Louise L. Roseman, Director, Division of Reserve Bank Operations and Payment Systems

Internet gambling

Before the Subcommittee on Domestic and International Monetary Policy, Trade, and Technology, Committee on Financial Services, U.S. House of Representatives

April 2, 2008

Chairman Gutierrez, Ranking Member Paul, and members of the Subcommittee, I am pleased to appear before you to discuss the implementation of the Unlawful Internet Gambling Enforcement Act of 2006. I will provide an overview of the Act and of the proposed rule to implement the Act that the Federal Reserve Board and the Secretary of the Treasury (the Agencies) published for comment. I will also highlight the major issues raised in the comments we received.

Unlawful Internet Gambling Enforcement Act of 2006

The Act prohibits gambling businesses from accepting payments in connection with unlawful Internet gambling. Such payments are termed “restricted transactions.” The Act also requires the Board and the Secretary of Treasury, in consultation with the Attorney General, to prescribe regulations requiring designated payment systems and their participants to establish policies and procedures reasonably designed to identify and block or otherwise prevent or prohibit the acceptance of restricted transactions.

The Act does not spell out which gambling activities are lawful and which are unlawful, but rather relies on the underlying substantive Federal and State laws. The Act does, however, exclude certain intrastate and intratribal wagers from the definition of “unlawful Internet gambling,” and also excludes any activity that is allowed under the Interstate Horseracing Act of 1978. The activities that are permissible under the various Federal and State gambling laws are not well-settled and can be subject to varying interpretations. Congress recognized this fact when it included in the Act a “sense of Congress” provision that states that the Interstate Horseracing Act exclusion “is not intended to resolve any existing disagreements over how to interpret the relationship between the Interstate Horseracing Act and other Federal statutes.”

The Act directs the Agencies to designate payment systems that could be used to facilitate restricted transactions. A designated payment system and its participants must comply with the rule. Congress recognized, however, that it may be difficult to block restricted transactions made in certain payment systems, and directed the Agencies to exempt transactions or designated payment systems from the rule’s requirements in those cases where it is not reasonably practical to block restricted transactions. By including this requirement, Congress recognized the importance of an efficient payment system to a well-functioning economy and of ensuring that the Agencies’ rule does not have a material adverse effect on payment system efficiency. In addition, the Act requires that the regulations identify the types of policies and procedures, including non-exclusive examples, that the Agencies would deem reasonably designed to prevent or prohibit restricted transactions. The Act also requires the Agencies to ensure that their regulations do not block or otherwise prevent or prohibit transactions related to activity that is explicitly excluded from the definition of unlawful Internet gambling.

The Proposed Rule and Comments Received

Overview of the proposed rule. Over the course of this rulemaking, the Agencies have done a considerable amount of outreach to payment system representatives, gaming interests, Federal and State regulators, and others. These consultations enabled the Agencies to gain a better understanding of gaming and its regulatory structure, and the role the various payment systems play in facilitating gaming. Although Board staff is quite familiar with the operations of many types of payment systems, this consultation provided a deeper understanding of certain payment systems, such as money transmitting businesses (for example, Western Union, MoneyGram, and PayPal), and allowed the Agencies to better focus on formulating options for policies and procedures that would be practical for those systems to comply with the Act.

In October 2007, the Agencies published for comment a proposed rule to implement the Act. The proposed rule (1) designates payment systems that could be used by participants in connection with a restricted transaction, (2) exempts certain participants in certain designated payment systems from the requirements of the regulation, and (3) requires non-exempt participants to establish and implement policies and procedures reasonably designed to prevent or prohibit restricted transactions.

For each designated payment system, the proposed rule sets out non-exclusive examples of policies and procedures for non-exempt participants in the system that the Agencies believe are reasonably designed to prevent or prohibit restricted transactions. These examples are tailored to the particular roles participants play in each payment system. The examples include policies and procedures that address methods for conducting due diligence in establishing and maintaining a customer relationship designed to ensure that the customer does not originate or receive restricted transactions through the customer relationship. The examples also include policies and procedures that address remedial actions with respect to a customer if the participant becomes aware that the customer has originated or received restricted transactions through the customer relationship. Examples applicable to card systems and money transmitting businesses include procedures to address ongoing monitoring or testing to detect possible restricted transactions and, in the case of card systems, establishing transaction codes and merchant category codes that enable the card system or card issuer to identify and deny authorization for a restricted transaction.

