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Gambling in the Gray

The unregulated world of online poker may have to go legit or go bust
Michael Kaplan
From the Print Edition:
Paul Giamatti, January/February 2011

(continued from page 1)

It is 10:45 on a Wednesday evening in November. At this moment, there are nearly 100,000 people logged on to the Internet poker site Full Tilt Poker. Twice as many participants occupy the virtual tables of PokerStars. Over the course of this night, commercials for both sites air on various television networks. Millions of dollars change hands online. Tracking software monitors strategies for players and for the sites themselves. Pros and amateurs brush up against one another in these digitized worlds. Though the tables are outfitted with chat boxes, nobody seems to comment about online poker’s most pressing issue: the legal limbo in which the sites and players find themselves.

Precariousness ignored, the rudiments of poker game management—accounting for buy-ins, dealing cards, and officiating hands—all go off with the kind of clockwork accuracy that humans are just not capable of. Optimal efficiency, after all, is part of online poker’s allure. It presents opportunities to play many more hands per hour, sometimes on multiple tables simultaneously, than one would be able to in an old-fashioned brick-and-mortar casino. Online poker sometimes feels like the perfect meshing of chance, skill, technology and competition.

It’s also the nucleus of a shadowy industry that is estimated to be worth billions of dollars.

Nearly 13 years after the first real-money hands were dealt on a nascent website called Planet Poker, the online card-rooms are mired in red tape and gray areas that have become murkier since 2004. That is when the U.S. government passed its Unlawful Internet Gambling Enforcement Act. Snuck through the legislature as part of the Safe Port Act, which was designed to protect American borders from terrorists and their money launderers, the vaguely worded UIGEA prohibits the transferring of funds from banks to online casino sites. Congressman Barney Frank, a booster of legalizing and regulating online poker, has described the legislation as being “dumb and oppressive.”

Hopes for clarity glimmered this past summer when Frank put forward a bill to legalize the online game. It passed through the House Financial Services Committee but stalled.

“This won’t be a priority of the Republican congress, and it wasn’t a priority of the Democratic congress either,” acknowledges John Pappas, executive director of Poker Players Alliance (PPA), a lobbying group for the regulation of online poker. “But there is the prospect of online poker bringing revenue to the table, via taxation. That is appealing right now.” Nevada Senator Harry Reid agrees. But as this magazine goes to press, he appears to have run out of string on his attempt to get poker approved during the lame duck session of congress.

Advocates for the sites point out that in 49 states there is nothing illegal about playing online poker. That said, federal enforcers have shut down payment processors that move money. More chillingly, a spokesman for the Department of Justice has stated that just because online poker operators have not been targeted at the moment, it doesn’t mean that they won’t be in the future.

At the same time, of course, online poker entities sponsor TV shows and pay money to logo-wearing players. Plus, the sites can be accessed as easily as a gmail account. How do they get away with it? For one thing, according to I. Nelson Rose, a California-based attorney who specializes in gambling issues and consulted with the Department of Justice on this matter, whoever owns the sites may not be breaking American laws.  “We have never seen a case on Internet poker go to trial,” says Rose. “You need a good law to make the arrest and you need the defendants to be in the United States. The Wire Act is not a good law to arrest these guys on and the Feds are not sure they can extradite. The Feds can’t guarantee that they will win, and if they lose the case, then they lose their intimidation factor.”

All of this raises a legitimate question: Why does it remain unregulated, untaxed and, maybe, illegal? That situation hasn’t been helped by all the special interest groups—ranging from brick-and-mortar casino folks in Vegas and Atlantic City to tribal casino operators across the country to people behind existing online sites to politicians—who all want it to happen (if at all) on their terms. Concurring with the PPA’s Pappas, Rose believes that it will come down to financial need. “The federal government can print more money, but the individual states cannot and they suffer as a result,” says Rose. “We voted on legalizing marijuana. Who cares about Internet poker? Gambling is seen as a painless tax, and as soon as one state legalizes online poker, the others will fall in line.”

