Black Friday: What Happened, Why, and What it Means for Online Poker in the USA

Black Friday: What Happened, Why, and What it Means for Online Poker in the USA

I've been reading as much as I can about what happened on Black Friday to PokerStars, Full Tilt, and UB/Absolute Poker, and I see a ton of confusion and fear about the whole situation. Understandably, there are lots of questions and very few answers about the indictments, what they mean for online poker in the US and abroad, how the remaining sites can still operate, and the current legal situation in the US regarding online poker. Its pretty complicated stuff, so I'm going to break it down and hopefully make it easy to understand and get all the information in one place.

Before I dive in, I want to make it clear that I'm not a lawyer or a banker (my brief stint in corporate banking does not make me an expert), so this is information I have researched and put together, and reflects the understanding of someone who not only has been around online poker for 8 years, has been in the industry for 2, and who has closely followed the legal landscape for online poker in the US.
What happened on Black Friday?

PokerStars, Full Tilt Poker, and UB/Absolute Poker were indicted on nine counts and their dot-com domain names were seized, and player funds for US players were frozen. 4 of these charges were UIGEA violations, 3 were for "Operation of an Illegal Gambling Business" (one count for each poker site), 1 count of conspiracy to commit bank and wire fraud, and 1 count for money laundering conspiracy. The 4 UIGEA charges and the 3 gambling charges all hinge on the presumption that poker is a game of chance and that poker is included in UIGEA, this is a very important point, and we'll get to that later. The UIGEA violations are fairly straightforward, they assert that the sites processed transactions for online gambling. The illegal gambling indictments rely on parts of the New York State Penal code for offering games of chance. The bank fraud and money laundering charges are very serious, and fairly cut and dry based on what I have read from lawyers commenting on the issue, if what is alleged is true, it doesn't look like Stars and FTP have much ground to stand on there. (Please see TeddyFBI's excellent cliff notes post on 2p2 here for more info on the details of the indictments).

Before Continuing, Some Basic Facts about the Legality of Online Poker in the USA:

1. It is NOT illegal to play online poker in the United States, except in the state of Washington. There is no Federal law that makes it illegal to play poker online.
2. As a player, it is NOT illegal to deposit or withdraw money from an online poker site while in the US, or as a US citizen.
3. The legal landscape for online poker in the US has NOT changed, its the same today as it was last Thursday, the day before Black Friday.
4. The Unlawful Internet Gambling Enforcement Act (UIGEA) does not mention poker players. It only mentions payment processing for financial institutions. It stipulates that financial institutions cannot lawfully process "unlawful internet gambling" transactions. However, the law never defines what "unlawful internet gambling" is, what games it applies to, nor does it provide any guidance whatsoever for what "unlawful internet gambling" even means.

Understanding Different Types of Banking Transactions Used by Poker Sites
The next two sections are boring but necessary parts of the story. To understand why the Big Three were indicted, we need to understand how the poker industry uses payment processing, and the type of processing The Big Three were engaged in and why that led to money laundering and bank fraud charges.

How Processing Usually works with Traditional Methods to Fund or Withdraw from a Poker Site (Post - 2006)

The Poker sites rely upon payment processors to handle the transactions with their players. These companies provide various banking services for the poker sites like debit card processing, issuing checks, collecting money from e-wallets, etc. These companies run the risk of DOJ seizures as they are committing UIGEA violations, so to shoulder that risk, they charge high fees to the poker sites. There have been several payment processor seizures in the last few years, and usually this led to the sites delaying withdrawals while they found a new processor willing to work with them. When a payment processor was seized, 99% of poker players never knew about it, because the sites would absorb the losses. This is why players would experience occasional problems with checks bouncing or withdrawal delays.

The benefit to the poker sites to using a processor is pretty straightforward. UIGEA targets the financial handling of gambling transactions, so the sites use payment processors as 3rd parties between them and the players, so that the sites would not handle their own processing and thus, would not be UIGEA targets. That's why up until Black Friday, any seizures related to online gambling were payment processors being shut down. The obvious problem emerges that as more and more payment processors got shut down, there were fewer of them willing to take the risk, and the people behind them got shadier and shadier, and they charged the sites more and more for their services. On top of that, the tremendous volume of money processing needed by The Big Three would automatically make any processor willing to work with them a target for the DOJ.
Since UIGEA, the traditional methods of deposit and withdraw methods have been paper checks, bank wires, e-wallets, cash transfers such as western union, and debit cards. There have been some other more obscure ways to do it like prepaid visas and prepaid phone cards as well.

