The realities of HR2267

Here's a good explanation of why you're not likely to see anything come of HR2267:

http://www.casinocitytimes.com/news/article/top-10-hurdles-facing-u-s-online-gambling-legislation-194547

Reason magazine on HR2267

A post by Steve Chapman on Reason magazine's web site begins like this:

The other day, a citizen went before a House committee and urged its members to stop their burdensome interference with her business. "At its most basic level," said Annie Duke, "the issue before this committee is personal freedom, the right of individual Americans to do what they want in the privacy of their homes without the intrusion of government."

I know what you're expecting: At that point, the politicians all had a good laugh and told her to get lost so they could get back to meddling in people's lives.

But no. Not only did they hear out the winner of the National Heads-Up Poker Championship, they did exactly what she suggested. The committee voted to lift the federal ban on Internet poker and other online gambling, while approving a measure to tax and regulate it.

It's a well-written piece, though, I think, ultimately misguided in concluding that this bill is designed to promote "more freedom and less government," as the Mr. Chapman claims, and I submitted a comment to that effect. Still worth a read, though. I especially liked this zinger:

It's easy to forget that in the old days, opponents denounced casinos for luring bettors into dimly lit bunkers where they would fall victim to card sharps, leggy waitresses, and rivers of booze. Now the same opponents suggest that Luxor Las Vegas is far safer than that den of vice you call home.

Balkanization

I'm not sure why I'm spending so much time on the subject of HR 2267, since I'm highly dubious that it's going to get enacted into law. But sometimes I just get curious about something and have to figure it out, even if there are no real-world consequences.

I wrote earlier today about the balkanization of online poker, but only in a footnote. My friend Cardgrrl submitted a comment in which she expressed doubt that this was really a problem. That made me wonder if I'm understanding the matter correctly, so I went back to investigate it a little more, as I had previously been relying primarily on news reports summarizing the bill's provisions.

The first of two amendments that I'm focusing on is Amendment 8, offered by Campbell, and agreed to by voice vote. It adds to the requirements for obtaining a federal license this language: "Require licensees to maintain all facilities within the United States for processing of bets or wagers made or placed from the United States."

The second is Amendment 16, offered by Sherman, and agreed to by voice vote. This specifies that in order to receive a federal online gaming license, the applicant must provide "Certification that the applicant has established a corporate entity or other separate business entity in the United States, a majority of whose officers are United States persons and, if there is a board of directors, that the board is majority-controlled by directors who are United States persons." It further states that the licensing entity must "Require that a majority of all of the employees of the applicant or licensee, and of its affiliated business entities, be residents or citizens of the United States."

Let's suppose that, say, Australia passed an essentially identical law for the licensing of an online gaming company to accept bets from its citizens. Can Acme Poker USA operate in both places?

Clearly Acme Poker is going to have to have its servers and administrative offices in the U.S., using U.S. employees--at least all of those facilities that are going to be handling U.S. customers. I suppose it could set up a subsidiary corporation, something like Acme Poker Australia, and base it in Melbourne--although even there I'm a little uncertain, because of the language about "affiliated business entities."

Now can a U.S. player and an Australian player play at the same virtual cash-game table? That strikes me as problematic. Obviously the two servers have to communicate with each other continuously in order to make such a game happen. I wager $1 here, Kangaroo Ken raises me $2 more. It seems to me that the servers in Australia are necessarily "processing," in some way, the bet that I made, and, in parallel, the U.S. servers are "processing" the bet that Ken is making--in apparently violation of Amendment 8.

You might argue that the Australian servers are not part of the U.S.-licensed company. First, in my hypothetical, Acme Poker Australia is a subsidiary of Acme Poker USA, and thus is under the ultimate control of Acme Poker USA. So maybe we change that and make them, somehow, sister companies, neither one controlled by the other. Or go even further and say that they are wholly independent, but have negotiated a cooperative agreement to use compatible software and exchange real-time poker game data so that their players can freely compete against each other. (I have a hard time seeing how that could actually work, because there would be no common pool of money. But set that aside, and assume it could be figured out.)

But there is still a problem, I think. The language doesn't say that the licensee has to make sure that only those facilities under its control are in the U.S.; it says that "all facilities" for processing bets by U.S. players must be located here. The implication of that is that the company cannot allow the transmission outside of the U.S. of any data required for any part of the "processing" of a bet by a U.S. player, which would seem to imply that there can be no international play. If a server in Australia is receiving the wager information from me and passing it on to Ken, surely that server is "processing" my bet, which violates Amendment 8.

