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Welcome clarity on online sales in China for foreign investors from an unexpected source but uncertainty remains for the VIE structure
31 January 2013
The US federal government and state governments remain virulently opposed to internet gambling. Operators may be prosecuted under state law on the basis that it is unlawful to operate a casino without a licence. In addition, under the Federal Wire Act of 1960, it is unlawful to use phone lines to transmit or receive a bet. In February 2000, Jay Cohen, an internet gaming operator based in Antigua whose sports-betting site was taking bets from Americans, was the first person to be convicted for operating an internet sports betting operation. He was fined and sentenced to 21 months in prison. His conviction was upheld on appeal.
The Unlawful Internet Gambling Funding Prohibition Act was passed in the US House of Representatives and Senate Banking Committee earlier this year and will now be put to vote before the full Senate, probably by the end of this year. The bill will prohibit acceptance of any cheques, credit card payments or other fund transfers by financial institutions for internet gambling. This legislation will effectively supercede any attempts by states to legalise internet gambling.
Under pressure from federal and state governments, many credit card companies and other electronic payment services already will not process charges related to internet gambling. Yet, despite the illegality of internet gambling, it is estimated that US punters currently generate between 50-70 per cent of revenue for offshore online gambling operators.
Operation of online gaming businesses in the UK is not permitted under the existing legislation. UK law does not prohibit advertising for offshore online gaming businesses providing they do not solicit money for gaming.
Offshore online casinos, mostly resident in places such as the Caribbean islands, have grown dramatically in the past 10 years, from a few sites in the mid-1990s to an estimated 1,800 e-gaming sites today. Global revenues from internet gaming in 2003 are projected to be $5bn (£2.94bn). Where 10 years ago few countries in the world permitted online gaming, now more than 50 jurisdictions allow some form of remote gaming.
A review on UK gambling laws, known as the ‘Budd Report’, was published in July 2001. This recommended that online gaming should be legalised in the UK and regulated. In April this year, the Department for Culture, Media & Sport (DCMS) released its position paper on the ‘Future Regulation of Remote Gambling’. The purpose was to provide guidance to Parliament on how it might achieve its aim of introducing a reliable system of regulation for a newly legalised remote gaming industry. On 19 November, Trade and Industry Secretary Patricia Hewitt announced the publication of the UK Gambling Bill, which is now before the Joint Parliamentary Committee. It will investigate and comment on the bill before 8 April 2004. The reforms brought by the bill are not expected to become effective until 2005.
The view of the UK Government is that it is unrealistic to try to prohibit something its citizens broadly want. Through regulation, the Government will be able to test and certify software and systems used by operators, issue regulations and licences for operations, audit and inspect the businesses, and ensure that the games are fair and entertaining and the sites have secure payment methods. A further Government objective, one that it does not trumpet quite so loudly, is the additional tax revenues to be received from online gaming. Any taxation scheme of online operators will need to be sufficiently attractive to justify setting up in the UK.
US legislators are burying their heads in the sand and ignoring the realities of the market. Prohibition of alcohol in the 1920s never led to a decline in alcohol use. The continued prohibition of internet gambling in the US drives the most responsible and experienced companies from becoming operators. Why leave the industry in the hands of unregulated companies in remote locations? The UK approach suggested by the DCMS is much more realistic, practical, and balances the interests of its citizens’ right to choose their form of entertainment and its social responsibilities.