The Odds-On Favorite: Let The Poker Conspiracy Begin!

For the most part, I am not a conspiracy theorist.  I don’t think there was anyone on the grassy knoll.  I’m pretty damned certain that Neil Armstrong actually walked on the moon.  And I don’t think the US Government took down the World Trade Center from within to drag us into a war.  I generally believe most of what is presented to me as fact, though I also try my hardest to research both sides of an argument before making up my mind.  But every so often, stories are presented with such a one-sided slant that it’s hard to take it on face value.

The collapse of the online poker industry is one of those stories.  Full disclosure – I played poker online pretty competitively from about 2004 through 2007.  I earned quite a bit of money and even a little recognition doing it, though you will never get me to put the exact amount in writing.  And the reason for that is the exact reason that the industry has collapsed.

There was so much money flowing, unchecked, through online poker sites that they essentially became a form of online banking.  And until 2007, the money flowed like water, and the sites made millions, if not billions of dollars off of the rake.  For the most part, it was a safe industry that skirted the United States’ arcane laws about gambling by operating completely online, with all the physical companies located somewhere well outside the Department Of Justice’s jurisdiction.

In 2007, that began to change.  First, the US Government started enforcing the Wire Fraud act that made it illegal to send money for the purposes of defrauding people.  Trouble is, players weren’t being defrauded.  The players were willfully putting money into their own accounts in order to play poker against other players worldwide.  Sure, there were stories about players cheating, or colluding, but considering the number of players in online poker rooms at any give time, the amount of cheating was probably on par with what you find in any poker room in Vegas.  Players cheat.  Players collude.  It happens.  It doesn’t happen often, but it happens. There were plenty of stories of players “dumping” money to other players – losing large sums on purpose – as a means of money laundering.  And as with any technology, the opportunity exists for hackers to tear it apart.

In 2007, most online poker sites simply shrugged their shoulders and found new ways to allow players to continue playing.  Instead of a player simply logging on to the poker site and depositing money directly, or with a reputable third party like PayPal or Neteller, the players now would have to go through another website to “disguise” the money.  Most often, players would “purchase” a phone card or a gift card online, then give the number of that card to the poker sites and be reimbursed the full value of the card in digital chips.  A middle-man system that was made entirely necessary by the US Government.  And although there were extra, legal grey-area steps to depositing, it barely slowed the pace of online play.  Personally, this was around the time I got out of online poker – I didn’t like the idea of giving a questionable service access to my bank account or credit cards.

Then came Black Friday – the day in Mid-April of 2011 that the DOJ got on their high horse and finally decided that they’d had enough of Americans “gambling” online. (I use quotes there because I, like most poker players, don’t consider poker as gambling.  There is far more skill involved in poker than luck, though they both play their part.  But that’s a whole different post…)

The DOJ seized the domains of some of the biggest online poker sites, and froze the accounts of every American player, and some overseas players as well.  Players who counted on their poker money as their only source of income were now left to hang with no way to access their funds.  For some players, their accounts were frozen with hundreds of thousands, if not millions of dollars in them.  The highest stakes players on these sites were rumored to have account balances upwards of $10M, that they no longer had access to.

The problem was not that there weren’t enough checks and balances on the people running the games.  The problem was not that the government was trying to save us from ourselves.  The problem was that… the government wanted its cut.

You see, online winnings, though legally subject to the same taxes as winnings in a casino in this country, are not reported to the IRS the same way.  That is to say… they’re not reported at all.  Because the companies are all offshore, they do not send a Win/Loss statement to the IRS the way a casino like Caesar’s Palace in Vegas or the Trump Taj Mahal in Atlantic City would if you cashed out a large sum of money.  In fact, online casinos don’t report your winnings (or losses) at all.  They put the onus for that onto the player, who then decides just how scrupulous they want to be.

Back in 2004, I made a decent amount of money playing poker online.  That included physical prizes like satellite entries into bigger tournaments, a trip to Vegas, etc.  When the time rolled around for me to do my taxes in early 2005, I brought all the paperwork to H&R Block to let them handle it.  I even brought my own list of winnings and losses from online poker play, because the sites I played on provided no such records.  When I asked the CPA who was handling my returns what I had to do about the online gambling, he looked at me, smiled and said “Sir, do you have any gambling winnings that you wish to report?”  I gave him a blank stare, held up the paperwork and said, “I’m not sure.”  He replied with “Sir, let me rephrase.  Do you have any gambling winnings that have been reported to the IRS and that you are legally required to verify?”  I got the hint, smiled, and put away my papers.

That’s the problem for the government.  They aren’t getting their cut from online poker, much the same way that they aren’t getting sales tax from roughly 90% of all purchases made online.  Because the websites put the onus to report that money on the player (or the shopper, in the case of online shopping), the government will never see a single cent.  And that amounts to billions of tax revenue lost every year.  In fact, there are those who would tell you that the entire financial crisis was a function of online shopping jumping drastically over the past five years, and the tax revenue never being collected.

Tuesday and Wednesday, the smear campaign against the sites in question began in full force.  CNNMoney.com ran an article accusing Full Tilt Poker – the largest poker site in this whole mess – of being little more than a ponzi scheme.  Gizmodo.com (Gawker’s Tech Blog) chimed in saying that the owners of these sites were embezzling funds to their own bank accounts rather than paying their players.

