[Federal Register Volume 72, Number 192 (Thursday, October 4, 2007)]
[Proposed Rules]
[Pages 56680-56699]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 07-4914]


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FEDERAL RESERVE SYSTEM

12 CFR Part 233

[Regulation GG; Docket No. R-1298]

DEPARTMENT OF THE TREASURY

31 CFR Part 132

RIN 1505-AB78


Prohibition on Funding of Unlawful Internet Gambling

AGENCIES: Board of Governors of the Federal Reserve System and 
Departmental Offices, Department of the Treasury.

ACTION: Notice of joint proposed rulemaking.

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SUMMARY: This notice is published jointly by the Departmental Offices 
of the Department of the Treasury (the ``Treasury'') and the Board of 
Governors of the Federal Reserve System (the ``Board'') (collectively, 
the ``Agencies'') and proposes rules to implement applicable provisions 
of the Unlawful Internet Gambling Enforcement Act of 2006 (the 
``Act''). In accordance with the requirements of the Act, the proposed 
rule designates certain payment systems that could be used in 
connection with unlawful Internet gambling transactions restricted by 
the Act. The proposed rule requires participants in designated payment 
systems to establish policies and procedures reasonably designed to 
identify and block or otherwise prevent or prohibit transactions in 
connection with unlawful Internet gambling. As required by the Act, the 
proposed rule also exempts certain participants in designated payment 
systems from the requirements to establish such policies and procedures 
because the Agencies believe it is not reasonably practical for those 
participants to identify and block, or otherwise prevent or prohibit,

[[Page 56681]]

unlawful Internet gambling transactions restricted by the Act. Finally, 
the proposed rule describes the types of policies and procedures that 
non-exempt participants in each type of designated payment system may 
adopt in order to comply with the Act and includes non-exclusive 
examples of policies and procedures which would be deemed to be 
reasonably designed to prevent or prohibit unlawful Internet gambling 
transactions restricted by the Act. The proposed rule does not specify 
which gambling activities or transactions are legal or illegal because 
the Act itself defers to underlying State and Federal gambling laws in 
that regard and determinations under those laws may depend on the facts 
of specific activities or transactions (such as the location of the 
parties).

DATES: Comments must be received on or before December 12, 2007.

ADDRESSES: You may submit comments by any of the following methods:
    Board: You may submit comments, identified by Docket Number R-1298, 
by any of the following methods:
    <bullet> Agency Web site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    <bullet> E-mail: <a href="/cdn-cgi/l/email-protection#15677072663b767a7878707b61665573707170677479677066706763703b727a63"><span class="__cf_email__" data-cfemail="3a485f5d4914595557575f544e497a5c5f5e5f485b56485f495f484c5f145d554c">[email protected]</span></a>. Include docket 
number in the subject line of the message.
    <bullet> Fax: (202) 452-3819 or (202) 452-3102.
    <bullet> Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.
    All public comments are available from the Board's Web site at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm, as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper in Room MP-500 of the Board's Martin Building (20th and C 
Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.
    Treasury:
    <bullet> Federal eRulemaking Portal-- ``Regulations.gov'': Go to 
http://www.regulations.gov, select ``Department of the Treasury--All'' 
from the agency drop-down menu, then click ``Submit.'' In the ``Docket 
ID'' column, select ``Treas-DO-2007-0015'' to submit or view public 
comments and to view supporting and related materials for this notice 
of proposed rulemaking. The ``User Tips'' link at the top of the 
Regulations.gov home page provides information on using 
Regulations.gov, including instructions for submitting or viewing 
public comments, viewing other supporting and related materials, and 
viewing the docket after the close of the comment period.
    <bullet> Mail: Department of the Treasury, Office of Critical 
Infrastructure Protection and Compliance Policy, Room 1327, Main 
Treasury Building, 1500 Pennsylvania Avenue, NW., Washington, DC 20220.
    Instructions: You must include ``Treas-DO'' as the agency name and 
``Docket Number Treas-DO-2007-0015'' in your comment. In general, the 
Treasury will enter all comments received into the docket and publish 
them without change, including any business or personal information 
that you provide such as name and address information, e-mail 
addresses, or phone numbers. Comments, including attachments and other 
supporting materials, received are part of the public record and 
subject to public disclosure. Do not enclose any information in your 
comment or supporting materials that you consider confidential or 
inappropriate for public disclosure.
    You may view comments and other related materials by any of the 
following methods:
    <bullet> Viewing Comments Electronically: Go to http://www.regulations.gov, select ``Department of the Treasury--All'' from 
the agency drop-down menu, then click ``Submit.'' In the ``Docket ID'' 
column, select ``Treas-DO-2007-0015'' to view public comments for this 
notice of proposed rulemaking.
    <bullet> Viewing Comments Personally: You may personally inspect 
and photocopy comments at the Department of the Treasury Library, Room 
1428, Main Treasury Building, 1500 Pennsylvania Avenue, NW., 
Washington, DC. You can make an appointment to inspect comments by 
calling (202) 622-0990.
    Commenters are requested to submit copies of comments to both 
Agencies.

FOR FURTHER INFORMATION CONTACT:
    Board: Christopher W. Clubb, Senior Counsel (202/452-3904), Legal 
Division; Jack K. Walton, II, Associate Director (202/452-2660), 
Jeffrey S. Yeganeh, Manager, or Joseph Baressi, Financial Services 
Project Leader (202/452-3959), Division of Reserve Bank Operations and 
Payment Systems; for users of Telecommunication Devices for the Deaf 
(TDD) only, contact 202/263-4869.
    Treasury: Charles Klingman, Deputy Director, Office of Critical 
Infrastructure Protection and Compliance Policy; Steven D. Laughton, 
Senior Counsel, or Amanda Wise, Attorney-Advisor, Office of the 
Assistant General Counsel (Banking & Finance), 202/622-9209.

SUPPLEMENTARY INFORMATION:

I. Background and Introduction

    The Act prohibits any person engaged in the business of betting or 
wagering (as defined in the Act) from knowingly accepting payments in 
connection with the participation of another person in unlawful 
Internet gambling. Such transactions are termed ``restricted 
transactions.'' The Act generally defines ``unlawful Internet 
gambling'' as placing, receiving, or otherwise knowingly transmitting a 
bet or wager by any means which involves the use, at least in part, of 
the Internet where such bet or wager is unlawful under any applicable 
Federal or State law in the State or Tribal lands in which the bet or 
wager is initiated, received, or otherwise made.\1\ The Act states that 
its provisions

[[Page 56682]]

should not be construed to alter, limit, or extend any Federal or State 
law or Tribal-State compact prohibiting, permitting, or regulating 
gambling within the United States.\2\ The Act does not spell out which 
activities are legal and which are illegal, but rather relies on the 
underlying substantive Federal and State laws.\3\
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    \1\ From the general definition, the Act exempts three 
categories of transactions: (i) Intrastate transactions (a bet or 
wager made exclusively within a single State, whose State law or 
regulation contains certain safeguards regarding such transactions 
and expressly authorizes the bet or wager and the method by which 
the bet or wager is made, and which does not violate any provision 
of applicable Federal gaming statutes); (ii) intratribal 
transactions (a bet or wager made exclusively within the Indian 
lands of a single Indian tribe or between the Indian lands of two or 
more Indian tribes as authorized by Federal law, if the bet or wager 
and the method by which the bet or wager is made is expressly 
authorized by and complies with applicable Tribal ordinance or 
resolution (and Tribal-State Compact, if applicable) and includes 
certain safeguards regarding such transaction, and if the bet or 
wager does not violate applicable Federal gaming statutes); and 
(iii) interstate horseracing transactions (any activity that is 
allowed under the Interstate Horseracing Act of 1978, 15 U.S.C. 3001 
et seq.).
    The Department of Justice has consistently taken the position 
that the interstate transmission of bets and wagers, including bets 
and wagers on horse races, violates Federal law and that the 
Interstate Horseracing Act (the ``IHA'') did not alter or amend the 
Federal criminal statutes prohibiting such transmission of bets and 
wagers. The horse racing industry disagrees with this position. 
While the Act provides that the definition of ``unlawful Internet 
gambling'' does not include ``activity that is allowed under the 
Interstate Horseracing Act of 1978,'' 31 U.S.C. 5362(10)(D)(i), 
Congress expressly recognized the disagreement over the interplay 
between the IHA and the Federal criminal laws relating to gambling 
and determined that the Act would not take a position on this issue. 
Rather, the Sense of Congress provision, codified at 31 U.S.C. 
5362(10)(D)(iii), states as follows:
    It is the sense of Congress that this subchapter shall not 
change which activities related to horse racing may or may not be 
allowed under Federal law. This subparagraph is intended to address 
concerns that this subchapter could have the effect of changing the 
existing relationship between the Interstate Horseracing Act and 
other Federal statutes in effect on the date of enactment of this 
subchapter. This subchapter is not intended to resolve any existing 
disagreements over how to interpret the relationship between the 
Interstate Horseracing Act and other Federal statutes.
    \2\ 31 U.S.C. 5361(b).
    \3\ See H. Rep. No. 109-412 (pt. 1) p.10.
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    The Act requires the Agencies (in consultation with the U.S. 
Attorney General) to designate payment systems that could be used in 
connection with or to facilitate restricted transactions. Such a 
designation makes the payment system, and financial transaction 
providers participating in the system, subject to the requirements of 
the regulations.\4\ The Act further requires the Agencies (in 
consultation with the U.S. Attorney General) to prescribe regulations 
requiring designated payment systems and financial transaction 
providers participating in each designated payment system to establish 
policies and procedures reasonably designed to identify and block or 
otherwise prevent or prohibit restricted transactions. The regulations 
must identify types of policies and procedures that would be deemed to 
be reasonably designed to achieve this objective, including non-
exclusive examples. The Act also requires the Agencies to exempt 
certain restricted transactions or designated payment systems from any 
requirement imposed by the regulations if the Agencies jointly 
determine that it is not reasonably practical to identify and block, or 
otherwise prevent or prohibit the acceptance of, such transactions.
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    \4\ The Act defines ``financial transaction provider'' as a 
creditor, credit card issuer, financial institution, operator of a 
terminal at which an electronic fund transfer may be initiated, 
money transmitting business, or international, national, regional, 
or local payment network utilized to effect a credit transaction, 
electronic fund transfer, stored value product transaction, or money 
transmitting service, or a participant in such network or other 
participant in a designated payment system.
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    Under the Act, a participant in a designated payment system is 
considered to be in compliance with the regulations if it relies on and 
complies with the policies and procedures of the designated payment 
system and such policies and procedures comply with the requirements of 
the Agencies' regulations. The Act also directs the Agencies to ensure 
that transactions in connection with any activity excluded from the 
Act's definition of ``unlawful Internet gambling,'' such as qualifying 
intrastate transactions, intratribal transactions, or interstate 
horseracing transactions, are not blocked or otherwise prevented or 
prohibited by the prescribed regulations.
    The regulation being proposed by the Agencies in this notice: (i) 
Sets out definitions for terms used in the regulation; (ii) designates 
payment systems that could be used by participants in connection with, 
or to facilitate, a restricted transaction; (iii) exempts certain 
participants in certain designated payment systems from requirements of 
the regulation; (iv) requires the participants performing non-exempt 
functions in a designated payment system to establish and implement 
policies and procedures reasonably designed to prevent or prohibit 
restricted transactions, such as by identifying and blocking such 
transactions; (v) provides non-exclusive examples of policies and 
procedures for non-exempt participants in each designated payment 
system; and (vi) sets out the regulatory enforcement framework. 
Comments on all aspects of the proposed regulation are welcome; 
however, the Agencies are, in particular, seeking comment on the issues 
noted in the section-by-section analysis below.
    The Agencies desire to achieve the purposes of the Act as soon as 
is practical, while also providing designated payment systems and their 
participants sufficient time to adapt their policies and practices as 
needed to comply with the regulation. The Agencies propose that the 
final regulations take effect six months after the joint final rules 
are published, and request comment on whether this period is 
reasonable. Commenters requesting a shorter period should explain why 
they believe payment system participants would be able to modify their 
policies and procedures, as required, in the shorter period. Similarly, 
commenters requesting a longer period should explain why the longer 
period would be necessary to comply with the regulations, particularly 
if the need for additional time is based on any system or software 
changes required to comply with the regulations.

II. Section by Section Analysis

A. Definitions

    The proposed regulation provides definitions for terms used in the 
regulation. Many of the definitions (such as ``bet or wager,'' 
``financial transaction provider,'' ``Internet,'' ``money transmitting 
business,'' ``restricted transaction,'' and ``unlawful Internet 
gambling'') follow or refer to the Act's definitions. The proposed rule 
does not attempt to further define gambling-related terms because the 
Act itself does not specify which gambling activities are legal or 
illegal and the Act does not require the Agencies to do so. The Act 
focuses on payment transactions and relies on prohibitions on gambling 
contained in other statutes under the jurisdiction of other agencies. 
Further, application of some of the terms used in the Act may depend 
significantly on the facts of specific transactions and could vary 
according to the location of the particular parties to the transaction 
or based on other factors unique to an individual transaction. The 
purpose of the proposed regulations is to implement the provisions of 
the Act that instruct the Agencies to require participants in 
designated payment systems to establish policies and procedures 
reasonably designed to identify and block or otherwise prevent or 
prohibit restricted transactions. For these reasons, and in 
consultation with the Department of Justice, the Agencies' preliminary 
view is that issues regarding the scope of gambling-related terms 
should be resolved by reference to the underlying substantive State and 
Federal gambling laws and not by a general regulatory definition.
    The proposed rule includes definitions for some payment system 
terms (such as ``automated clearing house system,'' ``card system,'' 
``check collection system,'' ``check clearing house,'' ``money 
transmitting business,'' ``money transmitting service,'' and ``wire 
transfer system'') because they relate to the designated payment 
systems, exemptions, and required policies and procedures. The 
definitions of most of these payment system terms are based on existing 
regulatory or statutory definitions, such as the Board's Regulation CC 
(12 CFR Part 229) or the Uniform Commercial Code (UCC).\5\ Terms used 
in the context of particular payment systems are intended to be 
consistent with how those terms are used in those systems. The proposed 
rule incorporates by reference relevant definitions of terms regarding 
the automated clearing house (ACH) system as published in ``2007 ACH 
Rules: A Complete Guide to Rules & Regulations Governing the ACH 
Network'' (the ACH Rules) by the

[[Page 56683]]

National Automated Clearing House Association (NACHA). In accordance 
with the Act, the definitions of ``money transmitting business'' and 
``money transmitting service'' have the meanings given the terms in the 
Bank Secrecy Act,\6\ determined without regard to any regulations 
prescribed by the Treasury thereunder.\7\
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    \5\ The Uniform Commercial Code is a model commercial law 
developed by the National Conference of Commissioners on Uniform 
State Law (NCCUSL) in conjunction with the American Law Institute. 
NCCUSL is a non-profit organization that promotes the principles of 
uniformity by drafting and proposing specific statutes in areas of 
law where uniformity between the States is desirable. No uniform 
statute is effective until a State legislature adopts it as part of 
its State law.
    \6\ 31 U.S.C. 5330(d).
    \7\ The Agencies believe that this cross-reference does not 
otherwise require the Act and the Bank Secrecy Act to be interpreted 
in light of each other.
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    In addition, the proposed regulation defines the term ``participant 
in a designated payment system'' as an operator of a designated payment 
system, or a financial transaction provider that is a member of, has 
contracted for services with, or is otherwise participating in, a 
designated payment system. The proposed regulatory definition clarifies 
that an end-user customer of a financial transaction provider is not 
included in the definition of ``participant,'' unless the customer is 
also a financial transaction provider otherwise participating in the 
designated payment system on its own behalf.
    The Agencies request comment on all of the terms and definitions 
set out in this section. In particular, the Agencies request comment on 
any terms used in the proposed regulation that a commenter believes are 
not sufficiently understood or defined.

