A Law Professor Looks at Online Poker’s Black Friday

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In a previous blog, I wrote that the timing was suspicious.  Why did the federal Department of Justice (“DoJ”) make its big show on Friday, April 15, 2011, when the grand jury had been meeting for more than a year?

We might not know the reasons for the timing.  But we can understand why the prosecutors structured their cases as they did.

I often act as a consultant and expert witness for governments and industry.  But I am also a professor of law, teaching not only Gaming Law, but also Criminal Law.  So, here’s my view of why the DoJ’s indictment reads the way it does.

The 52-page document contained nine counts: violation of the Unlawful Internet Gambling Enforcement Act (“UIGEA”), conspiracy, illegal gambling business (“IGB”), bank and wire fraud, and money laundering.  The criminal charges were carefully structured for maximum legal and public relations impacts.

The UIGEA was used because it covers money transfers, and to reinforce the false message that it made Internet gambling illegal.  The UIGEA is actually only an enforcement act.  It requires there be a violation of some other federal or state anti-gambling law.

The UIGEA was rushed through Congress by then-Majority Leader Bill Frist (R.-TN) and is a mess, with typos and other problems.  For example, the UIGEA is expressly limited to payments going from players to operators for illegal online gambling, not the other way around.  Do all the bank accounts that were seized only contain money being sent by players in New York to the poker sites?  Was none of it money won by players?

Conspiracy is often called the prosecutor’s friend.  All you need to prove is an agreement and an act in furtherance of the conspiracy.  You don’t need to show any other crime was actually committed or even attempted.  Conspiracy also makes trials easier for prosecutors.  For example, testimony by a cooperating witness, “He told me he was going to take poker bets from the U.S.,” would normally not be allowed in as evidence under the hearsay rule.  But, “He asked me if I wanted to help him set up a site to take poker bets from the U.S., and I agreed” comes in, to prove there was an agreement.

Almost all of the DoJ’s legal claims depend on the underlying activity, online poker, being illegal.  The problem for prosecutors is that the main federal anti-gambling statue, the Wire Act, has been held in a published federal Court of Appeals decision to be limited to bets on sports events and races.  Since the Wire Act won’t work, prosecutors used the IGB.  That statute makes it a federal felony if five or more people do more than $2,000 in business a day in violation of state gambling laws.

The only ones mentioned in the indictment are New York’s misdemeanor anti-gambling statutes.  These clearly do not apply to players, which means the DoJ may not have had the right to seize players’ bank accounts.  More importantly, the New York laws have never been tested, to see if they overcome the strong presumption that a state law does not reach beyond its borders.  It also raises the issue of whether poker is a “contest of chance,” as required by Penal §225.00.

Note the repeated use of the word “fraud.”  With Internet gambling, prosecutors have tried to find ways to include fraud whenever possible.  For example, among the 22 counts in the criminal complaint filed against BetOnSports was a charge of mail fraud, for the weak claim of falsely advertising that sports betting was legal.  (The website reached the whole world, including places where sports betting is, in fact, legal.)  I believe, the DoJ’s emphasis on fraud is designed, in part, to create the impression among players that online sites cannot be trusted.

Most of the mail and bank fraud counts are actually weak.  They involve defendants lying to banks to disguise the fact that online poker was involved.  Phony companies were allegedly created and transactions labeled as sales of dog food and golf balls.  There will be factual issues whether the banks actually knew what was going on – billions of dollars is a lot of dog food.  And are we to believe no player ever mentioned online poker to his bank?

The bank fraud statute requires a scheme to either “defraud a financial institution” or to obtain any money owned or held by the bank.  The second one won’t work.  Lower courts have said the law was designed to protect the integrity of the banking system.  But, the U.S. Supreme Court ruled that part of the statute means what it says: prosecutors have to show the victim lost money.  Here, the banks were supposedly tricked into making millions of dollars.  Talk about a victimless crime.

So, the DoJ is left with having to show that banks were “defrauded.”  Again, there will be an issue of what exactly did the banks lose?  Even after the UIGEA a bank cannot be charged with a crime for unknowingly facilitating online poker.  As of June 1, 2010, there are regulations the banks have to follow.  But, almost all the events took place prior to that; and, the final regulations do not provide for fines.

