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Research
Article - Issues of Jurisdiction and Enforcement in Internet Gambling (October 2007)
- In Brief
- Approaches to Internet Gambling Regulation
- Internet Gambling in the US
- Internet Gambling in the European Union
- Australia’s Position
- Conclusion
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In Brief
The online gambling market is facing the same challenges of jurisdiction and law enforcement as internet activities in general. The author discusses recent issues in these areas, and examines the situation in three jurisdictions in detail - the US, the EU and Australia.
Approaches to Internet Gambling Regulation
Across the globe, the approaches to regulating internet gambling differ widely. Some jurisdictions rely on laws and regulations to control the supply and the quality of gambling services (e.g. through licensing) whilst other jurisdictions prohibit internet gambling entirely. In the internet gambling market the borderless nature of the internet gives rise to issues of jurisdiction and extra-territoriality, as well as national sovereignty. Some countries will find it difficult to place a ban on an internet market that exists in other countries. Given the rapid growth of the online gambling market and the variety in internet gambling regulations, jurisdiction and law enforcement issues have become more apparent.
The US has taken several steps to restrict internet gambling. US authorities have demonstrated that they are capable of arresting non-US citizens who are owners, officers, or directors of internet gambling entities that accept wagers from US-based customers, even though the entities are situated in jurisdictions where gambling is legal.
The US’s internet gambling restrictions have been challenged and the World Trade Organisation (WTO) has ruled that some US federal and state internet gambling regulations are discriminatory under the US’s obligations under the General Agreement on Trade in Services[2] (GATS). Throughout the proceedings, the US’s desire of national sovereignty has been highly visible and the US has continued to restrict internet gambling. In October 2006 the US passed the Unlawful Internet Gambling Act 2006[3] (UIGEA) to make it illegal for banks and credit-card companies to settle payments for internet gambling sites.[4]
By contrast, the EU is combating restrictions on the cross-border provision of gambling services within the internal market. Harmonised legislation on gambling has not been adopted. Nevertheless, under the EC Treaty the Member States must ensure that service providers are permitted to offer services that they are licensed to provide in their respective countries of origin in other EU countries. However, in practice, the freedom to provide gambling services across borders has been difficult to enforce and some Member States continue to prohibit gambling services, including internet gambling, from other countries.
In Australia internet gambling is prohibited through the Interactive Gambling Act 2001[5](IGA) The Act makes it an offence to provide an interactive gambling service to a customer physically present in Australia. Whether the company providing the service is Australian or foreign, based in Australia or off shore; makes no difference.
The IGA also makes it an offence for Australian companies to provide interactive gambling services to a person in designated countries, which includes foreign countries that have equivalent prohibitions and where the government has requested a designation under the IGA.
Internet Gambling in the US
Legislation
In the US, gambling is generally regulated at the state level, Federal law support state laws and there are regulations to ensure that interstate and foreign commerce do not circumvent them.
Under certain conditions, the federal Wire Act of 1961[6] prohibits a person from being engaged in the business of betting or wagering on any sporting events or contests. The Act has been used for several decades to combat evasion of US’s gambling laws by sport bookmakers who are located in the US, as well as overseas. Legal observers question the use of the Wire Act to prosecute individuals for using technology and services that were not invented when the Act was written. However, US authorities continue to impose their laws on the internet gambling industry and the increased popularity of internet gambling and the rapid growth of the market have made internet gambling companies high profile candidates for enforcement actions.
The Travel Act and the Illegal Gambling Business Act have also been used to prosecute gambling entities that take interstate or international bets over the telephone and are therefore likely to be applied to internet gambling.
UIGEA which was passed in October 2006, makes it illegal for banks and credit-card companies to settle payments for internet gambling sites, for the type of internet gambling that the law has previously made illegal, thus making it more difficult to get money into an online gambling site. The UIGEA was attached to the SAFE Port Act 2006, and no separate vote was taken on the UIGEA itself. The UIGEA has been strongly criticized by the gambling industry, as well as by other nations. Although many large US credit card issuers already use codes to deny authorisation for internet gambling transactions.