More than 200 organizations and consumers submitted comments on the proposal. Many of the comments were directed toward the Act itself. Most consumers who commented indicated that the Act represents an inappropriate governmental intrusion into citizens’ private affairs. Other commenters expressed concern that the Act will exacerbate the U.S.’s difficulties with the World Trade Organization related to Internet gambling. Some banks warned that the cumulative effect of the increased compliance burden of this and other laws will adversely affect the competitiveness of the U.S. payment system. In contrast, some commenters supported the Act’s goals, noting the problems that Internet gambling causes for individuals who gamble beyond their means.

I will now highlight certain aspects of the proposed rule and the associated comments that the Agencies received.

Determination of what constitutes unlawful Internet gambling. Like the Act, the proposed rule did not specify what constitutes unlawful Internet gambling. Lack of clarity on this topic in both the Act and the proposed regulation was the most prominent concern raised by the commenters. Commenters that represent payment systems and their participants stressed that uncertainty about what constitutes unlawful Internet gambling would make compliance with the rule very difficult and burdensome. Commenters generally supported bright-line mechanisms for determining which transactions they should block. Clarity on this point would permit them to design policies and procedures that they could be assured would meet the rule’s requirements. A number of commenters recommended that the Agencies develop a list of gambling businesses whose transactions should be blocked. While some of these commenters acknowledged the limited effectiveness of such a list, they desired the certainty and efficiency that it would provide. Other commenters suggested that the rule should place the onus on the Internet gambling business to demonstrate to its bank the legality of its transactions. Still others, including some gambling businesses and many consumers, asked that the rule clarify that certain types of gambling, such as pari-mutuel betting or poker, are lawful.

Designated payment systems. The Agencies proposed designating a broad range of payment systems that could be used in connection with Internet gambling. Designated payment systems include automated clearinghouse (ACH) systems, card systems (including credit card, debit card, and prepaid or stored-value systems), check collection systems, money transmitting businesses, and wire transfer systems (such as Fedwire and CHIPS). Commenters generally concurred with the scope of the payment system designations.

Exemptions. The Agencies considered instances when it would not be reasonably practical to identify and block, or otherwise prevent or prohibit, restricted transactions. The proposed rule did not exempt from compliance any designated payment system in its entirety, but rather exempted certain participants in the ACH, check collection, and wire transfer systems. With respect to domestic transactions, the proposed rule exempts all participants in these systems except for a participant that would have a customer relationship with an Internet gambling business. The institution that has the customer relationship with that business is in the best position to determine the nature of the customer’s business and whether the customer is likely to receive restricted transactions for credit to its account. The Agencies believe it is not reasonably practical for other parties to transactions in these systems to identify restricted transactions because these systems do not have the functional capabilities in place for identifying and blocking payments made for specific purposes or initiated in specific ways, such as on the Internet. For that reason, some banks recommended that these systems be exempt from the rule altogether. The proposed rule did not include exemptions for any participant in a card system or money transmitting business; rather, the Agencies tailored the examples of policies and procedures to the functional capabilities of those systems and their participants.

Due diligence. As I noted earlier, the proposed rule contained examples of policies and procedures that would comply with the rule. Those examples included procedures to conduct due diligence in establishing and maintaining commercial customer relationships to ensure that commercial customers do not originate or receive restricted transactions. Bank commenters generally believed that such due diligence could be performed at the time of account opening for accounts established following the effective date of the regulation if they had a mechanism to readily determine which Internet gambling activity was unlawful. They indicated it would be very difficult and burdensome, however, to ascertain which existing business customers conduct Internet gambling activity, because they have not maintained records on their accounts in a manner that would readily permit identification of such accounts. This requirement would be particularly challenging for the largest banks, which have millions of commercial account relationships.

Cross-border transactions. Most unlawful Internet gambling businesses are based outside the United States and therefore do not have account relationships with U.S. financial institutions. Instead, their accounts are held at foreign institutions, and restricted transactions enter the U.S. payment system through cross-border relationships between those foreign institutions and U.S. financial institutions or payment systems. The proposed rule, therefore, places responsibility on U.S. payment system participants that send transactions to, or receive transactions from, foreign institutions to establish policies and procedures reasonably designed to prevent these restricted transactions. For example, a U.S. correspondent bank could require in its account agreement that foreign institutions have policies and procedures in place to avoid sending restricted transactions to the U.S. participant.

