Commenting on the Prohibition on Funding of Unlawful Internet Gambling (Proposed Rule), issued recently by the Federal Reserve Board and the Department of the Treasury, the ABA told the House Committee on Financial Services that the UIGEA takes banks beyond the role of simply reporting potentially or allegedly illegitimate financial activity, into the role of policing, prosecuting and judging in the place of real enforcement officers.

"Punting the enforcement obligation to the banking industry and the other participants in the US payment system is an unprecedented delegation of governmental responsibility with no prospect of practical success in exchange for the burden it imposes," testified Wayne Abernathy, ABA Executive Vice President, financial institutions policy and regulatory affairs.

The UIGEA requires designation of payment systems that could be used in connection with unlawful internet gambling, which currently include Automated Clearing House Systems, Card Systems (e.g., credit cards, debit cards, as well as stored value products), Check Collection Systems, Money Transmitting Businesses and Wire Transfer Systems (i.e., CHIPS).

The act also exempts certain restricted transactions or designated payment systems from any requirement imposed by the regulations if the Treasury Department and the Federal Reserve Board jointly determine that it is "not reasonably practical for participants to prevent or prohibit unlawful internet gambling transactions".

However, the proposed rule does propose to partially exempt certain participants within some of the designated payment systems from having to establish "reasonably designed policies and procedures".

"The Treasury and the Federal Reserve Board determined that this was the most appropriate way to implement the Act while retaining fidelity to the intent of Congress," Deputy Assistant Secretary Valerie Abend told Wednesday's committee hearing.

Under the proposed rule, the gambling business's bank (or, if abroad, the first US bank dealing with that bank) would not be exempted because it could, through "reasonable due diligence", ascertain the nature of its customer's business and ensure that the customer relationship is not used to receive unlawful internet gambling transactions.

The proposed exemptions generally extend to the gambler's bank. For example, in the case of checks, the check collection system is highly automated, and it is not practical for the gambler's bank to know whether a check presented to it for payment involves unlawful internet gambling.

However, Abernathy argued that, while ABA members want to do their part to help fight financial crime, there are realistic limits to how far the payments system can be used effectively to solve these problems.

"The Federal Reserve's most recent Payment Study reported that more that 93 billion payments were processed by financial institutions in 2006. Additionally the system does not even take the names of account owners into consideration when moving funds in the automated programs," he stated.

Abernathy drew attention to the fundamental challenge of ensuring that internet gambling businesses are identified as such, and are assigned the correct merchant and transaction codes.

"The proposed rule relies primarily on internet gambling businesses to commit to an honor system whereby they would voluntarily identify themselves to credit card networks to deny themselves payments. This is hardly a realistic expectation," argued Abernathy.

He further noted that the ability to properly categorize customers operating internet gambling businesses as unlawful gambling enterprises is severely complicated by the need to define which gambling businesses or activities are unlawful.

"The ABA believes that the flaws in the definition of unlawful internet gambling are fatal to this proposal as a legal, policy and practical matter. Without a workable definition of unlawful internet gambling, it is impossible to determine what constitutes an unlawful internet gambling business for purposes of determining the customer relationship," Abernathy observed.

Finally, the ABA expressed the belief that the agencies' efforts at cross-border implementation by requiring US participants to engage foreign correspondent banks in identifying and blocking unlawful internet gambling-related transactions raise more problems than they solves.

"There is little basis upon which a US and a foreign correspondent could practically agree to implement effective controls to block unlawful cross-border gambling transactions. Not only is there currently an absence of international control standards for internet gambling transactions, there is also broad international resistance to create such controls," Abernathy concluded.