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Up Against the Wall

Online poker's opportunities and challenges post 'Black Friday'

Up Against the Wall

Usually, a federal prosecution isn’t good news for whatever sector of gambling is involved. In general, it taints whatever legitimate operators survive and drives the illegitimate ones further underground.

So when April 15—income-tax day in the United States—arrived with a hefty bill to pay for PokerStars, Full Tilt Poker and Absolute Poker, three of the leading online poker sites, the sector was reeling. And when a second wave of prosecution was launched in May—10 more websites shut down, including, for the first time, online sports betting sites—it was clear the government wasn’t stopping at the big boys.

The message to all illegal U.S.-facing online gambling sites—particularly the popular Bodog.com and a separate site operated by Calvin Ayre, former Bodog owner and founder? Be afraid. Be very afraid.

Legalization Lessons

Surprisingly (or maybe not if you are really paying attention), the “Black Friday” indictments—some of the legitimate companies involved in online gaming actually call it “Good Friday”— have spurred efforts to legalize online poker.

The American Gaming Association took the occasion to trumpet its recently changed policy of supporting online gaming.

“It is a fact that millions of Americans spend billions of dollars a year at foreign websites, and they will continue to do so even if their government tells them it’s illegal,” said AGA President and CEO Frank Fahrenkopf.

Fahrenkopf told Global Gaming Business that there are over 1,000 U.S.-facing websites that are still taking bets from Americans.

“These sites will fill the vacuum the same way that PokerStars and Full Tilt filled the vacuum after the passage of UIGEA (Unlawful Internet Gaming Enforcement Act) in 2006,” he said.

Fahrenkopf pointed out that many countries and jurisdictions outside the U.S. successfully legalize and control internet gambling. According to the reports, these countries employ systems that are played fairly, according to their rules, and pay off as promised;

• that underage gamblers are excluded from play;

• that people who struggle to control their gambling have access to tools to limit their deposits, bets and overall play, or even exclude themselves from gambling websites entirely;

• that online gambling operators do not accept bets from jurisdictions that prohibit online gambling; and

• that gambling websites are not used for money laundering and other illegal purposes.

The report also notes that some forms of online gambling are already legal in the U.S., including betting on horse racing and the sale of lottery tickets in various jurisdictions.

Fahrenkopf insists that the U.S. does not consider playing poker on the internet illegal.

“Going all the way back to the first administration of George W. Bush and continuing through this administration, there is nothing that declares internet poker illegal,” he says. “So that makes online poker the only activity that is legal, but any companies trying to serve these players are illegal because simply by collecting money, they are violating UIGEA. It doesn’t make any sense, and that’s why we’re trying to ensure that U.S. companies can fill this void, create U.S. jobs, collect U.S. taxes and create a new profit center for their companies.”

Clearly, with the extraction of the big poker sites, the remaining U.S.-facing online gambling sites are run by somewhat sketchy individuals.

“Online pornographers, organized crime of all stripes, and generally disreputable characters are involved here,” one source, a former U.S. marshal, told Global Gaming Business. “These are bad people, and they’re making a tremendous amount of money off unsuspecting players.”

After the second round of indictments in May, Fahrenkopf said an online poker bill would go a long way to preventing these kinds of operators from profiting on U.S. players.

“Strong enforcement against illegal operators and unambiguous U.S. laws are vital,” Fahrenkopf said. “Unfortunately, these indictments are only a half measure. The full solution is law enforcement and federally sanctioned state licensing and regulation of online poker for gaming companies that currently abide by U.S. law.”

Even with the federal action against the 10 websites, Fahrenkopf says there are many others acting in violation of U.S. law.

“Legislation is needed that removes the current ambiguity of UIGEA and provides a strong regulatory framework to preserve states’ rights to determine the online poker options available to their residents,” Fahrenkopf adds.

Capitol Hill Support

While Justice Department indictments do not encourage members of Congress to support online gaming, there is a core that continues to encourage advocates, at least of online poker.

Last year, a bill that would legalize a wide variety of online gaming activities was passed out of a House committee, only to fail to see the light of day after that. Sponsored by Rep. Barney Frank (D-Massachusetts), the bill is back in this session, adding support from Rep. John Campbell (R-California). And Rep. Joe Barton (R-Texas) has indicated he will introduce a bill to legalize online poker during this session of Congress.

