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May-18-2010,
Offshore Poker Sites Catering to the U.S. are Laughing all the Way to the Bank...By Hartley Henderson

On June 3rd, the UIGEA is set to go into effect. At the end of 2009 there was a push by Barney Frank and others to get mandatory UIGEA regulations delayed for a year, but the Treasury agreed to delay it to June 2010. There was an expectation that Frank and other pro-gambling groups would push for a further delay after June until after the midterm elections, but that doesn't appear to have happened.

It seems that at this point in time, the UIGEA has been deemed as so insignificant that it really doesn't matter if it goes into mandatory effect or not. Furthermore, if the Democrats get decimated in the midterms, like many predict, there could be very little support to scrap the UIGEA since the Republicans will hold the high cards. One needs to simply look at U.S. facing poker sites like Poker Stars, Full Tilt Poker and others to see why the UIGEA is no longer a prime concern.

After the passing of the UIGEA in 2006, most industry experts expected a dramatic drop off in all areas of gambling aimed at U.S. residents, including poker. 2007 did show a slight drop in overall revenue but surprisingly, it wasn't in the United States. Companies like Party Poker, 888 Gaming, Mansion and other European operators that were forced to leave the U.S. market saw a dramatic drop off in revenue. But Poker Stars, Full Tilt Poker and sites that continued to cater to the U.S. market saw revenues grow. In fact, H2 Gambling Capital reports that Poker Stars currently has almost 35% of the $5 billion plus online poker market while Full Tilt poker controls about 23% of the market. Spokespersons from Poker Stars have insisted that their success is rooted in the global presence of the company, but most insiders realize it's predominantly due to their U.S. presence. Pokerscout.com shows that at peak time Poker Stars and Full Tilt Poker have almost 10x the traffic of other poker sites. Even networks like Cereus and Cake Poker that cater to the U.S. have shown dramatic gains since the passing of the UIGEA.

Many banks took a 180 degree turn earlier this year announcing that they are willing to cooperate and enforce the UIGEA. This was contrary to the ABA's earlier claim that enforcement was impossible. But the statement was with a caveat. The banks seem to imply that they can only block transactions that are clearly labeled as offshore gambling or which are for companies that have certain labels in the name like poker, sports book, casino or similar. They have suggested that blocking bank wires or checks that do not clearly identify the activity will be impossible.

It appeared when George W Bush was in power the government demanded the banks block all illegal transactions and if any rogue ones got through they would be held accountable, but it now appears that the government is willing to accept the banking industry's best efforts and won't hold them accountable if illegal transactions do get by provided the banks perform some due diligence. Naturally, a law with no teeth is pretty meaningless, which is why the concern and frustration over the UIGEA has dissipated somewhat.

Many have equated the U.S. efforts to control the online gambling market, and particularly poker, to the war on drugs or prohibition at the turn of the century. The analogy is actually quite accurate. As a result of pressure from lobby groups representing religious factions and Republicans like John Kyl and Robert Goodlatte, the United States seems willing to pour time, money and effort into stopping an activity that can't be curtailed. There is no law that prevents Americans from betting online (the UIGEA and Wire Act do not apply to bettors) and any laws against poker operators are irrelevant because they operate in jurisdictions outside of the DOJ's reach. Some operators were foolish enough to land on U.S. soil and were arrested as a result, but the majority of the poker owners and directors have made it clear they have no intention of going near U.S. soil again.

More importantly, Americans have given every indication that they want to play online poker and are willing to do what is necessary to play. The UIGEA threatens to block online transactions to poker but realistically it's not possible. Credit cards, debit cards and money transfers have been essentially blocked for years but Americans have still been able to get money to poker operators and withdrawals have been processed by other methods quite successfully.

Like with the offshore poker operators, most payment processors are located offshore and banks have no way of identifying them. Even when they are identified and shut down, other processors pop up willing to take the action. The U.S. government has tried everything to try and stop the growth of these processors including arresting individuals that handle funds for online poker but they could only touch those that were residing or visiting the United States. Daniel Tzvetkoff was arrested in Las Vegas for processing funds for Full Tilt, Poker Stars, Absolute Poker and Ultimate Bet after an Australian newspaper announced that a company he founded owed the poker companies $52 million. And earlier, Doug Rennick was arrested and found guilty of violating the wire act for processing funds for Poker Stars and Full Tilt Poker. But what has become clear is that for every company shut down there are others willing to take it on. And payment processors are becoming smarter and are looking at designing new methods to process funds that may not be in violation of the UIGEA. But most importantly, they are staying as far away from the U.S. as possible.

