How Did It Happen?!

The past few weeks have been an emotional time for the poker world. It is not an overstatement to say that the passage of the Unlawful Internet Gambling Enforcement Act (UIGEA) has forever significantly changed the landscape of the online poker world. The bill came as a shock, as few expected this bill to be passed during this Congressional session. Many are angry that Congress passed this law and want it repealed. Still others are just more confused than anything at how on earth this bill was able to be passed. online poker 468x60 One thing I've noticed in the online poker world is a sense of invulnerability. Several Congressmen have been trying to pass a bill similar to the UIGEA for close to a decade, and they were never successful. Many considered this proof that such a prohibition bill would never be passed. They were wrong. The passage of the UIGEA was not a fluke. The House version of the bill passed easily as a stand-alone bill by a vote of 319-93. Congress has clearly shown its displeasure with internet gambling, and its inability to pass legislation against the industry in the past should not have been indicative that it was not going to pass laws in the future. When analyzing the major lobbies in favor and against the bill, a few things become clear. First, the anti-gambling groups had one of the most powerful senators in their corner. Bill Frist, the Senate Majority Leader, made anti-internet gambling legislation one of his priorities. He pretty much single-handedly got the bill passed through the Senate. Second, those who were negatively affected by the bill either were not lobbying hard enough to stop the bill or had little clout with Congress. Those against the bill ultimately were hoping that the banks would stop the passage of the bill. However, compromises with the banks were made, the bill's opponents were left with no powerful allies lobbying against the bill. As stated in previous Weekly Shuffles, nothing in this article should be construed as business or legal advice. Any opinions in this article are just my personal speculation and should not be construed as facts. Important Aspects of the UIGEA The Unlawful Internet Gambling Enforcement Act instructs banks and other financial institutions to block financial transfers that are used for "unlawful internet gambling." The bill has two important components. 1. The legal aspect of the bill. The UIGEA is the first piece of Federal legislation that defines or even refers to "unlawful internet gambling." Unlawful internet gambling is defined in the bill as gambling that is "unlawful under any applicable Federal or State law in the State or Tribal lands in which the bet or wager is initiated, received, or otherwise made." The importance of this definition is that it is now a Federal offense for a gambling website to accept money from someone in a state where placing a bet is illegal. It is primarily this legal aspect of the bill that has caused many online poker rooms to no longer offer their product to US gamblers. Only time will tell how aggressively the Department of Justice (DOJ) will use this bill to attack sites that accept deposits from American players. However, the DOJ now has a more solid legal basis to prosecute "unlawful internet gambling" if it makes such prosecutions a priority. 2. The enforcement aspect of the bill. The UIGEA instructs banks and other financial institutions to block transfers used for "unlawful internet gambling." The banks have 270 days to develop policies for this endeavor. It isn't yet clear how successful the banks will be at blocking these transactions. While the legal aspects of the bill are definitely important, the enforcement aspects of the bill may or may not be effective at all. Online poker sites may still very well be able to accept deposits from American residents, though accepting these deposits may now be illegal under this law. To understand why this bill made it through Congress, it's important to analyze the major parties affected by this legislation. Senator Frist Bill Frist made anti-internet gambling legislation one of his priorities as an effort to appeal to his conservative base. Frist has aspirations of becoming the Republican presidential candidate in 2008, and being able to pass a few high-profile conservative laws certainly helps bolster his credibility with his right-wing base. For the UIGEA to be a victory for Bill Frist, a total stop to internet gambling was not necessary. His presidential ambitions are not affected if internet gambling is only reduced by 20% instead of being stopped completely. For the passage of a bill to be a victory for him, all he needed to do was shrink the industry, which he has already been successful at doing. Anti-Gambling Groups There are two types of people who oppose gambling. One group views gambling from a moral perspective. They are satisfied with any "anti-gambling" bill, regardless of how effective it is. This group will view the legislation as a victory. The second group has a more practical view of gambling. To this group, the goal of the legislation should be to reduce problem gambling. Therefore, the legislation will only be a victory if it is enforceable. If Americans are still widely able to gamble online, then this bill is not a victory for the practical group. If anything, this bill only worsens problem gambling since it pushes the most legitimate internet gambling operators out of the US market. US-Facing Poker Rooms Those poker rooms that continue to accept American players will actually benefit from this bill's passage, at least in the short term. Americans will likely still be able to fund their online poker accounts for a while, so these businesses will receive an increase in business from Americans who used to play at sites such as Party Poker, 888 Poker, and Poker Room. It's not clear how stable these US-facing poker rooms will be in the future. If the banks are actually able to stop a significant amount of people from funding their online poker accounts, the fish may not able to deposit at these sites. The games will become increasingly tough, and fewer people will be playing poker. Some players have reported that games at these sites are already tougher than usual. This is because the sharks that had their accounts closed at Party Poker have already migrated to these sites, whereas the fish that had their accounts closed at Party Poker are just taking a poker break or may have quit poker altogether due to the legislation. Furthermore, owners and operators of these poker rooms may face prosecution if they are ever inside the United States. Operators of these sites can hope that the enforcement aspects of the bill are not effective, but they also must steer clear of the United States to be fully safe from the legal aspects. We don't yet know how aggressively the DOJ will enforce this law, but the UIGEA certainly gives them a powerful weapon in prosecuting online sites that accept US players' deposits. Unlike Senator Frist and anti-gambling groups, US-facing poker rooms did not push for the current legislation. This is because they may turn out to be greatly harmed by the bill. However, these firms generally did very little with regard to stopping the legislation from being passed. Sites that Stopped Accepting American Players Sites that no longer accept American players due to the legislation were hit the hardest by the bill. Most of these poker rooms were owned by public companies. The share prices of many of these companies