Remote gambling – all bets off? | Law Society of Scotland

From a lawyer’s perspective, the remote gambling industry provides a whole range of interesting legal challenges in the areas of data protection, multi-jurisdictional contractual issues, regulatory and political issues, systems verification, anti-money laundering issues, software development agreements, business continuity and disaster recovery issues, and hosting agreements. With this in mind, it is the purpose of this article to highlight some of the more interesting and relevant developments in this area over the past 10 months or so.

On 1 September 2007, the key provisions of the Gambling Act 2005 finally came into force, bringing with it a massive overhaul of the UK’s gambling laws. The 2005 Act repeals, inter alia, the Betting, Gaming and Lotteries Act 1963, the Gaming Act 1968 and the Lotteries and Amusements Act 1976. The 2005 Act covers both remote and land-based gambling operators and is the legislation under which the so-called “super casinos” would have been introduced. However, the purpose of this article is not to look at land-based gambling but rather, gambling on the internet, or “remote gambling” (this term is used in the 2005 Act and will be adopted here).

The USA

The past 12 months have been challenging times for the remote gambling industry, especially in relation to action taken and legislation passed in the USA. There have been a number of examples in the past year of the US Department of Justice (“DOJ”) attempting to hinder US-facing remote gambling business, under the auspices of anti-money laundering legislation and the US Wire Act 1961, a piece of federal legislation enacted to prevent certain bets being taken over the telephone.

Indeed, until last October it was the Wire Act 1961 that was the main federal statute that the DOJ used against remote gambling operators. In the case of In Re Mastercard International Inc, Internet Gambling Litigation, and Visa International Service Association Internet Gambling Litigation 313 F 3d 257 (5th Cir 2002), it was held that the 1961 Act extended only to sports betting – this however is not a view that has been accepted by the DOJ. The DOJ’s efforts include several complaints against remote gambling businesses including, for example, the widely reported indictment of BetonSports plc, and its founder Gary Stephen Kaplan, in July 2006 on charges of racketeering, conspiracy and fraud, and the arrest and detention of BetonSports’ David Carruthers.

Coming into force on 13 October 2006, the Unlawful Internet Gambling Enforcement Act (“UIGEA”) is the first federal US statute aimed specifically at the remote gambling industry. In summary, UIGEA seeks to stem the flow of funds to remote gambling operators by regulating payment systems. Federal regulators were given 270 days from the date of enactment, i.e. until early July 2007, to provide regulations dealing with the duties of payment processors under the Act, but as at the date of writing these have not been forthcoming.

UIGEA has not been used to date as an avenue for the DOJ to proceed against payment processors, and indeed it is hard to see how it could be used without the relevant regulations. When Stephen Lawrence and John Lefebvre, the founders of NETeller plc (one of the main payment processors for the industry), were charged in New York in January it was under, inter alia, federal anti-money laundering legislation rather than UIGEA. On 18 July 2007, NETeller admitted to criminal wrongdoing and agreed to forfeit $136,000,000 as part of an agreement to defer prosecution.

The United Kingdom

In contrast to the stance taken in the United States, the United Kingdom has taken a more pragmatic “regulate and tax” view to the industry under its Gambling Act 2005, the principal terms of which extend to Scotland.

Although remote gambling operators can be licensed under the 2005 Act, given the remote gambling duty imposed by Gordon Brown in his budget in March it has been the view of many commentators that the UK will not be an attractive environment for remote gambling operators. In view of this, the terms of s 331 of the 2005 Act are important to note. Under this section, it is unlawful to advertise foreign gambling in the UK, other than a lottery. Lotteries are dealt with in Part 11.

Section 327(1) provides the definition of “advertising” as anything which is done to encourage people to take advantage of facilities for gambling. It also covers bringing information about gambling facilities to people’s attention with a view to increasing the use of those facilities, as well as the activities of those who act with the specific intention of encouraging the use of such facilities.