B. Designated Payment Systems

    Section 3 of the proposed regulation designates the following 
payment systems as systems used by a financial transaction provider 
that could be used in connection with, or to facilitate, a restricted 
transaction: automated clearing house systems; card systems (including 
credit, debit, and pre-paid cards or stored value products); check 
collection systems; money transmitting businesses; and wire transfer 
systems. The broad range of the payment systems designated by the 
regulation reflects the fact that a restricted transaction may be made 
through many different payment systems. The designated payment systems 
are described in more detail below.
1. Automated Clearing House System
    The ACH system is a funds transfer system, primarily governed by 
the rules and guidelines published by NACHA, that provides for the 
clearing and settlement of batched electronic entries for participating 
financial institutions.\8\ ACH transfers can be either credit or debit 
transfers and can be either recurring or one-time transfers. Recurring 
ACH transfers typically occur on a set schedule and are pre-authorized 
by the individual or entity whose account is being credited or debited. 
Recurring credit transfers include payroll direct deposit payments, 
while recurring debit transfers include mortgage and other bill 
payments. One-time ACH transfers are authorized at the time the payment 
is initiated. One-time credit transfers include bill payments made 
through the bill payer's bank, while one-time debit transfers include 
bill payments made through the biller's payment site.
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    \8\ A primer on the ACH network is provided in the ACH Rules.
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    The designation of the originating and receiving institution in ACH 
terminology is based on the participants that initiate and receive the 
ACH entries, rather than the direction of the flow of funds. The 
originator of an ACH transfer generally sends the payment instruction 
to its bank, the originating depository financial institution (ODFI), 
so that the payment instruction can be entered into the ACH system. The 
ODFI combines the payment instructions with payment instructions from 
its other customers and sends them to an ACH operator for processing. 
The ACH operator will then sort and deliver the payments to the 
appropriate receiving depository financial institutions (RDFIs) and 
complete the interbank settlement process. The RDFIs then post the 
payments, either credits or debits, to the receivers' accounts. The 
fundamental difference between the ACH credit and debit transfers is 
that for ACH credit transfers funds are ``pushed'' to an account at the 
institution receiving the message, while in ACH debit transfers funds 
are ``pulled'' from an account at the institution receiving the 
message. In other words, for credit transfers, the originator is 
requesting that funds be credited to the receiver (the funds move in 
the same direction as the payment instruction), while for debit 
transfers, the originator is requesting that funds be debited from the 
receiver (the funds move in the opposite direction from the payment 
instruction).
    In some instances, a ``third-party sender'' acts as an intermediary 
between an originator and an ODFI with respect to the initiation of ACH 
transactions where there is no contractual agreement between the 
originator and the ODFI. Under the ACH Rules, a third-party sender 
assumes the responsibilities of an originator and is obligated to 
provide the ODFI with any information the ODFI reasonably deems 
necessary to identify each originator for which the third-party sender 
transmits entries. The use of third-party senders in ACH transactions 
poses particular risks because the ODFI does not have a direct 
relationship with the originators.
    The ACH Rules also include particular provisions governing cross-
border ACH payments made in cooperation with another country's national 
payment system. Under the ACH Rules, the U.S. segment of a cross-border 
ACH transaction is settled separately between the U.S. participants and 
the U.S. gateway operator. The interface between the two national 
payment systems is commonly accomplished through an ``originating 
gateway operator'' in the originator's country and a ``receiving 
gateway operator'' in the receiver's country. Both the originating and 
receiving gateway operators are participants in their respective 
national payment systems and capable of clearing and settling payments 
in their respective systems. In the United States, the gateway operator 
can be an ODFI (for ``inbound'' transactions), an RDFI (for 
``outbound'' transactions), or, with the appropriate agreements in 
place, an ACH operator. Additionally, a third-party sender may have 
proprietary arrangements with a foreign counterparty and accept 
instructions to submit cross-border ACH entries to the appropriate ACH 
operator or ODFI.
    In the case of inbound transactions, the ``originating gateway 
operator'' in the country of the originator receives the entry from its 
national payments network and then transmits the entry to a receiving 
gateway operator in the receiving country. The receiving gateway 
operator then transmits the entry into its national payments system for 
delivery to the intended RDFI. If a U.S. ODFI acts as a receiving 
gateway operator, it would be the first U.S. institution involved in 
the transaction and would submit the transaction to its U.S. ACH 
operator for further processing. Under the ACH Rules, a U.S. receiving 
gateway operator for a particular cross-border transaction must make 
warranties expected of an ODFI for that transaction and assumes 
liability for breaches of those warranties to every RDFI and ACH 
operator, so in effect it becomes the ODFI for the U.S. segment of the 
transaction.\9\ Similarly, a U.S. depository financial institution or 
third-party sender receiving instructions to originate cross-border ACH 
entries directly from a foreign counterparty would be the first U.S. 
participant involved in the transaction and would originate the ACH 
entry in the U.S. ACH system.
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    \9\ See ACH Rules, Operating Rules Sec. Sec.  11.6 and 11.7.

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[[Page 56684]]

2. Card Systems
    Card systems are systems for clearing and settling transactions in 
which credit cards, debit cards, pre-paid cards, or stored value 
products are used to purchase goods or services or to obtain a cash 
advance. In a typical card system transaction, there are three 
components to the transaction: Authorization, clearance, and 
settlement.
    The transaction begins when the payor provides his card or card 
number to the payee, either in person or through the Internet or 
telephone. The payee uses that information to create a card payment 
authorization request, which it sends to its bank (the ``merchant 
acquirer'') or the bank's agent. The merchant acquirer sends an 
authorization request through the card system network to the bank that 
issued the payor's card (the ``card issuer'') or its agent.\10\ The 
authorization request includes, amongst other information, the card 
number, the transaction amount, a merchant category code, and a 
transaction code. The merchant category code describes generally the 
nature of the payee's business and the transaction code describes 
whether the card was present at the point of transaction (i.e., a 
point-of-sale transaction) or not present (i.e., a transaction over the 
Internet or telephone). The card issuer or its agent either authorizes 
or declines the transaction and the payee is immediately notified of 
the decision through the card network. If authorization is granted, 
then the payee completes the underlying transaction with the payor; 
otherwise, the transaction is cancelled.
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    \10\ This discussion generally relates to the card processing 
model of Visa and MasterCard, in which the merchant acquirer, the 
card network, and the card issuer are separate entities. Other card 
companies, such as American Express, may employ a model in which one 
company owns the card processing network and performs all major 
functions involved in issuing cards and acquiring merchants to 
accept its cards.
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    After the transactions have been authorized, they must then be 
cleared. The clearing process for personal identification number (PIN)-
based debit card transactions is different from the process for credit 
card and signature-based debit card transactions. For PIN-based debit 
card transactions, the authorization and clearing occur at the same 
time and thus a separate clearing transmission by the payee to the 
merchant acquirer is not necessary. For credit cards and signature-
based debit cards, the payee batches its authorized transactions and 
transmits them, typically at the end of the business day, to the 
merchant acquirer to be cleared through the card network. Depending on 
the card type, card issuer banks memo-post or charge transactions to 
their customers' accounts when the transactions are either authorized 
or cleared. Once the transactions have been cleared, they are settled 
at a time specified by the card network and the merchant acquirer and 
the card issuer are, respectively, credited and debited.
3. Check Collection Systems
    A check collection system is an interbank system for collecting, 
presenting, returning, and settling checks or an intrabank system for 
settling checks deposited and drawn on the same bank (i.e., ``on-us 
checks''). A typical check transaction is initiated by the payor 
writing a check to the order of a payee and giving the signed check to 
the payee as payment. The payee deposits the check with its bank (the 
bank of first deposit or the ``depositary bank''). Except for on-us 
checks, the depositary bank will then send the check to the bank on 
which it is drawn (the ``paying bank'') for payment.
    The depositary bank may present the check for payment directly to 
the paying bank, may use a check clearing house, or may use the 
services of an intermediary bank, such as a Federal Reserve Bank or 
another correspondent bank (a ``collecting bank'').\11\ These 
intermediaries handle large volumes of checks daily and typically rely 
on three pieces of information: The routing number of the bank from 
which it received the check; the routing number of the bank to which 
the check is destined (i.e. the paying bank); and the amount of the 
check. Upon presentment, the paying bank settles with the presenting 
bank for the amount of the check and debits the amount of the check 
from the account of the payor.
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    \11\ Check clearing houses generally provide a facility or 
mechanism for banks to exchange checks for collection and return. 
The services provided by check clearing houses vary. Some merely 
provide space for banks to exchange checks. Others provide the 
capability to exchange between banks in electronic form. A check 
clearing house generally also facilitates settlement of the checks 
exchanged through it. Check clearing houses are not considered 
collecting or returning banks.
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    Checks may be cleared cross-border through correspondent banking 
relationships. If a U.S. payor writes a check to the order of an 
offshore payee, the payee will likely deposit the check in its home 
country bank. The home country bank may have a correspondent 
relationship with a U.S. bank for check collection and deposit the 
check with its U.S. correspondent bank. The U.S. bank will then collect 
the check through the U.S. check collection system. The first banking 
office located in the United States that receives a check from outside 
the United States for forward collection inside the United States is 
defined as the depositary bank for that check.\12\ Accordingly, if a 
foreign office of a U.S. or foreign bank sends checks to its U.S. 
correspondent for forward collection, the U.S. correspondent is the 
depositary bank for those checks.
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    \12\ 12 CFR 229.2(o) commentary. Foreign offices of U.S. and 
foreign banks are not included in Regulation CC's definition of 
``bank.'' 12 CFR 229.2(e) commentary.
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4. Money Transmitting Businesses
    A money transmitting business is a person (other than a depository 
institution) that engages as a business in the transmission of funds, 
including any person that engages as a business in an informal money 
transfer system or any network of people that engage as a business in 
facilitating the transfer of money domestically or internationally 
outside of the conventional financial institutions system. Money 
transmitters commonly will facilitate money transmissions through agent 
locations, by phone, or through an Internet website and can be used for 
payments to some businesses as well as money transfers to individuals. 
This term includes networks such as Western Union and MoneyGram, on-
line payment systems such as PayPal, and other electronic systems that 
engage in the business of transmitting funds.
    Money transmitting businesses use various operational models. In 
networks with operations similar to Western Union and MoneyGram, the 
payor initiates the transaction in person at the money transmitting 
business's location, by phone, or through the money transmitting 
business's Internet site and generally can use cash, a credit card, or 
a debit card to fund a transfer. The money transmitter obtains 
identification from the payor, as well as identifying information for 
the intended payee and the location to which the payment should be 
sent. The money transmitter may provide the payor with a reference 
number that the payee will need in order to pick up the payment. Large 
money transmitters, such as Western Union or, MoneyGram, typically 
transmit the payment instructions through an internal proprietary 
system. The payor or the money transmitter notifies the payee of the 
availability of the payment. The payee goes to one of the money 
transmitting business's physical locations, provides the necessary 
information (such as personal identification and perhaps the 
transaction reference number), and receives the funds. Alternatively, 
some

[[Page 56685]]

money transmitting businesses will transfer money directly into a 
payee's bank account in certain circumstances, such as when the 
recipient is a business that has been approved to receive funds through 
the money transmitting business (a ``commercial subscriber''). 
Settlement between the sending and receiving accounts or locations is 
effected based on rules established by the money transmitting business.
    Other money transmitters may follow the PayPal-type operational 
model and provide Internet electronic payment services to facilitate 
purchases over the Internet, either from vendors or through auctions. 
In such a model, a consumer establishes an account with the money 
transmitting business and uses a debit card, credit card, or ACH 
transfer to fund the account. In order to fund a purchase from a vendor 
with an account with the same money transmitting business, the consumer 
instructs the money transmitting business to transfer the funds to the 
vendor, identifying the vendor by e-mail address. The money 
transmitting business sends an e-mail notification to the vendor and 
transfers the funds from the consumer's account to the vendor's 
account. The vendor may keep the funds in its account with the money 
transmitting business (and subsequently use them to effect payments 
through the system) or may transfer the funds from its account to its 
bank account, such as through an ACH credit transaction.
    Other money transmitting businesses may use operational models 
different than those set out above. The Agencies intend to apply the 
term ``money transmitting business'' to cover businesses that meet the 
definition of the term as used in the Act, regardless of operational 
model.
5. Wire Transfer Systems
    A wire transfer system is a system through which the sender of a 
payment transmits an unconditional order to a bank to pay a fixed or 
determinable amount of money to a beneficiary upon receipt (or on a day 
stated in the order) by electronic or other means through a network, 
between banks, or on the books of a bank. Wire transfer systems are 
generally designed for large-value transfers between financial 
institutions, but financial institutions also send lower-value, 
consumer-initiated payment orders through wire transfer systems.
    In a typical consumer-initiated wire transfer transaction, the 
consumer would initiate the transfer after obtaining wire transfer 
instructions from the intended beneficiary (such as the bank to which 
the beneficiary would like the funds transferred and the beneficiary's 
account number at the bank). The consumer provides that information in 
the payment order to its bank (the ``originator's bank'') to initiate 
the wire transfer. The originator's bank may transfer the payment 
directly to the beneficiary's bank if the banks have an account 
relationship.
    Alternatively, the originator's bank may use the services of a wire 
transfer network, such as the Federal Reserve Banks'' Fedwire system or 
The Clearing House's CHIPS system, to send the transfer either to the 
beneficiary's bank or to an intermediary bank that has an account 
relationship with the beneficiary's bank. In an automated wire transfer 
system such as Fedwire or CHIPS, typically the information used in 
processing the payment order is the routing information of the sending 
bank, the routing information of the receiving bank, and the amount of 
the wire transfer. Although additional information may be, and in some 
cases is required to be, included in fields of the payment order 
message format (such as the names of the originator and the 
beneficiary, their account numbers, and addresses), this information is 
not relied upon by the intermediary bank to process the transfer.
    Wire transfer transaction proceeds may be sent cross-border through 
correspondent banking relationships. The last U.S. bank in the outgoing 
transaction may either have a correspondent banking relationship with 
the beneficiary's foreign bank or a foreign intermediary bank for 
further delivery to the beneficiary's bank. Alternatively, the U.S. 
bank may have a branch in the home country of the beneficiary and can 
make an ``on-us'' transfer to the branch for further processing through 
the beneficiary's home country national payment system.
6. Other Payment Systems
    The Agencies request comment on whether the list of designated 
payment systems in the proposed regulation is too broad or too narrow. 
In particular, the Agencies request comment on whether there are non-
traditional or emerging payment systems not represented in the proposed 
regulation that could be used in connection with, or to facilitate, any 
restricted transaction. If a commenter believes that such a payment 
system should be designated in the final rule, the commenter should 
describe policies and procedures that might be reasonably designed to 
identify and block, or otherwise prevent or prohibit, restricted 
transactions through that system.

