The Southern District of NY Takes On Poker Players

In 2009, in an action known as the Southern District of New York Action Against Online Poker Players, federal authorities took action to freeze over $34 million of the funds of U.S. online poker players which were in the process of being sent to them to accommodate their withdrawal requests from several leading online poker rooms.

PokerStars, Full Tilt Poker, and several other online poker rooms had continued to offer online poker to U.S. residents after the passing of the UIGEA, and among the reasons for this was the fact that there really wasn’t any federal law making online poker illegal.

These two poker sites, and others, actually did seek to comply with U.S. law, ironically enough, even though there was no real need to do so because they are not located within the United States. When the state of Washington made online poker explicitly illegal, both sites and others voluntarily withdrew from that market, due to concerns about being in violation of the UIGEA.

There are some practical considerations here, apart from the possibility of being indicted here, as the government could in theory go after the payments being made to these Washington State poker players and seize them. The poker sites would then be on the hook for these payments, if they wanted to preserve goodwill with their players, who rely on maintaining a high level of confidence in a gambling site to commit and keep funds on deposit with them.

So the thinking at the time was that, while the Department of Justice was well known to waive a big stick and shake it at the online poker industry, under the assumption that online poker was somehow under the scope of the Wire Act, surely they wouldn’t be able to go as far as to seize funds under this Act, although they thought wrongly.

What they failed to fully appreciate is the power of intimidation, and when it comes to being issued seizure orders, U.S. banks aren’t going to put up much of a fight. It really isn’t worth it to do so, and $34 million worth of money that isn’t even theirs, which they are only making a very small percentage on, is far from worth it.

So U.S. authorities ordered Citibank, Wells Fargo, and several other U.S. banks to freeze these funds, and they simply complied. The funds were being distributed by third party intermediaries called Allied Systems and Account Services, that was being used by Full Tilt and PokerStars, among other sites to process U.S. withdrawals.

Allied Systems and Account Services used these various U.S. banks to hold the funds and issue checks from, and the funds in question subsequently became frozen.

This Wasn’t Even About the UIGEA, Actually

Interestingly, the UIGEA had nothing to do with this action, and in fact the UIGEA explicitly exempts financial intermediaries, both the banks and the third party companies, Allied Systems and Account Services. So that wouldn’t work, so they just went after them on money laundering charges.

Money laundering of course requires the funds to originate from criminal activity, or to be used for criminal purposes, so the allegation was that this was the case by way of the funds being a result of illegal poker wagering under the Wire Act. The Department of Justice had been incorrectly assuming the Wire Act applied to poker ever since online poker was born, and at this point in time, they had not corrected this view yet.

Money laundering charges do not require any specific law, such as the UIGEA, and it is enough that the funds be the proceeds of crime and are being distributed in a way to disguise the original source of them that an action can be taken here. Ironically, this was a money laundering operation of sorts, otherwise the poker rooms would be distributing the funds to players directly, and the third party companies were indeed an attempt to disguise the source of the funds.

The alleged money laundering was only needed to get around not illegal activity per se, but a mistaken belief by authorities that the funds arose from illegal activity. However, if the government is the one with the mistaken belief and the one with the power to seize the funds under these allegations, it is wise to look to thwart them in this manner.

The Aftermath

About 27,000 poker players were involved, and poker players can’t be charged under the Wire Act of course since it only applies to businesses offering gambling, but having their withdrawals frozen certainly can hit home, and it did cause a bit of concern initially.

This was the first attempt by the US government to go after funds not connected to sports betting, and did so in spite of no real legal ground to stand on really, as far as the Wire Act and the game of poker was concerned. As far back as in 2002, the courts have ruled that the Act does not apply to any other form of gambling other than sports betting.

The bet here was that no one would come forward to fight this legally, as the payment processors would not want to become involved, and neither would players, so the action would stand unopposed. That’s exactly what happened actually, so this does show that being right or wrong as far as the law goes doesn’t always matter, and the practical side of things can matter a great deal.

So the U.S. government bluffed, and no one made them show their real cards, even though they held an empty hand basically. So the funds were seized, but the online poker sites involved took quick action and reimbursed the players, with players at PokerStars being given an extra 10% to compensate them for the stress this caused them.

There was more to come later though, in the event known as Black Friday, with much more bluffing and fireworks, leading to some very substantial repercussions.