The paper, entitled “Time to Fold the Unlawful Internet Gambling Enforcement Act: A Bad Law with Perverse Outcomes,” was written by Eli Lehrer, a senior fellow at the Competitive Enterprise Institute, a D.C. advocacy house very frequently associated with conservative, pro-business causes. The paper was quickly summarized in an “American
Spectator” piece called “No Dice,” also penned by Lehrer and Michelle Minton, a policy analyst for CEI, and the entire original white paper is available on the Poker Players Alliance web site at pokerplayersalliance.com.

The white paper focuses, in part, on the collateral damage that the implementation of the UIGEA could cause to America’s banking system. Lehrer notes, in his introduction, that “The Act [] seems unlikely to stop Internet gambling and could even threaten the stable, smooth operation of America’s banking system.” Lehrer notes the “affirmative obligation” this will place on banks to enforce the UIGEA’s mandates.

Also detailed in the CEI white paper is the unfunded nature of the UIGEA. While the Department of the Treasury, one of two agencies to be involved in UIGEA oversight, has noted its estimate for its own needed resources, the total costs to the banking industry and other small businesses remains unknown… and likely quite large. The Treasury Dept. expenses are estimated at $20 million and 350,000 person-hours per year, or as the CEI notes, the equivalent of hiring over 330 new full-time government bureaucrats.

The white paper also noted that the Small Business Administration’s Office of Advocacy has protested that the law’s impact on other small business was excluded from the preliminary Treasury analysis. Because of this, the expenses incurred in fulfilling UIGEA requirements will, the white paper avers, ultimately be passed on to consumers, even if those businesses are only indirectly impacted by the UIGEA. As for America’s banks, which face a more direct mandate, the bill could force incremental changes such as as higher loan rates, lower savings and CD interest rates, and higher fees for consumers who are in no way involved in Internet gambling.

The impact of the piece remains to be seen, but, combined with the Democratic-led UIGEA hearings next week, shows that opposition to the UIGEA in its current form spreads across the political spectrum, and that the “bad, bad law”, as Lehrer and Minton described it in their “American Spectator” piece, needs to be changed significantly from its current form.

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The 10:00 am hearing in Congress’s Rayburn House Office Building will be entitled “Proposed UIGEA Regulations: Burden without Benefit?” and will offer one of the first true Congressional examinations of the 2006 UIGEA, which was attached to unrelated, “must pass” port-security legislation by Sen. Bill Frist (R-TN) in a maneuver that left the UIGEA unread by many
Congressmen before it was passed into law. The hearing will examine the viability of the UIGEA, which has been termed unworkable by many affected parties, including America’s powerful banking industry.

The latest hearing was mentioned a couple of weeks back by Rep. Barney Frank (D-MA), whose proposed IGREA (Internet Gambling Regulations and Enforcement Act) regulation remains one of the proposed alternatives, compared to the UIGEA, that are likely to be considered by Congress in the future. Other measures that been proposed by Rep. Robert Wexler (D-FL) and Rep. Pete McDermott (D-WA) may also be brought forward for consideration at the hearing. Wexler’s bill for a “skill games” exemption for poker and other pastimes is favored by the poker world but has not been a priority for Congressman Frank, whose IGREA has more co-sponsors at this point than other measures related to Internet gambling. Wexler’s IGRTEA (Internet Gambling Regulation and Tax Enforcement Act), is pitched as a fiscally responsible alternative that will allow the US recoup tax revenues that Wexler and otehrs believe should go into US coffers, rather than flowing overseas.

The Poker Players Alliance has announced that they will offer a live webcast of the April 2nd Congressional hearing. Information on the pending webcast is available at pokerplayersalliance.org.

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The Canadian horse tracks do have a legitimate concern in that they have lost business over the years to online gaming. And while the horse tracks pay taxes and provide local jobs, the vast majority of the online industry contributes little to the local or national economies. “They take a lower commission on the bet because they don’t have infrastructure costs and pay purses. How many jobs are they creating here? None,” Jane Holmes, vice-president of corporate affairs for Woodbine Entertainment Group said. “If we tried to do what they’re doing, we would lose our licenses. It provides them with an unfair competitive advantage.” But if this is the problem, is UIGEA-like legislation the solution?

