Online Gambling Law Update

By: Lawrence G. Walters, Esq.

www.GameAttorneys.com

March, 2003

Net Blocking Threatens I-Gaming Sites

Attempts by the government to bar offensive websites are “technically problematic and legally worrisome” states a new study from Harvard University’s Berkman Center. The study highlights how modern Web standards have permitted thousands of domain names to share one Internet address. It concluded that instead of precisely targeting only objectionable sites, attempts to restrict Internet addresses with gambling, pornographic, or political-related content ultimately makes legitimate sites unreachable as well¹. “According to my results, two-thirds of sites are hosted on Web servers with 50 or more domain names” said Ben Edelman, a student fellow and author of the report. The original version of the Hypertext Transfer Protocol (HTTP) required each Web site to have its own Internet address, which maps names like News.com to numeric values such as 206.16.0.136. In response to a perceived shortage of addresses, Http 1.1 in 1999 permitted each address to host an arbitrary number of Web domains. However current technology allows Internet Service Providers to block only IP (Internet Protocol) addresses, not domain names or URL². Edelman’s study goes on to say that the practice of Web sharing IP addresses is so commonplace that blocking raises Free Speech problems. The study which has not yet become public, comes at a crucial time as state and national governments mull over possible methods to restrict access to objectionable Web sites which may be legal in one jurisdiction but not another.

State’s Outlook on Gambling

The HR 21, a new bill introduced by Rep. James Leach to ban Internet gambling in the U.S was introduced on January 7, 2003. This came after a similar bill failed to pass in the previous session of Congress. This bill would prohibit the use of all credit cards and other payment methods for funding internet gambling. Rep. Michael Oxley, Chairman of the House Financial Services Committee wants to put the bill on a “suspension calendar”, according to an inside source.³ If this happens the bill would go directly to the House of Representatives for a quick debate and a vote that would require a two-thirds majority. Opposition of the Leach bill is expected to hold up the suspension calendar idea. Instead, Conyers is expected to introduce a new bill this session calling for a committee to review Internet gambling in hopes to legalize it in the U.S.

With California facing a budget shortfall estimated at between $26 billion and $35 billion, Gov. Gray Davis will open negotiations next month with Indian tribes to tap a never-before-used revenue stream to help fund government in the State — gambling money⁴. Gov. Davis wants $1.5 billion- roughly one of every four quarters that pass through slot machines at the state’s 51 Indian casinos. Wall Street estimates put their business worth at about $5 billion a year. Despite the Davis administration’s rosy projections of a $1.5 billion budget bailout from California’s Indian casinos, tribal representatives and industry analysts say the odds of getting anything close to that amount are slim to none- and don’t bet on slim⁵. Even with Davis repeatedly voicing his opposition to gaming in urban areas, critics said they wonder how long he will hold to it, or if the next governor will share his objection, and whether casinos in major cities will soon seem inevitable.

Florida is also facing a potential $4 billion shortfall in next year’s budget. This has left State gambling interests betting on renewed legislative interest in allowing video slot machines. The state’s pari-mutuels, along with dog and horse breeders, have emptied more than $6.2 million into the past four state elections in hopes of encouraging state leaders to keep an open mind about expanded gambling⁶. The proposal would give the state Lottery Department control over the video lottery. The once reluctant legislative leaders have agreed to hearings on the video lottery. The first will be Feb. 25 before the House Subcommittee on Gaming and Pari-mutuels.

