Some Insight Into Differences in Regulators

I had a conversation with someone in the know at PokerStars who helped clear up some issues concerning how the different regulatory bodies work and why Stars was able to pay out their players so rapidly.

First, let’s just do a quick review of where each of the indicted poker sites are located.

AP/UB: Kahnawake
Full Tilt Poker: Alderney
PokerStars: Isle of Man

Each of these three regulatory bodies has different rules for the segregation of player funds. For instance, in Alderney the relevant rules state:

2.9.2 Customer Funds

State exactly how customer funds are held by identifying which of the following three categories best describes your present arrangement:

* Not segregated or protected.
In this example customer funds are merged into the same bank accounts as corporate funds. Likewise, customer and corporate funds are also co-mingled for internal bookkeeping purposes.

* Segregated but not protected
In such example customer funds are informally segregated from corporate funds.
This is achieved by holding customer funds in separate bank accounts from corporate funds, but not formally titling such accounts as “client accounts”. This can also be achieved by showing customer funds separate from corporate funds within the internal bookkeeping system.

* Segregated and protected
In this example customer funds are formally segregated from corporate funds
This is achieved by holding customer funds in separate bank accounts from corporate funds, and formally titling such accounts as “client accounts”.

Licensees that do not hold customer funds in a segregated and protected manner must inform its customers that their funds are unprotected. The medium/s used to inform customers must also be stated, e.g. via the website, terms and conditions etc.

Conversely, licensees that hold customer funds in a segregated and protected manner may inform its customers that their funds are held in a protected manner and that this is validated by the Commission. The medium/s used to inform customers should also be stated. (e.g. on website, in terms and conditions etc).

To substantiate precisely how customer funds are held a copy of each of your customer bank account statements should be presented as an appendix to the ICS.

As you can see, Full Tilt is not required to hold the funds in segregated accounts.

Kahnawake’s rules are similarly lax. However the Isle of Man requires that even with segregated funds that the operator has to have those funds on hand. As we saw in my blog post Player Account Segregation Explained even if funds are segregated they could have been seized by the DOJ. But the Isle of Man requires that operators hold back enough money in their main account to cover those funds sitting in US banks.

So, let’s say that you had deposited $500 on PokerStars using the diagram I laid out in the Player Account Segregation Explained post. Your actual $500 is sitting in a bank belonging to the bogus business and PokerStars credits your PS account $500. The $500 in the bogus business bank account then sort of becomes part of their operational funds. Because of the money segregation rules of the Isle of Man they cannot account for your $500 in the bogus business bank account. They actually have to move the money into a segregated account in the Isle of Man (or, I’m assuming, any bank approved of by the Isle of Man regulators).

So this explains why PokerStars could refund so rapidly while Full Tilt and UB/AP have been having difficulties.

One other major difference in regulatory control is that PokerStars resides within their gaming commission’s jurisdiction something that neither Full Tilt or AP/UB do. PokerStars is headquartered in the Isle of Man which means they can conduct an investigation at any time. If they are in serious violation of the gaming statutes executives can be arrested by the Isle of Man police.

However Full Tilt is licensed in Alderney but headquartered in Dublin. AP/UB are licensed on the Kahnawake reservation but headquartered in Costa Rica. The gaming license governing body has almost no criminal jurisdictional control over their licensees.

Earlier this month the Isle of Man regulators visited PokerStars offices and issued the following statement:

GSC Statement 9th May 2011

The Gambling Supervision Commission feels it would be useful to clarify the regulations relating to the protection of player money.

All Isle of Man licensees must separate their players’ deposits and winnings from the funds that the operator uses for conducting its business

This is a mandatory licensing requirement for Isle of Man online gambling operators.

The Commission can confirm that all of its current licence holders are complying with these requirements and any players who wish to withdraw money from their gambling accounts should be able to do so at any time subject to the checks required to comply with anti-money laundering, anti-terrorist financing and know-your-customer laws.

Further to the statement we made 21st April 2011 concerning PokerStars, the Commission can confirm that:

– PokerStars continues to demonstrate compliance with the above licence condition;

– PokerStars is currently offering withdrawals to any players who wish to withdraw their funds, including players in the USA to whom PokerStars does not currently offer real-money gaming.

Now compare that with the release from the Alderney regulators:

The AGCC’s investigation into the affairs of it licensee Vantage Limited, trading as Full Tilt.com, is ongoing; initial investigations indicate no reason to believe that player fund transactions are fundamentally threatened by any consequence of the US authorities’ actions. Delays caused by these actions are in the process of resolution, with normal service now being restored for non-US players. We understand that progress in respect of US player fund repatriation is anticipated and will be the subject of a separate statement from Full Tilt in due course. The Commission will remain engaged in this process.

Or look at the statement coming from Kahnawake Gaming Commission:

(MOHAWK TERRITORY OF KAHNAWAKE – April 19, 2011) – The Kahnawake Gaming Commission (“KGC”) is reviewing the indictments issued on April 15, 2011 by the Southern District of New York against three online poker companies, one of which (Absolute Poker) holds its primary gaming licence in Kahnawake.

The KGC’s principal concern is that players are not adversely affected by the actions taken by US authorities. The KGC is presently engaged in discussions with its licensee concerning the status of player accounts.

Upon completion of its review, the KGC will determine what steps may be required and will issue a further statement at that time.

Granted, Kahnawake hasn’t even issued a statement since April 19th but notice the subtle wording differences between Isle of Man and the other two. The Isle of Man “can confirm” while Alderney “understands” and Kahnawake is “engaged in discussions.”

I want to stress that, as I mentioned in my previous post Surprise, Surprise FTP Speaks and Says Little, I believe that US players are best served by a US regulated market. I believe that to fully represent the needs and rights of the players that the players must have some way in order to exert influence. If we get federal regulation then as voters we can have some say into the regulatory process. If on a state by state basis we also have input into the regulatory process.

But when the regulators are tribal areas and overseas the players have to rely on remote governments that don’t necessarily answer to the people being governed by them.

And while it may sound like I’m promoting PokerStars or the Isle of Man gaming regulators in this post I’m only trying to point out how subtle little differences in the regulators rules can mean the difference between a timely payout and being kept in limbo with no estimate on when (or in the case of UB/AP, if) you’ll see your money.

Prior to Black Friday I was not a big fan of how countries like France and Italy had their own regulated markets. I just didn’t see the need for them. But seeing out various regulators have handled the fallout and really digging deep into their regulations I can now see the wisdom for a country like the US to regulate it’s own citizens. To have it’s own rules and to be able to have those rules enforced in a local court of law.

But like a lot of things, when everything is working great you don’t see a need to change or improve. It’s only when the whole thing goes pear shaped that you start to notice the flaws.