C. Exemptions

    The Act directs the Agencies to exempt certain restricted 
transactions or designated payment systems from any requirements 
imposed under the regulations if the Agencies find that it is not 
reasonably practical to identify and block, or otherwise prevent or 
prohibit the acceptance of, such transactions. Section 4 of the 
proposed rule provides such an exemption for certain participants in 
ACH systems, check collection systems, and wire transfer systems. The 
proposed regulation is structured to impose requirements on 
participants in designated payments systems with respect to the 
segments of particular transactions that those participants handle. 
Therefore, rather than exempting entire categories of restricted 
transactions or entire payment systems, the Agencies have structured 
the exemptions to apply to particular participants in particular 
payment systems as described in greater detail below. The Agencies 
believe that this limited application of their exemption authority 
better serves the Act's purposes of preventing the processing of 
restricted transactions.
    The Agencies are proposing to exempt all participants in the ACH 
systems, check collection systems, and wire transfer systems, except 
for the participant that possesses the customer relationship with the 
Internet gambling business (and certain participants that receive 
certain cross-border transactions from, or send certain such 
transactions to, foreign payment service providers, as discussed 
further below). The exemptions for these participants reflect the fact 
that these systems currently do not enable the exempted participants to 
reasonably identify and block, or otherwise prevent or prohibit, 
restricted transactions under the Act. While other systems, such as the 
card systems, have developed merchant category and transaction codes 
that identify the business line of the payee (e.g., the gambling 
business) and how the transfer was initiated (such as via the 
Internet), so that the systems are able to identify and block certain 
types of payments in real time, the ACH systems, check collection 
systems, and wire transfer systems do not use such codes. Moreover, as 
a general matter, a consumer can make payment by check, ACH, or wire 
transfer to any business with an account at a depository institution. 
This is in contrast to card systems and money transmitting businesses, 
in which consumers can make direct payments only to those businesses 
that have explicitly agreed to

[[Page 56686]]

participate in those payment systems. As a result, the preliminary view 
of the Agencies is that it is not reasonably practical for the exempted 
participants in ACH systems, check collection systems, and wire 
transfer systems discussed below to identify and block, or otherwise 
prevent or prohibit, restricted transactions under the Act. The 
Agencies intend to monitor technological developments in these payment 
systems and will consider amending the exemptions if, in the future, 
the technology prevalent in these payment systems permits such 
participants to identify and block, or otherwise prevent and prohibit, 
those restricted transactions.
    No designated payment system is completely exempted by the proposed 
rule. The Agencies intend that the participant with the customer 
relationship with the Internet gambling business would have the 
responsibility in the ACH systems, check collection systems, or wire 
transfer systems to prevent or prohibit restricted transactions from 
being credited to the account of the gambling business through that 
particular payment system. The Agencies request comment on all aspects 
of the exemptions, but in particular, whether the exemptions for 
certain participants in the ACH systems, check collection systems, and 
wire transfer systems discussed in more detail below are appropriate. 
Commenters that believe that these participants should not be exempted 
from the requirements of the regulation should provide specific 
examples of policies and procedures that such participants could 
establish and implement that would be reasonably designed to identify 
and block, or otherwise prevent or prohibit, restricted transactions.
1. ACH systems
    With regard to an ACH system, the proposal provides an exemption 
from the regulation's requirements for the ACH system operator, the 
originating depository financial institution (ODFI) in an ACH credit 
transaction, and the receiving depository financial institution (RDFI) 
in an ACH debit transaction (except with respect to certain cross-
border transactions discussed below). The proposal does not exempt the 
institution serving as the ODFI in an ACH debit transaction or the RDFI 
in an ACH credit transaction because these institutions typically have 
a pre-existing relationship with the customer receiving the proceeds of 
the ACH transaction and could, with reasonable due diligence, take 
steps to ascertain the nature of the customer's business and ensure 
that the customer relationship is not used to receive restricted 
transactions.
    The proposal would provide an exemption for the ACH system operator 
because it is not reasonably practical for the operator to identify and 
block a particular ACH transfer as a restricted transaction. The ACH 
system operator's function is to act as the central clearing facility 
for ACH entries. The ACH operator sorts the entries by RDFI routing 
information and transmits the payment information to the appropriate 
RDFI for posting. The ACH system operator would not have any direct 
interaction with either the gambler or the Internet gambling business 
and would not be in a position to obtain the necessary information to 
analyze individual transactions to determine whether they are 
restricted transactions. In addition, ACH operators use highly-
automated systems to sort large volumes of ACH entries without manual 
intervention. A requirement to analyze each ACH entry manually to 
determine whether it is a restricted transaction would substantially 
increase processing times for all ACH entries, including entries that 
are not restricted transactions, and reduce the efficiency of the ACH 
system. Moreover, even if the payee information on an ACH entry is 
analyzed manually, it is very difficult for an ACH operator to 
determine whether the ACH entry is related to a restricted transaction.
    The proposal also would provide an exemption for the RDFI in an ACH 
debit transaction. In this case, the exempted participant would not 
have any direct interaction with its customer prior to processing the 
transaction. In a restricted transaction using an ACH debit 
transaction, a gambler could authorize the unlawful Internet gambling 
business to debit his account for the restricted transaction and the 
RDFI would not have an opportunity to obtain information from its 
customer (the gambler in this case) to determine whether the entry was 
in connection with a restricted transaction. Also, as discussed below, 
information obtained from the customer may be of limited value.
    In addition, the proposal would provide an exemption for the ODFI 
in an ACH credit transaction. The Agencies carefully considered whether 
such an exemption would be warranted. Typically, a consumer would 
initiate an ACH credit transaction on-line with the ODFI, so there 
could be an opportunity for the ODFI to design a procedure to obtain 
information on an outgoing ACH credit transaction to determine whether 
it is a restricted transaction. For example, for each ACH credit 
transaction, the ODFI could require the originator to submit a 
statement that the ACH credit transaction is not a restricted 
transaction and/or a description of the nature and purpose of the 
transaction.
    The Agencies' preliminary view, however, is that, while it may be 
possible at least in some cases for an ODFI in an ACH credit 
transaction to obtain information from the originator regarding whether 
the ACH credit transaction is a restricted transaction under the Act, 
any associated benefits would likely be outweighed by the associated 
costs that would be borne by ODFIs. Specifically, any process requiring 
the customer to describe the nature of the transaction and/or state 
that the transaction does not involve unlawful Internet gambling may be 
of limited value, either because a customer may knowingly 
mischaracterize the actual nature of the transaction in order to avoid 
the transaction being rejected or blocked, or because the customer may 
not actually know whether an Internet gambling transaction is a 
restricted transaction under the Act. The Agencies also believe that 
the ODFI would generally be unable to determine whether the 
originator's characterization of the transaction is accurate. Moreover, 
the burden on ODFIs in developing the necessary systems to obtain the 
information and determine whether to reject or block a transaction 
would likely be substantial.
    The Agencies specifically request comment on whether it is 
reasonably practical to implement policies and procedures (including, 
but not limited to, those discussed above) for an ODFI in an ACH credit 
transaction, whether such policies and procedures would likely be 
effective in identifying and blocking restricted transactions, and 
whether the burden imposed by such policies and procedures on an 
originator and an ODFI would outweigh any value provided in preventing 
restricted transactions and a description of such burdens and benefits. 
If a commenter believes that an ODFI in an ACH credit transaction 
should not be exempted, the Agencies request that the commenter provide 
examples of policies and procedures reasonably designed for an ODFI in 
an ACH credit transaction to identify and block or otherwise prevent or 
prohibit restricted transactions in the ACH system.
2. Check Collection Systems
    With regard to check collection systems, the proposed rule would 
provide an exemption from the regulation's requirements for a check

[[Page 56687]]

clearing house, the paying bank (unless it is also the depositary 
bank), any collecting bank (other than the depositary bank), and any 
returning bank. The proposal does not exempt the institution serving as 
the depositary bank (i.e., the first U.S. institution to which a check 
is transferred, in this case the institution receiving the check 
deposit from the gambling business) in a check transaction. The 
depositary bank is typically in a position, through reasonable due 
diligence, to take steps to ascertain the nature of the customer's 
business and ensure that the customer relationship is not used for 
receiving restricted transactions.
    The proposed rule would provide an exemption for the check clearing 
house because the check clearing house generally does not have a direct 
relationship with either the payor or the payee and would not be in a 
position to obtain information from either party regarding the 
transaction that would permit the check clearing house to determine 
whether a particular check was a restricted transaction.
    For similar reasons, the proposal would provide an exemption for a 
collecting bank (other than the depositary bank) and a returning bank 
in a check collection transaction. Collecting banks (other than the 
depositary bank) and returning banks are intermediary banks that 
generally do not have a direct relationship with either the payor or 
the payee in the check transaction and would not be in a position to 
obtain information from either party that would permit them to 
determine whether a particular check was a restricted transaction.
    The proposal would also provide an exemption for the paying bank 
(unless the paying bank is also the depositary bank). The paying bank 
is generally the bank by or through which a check is payable and to 
which the check is sent for payment or collection. In a restricted 
transaction, this would generally be the bank holding the gambler's 
checking account. While the paying bank would have a direct 
relationship with the payor, it would not be in a position to obtain 
information from the payor prior to the transaction being settled. 
Checks are processed and paid by a paying bank's automated systems 
according to the information contained in the magnetic ink character 
recognition (MICR) line printed near the bottom of the check. The MICR 
line commonly includes the bank's routing number, the customer's 
account number, the check number, and the check amount, but does not 
contain any information regarding the payee. A requirement to analyze 
manually each check with respect to the payee would substantially 
increase processing times for all checks, including checks that are not 
restricted transactions, and reduce the efficiency of the check 
collection systems. Moreover, even if the payee information on checks 
is analyzed manually, it is very difficult for a paying bank to 
determine whether the check is related to a restricted transaction. If 
the paying bank is also the depositary bank (i.e., an ``on-us'' 
transaction), the institution would still be required to comply with 
the regulations as a depositary bank.
3. Wire Transfer Systems
    With regard to wire transfer systems, the proposal provides an 
exemption from the regulation's requirements for the originator's bank 
(i.e., the depository institution sending the wire transfer on behalf 
of the gambler) and intermediary banks (other than the bank that sends 
the transfers to a foreign respondent bank as discussed below). The 
proposal does not exempt the institution serving as the beneficiary's 
bank (i.e., the institution receiving the wire transfer on behalf of 
the gambling business) in a particular wire transfer system. The 
beneficiary's bank typically has a pre-existing relationship with the 
customer receiving a particular wire transfer and, accordingly, is in a 
position, through reasonable due diligence, to take steps to ascertain 
the nature of the customer's business and assess the risk that the 
customer may be involved in restricted transactions.
    The proposal would provide an exemption for intermediary banks 
because it is not reasonably practical for institutions serving in this 
capacity in a wire transfer system to identify and block a particular 
wire transfer as a restricted transaction under the Act. The 
information normally relied upon by intermediary banks' automated 
systems in processing a wire transfer does not typically include 
information that would enable those systems to identify and block 
individual transfers as restricted transactions under the Act. In 
addition, intermediary banks process tremendous volumes of wire 
transfers in seconds or less on an automated basis, without manual 
intervention. A requirement to analyze each transaction manually to 
determine whether it is a restricted transaction would substantially 
increase processing times for all wire transfers, including transfers 
that are not restricted transactions, and reduce the efficiency of the 
wire transfer systems. Moreover, even if the beneficiary information in 
a wire transfer payment message is analyzed manually, it is very 
difficult for an intermediary bank to determine whether the wire 
transfer is related to a restricted transaction.
    The Agencies also carefully considered whether to grant an 
exemption for portions of a wire transfer system involving the 
originator's bank. Similar to an ODFI in an ACH credit transaction, the 
originating customer in a particular wire transfer generally has some 
direct interaction with the originating institution, so there could be 
an opportunity for the originating institution to design a procedure to 
review an outgoing wire transfer to determine whether it is a 
restricted transaction. For example, for each wire transfer (or for 
each transfer originated by a consumer), the originator's bank could 
require the originator to submit a statement that the wire transfer is 
not a restricted transaction and a description of the nature and 
purpose of the transaction. This two-part submission could be made in 
writing for in-person originations, orally for phone originations, or 
on-line for automated originations. For the casual or impulse gambler, 
requiring such a statement may cause the gambler to consider carefully 
(or to investigate) whether the payment is legal and even whether 
engaging in gambling is prudent in light of the gambler's personal 
circumstances.
    The Agencies' preliminary view is that, while it may be possible, 
at least in some cases, for an originating bank to obtain such a 
submission from the originator, any associated benefits would likely be 
outweighed by the associated costs for reasons similar to those 
described above regarding the exemption for ODFIs in ACH credit 
transactions.
    The Agencies specifically request comment on whether it is 
reasonably practical for an originator's bank and an intermediary bank 
in a wire transfer system to implement policies and procedures 
(including, but not limited to, those discussed above) that would 
likely be effective in identifying and blocking or otherwise prevent or 
prohibit restricted transactions; whether the burden imposed by such 
policies and procedures on an intermediary bank, an originator, and an 
originator's bank would outweigh any value provided in preventing 
restricted transactions and a description of such burdens and benefits; 
and whether any policies and procedures could reasonably be limited 
only to consumer-initiated wire transfers and, if so, a description of 
any costs or benefits of so limiting the requirement. If a commenter 
believes that the originator's bank or an intermediary bank should not 
be exempted, the Agencies request that the commenter provide examples 
of

[[Page 56688]]

policies and procedures reasonably designed for institutions serving in 
those functions to identify and block or otherwise prevent or prohibit 
restricted transactions in a wire transfer system.

