By Lorraine Woellert

Dec. 3 (Bloomberg) -- Internet-based poker games can be subject to manipulation, a top Federal Bureau of Investigation official said.

"There are several ways to cheat at online poker, none of which are legal," Shawn Henry, assistant director for the FBI's cyber division, wrote in a letter to Representative Spencer Bachus of Alabama.

"Technology exists to manipulate online poker games in that it would only take two or three players working in unison to defeat the other players who are not part of the team," Henry wrote. "The online poker vendors could detect this activity and put in place safeguards to discourage cheating, although it is unclear what the incentive would be for the vendor."

Bachus, the top Republican on the House Financial Services Committee, released the Nov. 13 letter today at a hearing on Internet gambling.

Committee Chairman Barney Frank, a Massachusetts Democrat, has introduced legislation to reverse a 2006 law that makes it a crime for financial institutions to process online gambling transactions.

On Nov. 27, the Federal Reserve and the Treasury gave U.S. financial companies six more months, until June 1, to comply with the Unlawful Internet Gambling Enforcement Act.

At today's hearing on the bill, technology and gambling industry executives said their technology can protect against identity theft, thwart money laundering and block minors from gambling online.

‘Wild West'

"Today's illegal online gambling is a Wild West affair," said Michael Brodsky, executive chairman of Burbank, California- based Youbet.com Inc., which accepts online wagers on horse racing. Internet betting on horse and dog racing is legal in many states.

"The only way to put any controls on Internet gambling is to legalize it and regulate it," Brodsky said.

Youbet.com said last month that it would be acquired by Churchill Downs Inc., of Louisville, Kentucky, which hosts the Kentucky Derby, in a cash-and-stock transaction then valued at about $126.8 million.

Frank said he would begin to advance the legislation when Congress returns next year. He called a ban on Internet gambling a "threat to liberty."

"It is unwise for the government to tell people how they can spend their money," Frank said.

Regulating Industry

WiredSafety, a non-profit education group funded in part by a coalition of online poker players, released a study today rebutting claims that online gambling is unsafe. The report by Malcolm Sparrow, a professor at the John F. Kennedy School of Government at Harvard University, said a regulated industry would offer better protection than prohibition.

"Online banking is the exact same form of commerce as online gambling," said John Pappas, executive director of the Washington-based Poker Players Alliance, a coalition that favors legalization and regulation of Internet wagering.

"Online gambling is financial commerce over the Internet," Pappas said in an interview. "Financial commerce over the Internet occurs every day and it's regulated."