Risky Business: Playing it Smart Regarding Unlawful Internet Gambling

by Trey Anderson, Esq., Senior Consultant, Capco Academy Blackboard

It’s sports season across the country. Whether you’re a fan of the NBA, NCAA basketball, NFL, NCAA college football, or soccer, people all over the country are gearing up to wager on sports. In 2018, the popularity of gambling increased nationally when the Supreme Court cleared the way in Murphy v. National Collegiate Athletic Association for states to legalize sports betting.

Betting used to be strictly a cash business. You settled with your bookie on Monday, in cash, or you brought cash to your Friday night poker game. Times have changed. Today, the payment systems like ACH and wire transfers may be used and regulators want to ensure that financial institutions are not being used improperly to facilitate illegal gaming. 

Are your banking customers in the gaming space? Would you know your financial institution’s responsibilities if they are? Let’s talk about the Unlawful Internet Gambling Enforcement Act (UIGEA).

Understanding UIGEA

The Unlawful Internet Gambling Enforcement Act prohibits anyone in the business of betting or wagering from knowingly accepting payments that result from unlawful internet gambling. The statute also required the regulatory agencies to identify which payment systems could be used to facilitate prohibited transactions and require participants in those systems to have policies and procedures to identify and block prohibited transactions, or prevent or prohibit them.

Under UIGEA, commonly referred to as Regulation GG, financial institutions (including both banks and credit unions) and other businesses that play a role in certain payment systems are required to take certain steps when it comes to internet gambling.

What is Considered Internet Gambling?

Internet gambling is any gambling that involves the use of the internet in some way. However, the regulation doesn’t say what is considered unlawful, and, in finalizing the rule, the Federal Reserve declined to provide a list of businesses that engage in unlawful internet gambling that financial institutions could use to compare against their customers. Rather, institutions must determine what is considered unlawful themselves under federal, state or tribal law. There is some joint guidance and exam procedures, however, and, of course, Capco’s outline in our Big Orange Book. 

Designated Payment Systems

Regulation GG’s requirements apply to persons that are considered “non-exempt participants in a designated payment system.” Participants include operators, third-party processors and financial transaction providers that are members of a designated payment system, have contracted with one or otherwise participate in one. 

These are the payment systems that are considered “designated payment systems” under Regulation GG:

• ACH systems

• Card systems

• Check collection systems

• Wire transfer systems

• Money transmitting businesses

Required Policies and Procedures

Non-exempt participants are required to have policies and procedures to identify and block, or otherwise prevent or prohibit, restricted transactions. The focus of the regulation is on the receipt of proceeds from unlawful internet gambling transactions, not the initiation of the transactions. Further, the regulation limits the burden of the policies and procedures to those non-exempt participants with commercial customers that are receiving the proceeds. In other words, non-exempt participants do not have to identify consumers who are engaging in unlawful internet gambling.

The requirements of the regulation are intended to be practical. For example, not all restricted transactions can be identified in advance or blocked in time. As a result, the regulation heavily emphasizes the importance of initial due diligence as a way to mitigate the risk that customers could receive restricted transactions in the first place. If coding systems are in place, or payment systems have policies and procedures in place for their participants to follow, institutions should be able to rely on them. When institutions and other participants have questions about the legality of internet gambling transactions, they can confer with the state and tribal licensing organizations, or require their commercial customers to get confirmation from licensing agencies, to minimize the burden on the institution in determining what internet gambling is considered illegal. Despite this effort to minimize the burden, however, it’s important that all financial institutions have the mandatory due diligence and procedures for blocking transactions.

Exemptions Within the Designated Payments Systems

The regulation does not require all participants in a designated payment system to have policies and procedures in place to identify and block, or otherwise prevent or prohibit, restricted transactions. Rather, it exempts certain participants in each of the designated payment systems other than card systems. For card systems, all participants in the system are subject to the policy and procedure requirements of Regulation GG.

For financial institutions, most of the exemptions do not apply, and an institution will be required to put policies and procedures in place. The exemptions are helpful for financial institutions because they highlight the activities that are the focus of institutions’ policies and procedures.

Impact on BSA/AML Program

In addition to the procedures required by Regulation GG, an institution also needs to incorporate unlawful internet gambling as a factor in its BSA/AML program. Unlawful internet gambling is, by definition, illegal. As a result, any restricted transactions identified by a financial institution may be SAR reportable. Further, actual or potential restricted transactions, and gambling activities generally, are higher risk activities and may be unusual for that particular commercial customer. Consequently, any of those activities and transactions, any SARs filed and any notices from the government or a designated payment system about the commercial customer’s transactions should be factors in an institution’s BSA/AML program that can be used to periodically review its customer’s risk rating, monitor its activities and determine if a SAR should be filed for any suspicious activities identified.

In Conclusion

Regulation GG is intended to enable financial institutions and other participants in designated payment systems to identify and block, or otherwise prevent or prohibit, unlawful internet gambling transactions. The rule requires certain participants in the designated payment systems to establish policies and procedures that are reasonably designed to identify and block or otherwise prevent or prohibit restricted transactions.