D. Processing of Restricted Transactions Prohibited

    Section 5 of the proposed regulations expressly requires all non-
exempt participants in the designated payment systems to establish and 
implement policies and procedures in order to identify and block, or 
otherwise prevent or prohibit, restricted transactions. In accordance 
with the Act, section 5 states that a participant in a designated 
payment system shall be considered in compliance with this requirement 
if the designated payment system of which it is a participant has 
established policies and procedures to prevent or prohibit restricted 
transactions and the participant relies on, and complies with, the 
policies and procedures of the designated payment system. In other 
words, the Act and the proposed rule permit non-exempt participants in 
a designated payment system to either (i) Establish their own policies 
and procedures to prevent or prohibit restricted transactions; or (ii) 
rely on and comply with the policies and procedures established by the 
designated payment system, so long as such policies and procedures 
comply with the regulation.
    Section 5 also imports the Act's liability provisions, which state 
that a person that identifies and blocks, prevents, prohibits, or 
otherwise fails to honor a transaction is not liable to any party for 
such action if (i) the transaction is a restricted transaction; (ii) 
such person reasonably believes the transaction to be a restricted 
transaction; or (iii) the person is a participant in a designated 
payment system and prevented the transaction in reliance on the 
policies and procedures of the designated payment system in an effort 
to comply with the regulation.
    Finally, section 5 implements the Act's requirement that the 
Agencies ensure that transactions in connection with any activity 
excluded from the Act's definition of unlawful Internet gambling are 
not blocked or otherwise prevented or prohibited by the regulations 
(the ``overblocking'' provision). Section 5 makes clear that nothing in 
the regulation requires or is intended to suggest that non-exempt 
participants should block or otherwise prevent or prohibit any 
transaction in connection with any activity that is excluded from the 
definition of ``unlawful Internet gambling'' in the Act, such as 
qualifying intrastate or intratribal transactions, or a transaction in 
connection with any activity that is allowed under the Interstate 
Horseracing Act of 1978 (15 U.S.C. 3001 et seq.).\13\ As noted above, 
it also seems clear that the Act was not intended to change the 
legality of any gambling-related activity in the United States.\14\ 
Consequently, the proposed regulations neither require nor are intended 
to suggest that participants in designated payment systems should 
establish policies and procedures to prevent any Internet gambling 
transactions that are legal under applicable Federal and State law.
---------------------------------------------------------------------------

    \13\ See the discussion of the interplay between the Interstate 
Horseracing Act and federal gambling statutes contained in Footnote 
1.
    \14\ 31 U.S.C. 5361(b).
---------------------------------------------------------------------------

    Some payment system operators have indicated that, for business 
reasons, they have decided to avoid processing any gambling 
transactions, even if lawful, because, among other things, they believe 
that these transactions are not sufficiently profitable to warrant the 
higher risk they believe these transactions pose.\15\ The Agencies 
believe that the Act does not provide the Agencies with the authority 
to require designated payment systems or participants in these systems 
to process any gambling transactions, including those transactions 
excluded from the Act's definition of unlawful Internet gambling, if a 
system or participant decides for business reasons not to process such 
transactions. The Agencies request comment on the proposed approach to 
implementing the Act's overblocking provision.
---------------------------------------------------------------------------

    \15\ Designated payment system representatives have informally 
indicated to the Agencies that many participants in their systems 
prefer not to process gambling-related transactions because they 
have experienced higher-than-usual losses due, for example, to 
assertions that gambling transactions were ``unauthorized.''
---------------------------------------------------------------------------

E. Reasonably Designed Policies and Procedures

    Section 6 of the proposed regulations sets out for each designated 
payment system examples of policies and procedures the Agencies believe 
are reasonably designed to prevent or prohibit restricted transactions 
for non-exempt participants in the system. Generally, under the 
proposed rule, non-exempt participants in each designated payment 
system should have policies and procedures that (i) Address methods for 
conducting due diligence in establishing and maintaining a commercial 
customer relationship designed to ensure that the commercial customer 
does not originate or receive restricted transactions through the 
customer relationship; and (ii) include procedures reasonably designed 
to prevent or prohibit restricted transactions, including procedures to 
be followed with respect to a customer if the participant discovers the 
customer has been engaging in restricted transactions through its 
customer relationship. These procedures are discussed in more detail 
below.
1. Due Diligence
    The Agencies would expect non-exempt participants' policies and 
procedures addressing due diligence to be consistent with their regular 
account-opening practices. The Agencies anticipate that participants 
would use a flexible, risk-based approach in their due diligence 
procedures in that the level of due diligence performed would match the 
level of risk posed by the customer. The due diligence is intended to 
apply to a participant when the participant is directly establishing or 
maintaining a customer relationship, but not with respect to entities 
with which the participant does not have a direct relationship. For 
example, if a card network operator does not act as the merchant 
acquirer in the network, the operator would not be expected to conduct 
due diligence on the merchant customers. This function should be 
performed by the member institutions of the network that are acting as 
merchant acquirers. However, if a card network operator also acted as 
the merchant acquirer, it should conduct the appropriate due diligence 
on its merchants in establishing or maintaining the customer 
relationship. The Agencies expect that the most efficient way for 
participants to implement the due diligence procedures in the proposed 
rule would be to incorporate them into existing account-opening due 
diligence procedures (such as those required of depository institutions 
under Federal banking agencies' anti-money laundering compliance 
program requirements).\16\
---------------------------------------------------------------------------

    \16\ See, e.g., 12 CFR 208.63.
---------------------------------------------------------------------------

    The due diligence requirements for a participant establishing a 
customer relationship in an ACH system also apply to the establishment 
of a relationship with any third-party sender. Before establishing a 
relationship with a third-party sender, a participant should conduct 
appropriate due diligence with respect to the third-party sender. A 
third-party sender should conduct due diligence on its customers to 
ensure that it is not transmitting restricted transactions through an 
ODFI, and the ODFI should confirm that the third-party sender conducts 
such due diligence on its

[[Page 56689]]

originators. In maintaining the customer relationship with the third-
party sender, the participant should ensure that there is a process to 
monitor the operations of the third-party sender, such as by audit.
    The Agencies request comment as to the appropriateness of 
participants incorporating into their existing account-opening 
procedures the due diligence provisions of the proposed rule. The 
Agencies also request comment on whether, and to what extent, the 
proposed rule's examples of due diligence methods should explicitly 
include periodic confirmation by the participants of the nature of 
their customers' business.
2. Remedial Action
    The Agencies also would expect a non-exempt participant to have 
policies and procedures to be followed if the participant becomes aware 
that one of its customer relationships was being used to process 
restricted transactions. These policies and procedures could include a 
broad range of remedial options, such as imposing fines, restricting 
the customer's access to the designated payment system or the 
participant's facilities, and terminating the customer relationship by 
closing the account. In addition, as provided in section 5(e) of the 
proposed rule, nothing in the proposed rule modifies any existing legal 
requirement relating to the filing of suspicious activity reports with 
the appropriate authorities. The Agencies request comment on the 
appropriateness of the proposed rule's examples of a participant's 
procedures upon determining that a customer is engaging in restricted 
transactions through the customer relationship, and whether any 
additional such procedures should be included as examples.
    A participant also would be expected to take appropriate remedial 
action with respect to a business engaged in unlawful Internet gambling 
with which it does not have a customer relationship if the participant 
becomes aware that the gambling business is using the participant's 
trademark on its website to promote restricted transactions. For 
example, the participant could consider taking legal action to prevent 
the unauthorized use of its trademark by an unlawful Internet gambling 
business.
3. Monitoring
    The policies and procedures of non-exempt participants in card 
systems and money-transmitting businesses are expected to address 
ongoing monitoring or testing to detect possible restricted 
transactions. Examples of such monitoring or testing include (1) 
Monitoring and analyzing payment patterns to detect suspicious patterns 
of payments to a recipient, and (2) monitoring of Web sites to detect 
unauthorized use of the relevant designated payment system, including 
unauthorized use of the relevant designated payment system's 
trademarks. Unlawful Internet gambling businesses may be able to access 
a designated payment system (such as a money transmitting business) 
that would otherwise deny them a commercial subscriber account, by 
using individuals as agents to receive restricted transactions and may 
advertise the use of these systems on their website. Certain money 
transmitting businesses have developed monitoring procedures to detect 
suspicious payment volumes to an individual recipient in order to 
address this risk.\17\ In addition, certain money transmitting 
businesses subscribe to a service that will search the Internet for 
unauthorized use of the money transmitting business's trademark.
---------------------------------------------------------------------------

    \17\ As provided in the Act and the proposed rule, participants 
that are part of a money transmitting network may be able to rely on 
the network's procedures in this regard if the participants 
determine that the network's procedures comply with the requirements 
of the regulation as applied to the participant.
---------------------------------------------------------------------------

    The proposed rule does not include ongoing monitoring and testing 
within the examples of the policies and procedures for ACH systems, 
check collection systems, and wire transfer systems because these 
systems currently do not have the same level of functionality for 
analyzing patterns of specific payments being processed through the 
system. Moreover, as mentioned above, these three systems are open, 
universal systems that do not require businesses to explicitly sign up 
in order to receive payments through them. The Agencies request comment 
on whether ongoing monitoring and testing should be included within the 
examples for the ACH, check collection, and wire transfer systems, and, 
if so, how such functionality could reasonably be incorporated into 
those systems. As a general matter, the Agencies will continue to 
monitor technological developments in all payment systems, and, as 
those developments warrant, will engage in future rulemakings to 
address emerging means of identifying and blocking or otherwise 
preventing or prohibiting restricted transactions in the designated 
payment systems.
4. Coding
    The policies and procedures of participants in a card system are 
expected to address methods for identifying and blocking restricted 
transactions as they are processed, such as by establishing one or more 
transaction codes and merchant/business category codes that are 
required to accompany the authorization request from the merchant for a 
transaction and creating the operational functionality to enable the 
card system or the card issuer to identify and deny authorization for a 
restricted transaction. Card systems may be able to develop one or more 
merchant category codes for gambling transactions that are not 
restricted transactions under the Act. For example, in certain cases it 
may be reasonably practical for card systems to develop merchant 
category codes for particular types of lawful Internet gambling 
transactions. The Agencies specifically seek comment on the 
practicality, effectiveness, and cost of developing such additional 
merchant codes.
    The proposed rule does not include specific methods for identifying 
and blocking restricted transactions as they are being processed within 
the examples of procedures for any designated payment system other than 
card systems because the Agencies believe that only the card systems 
have the necessary capabilities and processes in place. The Agencies 
request comment on whether the procedural examples for the other 
designated payment systems should encompass identifying and blocking 
restricted transactions as they are being processed, and, if so, how 
such functionality could reasonably be incorporated into the systems. 
Again, the Agencies will monitor technological developments in all 
payment systems, and engage in future rulemakings as warranted to 
address emerging means of identifying and blocking or otherwise 
preventing or prohibiting restricted transactions in the designated 
payment systems.
5. Cross-Border Relationships
    Based on the Agencies' research and statements by industry 
representatives, the Agencies believe that most unlawful Internet 
gambling businesses do not have direct account relationships with U.S. 
financial institutions. In most cases, their accounts are held at 
offshore locations of foreign institutions that are not subject to the 
Act, and restricted transactions enter the U.S. payment system through 
those foreign institutions. In two of the designated payment systems 
(card systems and money transmitting businesses), the proposed rule 
does not provide exemptions for any participants and the proposed 
rule's requirements would

[[Page 56690]]

apply to all U.S. participants in both domestic and cross-border 
transactions. In the case of ACH, check collection, and wire transfer 
systems, exemptions are provided for certain participants and examples 
of special policies and procedures for cross-border transactions are 
provided.
    In general, in the case of U.S.-only transactions, for the ACH, 
check collection, and wire transfer systems, the proposed rule would 
require the participant in a particular payment system that has the 
direct relationship with the gambling business to have policies and 
procedures to prevent or prohibit restricted transactions through these 
systems. The other participants in each of these systems would 
otherwise be exempt from the requirements of the regulation. In the 
case of payment transactions for the benefit of offshore gambling 
businesses, none of the participants in the United States that process 
the transaction would have a direct relationship with the gambling 
business that receives the payment and would, under the general 
regulatory requirements, be exempt and not required to have policies 
and procedures to prevent or prohibit restricted transactions.
    In the case of incoming cross-border ACH debit and check collection 
transactions, the proposed rule places responsibility on the first 
participant in the United States that receives the incoming transaction 
directly from a foreign institution (i.e., an ACH debit transaction 
from a foreign gateway operator, foreign bank, or a foreign third-party 
processor or a check for collection directly from a foreign bank) to 
take reasonable steps to ensure that their cross-border relationship is 
not used to facilitate restricted transactions.\18\ Participants in 
such arrangements should take steps to prevent their foreign 
counterparty from sending restricted transactions through the 
participant, such as including as a term of its contractual agreement 
with the foreign institution a requirement that the foreign institution 
have policies and procedures in place to avoid sending restricted 
transactions to the U.S. participant. In addition, the U.S. 
participant's policies and procedures would be deemed compliant with 
the regulation if they also include procedures to be followed with 
respect to a foreign bank or foreign third-party processor that is 
found to have transmitted restricted transactions to, or received 
restricted transactions through, the participant. These policies and 
procedures might address (i) When access through the cross-border 
relationship should be denied and (ii) the circumstances under which 
the cross-border relationship should be terminated.
---------------------------------------------------------------------------