Commenters stated that measures to prevent foreign institutions from sending restricted transactions to the United States would likely be unworkable. They believed that most foreign banks would not agree to modify their contracts with U.S. banks, particularly if Internet gambling is legal in a foreign institution’s home country. Detecting and preventing cross-border Internet gambling transactions presents challenges that differ from other criminal financial transactions, such as money laundering or terrorist financing. Laws in many other jurisdictions impose compliance obligations upon financial institutions with respect to those types of financial crime; there are, however, few comparable compliance requirements with respect to Internet gambling.

Given that Internet gambling is lawful in many countries where U.S. banks have correspondent relationships, it may be particularly difficult to craft workable procedures to prevent individuals in the United States from making payments to a foreign Internet gambling company’s account at a foreign bank. Moreover, commenters noted that, given the complexity of U.S. gambling law, it is unrealistic for foreign institutions to ascertain which forms of Internet gambling are unlawful and therefore should be prevented.

Many of these cross-border correspondent relationships support large volumes of daily payments that are wholly unrelated to gambling. It seems impractical to require U.S. banks to end these relationships because some small percentage of their overall payments may be directed toward unlawful Internet gambling. Therefore, there may be limited options for dealing with the international banking relationships through which most unlawful Internet gambling transactions are processed without causing significant disruption to international payment flows.

Overblocking. The proposed rule implements the Act’s overblocking provision by stating that nothing in the regulation is intended to suggest that payment systems or their participants must or should block transactions explicitly excluded from the definition of unlawful Internet gambling. Banks and other payment system participants supported the proposed rule’s implementation of the Act’s overblocking provision, stating that the Act does not require that these gambling transactions, or any other transactions, be processed, but, instead, simply requires that the regulation itself not mandate that these gambling transactions be blocked. Some of these commenters indicated that, even before the Act’s passage, they had decided to avoid processing any gambling transactions, even if lawful, because these transactions were not sufficiently profitable to warrant the higher risk they posed. In contrast, some organizations representing gaming interests commented that the rule should require payment system participants to process transactions excluded from the Act’s definition of unlawful Internet gambling. Certain gaming interests recommended that the rule’s policies and procedures for card systems at a minimum include the establishment of separate merchant category codes for the types of gambling that are not defined as unlawful under the Act. As noted in the proposal, the Agencies believe that the Act does not provide the Agencies with the authority to require designated payment systems or participants in these systems to process any gambling transactions, including those transactions excluded from the Act’s definition of unlawful Internet gambling, if a system or participant decides for business reasons not to process such transactions. Nor do we possess any other authority that would allow us to do so.

Conclusion

In recent years, funding Internet gambling through the U.S. payment system has become more difficult, due in large part to steps card issuers and money transmitting businesses have already taken on their own initiative to prevent these transactions. Board and Treasury staffs are currently focused on developing a final rule that leverages existing practices to prevent unlawful Internet gambling transactions and provides additional and reasonably practical examples of actions that U.S. payment system participants can take to further impede the flow of restricted transactions through the U.S. payment system. As the comments to the proposed rule make clear, this is a challenging task, and the ability of the final rule to achieve a substantial further reduction in the use of the U.S. payment system for unlawful Internet gambling is uncertain. As part of this effort, we are carefully considering all comments received on the proposed rule and determining what modifications may be appropriate in light of the issues raised by those comments. Our objective is to craft a rule to implement the Act as effectively as possible in a manner that does not have a substantial adverse effect on the efficiency of the nation’s payment system.

I would welcome any questions that the Committee members may have.

Frightening.

New York Post

Reason magazine

ABC News

Wall Street Journal

Wall Street Journal

Slate

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Psstt… Somebody registered Client9.com just after news broke…

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The New York Times:

The Senate Judiciary Committee voted on Tuesday to approve the nomination of Michael B. Mukasey as attorney general despite opposition from most of the committee’s Democrats over Mr. Mukasey’s refusal to label a harsh interrogation technique used on terrorist suspects as torture.

Protesters opposed the Mukasey nomination and votes of two Democratic senators.