Increased Reach of US courts
Even though internet gambling is legalised in several other countries the US Department of Justice (DOJ) argues that entities that are in the business of betting or wagering who use international communication facilities like the internet, and in some way enter or affect the US or its citizens, are violating US law.[7]
The July 2006 arrest of David Carruthers, a former chief executive of BetOnSports, was perhaps the first warning to the internet gambling industry. Carruthers had just landed at the Dallas Forth Worth Airport and was in transit between Costa Rica and Great Britain when he was arrested on federal charges, including violations of the Wire Act, the Travel Act and the Illegal Gambling Business Act.[8] Carruthers ran an online gambling site that allowed users to place wagers on sports events or play casino-style games for real money. In conjunction with the criminal charges an order of permanent injunction, which blocked the company from accepting any bets from US citizens was issued.[9]
The magistrate suggested to deny the dismissal filed by Carruthers, which would be potentially devastating for the defendants and also the gambling industry at large. The magistrate further argued that the Wire Act applies to all forms of gambling because the wording of the Act includes sporting events or contests. If that would be the final outcome, the viability of the In Re MasterCard[10] decision would be threatened. The In Re MasterCard decision appears to support the interpretation that the Wire Act merely applies to sports betting but not to other gambling, an exemption that internet casinos have relied upon for years. Meanwhile, Gary Stephen Kaplan the founder of BetOnSports was also arrested in the Dominican Republic and sent to Puerto Rico for initial appearance.[11]
In September 2006, Peter Dicks, a former non-executive chairman of London-based Sportingbet was arrested at New York’s John F. Kennedy International Airport based on Louisiana warrant. Dicks was charged with violations of a Louisiana law prohibiting internet gambling. Dicks was, however, set free after the New York state governor refused to sign an order for the extradition to Louisiana.[12]
The arrest in New York, in January 2007 of the two founders of Neteller demonstrates that it is also not safe to provide a so-called e-wallet service, to facilitate for US citizens engaging in internet gambling.[13] The charges of conspiracy to engage in money laundering, stems from transmitting or transferring money from a place in the US to or through a place outside the US and thereby promoting unlawful activity. The unlawful activities were specified as the operation of illegal gambling businesses and violation of the Wire Act. Part of the definition of conducting, financing or managing an illegal gambling business, requires that the gambling business violate the law of the state in which it is conducted. In collecting evidence, the Federal Bureau of Investigation (FBI) set up a Neteller account and transferred money from the account to a number of internet gambling companies based in Costa Rica.[14] Therefore the issue arises, whether or not the Antiguan and Costa Rican businesses referred to in the complaints conducted their businesses in the US.
These actions demonstrate how the US can assert subject matter jurisdiction over internet gambling activities as well as personal jurisdiction over owners, officers or directors of entities providing the services. The series of actions taken indicates that further charges can be expected.
Committing to Obligations under the WTO
As one may expect there have been reactions to the US restrictions on gambling. In 2003 the Caribbean nation of Antigua and Barbuda filed a complaint in the WTO, against the US federal and state internet gambling regulations. The nation of Antigua and Barbuda argued that US law was inconsistent with its obligations under the WTO.
In a first decision the WTO lower panel ruled that three US federal laws (the Wire Act, the Travel Act and the Illegal Gambling Business Act) and the provisions of four US state laws (those of Louisiana, Massachusetts, South Dakota and Utah), prohibit delivery in cross border supply and are contrary to provisions included in the GATS.[15]
Following the US appeal, the WTO appellate panel upheld the decision affirming that the US has submitted all of its federal, state and local gambling laws to those rules when it agreed to commit recreational services to WTO disciplines. Even though internet gambling bans may be covered under an exception to the GATS rules, for regulations that are necessary to protect public morals or to maintain public order, the appellate Panel ruled that the exception could not be applied in this case, because the US policy discriminates against foreign gambling service providers, thus failing to meet an essential criterion of the exception. The GATS non-discrimination rule requires that no domestic policy can alter the conditions of competition, in a way that results in less favourable treatment for a foreign service provider, even if the law applies equally to domestic and foreign providers.
Antigua and Barbuda stressed the importance that the US comply rather than raise retaliatory actions. When no action was taken by the US to comply with the ruling, the Antigua and Barbuda was forced to request further investigation by the WTO.[16] Subsequently, in May 2007 a WTO panel report stated that the US had failed to comply with the ruling.[17] Despite the ruling in favour of Antigua and Barbuda, the US is yet to comply with the ruling or agree to pay compensation.