Wires and Electronic Fund Transfers

These are the two basic types of electronic types of funds transfer, they look similar on the surface, but are very different. The first is standard bank wires, and these have not been a problem post-UIGEA. Wires are bank-to-bank transfers, and are what are used every day all over the world. They work internationally, are secure, and work for large amounts of money. They also come with high fees, usually $30 - $50 on each end. Because they are account to account, there is no transaction involved, so they do not require electronic coding to classify the nature of the transaction. This makes them a safe way for the site to collect from and distribute to Americans.

Now, the maximum wire deposit and funding options with the poker sites were usually very high, up to a million dollars if I am not mistaken. Of course the sites never put this in the cashier page, but they had VIP services available to high stakes customers for this purpose. So I don't know if they used processors for their 5-figure plus wire transfers or not (maybe someone can comment on this below), but I would not be surprised if their banking department handled this themselves, because of the very low risk of a wire transfer being identified as an internet gambling transaction, since there is no coding required or other information required. But it also is far too costly and cumbersome (each wire has to be manually inputted) for the mass of customers looking to deposit or withdraw an amount smaller than thousands of dollars. So its not a viable option for the masses of small stakes casual players who really drive the liquidity behind the big poker sites.

That brings us to the next type of electronic transfer that operates inside the ACH system (wires do not), and these commonly referred to as Electronic Funds Transfer (EFT) or ACH transfers. EFTs are a newer form of electronic transfer, showing up in the last 10 years or so. These are what we use for everyday for electronic transfers like purchases, automatic mortgage or insurance payments, payroll payments, etc. That is a fundamental difference between EFTs and wires, with an EFT something is being purchased, wires are simple transfer of funds. These have become very common for smaller transactions, usually a few thousand dollars and less. Because there is always a transaction involved, EFTs require electronic coding to specify what type of transaction is taking place, per money laundering laws.

The advantages to EFTs are significant. They can be automated, so anyone with a bank account and routing number can use them and they require no manpower for the poker site(wires require manual inputting). They also are far cheaper than wires, usually being free on one end and costing less than a dollar on the other. Compare that to a total of $60 or more for a wire transfer. So they are cheap and they are easy, but they also require coding to designated the purpose of the transaction, AND THEY CAN ONLY BE USED DOMESTICALLY. Many countries have EFT systems like this, but they can only be used within each country, but you can't use an EFT to pay someone in another country for a purchase, a service, or anything else.

How The Big Three Used EFTs

If EFTs are starting to sound familiar to American online poker players, its because The Big Three were using eChecks as deposit options, and instant bank transfers as cashout options. These were EFT transfers that required a description code. Party Poker did this before UIGEA, but no other sites have attempted to use these transfers since UIGEA. Obviously there are major advantages for a poker site using EFTs. They are very cheap, they are relatively fast, they are easy, and all a customer needs to use them is a bank account and a routing number.

Instead of asking their customers to mail in checks, sign up for an e-wallet, try a debit card that probably won't work (thanks to the customer's financial institution), or do a western union to a random person in Indonesia, they could simply supply basic banking info, and be playing poker minutes later. So for the Big Three, there was serious upside to being able to offer EFT payments to US customers. As a poker site, the more money your players can get online, the more games you have and the more rake you collect. The upside is amplified when you can tap the world's biggest online poker market with a huge advertising budget, profit tremendously by offering easy payments, and then use the profit to dominate the international market.

However there's a couple problems. UIGEA prohibits "unlawful online gambling" transactions, and EFTs have to be coded. So what's the answer since you can't code an EFT "online poker?" Secondly, EFTs only work domestically, they have to processed inside the US for US customers. Clearly these are tough issues to circumvent for an offshore poker site; first the EFT needs to be disguised, and then there has to be company inside the US willing to intentionally disguise them.

So, to get around these obstacles, and this is what the DOJ alleges that they did, The Big Three apparently bought shares in a bank in Utah called SunFirst. In exchange for the liquidity that this bank probably needed after the financial crisis, and along with a cash bonus for the CEO, the bank agreed to handle the EFTs for American players AND agreed to intentionally mis-code the transactions as other items completely unrelated to online gambling, things like golf equipment and other random items that had nothing to do with online poker. That's where the money laundering conspiracy and bank fraud charges come from. The scheme to buy part of this bank and pay the CEO to do this is the conspiracy, and the mis-coding of the transactions is bank fraud. These are serious crimes no matter if you are a poker site or a charity for homeless animals. The experts who've weighed in on this tend to agree that the DOJ is not going to indict a company for money laundering and bank fraud if they don't have a very solid case, so these charges are likely bad news for these sites.

This is why these seizures are different from past seizures. This time the actual poker sites were the ones doing the processing because they owned shares of the bank that was processing and mis-coding the EFT payments. That makes all the difference in the world. Because they were disguising the intent of the EFT transactions and miscoding the transactions, they got hit with bank fraud and money laundering indictments. On top of that, the DOJ has an argument about UIGEA violations, and lastly, the illegal gambling charges were probably thrown for good measure.

