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Citigroup’s decision to block fantasy sports payments could be illegal




Citibank could be breaking the law (UIGEA) by disallowing payments to daily fantasy sports sites in New York.

Citigroup just announced that it will be blocking payments by New York residents to FanDuel and DraftKings citing its concerns over the legality of the products in that state. This follows the move by Vantiv to no longer deal with transactions from the sites as well. It's obvious that Citigroup's decision stems from the lawsuit filed by New York Attorney General Eric Schneiderman to try and force daily fantasy sports (DFS) sites to stop catering to New York residents but Citigroup's decision could be premature because as of right now residents are doing nothing wrong.

The carve out for fantasy sports in the UIGEA is quite clear and there is nothing in the law that requires contests to take place over a full season or have set limits to be legal. It's true that DFS sites have always blocked residents from five states including Arizona, Iowa, Louisiana, Montana and Washington, as well as the Canadian province of Quebec, but that's only because state and provincial laws in those jurisdictions could be interpreted to make any activity which includes staking money to win more money illegal, and clearly DFS would fall under this definition. Most lawyers agree that DFS chose to offer their products in those states they would likely win any lawsuits the states decided to initiate since the UIGEA would supersede those ambiguous state laws, but FanDuel and DraftKings have decided to err on the side of caution and block their products in those states, although they are also lobbying with local interests to change the state laws to make it clearly legal. It's also likely the DFS sites are concerned about the state of Washington where the law there allows the police to charge individual bettors rather than having to go after the gambling companies and the last thing the DFS sites want to do is to cause trouble for DFS players.

While the DFS sites likely believe they have the legal representation to beat any challenges, they also want to operate on the side of caution for players who surely wouldn't have the same resources. But in New York there is absolutely nothing on the books similar to the aforementioned states that can be construed as making DFS illegal nor does the state have any interest in charging individual bettors. If Schneiderman's suit is successful then a new statute will have to be written that specifically makes daily fantasy sports illegal but until that time the state is governed by the rules of the UIGEA which allows fantasy sports under its current format.

So what does that mean for Citibank's decision to block New York residents from paying? The answer is that Citibank could actually be breaking the law.

Citi blocking DFS transactionsWhen the regulations for the UIGEA were finally passed just prior to Barack Obama taking office in 2009 they were very ambiguous but also strict as to what banks couldn't do. The banks asked for the name of illegal sites to block in order to adhere to the regulations but the Department of Justice and Treasury Department at the time instead told the banks to figure it out for themselves. The governement also put in a caveat not to block legal gambling transactions, particularly those exempted under the UIGEA or face repercussions. Faced with a situation where they could be charged for allowing illegal transactions (even though they didn't know what illegal transactions were) the banks indicated they would probably just block all gambling transactions and let the chips fall where they may.  In return the DoJ and Treasury told the banks not to "overblock" or they could face ramifications for that as well. Of course the result was a mess and banks pretty much just went about business as usual. If they suspected illegal gambling transactions they questioned their clientele about it to show the government that they were making a concerted effort but for the most part they did nothing different than they had previously. So Citibank's decision now to block DFS transactions actually could be illegal under the rules of the UIGEA, although it's very unlikely that the federal or New York Department of Justice will penalize them for that decision. The truth is that the feds are just as confused about whether DFS was meant to be exempted under the UIGEA as the banks are. That is why many federal agents, as well as state attorneys, are anxiously awaiting the decision by New York's court to determine how they should proceed.

What is somewhat unfortunate about the whole debacle surrounding DFS is that it can all be laid on the shoulders of one individual – Ethan Haskell.

Until September 27, 2015 all the talk about DFS was regarding its exponential growth, the love affair Americans and sports teams had with it and the numerous sponsorship and revenue sharing agreements DFS sites had in place with sports leagues. It seemed that everyone just accepted that DFS was legal and the majority were trying to figure out how to benefit from the success. Then on September 27th, Ethan Haskell, an employee at DraftKings, inadvertently leaked the picks of other DFS players for the main football contest leading to concerns expressed by players and national media outlets including the New York Times as to whether employees had an unfair competitive advantage and whether DFS was a reputable business. As part of the investigation into the leak it was also determined that Haskell won $350,000 at rival site FanDuel and that employees regularly won contests at the competition site. As a result of the report, a media storm of articles were printed questioning the legality of DFS let alone whether it's reputable, and politicians from all over the U.S. started weighing in on the question.

Draftkings fantasy sports legalNevada's attorney general almost immediately said that DFS was illegal in their state and told the sites to stop operating there to which the sites agreed, Schneiderman launched his lawsuit and Illinois attorney general Lisa Madigan stated her opinion that DFS is clearly gambling and indicated she would be asking the sites to stop catering to Illinois residents as well. Moreover AGs from various states started looking at their laws and at the specifics of DFS to see whether it should be banned and over 20 states indicated that they wouldn't ask for it to be made illegal but wanted DFS regulated with strict rules in place plus of course they wanted a share of the profits in the form of a tax. So in 4 months following Haskell's leak, DFS went from being the industry every entrepreneur dreamed about to being deemed a rogue industry, similar to offshore gambling, that most Americans feel doesn't deserve any sympathy or protection. And it's also affected the products itself.

The number of clients at both DraftKings and FanDuel have dropped significantly compared to prior years, the prize pools have dwindled and a lot of amateur and smaller DFS players have stopped playing after reports showed that like online poker more knowledgeable players won consistently at the expense of "fish" who submitted inferior lineups. And it was also proven that over 90% of DFS players have failed to win a cent in any contest. Yet despite all this turmoil it appears that Haskell still works at DraftKings even though most would have expected that DFS employees and managers would have been marching to his house with torches and pitchforks after his actions.

As for Schneiderman's lawsuit, there still hasn't been any decision made, which is surprising since Manhattan Supreme Court Judge Manuel Mendez indicated he would be "rendering a decision soon" and most lawyers expected a decision in January. Citigroup's decision is a disappointment to the DFS sites but fortunately for players there are numerous options. Most other credit cards are still accepted on the site and PayPal is still the main source of payments to both FanDuel and DraftKings. And with PayPal players can deposit with a credit card or directly from their bank accounts. The optics of Citigroup's decision is far more concerning to the Daily Fantasy Sports industry than the decision itself.

Read insights from Hartley Henderson every week here at OSGA and check out Hartley's RUMOR MILL!