    \18\ In an incoming cross-border ACH debit transaction, if the 
first participant in the United States is an ACH operator (not an 
ODFI), the proposed rule makes clear that, while serving in the 
capacity of a receiving gateway operator, the ACH operator is not 
exempt from the general requirement to have policies and procedures 
reasonably designed to identify and block, or otherwise prevent or 
prohibit, restricted transactions.
---------------------------------------------------------------------------

    In the case of outgoing wire transfers and ACH credit transactions, 
a transfer by a U.S. gambler to a foreign Internet gambling business 
would be initiated in the United States and be sent or credited to an 
account at the gambling business's foreign bank. In this case, the 
originator's bank or the intermediary bank in the U.S. that sends the 
wire transfer transaction, or the gateway operator that sends the ACH 
credit entry, directly to a foreign bank should have policies and 
procedures in place to be followed if such transfers to a particular 
foreign bank are subsequently determined to be restricted 
transactions.\19\ For example, some Internet gambling businesses 
indicate on their websites the U.S. correspondent bank through which 
wire transfers to them must be made. In such cases, the U.S. 
participant should consider whether wire transfer services or the 
correspondent arrangement should continue.
---------------------------------------------------------------------------

    \19\ The proposed rule makes clear that the originator's bank or 
the intermediary bank in the United States that directly sends a 
cross-border wire transfer to a foreign bank, while acting in that 
capacity, is not exempt from the general requirement to have 
policies and procedures reasonably designed to identify and block or 
otherwise prevent or prohibit restricted transactions. Similarly, in 
an outgoing cross-border ACH credit transaction, the ACH operator in 
the United States, acting as the originating gateway operator, that 
directly sends the transaction to a foreign gateway operator is not 
exempt from the general policies and procedures requirement while 
acting in that capacity.
---------------------------------------------------------------------------

    The Agencies recognize that the issue of the extent of a bank's 
responsibility to have knowledge of its respondent banks' customers is 
a difficult one, which also arises in the context of managing money 
laundering and other risks that may be associated with correspondent 
banking operations. The Agencies specifically request comment on the 
likely effectiveness and burden of the proposed rule's due diligence 
and remedial action provisions for cross-border arrangements, and 
whether alternative approaches would increase effectiveness with the 
same or less burden.
    6. List of Unlawful Internet Gambling Businesses
    The Act does not mention the creation of a list of unlawful 
Internet gambling businesses. However, the Agencies are aware that 
there is some interest in exploring this idea. The Agencies considered 
including in the proposed rule's examples of reasonably designed 
policies and procedures, examination of a list that would be 
established by the U.S. Government of businesses known to be engaged in 
the business of unlawful Internet gambling. Some have suggested that 
the obligation of financial institutions with respect to such a list 
might be similar in effect to their obligations under certain other 
U.S. laws, such as those administered by the Office of Foreign Assets 
Control (OFAC), albeit in a different context.\20\ Some have also 
suggested that the list could be either available publicly in its 
entirety, so that financial transaction providers could check 
transactions against the list themselves, or maintained confidentially 
at a central location, so that financial transaction providers could 
submit transactions to the entity operating the central database, which 
would inform the financial transaction providers whether the 
transaction involved an unlawful Internet gambling business on its 
list. Proponents of the list suggest that under either of these 
approaches, certain restricted transactions directed to unlawful 
Internet gambling accounts could be blocked.
---------------------------------------------------------------------------

    \20\ H. Rep. No. 109-412, Part 1, p. 11.
---------------------------------------------------------------------------

    Any government agency compiling and providing public access to such 
a list would need to ensure that the particular business was, in fact, 
engaged in activities deemed to be unlawful Internet gambling under the 
Act. This would require significant investigation and legal analysis. 
Such analysis could be complicated by the fact that the legality of a 
particular Internet gambling transaction might change depending on the 
location of the gambler at the time the transaction was initiated, and 
the location where the bet or wager was received. In addition, a 
business that engages in unlawful Internet gambling might also engage 
in lawful activities that are not prohibited by the Act. The government 
would need to provide an appropriate and reasonable process to avoid 
inflicting unjustified harm to lawful businesses by incorrectly 
including them on the list without adequate review. The high standards 
needed to establish and maintain such a list likely would make 
compiling such a list time-consuming and perhaps under-inclusive. To 
the extent that Internet gambling businesses can change the names they 
use to receive payments

[[Page 56691]]

with relative ease and speed, such a list may be outdated quickly.
    The Agencies do not enforce the gambling laws, and interpretations 
by the Agencies in these areas may not be determinative in defining the 
Act's legal coverage. As noted above, the Act does not comprehensively 
or clearly define which activities are lawful and which are unlawful, 
but rather relies on underlying substantive law.\21\ In order to 
compile a list of businesses engaged in unlawful Internet gambling 
under the Act, the Agencies would have to formally interpret the 
various Federal and State gambling laws in order to determine whether 
the activities of each business that appears to conduct some type of 
gambling-related function are unlawful under those statutes.
---------------------------------------------------------------------------

    \21\ See H.R. Rep. No. 109-412, at 10 (2006).
---------------------------------------------------------------------------

    The Agencies request comment on whether establishment and 
maintenance of such a prohibited list by the Agencies is appropriate, 
and whether examining or accessing such a list should be included in 
the regulation's examples of policies and procedures reasonably 
designed to identify and block or otherwise prevent or prohibit 
restricted transactions. The Agencies also request comment on whether, 
if it were practical to establish a fairly comprehensive list and a 
participant routinely checked the list to make sure the indicated payee 
of each transaction the participant processed on a particular 
designated payment system is not on the list, the participant should be 
deemed to have, without taking any other action, policies and 
procedures reasonably designed to prevent or prohibit restricted 
transactions with respect to that designated payment system. Similarly, 
the Agencies also request comment on whether, if such a list were 
established and a participant routinely checked the list to make sure a 
prospective commercial customer was not included on the list (as well 
as perhaps periodically screening existing commercial customers), the 
participant should be deemed to have, without taking any other action, 
policies and procedures reasonably designed to prevent or prohibit 
restricted transactions. Finally, assuming such a list were established 
and became available to all participants in the designated payment 
systems, the Agencies request comment on the extent to which the 
exemptions provided in section 4 of the proposed rule should be 
narrowed.
    Any commenter that believes that such a list should be included in 
the regulation's examples of policies and procedures is requested to 
address the issues discussed above regarding establishing, maintaining, 
updating, and using such a list. The Agencies also request comment on 
any other practical or operational aspects of establishing, 
maintaining, updating, or using such a list. Finally, the Agencies 
request comment on whether relying on such a list would be an effective 
means of carrying out the purposes of the Act, if unlawful Internet 
gambling businesses can change their corporate names with relative 
ease.

F. Regulatory Enforcement

    As provided in the Act, section 7 of the proposed rule indicates 
that the requirements of the Agencies' rule would be subject to the 
exclusive regulatory enforcement of (1) The Federal functional 
regulators, with respect to the designated payment systems and 
participants therein that are subject to the respective jurisdiction of 
such regulators under section 505(a) of the Gramm-Leach-Bliley Act and 
section 5g of the Commodity Exchange Act; and (2) the Federal Trade 
Commission, with respect to designated payment systems and financial 
transaction providers not otherwise subject to the jurisdiction of any 
Federal functional regulators.

III. Administrative Law Matters

A. Executive Order 12866

    It has been determined that this regulation is a significant 
regulatory action as defined in E.O. 12866. Accordingly, this proposed 
regulation has been reviewed by the Office of Management and Budget. 
The Regulatory Assessment prepared by the Treasury for this regulation 
is provided below.
1. Description of Need for the Regulatory Action
    The rulemaking is required by the Act, the applicable provisions of 
which are designed to interdict the flow of funds between gamblers and 
unlawful Internet gambling businesses. To accomplish this, the Act 
requires the Agencies, in consultation with the Attorney General, to 
jointly prescribe regulations requiring designated payment systems (and 
their participants) to establish policies and procedures that are 
reasonably designed to prevent or prohibit such funding flows 
(hereafter ``unlawful Internet gambling transactions'').\22\
---------------------------------------------------------------------------

    \22\ 31 U.S.C. 5364.
---------------------------------------------------------------------------

    In accordance with the Act, section 3 of the proposed rule 
designates five payment systems that could be used in connection with 
unlawful Internet gambling transactions. Sections 5 and 6 of the 
proposed rule require designated payment systems and participants in 
those payment systems to establish reasonably designed policies and 
procedures to identify and block or otherwise prevent or prohibit 
unlawful Internet gambling transactions. As required by the Act, 
section 4 of the proposed rule exempts certain participants in 
designated payment systems from the requirement to establish policies 
and procedures because the Agencies believe that it is not reasonably 
practical for those participants to prevent or prohibit unlawful 
Internet gambling transactions. As required by the Act, section 6 of 
the proposed rule also contains a ``safe harbor'' provision by 
including non-exclusive examples of policies and procedures which would 
be deemed to be reasonably designed to prevent or prohibit unlawful 
Internet gambling transactions within the meaning of the Act.
2. Assessment of Potential Benefits and Costs
a. Potential Benefits
    Congress determined that Internet gambling is a growing cause of 
debt collection problems for insured depository institutions and the 
consumer credit industry.\23\ Further, Congress determined that there 
is a need for new mechanisms for enforcing Internet gambling laws 
because traditional law enforcement mechanisms are often inadequate for 
enforcing gambling prohibitions or regulations on the Internet, 
especially where such gambling crosses State or national borders.\24\ 
Sections 5 and 6 of the proposed rule address this by requiring 
participants in designated payment systems, which include insured 
depository institutions and other participants in the consumer credit 
industry, to establish reasonably designed policies and procedures to 
identify and block or otherwise prevent or prohibit unlawful Internet 
gambling transactions in order to stop the flow of funds to unlawful 
Internet gambling businesses. This funds flow interdiction is designed 
to inhibit the accumulation of consumer debt and to reduce debt 
collection problems for insured depository institutions and the 
consumer credit industry. Moreover, the proposed rule carries out the 
Act's goal of implementing new mechanisms for enforcing Internet 
gambling laws. The proposed rule will likely provide other benefits. 
Specifically, the proposed rule

[[Page 56692]]

could restrict excesses related to unlawful Internet gambling by under-
age, addicted or compulsive gamblers.
---------------------------------------------------------------------------

    \23\ 31 U.S.C. 5361(a)(3).
    \24\ 31 U.S.C. 5361(a)(4).
---------------------------------------------------------------------------

    The Treasury also examined the potential benefits of the 
establishment by the U.S. Government of a list of entities that it 
determines are engaged in the business of ``unlawful Internet 
gambling.'' While the Treasury understands that interest exists in such 
a list, we have tentatively concluded that the benefits of the list as 
an effective tool for use by regulated entities to identify and block 
or otherwise prevent or prohibit unlawful Internet gambling 
transactions is uncertain relative to the likely costs involved in 
creating such a list.
    Establishing a list of unlawful Internet gambling businesses would 
be a time consuming process given the fact-finding and legal analysis 
that would be required. For example, the names of the businesses 
directly receiving unlawful Internet gambling payments are often not 
readily identifiable from their gambling websites. As a result, the 
Government would have to engage in fact-finding to identify the name of 
each unlawful Internet gambling business and its associated bank 
account numbers and bank. In addition, to avoid inflicting unjustified 
harm on lawful businesses by erroneously including them on the list, 
the Government would likely need to provide businesses with advance 
notice and a reasonable opportunity to contest their potential 
inclusion on the list. This process could result in a considerable lag 
time between the U.S. Government first identifying a gambling website 
and ultimately adding the name of an unlawful Internet gambling 
business to the list. Because it is possible for unlawful Internet 
gambling businesses, particularly those located in foreign countries 
with foreign bank accounts, to change with relative ease the business 
names and bank accounts of entities directly receiving restricted 
transactions, the list of unlawful Internet gambling businesses could 
be quickly outdated and thus have limited practical utility as an 
effective tool for regulated entities to prevent unlawful Internet 
gambling transactions.
b. Potential Costs
    Treasury believes that the costs of implementing the Act and the 
proposed rule are lower than they would be if the Act and the proposed 
rule were to require a prescriptive, one-size-fits-all approach with 
regard to regulated entities. First, both the Act and section 5 of the 
proposed rule provide that a financial transaction provider shall be 
considered to be in compliance with the regulations if it relies on and 
complies with the policies and procedures of the designated payment 
system of which it is a participant. This means that regulated entities 
will not be required to establish their own policies and procedures but 
can instead follow the policies and procedures of the designated 
payment system, thereby resulting in lower costs.
    Second, with regard to regulated entities that establish their own 
policies and procedures, both the Act and sections 5 and 6 of the 
proposed rule provide maximum flexibility. Specifically, neither the 
Act nor the proposed rule contain specific performance standards but 
instead require that such policies and procedures be ``reasonably 
designed'' to identify and block or otherwise prevent or prohibit 
unlawful internet gambling. In addition, the proposed rule expressly 
authorizes each regulated entity to use policies and procedures that 
are ``specific to its business'' which will enable it to efficiently 
tailor its policies and procedures to its needs. Because the Act and 
the proposed rule provide flexibility for regulated entities in 
crafting their policies and procedures, allowing them to tailor their 
policies and procedures to their individual circumstances, the costs 
imposed by the Act on regulated entities should be lower than if the 
Act and the proposed rule were to take a prescriptive one-size-fits-all 
approach.
    Third, the ``safe harbor'' provision, with its nonexclusive 
examples of policies and procedures deemed to be ``reasonably 
designed,'' provides regulated entities with specific guidance on how 
to structure the policies and procedures required by the Act. As a 
result, costs associated with formulating policies and procedures 
should be lower because the safe harbor provision provides guidance on 
how to so structure the policies and procedures.
    Because the Treasury does not have sufficient information to 
quantify reliably the costs of developing specific policies and 
procedures, the Treasury seeks information and comment on any costs, 
compliance requirements, or changes in operating procedures arising 
from the application of the proposed rule. Moreover, the Treasury 
anticipates that the Agencies will contact trade groups representing 
participants, particularly those that qualify as small entities, and 
encourage them to provide comments during the comment period to 
ascertain, among other things, the costs imposed by this rulemaking.
    Once the policies and procedures have been developed, however, the 
Treasury believes the burden of this rulemaking will be relatively low. 
It is estimated that the recordkeeping requirement required by the Act 
and the proposed rule will take approximately one hour per recordkeeper 
per year to maintain the policies and procedures required by this 
rulemaking. It is estimated that the total annual cost to regulated 
entities to maintain the policies and procedures will be approximately 
$4 million.\25\
---------------------------------------------------------------------------

    \25\ This estimate is based on an estimate of 270,721 
recordkeepers. The hourly cost of the person who would be 
responsible for maintaining the policies and procedures is estimated 
to be $14.60 per hour (based on the U.S. Department of Labor, Bureau 
of Labor Statistics' occupational employment statistics for office 
and administrative support occupations, dated May 2006).
---------------------------------------------------------------------------

    The Treasury also considered the potential costs to the U.S. 
Government of establishing a list of unlawful Internet gambling 
businesses, and has initially determined that such costs would likely 
be significant. This is because establishing a list would require 
considerable fact-finding and legal analysis once the U.S. Government 
identifies a gambling website. 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. This legal analysis would entail 
interpreting the various Federal and State gambling laws, which could 
be complicated by the fact that the legality of a particular Internet 
gambling transaction might change depending on the location of the 
gambler at the time the transaction was initiated and the location 
where the bet or wager was received. The U.S. Government would at the 
same time also need to identify the business name and the bank account 
number and bank of the entity directly receiving payments on behalf of 
the Internet gambling business, which is often not readily 
ascertainable from the Web site. Identifying the business name and bank 
account number of the entity directly receiving unlawful Internet 
gambling payments might be challenging, especially where the Internet 
gambling business is located in and maintains its bank accounts in a 
foreign country. Once the fact-finding and legal analysis are concluded 
successfully, the U.S. Government might then need to afford the 
business advance notice and an opportunity to object to its potential 
inclusion on the list in order to ensure that lawful businesses are not 
harmed by being erroneously included on the list. These due process 
safeguards would result in considerable added costs to the U.S. 
Government.

