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December-23-2008,
Three Stories that Dominated the Online Gambling News in 2008...By Hartley Henderson

While 2006 and 2007 were very newsworthy in the online gambling industry thanks to the passing of the UIGEA and the aggressive tactics of the DOJ which compelled many companies to close their business to U.S. citizens, in comparison 2008 was a fairly mild news year . The presidential election and the financial crisis took center stage, and while there were still relevant actions going on in the industry, almost everyone was focused on Obama vs. McCain and trying to figure out how Americans could keep their houses and pay their bills. Nevertheless, the three main story lines that dominated the online gambling news in 2008 are as follows: the ongoing issues with online poker, the final passing of UIGEA regulations, and the attempts to steal domain names by the state of Kentucky.

As most know only the Kentucky issue started in 2008, but 2008 was the year where all three stories took the spotlight. We will first start with the online poker industry. The Poker Player's Alliance has been growing its membership steadily, and last year it passed the million member mark. Along with Safe and Secure (a poker industry lobby group), the PPA has done everything in its power to try and convince the government that poker is a game of skill and is exempt under the UIGEA. Their argument is that unlike casinos or sports betting, players bet against each other and not the house and in the end the most skilful players will win. The general response from those in the government and the current DOJ (which wants to keep poker banned under the UIGEA) is that poker games are generally determined by the shuffle (which is totally based on luck) and under their definition that constitutes a game of mixed skill and not pure skill, which is illegal. Nevertheless Barney Frank and Robert Wexler have been generating support in the House for their initiative to legalize poker, and in fact Barney Frank's bill HR 6870, the Payment System Protection Act, cleared the House of Representatives Financial Services Committee. Under the bill the banks would be protected from processing gambling transactions that weren't technically legal under the UIGEA, and a secondary part of the bill aims to make all online betting, except sports wagering, legal. The bill never came to a full vote prior to the convening of the House for the winter break. Nevertheless the bill has momentum. Needless to say, many sports betting advocates aren't very happy and seem a bit distraught that Frank and the House are willing to throw sports betting under the bus to legalize poker. Pete Sessions issued a similar bill in the House that aims to provide a carve out for poker under the UIGEA while specifically highlighting online sports betting as illegal. Strangely, the PPA was not too excited with the bill using the argument that poker shouldn't need a special carve out like horse racing or fantasy sports as it is already legal as a skill game.

So while this huge wave to somehow get online poker legalized in the United States was taking place, others were looking for a way to pay off the U.S. government. In June, the New York Times reported that Party Gaming was prepared to pay the United States a billion dollars for exoneration from charges. The article wasn't specific, but poker insiders made it clear that Party Poker was prepared to pony up the billion dollars only if it was pardoned for any past wrongdoing. While the amount seemed ludicrous, Jay Lakin of pokersourceonline.com stated that the amount is insignificant when you are worth up to $7 billion and you want the freedom to enter the U.S. like any other law abiding citizen of the world. Others, including myself, saw an ulterior motive. The state of California is preparing to start an intrastate online poker network and every gambling attorney believes the federal government has no way to prevent it. After all intrastate gambling is legal under every aspect of U.S. law, and just because it takes place online doesn't make it off limits. Once it is legal in California, other states are prepared to start up online poker also, and according to sections of the Wire Act and the UIGEA if something is legal in one state and the same gambling is legal in another state then automatically it is legal between the states. Consequently the U.S. would have an interstate poker network. It is anybody's guess what would happen next, but under a more gambling friendly Democratic government it isn't inconceivable that online poker will just be given the o.k. throughout the United States for any state that wants to take part, especially considering the amount of revenue such gambling could bring in. Under that scenario, when the U.S. issues licenses (it won't be able to keep out all foreign entities under the WTO agreement), it is almost certain that Party Poker, with its pardon and superior software and management capabilities, would be put at the top of the U.S. list for licenses. The U.S. government didn't take the billion dollars, but just this month one of the founders and a large shareholder, Anurag Dikshit, pleaded guilty to violating the wire act and agreed to pay the U.S. government $300 million, as well as agreeing to cooperate with the authorities in investigating Party Gaming. Many are certain this is a trial balloon by Party Gaming, and if the feds let Dikshit off without jail time or a criminal record, the company itself will follow suit and complete the billion dollar deal in exchange for a full pardon.

