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Online Gambling: A Jurisdictional Nightmare

About The Author

Chris Bridges (Executive Editor)

Chris is an IT and Data Protection solicitor at a top 20 full service firm and the founder of Keep Calm Talk Law. He also contributes to Computers and Law and other sector specific publications.

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This year is set to be earth shaking for remote gambling companies, whether they provide services to UK consumers, or just advertise their services within the UK. For years, companies operating bookmakers and casinos online have been able to dodge their tax bills, and avoid UK regulation, by relocating abroad, in particular to the Isle of Man, Guernsey, and Gibraltar. However, this is all about to change, with new licencing regulations in force from 1st October 2014, and new remote gambling duty regulations expected to be in force by the end of this year.

Before discussing the situation in the UK, I shall provide a brief history of online gambling, and for perspective, an example of much greater jurisdictional issues in the USA than our own. The US discussion, in particular the World Trade Organisation decision, is however relevant to a later part of this article. To continue to the UK section, skip two headings.

A Brief History of Online Gambling

Gaming companies were among the first to jump on the dotcom bandwagon, with the first online casino appearing in 1995, which was operated in the paradisiacal Caribbean jurisdiction of Antigua & Barbuda. In 2001, Antigua & Barbuda had a population of just 78,571, yet a revenue of $2.392 billion USD from online gambling. This accounted for 59% of global online gambling.

You would hope each inhabitant of Antigua & Barbuda did not gamble $30,443 USD in that year and it is fair to say only a tiny proportion of that revenue would have been from Antigua & Barbuda, a relatively poor country. Antigua & Barbuda were the first jurisdiction to permit residing companies to export an online gambling service (see The Free Trade and Processing Zone Act 1994). People on the other side of the world could gamble in Antigua & Barbuda, from their own home. The sensation of online gambling was fully in swing.

Troubled International Waters – A Case Study

This, unsurprisingly, did not go down well with other jurisdictions that frown upon gambling. Here, we are not just talking about stringent regimes in the Middle East. Just across the pond, the USA were not happy. Whilst the US may be home to gambling capital of the world, Las Vegas NV, gambling is not universally legal across all states. Charitable gambling is legal in most states, but commercial gambling and racetrack gambling is prohibited in many. Some states, such as Utah (a Mormon state) and Hawaii, have zero tolerance to gambling, and other conservative states such as South Carolina and Tennessee permit nothing but lotteries (see Wikipedia for a breakdown of what is legal where).

As one of the largest economies in the world, this might be seen as a severe blow to the online gaming industry. Indeed, Antigua’s online gambling revenue now accounts for just 7% of the world’s total, and is significantly lower than its 2001 high ($948 billion). This is believed to be largely down to the US crackdown on offshore gaming.

In 2000, US citizen Jay Cohen was convicted for operating an offshore internet-gambling site, in Antigua. This was found to contravene the General Agreement on Trade in Services by the World Trade Organisation in 2004. This was first confidential, but after no resolution was reached, the report went public in November 2004. To this day, the US have not resolved the issue, despite sanctions being imposed, such as the suspension of US copyright in Antigua & Barbuda.

Complex US gambling law is not of concern to this article, but below are a few starting points should you wish to dig deeper. If you are not interested in US gambling law, skip to the next heading.

Originally, the US Department of Justice believed online gambling was prohibited by virtue of the Federal Wire Act of 1961 (see 18 U.S.C. ch. 50 § 1081 et seq), however the United States Court of Appeals, Fifth Circuit, found this Act to be only applicable to sports betting, not online gaming, In RE: Mastercard International INC.. Therefore, the Unlawful Internet Gambling Enforcement Act was passed in 2006 to regulate online gaming (see 31 U.S.C. §§ 5361 - 5367). The Act prohibits: "gambling businesses from knowingly accepting payments in connection with the participation of another person in a bet or wager that involves the use of the Internet and that is unlawful under any federal or state law." To date, only one licence has been issued for an online casino in the US: UK company (well, Gibraltarian) 888 Holdings was issued a licence by Nevada in March 2013.

