NEWS, EVENTS, PUBLICATIONS & EMERGING ISSUES
SW&M EMERGING ISSUE
December 4, 2009
COMPLIANCE WITH REGULATION GG AND THE UNLAWFUL INTERNET GAMBLING ENFORCEMENT ACT OF 2006: WHAT YOUR CREDIT UNION NEEDS TO KNOW
On January 19, 2009, the Federal Reserve Board and the Department of the Treasury issued a final rule to implement the Unlawful Internet Gambling Enforcement Act of 2006 (the “Act”). This final rule is known as Regulation GG. In general, the Regulation requires that financial institutions adopt policies and procedures that demonstrate that they are undertaking certain measures when opening commercial accounts that may operate as unlawful Internet gambling businesses. In addition, the Regulation requires that financial institutions develop policies and procedures that are specifically designed to identify and block these types of “restricted transactions.”
Many credit unions are already meeting many of the general requirements of the Regulation pursuant to the “know your customer” requirements of the Bank Secrecy Act and the USA Patriot Act. Nonetheless, credit unions must formally incorporate the requirements of the Regulation into separate, stand-alone policies and procedures in order to demonstrate compliance with Regulation. Compliance with Regulation GG is mandatory as of June 1, 2010.
What is Unlawful Internet Gambling?
The Regulation does not explicitly define “unlawful Internet gambling.” Instead, the drafters left it to the subject financial institutions to determine, by reference to applicable substantive state and federal law, what constitutes unlawful Internet gambling.
Who is Subject to Regulation GG?
All non-exempt participants in “designated payment systems” must comply with the Regulation. “Designated payment systems” include automated clearing house systems, card systems, check collection systems, certain money transmitting businesses, and wire transfer systems. A credit union is deemed to be a participant in such a payment system if it is a member of, or uses the services of, one of these five systems. In essence, the Regulation applies to virtually all financial institutions which use electronic payment systems—meaning all virtually credit unions.
It is very important to note that the Regulation focuses on commercial members (e.g., business accounts)—not on individual consumers. However, because of the broad scope of the Regulation, this means that even if your credit union does not currently offer commercial accounts, it nonetheless must comply with the Regulation and formally adopt the policies and procedures required by it.
What Does Regulation GG Require?
The Regulation can essentially be reduced to four principal requirements:
1. Performing due diligence at account opening. When a commercial member wishes to open a new account, the credit union must determine whether there is a “minimal risk” of the member operating as an Internet gambling business. If the credit union is unable to make this determination, it can rely on the commercial member’s sworn statement that it does not act as an Internet gambling business. On the other hand, if the Credit Union does determine that the member operates an Internet gambling business, it may still open the account for the member provided that the member furnishes evidence of its legal ability to conduct that business.
2. Blocking restricted transactions conducted via debit and credit cards. A credit union must have written policies and procedures in place to block debit or credit card transactions that are wagers or bets of unlawful Internet gambling. However, given the speed and volume at which credit and debit card transactions are processed, it would be impractical to require financial institutions to monitor such transactions on a daily basis. As such, the Regulation provides that a credit union may rely on a written statement from the card network affirming that the network has policies and procedures in place that identify and block such restricted transactions.
3. Acting when a commercial member’s account processes a restricted transaction. A credit union is required to take appropriate remedies when it has “actual knowledge” that a commercial account has processed an unlawful Internet gambling transaction. However, the Regulation is rather vague in this regard and gives the credit union the sole discretion to determine the appropriate remedy based on the relevant facts and circumstances.
4. Providing notice to commercial members of the requirements under the Regulation. A credit union is required to provide notice of the requirements of the Regulation to both new and existing commercial members. For new members, this notice could consist of a disclosure in the account agreement or other member relationship agreement provided at the account opening. For existing members, this notice could potentially be provided as a “buckslip” in a member’s periodic statement or a brief article in a credit union newsletter. The Regulation does not provide for specific language to be used for such disclosures and notices.
Compliance with Regulation GG may initially appear to be both confusing and overwhelming. If your Credit Union would like assistance in drafting the notices, policies, and procedures required under the Regulation, or would like to discuss the scope of the Regulation in further detail, please do not hesitate to contact us.
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