I might be completely wrong about all of this. I'm giving you my admittedly amateur and rather hasty and superficial analysis. But unless somebody presents me with a persuasive argument as to why these amendments do not, in fact, have the effect I'm inferring from them, I will be of the opinion that the version of the bill passed by this committee, if enacted, is going to make it impossible for there to be legal poker played by U.S. residents that involve anybody situated outside of the United States. (It would also mean that you couldn't play on your usual site when you were traveling outside of the country, but that's a much smaller concern.)

It appears to me that if every country passes substantially similar measures, what we will be left with is a global patchwork of sites, none of which can communicate with each other--the very antithesis of what the Internet was supposed to accomplish. The artificial lines we draw on maps to delineate our territory from that of other nation-states will be adopted into online gaming, as if the Internet did not exist beyond our own shorelines.

This is "definitely...good for poker"?

A legal oddity

I was just skimming through the actual text of H.R. 2267 to tie up a few loose ends on my previous post, when I noticed something unexpected. I was looking for what I assumed would be a provision for criminal prosecution and punishment for offering online gaming without a federal license. As far as I can tell, there is none. I.e., there's nothing that lays out as a crime, with specific associated penalties, the act of providing online gaming without a license. It looks to me as if the only way the feds will have to prohibit such gaming is by going to court and obtaining an injunction--basically a cease-and-desist order, the continued violation of which would bring the offender under the provisions of contempt of court.

That strikes me as odd and unexpected, because virtually every time a licensing program of any sort is put into place by any jurisdiction it is accompanied by a provision making it a crime to engage in the activity involved without obtaining said license. Still, I'm not at all sure what, if any, significance to attach to this fact. I also don't know how it would work in actual practice. After all, if a company has its headquarters and servers entirely outside of the U.S., what can a federal court actually do it? Of course, that's true of criminal provisions, too, as long as the owners/operators don't make the mistake of deciding to celebrate a good year by going to Disneyland.

Incidentally, there is also no clause that I can find making it a crime to engage in online betting as a person prohibited from doing so under the new regulatory scheme; the responsibilities lie wholly with the licensee/operator. Similarly, nothing in this bill makes a federal crime out of placing online bets with an unlicensed operator. Interesting.

More on H.R. 2267

Yesterday I reiterated my opposition to any federal licensing scheme for online gambling on general principle.

I should have also added that an independent, sufficient reason to be opposed to the idea is that the last thing this monstrously money-addicted Congress needs is another new revenue source; we should be looking for every possible way to starve it rather than feed it. That the current bill is picking up supporters who like it purely for the fact that it gives them more of our money to spend is alarming, though misguided people and groups (such as the Poker Players Alliance) are using this as a selling point.

Here's a snippet from the New York Times demonstrating this mindset:

Supporters of legalization said fiscal considerations played a role in
their thinking. “I was looking for the money,” Representative Jim McDermott,
Democrat of Washington, said in an interview. He sponsored the companion measure
to allow taxation of Internet gambling; he wants to dedicate the money to
education.

Representative Brad Sherman, Democrat of California, said in an interview
that the money was an attractive source of financing for other programs. “We
will not pass an Internet gaming bill,” Mr. Sherman predicted. “We will pass a
bill to do something very important, funded by Internet gaming.”

He added, “Forty-two billion dollars over 10 years has an
effect.”

This is just wrong. First, any tax and licensing fees should be no more than required to operate the regulatory body. Second, at a time when Obama's budget projections show a tripling of the federal debt to more than $15 trillion by 2020, compared to 2008 levels, it is simply insane to be thinking of doing anything with new revenue other than trying to reduce that number. Using it for yet more new spending commitments is so fundamentally irresponsible from a fiscal and public policy standpoint that any member of Congress advocating it (as, e.g., Sherman and McDermott above) should be impeached and removed from office--or maybe just shot where he stands.

Along the same lines, states that don't opt out of the federal plan will be able to tack on their own taxes, which causes the same problems for both the profitability of the game and for overstretched state budgets as I have outlined at the federal level.

But what I really wanted to address in this post is this offhand remark from a Wicked Chops Poker post of earlier today: "The bill, which ... definitely falls under the 'Good for PokerTM' category, would effectively undo the UIGEA and make all online gambling, except sports betting, legal at the federal level."

Good for poker? "Definitely"? Let's consider that.

Now there is no state or federal tax taken out of cash pots or tournament payouts that I win. Under H.R. 2267 there will be. (OK, technically the taxation part will be under a separate bill that is still in committee. But it is unthinkable that 2267 would pass without that part coming along for the ride. Also, having not read that companion bill, I suppose it's possible that the taxes will come out of deposits rather than individual bets or pots. Same difference.)

Now online poker sites do not report one's winnings or losses to the IRS. Under H.R. 2267 they will.

