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Federal crackdown on Internet poker looks like a relic from the past

Online poker won't go away any time soon, and placing artificial obstacles in its way is bad for players and worse for government, which wastes scarce resources in pointless regulatory pursuits.

April 29, 2011|Michael Hiltzik

By its nature, gambling is an uncertain proposition for the player. But here's a bet you can't lose: If a U.S. gambling regulation is on the table, put your money on the side that says it will be confused, hypocritical and costly.

Case in point: "Black Friday."

On April 15, federal prosecutors threw the book at three major online poker websites and their principals, unsealing a 52-page indictment charging 11 defendants with bank fraud, money laundering and operating illegal gambling businesses.

The websites — Full Tilt Poker, PokerStars and Absolute Poker — are all based overseas. The indictment declares that to get around federal laws that prohibit U.S. banks from helping to move money for illegal games, the defendants cooked up schemes to make billions of dollars flowing through the banking system between the websites and American players look as if the money was for other purposes.

In a single draw of the cards, the indictment encapsulates those three characteristics of U.S. gambling regulation: Confusion, hypocrisy and costliness.

Let's look at each:

Confusion: It's not illegal for Americans to play poker, even for real money. Whether it's illegal to play poker online for money is murky — if the law were clear, the Justice Department could have indicted 10 million players or more. (No one's quite sure of the size of the for-money poker market in the U.S.)

Hypocrisy: Gambling is legal in every state but two, Hawaii and Utah, and I'd wager that poker rooms are an integral feature of casinos in most of them.

Costliness: Leaving aside the prosecutorial man-hours expended in unraveling the international banking fabric to back up the indictments, the potential federal take from taxing a legalized online poker business runs into the billions.

Far from quelling interest in online poker, the Black Friday indictments have whetted the appetite for California to step into the lead in legalizing the business. California may be one of a very few states hosting a critical mass of players. Californians accounted for as much as 15% of the U.S.-based business for the poker sites shut down this month, estimates Howard Dickstein, a Sacramento gaming attorney who represents several Indian tribes hankering for a piece of the action.

It has been estimated that legalizing online poker for play within California could generate tax revenue for the state of $100 million a year. This figure comes from state Sen. Louis Correa (D-Santa Ana), who's pushing a bill to do just that.

Correa's economic argument for his bill is a first cousin to the rationale for legalizing marijuana, though as a social activity poker isn't nearly as submerged as pot-smoking. "Whether you like it or not, online poker is happening right now," he told me. "You want to regulate it and tax it."

What are the wages of sin? At the federal level, alcohol and tobacco taxes bring in more than $27 billion a year. (In California, the take is $1.3 billion.)

If there's one factor that reveals better than any other the economic potential of online poker in California, it's that our Indian tribes are hinting that their 1999 compacts with the state give them exclusive rights to the business within the state.

Dickstein, who represented several tribes in the compact talks, says that the compacts awarded the tribes exclusivity over electronic gambling devices, a term then used to define chiefly video slot and poker machines. "Nobody was thinking of devices that connected people via the Internet," Dickstein says.

But he believes the definition covers online poker systems, which means the tribes have an argument that awarding Internet poker rights to anyone else would violate the Indians' rights. Who has a counterargument? The state's card clubs and racetracks, some of which would like in on the Internet poker business too.

As the Legislature ponders Correa's bill and a separate proposal by state Sen. Roderick Wright (D-Inglewood), the question of exclusivity and what it might mean for the state's authority to tax the business will be front and center. At this time, the tribes can have poker rooms on their properties, and the state doesn't get a cut. What is clear is that the feds have opened a window for California or another entrepreneurial state to take the initiative in legalizing Internet poker.

The Black Friday indictment stems from a neat bit of congressional sleight of hand that would have impressed even the most hardened riverboat card sharp. This was the passage in 2006 of the Unlawful Internet Gambling Enforcement Act, which was slipped into a "must have" anti-terrorism bill by blue-nosed Senate Republicans in the middle of the night (literally).

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