Eleven Charged in Federal Crackdown on Online-Poker Companies

Eleven people, including the founders of three of the largest online poker companies doing business in the U.S., have been charged in the largest crackdown on Internet poker by U.S. authorities.

The charges set up a long-awaited showdown between the sites, which claim millions of U.S. players and billions in revenue, and the federal government, which has long alleged that their operations are illegal. The sites claim they do not violate federal laws pertaining to Internet gambling, in part because poker, they say, is not gambling.

The charges were accompanied by the shutting down of some popular sites that operate online poker and sent ripples through gambling communities.

"This is seismic," said James Kilsby, an editor for Gambling Compliance, a website which tracks regulatory issues. "It's a game changer."

Federal prosecutors in Manhattan have alleged the poker companies, which are located outside the U.S., tried to sidestep U.S. laws prohibiting banks and credit-card issuers from processing gambling payments by disguising billions of dollars from U.S. gamblers as payments to nonexistent online merchants for golf balls, jewelry, flowers and other merchandise.

Prosecutors also allege the sites conducted unlawful Internet gambling that flouted laws in several states, such as New York.

After U.S. banks and financial institutions began detecting and shutting down bank accounts used by the poker companies in late 2009, prosecutors allege, a new strategy was developed in which two poker sites allegedly persuaded a few small, local banks facing financial difficulties to process their payments in return for multimillion-dollar investments in those banks.

"Foreign firms that choose to operate in the United States are not free to flout the laws they don't like simply because they can't bear to be parted from their profits," said Preet Bharara, the U.S. attorney in Manhattan.

Those charged Friday include the founders of the online poker websites PokerStars, Full Tilt Poker and Absolute Poker. The charges include bank fraud, money laundering and online-gambling offenses.

Representatives of PokerStars and Full Tilt Poker didn't respond to requests for comment. Contact information for Absolute Poker couldn't be located.

"Online poker is not a crime and should not be treated as such," Senator Alfonse D'Amato, Chairman of the Poker Players Alliance, said in a statement Friday. The Alliance represents poker players, as well as the interests of sites such as PokerStars that operate in the United States.

Federal authorities also have filed restraining orders against 76 bank accounts in 14 countries allegedly associated with the poker companies and others as a part of a separate civil forfeiture action. They are seeking at least $3 billion in civil money-laundering penalties and forfeiture.

Prosecutors also seized five Internet domain names used by the poker companies.

This is the first big crackdown on online poker sites, though similar charges have been made in the last few years against sports betting sites and online payment processors.

The charges are likely to disrupt a fragile ecosystem that involves millions of players in the United States who play poker for money. PokerScout, a website that tracks online poker, estimates that 1.8 million people played poker for money in the U.S. last year, representing $16 billion in wagers. Estimates from Poker Players Alliance, which represents the interests of such sites as Full Tilt and PokerStars, estimates the number of players is much higher.

The sites' use plummeted Friday soon after the indictments were announced, as many players couldn't log in, PokerScout reported. Even in foreign countries some players reported being blocked.

The charges could also disrupt a burgeoning movement to legalize poker in the U.S., either through the federal government or state governments. It could also call into question some partnerships struck in recent weeks between major Las Vegas casino entities and Full Tilt and PokerStars, legal experts and casino regulators said Friday.

Yet some said the charges made a stronger case for new poker laws that allow for legal online play. "These allegations, if proven true, certainly provide added justification for strict regulation from the state or federal government," said Mark Lipparelli, chairman of the Nevada Gaming Control Board, Nevada's lead casino regulatory body. "Players are still going to seek out places."

Representatives for Full Tilt and PokerStars have recently indicated they might welcome a chance to prove in court that their activities do not violate federal law.

In October 2006, the U.S. made it a crime for companies to knowingly accept electronic payments in connection with Internet gambling. That led many large poker companies at the time, such as PartyGaming, to pull out of the U.S. and allowed the ones that did stay in to reap billions.

Some of the founders of the sites that pulled out of the country signed non-prosecution agreements with the U.S. while others pleaded guilty, paying the government as much as $300 million.

In the latest indictment, U.S. prosecutors have alleged that the poker companies recruited third parties to open bank accounts and process "e-check" transactions using phony company names. Four men who allegedly acted as middlemen in collecting payments also have been charged.

About a third of the funds deposited by gamblers went to the poker companies as revenue, known as the "rake," prosecutors said. A rake refers to a percentage of a poker pot that is collected by a casino or online poker site after a player wins the hand.

Two of the defendants were arrested in St. George, Utah and Las Vegas, while a third is expected to appear for an arraignment on April 19. Eight others, including the founders of Full Tilt, PokerStars and Absolute Poker, are out of the country and have not been arrested. In a statement, the Justice Department said it expects to work with foreign law-enforcement officials to secure their request and seize criminal proceeds that are abroad. 

Federal prosecutors have targeted the three largest online poker companies doing business in the U.S., charging their founders with money laundering and bank fraud and seizing five of the companies' domain names.

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