Australia's Current Efforts to Legalize and Control Internet Gambling

Internet Gambling - Problems and Opportunities

This article is the second of a series that is the product of my recent trip to Australia, during which I had the opportunity to meet with many colleagues in the gaming and wagering industries and to participate in conferences on "Casinos and Gaming" (including gambling via the Internet) and on "Australasian Off-Course Betting" (also including Internet gambling). Once again, I am grateful to Interactive Gaming News for providing this forum. The views expressed in these articles are entirely my own and do not necessarily reflect the views of anyone else.

The first article, subtitled "Separate Approaches to Internet Gambling in Australia and the United States," presents a broad outline of the Pitfalls and Potentials for Internet gambling and compares and contrasts - both historically and in the context of current legislative initiatives in both countries - the approaches to legalized gambling in the United States and in Australia. There is much significance in this comparison for policy makers, gambling-related business enterprises, and ordinary citizens alike. Whereas both countries are intent on "minimizing the use of unlawful and unlicensed gambling products" and protecting their citizens from the potential harm of unregulated Internet gambling, there are vast differences in these two jurisdictions in attitudes towards gambling in general and the response to Internet gambling in particular. [This article assumes familiarity with the prior article and the issues raised therein.]

The current American approach (as in the "Kyl bill") would be to criminalize interstate and international Internet gambling - both for gambling service providers and for players - and to call on the American government to seek to have other countries honor and enforce this American policy.

The Australian approach, more fully reviewed in this article, is that a policy of prohibition would prove ineffective and would deny policymakers both the opportunity to frame important rules and regulations to govern Internet gambling, and the opportunity to raise revenues both for government and for locally licensed gambling service providers.

Some of the many dilemmas that face both countries include:

What to do about pre-existing legal gambling providers within the jurisdiction.
What to do about gambling service providers from outside the jurisdiction who are able to bypass local government and through the Internet interface directly with potential customers --
- Where the provider is operating under a license lawfully issued in another country and offering products that would be legal if offered in a gambling establishment in this jurisdiction, and
- Where the provider is operating under a license lawfully issued in another country and offering products that, in any event, would not be legal to offer in this jurisdiction.

Redefining the roles of Federal and State governments in gambling policy, in countries where gambling policy has heretofore been left to the individual states.

The National Gaming Regulatory Model -- Australia

In May, 1997, a "Draft National Regulatory Model for Interactive Home Gambling Products" was released by the Australian State and Territory Gaming Ministers. According to a Press Release issued with the Draft Model, the report was "prepared by a special working group of State gaming officials and follows a meeting [in May, 1996] at which Ministers agreed to look at developing a regulatory model for all vehicles of interactive gaming, such as Internet and Pay TV gaming." The Victorian Minister for Gaming is cited in the press release as having said that "the report proposed that interactive home gaming be subject to strict licensing and regulatory conditions, rather than attempt to enforce an unrealistic and unworkable form of blanket prohibition", and that "an effective regulatory model was dependent on a national approach." The Minister stressed that "Ministers had not taken any formal position on any part of the report's discussion points... the report is only one set of options."

While reliant upon assumed "cooperation" between and amongst the Australian States and Territories, the Draft Regulatory Model [hereafter, "Model"] is based upon State, not Federal, legislative and regulatory action, and a continued Federal position that policy decisions about legalized gambling are to be determined at State level:

"Provided all States and Territories participate in the Model, the assistance of Federal bodies is unnecessary to provide effective regulation of interactive home gambling products sourced from within Australia….Implementation of the Model involves, in part, each State and Territory enacting complimentary legislation….The important assistance from the Federal Government is to ensure that Federal laws are not made that invalidate any State or Territory legislation that gives effect to the Model.

"The Model does not propose Federal action to attempt to block the entry of overseas products delivered over the Internet or by foreign satellites."

To date, only one state has proposed and enacted enabling legislation that reflects the Model - Queensland's "Interactive Gambling (Player Protection) Act 1998." The government of Victoria has endorsed the Model "in principle", and legislation is reportedly being developed. Current indications are that, while some other Australian states will follow the lead of Queensland (and Victoria), not all states will agree to participate under the Model.

In the following analysis of the Model, I will rely on the actual text of the Model (quotes given in italics), plus those oral and written comments presented at the Gaming Conference by Mr. Brian Farrell, Manager, Gambling Operations and Audit, Victorian Casino and Gaming Authority. Mr. Farrell also was Chairman for the Australian/New Zealand Working Parties, the task force that developed the Draft Regulatory Control Model.

