Cross-Border Betting: International Agreement on Protecting Local Residents

©Copyright 2009 by Professor I. Nelson Rose. All rights reserved worldwide. Gambling and the Law® is a registered trademark of Professor I. Nelson Rose, Encino, California, U.S.A. www.GamblingAndTheLaw.com.

When may a state or country restrict or even completely prohibit foreign legal gambling? With recent decisions from courts, including the European Court of Justice (“ECJ”) and United States Supreme Court, and international agencies, including the World Trade Organization (“WTO”), there is now general agreement on how to answer that question.

Is There A Prohibition In Place And Does It Apply To This Form Of Gaming?

In determining what controls, or prohibitions, will withstand judicial scrutiny, it is necessary to look at the precedents. Few governments have submitted their proposals for judicial or administrative review prior to implementation. In many cases, in fact, courts do not have the power to answer theoretical questions, there must be an actual, existing conflict. The European Commission is one of the few organizations that will give guidance to national and state lawmakers on pending legislation. So, most of the law has developed piecemeal, through a series of challenges filed by operators after they have been prevented from offering their gambling services to the residents of a jurisdiction.
The first step in most of the cases involving cross-border gaming operators thus starts with the question of whether there is, in fact, a local law in place that restricts foreign legal gaming sites from taking bets from local residents.
Governments almost never exercised their powers to their theoretical limits. First, most lawmakers simply have not thought about the issue. If they have, they rarely enact laws that would infringe on the sovereignty of other nations. Governments are reluctant to embarrass themselves by passing laws that cannot be enforced. And sometimes there are omissions created by historical and other accidents. Changes in the law follow changes in society. Lawmakers are reactive, rather than proactive. They wait until an actual problem has occurred before they take action, making laws that address that particular problem. Since different forms of gambling have spread to different jurisdictions at different times, the existing restrictions on gambling are a patchwork quilt of various statutes, regulations and court and administrative decisions usually with no connections with each other. Therefore, it is important to know what form of gambling is involved, when asking whether cross-border gaming is prohibited.
For example, the most important United States federal law restricting remote wagering is the Interstate Wire Act.1 It was designed to go after “the Wire,” i.e. the telegraph wire services illegal bookies used to get horserace results.2 Naturally, no one thought of playing poker by phone, let along Internet casinos.
The U.S. federal Department of Justice (“DOJ”) believes the law covers all forms of gambling transmitted across state lines. But the words of the statute are more limited:
Whoever being engaged in the business of betting or wagering knowingly uses a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers or information assisting in the placing of bets or wagers on any sporting event or contest, or for the transmission of a wire communication which entitles the recipient to receive money or credit as a result of bets or wagers, or for information assisting in the placing of bets or wagers [is guilty of a crime].
Three United States federal courts have been called upon to determine whether this statute does indeed cover all gambling on the Internet. They have unanimously agreed that the language “sporting event or contest” in the statute leads to the interpretation that the Wire Act is limited to wagers on sports events and races. They have held that Internet lotteries and casinos are not banned by this, or any other, federal law.
So, lawmakers and regulators have to start by reviewing the language of the laws that are on the books, to ensure that they cover all activities that the government wants controlled. This includes the various activities that everyone recognizes as gambling, and those that we might call near-gambling, such as skill contests and promotional games. It also requires examing and deciding whether supporting activities should be regulated, such as advertising and the offering of credit for gambling. And it includes expressly stating which individuals are subject to control, such as operators, players, financiers, and even, in the case of Internet gaming, Internet Service Providers (“ISPs”).
The possible prohibitions on foreign gaming are almost always criminal, rather than civil, in nature. Commonly, there also are legal protections for criminal defendants that do not exist in civil suits. These include requiring that the government prove its case beyond a reasonable doubt, rather than by a mere preponderance of the evidence, and requiring judges to strictly construe criminal statutes and resolve any doubts in favor of the criminal defendant. But most importantly, every element of the crime must be proved before anyone may be punished for engaging in the activity.
The Wire Act again provides a good example. By its own terms, the Wire Act only applies to individuals who are “engaged in the business of betting or wagering.” This means the statute does not apply to mere punters. Courts have agreed, dismissing charges the very few times prosecutors have charged individuals with violating the Wire Act by doing nothing more than placing bets.
Even if an activity seems to be exactly the type of action prohibited by a statute, the law has other requirements that must be met. Some of these are found in the language of the statute itself. Some are restrictions affecting all laws.
Many governments have the inherent power to prohibit all gambling. Of course, a sovereign may have voluntarily agreed to limit its power, by joining a federation, signing international treaties or accepting the doctrine of comity,3 which requires governments to mutually respect each others’ laws. But outside forces also impose limits. One inherent limitation on the laws of every state and country is the sovereignty of other states and countries.
A government has the power to regulate activities taking place within its borders. It has the power to regulate activities involving its citizens or their property in international waters and airspace, assuming there is no conflict with the rights of other governments. A state or country may even be able to punish those who do harm to its citizens who are physically within the borders of another sovereign. But international law does not allow a state or country to regulate activity which has no impact on that sovereign or its citizens if the activity is conducted by foreign nationals in their own territory.
