Politics & Government

Online gaming law could scuttle Kentucky Derby betting

WASHINGTON — Some horse racing fans looking to place online bets for the 134th Kentucky Derby this weekend may find their transactions blocked by banks and credit card companies trying to avoid running afoul of unclear federal regulations, gaming and banking industry experts said Thursday.

"Unless the government takes the responsibility of telling the banks which merchants they shouldn't deal with, and when banks take the position that they are not going to process these transactions without guidance, all heck will break loose," said Tony Cabot, an attorney with the Las Vegas firm Lewis and Roca, which represents the Nevada Pari-Mutuel Association.

Advocates for the banking and online gambling industries, legal scholars and several members of Congress are pushing the U.S. Treasury, the Federal Reserve and the Justice Department to clarify whether a regulatory exemption in the Unlawful Internet Gaming Enforcement Act that allows Internet gambling on horse racing could also mean that banks and credit card companies would be penalized for processing the money from those wagers.

Under the law, passed in 2006 as part of the SAFE Port Security Act, the nation's banks and credit card companies are prohibited from accepting payments for some online bets or wagers. However, the financial institutions are largely left to figure out which gambling transactions are illegal and block payments.

Financial institutions say this unfairly puts them in the position of trying to decide what's legal with little clear guidance from the federal agencies responsible for implementing the rule.

Until the federal agencies issue better guidance, some financial service companies may refuse to handle any online gambling transactions, said Nelson Rose, a law professor at Whittier College in Costa Mesa, Calif., and the author of several books on gaming law. At stake is millions of dollars in online gaming revenue and hefty legal penalties for banks that processed online gaming transactions that are later found to be illegal.

"The problem is that in some states online gambling is legal, in others it is not and in still other cases the question depends on where the bettor is, where the gaming operator is and what form of gambling is taking place," Rose said.

Last fall, in response to growing concern, the agencies solicited public response to proposed regulatory changes. They received more than 200 comments and are culling through the responses, said Jennifer Zuccarelli, a spokeswoman with the Treasury Department.

In the meantime, members of Congress who weighed in last month during a House Financial Services subcommittee hearing were sharply critical of the law, which they called vague and costly for financial institutions to implement. One of the most common complaints is that the rules fail to sufficiently define key terms, leaving financial institutions to figure out how to comply, said Rep. Luis Gutierrez, D-Ill.

"For example, the regulation fails to adequately define what constitutes 'unlawful Internet gambling' or 'restricted transaction,' yet requires the financial institutions to make a determination on their own about what is lawful or unlawful," Gutierrez said.

House Financial Services Committee Chairman Barney Frank, D-Mass., and senior committee member Rep. Ron Paul, R-Texas, have introduced legislation designed to prohibit the federal government from issuing regulations called for in the Unlawful Internet Gambling Enforcement Act of 2006.

House Judiciary Committee Chairman John Conyers, D-Mich., and Rep. Chris Cannon, R-Utah, took former Attorney General Alberto Gonzales to task in a letter last year for the law's ambiguity on which states should block online horse gambling transactions. In response, Deputy Assistant Attorney General Brian Benczkowski said then and the Department of Justice has since reiterated that "while the UIGEA requires that the regulations be issued 'in consultation with the attorney general,' the Department of the Treasury and the Federal Reserve have the primary responsibility for drafting the regulations, and therefore we would defer questions concerning the timing or the scope of the regulations to those parties."