CUNA Comment Letter

Prohibition on Funding of Unlawful Internet Gambling

December 12, 2007

Jennifer J. Johnson
Board of Governors of the Federal Reserve System
Secretary, Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 20551

Department of the Treasury
Office of Critical Infrastructure Protection and Compliance Policy
Room 1327, Main Treasury Building
1500 Pennsylvania Avenue, NW
Washington, DC 20220

Dear Ms. Rupp:

RE:    Prohibition on Funding of Unlawful Internet Gambling; Federal Reserve Docket Number R-1298; Department of Treasury Docket ID Treas-DO-2007-0015

Dear Madam or Sir:

This letter is submitted on behalf of the Credit Union National Association in response to the Notice of Proposed Rulemaking (NPR) issued jointly by the Department of the Treasury and the Board of Governors of the Federal Reserve System on the prohibition on funding unlawful Internet gambling. By way of background, CUNA represents approximately 90 percent of our nation’s 8,400 state and federal credit unions, which serve nearly 87 million members. The views reflected in this letter are based on the input from members of the CUNA Payments Policy Subcommittee and Payments Operations Task Force, as well as on comments we received from other credit unions and leagues.

A Moratorium Is In Order

CUNA commends the Treasury and Federal Reserve Board for your efforts to comply in a timely manner with statutory requirements to implement the Unlawful Internet Gambling Enforcement Act of 2006 (Act), a complex statute, while mindful of the additional regulatory burdens the new law will impose on financial institutions. However, the proposal raises a number of serious and practical concerns that we believe will make compliance for institutions extremely difficult, if not virtually impossible. In light of those concerns, we have written to House Financial Services Committee Chairman Barney Frank and Ranking Minority Member Spencer Bachus seeking their support for a moratorium on the implementation of the law until a number of issues can be resolved.

CUNA supports the objective of the Act, which is to eliminate payments to unlawful internet gambling businesses. To achieve that result, the law prohibits the receipt of checks, credit payments, electronic funds transfers and similar transactions for businesses engaged in such unlawful activities. The law also directs Treasury and the Federal Reserve, in conjunction with the Justice Department, to promulgate regulations within nine months to require covered payment systems and financial transaction providers that participate in those systems to identity and prevent transactions that fund unlawful Internet gambling.

Despite our recognition of the importance of curtailing unlawful Internet gambling, we cannot support the proposal as it presents a number of problematic issues, We feel much more time is needed to sort out issues unanswered by the statute and develop workable approaches that will meet the law’s objectives. A discussion of our specific concerns is below.

The Proposal Raises Fundamental Issues

One of our most basic concerns with the proposal is that it seeks to impose complicated policing activities on financial institutions that are in business for another purpose – to provide financial services to their communities and markets. In recognition of that fact, we believe the Internet gambling enforcement responsibilities imposed on financial institutions should be limited and straight forward.

Of equal concern, it is not clear how institutions will be able to meet their compliance requirements to identify and block transactions that fund illegal gambling activities when there is no mechanism under consideration that would allow them to verify when a payment transaction is intended for that purpose.

One means to facilitate compliance for institutions would be for the government to provide a list of unlawful Internet gambling businesses. The supplementary information discussing the proposal goes to great lengths to explain why such a list should not be provided by the government.

We appreciate the concerns raised in the supplementary information that such a list would require periodic updating and thus could be costly to maintain. While such a list may not be feasible for the government, reasonable compliance for financial institutions will be impossible without some system under which illegal Internet gaming businesses can be identified. Also, it is completely unreasonable to expect financial institutions to develop and maintain their own internal lists.

One solution that would promote regulatory simplicity while assisting institutions to comply is contained in HR 2046, the Internet Gambling Regulation and Enforcement Act, introduced by House Financial Services Committee Chairman Barney Frank. This bill would require Internet gaming businesses to be licensed and pay user fees to the Financial Crimes Enforcement Network (FinCEN).

We can envision that under this measure a list of licensed gambling enterprises could be developed for use in identifying and blocking transactions for Internet gambling entities that are not on the list. (The list could possibly be augmented by information from the Justice Department regarding such businesses or individuals involved in illegal gaming activities.) Such an approach would promote compliance for institutions by providing them a much greater level of certainty as to whether a transaction for a particular entity should be prevented. In conjunction with the development of such a list, the exemptions and safe harbor provisions in the proposal (modified as discussed below) would help provide a regulatory framework that assists in policing illegal Internet gambling activities without inflicting unreasonable and unworkable compliance burdens on financial institutions.

