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Is Regulation for Online Gambling Imminent?...By Hartley Henderson

From the original Online Gambling Prohibition Act of 1997 introduced by Jon Kyl to the Unlawful Internet Gambling Enforcement Act which became law in October of this year, a common reason was given in those bills for requiring the ban on internet gambling: the fact that it was impossible to regulate the industry. While most people involved in the industry didn't believe this was the real reason the United States wanted online gambling banned and still don't today, the legislation nevertheless clearly outlined that, in the eyes of the U.S. government, the internet could not be regulated and hence the only option was to ban online gambling in the United States. Because many in congress didn't understand how the internet worked and really didn't want to learn the intricacies of it, they decided instead to label the internet as some sort of "black hole" where evil prevails and cannot be regulated. Essentially the arguments were that there is no way to determine if a game is being run honestly online since everything is virtual, so the player is at the mercy of the operator. As well, they argued that because the gambling operations were located offshore there was no way to ensure that winnings would be credited and in such a case gamblers have no recourse if the business doesn't pay up. Furthermore, they said they were concerned that minors could bet online and they were also concerned that problem gamblers could continue betting without any parameters set on them.

Of course all these things could, and do, happen at brick and mortar casinos, but the thinking in that regard is that if nothing else, the governments and or police could shut down physical casinos and sportsbooks who are not operating according to the law, while online entities were out of their control. A few industry insiders tried to refute these arguments, and even offered up some methods by which the industry could be regulated. But the U.S. government was set in its belief and nothing could change its mind. In fact, the U.S. turned down opportunities to discuss the topic of regulating internet gambling because it believed there was nothing to talk about.

While the U.S. stance seemed a bit staunch, if naïve, there were other jurisdictions following suit. Australia, which was the first to regulate online gambling, changed its tune in the last few years as a result of the number of Australian problem gamblers and Prime Minister Howard's dislike of gambling. The country decided to make all online gambling illegal with the exception of sportsbetting and lotteries, which the government contended weren't traditional gambling. They were more concerned about games of chance like slots and roulette. Canada seemed to be moving in the U.S.'s direction of prohibiting online gambling by law, even though a large number of internet betting software companies and gambling operations themselves were located in the country; and in the European Union, Italy, Germany and Spain looked ready to make online gambling illegal also. Even the United Kingdom, where gambling is king, seemed a bit concerned about the area of online gambling due to the concern over regulation and the fact that so many casinos and sports operators were setting up offshore in Malta, Gibraltar and the Isle of Man.

But in October things changed. The United States passed the Unlawful Internet Gambling Enforcement Act and in the process drove away businesses that catered to the U.S. market and wiped billions off the value of stock exchanges worldwide. More importantly, it made other countries take a second look at the whole area of regulation. After all, if the United States is so vastly opposed to the idea, then maybe there is merit to the whole area. While George Bush contends the war in Iraq is justified, few countries are convinced and the fabricated evidence the U.S. presented to the U.N. relating to Iraq's weapons of mass destruction have badly hurt the United State's credibility worldwide. This is particularly true in Britain where Tony Blair's government has taken a beating in Britain for supporting the war.

Besides that, there has been some concern worldwide and particularly in Europe that prohibition could lead to new types of speakeasies which would drive online gambling underground to websites and into the control of criminals as happened with alcohol prohibition in the 1920s and 1930s. For example, now that so many have had a taste of online poker, if they can no longer do it online, they will set up places onshore to do it and outside of the government's reach. The British government, therefore, decided to hold a conference in early November in Europe to discuss the whole area of internet gambling regulation, since as Anthony Wright, a spokesperson for Tessa Jowell, the secretary for culture, media and sport in Britain, stated: "We believe that tough regulation is a better approach than a free-for-all or prohibition. We will be looking to secure agreement to the principles for international standards of regulation." To prove this point, Britain recently announced plans to give incentives for companies located offshore to move their operations into Britain in exchange for lower taxes than the government currently asks for, which is 15% of gross profit. Doing so, Britain felt, was essential to leading the way to gambling regulation online.

The conference was held in London, and most of the free world attended, with a notable exception being the United States, which declined, stating there was nothing to discuss. While the conclusions of the conference have still not been finalized, some findings were released and it has become clear that the internet can indeed be regulated at least to some degree. In fact, Italy, which in February of 2006 was set to make internet gambling illegal by forcing ISPs to block gambling sites, did an about face and in October declared that it is going to legalize online gambling that is not pure luck based as of January 1, 2007. The legislation in Italy deregulates all "ability based and fixed betting activities", which includes poker, sports betting, bingo and any such games that are not based solely on chance. In turn, Italy gets 3% of any gaming based revenues that are bet at Italian IPs, and consequently Italy has handed out 17,000 online licenses to operate from their country.

Spain followed suit with some conditions, issuing a fixed license fee and a limited number of licenses themselves. However, the license owners are free to open unlimited numbers of online gambling websites. Many other European countries are looking at the area of regulation, and in fact may be forced to allow online companies as part of the EU pact. The only European holdout at this point is Germany, who in October was ready to pass an outright ban on all non state sponsored gambling in an attempt to protect their monopoly on lotteries and sports betting. In December, however, the country postponed their decision pending more information relating to regulation. It's quite ironic that Germany now seems to be the one real European ally for the United States in its fight to ban online gambling.