A gambling conference was held recently in Canada and one of the themes of the conference related primarily to poker and the waste of resources and potential revenue as a result of the meaningless laws. While the presenters were clearly biased in favor of gambling, their sentiments couldn't be ignored. In fact, there was almost a sense of urgency by state representatives that they had better do something now or they will continue to lose ground and revenue. Dann Grevlos, President of NextEnterprise summed it up best with a quote at the conference regarding the difficulty of waiting too long for states and the U.S. government to enter the market "PokerStars, if nothing changes, will become the Google of poker in the United States, and it will be more and more difficult for land-based and other licensees across the country to get involved and get those customers back if we wait too long."

The sentiment was echoed by others at the conference and the general consensus was that states had better start offering online poker as soon as possible and not worry about the ramifications of the UIGEA if they want the badly needed revenue to help balance their books. Roderick Wright, a state senator from California and strong proponent for an intrastate poker network, was quite adamant that California was preparing to move forward although it could take some time since they have to resolve some issues with California tribes. As to how much California could make from online poker, Wright stated at the conference "I've heard that we could make $4 billion playing in California. I've also heard that we may not make squat. What's the real number? Hell, I don't know. But there's a whole lot space between squat and $4 billion." It should be noted that while the tribal issue is a concern there is a belief that a deal can be worked out where both the state and tribes are well compensated.

It seems that even the strongest poker proponents are tired of the rhetoric and just want the States to get on with it already. Stating the same arguments over and over only to have it fall on deaf ears can be exhausting. John Pappas from the Poker Player's Alliance has been touting the virtues of poker for years and built a membership of over one million Americans that want poker legalized in the United States. Pappas has argued that poker is a game of skill that should be exempt from the UIGEA and also that poker doesn't fall under the Wire Act. The courts have agreed with the last point and stated that the Wire Act only applies to sports betting. Pappas stated the following at the conference:

"We've been working this at the federal level since the day the UIGEA was signed into law, and over four years of progress we've gotten to the point where I can feel comfortable saying that this is going to happen sooner rather than later. At the state level, they're just starting this discussion."

However, Pappas isn't excited about a highly taxed intrastate poker network and isn't convinced it's the solution to the States' problems. This is particularly true if they adopt a policy like McDermott?s that taxes the heck out of offshore operators and imposes a smaller but still hefty tax on 'regulated' intrastate gambling.

"Today if you're playing online poker, you're playing in a global marketplace. If the state comes in and decides to intrastate regulate this, you're effectively cutting off your players from playing with the rest of the world." Pappas stated at the conference.

If the U.S. proceeds as expected and legalizes online poker in various states they still need to decide what to do with the likes of Full Tilt or Poker Stars. The State senators seem to believe that Americans will happily pay a hefty tax and smaller payout for the ability to play online in their own state but there are many who don't believe this is the case. Why would Americans pay upwards of a 10% tax on all deposits along with a tax on winnings if they can continue to play with a poker site that they enjoy and don't have to part with a large portion of their winnings?

Party Poker believes they will be given the chance to run the intrastate poker networks having settled with the U.S. government for 'past wrongs' and places like Betfair believe they will be given the opportunity to run a poker network since they never offered gambling to Americans at all. But if the states do take that route and shut out any sites catering to the U.S. market they may be surprised to learn that a lot of gamblers will just stick with Poker Stars or Full Tilt Poker. It may actually be in the state's best interest to offer the ability to run the networks to the industry leaders and tap in where players are familiar with the software and companies. Of course, to do so, the U.S. will have to agree not to arrest anyone from Full Tilt or Poker Stars when they touch down on U.S. soil and that doesn't appear to be something the DOJ is anxious to cooperate with given the recent arrests.

In any case the U.S. government finally realizes that they have to do something about online poker to help maximize state revenue. Prohibition isn't the answer and during these economic times, states can't afford to pass up the potential revenue. But every day that offshore poker sites are the only option, Poker Stars and Full Tilt directors get richer and laugh all the way to the bank while states lose out on a large revenue opportunity.

05-18-2010
Hartley Henderson
MajorWager.com
henderson@majorwager.com

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