[[Page 56693]]

3. Interference with State, Local, and Tribal Governments
    The Act does not alter State, local or tribal gaming law.\26\ In 
addition, the Act exempts from the definition of the term ``unlawful 
Internet gambling,'' intrastate, intratribal, and intertribal gambling 
transactions.\27\ Because the proposed rule does not alter these 
defined terms, it avoids undue interference with State, local, and 
tribal governments in the exercise of their governmental functions.
---------------------------------------------------------------------------

    \26\ Specifically, the Act defines the term ``unlawful Internet 
gambling'' as a bet or wager, which involves at least in part the 
use of the Internet, where such bet or wager is unlawful under any 
applicable Federal or State law in the State or Tribal lands in 
which the bet or wager is initiated, received, or otherwise made. 31 
U.S.C. 5362(10)(A).
    \27\ 31 U.S.C. 5362(10)(B) and (C).
---------------------------------------------------------------------------

B. Regulatory Flexibility Act Analysis

    Congress enacted the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 
et seq.) to address concerns related to the effects of agency rules on 
small entities and the Agencies are sensitive to the impact their rules 
may impose on small entities. In this case, the Agencies believe that 
the proposed rule likely would not have a ``significant economic impact 
on a substantial number of small entities.'' 5 U.S.C. 605(b). The Act 
mandates that the Agencies jointly prescribe regulations requiring 
designated payment systems, and all participants therein, to identify 
and block or otherwise prevent or prohibit restricted transactions 
through the establishment of reasonably designed policies and 
procedures. Comments are requested on whether the proposed rule would 
have a significant economic impact on a substantial number of small 
entities and whether the costs are imposed by the Act itself, and not 
the proposed rule.
    The RFA requires agencies either to provide an initial regulatory 
flexibility analysis with a proposed rule or to certify that the 
proposed rule will not have a significant economic impact on a 
substantial number of small entities. In accordance with section 3(a) 
of the RFA, the Agencies have reviewed the proposed regulation. While 
the Agencies believe that the proposed rule likely would not have a 
significant economic impact on a substantial number of small entities 
(5 U.S.C. 605(b)), the Agencies do not have complete data at this time 
to make this determination. Therefore, an Initial Regulatory 
Flexibility Analysis has been prepared in accordance with 5 U.S.C. 603. 
The Agencies will, if necessary, conduct a final regulatory flexibility 
analysis after consideration of comments received during the public 
comment period.
1. Statement of the Need for, Objectives of, and Legal Basis for, the 
Proposed Rule
    The Agencies are proposing a regulation to implement the Act, as 
required by the Act. The Act prohibits any person in the business of 
betting or wagering (as defined in the Act) from knowingly accepting 
payments in connection with the participation of another person in 
unlawful Internet gambling. Section 802 of the Act (codified at 31 
U.S.C. 5361 et seq.) requires the Agencies jointly (in consultation 
with the Attorney General) to designate payment systems that could be 
used in connection with, or to facilitate, restricted transactions and 
to prescribe regulations requiring designated payment systems, and 
financial transaction providers participating in each designated 
payment system, to establish policies and procedures reasonably 
designed to identify and block or otherwise prevent or prohibit 
restricted transactions. The proposed regulation sets out necessary 
definitions, designates payment systems that could be used in 
connection with restricted transactions, exempts participants providing 
certain functions in designated payment systems from certain 
requirements imposed by the regulation, provides nonexclusive examples 
of policies and procedures reasonably designed to identify and block, 
or otherwise prevent and prohibit, restricted transactions, and 
reiterates the enforcement regime set out in the Act for designated 
payment systems and non-exempt participants therein. The Agencies 
believe that the proposed regulation implements Congress's requirement 
that the Agencies prescribe regulations that carry out the purposes of 
the Act.
2. Small Entities Affected by the Proposed Rule
    The proposed rule would affect non-exempt financial transaction 
providers participating in the designated payment systems, regardless 
of size. The Agencies estimate that 4,792 small banks (out of a total 
of 8,192 banks), 420 small savings associations (out of a total of 
838), 7,609 small credit unions (out of a total of 8,477), and 240,547 
small money transmitting businesses (out of a total of 253,208) would 
be affected by this proposed rule. Pursuant to regulations issued by 
the Small Business Administration (13 CFR 121-201), a ``small entity'' 
includes a commercial bank, savings association or credit union with 
assets of $165 million or less. For money transmitting businesses, a 
``small entity'' would include those with assets of $6.5 million or 
less. The Agencies propose that the requirements in this rule be 
applicable to all entities subject to the Act, as implemented, 
regardless of their size because an exemption for small entities would 
significantly diminish the usefulness of the policies and procedures 
required by the Act by permitting unlawful Internet gambling operations 
to evade the requirements by using small financial transaction 
providers. The Agencies anticipate, however, that, as provided in the 
Act and the proposed regulations, small non-exempt participants in some 
designated payment systems, to a large extent, should be able to rely 
on policies and procedures established and implemented by the 
designated payment systems of which they are participants or other 
existing systems. The Agencies seek information and comment on the 
number of small entities to which the proposed rule would apply.
3. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements
    Section 802 of the Act requires the Agencies to prescribe 
regulations requiring each designated payment system, and all financial 
transaction providers participating in the designated payment system, 
to identify and block or otherwise prevent or prohibit restricted 
transactions through the establishment of policies and procedures 
reasonably designed to identify and block or otherwise prevent or 
prohibit the acceptance of restricted transactions. The proposed rule 
implements this requirement by requiring all non-exempt participants in 
designated payment systems to establish and implement policies and 
procedures reasonably designed to identify and block or otherwise 
prevent or prohibit restricted transactions. Because the Agencies do 
not have sufficient information to quantify reliably the effects the 
Act and the proposed rule would have on small entities, the Agencies 
seek information and comment on any costs, compliance requirements, or 
changes in operating procedures arising from the application of the 
proposed rule and the extent to which those costs, requirements, or 
changes are in addition to or different from those arising from the 
application of the Act generally. Moreover, the Agencies anticipate 
contacting trade groups representing participants that qualify as small 
entities and encouraging them to provide comments during the comment 
period to ascertain,

[[Page 56694]]

among other things, the costs imposed on regulated small entities.
4. Identification of Duplicative, Overlapping, or Conflicting Federal 
Rules
    The Agencies have not identified any Federal rules that duplicate, 
overlap, or conflict with the proposed rule. The Agencies seek comment 
regarding any statutes or regulations that would duplicate, overlap, or 
conflict with the proposed rule.
5. Significant Alternatives to the Proposed Rule
    Other than as noted above, the Agencies are unaware of any 
significant alternatives to the proposed rule that accomplish the 
stated objectives of the Act and that minimize any significant economic 
impact of the proposed rule on small entities. The Agencies request 
comment on additional ways to reduce regulatory burden associated with 
this proposed rule.

C. Paperwork Reduction Act Analysis

    The collection of information requirement contained in this notice 
of joint proposed rulemaking has been submitted by the Agencies to the 
Office of Management and Budget (OMB) for review in accordance with the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). Comments on the 
collection of information should be sent to the Office of Management 
and Budget, Attention: Desk Officer for the Department of the Treasury 
and the Board of Governors of the Federal Reserve System, Office of 
Information and Regulatory Affairs, Washington, DC 20503, with copies 
to Treasury's Office of Critical Infrastructure Protection and 
Compliance Policy and the Board's Secretary at the addresses previously 
specified. Because OMB must complete its review of the collection of 
information between 30 and 60 days after publication, comments on the 
information collection should be submitted not later than November 5, 
2007. Comments are specifically requested concerning:
    (1) Whether the proposed information collection is necessary for 
the proper performance of Agency functions, including whether the 
information will have practical utility;
    (2) The accuracy of the estimated burden associated with the 
proposed collection of information (see below);
    (3) How to enhance the quality, utility, and clarity of the 
information required to be maintained;
    (4) How to minimize the burden of complying with the proposed 
information collection, including the application of automated 
collection techniques or other forms of information technology; and
    (5) Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to maintain the information.
    The collection of information in the proposed rule is in sections 5 
and 6. This information is required by section 802 of the Act, which 
requires the Agencies to prescribe joint regulations requiring each 
designated payment system, and all participants in such systems, to 
identify and block or otherwise prevent or prohibit restricted 
transactions through the establishment of policies and procedures 
reasonably designed to identify and block or otherwise prevent or 
prohibit the acceptance of restricted transactions. The proposed rule 
implements this requirement by requiring all non-exempt participants in 
designated payment systems to establish and implement written policies 
and procedures reasonably designed to identify and block or otherwise 
prevent or prohibit restricted transactions. The proposed rule does not 
include a specific time period for record retention; however, non-
exempt participants would be required to maintain the policies and 
procedures for a particular designated payment system as long as they 
participate in that system.
    The Agencies anticipate that, as provided in the Act and the 
proposed regulations, small non-exempt participants in designated 
payment systems, for the most part, should be able to rely on policies 
and procedures established and implemented by the designated payment 
systems of which they are participants. For example, certain money 
transmitting business operators may have their own centralized 
procedures to prevent unlawful gambling transactions. Small money 
transmitters, acting as agents in these large systems, may be able to 
rely on the system's policies, and therefore would not have to create 
their own.
    Many of the payment systems used by depository institutions, such 
as check clearing, do not have centralized system operators. Therefore, 
depository institutions would likely have to create their own policies 
for check clearing.
    The likely recordkeepers are businesses or other for-profits and 
not-for-profit institutions and include commercial banks, savings 
associations, credit unions, card servicers, and money transmitting 
businesses. The Agencies have agreed to split equally for burden 
calculations the total number of recordkeepers not subject to 
examination and supervision by either the Board or the Treasury's 
Office of the Comptroller of the Currency and Office of Thrift 
Supervision.
    Board:
    Estimated number of recordkeepers: 134,451.
    Estimated average annual burden hours per recordkeeper: 25 hours 
for depository institutions and card servicers, 1 hour for money 
transmitting businesses.
    Estimated frequency: Annually.
    Estimated total annual recordkeeping burden: 322,779 hours.
    Treasury:
    Estimated number of recordkeepers: 136,270.
    Estimated average annual burden hours per recordkeeper: 25 hours 
for depository institutions and card servicers, 1 hour for money 
transmitting businesses.
    Estimated frequency: Annually.
    Estimated total annual recordkeeping burden: 368,254 hours.
    The initial burden is imposed by the Act which requires non-exempt 
participants to establish policies and procedures. The Agencies 
estimate that this initial burden will average 24 hours per 
recordkeeper for depository institutions and card servicers. The 
Agencies also estimate that the annual burden of maintaining the 
policies and procedures once they are established will be 1 hour per 
recordkeeper. An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a valid control number assigned by OMB.

D. Plain Language

    Each Federal banking agency, such as the Board, is required to use 
plain language in all proposed and final rulemakings published after 
January 1, 2000. 12 U.S.C. 4809. In addition, in 1998, the President 
issued a memorandum directing each agency in the Executive branch, such 
as Treasury, to use plain language for all new proposed and final 
rulemaking documents issued on or after January 1, 1999. The Agencies 
have sought to present the proposed rule, to the extent possible, in a 
simple and straightforward manner. The Agencies invite comment on 
whether there are additional steps that could be taken to make the 
proposed rule easier to understand, such as with respect to the 
organization of the materials or the clarity of the presentation.

IV. Statutory Authority

    Pursuant to the authority set out in the Act and particularly 
section 802 (codified at 31 U.S.C. 5361 et seq.), the

[[Page 56695]]

Board and the Treasury jointly propose the common rules set out below.

V. Text of Proposed Rules

List of Subjects

12 CFR Part 233

    Banks, Banking, Electronic funds transfers, Incorporation by 
reference, Internet gambling, Payments, Recordkeeping.

31 CFR Part 132

    Banks, Banking, Electronic funds transfers, Incorporation by 
reference, Internet gambling, Payments, Recordkeeping.

Federal Reserve System

Authority and Issuance

    For the reasons set forth in the preamble, the Board proposes to 
amend Title 12, Chapter II of the Code of Federal Regulations by adding 
a new part 233 as set forth under Common Rules at the end of this 
document:

PART 233--PROHIBITION ON FUNDING OF UNLAWFUL INTERNET GAMBLING 
(REGULATION GG)

Sec.
233.1 Authority, purpose, and incorporation by reference.
233.2 Definitions.
233.3 Designated payment systems.
233.4 Exemptions.
233.5 Processing of restricted transactions prohibited.
233.6 Policies and procedures.
233.7 Regulatory enforcement.

