What Is Regulation GG? The Unlawful Internet Gambling Rule

Regulation GG is a federal regulation designed to prevent financial institutions from processing transactions related to unlawful internet gambling. It implements the Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006, which was enacted to restrict the flow of funds to illegal online gambling operations. The regulation aims to safeguard the financial system by ensuring that covered entities do not unknowingly facilitate prohibited activities.

Defining Unlawful Internet Gambling Transactions

Unlawful internet gambling refers to placing, receiving, or knowingly transmitting a bet or wager using the internet where such activity is illegal under any applicable federal or state law in the location where the bet is initiated, received, or made. UIGEA prohibits gambling businesses from knowingly accepting payments in connection with unlawful internet gambling. These prohibited payments are termed “restricted transactions” under Regulation GG.

The types of financial transactions that Regulation GG seeks to prevent include credit card transactions, electronic fund transfers, checks, and other payment methods knowingly accepted by gambling businesses for unlawful internet gambling. For example, if an online poker site operates in a state where online gambling is prohibited, any payments processed for that site would generally be considered restricted transactions. The focus remains on whether the underlying gambling activity itself is illegal under relevant federal or state statutes.

The regulation clarifies that certain activities are excluded from the definition of unlawful internet gambling, such as fantasy sports that meet specific requirements, skill games, and legal intrastate or intertribal gaming. Similarly, transactions related to securities or commodities traded on U.S. exchanges are not considered gambling for these purposes.

Parties Subject to Regulation GG

Regulation GG applies to “covered financial institutions,” a broad range of entities that handle financial transactions. These include state or national banks, federal or state savings and loan associations, credit unions, and other persons that directly or indirectly hold accounts for consumers. Payment processors and credit card companies are also subject to the regulation’s requirements. These institutions bear the responsibility of preventing restricted transactions from being processed through their systems.

The regulation also identifies “designated payment systems” that could facilitate restricted transactions. These systems include automated clearing house (ACH) systems, card systems, check collection systems, certain money transmitting businesses, and wire transfer systems. Financial institutions participating in these designated payment systems must establish policies and procedures to comply with Regulation GG. While the regulation primarily targets financial institutions, internet gambling businesses are indirectly affected because financial institutions are required to block transactions to them if their activities are unlawful.

Regulation GG primarily focuses on financial institutions and businesses involved in processing payments, not individual consumers placing bets. The regulation aims to cut off the flow of revenue to unlawful internet gambling operations by making it difficult for them to conduct financial transactions. Financial institutions are not required to monitor individual customers to determine if they are gamblers, but rather to ensure that transactions involving unlawful internet gambling businesses are blocked.

Compliance Framework for Financial Institutions

Financial institutions subject to Regulation GG must establish and implement written policies and procedures to prevent or prohibit restricted transactions. These policies should be designed to address the specific risks associated with unlawful internet gambling. Institutions are expected to integrate these procedures into their existing compliance frameworks, such as those for Bank Secrecy Act (BSA) requirements.

Due diligence measures are a component of compliance, particularly for commercial customer accounts. Financial institutions should conduct risk assessments to evaluate the potential for unlawful internet gambling activities among their commercial customers. This can involve assessing whether a business presents a minimal risk or requiring certifications that they do not engage in such activities. For higher-risk commercial customers, institutions may request evidence of legal capacity to operate an internet gambling business or a reasoned legal opinion.

Ongoing monitoring of transactions is also a requirement to detect signs of restricted activities. While blocking all restricted transactions may not always be practical, especially for payment methods like ACH or wire transfers, institutions are expected to act when they have actual knowledge of such transactions. If a financial institution identifies a restricted transaction or becomes aware of unlawful internet gambling activity, it may be required to file a Suspicious Activity Report (SAR) with authorities. Training for employees involved in payment processing and account management is also important to ensure understanding of their responsibilities under Regulation GG.