Nowhere is the lack of cohesion throughout the gaming sector more evident than in its reaction to the US Department of Justice and the FBI strike on April 15th when 11 individuals associated with Poker Stars, Full Tilt and Absolute Poker were indicted, their URL’s were seized and they were charged with money laundering and fraud. The Gaming sector, moving, as it is, inexorably towards increased regulation, depends for its successful operation on honesty, transparency and trust. Too often, gambling is perceived in the same light as alcohol and drugs, despite the fact that it provides entertainment for millions of players, notwithstanding that there is a small proportion who are vulnerable. Indeed, if the sector is ever going to grow up and become properly mainstream, it needs to shake off this aura of illegality.
At last, the DOJ has woken up to this and acted. And how is this incredibly positive development described throughout our industry? We’ve called it ‘Black Friday’. Maybe, I’m missing something but what is remotely black about it. As the Manhattan US Attorney, Preet Bharara, said at the time the action was launched “as charged, these defendants concocted an elaborate criminal fraud scheme, alternatively tricking some US Banks and effectively bribing others to assure the continued flow of billions in illegal gambling profits. Moreover, as we allege, in their zeal to circumvent the gambling laws, the defendants also engaged in massive money laundering and bank fraud”. The evidence seems incontrovertible and the charges could hardly be more serious. As the US Attorney observed quite reasonably “Foreign firms that choose to operate in the United States are not free to flout the laws they don’t like simply because they can’t bear to be parted from their profits”.
These profits, moreover, have been used to invest heavily in a legal European business where their huge cash pile has heavily distorted the market in their favour. Indeed, it is a salutary fact that, prior to April 15th, Poker Stars, Full Tilt and Absolute Poker represented close to 75% of the liquidity of cash players around the world. That these companies achieved such pre-eminence is down to the fact that they cynically decided to ignore the implications of UIGEA, unlike other operators, such as Party Poker, who banned US Players back in 2006 when UIGEA was introduced. At that time, it is also worth remembering that Party Poker was the biggest on-line Poker room, both in terms of assets and customers and that, as consequence of their decision to boycott the US market, they suffered enormous losses in the revenue.
For that reason alone, it is hard to feel any sympathy for the 11 who have been indicted. They gambled that they were above the law and, if that means they end up spending considerable time in prison, they have only themselves to blame. Even worse, they set about systematically corrupting the basic framework of responsible gaming, customer protection, anti-money laundering and the controls in place to prevent terrorist financing in order to achieve it. One of their number, Bradley Franzen, who has entered into a plea agreement to try and reduce a potential 30 year prison sentence, told the court, according to the Washington Post, that ‘to avoid bank restrictions, they (the poker companies) used shell companies and phony websites which tricked banks and financial institutions into illegally processing US $ 3 bn in payments’. Furthermore, another of their number, Ira Rubin, who was arrested on nine separate counts, has had his request for bail (on the basis of a US $ 300,000 bond) summarily rejected. It transpires that on the day of the Federal indictment, Rubin had chartered a plane from Costa Rica to Guatemala in an attempt to flee to Thailand. What’s more, he additionally had an outstanding warrant for his arrest on contempt of court charges, after he fled to Costa Rica from Florida in 2008 when charges were made against him on a telemarketing fraud, as well as having outstanding warrants and criminal cases in Massachusetts, Nevada, Missouri, Florida, New York and Virginia.
This is not about legal niceties. These are bad men and any attempt to remove them from any association with the gambling industry can only be a positive move from a reputational point of view. Indeed, white Friday would have been a more apt description for what happened on April 15th.
Why does this matter? There are a number of reasons. Firstly, the on-line gambling industry, though huge, is still a relatively new phenomenon. It remains imperative that it behaves in a legal and responsible way that reconciles the need to protect customers and the need for governments and states to generate income with its desire to make profits. Not to do so gives substance to those who are opposed to the legalizing of on-line gambling and ammunition to the likes of the Daily Mail who wish to portray on-line gambling not as a legitimate form of entertainment but rather as the indulgence of a sordid and harmful vice. Indeed, the current inability of the on-line operators to agree on common best principles frustrates the ability of the industry to negotiate sensibly with the various regulatory authorities. Already, it can be observed that vast amounts of money are being spent by the industry on lobbying – last year over $18 million in the US alone. However, a lot of this activity and expense is directed at trying to gain a competitive advantage over its competitors through legislation rather than through genuine competition in the market place. This confusion of messages being put forward, moreover, gives jurisdictions, considering regulation, a much stronger hand in any negotiations about tax and structure, which, in turn, will lead to a more expensive operating environment in which the operators have to do business. Look at Europe. The UK, Italy and France have all arrived at the need for regulation with little consensus on what is the best way forward.