The vote, 11 to 8, with two Democrats joining all of the committee’s Republicans in supporting Mr. Mukasey, all but assured him of final confirmation by the full Senate. The Senate’s Democratic leaders are expected to schedule a vote by next week. [...]

Dynamic chart:

Static chart:

I think you’re reading the contract wrong. The April, May, June, and July lines are all “Gonzales will leave his post in [insert month].” The August contract is different. Instead of “Gonzales will leave his post in August,” the contract is “Gonzales will keep his job until at least August 1st.” Thus, the contract expired at 100 on August 1st. His retiring after August 1st was irrelevant in terms of the specified contract.

The contracts:

stock information
August or later
Attorney General Alberto R. Gonzales will keep his job until at least August 1st, 2007.
April
Attorney General Alberto R. Gonzales will leave his post during the month of April, 2007.
May
Attorney General Alberto R. Gonzales will leave his post during the month of May, 2007.
June
Attorney General Alberto R. Gonzales will leave his post during the month of June, 2007.
July
Attorney General Alberto R. Gonzales will leave his post during the month of July, 2007.

Hummm…. Incoherent. Another reason for me to be wary of the Inkling prediction markets…

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THIS IS MY ORIGINAL POST (WHICH HAPPENED TO BE WRONG):

Thanks to the pertinent comments from prediction market experts Mike Giberson and Jed Christiansen, I turned my attention to a prediction market at Inkling Markets, which indeed was “predictive” (whatever that could mean ) —but on such thin volumes in the last month that I really wonder whether it’s meaningful.

Note: I rarely pay attention to the event derivatives at Inkling Markets because there is not much information about the reliability of the volunteers who expire those prediction markets.

Note #2: Pay attention to the green line…

Doug Mills / The New York Times

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Once again, Chris Masse was right on the money:

[...] Just like the Olympic City prediction markets, the resignation prediction markets are rarely predictive because there aren’t any reliable advanced indicators to guide the traders. The Olympic committee is secretive and does not grant on merit but on politics (or corruption). As for the embroiled officials (politicians or CEOs), they are secretive too and send false signals (”Read my lips; I will never resign”). In both cases, the event derivative traders don’t have any access to inside information, the only one that counts. So these two types of prediction markets are of inferior quality, which explains why experienced traders don’t speculate on them. [...]

And I provoked a polémique, once again.

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InTrade-TradeSports:

Alberto Gonzales to announce his resignation on/before 30th September 2007

Alberto Gonzales to announce his resignation on/before 31st December 2007

Alberto Gonzales to announce his resignation on/before 31th Mar 2008

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NewsFutures:

Alberto Gonzales won’t remain Attorney General through the rest of Bush’s presidency.

[This one, with a November 2008 deadline, was indeed predictive.]

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Reminder:

Karl Rove will resign from the White House.

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Yesterday, the Seattle Post-Intelligencer ran a story entitled “Betting web site’s computers seized.” Within hours, bloggers and other news outlets picked up the story and translated it into something akin to “Betcha shut down.”

Problem: the translation isn’t true. (WARNING: if tails of government bureaucrats running roughshod over its citizens turns your stomach, stop reading here.)

What’s Happening

What happened was this. Last Friday, Betcha’s attorneys and I met with the state Gambling Commission to address their concerns. They had us drive to their offices in Lacey, WA, about an hour from Betcha’s offices. The meeting lasted all of about five minutes, with it ending in a deputy commissioner handing us a pre-printed Cease and Desist order. I’ll attached a PDF copy of it later, but the gist of it was “shut down or else.” Why she couldn’t have told us this over the phone I am not sure — I suspect it had something to do with making my Friday afternoon a very expensive one. (Tax dollars hard at work.) At almost the exact same moment, Seattle lawyer Lee Rousso was, coincidentally, filing a lawsuit in state court asking the court to declare the state’s anti-Internet gambling ban unconstitutional. Although the law has previously been criticized on First Amendment grounds, and the Commission has taken positions in the past that appear pretty tough to square with any notion of free speech [], Mr. Rousso’s challenge is based on the Commerce Clause — that is, the law seeks to protect the in-state Native American casinos from out-of-state competition, and is therefore unconstitutional.