In addition, the US chose to invoke procedures under Article XXI of the GATS in order to clarify its commitment under the GATS.[18] The decision was made by the motivation that either way the US would have to pay for sovereignty and the right to regulate gambling within their country but the option chosen will remove threats of additional WTO challenges against the US ban on internet gambling. The announcement made by the office of the United States Trade Representative (USTR) did not explain what American industries the USTR would be willing to trade to compensate for the withdrawal of the gambling industry from the WTO.[19] The US will now have to negotiate with any other WTO countries that raises objection to the move, and wants to renegotiate any of their own commitments in return, or face costly demands for compensation after removing the gambling sector from WTO jurisdiction. Several countries, including Australia, Canada, Costa Rica, India, Macau, Japan and the 27-nation European Union have all joined Antigua in filing such compensation claims.[20]
Targeting Virtual Internet gambling
Second Life - a popular virtual online world - recently decided to ban gambling following an FBI investigation of virtual online gambling.[21] The decision was made to avoid potential legal action, taking into consideration the increased reach of US authorities. Although gambling was taking place in a virtual world with a virtual currency, there is technically a stored-value or token system in place, as members of Second Life can exchange US dollars for the virtual currency Linden Dollars.[22]
Federal anti-gambling laws require an element of chance and that something of value is being wagered and a convertible virtual currency seems to qualify for this. Overall, jurisdiction in virtual worlds like Second Life is still an issue. However, taking into account the US’s restrictive measures on internet gambling, it seems likely that US authorities will try to enforce US law in virtual internet gambling.
Internet Gambling in the European Union
In the EU, no harmonised legislation on gambling has been adopted. Nevertheless, under the EC Treaty the EU is combating restrictions on the cross-border provision of gambling. Member States must ensure that service providers are permitted to offer their services they are licensed to provide in their respective countries of origin, in other EU countries, unless national restrictions are justified on the grounds of public interest.[23]
In 2003 the European Court of Justice (ECJ) ruled in the Gambelli case[24] that Italian gambling law restricted the provisions on the freedom of establishment and the freedom to provide services provided for in Articles 43 and 49 of the EC Treaty. The Italian law at issue, prohibited the pursuit of the activities of collecting, taking, booking and forwarding offers of bets, in particular bets on sporting events, without an Italian licence or authorisation.
In September 2006, in direct contravention of the Gambelli ruling, two senior officials of Bwin, a licensed and regulated company in various EU Member States, and also listed in Austria was arrested in France.[25] The arrest was made on the ground that French authorities claimed Bwin’s activities illegal in France. Bwin’s promotional activity in France was dominated by a shirt sponsorship deal and by web-based sponsorship deals with French football clubs.
This year the ECJ delivered a ruling in the Placanica case[26] which stated that Italy cannot use criminal law to stop gaming companies that are licensed in other EU nations from operating in Italy without violating Article 43 and 49 of the EC Treaty. Three operators of shops in Italy that allowed people to place bets with the UK Stanley Leisure’s home office, were arrested for collecting bets without authorisation. However, Stanley Leisure is not a listed company in Italy and is not eligible to apply for authorisation.
The Placanica ruling clarifies the Gambelli ruling and will put pressure on European Governments to end national protectionism and to open up national gambling markets for competition.[27] The Placanica case was acknowledged by the French high court when it recently ruled that the French horse racing monopoly couldn’t prevent a Malta-based company from offering wagers over the internet on French horse races.[28]
In addition, in the battle to combat restrictions on internet gambling the European Commission (EC) sent official requests for information on national gambling legislation to a number of Member States.[29] The letters of formal notice were the first step of an infringement procedure under the EC Treaty. Following considerations of the replies the EC has requested changes of the laws to allow open competition to sports betting services in Hungary, Denmark and Finland, since those countries failed to prove that their restrictions were necessary, proportionate and non-discriminatory.
Australia’s Position
Traditionally it has been the responsibility of the States rather than the Commonwealth to ensure gambling regulation in Australia. However, the increase of internet gambling and the concern over the impact of gambling on Australian society, prompted the Federal Parliament to pass legislation prohibiting internet gambling sites to provide services to Australians. The Interactive Gambling Act 2001[30](IGA) was passed in 2001 and makes it an offence to provide an interactive gambling service to a customer physically present in Australia.