The Theory of the Model

Mr. Farrell noted five different reasons why a (gambling) product may be legalized:

Protect players [who may otherwise partake in illegal or unfair products]
Combat illegal operations by satisfying market demand [provide a better alternative]
Spur economic development or tourism
Support an ailing industry [example in America: gaming machines at racetracks]
Raising funds for government objectives [taxation]

The Model addresses "Interactive Home Gambling ...new forms of gambling made possible by advances in telecommunications and computer technologies." The Internet is "virtual" and not subject to the normal forms of regulation that are based upon intervention at a physical place. Also, the Internet is "global", with no respect for boundaries or local rules.

But, the argument goes, the Internet is already here, and will have a bigger presence over time. It will contain many sites at which persons in any country will be able to wager with untested probity of the operators and without technical testing of the "games".

By legalizing Internet gambling and applying a carefully prepared, rigorous scheme of regulations, Australia (through its participating states) hopes to protect the interests of players by "ensuring the games are conducted fair and honestly and by people who are of good repute" and "…that players receive their proper entitlements and ancillary activities such as advertising are carried out in a responsible way." Mr. Farrell noted that Australia is a respected jurisdiction, and that several of its states already had "regulatory experience with technology-based gambling products" - which regulatory scheme and product testing would carry over to interactive gambling products.

A proactive policy of licensing and regulating Internet gambling seeks to "minimize the impact of products provided from overseas or illegal sources by maintaining (and creating) obstacles to their advertising and marketing and by providing alternative products where the entitlements of players are protected."

By prohibiting advertisements or other activities on behalf of unlicensed products, and encouraging the wide marketability of licensed products, the Model is intended to encourage Internet gambling entities to accept the underlying regulatory program. In addition, the Model assumes a public perception of "respectability" for those sites that are subject to strong and credible regulation…("a regulatory regime that players will trust"). It is felt that the public will support the licensed Internet sites [over other Internet gambling sites] if they are well regulated, "visible" through allowed promotion, and well run as legitimate businesses.

In the process, of course, the potential diminution of gambling tax revenues would be combated and, if the program were successful, government revenues from gambling could even go up. As Mr. Farrell put it, "There is a window of opportunity to grab and maintain a large slice of the world pie."

Exclusion of Existing Interactive Wagering Products

But, what to do about existing industries that either (1) already participate in interactive gambling, or (2) could be adversely affected by potential competition for the gambling dollar by the spread of licensed interactive gambling? As I read the Model, it protects the former group (to some extent) but for the most part denies protection to the latter group under the assumption that virtual gambling would not be a direct competitive threat to physical gambling.

The Model notes that "apart from phone betting with TABs or bookmakers, a gambling service provider has previously required a physical location where money changed hands or players placed their bets." The Model specifically excludes these existing interactive activities:

"The scope will include gambling products in which players participate using telecommunications but excluding telecommunications enabled-products currently offered by TABs or bookmakers and authorized trade promotions."

Such exclusion appears to have been done for several reasons.

First, the Model contemplates that, for any form of Internet gambling legalized by states pursuant to the Model, the states will be authorized to issue unlimited licenses to those operators who meet the established regulatory standards. This kind or amount of legal competition is in contradistinction to the monopolistic licenses issued TABs (in their existing interactive products) and may not be desired for licensed bookmakers.

Second, since these operators are already participating in interactive gambling by telephone (and in some instances by the Internet), it would seem that - at least in some Australian states - these operators can expand their presence via the Internet without the need for new legislation. In addition, operating under the Model involves making payments to the state-of-origin of the player. Such a remission of taxation is not the norm for these existing legal interactive operations.

Third, the Model advocates a cooperative policy of removing barriers between the jurisdictions for advertising or other restrictions on approved interactive wagering products. However, as described at the end of this article, virtually all Australian states impose (and are likely to maintain) various restrictions on interactive wagering conducted by their licensed bookmakers.

Note that the Model proposes that such an exclusion for TABs and bookmakers only encompass "telecommunications-enabled products currently offered...":

"It is intended that the Model will capture all interactive gambling products unless the product is currently offered by a TAB or bookmaker and the product is based upon the result of a "third party" outcome such as a sporting contest or election. If, in the future, a TAB or bookmaker was to offer casino games, lotteries, gaming machine games or new interactive gambling products, it is intended that it would be done within the Model."

