There isn’t a gaming regulator on the planet which doesn’t have protecting players as part of its mandate: Every regulatory proposal in the EU or US argues its own necessity on the basis of protecting players. Players are protected from becoming gambling addicts, from fraud and from rigged games, but their deposits are left totally exposed. Full Tilt, Everleaf, Purple Lounge and 5050 Poker show the failure of regulation when it comes to protecting players’ money.
Some regulators require poker sites to maintain “segregated funds.” Malta’s Lotteries and Gaming Authority (LGA), regulator of Everleaf, Purple Lounge and 5050 Poker, has just such a stipulation in its regulations. Why then are the players with deposits on these sites waiting for their money or worse, expecting to lose some or all of their bankrolls?
The Problem of Ownership
It is not generally known that funds placed on deposit in a bank account don’t belong to the customer. The money you have in your bank accounts is not legally yours. The system just doesn’t work the way people think it works. From Wikipedia:
“For example, a depositor opening a checking account at a bank in the United States with $100 in cash surrenders legal title to the $100 in cash, which becomes an asset of the bank … The bank’s financial statement reflects the economic substance of the transaction—which is the bank has actually borrowed $100 from its depositor and has contractually obliged itself to repay the customer according to the terms of the demand deposit account agreement. To offset this deposit liability, the bank now owns the actual, physical funds deposited, and shows those funds as an asset of the bank.”
The situation is legally identical when you deposit money in “your” account on a poker site. The critical difference between the two is that National or Federal deposit guarantees exist to protect deposits up to a certain threshold if the bank goes bust. Banking regulators also closely monitor what banks do with the money (although the current financial crisis doesn’t give them much credibility either!).
But the same is not true for online poker. “Full Tilt’s regulator, the AGCC, got one thing right: Simply segregating the player funds is no silver bullet.” There’s no deposit insurance covering your poker bankroll and minimal supervision of how the companies are managing the funds in your account.
The Result is Catastrophe
“The operational cost of 5050 Poker Ltd has for a long time exceeded the revenues, resulting in players’ funds being used in the operation of the company … the Board of Directors [of the parent company] has been presented with false information on the size of the players’ fund, the costs of operations as well as the size of the company’s assets.”
“… there is no reason to believe that the payback ratio will be higher than 15% of the actual balance of the players’ funds.”
The above statements come from 5050 Poker Holding AB, A public company listed on the NASDAQ OMX. 5050 Poker Ltd is its only asset, being the operating company based in Malta and licensed by the Maltese LGA.
Breathtaking! A public company that doesn’t know how much money it has in its only subsidiary; a regulated subsidiary contravening the regulations on player fund segregation; player funds used for operating costs, and no warning at all from the regulator. 85%+ of player funds have disappeared.
On the liquidation of a poker company, players have no more legal rights than other creditors. The legal phrase is “ranking parri passu” with other unsecured creditors, who will include suppliers and employees. Even if all player balances had remained intact and segregated, these other creditors would still have been entitled to the money to satisfy their own claims on the company.
Full Tilt players remain in complete ignorance of the probability of them recovering any of their money. When the DOJ took action against Full Tilt, its assets were seized. The players’ funds (to be more accurate, the players’ remaining funds) were seized too because as far as the DOJ was concerned they were simply a part of the company’s assets. Full Tilt’s regulator, the AGCC, got one thing right: Simply segregating the player funds is no silver bullet.
Note the different outcome for Full Tilt and PokerStars. Pokerstars had effective financial controls and genuinely segregated player funds as well as the financial strength to weather the setback. Within a short time US customers of PokerStars were made good. Why?
Trust Fund Solution
“PokerStars’ approach provides a third-party, fully independent trustee being appointed to oversee player funds in France. The Trustee will be a UK trust company wholly owned by IFG Group PLC, an international financial services company with full market listings in London and Dublin.”
When player funds are placed in a trust, the ownership of the money passes to the trust. Their money cannot be lost on a liquidation or misused for operating costs. According to Gabi Campos, at the time the CEO of PokerStars:
“This protection is a simple extension of the protection already afforded to PokerStars players playing under their Isle of Man license … we have developed a unique structure that is ideal for the newly regulating markets. We hope that all responsible licensing authorities will ultimately insist that online gaming companies maintain the full amount of customers’ funds in fully segregated, independently managed accounts.”
This is not an expensive solution to the problem. A trust is cheap to set up requiring no more than a few simple legal agreements. The IT systems can be set up to sweep excess funds from the trust into the company’s accounts or top up the trust funds if necessary. In investment banks such transactions are routine in trading accounts.
Regulators need add only a line or two to their existing regulations, and check that companies are using the system; such checks can again be automated. A low cost system of player protection that can put an end to the debacle we have seen over the past year that has brought the whole online gaming industry into disrepute; who could possibly object?
“In every big transaction,” said Leech, “there is a magic moment during which a man has surrendered a treasure, and during which the man who is due to receive it has not yet done so. An alert lawyer will make that moment his own, possessing the treasure for a magic microsecond, taking a little of it, passing it on …”
— “God Bless you, Mr Rosewater” Kurt Vonnegut 1965
The reality for many gaming companies is that they need cash to pay for operating costs and player withdrawals. Any extra cash can be invested to generate an additional return. Any barriers to that investment remove the potential upside. Trust funds for players’ deposits take away the opportunity for that “magic moment.” Player funds constitute very large sums of money, money which currently belongs to the company and some corporate treasurers cannot resist trying to use that money to add extra revenue or to smooth erratic cashflows.
The player trust concept reduces companies’ freedom to gamble with your money. The best, the virtuous, those that believe in “the customer comes first” won’t gamble with your money, they’ll help you to gamble with it. The others shouldn’t be in the business anyway.
PokerStars has seen an opportunity to secure a competitive advantage by promoting player fund trusts. The incentive for other companies is weak. The people who have most interest in this, the players themselves, have very little voice and even less influence on legislative and regulatory processes which follow the dictates of the big money lobbyists.
What can be done? Players can vote, send emails and inform regulators and politicians that this is what we want. Share this article with other players, get the message out: Players don’t have to put their money at risk; there is a solution and it’s an easy one for politicians, regulators and the industry to adopt.