Interactive gambling services include those that are often described as internet casinos and usually involve using the internet to play games of chance, or games of mixed chance and skill.[31] The IGA also prohibits advertising of gambling services. Therefore, a Web site that advertises internet gambling services and targets Australian users, is breaking the law regardless of where that gambling site is located because the advertisement is published in Australia.[32] Advertisements on internet sites not specifically aimed at Australian end-users are not prohibited. If an interactive gambling service provider did not know and could not, with reasonable diligence, have ascertained that its service had Australian customers, the offence will not apply.
The IGA also makes it an offence for Australian companies to provide interactive gambling services to a person in designated countries, which includes foreign countries where the government has requested a designation under the IGA from the Minister.[33] Such request can be made under the condition that the country has legislation in force that corresponds to the main offence provision of the IGA.
Despite the introduction of the Act, a study showed that Australians continued to visit internet gambling sites. [34] However, since local sites have strict player protection measures in place, Australians are forced to gamble on offshore sites. Even if the prohibition of the IGA does apply to both local and foreign interactive gambling providers, in practice only such foreign providers that have a connection with Australia are likely to be prosecuted.[35]
Conclusion
The online gambling market is facing the same challenges of jurisdiction and law enforcement as internet activities at large. The issues may, however, be even more visible in the online gambling market due to strong economical and political interests, often associated with gambling.
Evidently, US authorities are doing everything in their power to restrict internet gambling. It has not made a difference that internet gambling companies that are targeting US residents are situated in jurisdictions where internet gambling is legal. The desire of US national sovereignty and the right to regulate gambling within their country have proven to be very strong.
The question is how far the US can go and how long the US can continue to reach out of its borders? The lengthy proceedings brought before the WTO by Antigua and Barbuda, and other country’s demands for compensation after planning to remove the gambling sector from WTO jurisdiction, are signs that there might be a limit on how far the US can reach before the rest of the world reacts.
The obligation of the EU Member States under the EC Treaty to ensure that service providers are permitted to offer their services they are licensed to provide in their respective countries of origin, in other EU countries, is leading the way for how to solve issues on jurisdiction and law enforcement for internet gambling in the EU. Issues have arisen due to state monopolies on gambling. However, the Placanica case, which builds further on the Gambelli ruling, could mark the end of the state monopoly model in the gambling sector. In the future only restrictions on the grounds of public interest may be justified.
The Australian approach to internet gambling, including total prohibition with few exceptions, was justified due to increased public concern over the impact of gambling on Australian society. Despite the ban, there have been no significant attempts by Australian authorities to enforce the law beyond its borders and no real issues on jurisdiction or law enforcement have yet arisen.
[2] WTO, General Agreement on Trade in Services, <http://www.wto.org/english/docs_e/legal_e/26-gats.pdf>.
[3] Section 5363, the Unlawful Internet Gambling Enforcement Act 2006.
[4] The Act is title VIII of the SAFE Port Act 2006 H.R. 4954, <http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=109_cong_bills&docid=f:h4954enr.txt.pdf>.
[5] Interactive Gambling Act 2001 (Cth), <http://www.comlaw.gov.au/>.
[6] The Federal Wire Act of 1961, <http://uscode.house.gov/download/pls/18C50.txt>.
[7] See the Statement of John G. Malcolm Deputy Assistant Attorney General, Criminal Division, United States Department of Justice, at Special Briefing: Money Laundering and Payment Systems in Online Gambling, 20 November 2002, <http://www.cybercrime.gov/JGM_Intgambling.htm>.
[8] Department of Justice, Eleven Individuals and Four Corporations Indicted on Racketeering, Conspiracy and Fraud Charges, 17 July 2006, <http://www.usdoj.gov/opa/pr/2006/July/06_crm_443.html>.
[9] United States District court of Eastern Missouri, Eastern Division, United States of America v. BetOnSports PLC, Order of Permanent Injunction, 9 November 2006, <http://www.usdoj.gov/usao/moe/files/significant_cases/betonsports_permanent_injunction_order.pdf>.
[10] In Re MasterCard International, Inc., Internet Gambling Litigation, <http://pub.bna.com/eclr/1321a.htm>.
[11] United States Attorney's Office Eastern District of Missouri, Significant cases - Betonsports PLC, <http://www.usdoj.gov/usao/moe/files/significant_cases/betonsports.html>.
