UIGEA Regs: Burden without Benefit? Without a Doubt.

Well, the coffee was sufficiently caffeinated and I made through the lengthy hearing. All in all an above average day for opponents of the Unlawful Internet Gambling Enforcement Act of 2006, I’d say. Here’s what happened.

Opening Remarks

The hearing was chaired by Luis Gutierrez (D-IL) who opened proceedings by saying he expected “a vigorous debate on the issues.” Later on he’d remark on how well attended the hearing was, as a good number of his committee colleagues ended up showing up to hear the testimony and participate. A few of them made opening statements before the first witnesses spoke.

The day began on a sour note with UIGEA proponent and self-appointed savior of humankind Spencer Bachus (R-AL) again sharing his view that “illegal internet gambling ruins lives and tears families apart.” As he did at the June 2007 hearing, he trotted out that highly misleading University of Connecticut study to suggest that “74% of those who have used the internet to gamble have become addicted to gambling, and many of these gambling addicts have turned to crime to support their habit.” (He also couldn’t resist bringing up Rev. Greg Hogan’s son yet again.) I explained at length back then how that study -- which Bachus calls “recent” even though it was conducted in 2002 -- doesn’t come close to proving what Bachus is claiming. Bachus once again established himself as an incredibly hard-headed and ill-informed participant in the discussion. Unfortunately, he’s the ranking member of the House Financial Services Committee and therefore gets to talk a lot at these things.

Barney Frank (D-MA) then came on and clarified that while such moral righteousness was certainly a big part of why the UIGEA was passed in the first place, the topic of today’s hearing was the problem of enforcement. “Even those that agree with [the law],” said Frank, “ought to say ‘you know what, let’s find a different way to enforce it.’”

A few more committee members added their two cents. Jeb Hensarling (R-TX) pointed out how he’d once been a small businessman himself, and thus knew how “[small] businesses tend to get risk averse.” His point was that when faced with uncertainty about how to proceed with the UIGEA, banks are very likely going to “overblock” all suspect transactions, even those that are clearly not restricted. Maxine Waters (D-CA) came on to say that while she had voted for the original House bill back in the summer of ’06 (H.R. 4411) -- and, of course, the Safe Port Act that included the UIGEA -- she was now thinking she’d vote differently if given another opportunity. Peter King (R-NY), one of the co-sponsors of Frank’s IGREA (H.R. 2046), added that he’d prefer “unlawful internet gambling” be restricted to sports gambling only so as to remove potential ambiguities.

Panel 1 -- The Regulators

Two witnesses representing the authors of the proposed UIGEA regulations then testified. First to speak was Louise Roseman of the Board of Governors of the Federal Reserve System. Then Valerie Abend of the Department of Treasury gave her statement. The Poker Players Alliance has posted both of their statements (Roseman & Abend).

In a nutshell, both primarily communicated how difficult a task the regulators face in trying to hammer out any sort of concrete, non-ambiguous guidelines for financial transaction providers. They both referred to the 200-plus comments that had been made on the proposed regulations, and both essentially responded here by saying “we’re trying” and “we’re still working on it.” Then the questioning began.

Rep. Gutierrez started off asking the witnesses about what the regulations mean when they refer to the moment when a financial institution “becomes aware” of a restricted transaction. Neither could really clarify the ambiguity of the phrase. “It is something we are looking at,” said Roseman. “We’ve not come to a final determination” regarding the extent of the banks’ obligation to monitor their clients, said Abend.

Indeed, much of the question/answer period was taken up with Congressmen asking in various ways for clarity, and the regulators responding that the UIGEA doesn’t really give them enough guidance to produce that desired clarity.

For example, Frank asked a series of questions about betting on horse racing, a form of gambling that is nominally excluded from the UIGEA even though such bets are not allowed in certain states. “Under your regulations as proposed -- they may be amended -- [if] I am a financial institution, do I or do I not process that payment [of one of my clients] for a bet on a horse?”

Roseman took a shot at answering Frank’s question. (Indeed, she took the lead and answered most of the questions during this first panel.) “I would assume that most institutions would not process . . . ” she began. “No, no, no!” interrupted Frank. “I’m not asking you to ‘assume’ what they would do. You’re the regulator!” Roseman again said they’d have to look into such a question further. Frank wryly replied that, in effect, this law designed to prevent online gambling required banks to “gamble” (in a sense) when trying to decide what exactly they are being asked to do.

Kenny Marchant (R-TX) asked if the finalized regulations would provide a clear definition of “unlawful internet gambling.” “I can’t say at this point what’s going to be in the final law,” Roseman replied. “The challenge we have is interpreting something -- particularly [with regard to existing] federal laws [about gambling] -- that Congress itself isn’t sure what they mean . . . . That is something that we are really struggling with at the moment.”

Marchant then brought up what I thought was an interesting -- and revealing -- example of the problems banks would face. What could the banks do, he asked, if someone placed an illegal wager at an online site that identified itself not as a gambling business, but, say, as “Joe’s T-Shirt Shop”? “In that case, payment system participants would have no way of knowing that the transaction actually related to unlawful internet gambling and would likely process the transaction,” answered Roseman.

Later Rep. King would bring back up his suggestion that only sports gambling be identified as illegal, but even there the banks could have the same problem identifying a transaction if the business wasn’t immediately recognizable as a gambling site. Replied King, “if even with something which everyone agrees is illegal, and everyone agrees should be controlled . . . if that can’t be [effectively prohibited], doesn’t that just show almost the impossibility of coming up with regulations that would cover an area which no one has been able to fully define?” Roseman said she could not disagree.

A couple of other highlights during this first panel.

