Order Code RS22749
November 1, 2007
Unlawful Internet Gambling Enforcement Act
and Regulations Proposed for Its
Implementation
Charles Doyle
Senior Specialist
American Law Division
Summary
The Unlawful Internet Gambling Enforcement Act (UIGEA) seeks to cut off the
flow of revenue to unlawful Internet gambling businesses. It outlaws receipt of checks,
credit card charges, electronic funds transfers, and the like by such businesses. It also
enlists the assistance of banks, credit card issuers and other payment system participants
to help stem the flow. To that end, it authorizes the Treasury Department and the
Federal Reserve System (the Agencies), in consultation with the Justice Department, to
promulgate implementing regulations. Proposed regulations have been announced with
a comment period that ends on December 12, 2007, 72 Fed. Reg. 56680 (October 4,
2007).
The proposal addresses the feasibility of identifying and interdicting the flow of
illicit Internet gambling proceeds in five pay systems: cards systems, money
transmission systems, wire transfer systems, check collection systems, and the
Automated Clearing House (ACH) system. It suggests that, except for financial
institutions that deal directly with illegal Internet gambling operators, tracking the flow
of revenue within the wire transfer, check collection, and ACH systems is not feasible
at this point. It proposes exempting them from the regulations’ requirements, but invites
comments that offer alternative approaches. It charges those with whom illegal Internet
gambling operators may deal directly within those three systems, and participants in the
card and money transmission systems, to adopt policies and procedures to enable them
to identify the nature of their customers’ business, to employ customer agreements
barring tainted transactions, and to establish and maintain remedial steps to deal with
tainted transactions when they are identified. Introductory remarks explain why the
Agencies rejected a check-list-of-unlawful-Internet-gambling-operators approach.
Several bills have been introduced to augment these efforts, including H.R. 2046
(Internet Gambling Regulation and Enforcement Act), H.R. 2607 (Internet Gambling
Regulation and Tax Enforcement Act) and H.R. 2610 (Skill Game Protection Act).

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Background. Passage of the Unlawful Internet Gambling Enforcement Act
(UIGEA) as Title VIII of the SAFE Port Act1 represented the culmination of legislative
consideration that began with the recommendations of the National Gambling
Commission.2
UIGEA prohibits gambling businesses from accepting checks, credit cards charges,
electronic transfers, and similar payments in connection with illegal Internet gambling.3
It exempts lawful intrastate and intratribal Internet gambling operations that feature age
and location verification requirements imposed as a matter of law.4 It leaves in place
questions as to the extent to which the Interstate Horseracing Act curtails the reach of
other federal laws,5 an issue at the center of World Trade Organization (WTO) litigation.6
It instructs the Secretary of the Treasury and the Board of Governors of the Federal
Reserve, in consultation with the Attorney General, to issue implementing regulations
within 270 days of passage.7
As a consequence of UIGEA and Department of Justice enforcement efforts,
NETeller, which reportedly processed more than $10 billion in gambling proceeds
between U.S. customers and offshore Internet gambling business from 1999 to 2007,
entered into a deferred prosecution agreement under which it agreed to discontinue U.S.
operations, cooperate with investigators, and to pay the U.S. $136 million in sanctions
and to return an additional $96 million to U.S. customers.8 Several offshore Internet
gambling companies have apparently sought similar agreements.9 A number of large
banking institutions, which underwrote the initial public offers for offshore Internet
1 P.L. 109-347, 120 Stat. 1952 (31 U.S.C. 5361-5367) (2006).
2 National Gambling Impact Study Commission, Final Report at 5-12 (1999). Earlier related
CRS Reports include Internet Gambling: Two Approaches in the 109th Congress, CRS Report
RS22418, from which some of this report is drawn, and Internet Gambling: A Sketch of
Legislative Proposals in the 108th and 109th Congresses, CRS Report RS214587, which includes
a more extensive discussion of the legislation’s evolution.
3 31 U.S.C. 5363.
4 31 U.S.C. 5362.