Bank fraud carries a maximum sentence of 30 years and a $1,000,000 fine. Money laundering also can lead to hefty penalties.  It is another commonly used count in gambling prosecutions, because the prison sentence is based on the volume of money that was transferred, not on the gaming operations’ actual profit and loss.  A defendant faced with 50 years in prison can be persuaded to plead guilty to illegal gambling charges that would otherwise be dismissed.

The indictment sets forth facts that would seem to call for a count of bribery, if true.  Some of the defendants paid a small Utah bank $10 million to buy 30% of the bank, so the bank would transact online poker payments that the bank was reluctant to do.  An officer and part-owner allegedly asked for, and received, $20,000.  The indictment is careful to call this payoff a “bonus” rather than a bribe.  The banker was charged with conspiracy and being part of the other activities constituting crimes.  This avoids the question of who exactly was the victim, since it was the banker who solicited the payment.  It also gets around the problem of whether a briber and bribee can also be charged with being coconspirators.

The DoJ has done what it could to make this indictment as frightening as possible.  But we will probably never know just how strong the government’s case actually is.  The payment processing defendants who are now in the U.S. will fight for a while, but will eventually have to agree to plea bargains.

The others, especially the big fish, also won’t stand trial.  They would like to settle, even paying hundreds of millions of dollars and admitting they violated the law, but only if they won’t serve long prison sentences and risk losing their licenses in other countries.  The operators have one major bargaining chip: If the DoJ won’t make a deal they can live with, they will simply stay away from countries where they might be extradited.

Republished with permission © Copyright 2011, I. Nelson Rose, Prof. Rose is recognized as one of the world’s leading experts on gambling law, and is a consultant and expert witness for governments and industry.  His latest books, Internet Gaming Law (1st and 2nd editions), Blackjack and the Law and Gaming Law: Cases and Materials, are available through his website, www.GamblingAndTheLaw.com.

Poker Prohibition Is Not Regulation

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When people want something, businesses arise to fill the demand.  How much more so when the activity, online poker, is not even clearly illegal?

If the commercial goods or services are not legal, then by definition, the organizations will be criminal.  Prohibition created modern organized crime, by outlawing alcoholic beverages.

When Prohibition was repealed, organized crime turned to things people wanted but could not get legally: prostitution, drugs and gambling.

When legal gambling began to spread, with insufficient safeguards to keep out the bad guys, organized crime used its experience to infiltrate.

Over the years and around the world, governments realized they had few options.  The only way to completely outlaw gambling would be to crack down on players almost as hard as operators.  This is not politically possible in a democracy.

Since prohibition does not work, the next best choice is to legalize gambling and put in strict regulations.

The federal government of the United States has decided to ignore these lessons of history and take the worst aspects of the choices available.

Every action by the federal government makes it more difficult for it to go after the next operator.  The UIGEA, rammed through by the failed politician Bill Frist (R.-TN), scared all of the publicly traded gaming companies out of the U.S. market.  Then prosecutors went after payment processors, making it more difficult for players to find legitimate ways to send their money to betting sites.

Now the feds have seized .com domain names and charged operators with bank fraud.  So, gaming sites are switching to .eu and .uk, and cutting off all physical contact with the U.S.  Even the present American operators can’t be extradited, so what hope is there for the DoJ to bring future foreign operators here to stand trial?

The criminal indictment against PokerStars, Full Tilt, Absolute and their founders, was unsealed by the U.S. Attorney for New York on April 15.  Why now?

Maybe this just happened to be when the cases came together, when investigators had verified all the information about bank accounts they got almost exactly a year before.  Daniel Tzvetkoff was arrested in April 2010, apparently turned in by these very same websites for embezzling tens of millions of dollars while doing payment processing.

So, maybe it was merely a coincidence that recent developments had given Internet poker an air of respectability, a feeling that legalization was inevitable.  Nevada regulators approved Caesars Entertainment’s partnership with 888, a company that used to take bets from the U.S.  Steve Wynn upped the stakes by announcing a joint venture with PokerStars, which was still accepting American poker players.  The Nevada Assembly Judiciary Committee approved a bill to regulate online poker.  And the District of Columbia actually made it legal.