But few expect any of these bills to pass, since Frank’s liberal/libertarian leanings are at odds with the House leadership, now conservative Republicans. And even though Campbell and Barton rule from that side of the aisle, one D.C. insider calls them “political lightweights.”

So online gaming has one very powerful champion in Congress: Senate Majority Leader Harry Reid, from the great state of Nevada. Reid’s efforts to push an online poker bill through Congress at the end of the last session were not successful for a variety of reasons, but the most important reason was that the industry itself was not unified.

While the American Gaming Association says that problem has now been resolved—members support legalization of online poker at the federal level with a “penalty box” for any foreign company that had previously been involved in the U.S.—there are cracks in the wall.

Sheldon Adelson, chairman and CEO of Las Vegas Sands and a huge supporter of conservative Republicans—whose support will be crucial if an online poker bill is to pass—isn’t convinced. While he said he would not try to block a bill to legalize online poker, he clearly isn’t going to throw his considerable weight behind it.

Tribes in Tow?

But even if the commercial gaming industry can present a united front, there is still a question of the commitment of Indian Country to legalizing any form of online gaming. And there is certainly no unanimity there.

In the wake of the federal indictments, tribes are stepping back to determine how—or even if—they should participate. With the impact of online gaming in the U.S. uncertain—with several studies contradicting each other—Native Americans are cautious.

Leslie Lohse, vice chairwoman of the California Tribal Business Alliance, wants tribes to take their time to evaluate how it will impact their existing gaming businesses, but more importantly, their future prospects.

“We don’t want to destroy everything we’ve built over the past 20 years,” she says. “Our children and grandchildren’s future is at stake, so we don’t want to rush into anything where we are not sure of the impact.”

On the other hand, Robert Martin, chairman of the Morongo Band of Mission Indians, thinks time is of the essence.

“If we don’t figure out how to get involved in this new form of gaming,” he says, “we’re going to get left behind. This is an opportunity we cannot ignore.”

Many tribes are concerned about the impact of online gaming on the Indian Gaming Regulatory Act, fearful that it could negatively impact what they already have. For years, tribes have resisted any amendments to IGRA, and to start now might cause problems.

“One of the unifying policies for tribes in the United States has been resisting any amendments to IGRA, primarily because attempts to amend it over the years have always been rather draconian,” Chairman Mark Macarro of the Pechanga Band of Luiseño Indians of Temecula, California, told the delegates at the GIGSE conference in San Francisco in May.

But internet gaming is so important, says Macarro, that tribes need to consider whether it’s time to change that stance.

“Internet gaming, if it’s legalized, is such a game-changer and there’s such potential for it to be a winner across the board for everybody, that tribes will want to be part of it, because they need to be part of it,” Macarro says. “It seems like a practical problem that tribes will have to reconcile and maybe agree to an amendment, that in this case will be a positive amendment.”

The central question, however, seems to be whether the tribes will approach internet gaming as an extension of tribal gaming or as a commercial enterprise, similar to Connecticut’s Mohegan tribe, which invested in a Pennsylvania racetrack as a commercial entity, subject to the same taxation and regulation as any commercial gaming company.

Lohse believes that approach still threatens tribal sovereignty.

“This is a slippery slope,” she says. “If we approve of taxation in one instance, how can we respond when they come and demand taxation in another? We are sovereign nations, and we cannot be taxed by another nation.”

Wilson Pipestem, a lobbyist with IETAN Consulting in Washington, D.C., asks, “Do the tribes want to subordinate themselves to a state regulatory agency? I think tribes feel strongly about the jobs they do regulating gambling on their existing reservations… and to the extent that some of the proposed online regulation would just cast that to the side, I think that ignores some of the real expertise that’s out there.”

While Martin also opposes any state-imposed regulation over tribal gaming, he’s realistic when it comes to online gaming. He says that under California law, poker is a Class II game and therefore not exclusive to tribes, who do control all Class III gaming in the state.

“With poker-only, we think a distinction needs to be made that it is a Class II game and not a Class III game,” he insists. “The sovereignty issue to us is very clear. We feel strongly that we’re on solid ground there.”

While Martin’s point is accepted by many legal experts, few expect online gaming to stop at poker, causing a larger discussion for tribes.

