On September 30, Congress passed the Unlawful Internet Gambling Enforcement Act of 2006 (included in H.R. 4954, the Port Security Improvement Act of 2006) (the "Act"). The President is expected to sign it soon. This bill does not contain any general prohibition against internet gaming; rather the Department of Justice takes the position that such activities are already illegal under existing statutes, as demonstrated by the arrest last summer of David Carruthers, the CEO of UK-based BETonSports. Passage of this bill suggests even more aggressive federal prosecution of internet gaming activities in the near future. Our understanding is that preliminary talks are already taking place with internet gaming stakeholders, congressional staff and Justice on implementation of this bill. One source cryptically told us that "we're trying to make this thing work."

Instead, this new statute attempts to choke off the transmission of funds between Americans and internet gaming sites, irrespective of where the gaming sites are located. It prohibits acceptance of credit cards, funds, bank instruments, or proceeds of any other form of financial transaction in connection with the participation of another person in unlawful internet gaming.

In doing so, it creates compliance problems for numerous types of entities, in addition to those directly engaged in internet gaming operations. These include U.S. financial institutions and similar businesses, especially those subject to the Bank Secrecy Act ("BSA") and the USA Patriot Act of 2001, which will now have specific gaming obligations superimposed on their more generalized obligations not to facilitate illegal activities.

Any individual or business that may have involvement with internet gaming activities, whether intentional or otherwise, should understand what this statute does and does not do and should take steps to insure compliance with federal legal obligations. We also note that those already having excellent BSA and USA Patriot Act compliance programs will need to update them to be sure that they address conduct covered by this new internet gaming statute.

There will be an important opportunity for covered businesses to attempt to mitigate the cost and aggravation of compliance. This relates to the bill’s requirement that the Secretary of the Treasury, the Federal Reserve and the Attorney General work together to issue regulations to further the goals of this legislation. The rulemaking, which Congress has ordered be completed within nine months of President Bush’s signing the bill into law, provides opportunities for those affected to argue for the creation of "safe harbors" that absolve institutions of liability and, further, to claim that certain types of transactions should be exempted from coverage of the Act. In short, this rulemaking probably affords the best – and probably the last – opportunity to try to minimize the potential disruption of operations caused by the prohibitions ordered by Congress.

Among other things, the new legislation:

  • Prohibits U.S. banks, credit card companies, money transmitting businesses, and other third-party payment providers from knowingly processing online gaming transactions;

  • Creates new civil and criminal penalties against banks, money transmitters, and other financial institutions that violate these new laws;

  • Grants the United States and state Attorneys General injunctive authority to prevent prohibited activities; and

  • Permits the blocking of access to an interactive computer site.

"Basically, we are shutting down the payment system for Internet gaming" said Representative James Leach (R-IA). By making it "illegal to use a financial instrument to settle an Internet wager," Congress is "putting responsibility on the financial community," Leach said. The main impact of the Act will be on banks, credit card companies, money transmitting businesses, and other financial institutions which handle the funds destined for overseas gaming sites.

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