E.U. Member States Have Only Two Choices

written by I. Nelson Rose

© Copyright 2010, all rights reserved worldwide. Gambling and the Law® is a registered trademark of Professor I Nelson Rose, www.GamblingAndTheLaw.com

The European Court of Justice (“ECJ”) has now made it clear that the governments of the European Union have only two options when it comes to Internet gambling. A Member State (“M.S.”) can keep its monopoly, but only if it greatly restricts the operation, especially advertising. If the M.S. is unwilling to limit the size and growth of its local lottery and gaming, then it must open its borders to all operators licensed by any other M.S.

As with much of the law, the devil is in the details. A M.S. that is forced to open its local market can still make things so difficult that most foreign operators will not want to bother, especially if the M.S. has a small population. And an operator with the resources and legal knowledge can often successfully fight its way in, even when the M.S. announces that it is going to keep its local monopoly.

All branches of the E.U. legal bodies have made it clear that gambling is a unique activity that is not subject to harmonization. Member States are free to create their own standards because morality and public order are, and always have been, primarily a local concern. The governments of Europe have great discretion as to how they want to handle this morally suspect and inherently dangerous activity. It is fair to say that lawmakers and regulators have greater rights to decide how they want to control gambling than they have in almost any other area of human activity, certainly more than in any other economic area.

European operators had been hoping for years that the ECJ would do what it had done in other areas, and announce that a company licensed by one M.S. would automatically have the right to take bets from the residents of another M.S. The Court expressly rejected that idea in the recent case, Liga Portuguesa de Futebol Profissional, Bwin International Ltd. v. Departamento de Jogos da Santa Casa da Misericórdia de Lisboa (Santa Casa).

A M.S.’s power in this area derives not only from its right to continue to exist as an independent state, but also from the fundamental reason a government exists. In the U.S., we call this the police power. A state’s police power is the inherent right, and perhaps the obligation, of a government to protect the health, safety, welfare and morals of its citizens.

The concept is universal, even with treaty organizations: In the World Trade Organization, it is called “necessary” actions, again taken in seeming violation of the WTO treaties, but for reasons of necessity, such as preserving public order. In the E.U. it is called the “overriding public interest,” which allows M.S.s to take actions that would otherwise seem to violate the rights established by the treaties that created the European Common Market.

The European states have a long history of governmental monopolies being the only source of legal gambling within their borders. But this is being continuously challenged today by companies in other M.S.s: manufacturers of slot machines, owners of casinos and sports books; and, in particular, operators of Internet gaming websites.

The ECJ has made it clear that a M.S. may legalize legal gambling as a monopoly, but only if it is doing so for the right reasons.

The strongest reason would be morality: A state can completely keep out anything that it finds immoral. Of course, it is difficult for a government to say that gambling is immoral if the state is licensing or operating games itself.

We all know the other standard reasons for limiting legal gaming: protecting the vulnerables – compulsive gamblers and children – and keeping out criminal influences. These will work, if done correctly.

The one argument for a legal monopoly that won’t work, even though this is often the true motivation, is to protect the local operator from competition. Even when artfully phrased, such as “preserving revenue for local social benefit programs,” the profit motive alone will not succeed as a reason for keeping out licensed operators from other M.S.s.

But a monopoly can keep the door closed, if it is careful. The government has to not only take the right steps, it has to make the right arguments.

Take Santa Casa, which runs the Portuguese National Lottery. Santa Casa was careful not only to limit the Lottery’s advertising. It argued, successfully, to the ECJ that the reason it was advertising at all was to attract players away from unauthorized operators – to channel existing demand and raise funds for beneficial social causes.

The ECJ has given detailed guidance in some areas, though it is up to the high court of each individual M.S. to decide whether the state’s law meets the stated objectives. For example, where the national law of Finland grants to a single Finnish public body exclusive rights to operate slot machines, 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. Similarly, where a U.K sports book wanted to take bets from Italy, the ECJ held, “It is for the national court [of Italy] to verify” whether Italy’s highly limited sports betting is justified.

The most extreme example is Gambelli, where a licensed U.K. sports book challenged Italy’s monopoly on Internet sports betting. The ECJ made it clear in its comments that it felt Italy could not justify its exclusion of other M.S.’s operators on the ground that it was discouraging gambling, when Italy itself was rapidly expanding and promoting legal gambling. Yet, the Court still said it is up to the highest court of Italy to decide the question.

I have been meeting with many parties on both sides of the issue to advise them on what can, and cannot be done, about government gambling monopolies in Europe.

For example, a government that wants to keep its monopoly should clearly and expressly state the objectives its gaming legislation is intended to achieve. It is possible that the ECJ will accept justifications for restrictions raised after the statutes and regulations have been enacted, as it did in the Santa Casa 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 Plancanica 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 outside of Italy.

The starting point should be the reasons why states regulate, and often completely prohibit, gambling.

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.

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 violate the M.S.’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.

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 following are restrictions that have been implemented in various jurisdictions that are designed to support one or more of the objectives listed above:

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.
Disqualify anyone convicted of any felony, or any misdemeanor involving illegal gambling or moral turpitude.
Restrict or prohibit granting of credit to bettors.
Criminal penalties for financial institutions that knowingly aid illegal gambling operators. (Norway).

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.

The M.S.s in the E.U. are realizing they have to choose which of only two paths they may take when it comes to legal gaming. They can keep their monopolies, but only by restricting the gaming operation in almost every respect, particularly advertising. Or they can choose to open their markets to operators licensed by other M.S.s.

In either case, both government and private operators have to be careful that they are proceeding correctly, or they will find themselves on the losing end of challenges in the European Commission and courts.

© Copyright 2010, all rights reserved worldwide. Gambling and the Law® is a registered trademark of Professor I. Nelson Rose. Harvard Law School educated, Prof. Rose is recognized as one of the world’s leading experts on gambling law. He is an internationally known public speaker and a consultant and expert witness for governments and industry. His latest books, Internet Gaming Law (1st & 2nd editions), Blackjack and the Law and Gaming Law: Cases and Materials, are available through his website, www.GamblingAndTheLaw.com.

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