Michael Lipton, a Toronto lawyer specializing in gaming law, points out that the US is still hard pressed to implement any meaningful enforcement of the UIGEA, stating, “They are completely bogged down on how to block this system.” The recent comments by the American Banking Association on the proposed UIGEA rules appear to support Lipton’s remarks. Lipton instead sees a much more tenable solution through government regulation, whereby the industry could be held accountable, provide tax revenues, and develop into an internationally competitive trade resource for Canada. Instead of developing a trade resource, however, UIGEA-like legislation would likely represent a trade liability for Canada. Canada is a World Trade Organization member and legislation that is deemed discriminatory to foreign online gaming competitors would likely open them to sanctions like those triggered by Antigua’s WTO case against the US.

Somewhere in the crosshairs of this debate is the sovereign territory of the Kahnawake, located near Montreal, which plays host to over 400 online gambling sites. The Kahnawake have always contended that their operations are not governed by Canadian or provincial law, and would not be effected by any law Canada may pass in the future. Responding to inquiries about the potential for a legal showdown with Canada over the Mohawk Nation’s online operations, Joe Delaronde, spokesperson for the Mohawk Council of Kahnawake said, “It would be very unwise of the government. This operation is taking place in our jurisdiction. If they really want to come to some sort of resolution on this, the best idea would be to contact our grand chief and talk about it. We’re very open to discussion.” In every respect, Canada’s potential legislative reach will mirror the limitations of the US’s UIGEA legislation, which acknowledges its inability to alter state or Indian territorial law relative to gambling.

If all the horseracing industry wants is a level playing field, why go to such great lengths to eliminate the competition? These lengths potentially involve a law that will be hard to enforce, conceding potential tax revenue, international trade liabilities, and a tussle with an indigenous sovereign nation. If they want it level, give them level and regulate online gambling just as Canada regulates its horseracing industry. It’s just a thought, but one we hope MP Roy Cullen might consider before taking Canada down the UIGEA path.

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Said EU Trade Commissioner Peter Mandelson, in announcing the launching of the probe, “The US has the right to address legitimate public policy concerns relating to internet gambling, but discrimination against EU companies cannot be part of the policy mix.”

The EU probe is expected to last five to seven months, and will produce a report which in turn could lead to the launch of World Trade Organization proceedings by the European Union against the US. The EU was formerly a party of interest in Antigua and Barbuda’s much-publicized complaint against the United States over US restrictions on online gambling, but the EU has not, to date, filed its own complaint on the matter. The Antiguan complaint was also, as a technical matter, narrowly defined to Internet-based horseracing betting services, leaving the door open for a larger complaint on more generalized online-gambling topics.

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In its comments, the ABA raised nine crucial points and urged “several changes or clarifications to the proposal to enable banks to execute some form of feasible program.” However a thorough reading shows that the ABA has little hope that the UIGEA is workable in its present form. “ABA believes that the proposal, in large part due to the nature of the statute itself, will fail to create a practical process for intercepting prohibited conduct that maintains an efficiently functioning payments system.” The above was shortly followed by a statement more damning: “(W)e believe that UIGEA will in the end catch more banks in a compliance trap and do greater damage to the competitiveness of the American payments system, than it will stop gambling enterprises from profiting on illegal wagering.”

The ABA noted that the UIGEA correctly made an attempt to exempt the US banking industry from the penalties called for within the UIGEA. However, the ABA’s earlier take on the situation differs from the simplified “blanket exemption” touted in stories this week regarding the dismissal of a lawsuit by the Interactive Media Entertainment and Gambling Association (iMEGA) against the US government. That lawsuit attenpted to block the implementation of the UIGEA altogether, and was dismissed, though with continuing appeals possible. The ABA saw three serious flaws with the UIGEA rules: “(1) the definition of unlawful Internet gambling in the Prohibition leaves the vague definition of the Act uncured and therefore renders compliance virtually impossible; (2) the intractable problem of identifying or intercepting cross-border gambling activities and tainted correspondent relationships has not been adequately solved by the proposal; and (3) the uncertain standard for knowledge that triggers blocking is too indefinite to be practically operative.”

