GPWA Times Magazine - Issue 36 - October 2016

H owever, in the last several years, the UIGEA has also posed a hurdle to operators who want to offer legal Internet gaming in the U.S. It has added to the cost of compliance for those who wish to offer online contests of skill or other promotions, because it has greatly increased the sensi- tivity of payment processors and banks — and, in some cases, has caused them to avoid processing payments for anything that might be remotely considered gambling. What does the UIGEA do, and what doesn’t it do? Despite its title, the UIGEA does not actually make online gaming illegal. To this day, online gaming in the U.S. is a crime primarily because of state laws. The applicable federal laws, such as the Travel Act or Illegal Gambling Business Act, are for the most part derivative of state law— they require an underlying violation of a state gaming law in order to apply. The one major exception, the Wire Act, was interpreted by the Depart- ment of Justice in 2011 to apply only to wagers on sporting events and not to Internet gaming. The UIGEA, too, is derivative of state law in that it defines “unlawful Internet gambling” as a bet or wager that involves the Internet where the bet or wager is illegal under any applicable federal or state law in the state where the bet is initiated, received or otherwise made. However, the UIGEA does not make “unlawful Internet gambling” illegal in its own right, despite common thoughts to the contrary. Instead, it is illegal for a person who is in- volved in the betting or wagering business to accept credit cards, elec- tronic funds transfers, checks or the proceeds of any other form of financial transaction from a person engaged in unlawful Internet gambling. The UIGEA, therefore, applies to the payment side of online gaming. It requires the Board of Governors of the Federal Reserve System to adopt regulations requiring operators of payment systems to identify and prohibit transactions restricted by the UIGEA. The Federal Reserve has adopted Regulation GG, requiring those who operate payment systems to block UIGEA-restricted transactions. Methods that have been per- mitted under Regulation GG include blocking transactions with certain credit card codes that relate to online gaming transactions and requiring due diligence at the time a merchant opens an account to ensure that the merchant is not engaging in restricted transactions. The UIGEA, therefore, affects payment processing—not an individual’s engagement in online gaming. UIGEA’s initial effects The initial effects of the UIGEAwere dramatic. Before the UIGEA, many online gaming companies accepted bets fromU.S. players even though those bets were, at best, placed in a legal “gray area” and could be construed to have violated state law inmost states. It was not at all uncommon for patrons with credit cards issued by U.S. banks or with deposit accounts at U.S. banks to transfer funds to online gaming companies, virtually all of which were based offshore. There was no meaningful impediment to doing so from a technical perspective. Once the UIGEA and Regulation GGwere adopted, however, the vast majority of banks and credit card processors stopped processing payments for online gaming. The result was a shutdown of options for manyU.S. patrons who wanted to engage in online gaming, andmany operators stopped their efforts to recruit U.S. patrons. Some, however, continued to find ways to accept wagers from U.S. patrons. For example, as part of the 2011 “Black Friday” indictments, alle- gationsweremade that companies that were acceptingwagers post-UIGEAhad engaged in fraud by applying incor- rect transaction codes to online gaming transactions in order to disguise those transactions frompayment processors. The Black Friday indictments resulted in a number of guilty pleas, restitution, seizure of domain names and other sanctions imposed by the U.S. justice system against operators who tried to circumvent the UIGEA. The enhanced scrutiny applied to transactions after the Black Friday indictments, along with fear of prosecution, further tight- ened the ability of U.S. players to par- ticipate in online gaming—at least in a convenient manner. Has the UIGEA gone too far? The DOJ’s interpretation of the Wire Act in 2011 to apply only to sporting events or contests opened the door for intrastate Internet gaming. Thus far, New Jersey, Nevada and Delaware have implemented online gaming. As discussed above, the UIGEA applies only to those in the business of betting or wagering when a bet or wager violates the law of the state in which it is received or placed. Presumably, Internet gaming conducted under the auspices of regulatory authorities in states where Internet gaming has been authorized does not violate state law. That said, when New Jersey began accepting legal Internet wagers, payment processing proved to be a major hurdle. Many payment processors either outright refused or severely restricted the processing of payments for online gaming trans- In the last several years, the UIGEA has also posed a hurdle to operators who want to offer legal Internet gaming in the U.S. Disclaimer: This article is prepared and published for informational purposes only and should not be construed as legal advice. The views expressed in this article are those of the author and do not necessarily reflect the views of the author’s law firm or its individual partners. Solutions or problems? W W W . G P W A T I M E S . O R G 33