Ironically, while only one company has a licence to run online casinos in the US, many are operated on Native American reservations thanks to the Indian Gaming Regulatory Act of 1988, which allows states to permit such nations to gamble, and the complex relationship between US and Nation law. If you have driven any great distance in the US, you would most likely have driven through a Native American Nation, and witnessed the sudden presence of casinos, even at gas stations!

The State of Affairs in the UK

As demonstrated above, the inherently international nature of the internet makes online gambling law complex. However, the UK, as a country that has little issue with gambling, has a slightly easier time legislating. That is not to say UK online gambling legislation is trouble free.

Over the past few years, UK gambling powerhouses have been relocating to Gibraltar to take advantage of the preferential tax treatment. Remote gambling duty in mainland UK is 15%. In Gibraltar, online gaming tax is just 1%, with a maximum tax bill of just £425,000 per annum. According to The Independent, UK bookmakers and casinos are avoiding over £1 billion in tax bills by locating their online gambling facilities abroad. William Hill, Ladbrokes, 888 Holdings, Betfair and Paddy Power, to name a few, are all now located in Gibraltar, with the remaining five largest online bookmakers & casinos located between Guernsey and the Isle of Man, another two tax havens of the British Isles. Were we not all in uproar over Amazon and Starbucks dodging tax bills?

Under the previous online gambling legislation, The Gambling Act 2005, if a company did not have any key gambling equipment in Great Britain, it did not need a licence to sell to UK consumers (s. 89). Furthermore, if it was regulated in the European Economic Area (EEA), or was a whitelisted company, it did not need a licence to advertise to UK consumers either (s. 331). The Isle of Man and Guernsey were whitelisted, and Gibraltar fell within the EEA for the purposes of the Act. This can be called the point of origin approach; it did not matter where the end consumer was located, it only mattered where the operator was located. A similar approach is currently taken to determine whether tax is payable to the UK government.

New remote-gambling legislation was passed in April of this year in the form of The Gambling (Licencing and Advertising) Act 2014. This legislation has changed the approach taken when considering whether a company needs a gambling licence. Section 1(2) of the Act amends the 2005 Act to be applicable where equipment is located within the UK, or where “no such equipment is situated in Great Britain but the facilities are used there”: a point of consumption approach. The 2014 Act is expected to come into force on 1st October 2014. Whilst this point of consumption approach only applies to licencing, a similar approach is being taken to tax in Section 155(2)(b) of the Finance Act 2014, with no apparent suggestions that this provision might not be implemented; after all, very few politicians will take the side of tax avoidance. All being well, the new scheme will be in force by December 2014.

The justification for closing a tax loophole is clear, but what justification does the government have for amending licencing requirements?

The explanatory note that accompanied the original Bill details numerous reasons why change was justified, all of which concerned the risk to British consumers and advertisers. The Gambling Commission was concerned about emerging European jurisdictions offering remote gambling facilities to UK consumers, when little is known about the level of regulation and consumer protection. Why should European operators without sufficient regulatory oversight have an automatic right to sell to British consumers? Concerns included:

  • consumer protection from lack of software standards and testing;
  • lack of reporting to the Gambling competition for example concerning suspicious betting activity that might be linked to match fixing;
  • confusion to consumers over what was licenced by the Gambling Commission and what was not (often services are on the same branded website, despite different services being offered from different jurisdictions); and
  • confusion for advertisers over what foreign services they can advertise.

Do Problems Remain?

A European Complaint

The Gibraltar Betting and Gaming Association (GBGA) is without a doubt an inherently interested party in incoming changes to the regulatory landscape, and have as such already made a move for Judicial Review, first writing to the UK Government in June, putting them on notice. The GBGA challenges at first sight appear well founded.