This has led to the creation of some legal presumptions, which have a major impact on interpreting whether a law prohibits cross-border wagering. Even though a government might have the power, there is often a strong presumption that lawmakers have not reached out beyond their jurisdictions’ borders in enacting a statute. Therefore, any prohibition on gambling which does expressly state that it applies to cross-border wagers may be presumed to include only activities taking place with the borders of that particular government entity. For example, U.S. federal criminal statutes do not apply to activities taking place entirely outside of the territorial boundaries of the United States, unless the statute itself contains an extremely clear statement of congressional extraterritorial intent. This strong presumption against extraterritorial application of federal criminal statutes has been part of American law for decades.4 United States federal civil statutes carry the same heavy presumption that they are limited to acts committed within the territory of the United States.5 This reflects the growing recognition of international law and the impact American laws can have on the sovereignty of foreign nations. A strict drafting standard is necessary to avoid “unintended clashes between our laws and those of other nations which could result in international discord.”
There are, of course, times when it is clear that a government has acted to prohibit or regulate cross-border gambling. These are usually recently enacted statutes designed to prevent local residents from betting via the Internet, though not by punishing the bettor. The most common approach is to make it a crime to take bets online from anyone who is physically present in that jurisdiction. A growing number of governments are passing statutes and regulations aimed at financial institutions and others who facilitate the gambling transaction. The 2006 Unlawful Internet Gambling Enforcement Act6 makes it a crime for a gambling business anywhere in the world to accept money for a gambling transaction that violates a U.S. federal or state law. It also calls for regulations to require financial institutions and e-wallets to identify and block money transfers for unlawful online gaming. Although the Act is supposedly aimed at the transfers of funds, it bizarrely does not actually make it a crime to transfer money for illegal gambling.7
Legislators do not often make it a crime to make a bet online. Laws against land-based gambling similarly are more concerned with the illegal operator than the patron. This follows the pattern of other victimless crimes, such as prostitution and drugs, where the penalties are lighter, or non-existent, on the patron. This is partly because the seller, particularly the organized criminal business, is seen as being more dangerous to society than the buyer of the illegal goods or services. But is also based on the realization by lawmakers and law enforcement that it would be simply impossible to arrest every patron, and having laws on the books that cannot be enforced creates disrespect for the law as a whole and creates opportunities for venality.
Cross-border is unique in that, by definition, it is only the patron who is physically present in the jurisdiction and thus easy to arrest. The first proposed U.S. federal prohibition on Internet gambling,8 if it had been enacted, would have been the first time the it would have been a crime to merely make a bet. The agency charged with enforcing federal criminal law, the U.S. DOJ, spoke out against the bill, making it clear that the agents did not want to be in the business of knocking on bedroom doors to arrest $5 bettors.
No matter how the prohibition on cross-border gambling is set-up, there are almost always express exceptions written into the statute for forms of gambling that are legal in that jurisdiction. This is necessary since it is often the government itself who is in the business of Internet gambling. It is common for state lotteries, outside of the United States and Canada, to take bets from their own residents’ homes and offices by computer and phone. Even in North America the Lotteries of the four Canadian Atlantic provinces have joined together to sell tickets online9 and American state legislatures are considering proposals for at-home sales. But these are far behind developments in Europe, where government-run lotteries take online bets on sports events.
Around the world, state-licensed operators have for years taken bets on sports events and horseraces. These were often allowed by phone, so it was natural to extend the law to include the Internet. Even in the United States, states like New York have allowed what is called “Advanced Deposit Wagering” (“ADW”) on horseraces for many years. This required a patron to deposit money in advance, usually by credit card, with an off-track betting (“OTB”) operator. The punter could then make bets by phone. In December 2000 Congress amended the Interstate Horseracing Act to expressly allow ADW by computer, so long as the bet was legal in both the state where the patron was and the state where the OTB accepted the bet.10

Keeping Out Gambling – Police Power

Assuming a government has acted to prohibit cross-border gambling the question arises whether that action was valid. In analyzing whether a jurisdiction has the power to prevent cross-border betting it is necessary to step back and analyze that government’s legal relationships with other governments. These fall into one of two types: The first is the more common situation, where the state or nation has no relevant legal restrictions on its power. The second, which has become of great interest recently, are governments whose rights to exclude extraterritorial legal gambling are limited, due to some other law. These latter include states that belong to federations and are restricted under federal laws or the federal constitutions; nations that have voluntarily, if sometimes unintentionally, agreed to let in legal gambling from other specific countries under treaties; and governments bound by the doctrine of comity, where out of courtesy and mutual respect, rather than because they are bound by a written document, states and nations recognize the laws of some other states or nations.