While the inevitable legalization of online poker was of great interest this year, the buzz in the poker world still involved the Absolute Poker and Ultimate Bet scandals. The issue which was brought forth by gamblers in 2007 at the 2+2 forum gained momentum in 2008. The scandal, which allowed former employees of the companies to see other player's hole cards, came to a head; and the town of Kahnawake, which currently has the license for those companies, ensured that all players who were ripped off were paid back every cent stolen from them. The company also issued large fines to Tokwiro Enterprises which owns the two companies, although the cheating occurred long before Tokwiro bought them. In fact Escapsa Inc., which sold the company to Tokwiro, is reimbursing the company for the faulty software. The scandal was highlighted in November on the CBS show 60 Minutes and the conclusion of all involved is that this situation could take place anywhere, so there is still some work that needs to be done to get online poker accepted universally as a legitimate game of pure skill.

The second big issue in 2008 was the UIGEA regulations. In 2007, the government issued some draft regulations which basically shifted the burden of enforcing the law to the banking industry, but it appears that final deadlines mean nothing to the government as the final regulations were not drafted until long after the deadline passed. During the time between the draft and final regulations, the banks attended a meeting of the House Services Financial Subcommittee to discuss their concerns. Barney Frank called the meeting and it was clear that only one person in the room, the chairman, Spencer Bachus, was in favour of carrying out the UIGEA regulations as they stood. Bachus and others heard over and over from banks that if they were forced to track every single transaction to make sure they caught the elusive online gambling transaction it could actually bankrupt the industry. Ironically it wasn't long after that that many banks did go bankrupt or were forced to sell to other entities or ask for government assistance as a result of the sub-prime mortgage debacle. The UIGEA was the least of their worries and an unnecessary burden, and for a while it appeared that the current regime would leave it to the incoming Democrat government to sort out. However, in a last minute move, the Treasury issued final regulations. The regulations were similar to the draft regulations of 2007, except it lifted penalties on banks provided they used do diligence. The regulations also stated that the UIGEA wouldn't apply to transactions that use foreign banks. The legislation also avoided listing any set penalties. For this reason many lawyers and industry insiders stated that the regulations were a bust, and that they essentially gave the go ahead to online gambling in the U.S., provided it is state sanctioned. Some gambling attorneys suggested that the regulations are so poorly written and irrelevant that they could actually help further the cause of legalized online gambling.

The reason the finalized UIGEA regulations were such an important issue is that this was the law which forced many businesses out of the U.S., and was the one issue stopping other businesses from catering to the U.S. market. If the law is unenforcble as a result of the regulations writtenthere is really nothing preventing new gambling sites and new payment processors from coming aboard. Clearly the law is incapable of preventing payments from foreign banks - where most payments are initiated these days, and really there is no incentive for banks to try and track gambling transactions anyway because there is no set penalty for processing them. Furthermore, because the regulations were passed at the last minute there is every chance that the new Obama regime, spearheaded by friends like Robert Wexler, will ask to overturn the regulations and try and have the useless law scrapped. Most importantly, however, there is nothing in the new regulations which can install fear in the minds of bettors or gambling sites that current payment processing options are in jeopardy.

Another issue which popped up in 2008 was the attempt by Governor Steve Beshear and the state of Kentucky to seize 141 gambling domain names. In a brazen move of gall and hypocrisy, Steve Beshear, whose state is one of the leaders in gambling and runs TwinSpires.com, announced that offshore gambling sites are "leeches on our community" and proceeded to try and seize 141 gambling domain names, including pokerstars.com, fulltiltpoker.com, wsex.com, bodoglife.com and many others. The state's strategy was to claim that domain names are gambling devices, and since the domain names were being accessed by Kentucky residents contrary to Kentucky law that the state had the right to seize the domain names, as they could with any illegal gambling devices that entered the state. A justice cabinet person stated it this way:

"This is illegal activity that's clearly occurring in Kentucky and we believe we should have the ability to step in and protect our citizens when this illegal activity happens within our borders."

All online gambling advocates were appalled, and iMEGA took up the cause to try and have the case thrown out on the grounds that domain names were not gambling devices, and furthermore that Kentucky didn't have jurisdiction over the names, which were mostly registered in and operating out of other countries. As well iMEGA rightly pointed out that if this case were allowed to proceed it could create a dangerous precedent whereby other countries could seize domain names of U.S. based companies for nefarious reasons. For example, China could attempt to seize the domain name NewYorkTimes.com if the Times posted an article that criticized the Chinese government and somehow got accessed by Chinese citizens. Unfortunately, the Kentucky courts saw it differently. Circuit judge Thomas Wingate decided that his court had the right to seize the domain names and ordered such, but before the names could be seized the court of appeals intervened and asked for some more clarity and arguments before it would make a decision. By all accounts the court of appeals has serious issues with the state's case and is leaning towards throwing out the motion. Those close to the case have stated that the appeals court really doesn't believe Kentucky has jurisdiction, nor are they prepared to put the U.S. once again in a global showdown over something so insignificant. And throughout his campaign Barack Obama stated that the U.S. has to start becoming less combative with other nations. A ruling should be made by the court of appeals early in the new year.

