Regulators struggling with Internet gambling rules

"That is something we're really struggling with," Louise Roseman, the Fed's director of reserve bank operations and payment systems, told a House Financial Services subcommittee. "The challenge we have is interpreting ... federal laws that Congress itself isn't sure what they mean," she said.

Congress passed a bill in 2006, when Republicans were still in control of the Senate and the House of Representatives, that prohibits companies from accepting payments in connection with "unlawful Internet gambling." It also instructed the Federal Reserve and the Treasury Department, in consultation with the Justice Department, to come up with rules to enforce the act.

But rather than define what types of gambling are illegal online, the Unlawful Internet Gambling Enforcement Act of 2006 relied on existing Federal and state laws to answer that question. It also still allowed any online horserace betting permissible under the Interstate Horseracing Act of 1978.

Now, both gambling and financial industry companies want to be told specifically which transactions should be blocked. "Clarity on this point would permit them to design policies and procedures that they could be assured would meet the rule's requirements," Roseman said. "Still others, including some gambling businesses and many consumers, asked that the rule clarify that certain types of gambling, such as pari-mutuel betting or poker, are lawful."

The payment system that companies rely on to do business "isn't frankly well designed" to identify an illegal Internet gambling transaction from a legal one, which is another challenge to crafting a rule, Roseman said.

Valerie Abend, deputy assistant secretary of Treasury, said regulators were striving to craft a rule that comes as close as possible to what lawmakers intended. But the question of which forms of Internet gambling are illegal is an issue regulators "are struggling with and trying to figure out what, if anything, we can do," Abend said.

The 2006 law has incurred the wrath of the European Union, which argues that it discriminates against European gambling operators. US Representative Barney Frank, the Massachusetts Democrat who chairs the House Financial Services Committee, has proposed legislation to repeal the ban.

Roseman told the subcommittee that Fed and Treasury staffs were pressing ahead with a final rule that provides "reasonably practical examples" of actions by banks and payment companies to comply with the existing law. "Our objective is to craft a rule to implement the act as effectively as possible in a manner that does not have a substantial adverse effect on the efficiency of the nation's payment system," Roseman said.

After the hearing, she said regulators hoped to issue a final rule before the end of 2008 but did not have a precise target date for finishing their work.