There seems little doubt that a government normally can exclude outside illegal gambling and even legal gambling. A sovereign government by definition has power over its own territory and citizens. It is thus the inherent right of every sovereign state to protect its borders from intrusions. This right is so fundamental that it need not be spelled out explicitly in a constitution or statute.
The state’s right derives not only from its right to continue to exist as an independent state, but also from the state’s police power. The police power is the inherent right, and perhaps the obligation, of a government to protect the health, safety, welfare and morals of its citizens. In the European Union (“E.U.”) it is called the “overriding public interest,” which allows Member States to take actions that would otherwise seem to violate the rights established by the treaties that created the European Common Market. In the WTO it is called “necessary” actions, again taken in seeming violation of the WTO treaties for reasons of necessity, such as preserving public order.
The police power is most commonly connected with governmental action taken in emergency situations, especially where public health is endangered, as in a fire or an epidemic. But gambling, licensed or illegal, even legal lotteries, has always been held to fall within a state’s police power.11 For example, the U.S. Supreme Court declared in Edge Broadcasting: “While lotteries have existed in this country since its founding, States have long viewed them as a hazard to their citizens and to the public interest . . . Gambling implicates no constitutionally protected right; rather, it falls into a category of ‘vice’ activity that could be, and frequently has been, banned altogether.”12
The police power has three interesting, and unusual, attributes:
1) A government’s police power is virtually unlimited. It is the nature of government for the state to exercise power for the good of society as a whole, at the expense of individual rights. This is obvious in totalitarian and authoritarian regimes. But the same is true of democracies. Ever since Jean-Jacques Rousseau published his Social Contract in 1762, it has been generally accepted that a democratic state derives its sovereign power from the surrender by individuals of their natural liberties.
Constitutional and other legal safeguards protect citizens from improper use of the government’s power. But, when a jurisdiction is faced with a threat to the health, safety and welfare of its citizens, particularly in an emergency, the police power prevails. The police power trumps constitutional and other legal rights; government has the legal right and power to do literally almost anything to anyone. At its most extreme, government can even take life without due process safeguards — the police do not conduct evidentiary hearings before shooting a terrorist who is trying to detonate a bomb.
Because gambling is treated as a police power issue, governments can act in ways that would be unthinkable in other commercial and social settings. “The police power of the State to suppress gambling is practically unrestrained.”13 “Because we are dealing with authorized gambling, the State may exercise greater control and use the police power in a more arbitrary manner.”14
2) A government’s police power is often tied to morality. It used to be a given that government played an important role in upholding the moral standards of a community. But the 1970s led to a widespread belief among opinion-leaders in many countries in situational ethics, the notion that there are no absolute standards of right and wrong. By the 1980s, even anti-gambling crusaders rarely argued that gambling should be outlawed because it is immoral; they feared being viewed as right-wing religious fanatics. However, government’s police powers are still aimed at morally suspect behavior, even if the justifications given are more pragmatic than religious.
Gambling has always been inextricably linked with the morality of a society, supporting the use of the police power. The explosion of legal gambling in recent years has not weakened government’s police power over gambling.
3) Governmental police power tends to be a local issue.15 As the United States Supreme Court observed in upholding Puerto Rico’s nearly universal ban on advertising by Puerto Rican licensed casinos, restrictions aimed at promoting the welfare, safety and morals of the residents of a state represent a well-recognized exercise of state police power.16 Whether the government involved is a state in a federation, like the states of Australia and the U.S., or a “state” in a treaty organization, like the E.U. or WTO, it is the state that has the primary concern with police power issues. Unlike other areas of commerce, it is highly unusual for a federal government, let alone a treaty organization, to overrule police power decisions of Member States.17 Higher levels of government are not usually concerned with police power issues, unless there is a perception that a threat to society exists that is beyond the control of local government.
Police power is usually a state issue based on history and practicality. During the formative stages of modern governments the protection of citizens’ health and safety was best left to authorities on the scene. Given the technology existing then, and perhaps even today, the major threats of fire and disease were not controllable from distant national capitols.18 The very nature of the Internet has led to an unusual level of involvement by federal governments, particularly in Australia and the U.S., into online gambling.
Morality also was and still is decided primarily at the state level. States tend to be small enough to appear homogeneous, or at least dominated by a single religion. Official state religions were, and are, common throughout the world.
Whether a state’s morality is based on a formal government-mandated religion or simply the accepted norms of the ruling majority, attitudes toward gambling are almost always written into a state’s laws. As a dramatic example, feelings against gambling games ran so strong in the Massachusetts Bay Colony that the possession of cards, dice or gaming tables, even in private homes, was outlawed.19
The repeated refusal of the E.U. to harmonize gambling is based on the recognition that even within a system designed to create a Common Market, morality and public order are, and always have been, primarily a local concern. The explicit rejection of harmonization means that Member States have great discretion on how they want to handle this morally suspect and inherently dangerous activity. It is fair to say that governments have greater rights to decide how they want to regulate gambling than they have in almost any other area of human activity, certainly more than any other economic area.