“Some of us have started to rationalize that if internet gaming is limited to poker, it can be done in a way that doesn’t threaten exclusivity,” says Macarro. “However, nobody thinks they’re just going to do poker forever; this is really a gateway to expanded gaming.”

Macarro says any bill to legalize online poker must take tribes into account, because tribes have the power to stop any measure they don’t like.

“If the policy path is not inclusive of tribes,” he says, “we’re looking at mutually assured destruction. We’ll want to make sure nothing happens, because it can’t happen without us.”

Legalization Strategy

As the leading advocate for online poker in the United States, Caesars Entertainment, owner of the World Series of Poker brand, has focused exclusively on federal legislation. Caesars Senior Vice President for Corporate Communications Jan Jones has insisted that any other path toward legalization would lead to chaos.

“Imagine 50 states, with 50 different sets of regulations, 50 legislative sessions,” she says. “It’s a nightmare compared with one federal law that everyone can understand.”

Nonetheless, there are those who are skeptical that any federal law can pass, particularly during such a contentious period in the U.S. There is but one chance, says Mark Tenner, president of the consulting company Concept Development Group, who believes there is a narrow window to pass online poker, and the indictments of the online operators have narrowed that even further, leaving the fall congressional session as the deadline.

“If it doesn’t get done this year,” he says, “you can kiss it goodbye until after the 2012 elections. And then all bets are off.”

Joe Brenner, president of iMEGA, says the chances of passage by Congress are “slim and none,” so the industry should concentrate on passage in the states rather than at the federal level.

“Congress is a bottleneck,” he says. “Online gaming will grow the same way land-based gaming and the lotteries grew: on a state-by-state basis.”

Steve Wynn, chairman of Wynn Resorts, was not embarrassed by the indictment of his former partner, PokerStars, and told his investors that he’s simply trying to understand what his company should do.

“Most everything in Washington is mysterious and unfathomable,” Wynn said during an earnings call. “We’re trying to figure out what the hell the public policy is, and then we can have a corporate policy.”

Online poker has already been legalized in Washington, D.C., although it may be overturned because of the strict oversight that Congress has over laws in the District of Columbia. Other online bills have passed and been signed into law in Nevada and Iowa, but neither specifically permits online gaming to operate. New Jersey will try again after a veto from Governor Chris Christie sent legislators back to the drawing board. California flirted with two online gaming bills before failing to act on either one.

Opposition from Caesars Entertainment played a big role in the defeat in New Jersey, the inaction in California and the emasculation of the Nevada bill. But it’s unclear what the operator’s position would be as a result of failed congressional legislation. Some experts believe that only legalization of intrastate online gaming in a significant jurisdiction will force Congress to move.

While the AGA once opposed federal involvement in online gaming—“We don’t want the camel’s nose under the tent,” said Fahrenkopf of possible federal oversight of any kind of gaming—that position was later altered to support a federal system.

“If Congress doesn’t act,” he says, “you’re going to have a patchwork quilt of internet poker and/or gaming laws and regulations. That’s not in the best interests of surety and is not a comprehensive solution for this issue.”

Organizations such as the Poker Players Alliance have surely been damaged by the Black Friday indictments, since their financial backing came largely from those three websites. Many believe the power they wielded at the federal level has diminished greatly. Sources tell Global Gaming Business that an alternative lobbying organization made up of U.S. poker players will be launched soon, supported not by offshore online gaming companies, but by the U.S. gaming operators that want to bring legal, controlled and transparent online poker to America.

Roger Gros is publisher of Global Gaming Business, the industry's leading gaming trade publication, and all its related publications. Prior to joining Global Gaming Business, Gros was president of Inlet Communications, an independent consulting firm. He was vice president of Casino Journal Publishing Group from 1984-2000, and held virtually every editorial title during his tenure. Gros was editor of Casino Journal, the National Gaming Summary and the Atlantic City Insider, and was the founding editor of Casino Player magazine. He was a co-founder of the American Gaming Summit and the Southern Gaming Summit conferences and trade shows. He is the author of the best-selling book, How to Win at Casino Gambling (Carlton Books, 1995), now in its fourth edition. Gros was named "Businessman of the Year" for 1998 by the Greater Atlantic City Chamber of Commerce, and received the Lifetime Achievement Award from the American Gaming Association in 2012.