Banks: Planned Net-gambling curb could disrupt e-commerce

Banks, credit card companies, and some Democratic members of Congress are predicting that forthcoming restrictions on Internet gambling will ensnare innocent customers and threaten the viability of e-commerce.

The criticism came at a congressional hearing on Wednesday devoted to the Unlawful Internet Gambling Enforcement Act, enacted in 2006 by a Republican Congress after pressure from social conservatives. The Federal Reserve and the Treasury Department published draft regulations last fall--which financial institutions say will disrupt perfectly legal transactions unless dramatic changes are made before the rules take effect.

Rep. Ron Paul, the libertarian-minded Republican presidential candidate, criticizes Net-gambling restrictions on Wednesday, saying 'people should make their own decisions.'

(Credit: U.S. House of Representatives)

"Consumers will be placed at risk of having lawful transactions blocked," said Rep. Luis Gutierrez, D-Ill., chairman of the House monetary policy and technology subcommittee. "It is easy to see how these regulations, if implemented in their current form, could wreak havoc on electronic commerce in the U.S."

The 2006 law forces banks and other financial intermediaries to police money flows that could be related to Internet gambling. It never received a formal up or down vote in the entire Congress; instead, Republican congressional leaders simply glued it on to an unrelated port security bill that was approved nearly unanimously.

No consensus
The difficulty with the law's approach is that, while banks cooperate internationally to identify terrorist-related funds and drug-related money laundering, there's zero consensus on Internet gambling transactions.

Online betting is perfectly legal and government-regulated in many areas of the world: PokerStars is licensed by the U.K.'s Island of Man; Bodog Entertainment is a betting company headquartered in Antigua; so is the World Sports Exchange. Other European Union nations also license Net-gambling firms.

Given that financial institutions process nearly 100 billion payments a year, according to Federal Reserve data, and given that other governments won't necessarily be cooperating, identifying which payments are gambling-related is no trivial task.

The U.S. government's "decision not to fully define unlawful Internet gambling places our members in a very difficult position," said Leigh Williams on behalf of the Financial Services Roundtable, which counts Visa, Mastercard, Bank of America, Wells Fargo, and other banks as members. "They cannot know if a transaction is restricted unless they have in hand specifics of the transaction that in almost all instances they will not have."

At the very least, Williams said, the U.S. government should provide a list of names of Internet gambling businesses that can be identified and blocked--something that regulators are unwilling to do. (One model that's been suggested is the Treasury Department's list of "specially designated" people and organizations subject to economic sanctions.)

Federal regulators have said it would be too expensive for them to create a list themselves, arguing that "the government must engage in an extensive legal analysis to determine whether the gambling Web site is used, at least in part, to place, receive or otherwise knowingly transmit unlawful bets or wagers" and that due process safeguards "would result in considerable added costs."

Adding to the complexity is that horse racing was explicitly exempted from monitoring in the 2006 bill, although it's unclear whether betting itself is legal. The Justice Department thinks it can be prosecuted under the the Wire Communications Act, but the Fifth Circuit has indicated that the statute doesn't apply to a game of chance.

Another unusual aspect is that the draft regulations from the Federal Reserve and the Treasury Department require "monitoring of Web sites" related to gambling--based on the premise that credit card companies and banks can identify if their payment systems are being used.

Rep. Ron Paul, the libertarian-minded Republican candidate for president, said that could lead to more Internet regulation: "Though I do not endorse gambling per se, people should make their own decisions. It's a personal choice. I've always been concerned about this type of regulation and legislation--it's likely to open the door (to control and regulation) of the Internet itself."

"There is a risk that financial institutions would misclassify a payment as illegal and thus be exposed to liability," said Williams, from the Financial Services Roundtable. "We also believe that 'monitoring of websites'...is inappropriate to include in a financial institution's monitoring activity."

Rep. Barney Frank, the Democratic chairman of the full House Financial Services Committee, used the chance to talk up his bill that would effectively legalize--but closely regulate, including with criminal background checks and financial disclosure--the online gambling industry. (Here's our audio interview with him last year.")

In the Treasury Department and Federal Reserve's 52-page draft regulations, the word "identify" appears 61 times and "monitor" appears 18 times. "Privacy" appears not once.

Frank was one of the few people to raise that point on Wednesday, telling the financial representatives on the panel that there was "a conflict between the obligation imposed on you by the act...and the privacy expectations of your customers."