. For example, most financial institutions will likely rely on card network rules and procedures to comply with the final regulations.
Financial institutions holding direct customer relationships with Internet gambling businesses should exercise reasonable due diligence to ensure that the relationship is not used for sending or receiving restricted transactions. Financial institutions covered by this compliance requirement include those: originating ACH debit transactions, receiving ACH credit transactions, serving as a depositary bank in a check collection system, acting as a beneficiary bank in wire transfer systems, and maintaining relationships with ACH third-party senders.
Policies and procedures should include the screening of potential commercial customers to ascertain the nature of their business, as required under the agencies' anti-money laundering program and a provision in the deposit agreement prohibiting restricted transactions. …