The Need for a "Cooperative Approach" Amongst the Jurisdictions

In order for the proposed proactive strategy to be successful, it should receive the support of all Australian jurisdictions:

"The legislative framework currently in place in each State and Territory is not capable of addressing the challenges of future interactive home gambling products and any State or Territory acting alone will not be able to develop an effective regulatory system."
"A cooperative approach by all State and Territorial Governments is the only effective means of regulating interactive home gambling products at this level. A non-cooperative approach is likely to result in individual States and Territories maintaining barriers to interstate products. In the short term, this will limit the ability of Australian-based service providers to effectively market their products to a critical mass of consumers and provide advantages to overseas-based providers. In the long term, a non-cooperative approach can only result in the ineffective regulation of interactive home gambling products and erosion of the gambling taxation revenue of all States and Territories."

Proposed Legislation under the Model

The following outline is culled, with a little paraphrase, directly from the Model:

Foundation Provisions, proposed for each State's Enabling Legislation

licensed and approved products are declared legal
all other products are declared illegal to offer, market or advertise
each jurisdiction will license and regulate gambling service providers located or providing services from within that jurisdiction; the number of service providers that may be licensed will not be limited

Key Legislative Objectives

facilitate the offering of interactive home gambling products
protect the rights and entitlements of players
enable free access to the National market, and access to the global market
promote competition to promote highest level of quality service to players
seek to insure the integrity of industry participants
seek to insure honest conduct of interactive home gambling
seek to minimize the incidents of harm caused by problem gambling
allow for the proper accounting of taxes
implement consistent regulation and standards
protect the interests of States and Territories by implementation of a cooperative approach to the regulation of interactive home gambling

Licensing Scheme

assess suitability for licensing
mutual recognition [reciprocity] will apply to the results of any suitability (or product) tests conducted by another participating jurisdiction
demonstrate a clear ability to pay major prizes from existing reserves, or a guarantee from a third party with that capability
technology-based operational controls over each product; demonstrate that the system provides effective protection of player entitlements and can easily be audited
controls will ensure interactive terminals are not used by commercial sites
service provider must maintain privacy of player information
to open an account with the service provider or be registered by the service provider "as a recognized eligible participant", players will be required to provide proof of identity, age and place of residence
anti-money laundering conditions will be placed on the gambling service provider's license

Other Considerations for Enabling Statutes and Rules

A general prohibition on minors gambling will be provided
credit gambling will be prohibited. Funds transfers will be permitted, including transfers from credit cards for deposits into customer accounts
"Provisions directed at compulsive and problem gambling will require service providers to offer players the ability for the player to set maximum bet levels or maximum total bets for a period. Persons will be allowed to self-exclude themselves. A self-exclusion will only be lifted on seven days notice (to provide a cooling off period). Service providers will be required to make available information on contact points for problem gambling services."
local prohibitions will be lifted concerning the advertising and marketing of approved products offered interactively from other jurisdictions under the National scheme

Relationship of Gambling Service Provider's Jurisdiction to the Player's Jurisdiction

The Model contemplates cooperation amongst jurisdictions. It is anticipated that where a Provider is licensed in one State, on a principal of "reciprocity" that Provider need not also be licensed in a second state that is a "Participating Jurisdiction", but will be automatically acceptable in that second state as a purveyor of interactive gambling products to the Internet players who are residents of the second jurisdiction. But where does the player fit in?

According to Mr. Farrell, "Player identification is a cornerstone of the model upon which many other controls rest." In the first instance, accurately identifying the player is the only way to effectively monitor that minors or other prohibited persons will not gain access to the gambling system. (Service providers will be required to obtain "positive proof" of the player's name, age, and place of residence.)

In fact, accurately identifying the player is essential to the revenue distribution concepts underlying the Model.

"Taxation will be applied on the basis of the location of residence of the player and will be set by the Government of the jurisdiction of the player's residence. The taxation paid by the service provider will be remitted to the player's jurisdiction. The jurisdiction where the service provider is located will be responsible for collecting, auditing and verifying that the service provider has remitted the appropriate amount of tax in respect of each jurisdiction."

"Unless there is an alternative agreement by Treasuries, if a player who is not resident in a participating jurisdiction accesses the product, the tax applied will be set and retained by the jurisdiction in which the service provider is located."