Rep. Bachus tried to challenge the witnesses’ assertion that they “can’t assemble a list of bad actors” or illegal gambling operations. Recall that neither the UIGEA nor the proposed regulations purport to do this work, and instead leave it to the financial institutions to make such determinations. According to Bachus, the feds have been able to make such distinctions in other contexts and make lists of outlawed entities -- e.g., the Banks Secrecy Act, or the Specially Designated Nationals List (produced by the Office of Foreign Assets Control). If the feds could produce those lists, said Bachus, he was “mystified” why they couldn’t here.

Roseman replied that “the one thing that really distinguishes a list here from the OFAC list is that the OFAC list talks about particular entities that you shouldn’t have transactions with . . . but in this case, [what is being targeted] is [a] restricted activity, not restricted parties. So even gambling operations would have a combination of payment transactions that would be restricted under this law and others that would not be.” Bachus disagreed. “Can’t you block ’em [altogether]?” he asked. In other words, if the party tried to make a single restricted transaction, couldn’t they be put on a list and forbidden to make all transactions? Roseman tried again to explain to Bachus that the law doesn’t work that way, but he wasn’t hearing her.

Also, Robert Wexler (D-FL) chimed in to talk about skill-based games and try to make a distinction between, say, poker and other forms of gambling that do not involve skill. (You’ll recall Wexler is the one who last year proposed the “Skill Game Protection Act,” H.R. 2610.) A little off-topic, really, as the point of this hearing was primarily to address the regulations and problems of enforcement, and not specifically to entertain alternate legislation like Wexler’s bill. Still, it was interesting to hear Roseman respond that “we did get a lot of comments from poker players that made exactly that argument,” namely, that as a game of skill poker shouldn’t be covered by the UIGEA. However, as Roseman explained, “in the Act’s definition of what is a bet or wager, it does say that that includes ‘a game subject to chance.’ So there are a number of games like poker that involve a great deal of skill, but probably are also subject to chance . . . . It doesn’t say ‘having a predominant element of chance.’ It is just ‘subject to chance.’”

That’s a point I’ve made repeatedly here on the blog, the first time way back in October 2006, a few days after Bush signed the thing into law. The fact is, as interesting as the skill-vs.-luck-in-poker debate can be, it has zero practical meaning in the context of the UIGEA in its present form.

Gutierrez concluded the first panel by remarking that the regulators had “one hell of a complicated job” on their hands.

Panel 2 - The Financial Institutions

The second, shorter panel featured four witnesses, each of whom represented different areas of the American payments system. Harriet May spoke first on behalf of the Credit Union National Association. May stated that CUNA believed “compliance under the Act . . . [was] difficult, if not impossible for financial institutions,” and that the UIGEA simply could not be implemented “without creating a list similar to what OFAC publishes” (i.e., the Specially Designated Nationals List). She also voiced concern about the date of implementation, stating that financial institutions would need “at least 18 months if not longer to try to figure out what to do and conform to the new requirements.” Her full testimony can be read here.

She was followed by Wayne Abernathy, the Executive Vice President of the American Bankers Association. His remarks weren’t much different from what the ABA said in their comments on the proposed regulations. He complained that the UIGEA unfairly “makes financial institutions the police, prosecutors, and judges in place of real law enforcement officers when it comes to the practice of [regulating] unlawful internet gambling.” He called the Act “an unprecedented delegation of governmental responsibility, with no prospect of practical success,” and predicted the burdens would threaten to compromise the efficiency of the entire payments system. Here is his full testimony.

The last two witnesses were Leigh Williams, a representative of BITS (not an acronym) and the Financial Services Roundtable, and Ted Teruo Kitada of Wells Fargo. Both also highlighted the impracticality of the Act’s implementation. Williams called it a “policing activity” than may have reached “a point of diminishing returns,” while Kitada spoke of the imprecise definition of unlawful internet gambling and worried about the possible consequences to existing customers. Like May, Kitada also expressed grave concerns about the UIGEA’s implementation date. Their testimonies have also been posted (Williams & Kitada).

The Q & A for this panel was less extensive, as many of the points they made had already been addressed previously. Also, the questioners were uniformly in agreement with their arguments, thus making the discussion a series of affirmations of the overall argument about the UIGEA’s lack of feasibility. Rep. Ron Paul (R-TX) specifically asked about the potential costs to banks in order to follow the UIGEA’s instructions, as well as the potential encumbrance of record-collecting and the monitoring of information. Abernathy agreed that the Act was unreasonably burdensome in both respects. Williams added that “regulatory uncertainty ironically [was] making it very difficult for us to estimate what the ultimate cost would be.”

Gutierrez finally closed the hearing, pointing out that while he didn’t necessarily agree with Paul and Frank’s position on gambling, generally speaking, he certainly recognized the many problems with enforcement that had been highlighted during the previous couple of hours. Pointing out that he sometimes couldn’t determine the source of a charge on his own credit bill, he sympathized with the banks’ burden of making such determinations on a case-by-case basis, and agreed with most of those present that financial institutions shouldn’t be tasked with “sheriffing” in order to block restricted transactions.

Conclusion

Ultimately, the hearing appeared to prove quite decisively that the various burdens caused by the UIGEA greatly outweighed whatever potential benefits its authors and backers had once perceived it to provide. In fact, I wouldn’t necessarily characterize the hearing as a “vigorous debate” at all. Any rational observer -- regardless of his or her feelings about online gambling -- would simply have to recognize how destructive the UIGEA’s implementation would ultimately prove to be.

The complaints of the financial institutions should carry some influence, I would think. Most promising to me, though, were the reservations expressed by the very authors of the regulations at today’s hearing. While it is possible they may go ahead and produce some sort of ambiguous, highly detrimental, finalized version of the law on schedule, my impression coming away from the hearing was that they may find themselves caught in an extended rethink for some time to come.