On Monday, I arrived to the offices early to unlock the doors so the raiders wouldn’t bust them down. (Not cheap to replace a busted down door.) A few hours later, Commission enforcers, indeed, showed up and took everything. Our books, our posters, my business cards — everything. (The warrant wasn’t limited – among other things, it included “stamps,” “printers,” “scanners,” “jewelry,” “envelopes”, “napkins”, “cardboard coasters” and “keys.”) No one from Betcha was there — not a good way to start the week, being on the business end of a roving commission. Ironically, my wife stopped by during the raid and chatted up Rick Herrington, the chief Raider (read: head of Commission enforcement.) When my wife asked Mr. Herrington whether they’d be selling our equipment on eBay, he shrugged his shoulders, as if to say “maybe yes, maybe no.” He then told her “Nick should have come to us first about this.” This exchange I find revealing: it seems that the Commission is more interested in ruining me and Betcha than anything else. Why? Because we’re near their turf.

As troubling was how the conversation continued. According to my wife, Mr. Herrington repeated several times “he’s breaking the law, he’s breaking the law.” When she told him that that was a judge’s decision, he replied “doesn’t matter, he’s still breaking the law.” (If that’s not guilty until proven innocent, I don’t know what is.)
On Tuesday, we petitioned a state court in Olympia to enjoin the Commission from this “seize and threaten now, ask questions later” approach. It almost never happens that a court will enjoin law enforcement from enforcing its version of the law, no matter how warped that version may be. This is an extraordinary remedy and we didn’t get it yesterday, although it wasn’t for lack of fantastic work by our lawyer.

The hearing wasn’t without substantial incident and irony. Apparently, although several people at both the Commission and Attorney General’s office had been served with our papers via fax, e-mail, and PDF, someone at the Commission did not receive an original copy of one of the documents, as required by the state service statute. As a result, we could not proceed until we could prove someone at the Commission had been served with an original copy of this document. We then had to race across Olympia to the Commission’s office in a nearby town to serve the Commissioner himself — personally. (Not a single person in the legal department was working on that glorious 94-degree Tuesday — go figure.) The irony — exactitude matters big time to the Commission when it comes to serving paperwork that they already had. But precision in reading a criminal statute that may result in me doing years in the Gray Bar Hotel, not to mention wiping out a fair bit of investor capital and no less than seven years of man work — nah.

What’s Next

In terms of next steps, the situation is this. We are pursuing an action to get a court to declare Betcha legal. If the law and/or the Constitution matters in Washington (open question, that), I am confident Betcha will prevail. In the meantime, however, we face a Cease and Desist Order from a Commission that appears hell-bent on destroying Betcha at all costs. We’re going to review it in detail later today and decide on a course of action. We may have to take the betting-for-money part of the site down until we get on the other side of the steamroller.

You can rest assured, however, about our resolve. The government bureaucracy has been running roughshod over the citizens of this country for far too long. [] Prosecutors make up facts, legislators make it a crime to play poker in your own home, bureaucrats rewrite the laws, logic and the dictionary — and we’re all left at their mercy. The frog is boiling and the water’s getting hotter every day. I pledge to the friends and users of Betcha.com that I will do my part to turn the heat down. If that means rotting in jail, so be it.

The text above appeared on Nick Jenkins’ blog at Betcha.com. Visit the original blog post to see all the links inserted in his text, and which don’t appear above.

Previous: IT DIDN’T TAKE LONG. NICK JENKINS’ BETCHA.COM GETS BUSTED THREE WEEKS AFTER LAUNCH.

Problem: the translation isn’t true. (WARNING: if tails of government bureaucrats running roughshod over its citizens turns your stomach, stop reading here.)

What’s Happening
What happened was this. Last Friday, Betcha’s attorneys and I met with the state Gambling Commission to address their concerns. They had us drive to their offices in Lacey, WA, about an hour from Betcha’s offices. The meeting lasted all of about five minutes, with it ending in a deputy commissioner handing us a pre-printed Cease and Desist order. I’ll attached a PDF copy of it later, but the gist of it was “shut down or else.” Why she couldn’t have told us this over the phone I am not sure — I suspect it had something to do with making my Friday afternoon a very expensive one. (Tax dollars hard at work.) At almost the exact same moment, Seattle lawyer Lee Rousso was, coincidentally, filing a lawsuit in state court asking the court to declare the state’s anti-Internet gambling ban unconstitutional. Although the law has previously been criticized on First Amendment grounds [1|2], and the Commission has taken positions in the past that appear pretty tough to square with any notion of free speech (an example), Mr. Rousso’s challenge is based on the Commerce Clause — that is, the law seeks to protect the in-state Native American casinos from out-of-state competition, and is therefore unconstitutional.