Olswang, the firm representing the GBGA, and Peter Howitt, CEO of GBGA have explained that the measures introduced are not reasonable or proportionate to achieving the goal of consumer protection, and are likely to have adverse consequences for consumers. By doing so, the GBGA believes gambling companies will relocate to jurisdictions where the UK has no extra-territorial information gathering or enforcement powers, thereby leaving consumers in a worse position than they are currently in. This will also give companies operating out of poorly regulated countries a competitive edge. Overall, it is argued that these changes are a disproportionate interference with the free movement of services, which would contravene Article 56 of the Treaty on the Functioning of the European Union (TFEU).

Whilst this complaint is predominantly aimed at the changes in licencing, the argument could also apply to proposed tax changes if the new tax scheme is seen disproportionate to its aim, or simply a way in which to increase tax revenue.

I find this argument to be somewhat of a weak one. Part of the justification for change in the regulatory scheme was that many countries in the EEA have less than sufficient regulations concerning remote gambling, and are not required to report to the Gambling Commission. Without any relationship between the Commission and the country in question, the Commission currently have no way to gather information or enforce.

Whilst the Commission may not have a de facto jurisdictional right to gather information or enforce decisions and licencing conditions, a condition of any issued licence will surely require reporting, and permit the Commission to inspect as necessary to determine whether an operator should be granted a licence.

Furthermore, enforcement comes down to a simple solution of not issuing a licence to non-complying operators, and revocation of licences should an operator refuse inspection. Unfortunately, whilst it is all well and good not issuing a licence, there is little the Commission can do to prevent UK consumers from accessing an unlicensed operator’s website. Access could be blocked at internet service provider level, but these can often be bypassed by using proxies. Access blockages would however protect the unsuspecting consumer from accessing unlicensed betting services, and in my opinion, someone who deliberately gets around an ISP block does so at their own risk. Alternatively, banks and credit card providers could be restricted from allowing payments to such companies, although this could be easily avoided on the operator’s side by using an intermediary.

One issue does remain with my solution, the General Agreement on Trade in Services, and the WTO decision against the US in 2004 (see above) could equally apply to the UK restricting access to unlicensed companies. However, consumer protection is a somewhat stronger justification than the US provided. (Although I believe the US should be able to decide whether its residents can gamble, after all, it can be considered a public well-being issue due to the social problems gambling can cause.)

The only way in which the old scheme could be more workable than the new scheme, is if remote-gambling regulation was harmonised across the EU. Personally, I am against legislative creep of the EU, but this is one area I can see justification. If harmonisation did occur, I would quickly go back to the old legislative scheme.

However, for now, one point for the United Kingdom.

A Domestic Industry Complaint

James Earl of Pinsent Masons believes the new regulations may well damage the UK sport industry, which is increasingly reliant on foreign markets.

The new regulations would require foreign operators to obtain a remote gambling licence where they sponsor UK sports teams to target a non-UK audience. This may seem farfetched, but when you consider the huge international following of teams such as Manchester United, you can see the value in a non-UK operating betting company sponsoring a UK team. Could this deny the upper echelons of the sports industry an investment they deserve?

The Gambling Commission has suggested that an overseas operator would still contravene the new regulations where they blocked access to UK consumers. They have made clear that they are unlikely to licence a company unless they have a British facing business, or have plans to start one in the near future. This quickly rules out the possibility of an ‘advertising only’ licence.

This argument has indisputable merit, and for that, one point against the UK. However, on aggregate, I feel the UK wins; nothing should trump consumer protection, especially in an industry such as remote gambling where “punters” may be considered more vulnerable than the everyday consumer. Whilst the stigma attached to the gambling industry may or may not be warranted, the fact of the matter is, a consumer cannot and does not know whether the software is treating them fairly; the licence should give them this assurance, just like it would if they walked into a their local casino.

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Tagged: Commercial Law, European Union, International Law, Regulators, Tax Law, Technology

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