Rose may or may not be a betting man, but he does prognosticate that Iowa, New Jersey and Florida all count among the first-in front runners. “Florida is desperate, and the Tea Party crazies there don’t necessarily mind people gambling at home,” he says. “It can happen in the coming year.”

During a recent trip to Las Vegas, I had lunch with a professional poker-playing friend of mine. He buys into some of the highest stakes games online—games in which six-figure pots raise few eyebrows—and he’s managed to put together a seven-figure bankroll for his trouble. Talk shifted to the possibility of online poker being legalized, and I suggested that it’s a turn of events he must be salivating for. Once poker is legalized in America, money is more easily transferred into accounts and the stigma of violating the law is gone. At that point, there should be lots of new players (i.e., bad players) and the games would get juicier for my friend. Or so one would assume.

He shrugged and said, “I think I like it the way it is now. At my level, I’m not sure that the influx of new players will make up for the money that is lost through taxes and stuff.”

At the time, I assumed he was referring to taxes that would need to be paid on winnings in a totally regulated environment, where 1099s are filed and the IRS receives your profit/loss statement. I still figure that there was some of that to his response. But the bigger point probably revolved around heavy taxes that the sites would have to pay—and the costs that would invariably get passed onto players via increased rakes.

The reality of what happens with legalization can be seen through the turns of events in places like France, where online poker recently went legit. “Everybody wants to run an honest business and nobody wants to be a criminal, but the cost difference between playing an onshore site [one that is legal and pays French taxes] and playing an offshore site is 30 percent,” says Warwick Bartlett, a London-based gaming consultant who has worked with firms such as Ladbroke’s and William Hill. Hinting that some players prefer to tolerate shadier operators in exchange for keeping more of their money, Bartlett also points out that there are issues of liquidity. “People always go to where they can find a wide range of games. Nobody wants to sit around waiting online.” French players responded to the increased rakes by staging virtual sit-ins: Signing onto sites, occupying seats at tables and sitting out hands.

At low to medium stakes, financial drawbacks may be compensated by a flood of neophytes who play badly and lose enough to offset the inflated rake. The larger issue is the possibility that your favorite site won’t even get licensed. At least that is how it will go if Haig Papaian gets his way. Chairman of the Commerce Casino, located near Los Angeles and ranking among the top live poker venues on the West Coast, he resolutely believes that sites currently doing business in the United States are breaking the law.

For that reason, he says, they should not be allowed to participate in what may be a gold rush of new business for operators that ultimately get licensed. “Why reward people who are snubbing their noses at the U.S. government?” he asks. “We would not allow Al Capone into the liquor industry. After all that we have gone through to get and keep our casino license, we should have an opportunity to get some of the online business.”

Professional poker player Andy Bloch—who is in the fairly unique position of being both an attorney and an original member of Team Full Tilt, the site’s elite group of sponsored poker pros—wants to see it legalized even though he acknowledges the possibility of things going Papaian’s way. In spite of that, he fears, the downside of keeping poker unregulated could be more odious. “Some people are of the opinion that it would be better if the status quo continues,” Bloch says. “But the problem is that you don’t know if the government will pass new laws against online poker or pursue the existing laws more aggressively. Who knows what will happen? I prefer some sanity and stability and clarity in the legal environment.”

Lee Rousso can relate. He resides in a state where the very act of playing online poker is completely illegal. In 2006, Washington’s state legislature passed a law that makes it a felony to play poker online. “Nobody has been prosecuted yet,” acknowledges Rousso. “But they have knocked on some doors. Poker players here are pretty upset, and some people who play for a living have actually left the state. Most people are law abiding and they don’t want to be hassled.”

