Re-Thinking Internet Gambling: International Regulatory Models and Hot Topics in 2009
Michael D. Lipton, Q.C. and Peter J. Kulick
Dickinson Wright
North American Gaming Regulators Association
2009 Annual Conference
Washington, D.C.
June 3, 2009
I. Introduction
The origins of gambling, according to some accounts, extends as far back as the dawn of mankind.[1] The advent of the internet traces back to the 1960s, with wide-spread use beginning by the mid-1980s. The internet has revolutionized the exchange of information and global commerce. It was merely a matter of time before the gambling world would intersect with the world wide web. The intersection finally occurred in 1995 with the launch of the first internet-based gambling website.[2] Some fourteen years later, the i-gambling industry has evolved into a multi-billion dollar industry populated with over 2,800 i-gambling websites.
A global effort to ban i-gambling quickly became impractical after the launch of the first i-gambling website as nations such as Antigua and Barbados and Costa Rica moved to legitimatize i-gambling. The remainder of North America has largely followed a different route by resorting to legislative means to prohibit i-gambling. In contrast, some European Union ("EU") nations, most notably the United Kingdom, have authorized i-gambling and established licensing regimes.
The virtual world in which i-gambling operates presents new challenges to regulators. The internet alone presents an evolving array of legal issues. The internet has become an essential component of global commerce and communication. The internet is often described as the modern reincarnation of the proverbial "Wild, Wild, West," -- the last place on the globe with laissez-faire regulation. In contrast, the gaming industry has historically been heavily regulated. The regulatory issues i-gambling face are similar to traditional land-based gaming. However, i-gambling presents an additional range of challenges due to the unique characteristic of the internet which can permit a person to act anonymously and literally reach a global audience from anywhere in the world.
The regulation of i-gambling in the United States formally took effect with the passage of the Unlawful Internet Gambling Enforcement Act ("UIGEA") on October 13, 2006. The Department of the Treasury and Federal Reserve Board jointly promulgated final regulations implementing UIGEA on November 12, 2008. Internationally, developed nations have adopted diametrically differing regulatory models. For example, Germany and Norway, have opted to ban i-gambling, while the United Kingdom authorizes i-gambling. Other nations have tried to operate in ambiguity by either adapting antiquated laws to i-gambling or tacitly failing to enforce existing laws. The state of i-gambling regulation can aptly be described as a fluid state. The fluidity can be exemplified by recent efforts in the United States to make an 180 degree regulatory change to adopt a model authorizing and licensing i-gambling.
The historical development of i-gambling is first discussed below. The outline then discusses the issues and approaches which have been taken to regulate i-gambling. Current developments are then discussed. Finally, the outline examines the future regulation of the i-gambling industry.
II. The History and Economics of I-Gambling
A. The Historical Development of Internet Gambling and the Early Regulatory Models of Internet Gaming
Gambling is interwoven in the fabric of man.[3] The modern history of commercial gambling in the United States dates back to more recent times when Nevada became the first state to legalize gambling in 1931. It took over forty years later for New Jersey to become the second state to legalize commercial gambling. In the ensuing two decades, commercial gambling has expanded to reach a total of 12 states and Tribal gaming has led to even greater prevalence of gaming in the United States. By 2007, land-based gaming was a $34.1 billion industry in the United States alone.
The expansion and development of i-gambling has resembled the speed at which the internet has become an essential component of everyday life. In the decade and half after the launch of the first i-gambling website, as of 2009, there are an estimated 2,800 i-gambling websites.[4] North American residents, despite bans on i-gaming, accounted for approximately 47% of the gross gaming revenue in 2005.[5]
It did not take long for nations to legitimize i-gambling following the launch of the first i-gambling website. Antigua was one of the early nations to establish an i-gambling licensing system.[6] Antigua remains one of the more popular offshore jurisdictions in which i-gambling website operators will seek to obtain a gaming license. In North America, the First Nations tribe, the Mohawks of the Kahnawake Territory, established the Kahnawke Gaming Commission, in part, to regulate i-gambling in 1996. The Kahnawke Territory is located in Québec. Over the course of the last decade, the United Kingdom, Australia, and France have similarly adopted laws to regulate i-gambling.