The E.U., in particular, has made it clear that a Member State may legalize and even advertise legal gambling – to attract players away from unauthorized operators – to channel existing demand and raise funds for beneficial social causes. Liga Portuguesa.20 Directives, including the E-Commerce Directive21 and the Services Directive,22 by expressly excluding gambling from their coverage, and the Audiovisual Media Services Directive,23 by implicitly excluding gambling, show that there is agreement that gambling should not be treated as other goods and services. The elimination of market barriers is, after all, designed to increase consumption, lower costs and spur innovation. Societies throughout the world and throughout history have found that these are not desirable goals when it comes to legal gambling.
There is no dispute that a state has the power to protect its citizens from illegal gambling. The question of a government’s ability, under its police power, to control the transmission of information and wagers connected with gambling that is clearly illegal both where the bet is made and where it is taken was resolved years ago.24
Thus, if the gambling is illegal in its country of origin, the government of the receiving country where the punter is has the legal right to keep it out. Of course, as the first part of this paper showed, it is often difficult to know whether the gambling activity is illegal even under the laws of the jurisdiction trying to ban the gaming website. It is obviously nearly impossible to be sure that the country of origin bars this particular form of gambling. Even if gambling is illegal there, almost all jurisdictions have little regard for activities taking place outside their borders. It is very possible that the laws of the country of origin do not cover gambling operations where the bettor is in another country.
Still, a jurisdiction faced with an foreign operator who wants to take bets from its residents always has the right to require the operator to prove that it is in complete compliance with its own local laws. This means not only that it is licensed to operate, but that the license expressly allows it to take the type of bets proposed from other states and nations.
For governments that have not voluntarily agreed to put limits on their police powers, the question of legality in the country of origin is of no particular significance. Being legal in another jurisdiction in this situation gives the foreign gaming operator no protection. Under the police power, governments routinely exclude goods and services shipped from countries where the items are legal. Whether it is Saudi Arabia barring the importation of alcoholic beverages, the United Kingdom going after advertisements of sex tours in Thailand or China banning soft-core pornography from abroad, the assertion that the activity is legal in the country of origin is not even made.25 But for the Member States of the E.U. and others who have agreed to open their borders under some circumstances, the first step must be to see if the foreign gambling is, in fact, legal under the operator’s own laws.

Limits On Police Power

Recent decisions from the WTO, ECJ and trial and appellate courts in Europe and the United States have shown there are often limits on a state and nation’s power to keep out goods and services it finds detrimental to its citizens’ welfare. A body of law has developed which makes it possible to analyze whether a law that makes cross-border betting extremely difficult, or even impossible, is legally valid in these cases. The laws under review almost always involve statutes and regulations enact by a jurisdiction which prevent companies outside the jurisdiction from accepting wagers from punters who are physically within the jurisdiction. In other words these are laws expressly designed to prevent cross-border gambling, so long as the operator is outside the boundaries of the state or nation. It is common to find that legal gambling, including Internet gaming, is permitted by companies that are licensed by that same state or nation, or even that the government is running gambling games itself.
The major restrictions on a government’s police power are created by the government itself: A state joined a federation and thus subjected itself to federal statutes and treaties and a federal constitution; a nation signed a bilateral treaty with another country or a multilateral treaty with possibly a large number of other nations and agreed to either allow in goods and services from its treaty partners, or at least to limit its criminal prosecutions of those partners’ citizens; or a state or nation has had unwritten agreements for many years based on courtesy to respect the laws of other jurisdictions with similar legal systems, a comity of nations.
The wording of the tests may differ, and certainly the actual applications of the policies to real-world situations vary greatly. The ECJ, for example, has taken pains to distinguish among the basic Freedoms and Principles laid down in the EC Treaty: Freedom of Establishment, Freedom to Provide Services, Freedom to Provide Goods, Freedom of Capital, and Principles of Proportionality and Non-Discrimination. For example, if an Internet operator does not apply for a license, or attempt in any other way to establish itself in a Member State, it cannot raise the Freedom of Establishment clause.26
But, decision-makers around the world have been surprisingly consistent in determining whether a government has the right to exclude cross-border betting. The basic rules can be stated easily: A government that is obligated to let in goods and services of other jurisdictions must let in outside legal gambling, unless it can show that the exclusion is to protect its residents. Laws that merely protect the local gambling operations from outside competition to maximize revenue are invalid. But even restrictions designed to limit gaming for solid reasons of protecting a society are invalid, if, in practice, they discriminate in favor of local operators.
There were few precedents dealing with cross-border gambling prior to the explosion of Internet gaming. In earlier cases, the issue of whether a government may exclude legal gambling from its partners mostly involved lottery tickets, which are easy to ship through the mails. But in addition there are other morally suspect industries producing goods and services that are routinely subjected to the police power of a state, such as alcoholic beverages and tobacco, that have also been the subjects of court decisions.
