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Addressing the Stated Gambling Concerns - Legitimacy of Games and Operators...By Hartley Henderson

When the internet prohibition bill was introduced, the Government stated four reasons for wanting internet gambling banned. These included 1) a concern that the games and/or operators may not be on the up and up 2) that there is a greater risk for underage betting 3) that there is a greater risk for addiction and problem gambling and 4) that it will take away from state revenues derived from land based casinos. Later, the concern over money laundering came up.

Over the next couple of weeks I will be putting together a series of articles aimed at addressing each of these concerns to show that they are not as dire as the U.S. Government has made them out to be. And more importantly that they can be easily rectified, even more so than at brick and mortar casinos. The series will close with an article discussing the benefits of online gambling and why the 2008 U.S. Democratic candidate should consider having online gambling legalization as a issue for his or her campaign. In this article I will address the first stated concern, namely that games and/or operators may not be legitimate.

When Kyl stated his fear that online games may not be legitimate, the implication was that they could be fixed to pay out at a poor rate or that they could be rigged in other ways. Obviously in stating this he was not considering wagering on sports where the outcome is settled on the field of play. In sports betting, with the exception of horse racing, the odds are fixed and the payouts are known. If someone bets on a team at -110 for $550 they know that they will either win $500, lose $550, or have their stake returned to them in the case of a tie. Even parlays, futures and teasers have fixed odds associated with them and the potential payout or loss is known in advance. The funds for the bet are withdrawn from the account as soon as the wager is made, and the winnings are credited after the game or competition is complete. There is no way to "fix" payouts for sports betting online, and furthermore the odds at most offshore sportsbooks are actually better than they are in Las Vegas. It is not uncommon to find less than the standard 20 cent lines on many sports with online books, and parlays and futures generally pay out at a better rate. For football and basketball, most Las Vegas books still pay 6/1 on a 3 teamer, 10/1 on a 4 team parlay, 20/1 on a 5 team parlay and 35/1 on a 6 team parlay. Online, most sportsbooks will payout at a multiple of whatever their game lines are. So 3 teamers will also pay 6/1 but 4 team parlays pay 12.3/1, 5 team parlays pay 23.4/1 etc.

As such, Kyl's trepidation must have been in regards to casino games and poker. These fears are legitimate, but funny play with today's software is almost impossible. Aside from the fact that news of any rigged games would spread like wildfire across the internet, leaving the casino company with no customers, for the most part, casino or poker companies do not have control in the design of the programming for the games. The games are purchased from various software suppliers like Wagerlogic who ensure that their software is not compromised. Clearly, a publicly traded company like Cryptologic with blue chip gaming clients in respected jurisdictions are not going to risk its business model with unscrupulous casino companies, so they maintain control of their product by only licensing those companies to use the software and then in turn work in a partnership with the host site. It may appear that the site itself is in full control of the software, but in reality they have no way of altering the randomness of the payouts. And if it is determined that there are problems with the site, the software provider usually has a right in its contract to revoke the license. The games are powered by complex random number generators and are set to pay out at a predetermined percentage. And for most reputable suppliers and casinos, the payout rate is clearly listed on the site - usually from 94 to 98 percent depending on the game played. The payout rate cannot be altered or manipulated by the casino. Obviously there will be times when the dealer will win 5, 10 or even 20 times straight causing everyone to yell "fix", but there will also be the same result on the other side. In any land based casino, there will be hot and cold streaks in any blackjack, craps or other casino game, so one has to expect the same thing to occur online. Clearly, online casinos would prefer that the games appear as random as possible to eliminate any protests from the public and the inevitable cries of "fix" when dealers go on streaks. The problem of course is that to do this, the software company would actually have to rig the games. If games are realistic they have to be truly random which means at times they will appear rigged. But studies and audits from companies such as Price Waterhouse Coopers and Deloitte Touche have shown over and over that online casino games are truly random.

As for poker software, the same holds true as with online casinos, but with one major difference. Unlike online casinos, players are playing against each other and not the house. The poker room takes a percentage from each round of hands dealt (the rake), similar to any poker room in the United States or elsewhere in the world. In poker tournaments, a small fee (usually 10%) is added to each entry to provide the poker room and software provider with an incentive for offering them. So in a $20 tournament with 100 people, there will be $2,000 to divvy up among the winners and the poker room will net $200 as a fee for hosting the tournament. Since the players are independent of the poker room, there is absolutely no incentive for the poker rooms to rig any software. There have always been rumors of cheating in poker rooms, but as was posted in my article: "It's Not the Software Stupid, It's You"! =25394872, there is just no proof that the software is rigged. I tested close to 2,000 hands at various levels and in different game types, and the results were random. Clearly the result of bad beats is the fact that bad players play too many hands, particularly at the lower limits and too often get lucky. Most of the time, however, the poorer players lose.

