Gambling Crackdown

Here’s a brief summary of last Friday’s federal government offensive against online gambling.

  • Federal prosecutors brought fraud and-money laundering charges against the three largest online poker sites: Full Tilt Poker, PokerStars, and Absolute Poker.  The government also seized their domain names, terminating their presence online–until they obtain another domain name.
  • All three sites are located outside the U.S.  Full Tilt is based in Alderney (an island in the English Channel and part of the U.K., ) PokerStars is on the Isle of Man, and Absolute Poker is in Costa Rica.
  • According to the Wall Street Journal online poker sites last year took in about $16 billion in wagers from about 1.8 million U.S. residents who play poker online.
  • The Unlawful Internet Gambling Enforcement Act of 2006 made it a crime for U.S. financial institutions to process payments for online gaming businesses.  The NY Times reports “[t]he online poker operators sought to avoid detection by banks and legal authorities by funneling payments through fictitious online businesses that purported to sell jewelry, golf balls and other items, according to the indictment. It says that when some banks processed the payments, they were unaware of the real nature of the business, but the site operators also bribed banks into accepting the payments.”
  • The legal environment is online poker is hardly clear.  Disagreement exists over whether poker and blackjack are even illegal under federal anti-gaming laws, since some argue they are games of skill, not chance.
  • The NY Times again:
    • “Prosecutors seemed to skirt the issue. They based parts of their prosecution on state laws in New York and elsewhere that prohibited unlicensed gambling, including poker. Legal experts said the prosecutors needed to rely on such prohibitions as a foundation for going after the claims of money laundering and fraud. But Mr. Walters [a lawyer whose clients include other online gaming sites]  said this strategy might face challenges. He said it was not clear that the state laws applied to foreign-based gambling operations, given that under federal law, international commerce was regulated at the federal level.”
  • According to the WS Journal the sudden enforcement action surprised the sites’ customers, quoting a professional poker player who said “we understood there were issues.  We never assumed there’d be some type of black-out overnight.”

Update on Kentucky Domain-Name Seizure

Last fall the State of Kentucky convinced a trial court judge to order the seizure of 141 domain names belonging to Internet gambling sites (see posts here and here). The judge ruled that the domain names were gaming devices under state law.  This week the Kentucky Court of Appeals overturned the trial court’s seizure order, holding that “it stretches credulity to conclude that a series of numbers of Internet address, can be said to constitute ‘a machine or any mechanical or other device . . . designed and manufactured primarily for use in connection with gambling.”  The Court of Appeals declined reading “domain names” into the relevant Kentucky statute.  Citizen Law Media Project has a more detailed post about the Court of Appeals decision.

Kentucky’s attempt to seize the names is motivated by money, not morality; the state believes the gaming sites “drained money away from Kentucky’s legitimate gambling.”  The state announced that it will appeal the Court of the Appeals decision to the Kentucky Supreme Court.

Judge Orders Transfer of Domain Names

Kentucky’s plan to seize domain names belonging to online gambling sites took a giant step forward this week when a state court judge ordered transfer of 141 domain names to the state in 30 days unless the sites block access by Kentucky residents.  The judge ruled that the domain itself is a gaming device under Kentucky law.  Kentucky has targeted the online gaming industry “because it was illegal and drained money away from Kentucky’s legitimate gambling.”

Consider what transferring the domain names to the state means.  A user anywhere in the world who types, say, into his web browser will be directed not to but to a Kentucky .gov subdomain bearing notice that the site has been seized. It won’t matter whether online gaming is legal where the user resides–he will not be able to access the site.  If does not find a way to block Kentucky residents it will be forced out of business.  Domain name seizure would become a highly effective method for local governments to force their law on the world.

That’s a bad precedent.