Under s 331, “foreign gambling” means (a) non-remote gambling which is to take place in a non-EEA state (Gibraltar is treated as an EEA state for the purposes of this section), and (b) remote gambling none of the arrangements for which are subject to the law about gambling of an EEA state. However, the Secretary of State is entitled to specify that a country is to be regarded as an EEA state for the purposes of the definition (the so called “whitelist”). In July, the Department for Culture, Media and Sport published its long-awaited whitelist. The Isle of Man and Alderney were the only jurisdictions to make it onto the list, which became law on 1 September under the Gambling Act 2005 (Advertising of Foreign Gambling) Regulations 2007 (SI 2007/2329).

The effect of s 331 is that from 1 September 2007, it is an offence to advertise gambling which does not take place in, or is not subject to the laws of, an EEA state, Gibraltar, the Isle of Man or Alderney. This means that operators based in jurisdictions such as Costa Rica, Kahnawake in Canada and the Netherlands Antilles (all of which are major offshore jurisdictions for remote gambling) will not be permitted to advertise in the UK their gambling services that are not regulated in an EEA or whitelisted country. How the UK intends to police this provision given that the 2005 Act has no extra-jurisdictional effect remains to be seen.

In addition, given the wide provisions of s 331 it will not just be operators, but also businesses such as advertising companies that provide services to operators, that will require to ensure they do not fall foul of the legislation.

The European Union

The remote gambling industry is a multi-billion pound international industry and therefore it is not surprising that governments have attempted to control it, especially when it is not based in their own jurisdiction. In the EU arena, national laws that have sought to grant monopolies to the provision of gaming and betting services have been the subject of challenges, culminating in the ECJ’s decision in Placanica in March of this year (Joined Cases C338/04, C359/04 and C360/04). In this judgment, the ECJ held that the Italian Government’s blanket refusal to license gambling companies from other member states was a breach of EU law. The court ruled:

1. National legislation which prohibits the pursuit of the activities of collecting, taking, booking and forwarding offers of bets, in particular bets on sporting events, without a licence or a police authorisation issued by the member state concerned, constitutes a restriction on the freedom of establishment and the freedom to provide services, provided for in articles 43 EC and 49 EC respectively.

2. It is for the national courts to determine whether, in so far as national legislation limits the number of operators active in the betting and gaming sector, it genuinely contributes to the objective of preventing the exploitation of activities in that sector for criminal or fraudulent purposes.

However, the ECJ also held that restrictions on gambling operators by member states could be justified for example to prevent criminal or fraudulent activities, subject to the principles of proportionality and non-discrimination between member states. This followed the reasoning in its earlier Gambelli decision [2003] ECR I13031, but Placanica went further on the issue of proportionality, making it clear that a licensing system was acceptable but that blanket bans were not.

How far the EU will be willing to go to open up gambling services between member states still remains to be seen. At present, however, 10 member states are currently the subject of formal proceedings by the Commission in this regard.

It is well to remember that the remote gambling industry matures as the internet matures – and the laws regarding it attempt to play catch-up. That however makes for interesting and challenging times, not just for the industry but also for its advisers.

Claire Milne is a Scottish solicitor working as a senior associate with Dickinson Cruickshank, Advocates, Isle of Man and London

AN INTER-STATE ISSUE

On an international platform, the World Trade Organisation has witnessed a long running battle between the United States and Antigua, regarding the cross-border supply of gambling and betting services, in which the United States’ position regarding remote gambling has been deemed to be inconsistent with its Treaty obligations. Despite Antigua’s victories in this forum, the US will not change its position or give Antigua compensation, compensation that Antigua values at US$3.4 billion per annum. Indeed, the latest move by the US has been to seek to withdraw its WTO trade commitments regarding remote gambling.

The US position is that gambling is viewed by it as a public order and public morals issue and therefore is open to be regulated. In return, in July this year, Antigua sought the suspension of its intellectual property obligations to the US, thereby allowing Antigua to produce software and pharmaceuticals without paying licence fees to the rights’ holders. The EU, Canada, Australia, India, Costa Rica and Macau have now joined the argument on the side of Antigua.