That said, there have been other concerns mentioned in regards to poker, which could make it appear that the legislators were correct in stating online poker is subject to more questionable tactics than in brick and mortar poker rooms. These include collusion, robots, poker cheats and people who purposely disconnect. As it stands now, the number one issue poker rooms face to protect the integrity of their games is player collusion. This occurs where two or more players at a table work together to improve their chances. Often they will be on Instant Messenger and relay to each other what cards they have. By knowing 2 or more of the hands at the table it gives the colluders a huge advantage in knowing when it's appropriate to fold, raise or call. Furthermore, colluders with weak hands can often raise the bets to help out the colluders with great hands, forcing others to spend more money to get into the pot. This is essentially the equivalent of the guy at the auction who works for the auction house, but puts in bids to force others to raise theirs. The good news is that poker monitoring software is becoming increasingly more sophisticated so that the poker sites can usually spot colluders almost immediately. When someone folds Q-Q or A-K suited prior to a flop it sends off alarm bells to those monitoring the play, particularly if someone else has K-K or A-A. And upon spotting collusion, if the players cannot provide valid reasons for their play, the poker sites will ban them and their IPs from playing at that poker room any more and will inform other poker rooms on the internet about the colluders. Brick and mortar poker rooms don't even have ways to do perform this type of monitoring.

A lesser concern is robots, or computers that play a large number of games. These robots have all the calculations in mind, know the odds and play according to the "rules". They also can be set to bluff every dozen or so hands to keep the other players honest. The problem of course is that if they play high stakes games they could be in against the Greg Raymer or Chris Ferguson types who are more skilled and have the human skills that robots don't have to read players. At low stakes games they may be playing bad players who will beat them often by going in with 3-5 offsuit and lucking into a straight. But more than that, the monitoring software will pick it up. If a player has played for 20 hours straight or there is a set reaction time to every player response, the software will flag it as a robot and block the IP from playing there or across the poker network anymore.

Software cheats are computer programs that hack into the software and allow you to see the other people's cards. I read about this on several occasions, but upon speaking to thousands of online poker players I have yet to hear of anyone this has actually happened to. Firewall technology and poker software today are just too sophisticated, and if this did indeed happen news would spread and the poker room would be out of business in a heartbeat. In 1999 there was a problem with the algorithm at an online poker room, but the software was patched immediately and similar problems were never reported there afterwards. Poker software has improved remarkably since 1999.

Lastly, there is always the concern that players can disconnect if they have a hand that they don't want to play but also don't want to fold. This was a problem with online poker at first, but was quickly remedied when players were given one "all in" per day and then their hands were automatically folded if they disconnected. Regardless, the poker rooms monitor IP addresses, suspicious betting, and security can call up histories of every card someone has played to look for behaviour patterns or study players who appear to be "too close". When it is determined that someone is cheating, their accounts are closed and their IP addresses banned across the player network. The risk of cheating is just too high.

But in any case, there is another solution as well. CPA firms like Price Waterhouse Coopers and Deloitte Touche have started conducting quality audits as a standard product they offer. Quality audits ensure that products run as they are supposed to. This includes monitoring IT programs, statistical models and anything else that can call on the credibility of the program. Since the U.S. Government trusts these public accounting firms to be upfront with the results of the financial statements for publicly traded companies, and since the Government uses these same companies to conduct Government audits where they determine whether a government is spending tax money wisely (which are essentially quality audits), they would certainly feel comfortable if independent auditors from these public accounting firms can confirm that all casino games, poker rooms and the grading of sports bets are legitimate and fair. It should be noted that most casinos and poker rooms already conduct voluntary audits on an annual basis, but if using named firms ensures they can stay in business it is doubtful many online operations would object to it.

That brings us to the other concern, namely the legitimacy of the offshore casino owner themselves. This is more of a political issue than the games themselves, but it shouldn't be a problem to address. There have been instances of offshore owners who have taken post up money and just skipped town with those funds. It happened with RKR Sports, it happed with Dial-A-Bet, it happened with Ace's Gold and it has happened at other times as well. For the most part, offshore owners have been honest and have never had payment issues, but there is a chance that a disreputable individual could be granted a license to operate. Clearly the U.S. Government would prefer if all the offshore operators were hard working MBAs who volunteer with the Boy Scouts or Big Brothers in their spare time, but moral character has never been an issue when licensing brick and mortar casino operators in the United States. What does need to be considered is whether the owners are qualified in their field and can pay the players. When it comes down to it, the only real concern of bettors and government is that the owner has the funds to bankroll the operation. This can be determined in 2 ways. First, a background check can be conducted on of all the key individuals and beneficial owners who apply for a license to ensure that they indeed have the necessary know how and resources to run an online casino or sportsbook. While this won't guarantee that the owner won't leave town early, it will at least ensure that they have the resources and are not simply gamblers hoping for a quick buck by operating as the house on borrowed money. A second option is to have a licensing rule similar to Australia. In that country any owners must have all post up funds held in escrow in a separate bank account that is accessed only by the government. This ensures that if an operation were to go under, all people with accounts at the operation in question would have their post up money returned to them. As well, there must be a mandatory decision not to allow credit betting under any circumstances. By instituting these requirements, if a company were to fail, at least the bettors would have their money returned. Naturally, this won't guarantee that money is paid for pending futures bets or any large surpluses in player's accounts, but at least it ensures the operator can't continue in business and run up further losses or skip town and run away with all the post up money. If a Las Vegas casino were to go under, it's safe to say that the Nevada government wouldn't assume liabilities for any large future bets either.

Hopefully I have shown that any concerns related to the honesty and integrity of online games and operators can be addressed in a manner that makes everybody happy, and that routine public audits will ensure that games are never compromised and run as they should.

In my next article I'll address the concerns of underage betting and problem gambling.

Hartley Henderson

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