The holes in the UIGEA’s approach and the vagueness of its language then led the ABA to comment as follows: “We maintain that the UIGEA is a fundamentally flawed response to those challenges.” The ABA then took the authors of the UIGEA to task for transferring police powers to the private banking industry, requiring them to work as deputies of sorts on behalf of the government. This was without even a mention of the “unfunded mandate” nature of the UIGEA itself. One of the most damning passages in the ABA response then followed, with the ABA noting that it was “saddled with this exceptional burden” due to the federal government’s own inadequacies. The harshest part of the passage reads thus:

“In other words, in the view of the drafters of the legislation, all the sophistication of the FBI, Secret Service, and other police computerized detection systems and investigative expertise devoted to fighting terrorism and financial crime are inadequate to the task of apprehending the unlawful gambling business or confiscating its revenues. ABA believes that punting this obligation to the participants in the U.S. payment system is an unprecedented delegation of governmental responsibility with no prospect of practical success in exchange for all the burden it imposes.”

The ABA’s response then went on to list nine specific points that need to be addressed. The first three points sought to strengthen beneficial aspects (“beneficial” from the viewpoint of the ABA) of the UIGEA, while the last six points highlighted “deficiencies that persist in the proposal that preclude effective implementation of the Act.” The nine ABA action points:

1. The exemption language in the proposed rule should be reinforced to underscore that all participants in the specified payment systems except those with a customer relationship with the Internet gambling business are exempt.

9. Financial Institutions should have a longer period to phase-in the new policies and procedures prior to the effective date.

Point #1 explored the conflicting language of the UIGEA regarding exemption from liability for the US banking industry. The ABA duly noted that problems exist in the case of a relationship between an “Internet gambling business” and an offshore bank; in this instance, the US bank loses its exempt status when dealing with the other, offshore bank, even though the US bank might lack information on which to identify the transaction. As the ABA response noted, “For all the reasons this is not feasible in a domestic banking transaction, such an arrangement is not feasible cross-border. Only the bank with the customer relationship with the Internet gambling business can practically access sufficient information to identify the circumstances giving rise to a judgment about a restricted transaction.”

It was when the ABA explained why the UIGEA won’t work that the language again grew sharper, as in Point #4, which was stated bluntly: “The Agencies need to cure the impossibly vague scope of what is meant by ‘unlawful Internet gambling.’” The ABA then noted the UIGEA’s refusal to adequately define the problem for itself: “The Prohibition does not specify which transactions qualify as ‘unlawful Internet gambling.’ Instead, the Prohibition looks to ‘underlying substantive State and Federal gambling laws and not . . . a general regulatory definition’ to determine the scope of what unlawful Internet gambling comprises. ABA believes that requiring banks to be arbiters of gambling laws for all states, as well as federal gambling laws, is infeasible and would place a crippling processing burden and unbounded litigation risk on the nation’s payments system participants.

The ABA also noted existing conflicts between the Department of Justice and other federal agencies regarding the correct interpretation of already existing laws, and essentially summed it up as bad law: “If the federal agencies themselves cannot agree on the law, what hope is there that banks can resolve these confounding legal issues?”

Of course, not only does the UIGEA not properly define the laws, it forces the banking industry to try base policy and judgment upon those inadequacies. As noted in the ABA response: “Given the different entities encompassed by the proposal as participants in the payments system who are deputized with this authority, the Prohibition seems effectively to require vigilante justice empowered by a vague and overbroad delegation of the government’s police powers.” In fact, the ABA found the UIGEA’s standing definition of “unlawful Internet gambling” to be so lacking that it all but dismissed the law as unworkable in its present form: “A unified, practically workable definition of ‘unlawful Internet gambling’ must be included in the Prohibition. This is such a keystone element of the Prohibition and is currently so thoroughly flawed that a workable rule cannot possibly be issued in final form without re-proposal.”

The ABA’s comments then exposed why expecting US banks to know everything about a foreign bank’s customers wouldn’t work, and also derided the UIGEA for expecting that foreign banks, in addition to domestic ones, would somehow become expert in not only US federal gambling laws, but the related laws of all 50 US states as well. It also assailed the UIGEA for its presumption that its own language should usurp that of foreign banks operating legally in their home countries.