Now I can play on Full Tilt Poker, PokerStars, Ultimate Bet, Bodog, Cake network, etc. Under H.R. 2267 those sites would not be available.*

Now I can bet on sports through any number of online sites. Under 2267 that will not be possible.

Now I can fund at least some online poker accounts via credit card. Under 2267 that option will be taken away.

Now I can play online even if I'm behind in child support payments. Under 2267 that will become illegal.**(As a matter of general principle, you tell me how the status of my child support payments is any business of either the federal government or Party Poker.)

Now I can easily transfer to or receive from friends funds from my online poker accounts. Under 2267, that freedom will almost certainly be eliminated, due to the anti-money-laundering requirements.

So, Wicked Chops Entities, can you explain to me how any of these things makes my life as an online poker player better, i.e., how these provisions are "definitely...Good for Poker"?



*PokerStars seems oddly confident that it will be able to become a licensee under this bill. Similarly, the blogger for Doyle's Room is calling this bill "a great success for legalized poker in the U.S." I don't know what they are seeing or thinking that escapes me, because it sure looks to me like they would be excluded. Even if they somehow were to get past being able to prove that they had never violated any state or federal law with respect to online gaming (itself a dubious proposition, given the Justice Department's interpretation of current federal law and several state laws that are pretty unambiguous), I simply can't believe that they would be willing to move their entire operation to the United States, as would be required for licensure. By the way, this is another problem with the whole idea of licensure: Every jurisdiction wants the businesses it regulates to be physically within its borders. FTP and Stars simply cannot simultaneously be wholly located within the borders of the U.S. AND France AND England AND Italy AND every other nation that wants to regulate and tax them. This trend will inevitably lead to the unnecessary balkanization of the online poker world.

**My friend Shamus reads this provision as saying only that one cannot obtain a license to operate an online gaming site if one is behind in child support payments. Though the wording of the amendment is clumsy, I think that's pretty clearly wrong. It doesn't say that the licensee must not be behind in child support payments; it says that the licensee is required not to take bets from any person who is behind on child support payments.

Slippery slopes

A convergence of events prompts me to pick this subject.

First, last night I was reading the new issue of Card Player magazine. There's a news story about the broadening of Florida's laws to allow real no-limit poker (July 28 issue, page 26, article by Stephen A. Murphy). That wasn't news to me, but it gave more background about the history of Florida's poker laws than I had been aware of:

Florida legislators legalized penny-ante poker in 1989, but capped all pots
at $10. While the law would loosen up a little over the years, it never went as
far as most serious poker players would've liked.

In 1996, state-licensed pari-mutuel facilities were allowed to begin
spreading poker games with the $10 cap. In 2003, a new law passed that scrapped
the $10 cap but still forced the max bet in any action to be only $2. In 2007,
no-limit hold'em was finally introduced, but with the $100 max buy-in.

The second convergent event was reading today the final arguments in an interesting pro-con debate about online gambling sponsored by The Economist, available here.

The third event was today's passage out of committee of H.R. 2267, proposing to establish a federal licensing/regulatory scheme for online gaming. See the Poker Players Alliance's press release on it here.

Slippery slopes are real. (For an excellent overview of how and why slippery slopes work in law and politics, see Eugene Volokh's article here.) You can easily imagine how the latest Florida law is the literal, nightmarish fulfillment of an anti-gambling activist's parade of horribles. "You see? We warned you back in 1989 that penny-ante was just the first step, and they'd demand more and more. Now they have finally achieved what they really wanted 20 years ago."

It works in other subjects, too. A friend of mine from back in Minnesota, Joe Olson, co-authored a fine historical essay for a law review about how England went from almost no gun-control laws to a nearly total ban on firearms (and, along the way, use of any force for self-defense) in just a few decades ("All the Way Down the Slippery Slope"). When the Supreme Court declared unconstitutional restrictions on sale of contraceptives and laws against interracial marriage, few would have guessed that those decisions created a slippery slope leading to judicial striking of anti-abortion laws and legalization of same-sex marriage.

On the other hand, perhaps those pressing the first cases knew exactly what they were doing and saw the end from the beginning. After all, there is a clear history of smart, strategically-minded people using the slippery slope to achieve their purposes through patient gradualism. Thurgood Marshall's brilliant stepwise attack on racial discrimination laws jumps to mind. He very carefully plotted out how to use courts, legislatures, and public opinion to knock down barriers one at a time, starting with the most patently unfair and unreasonable ones. It took decades for his plan to play out fully.

It's good to see examples like Marshall's, and like the Florida poker history, and know that you can achieve meaningful reform of stupid, restrictive laws by continuing to press an issue over time. After all, you can't just fly to the top of Mount Everest in a helicopter and say you've conquered it. You can only get there one step at a time.