An attorney who likes to play poker, but is adamantly uninterested in being a criminal, Rousso responded by doing what he does best. He took his concerns to the courts. “I filed a suit against the state, to try overturning the law,” says Rousso, maintaining that Washington’s clampdown is rooted in a desire to protect tribal casino interests. “This past September, I lost my lawsuit for the third time, and that seems to be the end of it. I could take my case to the Supreme Court, but I don’t expect to do it.”
In the wake of Rousso striking out, PokerStars pulled away from Washington state, meaning that the site will reject business that originates there. Full Tilt did the same. UltimateBet (aka, UB), however, continues to accept business from the Evergreen State. It’s reminiscent of what happened seven years ago, when the UIGEA kicked in. At the time, the publicly traded PartyPoker, which ranked with Tilt and Stars among the top sites in America, did not want to risk doing anything that could be perceived as skirting the law. A $300 million fine was paid by PartyPoker to the U.S. government. The site shut down its U.S. operation, and, in the process, voluntarily forfeited millions in future profits.

It is easy to believe that PartyPoker was motivated by a desire to stay in the good graces of American regulators, preparing for the day when online poker gets green-lit by the government here. It’s also easy to imagine that executives who work for sites that chose to continue doing business in America view the decision as independent of whatever new legislation comes down the pike. “Leaving America hurt PartyPoker,” admits Paul Leggett, chief operations officer of Blanca Games, which owns and operates UB. “But does that mean that UB, PokerStars and Full Tilt should be shut out? Maybe a large fine and back taxes will be an option.”

In Las Vegas, where executives behind brick-and-mortar casinos initially feared that a regulated form of online poker (and the broader casino gambling that may follow) would eat into their profits, the tide has turned. Harrah’s already has a legal online poker site in Europe. It ties into the casino’s World Series of Poker franchise. Resort and real estate developer Steve Wynn has softened up on the possibility, and Alan Feldman, spokesman for MGM Resorts International (which counts Bellagio,
Mirage, and MGM Grand among its holdings), sounds enthusiastic about the possibilities, albeit on terms that suit MGM particularly well. “One of the most important issues is the regulatory threshold,” says Feldman, referring to the requirements for companies that get licensed to run the sites. “We think there should be a strict standard. You put in entities that have proven track records in regulated gaming and do it in big ways.” So the MGM stance is that existing, major casino operators in heavily regulated states should be the ones that get licensed for online poker.

Though this sounds reasonable, Papaian sees it as something of a worse case scenario, fueled by internationally known casinos injecting their rewards programs into online poker and capitalizing on big databases of gamblers. “I don’t want Nevada coming into California,” says Papaian who is rallying for online poker to remain an intrastate operation there. “Forty-percent of Nevada’s casino revenue already comes from California. They’ll poach business from the most populous state in the country.”

From the player’s perspective, of course, the best outcome is for online poker to be legalized across the nation, for many licenses to be issued and for Darwin’s Law to do the rest. Sites will be forced to compete; the best among them will draw the most business and maintain the most liquidity. Those entities will thrive, and the others, well, they will go the way of bust-out poker practitioners everywhere.

First, though, we have to wait for congress to focus on poker, a game that has a storied history in America and more of an outlaw status than might be warranted. As Lee Rousso aptly puts it, “I miss playing poker. Everybody tells me that it will eventually be legalized and regulated. But here’s the big question: How long is eventually?” v

Michael Kaplan is a Cigar Aficionado contributing editor.

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Comments   1 comment(s)

Alan Fuller March 15, 2011 4:27pm ET

The assertion that these sites are unregulated is false; all are based in countries that have laws in place to protect the players (to some degree). Also, the stigma of poker, a skill game, compared to the respectable, hit-by-lightning type odds of government run lotteries reeks of self-serving greed and political spin. By all means regulate and tax it but on a level playing field. The casinos are 10 years behind most big sites in terms of experience in a very different market place and should not be gifted a monopoly on an industry they have done everything to suppress. As it is, thank god I don't live in the state where a 5/10 cent poker game is regarded to be as dangerous as a knife fight.


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