But it is not just in Europe that online gambling regulation is being looked in to. Tessa Jowell has approached the Canadian government and urged it to fall in line with Britain in the area of online gambling regulation. Canada's stance has always been that online gambling is illegal in the country because only state run gambling is legal and sports betting is illegal under federal statutes. But unlike the United States, the country has never really sought to prosecute anyone for "breaking the law" in this regard, and for good reason. Currently, there are 2,300 gambling websites being run worldwide. 537 of the sites are located in Antigua and Barbuda, 474 are located in Costa Rica and 400 are located on the Indian Reserve of Kahnawake located outside of Montreal, many with close ties to Microgaming which is highly regarded in Canada. Furthermore, Cryptologic and other gambling software developers are located in Canada and provide a great many jobs in the country and tax revenue for the Mohawk Indian reserve in Kahanwake.

But there is another incentive to make online gambling legal in Canada - tax incentives. The current Canadian government in power, the Conservatives of Stephen Harper, has always run on the premise that it is an "anti-tax" government. It feels that Canadians are badly overtaxed and it would try to avoid raising personal income taxes at any cost. In fact. it would be a big benefit to the government if it could decrease them. At the same time, the government needs tax revenue for better health and education, which are key components to the Conservatives getting re-elected - not to mention the Conservatives' promise to spend more money on the Canadian military. Since so many companies are already located in Kahanwake, the government could offer enticements similar to Britain and Italy which would convince some of those companies to move into Canada proper and pay provincial and federal taxes in the form of a gross profit tax like Britain has, or a fixed fee like Spain has implemented, rather than what they are currently doing: a fee to the Indian groups. These companies are already in Canada, so why shouldn't the federal government and provinces benefit from that? Furthermore, many companies currently located in Antigua, Costa Rica and similar countries would be thrilled to move their operations to a more stable technical environment like Toronto, Montreal or Vancouver if they weren't worried about being prosecuted.

At the current time, it doesn't seem likely that Canada will follow suit, but it could happen in the future. As well, it should be noted that the Conservatives currently have a minority government, but are second in the polls to the Liberals who are led by recently elected Stephane Dion, and the next election likely isn't far off. And while Harper has tried to develop close ties to the United States government, who no doubt is urging Ottawa not to follow the lead of Britain or Italy, the Liberal government has actually scored points in Canada throughout the last decade by opposing U.S. policies. In fact, in a recent poll on what policies Jean Chretien will be most fondly remembered for, the majority of Canadians who answered the poll stated it was his decision not to take Canada into the war in Iraq and defying George Bush. Thus, if Stephane Dion ran on this "anti American" campaign in the next election, it could help him get elected. And allowing gambling websites to operate legally in Canada would be a gigantic step in this direction.

So what exactly is entailed in this regulatory framework? Here are some things that are known for sure, based on prior discussions related to the topic in Britain:

1) Move the sites inland. The reasoning here is that if the sites are located in the country proper, rather than offshore, they can be monitored and audited by government appointed officials. Moreso than brick and mortar casinos, regulatory officials can go into the offices of the online operators and ensure they are following guidelines mandated relating to underage betting, problem gambling and the fairness of games. While games of chance are tough to monitor, and hence many countries seem to be opposed to making those legal, software does exist to monitor sports, poker and games of chance to conclude if the games are truly random and the gamblers online are who they say they are when they sign up. As well, it ensures that the operations have money in escrow to pay all post up money.

2) Address the issue of underage betting and problem gambling. While underage betting presents some obstacles online, there are methods to ensure that underage people are greatly hindered from signing up and betting. At a brick and mortar casino, a young person can easily present a fake ID and walk in without much problem. Online, there are more options available to the operator who can try and be more certain that the ID is real and the person is the age they say they are. Of course a big disincentive for young people online is the requirement to set up larger deposits, and also the need to send in things like utility bills in their name. Unlike a driver's license, it's hard to fake a telephone bill, particularly if the operator is able to follow up to ensure the bill is authentic (which would be a great regulatory requirement).

But where the internet really has is advantages is in the area of problem gambling. While it is impossible for a casino to really monitor an individual's gambling patterns unless they sign up for a rewards card and use it constantly, online a person's activity can be monitored and if they display patterns of problem gambling the person can be banned from further betting. As well, the person has the option of self exclusion which exists at some casinos online now. In Las Vegas, recently a man won a large amount of money but had to forfeit the winnings to charity when it was discovered he was on the self exclusion list. The program worked, in that the man didn't get his winnings, but it failed because the man was able to bet in the first place. Online, any person who places himself on such a list can have their IP blocked from accessing the site, as well as disallowing any credit or debit card transactions, addresses, etc. if the online database shows the person to be the same as the one on the list. Consequently, it is far more effective than any ban a brick and mortar casino can put in place.

3) Ensure all money is post up. Totally disallowing credit betting (credit cards excluded) and having set limits on the amount that can be deposited under certain circumstances like credit cards helps ensure the person really has the money to gamble.

It seems very likely that regulated internet wagering is not far off for most of the free world. Will the United States be one of the only countries on the outside looking in? If so, will Brick and Mortar casinos in the United States be willing to go along with a ban when they can be regulated online and increase their revenues and profit share? Will the new United States President be willing to continue a ban that could give it a lot of new tax revenue without raising taxes, especially if most of the free world is operating successfully in a regulated industry? Within the next few years we should know for sure.

Hartley Henderson

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