But it works both ways. Freedoms can be just as easily destroyed in small steps as they can be won--probably more easily, in fact. It is easy for politicians to vote either to ban or to continue or tighten a ban on some activity that only a minority of people want to do, whether it be smoking marijuana or riding a Jet Ski or shooting a machine gun or piloting a motorcycle without a helmet. Those examples also share the characteristic of being things that are either objectively or arguably bad or dangerous, which makes it even easier for politicians to prohibit them by law, in the name of protecting people from their own folly.

I'm not proud of this, but I was once all in favor of a bunch of prohibitions of things that I knew were bad for people. I have supported anti-tobacco legislation, helmet laws, seat belt laws, and even an attempted ban on tanning booths. They seemed like no-brainers to me; these activities are dangerous and no reasonable person could want to see his fellow citizens harmed needlessly.

I'd like to think that I'm more enlightened now. I have come to realize that if I don't want other people mucking around with the liberties that I want to engage in (driving ridiculously overpowered fast cars, playing with guns, entering poker tournaments, eating foods crammed with salt and trans fats, etc.), I can't very well be working to prohibit the things that they so irrationally want to do (drink themselves into a stupor, smoke cigarettes, hire prostitutes, go sky diving, drive Humvees, worship Baal, etc.), even if I think they've gone mental to want to do them.

Today's second and third items provide vivid reminders that there are lots and lots of people out there who remain as paternalistic as I used to be. The "con" author of the Economist debate and any number of politicians opposing H.R. 2267 (because they want online gaming to be illegal) want to control your life. They claim the right and power to decide for you whether you should be able to enter $1 tournaments on PokerStars in your pajamas, because, Lord knows, you're just too stupid to be trusted to make such decisions for yourself. Although they would undoubtedly deny it, it is absolutely, demonstrably the case that they believe they are in a better position than you are to decide what you do with your time and your money.

You should be appalled and resentful of this--unless, of course, you try to do the same to others with respect to some activity that you find abhorrent and want to ban, in which case you're just getting tit for tat and you deserve it.

Anyway, I have strayed from where I set out to go. What I wanted to get to was this: I remain opposed to the Frank bill, and all others like it, precisely because of the slippery slope. As I have argued here several times before, I think it is a dangerous precedent that is far more likely, ultimately, to kill online poker than to save it.

The reason I think this is that taxes and regulations, with rare exceptions, tend to ratchet in one direction only. If we get federal licensing of online gaming, then every time there is some crime or other scandal, as there surely will be, the regulations will get tighter and more severe. Witness what happened just last week with the banking industry, and what happened with respect to offshore oil drilling almost as fast as the tar balls washed up on the Florida beaches.

Same thing with taxes. How often do you see tax rates cut, compared to how often you see them raised? Isn't the latter, oh, about a hundred times more common than the former? Politicians tend to disbelieve the Laffer curve, or at least always convince themselves that they're still on the upslope side of it so that raising tax rates will increase governmental revenue. It will be the same with online poker. The initial tax rate will be painful but not lethal to the industry. Over time, though, the slippery slope will make the games less and less profitable, both because of increased tax drains (as you can see happen with tobacco taxes, gasoline taxes, alcohol taxes--heck, just about any kind of tax you can name) and because of increased rake due to ever-higher overhead costs of complying with ever-more-burdensome regulations.

The process may eventually stop or reverse, but it will only do so when the damage has become so great (i.e., both the sponsoring companies and the government making less and less money) that it is impossible to deny--and then it's too late. The kitten will have fallen off the end of the slide, and mother cat won't be able to rescue it. They will have killed the goose that lays the golden eggs. (Add your own overblown metaphor here.)

The current situation is not great. I am not fond of the legal haze of today's status quo, nor the fears that such uncertainty generates. I have heard from many friends, readers, and fellow players at the live tables that they don't play online because they're worried about cheating, or it being illegal, or the IRS being able to trace transactions, or funds being suddenly confiscated by the government, or sites being shut down or going bankrupt. It is a disgrace, an outrage that people in Russia are more free to play poker online than we are in the allegedly last great bastion of freedom. But I remain convinced that the way things are is better than the way they eventually will become if the feds get involved.

I am fully persuaded that what we will witness will not be a repeat of Florida, with gradual liberalization of the game. No, it will be a promise of Shangri-La, but actually leading to slow death by regulatory and confiscatory strangulation. Ironically, I believe that those currently fighting federal licensing will in the long run get their wish--the end of online gambling--while those begging "Tax and regulate it, please!" will celebrate now, only to see it all go to pieces on them later, one small step at a time.

The best hope for online poker is for the government to leave it the hell alone. That is what a free nation would do. That is what a free people deserve.