We recognize that this is not a total solution and that entities offering illegal Internet gambling activities could operate under business names that are very similar to those on such a list or could avoid the licensing process and operate using a name that would not permit ready identification as an internet gambling organization. These concerns, however, should be beyond the scope of matters that financial institutions are required to address.

We also realize that Congress has not enacted HR 2046. However, until the government is able to provide a workable list or until Congress passes legislation such as HR 2046 to license legal activities, we feel it will be extremely difficult for institutions to identify and block transactions that they cannot conclusively determine are illegal. That is why we believe a moratorium on the promulgation of this regulation is necessary until a better approach for identifying the payee as an Internet gambling business can be established.

Definition of Unlawful Internet Gambling Is Unclear

The proposal to a large extent utilizes the definition of “Unlawful Internet Gambling” as provided in the Act. While we appreciate that the proposal should be consistent with the Act, our members did not find this definition useful in helping them to identify the types of activities that are illegal, even in light of the proposed definition of “restricted transactions.” We believe the proposal needs to provide clearer information to institutions on what illegal activities are covered so that they have a better understanding of the transactions they are expected to identify and block.

CUNA Supports the Exemptions

The proposal would exempt certain participants in ACH systems, check collection systems and wire transfer systems from having to develop written policies and procedures. We support such the exemptions, which would cover most participants in these systems.

“Policies and Procedures” Explanations Should Be Expanded

The proposal would require institutions to establish and implement policies and procures to identify and block restricted transactions. Alternatively, institutions could rely on policies and procedures established by the payments system, as provided under the proposal. Section ____.6 of the proposal provides some examples of policies and procedures that institutions should develop to assist them in identifying and blocking covered transactions.

Our members were concerned about the scope of the requirements, particularly under the “Card system examples.” To illustrate, the proposal calls for participants including card issuers to monitor websites to detect unauthorized use of the relevant card system, including monitoring and analyzing payment patterns. This is not realistic. The examples also direct covered entities to address “due diligence” without defining or explaining what is meant by that term.

Examples of policies and procedures could be extremely beneficial and we encourage the agencies to develop guidance that provides model language that financial institutions could incorporate in complying with the proposal.

Safe Harbor Should Be Enlarged

Under Section ____.5 of the proposal, institutions that “reasonably believe” a transaction is restricted will not incur liability for incorrectly blocking the transaction. We support such a safe harbor for institutions that inadvertently block transactions that are not covered by the rule.

However, the regulation should clearly discuss what is necessary for an institution to show that its belief was reasonable. We also support a change in the proposal to provide a safe harbor when an institution with reasonable policies and procedures inadvertently mis-identifies and thus fails to block a restricted transaction, particularly if the institution makes a good faith effort to otherwise comply with the regulation.

Further, the proposal contemplates that when restricted transactions are involved, an account could be closed under an institution’s compliance procedures. We believe the safe harbor should also encompass situations in which an account is closed based, in good faith, on an erroneous analysis or treatment of a transaction or transactions that the institution reasonably believed were restricted. Situations involving a decision to decline to open an account should also be covered by the safe harbor.

Enforcement Provisions Should be Clearer

Section _____.7 of the proposal states that the Federal functional regulators will be responsible for enforcing the rule. However, it is not clear how enforcement would occur. The financial regulators should develop a uniform approach for enforcing the rule which is provided to institutions when the rule is adopted in final form.

The Effective Date Should Be Extended

The agencies sought comments on whether the proposal could take effect six months after the final rule is adopted. While we do not believe this proposal should be promulgated, if the agencies decide to proceed we believe at least a year or perhaps up to 18 months would be necessary for institutions to digest the proposal, develop and adopt proper policies and procedures, and review and modify operations to conform to the new requirements.


The law passed by Congress has commendable objectives, but is difficult to implement. We feel that rather than continue with implementation of the current proposal, which raises a range of problematic issues, the regulators should work together with Congress to develop an approach that will meet public policy goals in a clearly understood manner and without inflicting undue hardships on the financial institution sector in the process.

Thank you for the opportunity to express our views.


Mary Mitchell Dunn
SVP and Deputy General Counsel