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Nov. 9, 2006

Russ is the co-author of two well received books on poker:  Mastering No-Limit Hold'em and Why You Lose at Poker .  Both books can be ordered through Conjelco.com.  He is an EA and is a tax practitioner enrolled to practice before the Internal Revenue Service. He is also a financial consultant, the principal of Clayton Services and serves on a contractual basis as the chief financial officer of numerous privately-held businesses. He can be reached in Irvine, CA at (714) 225-7877 or by e-mail to: rcfox@claytonservices.com.

Russ has given me permission to republish the following Q&A presentation from his blog:

My college football picks have been quite good this year. My political picks haven't been (although I got the Irvine City Council race correct :> ). Congratulations to the Democrats on winning the House and *** the Senate. I've gotten some emails asking me what's going to happen with the UIGEA now that we have a new Congress.

Nothing.

The law was passed. It's on the books. The Executive Branch of the government (the Department of Justice, Federal Reserve, and the Department of the Treasury) will be writing regulations to implement it, in theory by July. Nothing changed this week about who is in those offices.

1. "But with the Democrats now in control of Congress, the law will be ignored, right?"

Wrong. The law is on the books. Unless Congress votes to change it, it stays on the books.

2. "But with the Democrats now in control of Congress, they'll vote to change/eliminate/rescind the UIGEA, right?"

Wrong. The Leach bill passed the House by an overwhelming majority. In fact, an overwhelming number of Democrats voted for the bill. In the Senate, most Democrats favor a ban on Internet gambling--not because they consider it amoral, but because of their "nanny-state" philosophies. This includes both California Senators, Boxer and Feinstein. There is currently no impetus to have the law rescinded.

3. "But with the Democrats now in control of Congress, the law won't be enforced, right?"

Wrong. All it takes is one U.S. Attorney who wants to enforce the law. U.S. Attorneys are appointed by the President; they're part of the Department of Justice--the Executive Branch of government. That's not going to change until 2009. And the U.S. Attorney for the Eastern District of Missouri has shown that she's more than willing to go after online gambling. I expect enforcement actions in 2007. As I said previously, if a U.S. Attorney want to go after a site, all he or she must do is (a) get a colleague in Seattle (or Indianapolis or Portland, OR) to sign up on Full Tilt or PokerStars, (b) have that individual play some poker, making sure to get screen captures (or have a video camera run showing the computer screen), and (c) cash out from the site. Then go in front of a Federal Grand Jury and you have indictments one hour later. And convictions when the trials occur.

4. "You must be joking. There are so many more important things for the Justice Department to do than this."

That might be true, but remember, it only takes one prosecutor to do this. And given U.S. forfeiture statutes, and the amount of money involved with a site, I think the sites that continue to operate are in trouble.

5. "But Neteller is still around; they're not leaving, right?"

Wrong. When the regulations are announced, I'm certain they'll ban direct transfers to online sites. Neteller has announced they'll comply with the regulations. They'll be gone when the regulations are issued.

6. "So we only have until July?"

On this issue I'm actually much more optimistic than most people. We probably have much longer than July. First, there is no penalty if the regulations are not implemented on a timely basis. As a tax professional, I see Congress write this kind of language all the time for various tax statutes. Sooner or later, usually much later, the IRS gets around to writing the regulations. There are some tax statutes written in the 1980s which had similar regulatory language and the IRS is still operating with temporary regulations! Also, remember that regulations must be submitted for comment, rewritten, submitted for final comments, and then are printed in the Federal Register -- all before they have the force of law. This is the good news; it's quite likely that the regulations will not be implemented by July 2007.

7. "Barney Frank is likely the next chairman of the House Financial Services Committee. He doesn't like the UIGEA. Given what you say above, can't he put a stop to the regulations being implemented?"

No. Congress has oversite authority on regulatory agencies, and Congressmen can certainly comment on the regulations themselves. However, Congress specifically passed a law that says that the agencies will write said regulations. Frank can't stop the regulations from being written. His comments, though, will be listened to more than someone like you or me.

8. "OK, that makes some sense. But didn't the WTO rule against the US (the Antigua case), so won't the UIGEA be ignored?"

First, the WTO did not rule against the US in the Antigua case. This is one of the biggest myths of online gambling. Indeed, with one exception (and it's an important one; see below), the US won the case against Antigua. As I previously wrote, "[The Appellate body] modifies the Panel's conclusion in paragraph7.2(d) of the Panel Report and finds, instead, that the United States has demonstrated that the Wire Act, the Travel Act, and the Illegal Gambling Business Act are measures 'necessary to protect public morals or maintain public order'...." The one caveat was that if the US is going to allow US companies to have online horse racing bets, the US must allow non-US companies to do the same.

On that one point, the US is not in compliance. The Department of Justice has said that the online horse racing sites are illegal. If so, why haven't they been gone after for prosecution? I expect the WTO to go after the US on this when the newest case filed by Antigua is decided early next year. The US will then have four choices: (1) a further appeal; (2) ban US companies from interstate horse racing bets; (3) allow international competition to interstate horse racing bets; or (4) ignore the WTO.

I've seen an issue like this impact my area of expertise: tax. The US used to have targeted manufacturer's tax credits. Cases were brought against the US at the WTO complaining that these tax breaks were illegal subsidies. The WTO ruled against the US. A year later, Congress would enact a new tax credit; a year later, the WTO would say that the new credit was just as illegal as the old credit. After five years of such shenanigans, the US enacted a tax deduction that is available to all companies doing business in the US (including foreign companies); this deduction was allowed by the WTO. If anyone expects the WTO to have an impact on this issue, they're dreaming.

9. "Hmm, you're probably right about the WTO; Antigua's too small. But let's say that somehow a repeal of the UIGEA is introduced into Congress. Could that pass Congress?"

It's very unlikely. Poker players aren't a big constituency. Indeed, let's assume the Democrats decide to expend political capital on such a bill. First, remember that they will have very small majorities in Congress (just two seats in the Senate). They have publicly stated they want to work on health care, minimum wage, and other social issues. Yet let's say they're right and someone introduces such a bill, perhaps at the request of a big casino company.

Well, such legislation isn't going to get anywhere. Perversely, it stood a much better chance in a Republican-dominated Congress of passing, as the GOP was much more likely to cater to big companies, than it does today. And more importantly, even if it passes, President Bush isn't going to sign such legislation. And there are nowhere near the number of votes in Congress to override a veto from President Bush.

10. "Then how can such legislation be passed?"

The same way the UIGEA passed--it must be attached to a 'must-pass' piece of legislation; say, funding for the Department of Defense. Unfortunately, I think it will take years of greasing Congress before that happens.

11. "So you think we're doomed?"

In the short-term, yes. In the long-term I think the amount of tax dollars available if Internet gambling were legalized will eventually persuade Congress to pass such legislation. But we're likely five years away from that.

12. "So should we cash out from the sites today?"

No. You'll have plenty of notice when Neteller and the other sites go away. I wouldn't keep extra money online, though. There's a chance I'm wrong and the sites vanish tomorrow, but it's very, very unlikely.

***********

I am a pessimist on this issue, because I think the US will repeat the mistake of Prohibition here. I'm thrilled that the major proponents of the ban are no longer in Congress: Frist (retired) and Leach (voted out). But it's going to take a lot of effort, and a lot of money, to reverse what's been done.