Chuck Humphrey's Analysis and Some More Thoughts on the UIGEA

Online gaming law expert, Chuck Humphrey has written the best analysis of the Unlawful Internet Gaming Enforcement Act I have seen. Not surprisingly I’m in complete agreement with his read (why else would I think it’s the best writeup I’ve seen?) and have had similar reactions to those who claim things about the law which don’t seem to match with what is actually in the law. For instance, both PokerStars and Full Tilt Poker have said that they don’t believe that the law applies to poker. I’ve been a little shocked by that read of the law because even a dolt like me can recognize that the law certainly does apply to poker. Humphrey says:

Some commentators have argued that the operation of online poker Websites should be excluded from the reach of the new law because poker, being a skillful game, is not a game of chance. Under current state law that argument does not hold water. Most U.S. jurisdictions apply the Dominant Factor test to determine if a contest is a game of skill or a game of chance. That test looks to which elements predominate (51%) in determining outcome of the game. If the elements of chance predominate, then it is a game of chance, notwithstanding that skill elements are important, but not predominant. Furthermore, the outcome is to be determined by the considering the nature of the game and the abilities of the average player coming to the game. See: Is Poker a Game of Skill? Online poker operators should consider mathematical analysis of their vast data bases of poker results to support attempts to overturn the case law that views the “luck of the draw” aspect of poker as resulting in its being a game of chance.

Additionally, there is the fact that they are unlicensed gaming establishments which negates any protection that the poker is a skill game argument might offer. You can’t just roll into Las Vegas and start setting up slot machines on The Strip. You have to apply for a license and offering any sort of gambling without such a license is a crime. And even if you have a license to spread poker games in Las Vegas you can’t just open up business in California or Atlantic City without apply for licenses in those states either. No online poker site has any such license. And basically what the law says (generously paraphrased) is that if the wager is illegal on either side of the transaction (i.e. in the state that that player is making the wager from or where the wager is executed) then it’s now a federal crime.

Unlawful Internet gambling is defined as:

* placing, receiving or transmitting a bet * by means of the Internet * but only if that bet is unlawful under any other federal or state law applicable in the place where the bet is initiated, received or otherwise made.

So how anyone can say that poker is excluded from this law is beyond me. There have been numerous press articles quoting experts saying that the law is effectively unenforceable which has given some a ray of hope that the law may never be enforced. But if one were to actually read what these “experts” are saying is that coding checks and EFT’s might not be possible thus the law would be unenforceable for those two payment methods. But companies like Neteller specifically know that their transactions are used to facilitate illegal wagering. And for those who who think Neteller is exempt from US laws, I’ll quote Humphrey’s analysis:

Some commentators have expressed the view that operators can avoid the application of the ban by accepting funds only through online financial intermediary e-wallets like NETeller and FirePay. The commentators reason that those intermediaries are located offshore, are not “financial institutions” and are not subject to direct regulation by the Federal Reserve Board (“Fed”) or other U.S. governmental agencies.

The commentators are wrong. Section 5362(4) defines “financial transaction provider” to include any “…international …payment network utilized to effect … electronic fund transfer[s]…”

If that were not enough to grant the Fed power to impose include NETeller, et al, in its regulations, the Act also grants regulatory and enforcement powers to the Fed and the Federal Trade Commission (“FTC”). The FTC’s enforcement authority specifically applies to financial transaction providers not otherwise subject to the jurisdiction of any Federal functional regulators. The Fed’s regulatory power also includes the authority to adopt policies and procedures designed to prevent the acceptance of financial transactions prohibited by Section 5363.

It is a legal maxim that a law cannot be circumvented by doing indirectly that which cannot be done directly. If it appears to the Fed or the FTC that these financial intermediaries serve primarily as conduits for transmitting funds to online gambling operators, then either one of them could adopt regulations or seek enforcement sanctions effectively banning U.S. financial institutions from dealing with those intermediaries except on stated conditions designed to prohibit the intermediary from retransmitting the funds to online gambling operators.

