Wednesday, January 17, 2007

NETeller Founders Arrested on Money-Laundering Charges; Reactions Run Gamut

(LATE EDIT --- NETeller just donked down; they are no longer available to U.S. customers for the purpose of depositing or withdrawing to/from online gambling sites.)

As promised, we're going to waste a few megapixels on the topic of NETeller, as of late the online financial transfer service (or just plain ol' e-wallet), servicing, among others, the online poker industry.

Earlier this week, news broke that the two original founders, John Lefebvre and Stephen Lawrence, had been arrested in separate locations by U.S. authorities. Early speculation ran amok as partly inaccurate reports flooded online-gambling sites. It turns out that Lefebvre, a middle-aged hippie type who also put in a few years as a corporate attorney, was detained at a Malibu locale, while Lawrence, several years younger than Lefebvre, was arrsted in the U.S. Virgin Islands.

It wasn't even for sure what the two were being detained in connection with, early on. Speculation tied it to Lefebvre's flower-child past, though anybody stopping to think for a second would realize how unlikely that was, because the arrests were of both Lefebvre and Lawrence. It had to be something that the two did together, and that meant... NETeller.

So it wasn't a great surprise when the DoJ announced the particulars of the case, charging both Lefebvre and Lawrence with money-laundering crimes in a seven-page indictment quite notable for its bombast, something your blogger recognizes pretty well, at that. Essentially, in a case going back several years and still being built today, the USDOJ alleges that NETeller is a "massive criminal enterprise" intentionally engaged in a willful circumvention of U.S. law.

Of course, NETeller was founded in Canada, and Lawrence and Lefebvre are Canadian, and of course NETeller was taken public several years ago and is now traded on London's AIM (Alternative Investment Market), part of the London Stock Exchange. That NETeller does business in 160 countries and now processes online transactions at a rate scheduled to eclipse $7 billion annually, matters naught. The USDOJ built the case by having a "Cooperating Witness" (love that term) open two or three sportsbook accounts, also open a NETeller account, and fund the sportsbook accounts in that manner.

In the indictment, the USDOJ also alleges that Lawrence and Lefebvre created a couple of secondary companies that were used for little reason other than to further obfuscate the nature of online transactions, and that's where the nature of these charges gets way interesting. You see, the founders of NETeller were arrested, but neither of the two remains an active part of the company today, despite owning sizable blocks of stock worth hundreds of millions.

The USDOJ is attacking NETeller by arresting its founders, who are no longer part of the company. In fact, according to continuing reports, NETeller Plc --- the publicly traded, regulated company that exists today --- has yet to even be contacted by U.S. officials on the matter.

Can you say "show case"? I knew you could.

But show cases can still be effective, and this one will no doubt have a dampening effect on the online-gambling market and, by extension, online poker. Once again, poker is not part of the case, but poker gets hurt by the same broad brush, due to its similar structure to sportsbook operations and online casinos. As with all previous state and federal cases of note, this is a sports-betting case being brought under provisions of the old Wire Act, per the specifics within the indictments.

It's quite clear that the U.S. is intent on sending a MESSAGE here: We're big and bad, and if we can reach you we will hurt you. And what they will accomplish is exactly what they don't want to see --- the online financial providers will be based outside the U.S./U.K. sphere of influence, and they'll use multiple channels of obfuscation to feed right back into the same world-intertwined financial network as before, with an extra level or two to circumvent the blocks. Online poker faces a near-future bump in the road, but it's just that, a bump. Maybe even a big-g-g-g bump. Not a wall.

And all this because the United States considers itself above the trade agreements it has itself negotiated and championed. That little WTO matter has yet to play out, as well. Talk about wanting to have one's cake and eat it, too, and that is exactly what this matter is about. These arrests and the WTO case are unconnected in the specifics, but one plays into the other; in fact, this may even be a move by the U.S. to circumvent the other.

Anyhow, what's odd is that both the original NETeller founders allowed themselves to be so blatantly within U.S. judicial reach, knowing that they would be targets for a show case such as this. Pity that these guys, despite their millions, didn't recognize the desperate nature of the U.S. situation, couldn't fully see that the U.S. was and is looking for high-profile targets to punish and make whipping boys out of to pursue their illogical, billion-dollar hissy fit. The U.S. had to make a grandstand play here... and make it they have.

Ah, well. Lefebvre is already out on $5 million bail, and Lawrence is expected to do the same. Wish them well.

Which brings us back to NETeller itself. This colossus of the online-transaction industry has already announced that it plans to comply with U.S. regulations as soon as those regulations are issued, although it's noted that in connection with some of these laws, regulations are so delayed that they end up never being issued. This could also be part of what's going on here, a clumsy and ham-handed attempted to force NETeller from the U.S. market earlier than scheduled.

So far that doesn't seem to have had the desired effect. NETeller issued a statement that the arrests concerned the original founders of the company, and reiterated NETeller's own stance and plans. NETeller did make some changes, however, disabling the "InstaCASH" function for U.S. customers, although NETeller commented that this was already in process and was merely a matter of coincidence in the timing.

Some sky-is-falling types recommended an immediate pullout of NETeller funds, or a reinsertion of those funds into major poker sites where other transaction formats are available. I admit myself that I had a couple of tiny NETeller transactions in progress myself, but those were already in progress. I can confirm that as recently as today, they are functioning normally, reports of traffic surges notwithstanding. Rumors of NETeller's imminent pullout from the U.S. market remain just that, rumors, but even if it did happen, so what? NETeller is a massive, highly liquid operation with immense cash reserves. They are not going to skulk off into the night with the account holdings of one country's patrons --- even if it is the largest country currently being served --- because they would then lose all credence with 159 other countries.

There's nothing wrong with pulling money out of NETeller, but do it for the right reasons, not the wrong ones. NETeller is going to go away at some point, and it may do so sooner rather than later. But they've already announced this, so why the hand-wringing and gnashing of teeth?

In the long term, the U.S. is in a global battle it cannot win. It can take punitive measures such as this, and you can bet that the U.S. will do a lot more, with other show cases sure to follow. Still, the U.S. cannot erase this global market, try as it might; it can only attempt to crimp online gambling in an attempt to gain its own larger foothold, and that day is coming, too. This isn't a struggle about right or wrong, it's a struggle about money.

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