Said the ABA, on this point: “For instance, if a British bank has policies and procedures to identify and block transactions which qualify as ‘unlawful Internet gambling’ in the US, but these same transactions are legal in the UK, the bank could be subject to litigation or enforcement actions in their own country.”

The ABA also noted that a list of unlawful Internet gambling businesses “might have some merit,” but that it wanted no part of the list’s creation. Said the ABA: “Of course, ownership and upkeep responsibilities for such a list cannot and must not fall on financial institutions. To place the onus for a list on financial institutions would only exacerbate the Act’s void-for-vagueness delegation flaw, converting it from impossible individual determinations of legality to impossible joint determinations of blacklisting.” The ABA also noted that a six-month period for implementation would be unworkable, in the event that some form of the rules were put into action; a 24-month period, at a minimum, would be more realistic.

In summary, the American Banking Association was not pleased with the requirements and mandates laid upon the banking industry with the passage of the UIGEA. Whether such strident opposition ultimately results in the abandonment or reworking of the UIGEA as a matter of practical law remains to be seen. In ending, the ABA noted this: “(G)iven that there are several points requiring change or clarification, including the essential component — a definition of what transactions “unlawful Internet gambling” encompasses — several revisions must be made and a new rule proposed for further comment. Even then, major, fundamental flaws must be cured before effective implementation of the UIGEA can even be contemplated.”

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However, iMEGA’s claims that implementation of the UIGEA would be a First Amendment, “free speech” violation for its members was held to be without merit, in part because iMEGA’s action identified no aggrieved parties by name, either as part of businesses offering online gambling or of aggrieved customers demanding the right to spend their income how and where they choose. Six different points were raised by iMEGA in the original complaint, and each was dismissed in turn by Judge Cooper. In dismissing one of the free-speech points, Judge Cooper noted that, “UIGEA does not have any adverse impact, much less a significant one, on the ability of the plaintiff and its members to express their views on Internet gambling.”

Also dismissed was the iMEGA argument that by passing the UIGEA, the US put itself in violation of its own World Trade Organization agreements. That argument was dismissed because such a challenge may be brought only by the government itself, not by any individual or private group.

In a footnote to the dismissal of one of iMEGA’s motions, a states-rights challenge based on the Tenth Amendment, Judge Cooper noted that “UIGEA exempts purely financial entities from criminal liability.”

iMEGA chairman Joe Brennan, Jr. expanded on that in a statement published on the iMEGA website in the wake of the decision. “Judge Cooper found that banks, credit card companies and other payment system instruments are exempt from criminal sanctions under UIGEA,” said Brennan, “significantly undercutting UIGEA’s enforcement mechanism. Her ruling echoes the growing consensus of opinion that UIGEA is a fundamentally flawed statute.”

However, the statement as issued by Cooper does not address the “overbroad” payment-blocking concerns that trouble the online industry regarding UIGEA, and in fact, Cooper specifically mentioned in her decision that the UIGEA in its current form was not overbroad. Her decision, though, could be construed as being narrow in scope, given its conclusion, which reads in part:

“The plaintiff’s claims express a fundamental disagreement with Congress’s judgment that Internet gambling should be controlled legislatively, and pose questions as to whether UIGEA, given its exceptions and conjectural enforcement problems, will be successful in accomplishing its desired ends. But it is not the Court’s role to pass on the wisdom of a Congressional act or speculative on its effectiveness.”

iMEGA’s official statement expressed pleasure over the granting on legal standing in the matter. iMEGA also announced tentative plans to appeal to the Third Circuit Court of Appeals. It also appears that the decision as rendered was the outcome iMEGA expected. Days prior to the release of Judge Cooper’s decision, iMEGA’s Ed Leyden commented on the pending decision to PokerNews as follows: “We remain hopeful that the government’s motion will be denied so that even if our own motion (for a prliminary injunction) is also denied, we’ll still be teed up to fight these vital issues of digital civil rights.”

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The complete text of the letter sent to Bernanke and Paulson:

Dear Secretary Paulson and Chairman Bernanke,