Opting In and Out, in Whole or in Part

Thus, the Model contemplates three kinds of jurisdictions. State A, a participating jurisdiction, is assumed to be the location of the applicant gambling service provider. State A licenses the applicant. State B, also a participating jurisdiction, contains players who bet on Internet sites operated by that licensee. State A collects all relevant payments from the licensee, and distributes the tax due to State B (where the player is located.) This would be true even if State B had chosen to "opt in" for purposes of such tax receipts, but not to license any site operators.

The third kind of jurisdiction is "State C" that has decided not to be a participating jurisdiction. In Australia up to now, there has been no legal barrier to residents of one state or territory wagering into legal interactive gambling games in a different state or territory. If such policy were to continue the applicable tax would stay in State A, even though the player were resident of State C.

It is not clear how all the above relates to jurisdictions outside of Australia. If only Australian jurisdictions may be deemed "participating", but Australian governments will not require licensees to refrain from accepting action from foreign citizens, then all the tax revenue from this gambling will inure to the benefit of "State A". However, if a foreign state may be given "participating" status, all sorts of additional regulatory questions are raised [including whether addition federal approval would be necessary for an Australian state to enter into a regulatory agreement with a foreign government.] In addition, there is a question whether -- even within the framework of the Model, an Australian state may require its licensees to accept players only from within participating jurisdictions. I will discuss these issues, and their ramifications, more fully in my next article.

The Queensland Legislation

In March 1998, the Australian state of Queensland adopted enabling legislation -- the "Interactive Gambling (Player Protection) Act 1998" - that "puts flesh on the bones" of the concepts set forth in the Model. As stated in the new law, "this Act contemplates a cooperative scheme between Queensland and other jurisdictions for the regulation and control of interactive gambling. However, this Act is not dependent on participation by any other jurisdiction in the regulatory scheme." As contemplated in the Model, the Act excludes from the definition of "interactive games" wagering authorized by that State's "Racing and Betting Act 1980" and "Wagering Act 1998" for activities authorized "at the commencement of this section." The next article will detail many aspects of the statute, including the powers granted Queensland's Minister responsible for administering the Act to prohibit the conduct of specific interactive gambling products within Queensland.

Some Observations on the Proposed Australian Regulatory System

While comments representing this author's viewpoint have certainly crept into these articles, it has been my intention to relegate the bulk of my personal comments for the next article. However, there are certain observations about the Model that are important to set forth here.

The Regulatory Model does not advocate that all forms of gambling be permitted via the Internet.

The Regulatory Model is intended to serve not as a binding federal compact over the states, but as a framework within which each state is asked to pass its own Internet gambling enabling legislation, with its owns rules, procedures, sanctions and exclusions. While the Model recognizes that uniformity amongst the states is desirable and would make the transition to Internet gambling more efficient and beneficial, it is not imposed on the various states. [At the Gaming Conference, in a mild rebuke to this writer who - in his presentation - linked New Zealand to subscribing to the Regulatory Model, a regulator from New Zealand took the floor to state for the record that New Zealand had not done so.]
Even within the Model, there is no requirement that a participating jurisdiction permit any and all forms of interactive gambling by its residents (even if other participating jurisdictions allow their residents to engage in such forms of gambling.)
It specifically upholds the right of individual Australian states to "opt out" of the Regulatory Model, in whole or for particular types of gambling.
It specifically excludes from its scope interactive wagering products of the type already legalized in various Australian states (race and sports betting through the TABs.)
What it does not do is to describe a series of parallel exclusions, or rights to "opt out", for jurisdictions outside of Australia.
It is by no means clear that, if interactive fixed odds race or sports betting is authorized, licensed bookmakers operating via the Internet will be permitted to display their full array of "fluctuating odds." In all but one Australian state, it is currently illegal for bookmakers' fluctuating odds on horse races to be displayed away from the racetrack, even on an intrastate basis. Last October, in a news release on the results of the 1997 Australian Racing Ministers Conference, it was reported that "Restrictions on the off-course broadcast of bookmakers prices fluctuations was also discussed. The Ministers agreed that there should be no change to the existing restrictions."
It is also of interest that Australian states currently require minimum bet levels when wagering by telephone with legal bookmakers, a provision apparently related to the potential impact of bookmakers' off-course turnover to TAB off-course turnover. According to the news release previously cited, "The minimum bet levels for telephone betting with bookmakers were reviewed and agreement reached that the status quo should be maintained."

In the next article, I intend to use the new Queensland statute as an example of how the Regulatory Model can be implemented, set forth my own views including the comments I made at the Australian Gaming Conference, and consider the usefulness of the Model as a template for international cooperation in the regulation (rather than prohibition) of Internet gambling.