The ubiquitin E3 ligase gene related to anergy in lymphocytes (GRAIL) (Rnf128) is a type 1 transmembrane protein that induces T cell anergy through the ubiquitination activity of its cytosolic RING finger. GRAIL also contains an equally large luminal region consisting primarily of an uncharacterized protease-associated (PA) domain. Using two-hybrid technology to screen for proteins that bound the PA domain we identified CD151, a member of the tetraspanin family of membrane proteins. GRAIL bound to the luminal/extracellular portion of both CD151 and the related tetraspanin CD81 using its PA domain, which promoted ubiquitination of cytosolic lysine residues. GRAIL exhibited specificity for lysines only within the tetraspanin amino terminus even in the presence of other cytosolic lysine residues in the substrate. GRAIL-mediated ubiquitination promoted proteasomal degradation and cell surface down-regulation of tetraspanins via Lys-48 linkages. As a result, the juxtaposition of PA and RING finger domains across a lipid bilayer facilitates the capture of transmembrane substrates for subsequent ubiquitination. These findings identify for the first time a single subunit E3 ligase containing a substrate-binding domain spatially restricted by a membrane from its E2 recruitment domain as well as an E3 ligase for members of the tetraspanin family.