One of the fastest growing online businesses is online gambling. The scope of this business is so enormous that some have even claimed it is the single most important factor in the growth of e-commerce. Despite this, there is much controversy and uncertainty surrounding the legality of online gaming in both the U.S. and Canada.
The U.S. Justice Department’s (DOJ) position with regards to Internet gambling, and by extension, advertising of Internet gambling, is that it is an illegal activity.
U.S. authorities claim that a recent ruling by the World Trade Organization (WTO) has effectively upheld this stance in that the decision partially reverses key aspects of an earlier ruling of the WTO that had resulted in overseas gambling firms having a claim that they should be allowed access to the U.S. Internet gambling market.
Conversely, Antigua, the tiny Caribbean country that licenses the gambling firms in question, is equally adamant that the decision will still allow its online gaming operators to enter the U.S. market.
As to the background of the WTO ruling earlier this month, in 2003, Antigua complained to the WTO that its Internet gambling companies were not able to properly access U.S. customers because federal laws barred the placing of bets across state lines by electronic means. It also argued that the U.S. was reneging on agreements undertaken with the WTO to make its services markets more accessible to other countries.
Antigua initially prevailed in that it was able to persuade a WTO panel “that it is inappropriate to treat businesses conducting transactions online as unequal to or somehow worse than traditional brick-and-mortar operations, or for the U.S. government to assume lack of industry integrity without any objective evidence.”
The U.S. government’s argument was that it had never intended for the services’ liberalization to include gambling and that, regardless, WTO rules allow states to limit trade to “protect public morals or maintain public order.”
The WTO panel found in favor of Antigua, but the U.S. appealed that decision to an appellate body of the WTO, which agreed with much of the U.S.’s argument, and the U.S. declared that it would be able to adjust its existing laws to meet the WTO rules while still maintaining restrictions on Internet gambling.
Antigua, on the other hand, maintains that the WTO ruling would “pave the way for new … opportunities for Antiguan gaming operators.” In short, the decision by the appellate body is being hailed as a success by both sides based on differing interpretations.
Much of the controversy surrounding the legality of Internet gambling in the U.S. concerns the fact that although online gambling is presently illegal, it has been virtually impossible for U.S. regulators to enforce the prohibition because major Internet gambling sites operate from locations outside of the U.S. in countries where Internet gaming is legal (as it is in Antigua) or unregulated.
Even though it is nearly impossible to enforce the prohibition against Internet gambling overseas, it is not systematically enforced within the U.S. as well.
Media Outlets’ Revenue
A case in point is the situation in Nevada where, even at the state level, the law prohibits both players and Internet operators from engaging in online betting. Yet, little is done to enforce the prohibition in the state, which is among the top 10 states in terms of online players. In fact, the world’s largest poker site, PartyPoker.com, now runs radio and television advertisements in Las Vegas and local billboards advertise Internet poker sites.
This leads us to the issue of advertising for online gambling. Online gambling firms have been filling the void for many well-known media outlets that have been struggling to keep up with advertising revenue over the past few years. Thus, online gambling ads have been appearing on more mainstream Web sites and competing with the most popular industries, including retail, financial services and travel, for advertising space on such well-known portals as Yahoo and Excite.
Even so, the DOJ has maintained that Internet gaming advertisements, like online gaming itself, are illegal and that “anyone carrying them could be charged with aiding and abetting.” Specifically, the department states that such advertisements are in violation of the Interstate Telephone Act of 1964 and that online gambling operators are violating the federal Wire Wager Act of 1961.
The DOJ has made good on its claims of illegality by issuing subpoenas to many well-known media outlets to stop them from running ads for online gaming. The most recent group of subpoenas were handed out on April 12 to Esquire magazine in regards to an eight-page insert billed as the “Gentleman’s Guide to Poker” and sponsored by BoDog Poker.
Heavy American Gambling
The insert includes a photo of BoDog’s CEO, Calvin Ayre, along with an exhortation to join him online at the tables to see “why the world is playing poker at Bodog.com.”
A similar insert appears in the May issue and another was planned for the June issue; however, reports say that Hearst Publishing, which publishes the magazine, is considering pulling the ads.
The subpoenas are the first reported legal action of this nature since the U.S. Attorney’s office in the Eastern District of Missouri carried out a grand jury investigation into the advertising practices of the online gambling industry starting in mid-2003 and lasting well into 2004.
The subpoenas issued in the original investigation, resulted in such media outlets as Clear Channel, Infinity Broadcasting and Discovery Networks having to end longstanding relationships with Internet gaming advertisers for fear of being subjected to indictments by the DOJ.
Despite the DOJ crackdown on advertising of online gambling, and its contention that it will be able to maintain restrictions on Internet gambling following the WTO ruling, the irony remains that 60 percent of all offshore gambling dollars comes from Americans. Similarly, about 70 to 85 percent of online poker players are believed to be Americans. Internet poker alone generated global revenues of $1 billion in 2004 and is projected to top $2.4 billion this year.
Few Clear-Cut Guidelines
Therefore, despite the illegality of Internet gambling and advertising of Internet gambling in the U.S., there is an obvious homegrown market for the activity.
The situation in Canada is similarly unclear as there are few gaming cases that provide clear-cut guidelines regarding online gaming and advertising.
Generally, and subject to a number of restrictions, Canadian laws allow provincial governments to conduct and manage lotteries and games of chance that are operated on or through a computer, such as Internet casinos; however, in most circumstances, there is criminal liability in Canada for anyone running an online gaming operation.
As for advertising of online gaming services, the position taken by Canadian authorities has been that it is illegal. However, there are some who dispute this position, but needless to say there are not many media outlets who would risk criminal prosecution to test the validity of this position.
Studies show that Internet gambling will continue to grow exponentially in the future. One estimate states that the global Internet gaming market will grow from $10 billion in 2002 to $14.5 billion in 2006. In fact, according to industry research, in 2005, online gambling will be the largest industry in Europe in terms of online entertainment.
Regulation Could Be Only Choice
Such strong growth data has convinced many, including some U.S. legislators, that regulation is the best method to deal with the widespread phenomenon of Internet gambling, since prohibition is not being enforced and many countries outside the U.S. already have legalized Internet gambling.
For example, early this month, the British Parliament passed new legislation to regulate online gambling. Under this new legislation, online casinos will be allowed to operate from Britain for the first time while a new commission, and a body of some 100 investigators, will be established to regulate the industry.
The British move to regulate is a precedent that should be followed by both U.S. and Canadian authorities. The simple reality is that online gaming is here to stay — the only question is whether governments such as that of the U.S. will choose to ignore this reality or will decide to share in the benefits of regulation, such as taxes or licensing fees to offset the social costs that generally accompany any form of gambling.
Javad Heydary, an E-Commerce Times columnist, is a Toronto lawyer licensed to practice in both Ontario and New York and is the managing editor of Lawsof.com.