Secondly, it matters because, in the world of on-line gambling, scale and liquidity – and, consequently, cash- are kings. The huge revenues (and minimal taxes) that the ‘Poker Companies’ were earning from their illegal operations have enabled them to outspend legitimate and law abiding operators in marketing and acquisition by a considerable multiple and make substantial profits in the process. The decision of A Dikshit, one of the founders of Party Gaming, to buy his repatriation to the United States for $300 million is witness to the volumes of cash that trading in the US against the wishes of the sovereign state can generate; and Party Gaming were only flouting the wishes of the Department of Justice, they were not cynically and systematically circumventing the law in a criminal way. The ‘Poker Companies’, on the other hand, were quite prepared to use part of their ill-gotten cash pile to do just that. By late 2009, according to the US attorney’s press release, “Poker Stars, Full Tilt Poker, and their payment processors, persuaded the principals of a few, small, local banks facing financial difficulties to engage in processing” i.e. gambling payments “in return for multi-million dollar investments in the banks”. John Campos, one of the eleven who were indicted and Vice Chairman of the Board and part owner of Sun First Bank, a small private bank in Saint George, Utah, for example, allegedly agreed to process gambling transactions in return for a $10 million investment in his bank. The decision of the US to limit their investigation only to the US operations of these companies, thereby allowing their legal European operations, funded from illegal US profits, to continue means that there is a danger that, whatever happens, the bad guys have already won. Indeed, according to various public and private estimates, Poker Stars currently does between 70 and 75 per cent of its business in the international market, while Full Tilt does between 50 and 60 per cent.
Thirdly, it matters because customers cannot receive the protection they merit from businesses that are already acting outside the law. Indeed, the April 15th indictments left millions of dollars in deposits from US players effectively in limbo. Nate Silver’s article in the New York Times quotes Brandon Adams, a high-stakes US poker player and teaching fellow at Harvard, as estimating that ‘Poker Stars and Full Tilt Poker collectively had on the order of $500 million in deposits from US players’. The tangled web of payment processes and obfuscated ‘purchases’ means that it is impossible for the ‘Poker Companies’ to guarantee that all players will have their money returned. Subsequently, Poker Stars and Full Tilt have brokered an agreement with the Department of Justice that allows them access to their seized domain names in order to help return funds to their US players. Absolute Poker, on the other hand, has not even done that and continues to offer games to Americans. Moreover, even by the standards of the ‘Poker Companies’, Absolute Poker is seen as the most unscrupulous, not least because they allowed players with connections to the site’s owners to have access to their opponents’ cards.
For on-line gambling to continue to thrive, it is imperative that there is full regulatory compliance, full transparency and unquestionable integrity. In other words, it needs to be whiter that white. What’s more, none of this has emerged with the benefit of hindsight. When Virgin Games set up, it deliberately sought out Alderney as its regulator because it was the strictest and because, as a consequence, it afforded all its players the best protection. Virgin Games also took the decision not to accept bets from jurisdictions where it was deemed to be illegal to do so. This has made it much more difficult for companies like Virgin Games to grow organically, as it has had to compete with both the huge marketing budgets and the resources, engendered from illegal play. On the plus side, neither my nor Richard Branson’s travel plans are in any way restricted.
It is still too early to say what exactly the outcome of the April 15th indictments will be or how long they will take, or, even, whether there is to be further action taken against other operators who have also flouted the law. European operators have seen liquidity grow as a direct consequence but, against an uncertain roadmap of new regulated jurisdictions – particularly in the US – it is by no means certain that the increase will be sustained. However, what – at least to me – is absolutely certain is that the move made by the Department of Justice was absolutely a step forward for the industry, even if it was a long time coming. Indeed, it was perhaps Black Friday only in the sense that it is always darkest before dawn.