dropped by 50% or more after the decisions to no longer accept US players. It should be noted that the bill exempts horse racing, state lotteries, and fantasy sports leagues. The reason for these exemptions is that these types of internet gambling sites are run by American companies, whereas other forms of internet gambling are run by foreign companies. The online poker rooms had little direct clout with Congressmen since they were foreign companies that had no assets in the United States. Online gambling sites did not provide jobs for Americans and did not directly benefit the American economy. In short, internet gambling companies were viewed by Congressmen to be shady foreign companies making a killing off of Americans, exacerbating problem gambling, and providing no benefit to the way of taxes or jobs. For these internet gambling sites to lobby effectively against the bill, they needed to have done a better job at supporting pro-internet gambling grassroots movements, most notably the Poker Players Alliance. If the Poker Players Alliance had been formed four years ago, it probably would have been strong enough to at least to have had some affect on the bill. However, Party Poker was the only online gambling site that really supported this cause, and it championed this movement far too late. Land-Based US Casino Interests It is no secret that online poker significantly helped land-based casinos in the United States. In this sense, online gambling helped the American economy, although in an indirect way. Many players learn to play poker online for low stakes. They then decide to visit a land-based casino for the live poker experience. These casinos make a significant amount of money from these players, many of whom would have had little interest in visiting a land-based casino if it were not for online poker. Furthermore, tournament circuits were heavily reliant on online poker rooms for both entrants and advertising. The 2007 WSOP will probably have less than half the entrants as the 2006 WSOP due to the UIGEA. It is rumored that Harrah's will not allow third parties to register players for the WSOP, a move to prevent US-facing online poker from registering entrants directly. The tournament poker TV shows will prove to be significantly less profitable now due to the UIGEA. Some of the larger advertisers on the WSOP and WPT were Party Poker and Paradise Poker, both of which no longer accept US players. Not only will the media lose the business of the sites that no longer accept US players, it's questionable whether or not they can even accept advertisements from the US-facing sites. It's not clear how aggressively the land-based casinos lobbied against the bill. Publicly, they claimed to be neutral on the legislation, though it is believed they lobbied privately against prohibition bills. Nevertheless, it's clear that their stance was not strong enough to prevent Frist from getting this bill passed. One thing the land-based casinos were successful at doing was preventing the definition of "unlawful internet gambling" to include certain forms of internet gambling. If the online gambling is legal where the bet is initiated, received, and otherwise made, then the gambling is legal under the UIGEA. Therefore, intrastate gambling is considered legal if it is permitted by the state. If a player in Nevada plays at an internet casino that is located in and licensed by the state of Nevada, then the gambling is legal. This intrastate clause of the UIGEA may in fact pave the way for regulated internet gambling in the United States in the future. Banks Under the UIGEA, the banks are given the task at blocking financial transactions used for "unlawful internet gambling." Some transactions, such as credit cards, will be easily blocked by the banks. However, ACH transactions (electronic funds transfers) are much more difficult for banks to police. The Independent Community Bankers of America lobbied against the bill due to the ACH provisions of the UIGEA. The United States Chamber of Commerce has also voiced opposition to prohibition bills in the past. Many opposed to the UIGEA believed the banks would effectively kill the bill. However, these people overlooked the fact that there was only one reason the banks opposed the bill--the burdens of policing the transactions. Provided that the bill did not force banks to undergo extensive restructuring to block internet gambling transfers, the banks had no qualms with the legislation. Frist was smart and made a concession to the banks in this respect. Under the UIGEA, banks are not expected to block payments unless it is "reasonably practical." The Results Frist was interested in passing a law, any law, that somehow reduced Internet gambling. The law did not need to be 100% effective. It just needed to be something he could claim as a victory. The only group who originally had both effective lobbying power and an opposing voice against the bill were banking interests. For a bill to be 100% effective, it would need to block ACH transactions, which are difficult for banks to monitor. However, it was not important for this bill to be 100% effective; it just needed to be passed. Because of this, a compromise was reached with the banks, and they are only expected to block transactions that they can easily stop. What ended up happening was a bill with legal ramifications and questionable enforcement possibilities. The Way Forward American online poker players are angered by the bill. Many in the poker community want the bill to be repealed. Some hope a Democratic Congress will somehow overturn the bill during the next Congressional session. Dream on. The bill is here to stay. The online poker market will never be what it used to be. The days of 70,000+ players at Party Poker are over. For American players, the way forward is pushing regulation. In fact, I personally believe regulation is more likely to occur due to the passage of this bill. Before the UIGEA was passed, there was no serious push for internet gambling regulation. While the online poker rooms publicly claimed to push for regulation, the truth is they were happy with the legal status quo. Regulation would have invited powerful firms such as Harrah's and MGM Grand into the online poker market. These were competitors the online gambling companies certainly could do without. The UIGEA forms the basis for future internet gambling regulation. It explicitly allows for intrastate online gambling. I predict Nevada will legalize some form of intrastate internet gambling within the next five years. The technology for intrastate internet gambling is available and not expensive. There is already regulated internet gambling for horse racing in over thirty states. Online poker will probably not be on the same level as horse racing anytime soon, but it is a definite possibility that states such as California will follow Nevada's lead to legalize online poker if Nevada chose to do so. If the states legalize online poker, firms will be forced to be licensed in those states to accept wagers. They will be taxed and regulated, just as the land-based casinos are. Publicly-traded firms that exited the US market may make a re-appearance if internet gambling is legalized in certain states. The way forward is intrastate legalization and regulation of online poker. Naively hoping that Congress will eventually overturn the UIGEA is futile. If enough states legalize online poker, then online poker may eventually have the status currently enjoyed by horse racing.