Indiana has its hands full with a case that is scheduled for trial in the state’s federal court in April. It is being watched carefully because it goes to the heart of a question that has gained notoriety as gambling proliferates across the country: Are casinos liable for failing to protect addicted gamblers from themselves? David Williams, a former state auditor in Indiana, who is now bankrupt, is suing the Casino Aztar to recover his losses. All told, he says he lost $175,000 in three years, most of it poured into slot machines so mesmerizing that he would pump coins into them at a rate of 15 a minute. The gambling, and the losses, continued even after he was banned from the casino. Williams says he was addicted to gambling and that the casino knew it. Therefore, it had an obligation to turn him away, much as taverns are obliged to stop serving intoxicated customers. Casino industry supporters say nobody is forced to go into a casino. And courts so far have agreed. Critics contend that the increasing availability of casino gambling will increase the number of addicted gamblers. They say more addicted gamblers, in turn, will increase the social and medical costs to taxpayers. These critics also suggest that litigation against casinos could increase, and follow a path similar to litigation against tobacco companies, unless states enact stricter safeguards for gamblers. What makes Williams’ lawsuit stand out from other claims is that he was banned from Casino Aztar in March 1998. He was back at the casino eight months later. It took until August of 2000 before casino managers discovered he was playing again. Gambling addiction is recognized by the American Psychiatric Association as a mental disorder similar to alcoholism or drug addiction. Williams says the adrenaline rush he experienced while playing the slots is what hooked him. The casino has a strict “self-ejectment” program to help problem gamblers — a program that is not required by state law. The casino also posts toll-free help numbers throughout the casino, as well as notices warning customers not to overspend⁷.

International Gambling Outlook

The future of a well known Internet Sports betting service in Taiwan could be called into doubt following raids at the offices of one of its marketing partners. The U.K. based Sportingbet plc, which runs sportingbet.com, has been pursuing the Asian market heavily and had recently announced plans to target Taiwan to further advance their reach. This past month authorities with the Interior Ministry raided the offices in Taichung City of 101 sports, one of Sportingbet’s content suppliers, and SBC Advertising et Promotions Ltd, Sportingbet’s promotional agent. Authorities also searched the offices of a high-tech company, where they suspected Sportingbet was secretly housing servers used for funneling bets to England. Law enforcement officials in Taiwan were unable to comment regarding the findings of the raid but Andrew McIver, group finance director for Sportingbet, said the strange series of events could delay the company’s plans in Asia, but will not derail them⁸.

Hopes of online casino gambling operators who had their eyes set on Malaysia have been crushed this past month as the Malaysian government fortified its policy to not encourage the people of Malaysia to gamble. Although Malaysian culture is almost synonymous with gambling in the eyes of online casino operators, the decision by the state government to reject new gaming permits clearly indicates the intention of Deputy Chief Minister Tan Sri Datuk Amar George Chan Hong Nam and highlights his policy on gaming⁹. The Deputy Chief Minister also specifically commented about gambling through electronic systems. It’s his opinion that the state government would have no power to control the operation of gambling via such systems since the operation of gambling via electronic systems had been privately license previously to companies Cash Sweep, Sports Toto and Magnum.

Costa Rica’s government will establish a registry of online gambling companies in an effort to impose a tax on such operations. The initiatives arise as a result of recent congressional legislation that established taxes targeted at online gambling companies. Costa Rica’s online bookies must register with the company ministry and pay 10mn-24mn colones (US$26,000-$63,000) depending on the number of employees the ministry stated¹⁰. The U.S. Virgin Islands is also taking steps to further Internet gambling. Senator Shawn-Michael Malone has informed Governor Turnbull that he intends to offer a bill that would create a Virgin Islands Gambling Commission that would put all gambling operations under a single agency. The new entity would supercede all current gaming commissions¹¹. Currently the Casino Control Commission oversees casino gaming, which is allowed only on St. Croix, and is the regulatory body for Internet gambling, which was legalized in the territory last year but is not yet operational.

Payment Problems

People’s Bank has joined several other banks in blocking the use of bank issued credits cards for Internet gambling. New York Attorney General Eliot Spitzer made the announcement that People’s and nine other banks are following in Citibank’s footsteps in blocking transaction codes for online gambling sites. The actions mean that customers can no longer use those bank-issued credit cards for funding their gambling. People’s and the other out-of-state banks have agreed to pay New York $335,000 to cover costs associated an investigation by Spitzer’s office. The office said the settlement is part of “a trend in law enforcement to focus on intermediaries in combating illegal online activity.”¹² In June, Citibank agreed to block online gambling-related credit card transactions and pay $400,000 to a nonprofit group that counsels problem gamblers. It was after that agreement that Spitzer’s office started speaking with other banks that issue credit cards to New York residents. The pressure is on!