The thing is, it’s not entirely true.  Before the DOJ froze the accounts of every US player, there were never any reported issues with people getting their money out from their accounts.  Payouts were offered on time, in whatever manner the player chose, without much delay.  Most payouts were processed within 24-48 hours – very rarely did a site take as much as a week.  Personally, I never had trouble receiving payouts from poker sites, just like I don’t have trouble getting payouts from sports betting sites that I still use today.  But once the player’s accounts were frozen, the income from new deposits (as well as the lack of new players who weren’t very good and therefore kept losing and depositing to fund the better players) kept the sites from being able to shuffle the money between winners and losers as easily.  Had the DOJ simply seized the sites, shut them down and refunded every Dollar (or Franc, Kronor, or Yen) back to the players who had them in their accounts, we wouldn’t be in this mess.

Instead, what the government is doing is using the press to undermine the credibility of the online gaming industry.  They are falling back to the old reliable “The Internet is a scary and dangerous place!” tactic, trying to convince people that online poker is little more than a table in the Wild West.  The simple fact of the matter is that online poker thrived for years without any interference from the US Government or any other government (you don’t see Parliament going after the thousands of British players, do you?) stepping in.

If the US Government wants their cut, all they have to do is negotiate with the companies to work out a reporting system.  Since everything is digitized, it shouldn’t be that hard.  There’s a very simple way to figure out a Win/Loss statement for every player who has ever sat down at a digital poker table, so there should be a simple way to calculate what that player owes in taxes. Many online poker players wouldn’t mind reporting their wins and losses to the government if it meant they could go back to playing online.  And since many of the biggest online players are playing as their only source of income, they’d be subject to lower taxes – gambling “winnings” are taxed higher than “gambling” earnings.

But the government has decided that rather than evolve and move forward, they’re going to force everyone to take a technological step back and go to their local brick and mortar casino to get a game.  The problem is, those places don’t report accurately either.  Casinos don’t report gambling winnings in poker unless it’s more than $5,000 (the limit for slot machines is $1,200, and I believe the limit for all other table games is any single cage transaction of $10,000 or more).  Most players know this rule and simply cash out smaller amounts multiple times for cash games, so the only time the IRS gets accurate information is if a player makes more than $5,000 “on the books” through tournament play, where all the players are usually tracked.  The government still isn’t getting paid – in fact, it’s much harder for live casinos to track poker money than it is for the online sites to do the same thing.

But that’s OK.  At least the government has done their best to save us from ourselves.  At least somebody is watching out for us.  At least somebody is thinking of the children.

What a bunch of BS.

12 thoughts on “The Odds-On Favorite: Let The Poker Conspiracy Begin!

  1. As I’m at work, I don’t want to search to confirm this, but I heard the problem with Full Tilt is that they did not have enough money on hand/in accounts to pay for all of the players who came calling after Black Friday. That’s where the “Ponzi Scheme” description came from. From what I’ve seen said by a local poker guy, Full Tilt didn’t start as a Ponzi Scheme, it just turned into one.

  2. The people at Full Tilt were having no trouble covering their bills for years. In fact, FullTiltPoker.eu was up and running without trouble as recently as 3 weeks ago.

    The trouble is, when the Government seized the American players accounts, they also seized the money in the accounts (roughly $115M). And according to reports, one of the main payment processors for FTP decided to cease their relationship without notice, and walked away with about another $40M.

    Like I said above, FTP – like most poker sites – operated something like a bank. If you deposited $100 into your account, and on the same day I requested to withdraw $50 from mine, I might get some of your actual money. So when roughly $150M was removed from the “bank’s” assets, other players tried to withdraw en masse. Unfortunately, although FTP still technically owns those funds, they only own them on paper. Until the legal side is cleared up, they don’t actually have access to them.

    It’s not really a ponzi scheme as much as it’s the equivalent of the 1920’s run on banks. But that’s a very fine line.

  3. Kinda hard to pay people back when the Gov’t has all of your money.

    Exactly. The government seized all of the funds from FTP, then decided to publicize the fact that they had no money and couldn’t pay their players.

    Just complete heavy-handed hypocrisy.

  4. I have to say I side with the government on this one. If the government is not getting the tax revenue from gambling winnings they should shut it down.

  5. Also, H&R block D? Really? Shop for a real CPA. They’ll do a better job and charge you a fair price.

  6. I got my check for $45 (earned from freerolls!) from Pokerstars a few weeks after Black Friday. Never deposited a dime, collected several times over the years. Not sure about FT, seems shaky to me.

    Pokerstars Payouts

  7. I got my $45 check from Pokerstars a few weeks after Black Friday. Earned from freerolls, withdrew a bunch of times, never deposited a dime. Not sure what’s up with FT, but it seems shady. Pokerstars Payouts

  8. Also, H&R block D? Really? Shop for a real CPA. They’ll do a better job and charge you a fair price.

    Yeah, I have. Between ’05 and ’09 I moved five times, so it was tough to have a “local” CPA.

    I have to say I side with the government on this one. If the government is not getting the tax revenue from gambling winnings they should shut it down.

    Here’s the thing. If you go overseas and win, you have to report it. If you goto an Indian reservation (a Sovereign Nation) and win, you have to report it. But the government didn’t want to make a deal with the online sites to allow for and enforce reporting. Most of the sites said they would work with the government and report. But instead of working with the sites, the government just decided to seize them.

  9. Kinda hard to pay people back when the Gov’t has all of your money.

    Also hard to pay it back when there’s not enough in the coffers when everyone comes calling. That’s the key problem with FT. D’s right, it’s a 1920’s bank. There was a run on the site, and did not have enough. There’s a reason why Vegas casinos are required to have a specific amount of cash on hand.

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