Poker Sites Made A Big Mistake By Disguising The Nature Of Their Gambling

A woman who wants to remain anonymous plays poker on the PokerStars.com website. Despite a federal law banning financial transactions connected to online gambling, millions of people, many in the United States, have figured out ways to bet money on the Internet.

Like doing drugs in front of the cops, poker websites were brazen in using U.S. institutions to conduct business the federal government had declared illegal.

So say Internet gambling compliance and law enforcement experts who weren’t shocked by the Justice Department indictment this month that caught a global gambling industry — on land and in cyberspace — off guard.

According to experts, the websites could have safely done business, although at greater cost and hassle.

Instead, they chose expediency over legality and integrity by using banks and other go-betweens in the United States to process payments amid a federal crackdown on Internet poker, experts said.

Many gaming insiders figured the online poker business, legal in the countries where the sites are based but under fire in the United States, was far down the path toward legitimacy.

Online poker brands are advertised on national television, their icons ubiquitous in poker tournaments in Las Vegas and beyond. Poker websites sponsor celebrity players who have testified before Congress in pursuit of laws regulating and taxing Internet gambling. It’s a multibillion-dollar business that has cultivated millions of amateur gamblers whose online winnings and branded sportswear have fueled unprecedented interest in live casino poker.

Along the road to respectability, some poker sites made a big mistake by disguising the nature of their gambling transactions over legal concerns in the United States, some legal experts said.

Although licensed in other countries, the sites opened themselves to liability in the United States, where banking laws forbid merchants from concealing the source of money that could be used to commit crimes, they said.

That’s why some offshore gambling websites not included in the indictment use foreign banks to process Internet gambling transactions for American gamblers — institutions that aren’t subject to U.S. laws and are far from the Justice Department’s reach.

Federal prosecutors accuse the operators of PokerStars, Full Tilt Poker and Absolute Poker of creating phony, nongambling businesses through which they processed payments from American gamblers. The poker sites concealed Internet gambling transactions from banks in the wake of a 2006 law making it a crime for financial institutions to process online wagers, according to the indictment.

Prosecutors say the sites still violated the Unlawful Internet Gambling Enforcement Act of 2006, which prevents illegal gambling operators from receiving the online wagers.

Poker proponents say the act is moot because online poker is legal and not subject to the 1961 Wire Wager Act — the primary federal law covering illegal gambling. The Wire Act, a Kennedy-era law outlawing wire transmissions of betting information across state lines, only covers sports betting, they say. Although originally aimed at mob bookmakers before the Internet age, the Wire Act today applies to all forms of gambling, the feds say.

This case could be the first to test that argument, for online poker, at trial. Previous Internet gambling targets have pleaded guilty and paid fines, gone to prison or remain in exile after jettisoning their U.S. operations. The first Internet gambling conviction under the Wire Act, in 2000, focused on sports betting.

PokerStars denied the federal allegations in a statement April 25, saying the company will “robustly defend itself.”

By avoiding the Wire Act in their indictment, some online poker advocates think the Justice Department has a weak hand.

The use of domestic banks and payment processors was an open secret in Internet poker circles, as were efforts to process poker payments through fictitious businesses. The indictment also accuses poker operators of bribing a Utah bank into processing payments when previous methods didn’t work.

The Justice Department declined to comment.

Using foreign institutions would have been more expensive for gambling sites doing business in the United States, said I. Nelson Rose, an attorney and Internet gambling expert in California. It would also be more time consuming for gamblers, as funds would take longer to process through a foreign institution than a domestic one, he said.

It was “silly” for the poker sites to put themselves at risk in the United States, Rose said.

“We knew about this eight years ago,” added one compliance expert about the efforts by poker sites to hide gambling transactions from U.S. banks. “The sites made it easy for the feds.”

Poker sites say they are fighting a war of intimidation by the Justice Department.

“PokerStars has received extensive expert advice from within and outside the U.S., which concluded that (the Unlawful Internet Gambling Enforcement Act) does not alter the U.S. legal situation with respect to our offering of online poker games,” the company told customers after the law’s passage in 2006.

Major banks had stopped processing Internet gambling transactions, which led some gambling sites to exit the U.S. market. Rather than put up a fight, the co-founder of the largest poker site at the time pleaded guilty to violating the Wire Act in December 2008 and paid a $300 million fine. PartyGaming’s U.S. demise paved the way for the ascendancy of the Big Three poker sites, which are thought to generate profits in the hundreds of millions of dollars.

Where critics saw arrogance, poker advocates saw confidence. Poker is an American tradition; playing online, they say, is a victimless crime and individual right.

“Why the Justice Department feels it can roll the dice and pick one form of gambling to ban over another is beyond me, and it is beyond the millions of Americans who are being denied their hobby and, for professional players, their livelihood,” former U.S. Sen. Alfonse D’Amato, chairman of the online advocacy group Poker Players Alliance, wrote in a Washington Post editorial after the indictment. “Congress should hold the administration accountable for this outrageous affront to individual freedom and quickly pass legislation that would codify once and for all the right of Americans to play the greatest American game.”

Internet gambling chieftains haven’t been so confident as to argue their case in person, however.

PokerStars founder Isai Scheinberg, who avoids travel in the United States, was noticeably absent from a March hearing in Carson City to consider his company’s bill to legalize Internet poker in Nevada.

PokerStars hired prominent Nevadans, such as former Gaming Control Board member Randall Sayre and former Assembly Speaker Richard Perkins, to help make the case for him.

Although Scheinberg avoids personal publicity, steering clear of the United States is a necessary precaution to avoid potential arrest, said one casino executive who requested anonymity. As a symbol of the federal crackdown on Internet gambling, the absence hurt the company’s case in Nevada, a possible first step to federal legalization of Internet gambling, the executive said, adding, “it just looks bad.”

For years, online poker advocates have called the federal crackdown a bluff.

Court records indicate the government had been building a case against the poker sites for more than three years.

Those efforts have been challenged by the lack of a centralized, task-force approach to Internet gambling by the Justice Department, which years ago decided on a haphazard approach of letting regional offices enforce gambling laws related to underlying issues such as money laundering or the drug trade, according to a law enforcement expert who requested anonymity.

“These Internet gambling investigations pay for themselves many times over” as operators have so far been willing to plea bargain and forfeit millions of dollars in assets, the source said.

Although the Justice Department views Internet gambling sites as corruptible enterprises ripe for fraud and money laundering, its Organized Crime and Racketeering Section, besides focusing on traditional organized crime, has been distracted by violent, gang warfare cases, the source said.

Still, federal prosecutors are training state and local officials seeking to crack down on Internet gambling operators using the Gambling Enforcement Act, an effort fraught with challenges given they can “only effectively go after banks and other entities located in their jurisdiction,” the source said.

With U.S. institutions in the mix, online gambling cases can make for easy pickings, the source added.

The law allows state and federal officials to seize Internet gambling assets in federal court but couldn’t be enforced until the regulations took effect in June.

The poker giants, especially PokerStars, may welcome a court battle. Although federal prosecutors, long silent on their legal strategy, may not have shown their best cards.

 

Related posts:

1. Full Tilt Poker, PokerStars and Absolute Poker Are Charged With Fraud And Illegal Gambling
2. Dutch Parlament say yes to online gambling on sports, poker
3. FBI Closes For Access To Online Poker
4. Online Poker Legislation Could Open Up Seminole Gambling In Florida
5. Poker Players Protest Against The Government Seizure

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