    Authority: 31 U.S.C. 5364.

Department of the Treasury

Authority and Issuance

    For the reasons set forth in the preamble, Treasury proposes to 
amend Title 31, Chapter I of the Code of Federal Regulations by adding 
a new part 132 as set forth under Common Rules at the end of this 
document:

PART 132--PROHIBITION ON FUNDING OF UNLAWFUL INTERNET GAMBLING

Sec.
132.1 Authority, purpose, and incorporation by reference.
132.2 Definitions.
132.3 Designated payment systems.
132.4 Exemptions.
132.5 Processing of restricted transactions prohibited.
132.6 Policies and procedures.
132.7 Regulatory enforcement.

    Authority: 31 U.S.C. 321 and 5364.

Common Rules

    The common rules that are proposed to be adopted by the Board as 
part 233 of Title 12, Chapter II of the Code of Federal Regulations and 
by Treasury as part 132 of Title 31, Chapter I of the Code of Federal 
Regulations follow:


Sec.  ----.1  Authority, purpose, and incorporation by reference.

    (a) Authority. This part is issued jointly by the Board of 
Governors of the Federal Reserve System (Board) and the Secretary of 
the Department of the Treasury (Treasury) under section 802 of the 
Unlawful Internet Gambling Enforcement Act of 2006 (Act) (enacted as 
Title VIII of the Security and Accountability For Every Port Act of 
2006, Pub. L. No. 109-347, 120 Stat. 1884, and codified at 31 U.S.C. 
5361-5367).
    (b) Purpose. The purpose of this part is to issue implementing 
regulations as required by the Act. The part sets out necessary 
definitions, designates payment systems subject to the requirements of 
this part, exempts certain participants in designated payment systems 
from certain requirements of this part, provides nonexclusive examples 
of policies and procedures reasonably designed to identify and block, 
or otherwise prevent and prohibit, restricted transactions, and sets 
out the Federal entities that have exclusive regulatory enforcement 
authority with respect to the designated payments systems and non-
exempt participants therein.
    (c) Incorporation by reference--relevant definitions from ACH 
rules. (1) This part incorporates by reference the relevant definitions 
of ACH terms as published in the ``2007 ACH Rules: A Complete Guide to 
Rules & Regulations Governing the ACH Network'' (the ``ACH Rules''). 
The Director of the Federal Register approves this incorporation by 
reference in accordance with 5 U.S.C. 552(a) and 1 CFR part 51. Copies 
of the ``2007 ACH Rules'' are available from the National Automated 
Clearing House Association, Suite 100, 13450 Sunrise Valley Drive, 
Herndon, Virginia 20171 (703/561-1100).
    Copies also are available for public inspection at the Department 
of Treasury Library, Room 1428, Main Treasury Building, 1500 
Pennsylvania Avenue, NW., Washington, DC 20220, and the National 
Archives and Records Administration (NARA). Before visiting the 
Treasury library, you must call (202) 622-0990 for an appointment. For 
information on the availability of this material at NARA, call 202-741-
6030, or go to: http://www.archives.gov/federal_register/code_of_federal_regulations/ibr_locations.html 20002.
    (2) Any amendment to definitions of the relevant ACH terms in the 
ACH Rules shall not apply to this part unless the Treasury and the 
Board jointly accept such amendment by publishing notice of acceptance 
of the amendment to this part in the Federal Register. An amendment to 
the definition of a relevant ACH term in the ACH Rules that is accepted 
by the Treasury and the Board shall apply to this part on the effective 
date of the rulemaking specified by the Treasury and the Board in the 
joint Federal Register notice expressly accepting such amendment.


Sec.  ----.2  Definitions.

    (a) Automated clearing house system or ACH system means a funds 
transfer system, primarily governed by the ACH Rules, which provides 
for the clearing and settlement of batched electronic entries for 
participating financial institutions. When referring to ACH systems, 
the terms in this regulation (such as ``originating depository 
financial institution,'' ``operator,'' ``originating gateway 
operator,'' ``receiving depository financial institution,'' ``receiving 
gateway operator,'' and ``third-party sender'') are defined as those 
terms are defined in the ACH Rules.
    (b) Bet or wager. (1) Means the staking or risking by any person of 
something of value upon the outcome or a contest of others, a sporting 
event, or a game subject to chance, upon an agreement or understanding 
that the person or another person will receive something of value in 
the event of a certain outcome;
    (2) Includes the purchase of a chance or opportunity to win a 
lottery or other prize (which opportunity to win is predominantly 
subject to chance);
    (3) Includes any scheme of a type described in 28 U.S.C. 3702;
    (4) Includes any instructions or information pertaining to the 
establishment or movement of funds by the bettor or customer in, to, or 
from an account with the business of betting or wagering (which does 
not include the activities of a financial transaction provider, or any 
interactive computer service or telecommunications service); and
    (5) Does not include--
    (i) Any activity governed by the securities laws (as that term is 
defined in section 3(a)(47) of the Securities Exchange Act of 1934 (15 
U.S.C. 78c(a)(47)) for the purchase or sale of securities (as that term 
is defined in section 3(a)(10) of that act (15 U.S.C. 78c(a)(10));
    (ii) Any transaction conducted on or subject to the rules of a 
registered entity

[[Page 56696]]

or exempt board of trade under the Commodity Exchange Act (7 U.S.C. 1 
et seq.);
    (iii) Any over-the-counter derivative instrument;
    (iv) Any other transaction that--
    (A) Is excluded or exempt from regulation under the Commodity 
Exchange Act (7 U.S.C. 1 et seq.); or
    (B) Is exempt from State gaming or bucket shop laws under section 
12(e) of the Commodity Exchange Act (7 U.S.C. 16(e)) or section 28(a) 
of the Securities Exchange Act of 1934 (15 U.S.C. 78bb(a));
    (v) Any contract of indemnity or guarantee;
    (vi) Any contract for insurance;
    (vii) Any deposit or other transaction with an insured depository 
institution;
    (viii) Participation in any game or contest in which participants 
do not stake or risk anything of value other than--
    (A) Personal efforts of the participants in playing the game or 
contest or obtaining access to the Internet; or
    (B) Points or credits that the sponsor of the game or contest 
provides to participants free of charge and that can be used or 
redeemed only for participation in games or contests offered by the 
sponsor; or
    (ix) Participation in any fantasy or simulation sports game or 
educational game or contest in which (if the game or contest involves a 
team or teams) no fantasy or simulation sports team is based on the 
current membership or an actual team that is a member of an amateur or 
professional sports organization (as those terms are defined in 28 
U.S.C. 3701) and that meets the following conditions:
    (A) All prizes and awards offered to winning participants are 
established and made known to the participants in advance of the game 
or contest and their value is not determined by the number of 
participants or the amount of any fees paid by those participants.
    (B) All winning outcomes reflect the relative knowledge and skill 
of the participants and are determined predominantly by accumulated 
statistical results of the performance of individuals (athletes in the 
case of sports events) in multiple real-world sporting or other events.
    (C) No winning outcome is based--(1) On the score, point-spread, or 
any performance or performances of any single real-world team or any 
combination of such teams, or
    (2) Solely on any single performance of an individual athlete in 
any single real-world sporting or other event.
    (c) Card issuer means any person who issues a credit card, debit 
card, pre-paid card, or stored value product, or the agent of such 
person with respect to such card or product.
    (d) Card system means a system for clearing and settling 
transactions in which credit cards, debit cards, pre-paid cards, or 
stored value products, issued or authorized by the operator of the 
system, are used to purchase goods or services or to obtain a cash 
advance.
    (e) Check clearing house means an association of banks or other 
payors that regularly exchange checks for collection or return.
    (f) Check collection system means an interbank system for 
collecting, presenting, returning, and settling checks or intrabank 
system for settling checks deposited in and drawn on the same bank. 
When referring to check collection systems, the terms in this 
regulation (such as ``paying bank,'' ``collecting bank,'' ``depositary 
bank,'' ``returning bank,'' and ``check'') are defined as those terms 
are defined in 12 CFR 229.2. For purposes of this part, ``check'' also 
includes an electronic representation of a check that a bank agrees to 
handle as a check.
    (g) Consumer means a natural person.
    (h) Designated payment system means a system listed in Sec.  --
--.3.
    (i) Electronic fund transfer has the same meaning given the term in 
section 903 of the Electronic Fund Transfer Act (15 U.S.C. 1693a), 
except that such term includes transfers that would otherwise be 
excluded under section 903(6)(E) of that act (15 U.S.C. 1693a(6)(E)), 
and includes any funds transfer covered by Article 4A of the Uniform 
Commercial Code, as in effect in any State.
    (j) Financial institution means a State or national bank, a State 
or Federal savings and loan association, a mutual savings bank, a State 
or Federal credit union, or any other person that, directly or 
indirectly, holds an account belonging to a consumer. The term does not 
include a casino, sports book, or other business at or through which 
bets or wagers may be placed or received.
    (k) Financial transaction provider means a creditor, credit card 
issuer, financial institution, operator of a terminal at which an 
electronic fund transfer may be initiated, money transmitting business, 
or international, national, regional, or local payment network utilized 
to effect a credit transaction, electronic fund transfer, stored value 
product transaction, or money transmitting service, or a participant in 
such network, or other participant in a designated payment system.
    (l) Interactive computer service means any information service, 
system, or access software provider that provides or enables computer 
access by multiple users to a computer server, including specifically a 
service or system that provides access to the Internet and such systems 
operated or services offered by libraries or educational institutions.
    (m) Internet means the international computer network of 
interoperable packet switched data networks.
    (n) Intrastate transaction means placing, receiving, or otherwise 
transmitting a bet or wager where--
    (1) The bet or wager is initiated and received or otherwise made 
exclusively within a single State;
    (2) The bet or wager and the method by which the bet or wager is 
initiated and received or otherwise made is expressly authorized by and 
placed in accordance with the laws of such State, and the State law or 
regulations include--
    (i) Age and location verification requirements reasonably designed 
to block access to minors and persons located out of such State; and
    (ii) Appropriate data security standards to prevent unauthorized 
access by any person whose age and current location has not been 
verified in accordance with such State's law or regulations; and
    (3) The bet or wager does not violate any provision of--
    (i) The Interstate Horseracing Act of 1978 (15 U.S.C. 3001 et 
seq.);
    (ii) 28 U.S.C. chapter 178 (professional and amateur sports 
protection);
    (iii) The Gambling Devices Transportation Act (15 U.S.C. 1171 et 
seq.); or
    (iv) The Indian Gaming Regulatory Act (25 U.S.C. 2701 et seq.).
    (o) Intratribal transaction means placing, receiving or otherwise 
transmitting a bet or wager where--
    (1) The bet or wager is initiated and received or otherwise made 
exclusively--
    (i) Within the Indian lands of a single Indian tribe (as such terms 
are defined under the Indian Gaming Regulatory Act (25 U.S.C. 2703)); 
or
    (ii) Between the Indian lands of two or more Indian tribes to the 
extent that intertribal gaming is authorized by the Indian Gaming 
Regulatory Act (25 U.S.C. 2701 et seq.);
    (2) The bet or wager and the method by which the bet or wager is 
initiated and received or otherwise made is expressly authorized by and 
complies with the requirements of--
    (i) The applicable tribal ordinance or resolution approved by the 
Chairman of the National Indian Gaming Commission; and
    (ii) With respect to class III gaming, the applicable Tribal-State 
compact;

[[Page 56697]]

    (3) The applicable tribal ordinance or resolution or Tribal-State 
compact includes--
    (i) Age and location verification requirements reasonably designed 
to block access to minors and persons located out of the applicable 
Tribal lands; and
    (ii) Appropriate data security standards to prevent unauthorized 
access by any person whose age and current location has not been 
verified in accordance with the applicable tribal ordinance or 
resolution or Tribal-State Compact; and
    (4) The bet or wager does not violate any provision of--
    (i) The Interstate Horseracing Act of 1978 (15 U.S.C. 3001 et 
seq.);
    (ii) 28 U.S.C. chapter 178 (professional and amateur sports 
protection);
    (iii) The Gambling Devices Transportation Act (15 U.S.C. 1171 et 
seq.); or
    (iv) The Indian Gaming Regulatory Act (25 U.S.C. 2701 et seq.).
    (p) Money transmitting business and money transmitting service have 
the meanings given the terms in 31 U.S.C. 5330(d) (determined without 
regard to any regulations prescribed by the Secretary of the Treasury 
thereunder).
    (q) Participant in a designated payment system means an operator of 
a designated payment system, or a financial transaction provider that 
is a member of or, has contracted for financial transaction services 
with, or is otherwise participating in, a designated payment system. 
This term does not include a customer of the financial transaction 
provider if the customer is not a financial transaction provider 
otherwise participating in the designated payment system on its own 
behalf.
    (r) Restricted transaction means any of the following transactions 
or transmittals involving any credit, funds, instrument, or proceeds 
that the Act prohibits any person engaged in the business of betting or 
wagering (which does not include the activities of a financial 
transaction provider, or any interactive computer service or 
telecommunications service) from knowingly accepting, in connection 
with the participation of another person in unlawful Internet 
gambling--
    (1) Credit, or the proceeds of credit, extended to or on behalf of 
such other person (including credit extended through the use of a 
credit card);
    (2) An electronic fund transfer, or funds transmitted by or through 
a money transmitting business, or the proceeds of an electronic fund 
transfer or money transmitting service, from or on behalf of such other 
person; or
    (3) Any check, draft, or similar instrument that is drawn by or on 
behalf of such other person and is drawn on or payable at or through 
any financial institution.
    (s) State means any State of the United States, the District of 
Columbia, or any commonwealth, territory, or other possession of the 
United States, including the Commonwealth of Puerto Rico, the 
Commonwealth of the Northern Mariana Islands, American Samoa, Guam, and 
the Virgin Islands.
    (t) Unlawful Internet gambling means to place, receive, or 
otherwise knowingly transmit a bet or wager by any means that involves 
the use, at least in part, of the Internet where such bet or wager is 
unlawful under any applicable Federal or State law in the State or 
Tribal lands in which the bet or wager is initiated, received, or 
otherwise made. The term does not include placing, receiving, or 
otherwise transmitting a bet or wager that is excluded from the 
definition of this term by the Act as an intrastate transaction or an 
intra-tribal transaction, and does not include any activity that is 
allowed under the Interstate Horseracing Act of 1978 (15 U.S.C. 3001 et 
seq.). The intermediate routing of electronic data shall not determine 
the location or locations in which a bet or wager is initiated, 
received, or otherwise made.
    (u) Wire transfer system means a system through which an 
unconditional order to a bank to pay a fixed or determinable amount of 
money to a beneficiary upon receipt, or on a day stated in the order, 
is transmitted by electronic or other means through the network, 
between banks, or on the books of a bank. When referring to wire 
transfer systems, the terms in this regulation (such as ``bank,'' 
``originator's bank,'' ``beneficiary's bank,'' and ``intermediary 
bank'') are defined as those terms are defined in 12 CFR part 210, 
appendix B.