One other story which is still hanging around, but really received little mention in 2008, was the Antigua WTO case. The battle between Antigua and the United States has been going on for over 5 years, and despite ruling after ruling favouring Antigua, the U.S. has refused to comply with the WTO decision. In 2007 the U.S. decided to rewrite its commitments and pay the cost. It reached agreements with most countries, although a few, including Antigua, are still open. Throughout the year Antigua announced they were close to an agreement, but one never was reached. At the end of 2007 the WTO awarded Antigua $21 million in compensation for the United States' decision to change its written agreements regarding remote gambling and announced it could be applied by ignoring intellectual property rights, such as copyrights and patents. Not surprisingly the U.S. Trade Representatives were appalled that a country could simply release legal versions of movies, CDs and software for pennies per copy and they told Antigua to hold off before actually carrying out the ruling. Many Antigua supporters were hoping the United States would back down from its decision if the European Union took a hard stance on the issue, but EU Trade Commissioner Peter Mandelson agreed to let the United States rewrite its commitments in exchange for concessions in shipping and storage.

While that decision by the EU appeared like it would bring the issue pretty much to a close, it didn't. In fact throughout 2008 a group in Britain supporting remote gambling companies demanded that the United States stop discriminating against EU based companies and Mandelson issued an edict telling the United States to back off discriminating against EU based gambling companies, and furthermore to stop arresting EU operators. The words seemed to fly in the face of the agreement he just signed with the United States and also seemed to indicate that perhaps he had second thoughts about letting the U.S. rewrite its commitments. But according to some EU based operators the explanation is simple. The United States passed the UIGEA in October of 2006. Nevertheless, the U.S. is trying to charge EU operators who pulled out at the time of the UIGEA with crimes committed prior to this time. The operators stated they were not operating illegally by catering to the U.S. market prior to October 2006 and any charges for activities prior to that time are unfair. As well, it is clear that both the EU and Antigua are very uncomfortable with the fact that an interstate poker network is almost inevitable in the U.S. only a year after agreeing to let the U.S. rewrite its commitments on moral grounds. For that reason they see the reasoning given by the USTR for wanting to rewrite its commitment as a blatant lie, and the truth is that it is strictly protectionism. If that is the case, it appears Mandelson wants out of the deal he signed with the U.S. and Antigua wants at the least additional compensation, since the WTO decision was based on what Antigua could generate if it was allowed to offer remote horse racing to the U.S. market. As well, with a new government coming in claiming it wants to be more conciliatory with other nations, and with people like Barney Frank, Robert Wexler and others having more power in a much more Democrat based House and Senate (not to mention a poker playing Democratic president), all countries are holding off with any major moves until it is clear how the new DOJ will want to proceed on all issues regarding online gambling in the United States. Furthermore, Antigua received a white list go ahead from the UK, indicating its regulations are in line with those of the UK (lack of regulations was a major concern stated by the U.S. for wanting to ban online gambling).

2009 should prove to be an interesting year for online gambling. All four issues above will come to a head. Just this week 2+2 forums reported that in a tournament at Ultimate Bet, the pot was wrongly awarded to a player who lost the hand, indicating there are issues with the software, as well as the integrity of its original owners. Kahnawake will have to decide what it will do to bring Ultimate Bet and Absolute Poker up to par, or whether it should just revoke its licenses. As well, California will go ahead with intrastate online poker and it will be interesting to see what, if anything, the new DOJ under Barack Obama will do to try and stop it. Furthermore, will the federal courts will be willing to take a stance against state's rights? 2009 will also be the year to determine if, as Kentucky believes, the United States owns the world and can control the internet by simply seizing domain names it doesn't like. And lastly, 2009 should be the year where the WTO issues with Antigua and the United States are finally resolved. Will Barack Obama live up to his word and back down from a case that provides the U.S. no benefit, but great costs in terms of worldwide goodwill and compensation to countries for rewriting a commitment over remote gambling? The online gambling world awaits decisions on all of the above.

12-23-2008
Hartley Henderson
MajorWager.com
henderson@majorwager.com

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