On Monday, I arrived to the offices early to unlock the doors so the raiders wouldn’t bust them down. (Not cheap to replace a busted down door.) A few hours later, Commission enforcers, indeed, showed up and took everything. Our books, our posters, my business cards — everything. (The warrant wasn’t limited – among other things, it included “stamps,” “printers,” “scanners,” “jewelry,” “envelopes”, “napkins”, “cardboard coasters” and “keys.”) No one from Betcha was there — not a good way to start the week, being on the business end of a roving commission. Ironically, my wife stopped by during the raid and chatted up Rick Herrington, the chief Raider (read: head of Commission enforcement.) When my wife asked Mr. Herrington whether they’d be selling our equipment on eBay, he shrugged his shoulders, as if to say “maybe yes, maybe no.” He then told her “Nick should have come to us first about this.” This exchange I find revealing: it seems that the Commission is more interested in ruining me and Betcha than anything else. Why? Because we’re near their turf.

As troubling was how the conversation continued. According to my wife, Mr. Herrington repeated several times “he’s breaking the law, he’s breaking the law.” When she told him that that was a judge’s decision, he replied “doesn’t matter, he’s still breaking the law.” (If that’s not guilty until proven innocent, I don’t know what is.)

On Tuesday, we petitioned a state court in Olympia to enjoin the Commission from this “seize and threaten now, ask questions later” approach. It almost never happens that a court will enjoin law enforcement from enforcing its version of the law, no matter how warped that version may be. This is an extraordinary remedy and we didn’t get it yesterday, although it wasn’t for lack of fantastic work by our lawyer.

The hearing wasn’t without substantial incident and irony. Apparently, although several people at both the Commission and Attorney General’s office had been served with our papers via fax, e-mail, and PDF, someone at the Commission did not receive an original copy of one of the documents, as required by the state service statute. As a result, we could not proceed until we could prove someone at the Commission had been served with an original copy of this document. We then had to race across Olympia to the Commission’s office in a nearby town to serve the one of the Commissioners himself — personally. (Not a single person in the legal department was working on that glorious 94-degree Tuesday — go figure.) The irony — exactitude matters big time to the Commission when it comes to serving paperwork that they already had. But precision in reading a criminal statute that may result in me doing years in the Gray Bar Hotel, not to mention wiping out a fair bit of investor capital and no less than seven years of man work — nah.

What’s Next
In terms of next steps, the situation is this. We are pursuing an action to get a court to declare Betcha legal. If the law and/or the Constitution matters in Washington (open question, that), I am confident Betcha will prevail. In the meantime, however, we face a Cease and Desist Order from a Commission that appears hell-bent on destroying Betcha at all costs. We’re going to review it in detail later today and decide on a course of action. We may have to take the betting-for-money part of the site down until we get on the other side of the steamroller.

You can rest assured, however, about our resolve. The government bureaucracy has been running roughshod over the citizens of this country for far too long. (Check out this book or BoilingFrog.com, among other sites, for some examples.) Prosecutors make up facts, legislators make it a crime to play poker in your own home, bureaucrats rewrite the laws, logic and the dictionary — and we’re all left at their mercy. The frog is boiling and the water’s getting hotter every day. I pledge to the friends and users of Betcha.com that I will do my part to turn the heat down. If that means rotting in jail, so be it.

Cross-posted from the Betcha.com blog

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Alberto Gonzales will remain Attorney General through the rest of Bush’s presidency.

© NewsFutures

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Alberto Gonzales will remain Attorney General through the rest of Bush’s presidency.

© NewsFutures

UPDATE: Alex Forshaw…

Intrade is saying that Gonzales probably _won’t_ be fired before September, and by December, little better than a coin toss.

Alex, the market-generated probabilities have changed a bit since I first posted. Thanks.

New York Times: Senate Democrats have said they would bring a no-confidence resolution to the floor as soon as this week.

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