Ever since US legislators’ intimidated credit cards into refusing to deal with Internet gambling payments, Americans have been faced with a wide variety of alternatives. PayPal seemed the obvious choice for most in the community however since they too have pulled out there has been a search for a convenient replacement. Citadel Commerce Corp. is certainly proving a strong alternative. Citadel Commerce (www.citadelcommerce.com) is offering North American players an alternative deposit option to the already crowded online financial transaction market¹³. Based out of Vancouver, Canada, Citadel Commerce Corp. delivers an electronic checking system which allows players to transfer money from their bank account to a casino’s e-cash processing system by writing an e-check. Companies such as E-Gold also provide similar alternatives.

Another possible option may just lie in the existing banking system. If officials with UseMyBank.com have their way, Internet gamblers will soon be funding their accounts through Internet banking services such as savings and checking accounts. The company has developed a Web site that enables consumers to pay any bill, even one to an Internet casino or sports book, through any bank that can be accessed on the Internet. Joseph Iuso, the creator of the system, said UseMyBank.com is the first and only payment company in the world to facilitate direct payments from online bank accounts in real time. Over 7 million online accounts are eligible to pay the merchant/sellers with zero chargeback’s in real time for less than 1 percent. Using the system is as easy as signing on and selecting a payment amount. If the seller has already provided the amount, it automatically appears and the consumer is asked to confirm it. Then, UseMyBank sends the payment off to the bank, which replies with an electronic confirmation that the funds are good. Payments are shown on the account as being made to UseMyBank. The company has already completed the first of three implementation phases. Iuso said phase two is under way and planning has begun for phase three. The system currently supports all major Canadian banks, and the company hopes to add major U.S. and European banks by the second quarter of this year. The system is scaled to accommodate 10,000 users a day. Iuso would like to increase that, but hardware issues have prevented that so far. Those obstacles, he said, will be overcome, however, and he hopes they will eventually process 100,000 transactions a month¹⁴.

Net Gambling Innovations

Ever since access to the Internet evolved from PC to mobile phones it has been just a matter of time until wireless gambling became available. Cell phones themselves are becoming better suited to gambling. The newest cell phones are essentially mini-PCs, with full operating systems, heavy-duty processor power and high-resolution color screens. Software within phones is also helping to further gambling. Smart phones now accept a version of the Java programming language, as well as a competing language for so-called applets, BREW, which is licensed by Qualcomm15. Developers would use an applet–easily downloadable software–to deal a card in blackjack, depositing the graphics on the user’s cell phone and sending a request to the casino’s server for a random card, says Don C. Harold, vice president of operations for Chartwell Technology, a gaming software company for online casinos based in Calgary, Canada. For now it’s only possible to gamble wirelessly outside of the United States. Software companies specializing in Internet betting are now fielding inquiries from customers outside of the U.S. who want to allow mobile users to play games and place bets. Phantom Fiber is currently in talks with several customers who want to offer wireless bets on sports, horse racing and casino games. Caribbean-based Tiger Gaming plans to feature multiplayer wireless games like poker and the popular Chinese game Big 2 using Phantom’s software.

Lawrence G. Walters, Esq., is a partner in the national law firm of Weston Garrou & DeWitt, with offices in Orlando, Los Angeles, and San Diego. Mr. Walters represents clients involved in all aspects of online gaming operations. Nothing in this article constitutes legal advice. Please contact your personal attorney with specific legal questions. Mr. Walters can be reached at Larry@LawrenceWalters.com, through his website: www.GameAttorneys.com, or via AOL Screen Name: “Webattorney.”