Although there has been some controversy on the issue, today there is little doubt that a government that has an absolute ban on a morally suspect commerce does not have to let it in, even if it originates in other states in its federation or treaty partners. A state or nation that makes it a crime to sell lottery tickets, with no exceptions, does not have to allow sister states or treaty partners to sell lottery tickets to is residents. This was the situation in Schindler,27 Europe’s first important cross-border betting case. When the United Kingdom prohibited all large-scale lotteries, the ECJ held that it could keep out advertisements for legal lotteries originating in the Federal Republic of Germany, another member of the E.U.
The U.K. had agreed when it signed the Treaty of Rome that it would not bar the importation of goods and services from other countries signing the Treaty.28 But a British law made it a crime to send tickets or advertisements of lotteries into Great Britain. The ECJ first held that lotteries were services subject to the Treaty and that E.U. Member States could almost never impinge on the freedom of other Member States to provide services. But then the Court carved out an exception, given “the peculiar nature of lotteries”:

[Paragraph] 60 First of all, it is not possible to disregard the moral, religious or cultural aspects of lotteries, like other types of gambling, in all the Member States . . . Secondly, lotteries involve a high risk of crime or fraud, given the size of the amounts which can be staked and of the winnings which they can hold out to the players, particularly when they are operated on a large scale. Thirdly, they are an incitement to spend which may have damaging individual and social consequences. A final ground which is not without relevance, although it cannot in itself be regarded as an objective justification, is that lotteries may make a significant contribution to the financing of benevolent or public interest activities such as social works, charitable works, sport or culture.
61 Those particular factors justify national authorities having a sufficient degree of latitude to determine what is required to protect the players and, more generally, in the light of the specific social and cultural features of each Member State, to maintain order in society, as regards the manner in which lotteries are operated, the size of the stakes, and the allocation of the profits they yield . . .
62 When a Member State prohibits in its territory the operation of large-scale lotteries and in particular the advertising and distribution of tickets for that type of lottery, the prohibition on the importation of materials intended to enable nationals of that Member State to participate in such lotteries organized in another Member State cannot be regarded as a measure involving an unjustified interference with the freedom to provide services . . .
It is important again to emphasize that Schindler involved a government that had completely prohibited (at the time) the form of gambling under consideration. The case would be even easier if a government has outlawed all gambling. But the situation is radically different once a state or nation legalizes a form of gambling and attempts to keep out identical forms from sister states or treaty partners.
Take the case of a state that is part of a much larger nation. States in a federation are, almost by definition, not allowed to put up barriers to legal commerce from other states in the union.29 The purpose in creating a federation is to create a single country, even if the Member States retain a great amount of their original power. The state’s police power will trump the federal constitution’s requirement that states must let in commerce from sister states; but, only if the state erecting the trade barriers has taken a strict prohibitionist stance, barring locals and foreigners alike from selling the morally suspect goods or services. Once a state has permitted even a small amount of trade in a morally suspect business, outsiders in sister states in the federation have strong arguments that they should be allowed to trade inside as well.
States can and do raise police power concerns to justify raising barriers to outside competitors while allowing the local businesses, or even the state itself, to operate identical businesses without restrictions. Sometimes the arguments work. But a court has to agree that not just companies in other states but those other states themselves may not be as concerned about issues like consumer health and safety. It is difficult, but not impossible, to convince a court that State A, which licenses gaming operations, is justified in keeping out a competing gaming operation licensed by State B in the same nation. For example, there have been a few land-based casino companies who have been licensed by Nevada regulators and yet found unacceptable by New Jersey regulators.
The more common situation is illustrated by an important case handed down by the Supreme Court of the United State in May 2005.30 The states of New York and Michigan allowed their local wineries to sell wine online for delivery to local residents, but put up substantial barriers to out-of-state wineries. The Court rejected the states’ police power justifications: “keeping alcohol out of the hands of minors and facilitating tax collection.”
Justice Kennedy, writing for a 5 to 4 majority, said that the 26 states that allowed direct shipment of wine report no problem with minors. He concluded this was not surprising, since minors are more likely to consume beer, wine coolers and hard liquor than wine; minors have more direct means of obtaining wine; and minors want instant gratification.
The ECJ and the Appellate Body of the WTO have laid down standards that are very similar to those facing federated states. A member nation may fairly easily use its police power to keep out other members’ legal gaming, if it permits no one at all to operate similar forms of gambling. But once the country allows its local businesses to take bets, it has the burden of justifying any barriers it imposes on foreign operators. Protecting the local monopoly operator from competition, although a valid and entirely understandable reason, is never sufficient. The overriding reasons relating to public interests that might justify a Member State of the E.U. excluding gambling goods and services from a provider in another Member State include those listed in paragraphs 60 and 61 of the Schindler decision, quoted above, as well as others.
