Federal Raids And Indictments Send a Chill Through Online Gambling

The government clamped down on Internet gambling on Friday with the Federal Bureau of Investigation seizing the domain names of the three leading Internet poker sites doing business in the U.S. and prosecutors announcing indictments against 11 defendants, including principals of the gambling sites and a Utah banker. The government is seeking $3 billion in civil penalties and forfeitures from the defendants.

Blogs and news sites catering to online gamblers are already calling April 15 “Black Friday” in the wake of the indictments. The federal government and online gambling sites have been at war for years, especially since enactment of the Unlawful Internet Gambling Enforcement Act (UIGEA) in 2006 that makes it illegal for payment processors to handle online wagering transactions. But observers estimate that online gambling sites, largely based offshore, nonetheless generate hundreds of millions of dollars a year from American players.

The Web sites of PokerStars, Full Tilt Poker, and Absolute Poker now feature announcements from the FBI and U.S. Department of Justice that their domain names have been seized. The 11 defendants are charged with various counts of UIGEA violations, operating illegal gambling businesses, conspiracy to commit bank fraud and wire fraud, or money laundering and conspiracy. Some of the charges carry up to 30 years in prison upon conviction.

According to a news release from the U.S. Attorney’s office in Manhattan, the gambling operators and their processor partners reacted to passage of the UIGEA by setting up phony online sites to mask their real businesses so that they could get bank accounts and processing services that would enable them to handle transactions from American customers. But by late 2009, banks and other financial institutions had shut down multiple fraudulent accounts used by the poker companies, the release says.

That caused some of the defendants to pursue a new strategy of persuading the principals “of a few small, local banks facing financial difficulties to engage in such processing in return for multimillion-dollar investments in the banks,” the release says. Those indicted include an executive and part-owner of SunFirst Bank, a small bank in Saint George, Utah, who allegedly agreed to process gambling transactions in return for a $10 million investment from one of the defendants and an associate. The $10 million was not invested, according to a bank attorney cited by the Salt Lake Tribune, but the indictment says the two who approached the banker invested $3.4 million.

While federal authorities have said it is their duty to enforce laws making online gambling illegal, their efforts have been controversial, especially since passage of the UIGEA, which opponents say deputizes banks and processors as Internet policemen. Eli Lehrer, a senior fellow and vice president at the Heartland Institute, a free-market think tank with operations in Washington, D.C., and Chicago, condemned the April 15 raids and indictments. “The charges against the operators don’t even pass a laugh test,” Lehrer said in a statement. “These companies operated legal, above-board poker facilities and they’re being shut down for money-laundering even though they did nothing of the sort.”

U.S. Rep. Barney Frank, D-Mass., the ranking member of the House Financial Services Committee, opposed the UIGEA when he chaired the panel but so far has been unsuccessful in persuading Congress to change it. He and another lawmaker recently started a new effort to revamp federal online gaming regulations. A spokesperson for Frank could not be reached for comment.

The government obtained a court order freezing approximately 76 bank accounts in 14 countries allegedly containing the proceeds of the illegal activities.