5 31 U.S.C. 5362(10)(D)(iii). The Justice Department and certain members of the horse racing
industry disagree over the extent to which the Horseracing Act amends the coverage of the Wire
Act which outlaws the interstate transmission by wire of certain information related to gambling.
UIGEA simply denies that its provisions are intended to resolve the dispute.
6 See e.g., Don’t Bet on the United States’s Internet Gambling Laws: The Tension Between
Internet Gambling Legislation and World Trade Organization Commitments, 2007 COLUMBIA
BUSINESS LAW REVIEW 439.
7 31 U.S.C. 5364.
8 “Neteller to Pay Dollars 136m Gambling Penalty,” Financial Times USA at 16 (July 19, 2007).
9 Id.; “Sportingbet Cuts Deal,” Express on Sunday at 7 (August 5, 2007)(“Sportingbet is now
following the lead of rivals PartyGaming and 888 Holdings which started talks with the United
States Attorney’s Office . . . in a bid to remove the threat of any criminal proceedings. . .”).

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gambling companies on the London stock exchange, have been the targets of grand jury
subpoenas as well.10
Proposed Regulations. On October 4, 2007, the Board of Governors of the
Federal Reserve System and the Secretary of the Treasury issued proposed regulations
implementing UIGEA, 72 Fed. Reg. 56680. The proposal invites commentators to
suggest alternatives before the close of the comment period on December 12, 2007 and
explains why the two Agencies did not propose a list-of-unlawful-Internet-gamblers
approach similar to that used to deny drug dealers and terrorists access to American
financial services. It proposes to exempt substantial activities in those payment systems
in which tracking is not possible now and in which it may ultimately not be feasible. It
also notes that the two Agencies feel that they have no authority to compel payment
system participants to serve lawful Internet gambling operators.11
UIGEA calls for regulations that require “each designated payment system, and all
participants therein, to identify and block or otherwise prevent or prohibit restricted
transactions through the establishment of policies and procedures” reasonably calculated
to have that result, 31 U.S.C. 5364(a). The proposal identifies five relevant payment
systems: Automated Clearing House System (ACH), cards systems, check collection
systems, money transmitting business, and wire transfer systems, proposed 12 C.F.R.
§132.3.
The proposal directs participants in the designated systems, unless exempted, to
“establish and implement written policies and procedures reasonably designed to identify
and block or otherwise prevent or prohibit restricted transactions,” proposed 12 C.F.R.
§132.5(a), and then provides examples of reasonably compliant policies and procedures
for each system, proposed 12 C.F.R. §132.6. Participants may comply by adopting the
policies and procedures of their payments system or by adopting their own, proposed 12
C.F.R. §132.5(b).
Of the five systems, a “card system” as understood by the regulations is one that
settles transactions involving credit card, debit card, pre-paid card, or stored value product
and in which the cards “are issued or authorized by the operator of the system and used
to purchase goods or services or to obtain a cash advance,” proposed 12 C.F.R. §132.2(d).
Merchant codes are a standard feature of the system which permits the system to identify
particular types of businesses, 71 Fed. Reg. 56684 (October 4, 2007). There are no card
system exemptions. Examples of reasonably compliant policies and procedures feature
due diligence and prophylactic procedural components. The standards involve screening
merchants to determine the nature of their business, a clause prohibiting restricted
transactions within the merchant agreement, as well as maintaining and monitoring a
business coding system to identify and block restricted transactions, proposed 12 C.F.R.
§132.6(c).
10 “Gambling Subpoenas on Wall St.” New York Times at C1 (January 22, 2007).
11 “Some payment system operators have indicated that, for business reasons, they have decided
to avoid processing any gambling transactions, even if lawful, because among other things, they
believe that these transactions are not sufficiently profitable to warrant the higher risk they
believe these transactions pose.” The Agencies do not believe UIGEA authorizes them to
countermand such a decision, 72 Fed. Reg. 56688 (October 4, 2007).