The ECJ has given detailed guidance in some areas, thought it is up to the high court of each individual Member State to decide whether the state’s law meets the stated objectives. For example, where the national law of Finland grants to a single Finish public body exclusive rights to operate slot machines in the national territory, it creates “an impediment to freedom to provide services.” But “that impediment may be justified on grounds relating to the protection of consumers and the maintenance of order in society.” Except in cases of blatant discrimination, it is up to the local government to decide:

[T]he power to determine the extent of the protection to be afforded by a Member State on its territory with regard to lotteries and other forms of gambling forms part of the national authorities’ power of assessment. It is for those authorities, therefore, to assess whether it is necessary, in the context of the aim pursued, totally or partially to prohibit activities of that kind or merely to restrict them and, to that end, to establish control mechanisms, which may be more or less strict.31
Similarly, a U.K sports books that wanted to take bets from Italy was told “It is for the national court [of Italy] to verify” Italy’s highly limited sports betting is justified.

[Paragraph] 38 [T]he Treaty provisions on the freedom to provide services do not preclude national legislation, such as the Italian legislation, which reserves to certain bodies the right to take bets on sporting events if that legislation is in fact justified by social-policy objectives intended to limit the harmful effects of such activities and if the restrictions which it imposes are not disproportionate in relation to those objectives.32
The most extreme example was a licensed U.K. sports book, which challenged Italy’s monopoly on Internet sports betting. Even though the ECJ made it clear in its comments that if felt Italy could not justify its exclusion of other Member State’s operators on the ground that it was discouraging gambling, when Italy itself was rapidly expanding and promoting legal gambling, the Court still said it is up to the highest court of Italy to decide the question.33
The WTO came to similar conclusions as to the standards to be applied when one Member State claims it is excluding businesses that are legal where they originate from another Member State for reasons of “necessity.” The widely reported decision arose when Antigua filed a complaint against the United States for prohibiting cross-border betting by Antigua’s licensed Internet gambling operations. The Appellate Body not only stated the standards to be applied to such claims, it then, unlike the ECJ, decided for itself whether those standards had been met.
The U.S. asserted that its federal criminal statutes prohibiting international gambling, the Wire Act, the Travel Act, and the Illegal Gambling Business Act, were “measures . . . necessary to protect public morals or to maintain public order.” Specifically, the U.S. stated the laws were passed to address its concerns “pertaining to money laundering, organized crime, fraud, underage gambling and pathological gambling.” In this, the first case before the WTO ever to raise the “necessity” defense, the Appellate Body found that the U.S. had presented sufficient evidence to show that its concerns related to gambling, particularly remote wagering were legitimate.34
But, even if a government can name significant public policy interests that it needs to protect, and convinces the court or other decision-maker that the restrictions on cross-border gambling it has enacted actually do protect those interests, the restrictions will be declared invalid if they are overbroad or discriminate against foreign operators.
A statute or regulation is overbroad if there exists another way to achieve the same police power goals without infringing on fundamental rights. A ban on advertising of legal gaming would be unconstitutional or violate treaty rights if the desired goal of reducing gambling by minors could be achieved through related, but less intrusive means, such as limiting the times and places where gaming ads may appear, or unrelated means, such as restricting hours of operation or requiring guards at the door. However, even though a system of licensing might be equally as effective as the complete prohibition of gambling in protecting minors and compulsive gamblers, preventing fraud, keeping out organized crime, etc., governments are not required to legalize gaming, because gambling has always had a moral element.35
The police power of a government that is part of a federation or a treaty organization is also limited by the requirement that it not discriminate against its sister sovereigns. Even if a nation or state can justify its restrictions on cross-border wagers originating from another state of its federation or a treaty partner to protect its important local public interests, the law will be struck down if it arbitrarily discriminates in favor of local gaming operators. So, the U.S. Supreme Court struck down state laws which made it relatively easy for local wineries to take orders on the Internet and deliver wine to people’s homes in the state, but difficult or impossible for wineries in other states of the union to do the same. The ECJ has repeatedly looked at whether a Member State has restrictions on cross-border betting while allowing local operators to take bets from its citizens, and if so, whether the discriminatory laws can be justified on public policy grounds.
How To Protect Local Residents
The ECJ has thus made it clear how a Member State of the E.U. can impose restrictions on gambling operators from other Member States. The local government should clearly and expressly state the objectives it gaming legislation is intended to achieve. It is possible that the ECJ will accept justifications for restrictions raised by the government after the statutes and regulations have been enacted, as it did in the Liga Portuguesa36 case. But this is dangerous. It is a better practice to list objectives and link each individual restriction with a particular objective.
It is also essential that the objectives and linkage with government restrictions be honestly made. The ECJ seemed to be angry with the claims by the Italian government in Plancanica37 that the objective was to restrict legal gambling, when it announced that it was going to award 1,000 licenses for sports betting, and automatically renew 329 licenses for horse books, while adding 671 more, with none going to anyone not in Italy.
The starting point should be the reason why states regulate, and often completely prohibit, gambling. The strongest arguments are based on local morality, followed by the need for public safety. The weakest objectives are maximizing financial gain for the local operators or recipients.
Gambling is the only business where there is no product other than cash – large amounts of untraceable cash – and there are no paper records. Even loan sharks keep track of every cash transaction. It is addictive, sometimes highly so, to some individuals. Even to those not addicted, it can be powerfully seductive, especially to children.