The DoJ has been waging a war of intimidation against Internet gambling for years, successfully scaring players, operators, payment processors and affiliates into abandoning the American market.  Lacking the two essentials to any prosecution – a statute that clearly makes the activity illegal and a defendant physically present in the U.S. – the feds have announced showy legal action against easy targets about every other year.

Online poker is not an easy target, since a federal Court of Appeal ruled the Wire Act is limited to bets on sports events.  And tricking financial institutions into processing poker payments seems a technicality, especially since the banks made millions without ever facing any criminal charges or even paying a penny in fines.  Talk about a victimless crime!

But getting a Utah bank to agree to process gambling transactions in return for a $10 million investment is an easier case, if true.  The bank was so small that the officer and part-owner who allegedly arranged the deal, asked for, and received, only $20,000 for his “bonus.”

Even if there was a bribe, the feds are still going to have to prove that the poker was illegal.  Since the Wire Act won’t work, prosecutors used 18 U.S.C. 1955, which makes it a federal felony if five or more people do more than $2,000 in business a day in violation of state gambling laws.  The indictment relies on “New York Penal Law 225 and 225.05 and the laws of other states.”  There is an obvious problem with using a state misdemeanor to charge federal felonies against foreign corporations licensed by foreign countries.

The DoJ also included a “thank you” to the Washington State Gambling Commission, indicating that the DoJ is probably going to piggyback on that state’s 2006 law outlawing all Internet gambling, as well.  At least Washington state makes Internet gambling a felony.

Still, there are problems.  State laws are presumed not to reach beyond their borders.  And even if Internet poker is illegal in that state, it is quite a leap to seize domain names for the entire country and threaten bank accounts in places like Panama.

The only state with a law better than Washington’s is Nevada, because it expressly says it reaches beyond the borders of the state.  But basing this attack on Internet poker on Nevada law would look like it was motivated by the landbased casinos.  After all, who are the big winners here?

The operators will never stand trial, unless they voluntarily return to the U.S. or make some other mistake.  The only U.S. extradition treaty I have found that covers illegal gambling is with Hong Kong.  Calling it bank fraud won’t work, since the defendants can show their local courts that it is based on gambling.  And the activity must be illegal in both countries.  No nation will extradite an individual to be tried for the very activity that that nation licenses.

But what is the federal government accomplishing with going after foreign licensed poker operators?

The DoJ is raking in lots of dough for itself.  For example, it received $405 million from PartyGaming and one of its founders, without even filing any criminal charges.  And Party Poker had pulled out of the U.S. years earlier.

Certainly the prosecutors are scaring a lot of people and making it difficult for average citizens to even get their money to a foreign site, let alone place and collect a bet.  But when the public relations campaign turned against it, the DoJ quickly backed down.

The DoJ’s seizure of .com names around the world, even in countries where online poker is 100% legal, led to international outrage.  It also creates a dangerous precedent.  Can an Islamic country, which outlaws alcohol, seize the worldwide domain names of every retailer that advertises beer or wine?

And the DoJ made it nearly impossible for players to get their deposits back.  Even in the U.S., there is no federal law against merely playing poker on the Internet.

Five days after Black Friday, the DoJ announced that an agreement had been reached with PokerStars and Full Tilt Poker.  The companies will be permitted to operate money games outside of the U.S., which they always had the legal right to do anyway.  American players will be able to go to the .com sites and get their deposits back.

The problem for the DoJ is that prohibition is not regulation.  Getting rid of publicly traded operators created a vacuum that was quickly filled by companies whose owners were difficult to trace.  Scaring away well-known poker names means that newcomers, some of whom will undoubtedly be sleazy, will take their places.  If the multi-billion-dollar U.S. online poker market becomes too hot for licensed companies, operators without any licenses, who won’t even reveal what country they are in, will be glad to run the games.

Meanwhile, like a raid by Elliot Ness on bootleggers and speakeasies during Prohibition, there are now wonderful opportunities for individuals you would not want to meet in a dark alley.

Unless, of course, Americans are actually going to stop playing poker on the Internet.

Republished with permission © Copyright 2011, I. Nelson Rose, Prof. Rose is recognized as one of the world’s leading experts on gambling law, and is a consultant and expert witness for governments and industry.  His latest books, Internet Gaming Law (1st and 2nd editions), Blackjack and the Law and Gaming Law: Cases and Materials, are available through his website, www.GamblingAndTheLaw.com.