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“Money transmitting businesses” are entities such as Western Union and PayPal that
are in the business of transmitting funds, 71 Fed. Reg. 56684 (October 4, 2007). They
too are without exemption. Examples of the UIGEA-acceptable policies and procedures
for money transmitting businesses feature procedures to identify the nature of a
subscriber’s business, subscriber agreements to avoid restricted transactions, procedures
to check for suspicious payment patterns, and an outline of remedial actions (fines, access
denial, account termination) to be taken when restricted transactions are found, proposed
12 C.F.R. §132.6(e).
The proposal contains exemptions in varying degrees for the other payment systems.
In essence, because of the difficulties of identifying tainted transactions, they limit
requirements to those who may deal directly with the unlawful Internet gambling
businesses. In the case of “check collection systems,” the coded information available to
the system with respect to a particular check is limited information identifying the bank
and account upon which the check is drawn, and the number and amount of the check, 72
Fed. Reg. 56687 (October 4, 2007). Information identifying the payee is not coded and
a “requirement to analyze each check with respect to the payee would substantially . . .
reduce the efficiency of the check collection system,” 72 Fed. Reg. 56687 (October 4,
2007). Consequently, the proposal exempts all but “the first U.S. institution to which a
check is transferred, in this case the institution receiving the check deposit from the
gambling business,”72 Fed. Reg. 56687 (October 4, 2007); proposed 12 C.F.R. §132.4(b).
Banks in which a payee deposits a check are covered by the regulations as are banks
which receive a check for collection from a foreign bank. The proposal offers examples
for both circumstances. In the case of a check received from a foreign bank, an example
of reasonably compliant policies and procedures would include methods of conducting
due diligence to ensure the prevention of tainted transactions and of remedial steps to be
considered (collection services denied or correspondent account closed) should the
foreign bank be found to be presented tainted checks, proposed 12 C.F.R. §132.6(d)(2).
In the purely domestic cases, examples of reasonably compliant policies and procedures
would include (1) due diligence in establishing and maintaining customer relations
sufficient to identify the nature of a customer’s business, and to provide for a prohibition
on tainted transactions in the customer agreement, and (2) remedial action (refuse to
deposit a check; close an account) should a tainted transaction be unearthed, proposed 12
C.F.R. §132.6(d)(1).
“Wire transfer systems” come in two forms. One involves a large volume
transactions between banks; the second, customer-initiated transfers from one bank to
another, 72 Fed. Reg. 56685 (October 4, 2007). Like the check collection systems, under
current practices only the recipient bank is in a realistic position to determine the nature
of the payee’s business. The Agencies sought comments on whether additional
safeguards should be required of the initiating bank in such cases, but in the interim
exempted all but the bank receiving the transfer, 72 Fed. Reg. 56687 (October 4, 2007);
proposed 12 C.F.R. §132.4(c).
Banks that receive a wire transfer are covered and examples of reasonably compliant
policies and practices resemble those provided for check collection system participants:
in purely domestic cases, know your customer, have a no-tainted transaction customer
agreement clause, have a remedial procedure (transfer denied; account closed) when

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tainted transactions surface; in the case of transfers from overseas, know your
correspondent bank partner, have a no-tainted transaction agreement, have a remedial
procedure (transfer denied; correspondent account closed) when tainted transactions
surface, proposed 12 C.F.R. §132.6(f).
The “Automated Clearing House System” (ACH) is a system for settling batched
electronic entries for financial institutions. The entries may be recurring credit transfers
such as payroll direct deposit payments or recurring debit transfers such as mortgage
payments, 72 Fed. Reg. 56683 (October 4, 2007). The entries may also include one time
individual credit or debit transfers, Id. Banks periodically package credit and debit
transfers and send them to a ACH system operator who sorts them out and assigns them
to the banks in which the accounts to be credited or debited are found, Id. Participants are
identified not according to whether they are transferring credits or debits but according
which institution initiated the transfer, i.e. originating depository financial institutions
(ODFI) and receiving depository financial institutions (RDFI), Id.
The proposal exempts the ACH system operator, the ODFI in a credit transaction and
the RDFI in a debit transaction, proposed 12 C.F.R. §132.4(a). ODFIs in a debit
transaction and RDFI in a credit transaction are not exempt under the theory that in any
tainted transaction they will be in the best position to assess the nature of the business of
the beneficiary of the transfer and to identify and block transfers to unlawful Internet
gambling operators, 72 Fed. Reg. 56686 (October 4, 2007).