The major danger for players with unregulated gambling is that operators may cheat. Why run rigged games? If the chances of getting caught are slim, for some the question is why not cheat? This is especially true of illegal games, where the operator is breaking the law anyway.
But even legal gambling creates great risks for the social order, which can only be controlled through strict controls. Potential problems include the possibility of secret ownership by organized crime, exploitation of minors and compulsive gamblers, incompetent or corrupt management, under-financed owners, dishonest employees and venal government officials. The games can be extremely fast, so that quick, short-term virtually untraceable cheating can lead to enormous financial gain. These inevitably lead to disastrous consequences for the victims and society.
Even regulation by an outside government will not prevent problems of infiltration by organized crime, cheating of patrons and skimming of profits, if that regulation is weak. Bugsy Siegel, a director of Murder, Inc., built one of the first large Las Vegas casinos, the Flamingo, during a period of almost no government regulation. But various criminal syndicates were still involved with Nevada casinos into the 1980s. There are so many stories of secret ownership of legal gambling interests by organized crime that it has become a stereotype. It should be noted, however, that the stories were often true. The movie “Casino” is based on a non-fiction work, Casino: Love and Honor in Las Vegas, by Nicholas Pileggi (1995). Large international gaming companies were only willing to build billion-dollar hotel-casino resorts in Las Vegas after Nevada put in strict controls.
Organized crime usually infiltrates through secret ownership and undisclosed deals. This is often tied to the use of threats, including extortion, and violence. Organized crime is attracted to any cash business, where it can launder money from drug sales and other illegal businesses. But the main goal of criminal insiders is the skim, i.e. taking out as much cash as they can before profits are reported and taxed.
Not only is revenue lost, but government authority is undercut when licensees avoid their most basic responsibility of paying their taxes. And the gambling operation’s legitimate owners can be hurt even worse. One management group took $7 million out of an Indian casino in Arizona in the 1980s, while giving the tribe only $235,000.
Gambling is regulated in an attempt to ensure both honesty and competence. The danger to the general public comes from all gaming insiders: management, dealers, cashiers, slot machine technicians — anyone who has access to the operation’s games and its untraceable cash. Even if management is completely honest, a crooked dealer will cheat players to cover up the money he is stealing.
Government oversight comes in many different forms. But regulation comes down to two fundamental principles:
1) The regulators must know everything they can about everyone who has any ownership interest or possible control over the operation; and
2) Systems have to be in place to track every euro: all money that is invested in the operation, taken out in profits or other ways, gambled, won and lost.
To uncover secret ownership and other tying arrangements with organized crime requires applicants and licensees to supply detailed financial information and much more. Regulators have to determine whether applicants and licensees are suitable, which means knowing detailed information about virtually every part of an applicant or licensee’s life and history. An applicant or licensee who does not want to reveal incriminating or embarrassing information should not apply for a casino license.
The lessons of history are clear: Everywhere that gambling has been made legal but allowed to operate without strict government controls, there has been corruption, scandals and widespread social problems. Within a few years, the gambling was then either regulated, or outlawed.
By looking at the controls on gambling that exist in states and countries around the world, it is possible to draw up a list of restrictions that should be upheld as supporting clearly stated objectives. Those objectives include:
Eliminating activities that are violate the Member State’s moral and religious culture and history.
Preventing the infiltration of organized crime.
Limiting cheating, fraud and skimming.
Protecting individuals against unfair practices.
Protecting individuals from themselves, particularly the vulnerables: children and compulsive gamblers.
Controlling the expansion of gambling.
Competing with existing, unregulated operators.
Ensuring that profits from gambling operations are used for benevolent purposes.
All gambling requires strict controls. But, because Internet gambling is often quick, and always involves transactions without face-to-face contact, additional protections may be required.
The ECJ in Liga Portuguesa made it clear that it is the Member State where the patrons are, and not where the foreign operator is, that decides what controls it wants in place to protect its residents. The following are restrictions that have been implemented in various jurisdictions that are designed to support one or more of the objectives listed above:
Forbid all gambling, except those forms and operations expressly authorized by law. (Portugal)
License every individual having any ownership interest or power to control the operation. This includes anyone involved in any financial arrangement, such as a lender or the lessor of a building where gambling is conducted.
Background checks on everyone involved in any way with the gambling operations, including criminal records and income tax returns.
Similar background checks on all applicants’ immediate families.
Disqualification for anyone convicted for any felony, or any misdemeanor involving illegal gambling or moral turpitude.
Disqualification for anyone involved with illegal gambling, even if no charges have been brought. This includes having taken wagers from a Member State without a license from that Member State.
Physical location of the servers and other equipment in the Member State. Surprise visits by inspectors are an important part of the control of gaming, as is the ability to immediately close down an operation.
Restrictions or prohibitions on the granting of credit to bettors.
License payment processors.
Criminal penalties for financial institutions that knowingly aid illegal gambling operators. (Norway).
