On Friday of last week, the Department of Justice issued an indictment charging the founders of Full Tilt Poker, PokerStars, and Absolute/UB Poker, as well 8 other individuals in the online poker industry, with bank fraud, money laundering, and illegal gambling offenses. The government also announced $2 billion in civil money laundering charges and in rem forfeiture actions against the defendants and their assets and issued injunctions that would seize 5 online domain names and 76 bank accounts. The DOJ’s press release is here (pdf).
The online poker community is still reeling from the government’s move. The domains for UB.com, Poker Stars, and Absolute Poker have already been seized and now display a notice from the DOJ. Many players found that they could not get access to money they had in their online accounts. Less than a day after the indictment, Full Tilt and Poker Stars issued announcements that customer account balances were safe and that they would continue processing customer withdrawals. But not everyone has been able to recover their money. Online poker has become a major, if not the primary, income stream for thousands of Americans in recent years, and the indictments have a number of people worrying about where their next paycheck will come from.
The indictment filed by Preet Bharara, U.S. Attorney for New York’s Southern District, contains nine counts. Of the charges, four are alleged violations of the Unlawful Internet Gambling Enforcement Act of 2006 (or UIGEA) (31 U.S.C. §§ 5361–5367), and three are in connection with a federal prohibition on “illegal gambling business” (18 U.S.C. § 1955). The eighth count is for conspiracy to commit bank and wire fraud (18 U.S.C.§ 1343), and the ninth is for money laundering conspiracy (18 U.S.C.§ 1956). A breakdown of which defendants were charged with which of these violations can be found here.
The theory behind the UIGEA and “illegal gambling business” charges is that poker is gambling. The merits of these charges could hinge on whether courts determine that poker is a game of skill or chance. Freakonomics had a series of posts on the question, and Harvard’s own Charles Nesson discussed the issue a few years back with the Wall Street Journal (pdf). At the moment, courts around the country remain split on the issue, but most people who’ve spent any time playing recognize the skill-component involved. Poker is arguably more a game of skill than much of what goes on in our financial sector, which is perhaps why Congress provided a statutory exemption to all SEC-regulated activities in the UIGEA.
The other claims are more straightforward allegations of fraud. According to the indictment, “defendants…arranged for the money received from U.S. gamblers to be disguised as payments to hundreds of non-existent online merchants purporting to sell merchandise such as jewelry and golf balls.” The DOJ further has alleged that the online poker companies incentivized banks to cooperate in these payments by paying bribes. These disputes will probably turn on the particulars of the payment arrangements involved and the degree of transparency and honesty that existed between parties.
There is a longstanding movement for the legalization of poker that’s probably about to pick up some steam. A lot of the criticisms speculate that Congress only acted against online poker because of pressure from physical casinos (consider Reid’s proposal to move online poker into the hands of U.S. casinos during the Dec. 2010 tax debate). But the arguments for legalization are most powerful when they emphasize that poker is a safe, consensual arrangement between adults. It’s hard to find principled reasons why online poker should be illegal.
But what, to me, remains the most remarkable about these prosecutions is this:
Why is the DOJ using bank fraud and money laundering statutes to go after poker websites but not any of the most significant participants in a multi-trillion dollar financial crisis? Poker is arguably more a game of skill than stock and derivatives trading, and any negative social utility is nothing compared to the financial crisis or the risks associated with speculation in housing or commodities markets. There is one explanationthat relies on the political influence of domestic casinos who want less competition, but part of it might be that online poker offers prosecutors easy targets and low-hanging fruit.
The New York Times and Matt Yglesias have questioned the DOJ’s inaction regarding the financial crisis, and they give the most weight to the Obama Administration’s fears that financial prosecutions could derail the economic recovery. That explanation proves too much and, as Bill Black observed, it ignores the fact that not prosecuting derails public confidence in our government and erodes the rule of law. Maybe going after online poker companies helps preserve the appearance that the government has an interest in prosecuting financial crimes.