Prohibition on Funding of Unlawful Internet Gambling, 56680-56699 [07-4914]

Agencies

• DEPARTMENT OF THE TREASURY
• FEDERAL RESERVE SYSTEM

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


=======================================================================
-----------------------------------------------------------------------

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.

-----------------------------------------------------------------------

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:
     Agency Web site: https://www.federalreserve.gov. Follow the 
instructions for submitting comments at https://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: regs.comments@federalreserve.gov. Include docket 
number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     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 
https://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:
     Federal eRulemaking Portal-- ``Regulations.gov'': Go to 
https://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.
     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:
     Viewing Comments Electronically: Go to https://
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.
     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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \8\ A primer on the ACH network is provided in the ACH Rules.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \9\ See ACH Rules, Operating Rules Sec. Sec.  11.6 and 11.7.

---------------------------------------------------------------------------

[[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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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 eff