Sec.  ----.3  Designated payment systems.

    The following payment systems could be used by participants in 
connection with, or to facilitate, a restricted transaction:
    (a) Automated clearing house systems;
    (b) Card systems;
    (c) Check collection systems;
    (d) Money transmitting businesses; and
    (e) Wire transfer systems.


Sec.  ----.4  Exemptions.

    (a) Automated clearing house systems. The participants providing 
the following functions of an automated clearing house system with 
respect to a particular ACH transaction are exempt from this 
regulation's requirements for establishing written policies and 
procedures reasonably designed to prevent or prohibit restricted 
transactions--
    (1) The ACH system operator, except as provided in Sec.  --
--.6(b)(2) and Sec.  ----.6(b)(3);
    (2) The originating depository financial institution in an ACH 
credit transaction; and
    (3) The receiving depository financial institution in an ACH debit 
transaction.
    (b) Check collection systems. The participants providing the 
following functions of a check collection system with respect to a 
particular check transaction are exempt from this regulation's 
requirements for establishing written policies and procedures 
reasonably designed to prevent or prohibit restricted transactions--
    (1) A check clearing house; and
    (2) The paying bank (unless it is also the depositary bank), any 
collecting bank (other than the depositary bank), and any returning 
bank.
    (c) Wire transfer systems. The participants providing the following 
functions of a wire transfer system with respect to a particular wire 
transfer are exempt from this regulation's requirements for 
establishing written policies and procedures reasonably designed to 
prevent or prohibit restricted transactions--
    (1) The operator of a wire transfer network; and
    (2) The originator's bank and any intermediary bank, except as 
provided in Sec.  ----.6(f)(2).


Sec.  ----.5  Processing of restricted transactions prohibited.

    (a) All non-exempt participants in designated payment systems shall 
establish and implement written policies and procedures reasonably 
designed to identify and block or otherwise prevent or prohibit 
restricted transactions.
    (b) A non-exempt financial transaction provider participant in a 
designated payment system shall be considered to be in compliance with 
the requirements of paragraph (a) of this section if it--
    (1) Relies on and complies with the written policies and procedures 
of the designated payment system that are reasonably designed to--
    (i) Identify and block restricted transactions; or
    (ii) Otherwise prevent or prohibit the acceptance of the products 
or services of

[[Page 56698]]

the designated payment system or participant in connection with 
restricted transactions; and
    (2) Such policies and procedures of the designated payment system 
comply with the requirements of this part.
    (c) As provided in the Act, a person that identifies and blocks a 
transaction, prevents or prohibits the acceptance of its products or 
services in connection with a transaction, or otherwise refuses to 
honor a transaction, shall not be liable to any party for such action 
if--
    (1) The transaction is a restricted transaction;
    (2) Such person reasonably believes the transaction to be a 
restricted transaction; or
    (3) The person is a participant in a designated payment system and 
blocks or otherwise prevents the transaction in reliance on the 
policies and procedures of the designated payment system in an effort 
to comply with this regulation.
    (d) Nothing in this regulation requires or is intended to suggest 
that designated payment systems or participants therein must or should 
block or otherwise prevent or prohibit any transaction in connection 
with any activity that is excluded from the definition of ``unlawful 
Internet gambling'' in the Act as an intrastate transaction, an 
intratribal transaction, or a transaction in connection with any 
activity that is allowed under the Interstate Horseracing Act of 1978 
(15 U.S.C. 3001 et seq.).
    (e) Nothing in this regulation modifies any requirement imposed on 
a participant by other applicable law or regulation to file a 
suspicious activity report to the appropriate authorities.


Sec.  ----.6  Policies and procedures.

    (a) The examples of policies and procedures to identify and block 
or otherwise prevent or prohibit restricted transactions set out in 
this section are non-exclusive. In establishing and implementing 
written policies and procedures to identify and block or otherwise 
prevent or prohibit restricted transactions, a non-exempt participant 
in a designated payment system may design and use other policies and 
procedures that are specific to its business and may use different 
policies and procedures with respect to different types of restricted 
transactions.
    (b) Automated clearing house system examples. (1) Except as 
provided in paragraphs (b)(2) and (b)(3) of this section, the policies 
and procedures of the originating depository financial institution and 
any third-party sender in an ACH debit transaction, and the receiving 
depository financial institution in an ACH credit transaction, are 
deemed to be reasonably designed to prevent or prohibit restricted 
transactions if they--
    (i) Address methods for conducting due diligence in establishing or 
maintaining a customer relationship designed to ensure that the 
customer will not originate restricted transactions as ACH debit 
transactions or receive restricted transactions as ACH credit 
transactions through the customer relationship, such as--
    (A) Screening potential commercial customers to ascertain the 
nature of their business; and
    (B) Including as a term of the commercial customer agreement that 
the customer may not engage in restricted transactions; and
    (ii) Include procedures to be followed with respect to a customer 
if the originating depository financial institution or third-party 
sender becomes aware that the customer has originated restricted 
transactions as ACH debit transactions or if the receiving depository 
financial institution becomes aware that the customer has received 
restricted transactions as ACH credit transactions, such as procedures 
that address--
    (A) When fines should be imposed;
    (B) When the customer should not be allowed to originate ACH debit 
transactions; and
    (C) The circumstances under which the account should be closed.
    (2) The policies and procedures of a receiving gateway operator and 
third-party sender that receives instructions to originate an ACH debit 
transaction directly from a foreign sender (which could include a 
foreign bank, a foreign third-party processor, or a foreign originating 
gateway operator) are deemed to be reasonably designed to prevent or 
prohibit restricted transactions if they--
    (i) Address methods for conducting due diligence in establishing or 
maintaining the relationship with the foreign sender designed to ensure 
that the foreign sender will not send instructions to originate ACH 
debit transactions representing restricted transactions to the 
receiving gateway operator or third-party sender, such as including as 
a term in its agreement with the foreign sender requiring the foreign 
sender to have reasonably designed policies and procedures in place to 
ensure that the relationship will not be used to process restricted 
transactions; and
    (ii) Include procedures to be followed with respect to a foreign 
sender that is found to have sent instructions to originate ACH debit 
transactions to the receiving gateway operator or third-party sender 
that are restricted transactions, which may address--
    (A) When ACH services to the foreign sender should be denied; and
    (B) The circumstances under which the cross-border arrangements 
with the foreign sender should be terminated.
    (3) The policies and procedures of an originating gateway operator 
that receives an ACH credit transaction containing instructions to send 
or credit a transaction to a foreign bank directly or through a foreign 
receiving gateway operator are deemed to be reasonably designed to 
prevent or prohibit restricted transactions, if they include procedures 
to be followed with respect to a foreign bank that is found to have 
received from the originating gateway operator either directly or 
indirectly transactions that are restricted transactions, which may 
address--
    (i) When ACH credit transactions for the foreign bank or through 
the foreign gateway operator should be denied; and
    (ii) The circumstances under which the cross-border arrangements 
with the foreign bank should be terminated.
    (c) Card system examples. The policies and procedures of a card 
system operator, a merchant acquirer, and a card issuer, are deemed to 
be reasonably designed to prevent or prohibit restricted transactions, 
if they--
    (1) Address methods for conducting due diligence in establishing or 
maintaining a merchant relationship designed to ensure that the 
merchant will not receive restricted transactions through the card 
system, such as--
    (i) Screening potential merchant customers to ascertain the nature 
of their business; and
    (ii) Including as a term of the merchant customer agreement that 
the merchant may not receive restricted transactions through the card 
system;
    (2) Include procedures reasonably designed to identify and block or 
otherwise prevent or prohibit restricted transactions, such as--
    (i) Establishing transaction codes and merchant/business category 
codes that are required to accompany the authorization request for a 
transaction and creating the operational functionality to enable the 
card system or the card issuer to identify and deny authorization for a 
restricted transaction;
    (ii) Ongoing monitoring or testing to detect potential restricted 
transactions, including--
    (A) Conducting testing to ascertain whether transaction 
authorization requests are coded correctly;
    (B) Monitoring of web sites to detect unauthorized use of the 
relevant card system, including its trademark; or

[[Page 56699]]

    (C) Monitoring and analyzing payment patterns to detect suspicious 
payment volumes from a merchant customer; and
    (3) Include procedures to be followed with respect to a merchant 
customer if the card system, card issuer, or merchant acquirer becomes 
aware that a merchant has received restricted transactions through the 
card system, such as--
    (i) When fines should be imposed; and
    (ii) When access to the card system should be denied.
    (d) Check collection system examples. (1) Except as provided in 
paragraph (d)(2) of this section, the policies and procedures of a 
depositary bank are deemed to be reasonably designed to prevent or 
prohibit restricted transactions if they--
    (i) Address methods for conducting due diligence in establishing or 
maintaining a customer relationship designed to ensure that the 
customer will not receive restricted transactions through the customer 
relationship, such as--
    (A) Screening potential commercial customers to ascertain the 
nature of their business; and
    (B) Including as a term of the commercial customer agreement that 
the customer may not deposit checks that constitute restricted 
transactions; and
    (ii) Include procedures to be followed with respect to a customer 
if the depositary bank becomes aware that the customer has deposited 
checks that are restricted transactions, such as procedures that 
address--
    (A) When checks for deposit should be refused; and
    (B) The circumstances under which the account should be closed.
    (2) The policies and procedures of a depositary bank that receives 
a check for collection directly from a foreign bank are deemed to be 
reasonably designed to prevent or prohibit restricted transactions if 
they--
    (i) Address methods for conducting due diligence in establishing or 
maintaining the correspondent relationship with the foreign bank 
designed to ensure that the foreign bank will not send checks 
representing restricted transactions to the depositary bank for 
collection, such as including as a term in its agreement with the 
foreign bank requiring the foreign bank to have reasonably designed 
policies and procedures in place to ensure that the correspondent 
relationship will not be used to process restricted transactions; and
    (ii) Include procedures to be followed with respect to a foreign 
bank that is found to have sent checks to the depositary bank that are 
restricted transactions, which may address--
    (A) When check collection services for the foreign bank should be 
denied; and
    (B) The circumstances under which the correspondent account should 
be closed.
    (e) Money transmitting business examples. The policies and 
procedures of a money transmitting business are deemed to be reasonably 
designed to prevent or prohibit restricted transactions if they--
    (1) Address methods for conducting due diligence in establishing or 
maintaining commercial subscriber relationships designed to ensure that 
the commercial subscriber will not receive restricted transactions 
through the money transmitting business, such as--
    (i) Screening potential commercial subscribers to ascertain the 
nature of their business; and
    (ii) Including as a term of the commercial subscriber agreement 
that the subscriber may not receive restricted transactions; and
    (2) Include procedures regarding ongoing monitoring or testing to 
detect potential restricted transactions, such as--
    (i) Monitoring and analyzing payment patterns to detect suspicious 
payment volumes to any recipient; or
    (ii) Monitoring web sites to detect unauthorized use of the 
relevant money transmitting business, including their trademarks; and
    (3) Include procedures to be followed with respect to recipients 
that are found to have engaged in restricted transactions, that 
address--
    (i) When fines should be imposed;
    (ii) When access should be denied; and
    (iii) The circumstances under which an account should be closed.
    (f) Wire transfer system examples. (1) The policies and procedures 
of the beneficiary's bank in a wire transfer are deemed to be 
reasonably designed to prevent or prohibit restricted transactions if 
they--
    (i) Address methods for conducting due diligence in establishing or 
maintaining a commercial customer relationship designed to ensure that 
the commercial customer will not receive restricted transactions 
through the customer relationship, such as--
    (A) Screening potential commercial customers to ascertain the 
nature of their business; and
    (B) Including as a term of the commercial customer agreement that 
the customer may not receive restricted transactions.
    (ii) Include procedures to be followed with respect to a commercial 
customer if the beneficiary's bank becomes aware that the commercial 
customer has received restricted transactions, such as procedures that 
address--
    (A) When access to the wire transfer system should be denied; and
    (B) The circumstances under which an account should be closed.
    (2) An originator's bank or intermediary bank that sends or credits 
a wire transfer transaction directly to a foreign bank is deemed to 
have policies and procedures reasonably designed to identify and block, 
or otherwise prevent or prohibit restricted transactions, if the 
policies and procedures include procedures to be followed with respect 
to a foreign bank that is found to have received from the originator's 
bank or intermediary bank wire transfers that are restricted 
transactions, which may address--
    (i) When wire transfer services for the foreign bank should be 
denied; and
    (ii) The circumstances under which the correspondent account should 
be closed.


Sec.  ----.7  Regulatory enforcement.

    The requirements under this regulation are subject to the exclusive 
regulatory enforcement of--
    (a) The Federal functional regulators, with respect to the 
designated payment systems and participants therein that are subject to 
the respective jurisdiction of such regulators under section 505(a) of 
the Gramm-Leach-Bliley Act (15 U.S.C. 6805(a)) and section 5g of the 
Commodity Exchange Act (7 U.S.C. 7b-2); and
    (b) The Federal Trade Commission, with respect to designated 
payment systems and financial transaction providers not otherwise 
subject to the jurisdiction of any Federal functional regulators 
(including the Commission) as described in paragraph (a) of this 
section.

    By order of the Board of Governors of the Federal Reserve 
System, October 1, 2007.
Jennifer J. Johnson,
Secretary of the Board.

    Dated: October 1, 2007.

    By the Department of the Treasury.

Valerie A. Abend,
Deputy Assistant Secretary for Critical Infrastructure Protection and 
Compliance Policy.
[FR Doc. 07-4914 Filed 10-3-07; 8:45 am]
BILLING CODE 6210-01-P, 4811-42-P


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