B. The Economic Expansion of I-Gambling
Practically overnight, the i-gambling industry has blossomed to a multi-billion dollar segment of the global gaming industry. Shortly after inception, as of 1997, the i-gambling industry generated revenue of approximately $300 million.[7] Between 1997 and 1998, revenue from i-gambling more than doubled to $651 million.[8] Slightly over a decade later, industry experts have forecasted that i-gambling will be a $22 billion industry in 2009.
III. Regulating Internet Gambling: Identifying the Concerns of Gaming Regulators and International Models Used to Regulate Internet Gambling
The crossroads of the internet and gambling present a degree of uneasiness for many gaming regulators because of the anonymity and isolation in which the internet can operate. The ability of a person to place bets from his own home and for operators to operate sites from remote -- and perhaps unknown -- locations raise legitimate regulatory concerns. Regulators may have a suspicion regarding the identity of bettors and whether gambling games are fairly operated. Consequently, from a regulatory perspective, there may be a reluctance to authorize i-gambling. Despite these concerns, several developed countries have authorized and regulate i-gambling. The following discussion, accordingly, considers regulatory concerns with i-gambling. Next, an overview of i-gambling regulatory models are discussed.
A. Regulatory Concerns Peculiar to I-Gambling
An understanding of regulatory apprehension with i-gambling, provides a framework for developing a regulatory model. Regulatory concerns with i-gambling include: (1) whether sufficient protections can be put in place to guard against the incidence of problem gambling; (2)prevention of money laundering; and (3) regulatory oversight. In 2000, the Australian Parliament prepared a comprehensive report, Netbets: A Review of Online Gambling in Australia (March 2000), which discusses regulatory concerns with i-gambling. The Netbets Report serves as good resource for identifying regulatory concerns and potential policy responses.
1. Does I-Gambling Lead to an Increase in Problem Gambling? What Practical Regulatory Measures can be Implemented to Reduce the Incidence of Problem Gambling?
One of the primary reasons cited for banning i-gambling is a belief that gambling through the internet will increase the incidence of problem gambling. The costs from problem gambling can be staggering, ranging from substantial monetary losses by problem gamblers to associated social costs. Proponents frequently point to the shear number of internet sites as the casual link to increased problem gambling. Specifically, advocates of i-gambling bans argue that the mere increase in available gambling opportunities directly leads to greater incidence of problem gambling. The logic would then follow that limiting gambling opportunities is the most effective policy means to reduce problem gambling.
Although there may be a visceral appeal to an argument to limit gambling opportunities, the issue of problem gambling, and the policy solutions to combat problem gambling, are not quite as simple as a pure numbers game. At the outset, the underlying premise of the theory -- that greater gambling opportunities leads to increased incidence in problem gambling -- may not be supported by extrinsic evidence. For example, the Netbets Report acknowledged that independent research has questioned the existence of a casual link between increased gambling accessibility and increased problem gambling.
There may be several factors which contribute to problem gambling, ranging from the forum in which gambling is made available, the extent of regulation and the nature of procedures adopted to protect against behaviors which could lead to problem gambling. The Netbets Report, for instance, suggested that the nature of accessibility to gambling opportunities can impact to extent to which there is an increase in problem gambling.
Simply prohibiting i-gambling could even potentially lead to a greater incidence of problem gambling by expanding market opportunities for unscrupulous operators of i-gambling websites. Unscrupulous operators may be unwilling to operate in a regulated environment which requires licensing, but are willing to enter an unregulated environment precisely because there is no regulatory oversight, which, among other matters, would establish rules making gambling games available. The Netbets Report concluded that there is a risk to increase problem gaming if an unregulated i-gambling regime is in place. Thus, several factors may influence a rise in problem gambling and simply banning i-gambling may not be as effective in combating problem gambling as implementing responsible regulatory oversight.
Second, it may not be feasible to completely ban i-gambling. A successful ban would likely entail not only eliminating all gambling opportunities -- which would be exceedingly difficult due to the divergent attitudes toward i-gambling throughout the world -- but also incorporate sufficiently stringent penalties to deter would-be gamblers from placing online wagers. As a result, a more practical approach may be to adopt a regulatory model that incorporates protections to reduce the incidence of problem gambling.