So, the Fed clearly has authority to regulate Neteller’s business with US customers.

There’s been a great deal of confusion about how the US can regulate offshore companies like Stars or Neteller and I can only assume that those who are confused know very little about how the US legal system works. Anytime you transact with a US citizen who is physically located in the US, you make yourself subject to US laws. It’s perfectly legal for Stars to allow UK citizens to gamble because Stars is in a country where such businesses are allowed and there are no laws barring a UK citizen from gambling online. But when you take bets from US customers while they are physically in the US, you are subject to US laws. I recently explained it to someone by saying that selling, possessing, or using marijuana is illegal in the US. A US citizen can go to Amsterdam and toke up all day long and not be in violation of any US laws. Nor would the Bulldog Cafe be in violation of any US drug laws for selling a US citizen a few joints while the US citizen is in Amsterdam. But the Bulldog Cafe cannot sell marijuana to US citizens while they are in the US. The Bulldog Cafe can’t set up a website and sell joints to US citizens.

So, with all of these issues cleared up (hopefully), let’s look at why different companies reacted differently to the law that went into effect Friday and what is likely to happen going forward.

Party, 888, and many other sites closed their doors to US customers. The reasons should be rather obvious. These companies fear US prosecution of their board and executives. So the real question is why did other sites not also close their doors to US customers? First off, I am absolutely, positively convinced that not one executive at those companies actually believes that the law doesn’t apply to poker. Unless they’ve secured incompetent legal advice, I believe that those statements are completely a PR move. They don’t want their customers to think that they are knowingly breaking laws.

In addition to not being public, the other factor that most of the companies who continue to operate in the US share is that they are heavily, heavily invested in the US market. While Party had 75% of it’s business in the US and 888 was near 50%, many of the other companies are likely to have 90% or more of their business in the US and simply couldn’t weather the loss of that business. I’m not privy to their boardroom discussions but I can only assume that most of these companies have seen the writing on the wall and thought that they might be able to continue to operate for another 270 days or so and make as much cash as possible before shutting their doors. Perhaps they’re hoping that some alternative payment systems can be set up that will allow US customers to continue to fund their gaming accounts beyond 270 days but in the end I think this is a grab for cash for as long as it lasts. Neteller is going to become persona non grata with US banks soon. But won’t Neteller be able to get around the law with EFTs since it’s unlikely that they can be coded for gambling transactions? Well, as we saw this week, even foreign banks are issuing warnings about violating the US gaming ban and you can almost guarantee that nearly every US bank will voluntarily stop processing EFT requests from Neteller at some point. The banks aren’t stupid. They know what business Neteller is in. They are also very risk averse which means that they’re not going to risk their business on what is likely an inconsequential benefit.

Most of the companies who are still open aren’t public so their financials are not available for scrutiny but marketing a top notch online gaming site isn’t cheap. It’s likely there’s not a lot of cash sitting in the coffers so when faced with the decision of complying with or defying the US law it’s possible that they looked at what they could cash out with today and decided that they were willing to take the legal risk in exchange for how much ever money they could horde in the next 270 days. I wouldn’t necessarily worry about them skipping town with your deposits — that would make them international criminals with no safe harbor — but extracting every last cent they can from their businesses before all funding methods dry up is certainly within reason. If someone like PokerStars is clearing $1 million a day, that’s an extra $270 million to split up between investors.

None of these companies can go public now. These companies will never float while they are actively engaged in illegal activity because no professional investor is going to touch them with a ten foot pole. And when and if online poker becomes legal in the US, none of these companies will be able to get a license to operate in the US. Who’s going to issue a gaming license to a company that’s been operating in violation of federal laws? Or to put it a different way, if they legalized marijuana possession tomorrow, all those folks sitting in the can for marijuana convictions don’t suddenly become free men. Their violations occurred while possession was still illegal and when and if poker does become legal in the US it won’t change the fact that the US government will still consider the boards and executives of those companies to be criminals. I can certainly envision some companies thinking, as I do, that eventually poker will become legal in the US but I’m unsure of what they believe the end game for them is if it does become legal. Perhaps selling the technology, assets, and customer lists to someone who’s hands aren’t dirty?

