What Does 'Additional Screening' Mean in Unlawful Gambling Act?

Last week the Federal Reserve and the U.S. Treasury delayed compliance with rules adopted under the Unlawful Internet Gambling Enforcement Act that would require financial institutions to implement policies  "reasonably designed" to prevent payments to illegal gambling Web sites. Monday, I spoke to Steve Kenneally from the American Bankers' Association regarding what those policies should look like and why the deadline delay was necessary.

First, Kenneally reiterated that the UIGEA does not expressly define illegal gambling, and the regulators specifically chose not to do so either, saying they would leave it up to the states. However, "the problem with that," he said, "is you have 50 states with 50 different definitions." Since there's no way to prevent payments to illegal sites when there is no clear definition of what is illegal, the regulators decided to have financial institutions subject potential corporate customers to "additional screening" before allowing them to even open an account.

Under the rules as they currently exist, that screening occurs in a series of steps. For instance, a corporate customer receives a higher level of scrutiny than an individual customer would, a corporate customer that maintains a Web site receives more scrutiny than a corprate customer that does not maintain a Web site, and a corporate customer that maintains a "gambling" Web site receives more scrutiny than a corporate customer that maintains a Web site for charitable donations or other payments.

For example, if a potential customer maintains a Web site for donations to fund cancer research, there is minimal risk that the Web site will be used to process payments made to gamble at all, let alone to gamble illegally. On the other hand, if a customer maintains a Web site and wants to set up an account to receive payments for raffle tickets sold to benefit the local Boys & Girls Club, that customer will be asked to provide documentation of the legality of that raffle, since a raffle is a form of gambling.

Or, if a state in which a lottery is legal wants an account to receive payments for lottery tickets, the state will need to provide documentation that the lottery is indeed legal and demonstrate that it has a means of preventing people who are residents of a neighboring state where the lottery is not legal from purchasing tickets. If the legality of the raffle or the lottery is in question, the bank can refuse to open the account, and thus minimize the risk that payment systems are being used in unlawful gambling.

Kenneally then explained that regulators have delayed compliance to allow Congress time to amend  the UIGEA so that financial institutions don't have to use such a "roundabout" method of compliance -- perhaps by specifically defining lawful vs. unlawful gambling.