Whether the federal government can police the Internet will be tested by the passage of recent legislation that attempts to put an end to U.S. residents betting with offshore operators. On Sept. 29, 2006, the U.S. Congress passed the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA).

The heart of UIGEA is Sections 5363 and 5364. These provisions contain the criminal prohibitions and the financial regulation provisions of UIGEA. Section 5363 prohibits accepting payments directly or indirectly from Internet gamblers. The section provides that no person (includes corporations and potentially officers and directors) engaged in the business of betting or wagering may knowingly accept directly or indirectly from a player in unlawful Internet gambling (that is, bets that are unlawful under other state or federal laws) virtually any type of payments. Prohibited payments include credit, credit card payments, electronic fund transfers, checks, drafts or similar instruments, or the proceeds from any financial transaction—either as the payor, financial intermediary or for another person—as specified by the Treasury secretary and the Federal Reserve by regulation. This is a criminal statute and penalties can include fines and imprisonment for up to five years.

UIGEA applies to all unlawful Internet gambling including casino games and poker. UIGEA defines "unlawful Internet gambling" as "to place, receive, or otherwise knowingly transmit 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 in which the bet or wager is initiated, received, or otherwise made."

The debate over Internet gambling has often centered on what gaming industry groups would be exempted from the prohibitions. This act has a healthy number of carve-outs for state lotteries, state run casinos, horse racing, fantasy sports and others. The bill specifically affects non-U.S. operators.

The regulatory provisions of the new legislation are contained in Section 5364. In short, the Treasury secretary and the Federal Reserve would have nine months to enact regulations (in consultation with the Department of Justice) that would require the payment systems used by credit card companies, banks, payment networks, money transfer business and others to identify, code and block transactions prohibited by Section 5363. The intent is to stop the "acceptance of the products or services of the payment system in connection with" Internet gambling.

While the regulations must block restricted payments, the secretary of the Treasury is tasked to assure that transactions for intrastate casino, state lottery transactions and interstate horserace wagers are not blocked.

Most financial institutions wanted no part of the liability or expense associated with this otherwise monumental undertaking. So, to get UIGEA passed, numerous concessions were made that could enfeeble UIGEA. The first concession is that financial transaction providers are not subject to Section 5363 if they do not own or control or are not owned or controlled by someone in the business of betting or wagering.

The second concession is that credit card companies, banks, payment networks, money transfer and similar businesses would be in compliance with the regulations if they follow the policies and procedures of the payment system that are adopted under Section 5363 and comply with the regulations. They also would face no liability for blocking a transaction that the processor believes is a restricted transaction if they are following the policies of the payment system.

The third concession is that the Secretary of the Treasury may exempt certain restricted transactions from any requirement imposed under such regulations if the secretary and the Federal Reserve Board find it is not reasonably practicable to identify and block such transactions.