One strategy that some of these companies may feel gives them some legal protection is the complex business structures that many have set up. For instance, UB has just completed the sale of parts of its business to some Malta based company which I can only assume is an attempt at distancing its owners from the illegal side of the business. Many of these companies operate what is essentially a maze of shell companies as a way of distancing their executives from the actual business. Perhaps they feel that this complex maze of shell companies will fool US prosecutors to the extent that they can’t go after their executives. I guess we’ll see how successful that is.

One interesting email I received from Full Tilt has me scratching my head though. The email was sent the day prior to the UIGEA being signed by Bush but the language of the email makes it clear that Full Tilt was fully aware that the UIGEA would become law. In that email they say the following:

Play Poker with the Pros on Thanksgiving Day…

If you’re looking for a Thanksgiving to remember, we’ve got tournaments that are sure to whet your poker appetite. Starting October 15th, we’re running weekly qualifiers to our Full Tilt Poker Championship at Red Rock where you can win a trip to Las Vegas and have a chance to play poker with the pros on national TV on Thanksgiving Day.

To earn your seat, just look for our weekly Red Rock Championship qualifier tournaments at 8:30PM ET on Sunday nights. Registration for these tournaments costs just 5,000 Full Tilt Poker points and satellites begin for as little as 500 points. Sign up today and you could spend Thanksgiving with the pros in Las Vegas.

So, Full Tilt is going to run qualifiers to win a seat to a televised final table at the Red Rock Casino in Las Vegas. When I read that I almost fell out of my seat. You couldn’t possibly thumb your nose at the law any more than to televise a tournament in which at least one player has earned his way there via your illegal activities. There are only a few logical explanations:

Full Tilt will not actually have any staff at the event. No super-sized check ceremony with the CEO or anything else that involves Full Tilt employees.
Full Tilt wishes to challenge the law and is planning on having an executive arrested and charged with violating the UIGEA.
Full Tilt assumes Fox Sports (I assume it’s Fox Sports since they’ve done all the previous Full Tilt Poker Presents … . shows), will cancel the program and the online winner will be compensated in cash for his equity in the prize pool.
They’ve completely lost their minds.

No matter how you look at it, it’s an odd promotion to run so close to the bill being signed into law. Even the WPT and the WSOP have said they aren’t taking online qualifiers so there’s a pretty solid belief out there that running qualifiers into live events presents legal risks. Whatever their plan is, it should be pretty interesting.

Though I may sound like a lot of doom and gloom, I think it’s important to cut through the BS that’s being passed off as fact. I could be wrong about a lot of this but whether the US government prosecutes and whether or not something is illegal are two different things. Online poker is illegal (or not specifically legal) in most states. The online poker industry took advantage of the fact that most states simply don’t care enough about the issue to do anything. Washington state is an obvious example of a state that did decide to do something about it and many online poker rooms steered clear of taking business from Washington. Now the matter has been taken out of the hands of the states and their laws are backed by the US government. Anybody who doubts the tenacity of the US government when it sets its sights on something is not a student of history. Sure, the drug war has been a failure but how many millions of people have rotted in jails for drug offenses. Ask them about the tenacity of the US government.

All that aside, I think this may eventually be good for the industry in the long term. It’s finally woken a lot of people up who were more than happy to let someone else fight the battle. Within a few years I feel that we’ll start to see legalized online gaming. First poker and then other games as the tide turns. The law is ignorant and many people who don’t even gamble online are irked at the audacity of the government to go against the wishes of the people to such a degree.

I’ll get off my soapbox for now. Have a good time at the tables!