[12] Guardian Unlimited, New York judge sets free former Sportingbet chairman, 30 September 2006, <http://www.guardian.co.uk/usa/story/0,,1884513,00.html>.
[13] Olswang, Internet gambling in the United States the net tightens, 18 January 2007, <http://www.olswang.com/news.asp?page=newssing&sid=110&aid=1699>.
[14] CreditCards.com, Preventing Credit Card Use Not Necessarily the End for Online Gambling, <http://www.creditcards.com/preventing-credit-card-use-not-necessarily-the-end-for-online-gambling.php>.
[15] WTO, General Agreement on Trade in Services , <http://www.wto.org/english/docs_e/legal_e/26-gats.pdf>.
[16] Government of Antigua and Barbuda, Letter from Antigua to Ambassador Portman, 16 February 2006, <http://forumdemocracy.net/trade_topics/gambling/documents/Antigua_letter_to_Ambassador_Portman_2-16-06.pdf>.
[17] WTO, The Dispute Settlement Body, United States — Measures Affecting the Cross-Border Supply of Gambling and Betting Services, Panel Report pursuant to Article 21.5 of the DSU, 29 May 2007, <http://www.wto.org/english/news_e/news05_e/news05_e.htm - 285abr>.
[18] USTR, Statement of Deputy United States Trade Representative John K. Veroneau Regarding U.S. Actions under GATS Article XXI, 4 May 2007, <http://www.ustr.gov/>.
[19] Public Citizen, Unprecedented Bush Administration Decision to Withdraw US Gambling Sector From WTO Jurisdiction Highlights Hazards of Fast-Track-Enabled Trade Agreements, 4May 2007, <http://www.citizen.org/pressroom/release.cfm?ID=2429>.
[20] SILICONVALLEY.COM, U.S., Antigua battle over WTO sanctions for U.S. ban on online betting, 28 September 2007, <http://www.siliconvalley.com/news/ci_7027811?nclick_check=1>.
[21] TechCrunch, Second Life Bans Gambling Following FBI Investigation, 25 July 2007, <http://www.techcrunch.com/2007/07/25/second-life-bans-gambling-following-fbi-investigation/>.
[22] Ramasastry A, Could Second Life Be In Serious Trouble? The Risk of Real-Life Legal Consequences for Hosting Virtual Gambling, FindLaw, 11 April 2007, <http://writ.lp.findlaw.com/ramasastry/20070411.html>.
[23] Article 49, the EC Treaty.
[24] European Court of Justice, Case C-243/01 (Reference for a preliminary ruling from the Tribunale di Ascoli Piceno): Piergiorgio Gambelli and Others, 6 November 2003, <http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:62001J0243:EN:HTML>.
[25] The Register, Two more gambling chiefs arrested, 21 September 2006, <http://www.theregister.co.uk/2006/09/21/gambling_chiefs_arrested/>.
[26] European Court of Justice, Case C-338/04 (Reference for a preliminary ruling from the Tribunale di Larino): Placanica and Others, 6 March 2007, <http://curia.europa.eu/jurisp/cgi-bin/form.pl?lang=EN&Submit=rechercher&numaff=C-338/04>.
[27] BBJ.hu, EU court strikes down Italian gambling restriction - extended, 06 March 2007, <http://www.bbj.hu/news/news_23644.html>.
[28] The Register, French high court rules in favour of online gambling industry, 14 July 2007, <http://www.theregister.co.uk/2007/07/14/zeturf_france_high_court_cassation/>.
[29] European Commission, Free movement of services: Commission inquires into restrictions on the provision of certain gambling services in Austria, France and Italy, IP/06/1362, 12 October 2006, <http://europa.eu/rapid/pressReleasesAction.do?reference=IP/06/1362>.
[30] Interactive Gambling Act 2001 (Cth), <http://www.comlaw.gov.au/>.
[31] Section 5, Interactive Gambling Act 2001 (Cth).
[32] Section 61EA, Interactive Gambling Act 2001 (Cth).
[33] Section 9A, Interactive Gambling Act 2001 (Cth).
[34] Creed A, Law Fails To Slow Online Gambling In Australia - Study, Newsbytes News Network, 6 February 2002, <http://findarticles.com/p/articles/mi_m0NEW/is_2002_Feb_6/ai_82561972>.
[35] See Section 15(5), Interactive Gambling Act 2001 (Cth).
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