Online poker fans woke up yesterday morning to their worst nightmare: The US Dept of Justice seized the domains of the top three online pokers sites -Full Tilt Poker, Poker Stars and Absolute Poker. The DOJ hit the owners of the sites and the sites themselves with a criminal indictment charging money laundering, bank fraud and illegal gambling. The government also filed a civil money laundering and forfeiture complaint against the defendants, their assets, and the assets of several payment processors for the defendants. In addition, restraining orders were issued against more than 75 bank accounts utilized by the defendants and their payment processors, and five Internet domain names used by the defendants to host the illegal poker games were seized. All the owners of the sites had moved off-shore after the passage of the Unlawful Internet Gambling Enforcement Act of 2006 (or UIGEA), discussed below.
The indictment and civil complaint seek at least $3 billion in penalties and forfeiture from the defendants. The Southern District (the federal court in NY) issued an order restraining over 70 different bank accounts in 14 countries containing the proceeds of the defendants. The United States also seized five Internet domain names used by the defendants to operate the online businesses in the United States.
On October 13, 2006, the United States enacted the UIGEA, making it a federal crime for gambling businesses to “knowingly accept” most forms of payment “in connection with the participation of another person in unlawful Internet gambling.” This law was slipped in at the last minute onto the Safe Harbor Act which was supposed to just make our ports safer from terrorists. US Sen Bill Frist, in an effort to further appease his conservative supporters, threw in the anti-gambling law at the last minute. Representatives who may have otherwise opposed it faced being accused of voting against the Safe Harbor Act.
Despite the passage of UIGEA, the Poker Companies, located offshore, continued operating in the United States. In a press release dated October 16, 2006, Absolute Poker announced that the company would continue its U.S. operations because “the U.S. Congress has no control over” the company’s payment transactions. Oh well, I guess they bet wrong that time.
Because U.S. banks and credit card issuers were largely unwilling to process their payments after the UIGEA, the poker sites allegedly used fraudulent methods to circumvent the federal law and trick financial institutions into processing payments on their behalf. Of the billions of dollars in payment transactions that the poker sites “tricked” U.S. banks into processing, approximately one-third or more of the funds went directly to the defendants as revenue through the “rake” charged to players on almost every poker hand played online.
PokerStars, Full Tilt Poker, and their payment processors are alleged to have also persuaded the principals of a few small, local banks facing financial difficulties to engage in the processing in return for multi-million-dollar investments in the banks. This leaves in doubt the status of the various poker players accounts that have been frozen as the government will likely argue that these accounts constitute the proceeds of a crime and that account holders were aware of the “illegal” nature of their activity by the passage of the UIGEA. Some of these accounts can be holding hundreds of thousands and even millions of dollars.
It will be interesting to see if TV stations continue to allow poker players to wear ads promoting the sites on the many poker-related TV shows currently on air. Before these charges, everyone was operating under the “Well, its not clear its illegal due to the quirky language of the UIEGA” Now with the charges pending, TV stations may feel allowing players to appear with these logos would be like having people appear with the names of various organized crime families on their shirts. This is how the law actually reads:
The act “prohibits gambling businesses from knowingly accepting payments in connection with the participation of another person in a bet or wager that involves the use of the Internet and that is unlawful under any federal or state law.”
But the act specifically excludes fantasy sports that meet certain requirements, and legal intra-state and inter-tribal gaming. It also does not expressly mention state lotteries; nor does it clarify whether inter-state wagering on horse racing is legal. Even more curious is that the Congress just last week passed a law allowing online gambling in the District of Columbia! As one can imagine, online poker players all over the country have been ranting how this action was done to snuff out competition and protect the DC online sites.
As with many such laws, its not clear what the government is trying to protect citizens from. The folks going online to play poker know that they are being charged a rake. They are aware of what it costs them to play and they know that it is gambling and they could lose their money. The law is a protectionist statute designed to force folks to gamble at brick-and-mortar casinos and play State lotteries. Of course more and more states are combing the two, now opening up State run casinos or “Racinos” like we have in NY where you can bet the ponies and play the slots at the same time. So Congress can’t look citizens in the face and say that the UIGEA was passed to deter gambling when the government is heavily invested in gambling. (Never mind if we talk about Wall Street, Hedge Funds and other forms of sanctioned gambling that are the basis of our whole economy).
The problem is that all these “societal” arguments may be good points in a barroom discussion on the issue, but in a court of law, all a judge and jury will be looking at is whether the actions of the defendants fit the language describing the actions that are prohibited by the statute. The various legal arguments will be flying fast and furiously and I expect the case will end up going all the way to the Supreme Court. It’s too early to say how this will all shake out as the defendants have not addressed the charges and the law is largely untested. If I were a gambling man, I would put my money on the government. Any takers?