What About the UIGEA and Gambling Indictments?

At first glance, it looked like Black Friday was all about a crackdown on online poker, that the UIGEA and gambling violations were the reasons The Big Three were indicted and had their domains seized. Most likely, the confusion arises because counts 1 through 7 were charges of UIGEA violations and operating an illegal gambling business. Counts 8 and 9 appear to be the crux of this case, but they easily got lost in the shuffle because the UIGEA and gambling indictments made this look like a big attack on online poker. However the story of an online poker crackdown doesn't make sense to me.

First, if these sites were indicted under UIGEA and other gambling laws, why hasn't this happened before? UIGEA was passed 5 years ago (has been enforceable for 10 months), and the gambling laws cited are much older than that.  If this was a case about offshore gambling companies serving US customers under the gambling laws cited in the indictments, why are these the first domain seizures of online, offshore gambling companies by the US Department of Justice?  Why didn't this happen sooner?   Next, why did it happen to poker companies instead of online casinos or sportsbooks?  Furthermore, if this was a UIGEA case, even though UIGEA has just become enforceable in the last 10 months, why would the DOJ target poker companies who have a stronger legal argument than casinos or sportsbooks?

After reading a lot of opinions by lawyers and people more expert than me on the law, it looks like the answer is because those are very difficult charges to prove. Remember in the beginning I said that these charges hinge upon the presumption that poker is a game of chance? Well the question of whether poker is a game of skill or a game of chance has never been litigated in federal court. There's obviously a good argument to be made that its a skill game. But more importantly though, UIGEA does not define "unlawful internet gambling," so whether or not poker even qualifies under UIGEA is another legal question that has not been litigated. These are not easy arguments for either side to make, and I've read repeatedly that the DOJ does not issue indictments for cases its at risk of losing or not getting a strong settlement out of. So it seems unlikely that the DOJ is going to the trouble and expense to indict billion dollar companies and seize their assets, when the laws being applied are on shaky legal grounds when it comes specifically to poker companies. Especially considering that such a case could end up in litigation for years.

So that brings us back to the questions one paragraph up. If the DOJ was going to issue indictments for UIGEA violations and gambling laws, then why not go after an online casino? Casino games have no argument for the skill versus chance debate since the house has a provable mathematical edge, so the UIGEA and gambling charges would be a much easier case for the DOJ. Why would they pick a poker company to indict under these laws when its a much harder argument and there is no legal precedent available to classify poker? That does not make sense... until you remember that The Big Three are accused of owning an equity stake in a US bank. Now they ARE guilty of all this stuff because they own a piece of a company that is processing gambling transactions (UIGEA) and now have US assets are offering gambling to Americans (State of NY gambling violations).  I don't think Black Friday would have happened without the alleged equity stake in SunFirst bank, that allows solid cases to be made on all charges.

Conclusion

After examining this situation, I'm now less upset at the government and more upset at the poker sites. If what they are accused of is true, then they took some big chances in order to reap the rewards and liquidity that easy EFT transfers brought their sites. We all agree UIGEA is one of the worst laws ever passed. Its hypocritical, its short-sighted, it was politically motivated, and it was an attack on our freedoms as Americans. But this wasn't about online poker or even UIGEA, it was about bank fraud and money laundering, two very serious crimes. Yes, Stars and FTP may have committed those acts in order to skirt a stupid law, but that doesn't make those actions acceptable, nor is it reasonable to expect a law enforcement agency to look the other way because a few million Americans enjoy playing online poker.

I also feel better knowing that the remaining US sites do not, and have not offered e-checks or other types of instant ACH transfers, since it seems very likely that is what made this happen. Black Friday was a very bad day and hopefully something positive emerges from it like favorable US legislation, but I don't see why it should stop Americans from playing online poker. The law has not changed, and its hard to see how Black Friday would have happened if The Big Three had not tried to skirt UIGEA by breaking other laws in order to offer easy ETF transactions to US customers.

None of the remaining US sites have offered this service post-UIGEA, and hopefully they have studied Black Friday and won't try to. I also anticipate that they will all be looking to keep a lower profile than the high-flying Full Tilt and PokerStars. Maybe this will make the games tougher, maybe it won't, we'll see. But we all want to keep playing online poker, even if that means making some adjustments to a different landscape or facing harder games. America is the biggest poker market in the world, twice the size of second place Canada, there will be games, and there will be ways to play them. The good news is that we can still play and we can do so with a solid expectation that this won't be happening again anytime soon, unless another site tries the same things The Big Three are accused of doing, which seems highly unlikely now that we've seen the consequences.

For more reading, particularly on the complete legislative history of online poker on the federal level, check out Nate Silver's excellent blog on the New York Times website.