Require ISPs to identify and block illegal Internet gambling sites. (Belgium). Or require ISPs to block payments when they become aware that unlawful gambling is occurring. (Estonia). This gives the government power to issue black lists.
Block ISPs that allow users to access unauthorized gambling sites. (Sweden, Hungary).
Require ISPs to redirect players to authorized websites if they try to access a site on the blacklist. (Italy).
Restrictions on advertising.
Restrictions on sponsorships of sports teams. (Portugal).
Limits on the types of games, how they are conducted, including speed of play, and stakes.
Close Internet cafes used for gambling. (Greece).
Require protections for problem gamblers, including self-exclusion, players’ ability to set daily limits, links to help lines. It is even possible to require operators to monitor play and bar players who appear to be compulsive gamblers. (Luxembourg).
Require protections for children, including means to verify the age and location of players. Players can be required to show national identity cards. (Luxembourg).
License all major suppliers.
Prior government approval or at least reporting of all contracts of more than some minimum amount, say €10,000.
Fine residents who place bets with unauthorized foreign operators. (Austria, Greece).
Expressly make it a crime in that state for anyone in that state to take a bet via the Internet from anyone anywhere in the world, or for anyone anywhere in the world to take a bet via the Internet from anyone in that state. (Nevada).
Licenses and other restrictions can be limited to nationals of EU Member States. (Cyprus).
High uniform tax rates on all operators, including foreign websites. (U.K.).
Require that gambling profits go to benefit the public.
Conclusion
It is now possible to answer the question, “When may a state or country keep out foreign legal gambling?” But the analysis can be extremely complicated, requiring an examination of exactly what type of gambling is involved, the statutes and regulations that might apply, and the relationship between the governments of the operator and the bettors. Under international law, a sovereign government does not have any restrictions on keeping out foreign legal gambling or any other commerce. But states that are part of federal nations and countries that have signed trade agreements often cannot keep out legal goods and services from their sister states and trade partners. However, gambling comes under a government’s police power, and thus is treated differently from almost all other legal commerce. A state or nation may choose to completely outlaw all gambling, or the type of gaming under consideration, and it is not required to open its doors to an activity that it considers immoral or dangerous. Once a government has legalized a form of gaming, it is more difficult for it to argue that it is excluding nearly identical forms of gambling because of its public interest concerns. However, it can have strict restrictions on gambling, including monopoly operators, if it clearly articulates the objectives of these restrictions and how they help achieve those objectives. This is especially true when gambling is conducted over the Internet, because there are additional dangers not present with bets made face-to-face. Although limiting gambling for moral and religious reasons are the strongest, restrictions can also be justified to preserve public safety and order, to protect children and compulsive gamblers. Most importantly, gambling, including legal gaming, has a history of infiltration by organized crime and fraud and cheating. The dangers to consumers and society call for strict licensing of every individual involved with the ownership or operation of the game, tracking every euro in and out, and requiring that servers be physically present in the state, so that government can act quickly to inspect and, if necessary, to close down the operation.

Prof. I. Nelson Rose, Encino, CA. www.GamblingAndTheLaw.com

I. NELSON ROSE
Professor I. Nelson Rose is an internationally known scholar, author and public speaker, and is recognized as one of the world’s leading experts on gaming law.
Prof. Rose is best known for his internationally syndicated column and 1986 landmark book, “Gambling and the Law®.” He is the co-author of Internet Gaming Law (2nd Edition just published), Blackjack and the Law, and the first casebook on the subject, Gaming Law: Cases and Materials. Prof. Rose is co-editor-in-chief of the Gaming Law Review.
Harvard Law School educated, Prof. Rose is a consultant to governments and industry. He has testified as an expert witness in administrative, civil and criminal cases throughout the United States, in Australia and New Zealand, including the first NAFTA tribunal on gaming issues. Prof. Rose has acted as a consultant to major law firms, international corporations, licensed casinos, Indian tribes, and local, state and national governments, including the provinces of Québec and Ontario, the states of Arizona, California, Delaware, Florida, Illinois, Michigan, New Jersey, Texas, and the federal governments of Canada, Mexico and the United States.
With the rising interest in gambling throughout the world, Prof. Rose has addressed such diverse groups as the National Conference of State Legislatures, Congress of State Lotteries of Europe and the National Academy of Sciences. He has taught classes on gaming law to the F.B.I., at the University of Ljubljana in Slovenia, Sun Yat-sen University in China, the Universidad de Cantabria in Spain, Université de Toulouse in France, University of Macau, and as a Visiting Scholar for the University of Nevada-Reno’s Institute for the Study of Gambling and Commercial Gaming. Prof. Rose has presented scholarly papers on gambling in Nevada, New Jersey, Puerto Rico, Canada, England, Australia, Antigua, Portugal, Italy, Argentina and the Czech Republic. He teaches International Gaming Law at the University of Macau every June.
Prof. Rose can be reached through his website: www.GamblingAndTheLaw.com.