The Netbets Report identified several steps which could be undertaken to reduce the incidence of problem gambling associated with i-gambling. Initially, similar to what is already occurring in the United States, an outright ban more likely than not will simply shift domestic gamblers to place bets through offshore i-gambling websites. The policy costs arising from such a ban could outweigh any benefits aimed to reduce problem gambling.[9] Mechanisms that could be implemented to reduce the incidence of problem gambling within the i-gambling industry include:
· limiting players' daily hours of gaming play;
· player exclusion programs;
· slowing the speed of games;
· limiting daily and/or monthly wagers or impose lose limitations;
· including problem gambling warnings during the log-on process; and
· educate gamblers regarding diagnosis of problem gambling.
2. Can I-Gambling Websites be Used to Launder Money and Perpetuate Fraud? Regulatory Solutions to Combat Money Laundering and Fraudulent Activity
Another concern often identified with i-gambling is that it may be used as a means to launder money. For example, a person could attempt to launder money by advance depositing money in an account with an i-gambling website, play for a limited period of time and then withdraw funds. The Netbets Report, while acknowledging that money laundering can be an issue with i-gambling, recognized that websites may employ mechanisms to protect against money laundering. These mechanisms include, for example, strict player identification requirements in order to reduce the degree of anonymity, use of encryption technology and financial transaction reporting requirements.
3. Steps Can Regulators Implement to Ensure I-Gambling Games are Conducted Fairly by Operators
Another potential concern with i-gambling is whether gambling games are operated fairly. The internet is ripe with spammers and other unsavory persons attempting to perpetuate frauds with the cloak of anonymity offered by the internet. Absent a robust regulatory framework, there are concerns that i-gambling websites will operate fraudulent games. The approach in the United Kingdom offers a prospective model. The United Kingdom requires i-gambling software and games to meet standards similar to those applicable to gambling games operated in land-based casinos. Moreover, as slot machine technology has evolved to become primarily computer driven, regulators' familiarity presents a practical approach to establish software standards for i-gambling games.
B. Developing a Practical I-Gambling Regulatory Model – Examination of Existing I-Gambling Regulatory Models and the Lessons Learned
Generally, jurisdictions have adopted two basic i-gambling regulatory models. First, one segment of the international community has sought to ban i-gambling. The United States, through UIGEA, is a leading example of the group of nations which have sought to prohibit i-gambling. Second, other nations tolerate i-gambling through active regulation of operators. The following discussion provides an overview of the basic regulatory models and the variations adopted.
1. Analysis of Regulatory Models Banning I-Gambling and How the Models Address Regulatory Concerns
The predominate model that countries have adopted to ban or severely restrict i-gambling is embodied in the United States’ UIGEA. The nominal justification offered to restrict internet gambling is to eliminate problem gambling behavior by reducing the available supply of gambling options.[10] The true motivation of some foreign jurisdictions, however, often lies with a desire to protect state-granted gaming monopolies.
UIGEA shifts the primary enforcement decision-making to financial institutions. UIGEA mandates that the United States Department of Treasury and Federal Reserve promulgate regulations requiring financial institutions to "identify and block" restricted transactions.[11] UIGEA further directs that the regulations require financial institutions to establish "policies and procedures reasonably designed to identify and block or otherwise prevent or prohibit the acceptance of restricted transactions."[12] Pursuant to UIGEA, these policies and procedures can operate by either: (1) allowing the payment systems and persons involved to identify restricted transactions by code and block the identified restricted transactions, or (2)preventing or prohibiting the acceptance of the products or services of the payment system in connection with a restricted transaction.[13] A financial institution is absolved from liability for blocking any transaction it "reasonably" believes is a restricted transaction.[14]
Norway, the Netherlands, Finland and Viet Nam all have laws that ban internet gambling. The means to enforce bans on internet gambling has taken varying degrees of separation from a pure UIGEA approach. The most prevalent approach has been similar to UIGEA by placing the onus of policing internet gambling squarely at the feet of the financial institutions.
a) The Norwegian Regulatory Model – a Modified Version of UIGEA
The Norwegian Sorting, Norway's parliamentary body, amended three laws, including the 1995 Norway Lottery Act, in December 2008 to effectively ban internet gambling by adopting a UIGEA-style approach. The Norwegian Ministry of Church and Cultural Affairs proposed the amendments. Similar to UIGEA, the amended Norwegian laws prohibit Norwegian financial institutions from processing payment transactions for on-line casinos.