The examples of ACH system reasonably compliant policies and procedures are
comparable to those for check collection and wire transfer systems: in purely domestic
cases, know your customer, have a no-tainted transaction customer agreement clause,
have a remedial procedure (fines imposed; disallow origination of ACH debit
transactions; account closed) when tainted transactions surface; in the case of transfers
from overseas, know your foreign gateway operator, have a no-tainted transaction
agreement, have a remedial procedure (ACH services denied; termination of cross-border
relationship) when tainted transactions surface, proposed 12 C.F.R. §132.6(b).
Unlawful Internet Gambling Operators Watch List. The Agencies explained
why they do not find a suitable model in a watch list approach similar to that administered
by the Office of Foreign Assets Control (OFAC), 72 Fed. Reg. 56690 (October 4, 2007).
The OFAC system is a product of the International Economic Emergency Powers
Act (IEEPA) which grants the President extraordinary powers to deal with foreign threats
to the national security, foreign policy or economy of the United States.12 The Presidents
have exercised their powers under IEEPA to bar financial dealings with various identified
drug dealers and terrorists among others.13 OFAC maintains an online list of the dealers
12 50 U.S.C. 1701- 1707.
13 See e.g., E.O. 12978, Blocking Assets and Prohibiting Transactions With Significant Narcotics
Traffickers, 60 Fed. Reg. 54579 (October 21, 1995); E.O. 13219, Blocking Property of Persons
Who Threaten International Stabilization Efforts in the Western Balkans, 66 Fed. Reg. 34777
(June 26, 2001).

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and terrorists subject to the freeze.14 It might be thought that assembling a list of known
unlawful Internet gambling operators and their fiscal accomplices might work just as well.
The Agencies argue that maintaining such a list would be a time-consuming effort
for which they lack the expertise and which would be made more difficult by the
complexity of the law in the area and by the ability of gambling operators to take evasive
measures, 72 Fed. Reg. 56690 (October 4, 2007). Critics might respond that the same
arguments ought to apply with at least equal force to drug dealers and terrorists.
Certainly, the offshore, open and notorious, publicly traded, Internet gambling operators
that the Justice Department has prosecuted and with whom it has entered deferred
prosecution agreements might earlier have been identified without great difficulty or
expertise. On the other hand, the effective use of such an approach would require the
participation of the Justice Department. It may be that the Department shares the
reservations voiced by the Agencies. Yet , it may also be that the Department will take
advantage of the comments period to rebut the Agencies’ claims.
Proposals in the 110th Congress. At least three bills have been introduced in
the 110th Congress to augment UIGEA. The most extensive of these, the Internet
Gambling Regulation and Enforcement Act of 2007 (H.R. 2046), introduced by
Representative Frank, the Chairman of the House Financial Committee, would establish
a federal licensing regime for Internet gambling operators. The second proposal, the
Internet Gambling Regulation and Tax Enforcement Act of 2007 (H.R. 2607), introduced
by Representative McDermott, would establish a licensing fee regime within the Internal
Revenue Code for Internet gambling operators. The third, the Skill Game Protection Act
(H.R. 2610), introduced by Representative Wexler, would remove from Wire Act and
UIGEA coverage games such as poker, which enthusiasts consider games of skill.15
14 31 C.F.R. ch.V, App.A (July 1, 2006), available on November 1, 2007 at
[http://www.treasury.gov/offices/enforcement/ofac/sdn/t11sdn.pdf].
15 Apparently with games like poker in mind, when defining the bets and wagers within its reach,
UIGEA uses the phrase “a game subject to chance,” when speaking of prohibited speculation
upon contests, sporting events, and games, 31 U.S.C. 5362(1)(A), rather than the phrase “a game
predominantly subject to change,” which it uses when speaking of prohibited speculation on
lotteries, 31 U.S.C. 5362(a)(B). A thorough analysis of the these proposals is beyond the scope
of this report.

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