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Michael Shagan
 

Separate Approaches to Internet Gambling in Australia and the United States

29 April 1998

Internet Gambling - Problems and Opportunities

During the latter half of March and beginning of April, I traveled to Australia to interact with colleagues in the gambling industries from throughout Australasia. My travels included attendance at two conferences: a three-day meeting of the Chief Executives of off-course betting ("TAB") organizations, and another three day meeting entitled "The 6th Australasian Casinos and Gaming Conference." The latter conference covered many forms of gambling, including racing and sports betting; casinos; lotteries; various forms of gambling as alternative entertainment within tracks, clubs and pubs; and Internet gambling. The topic of Internet gambling was addressed by numerous speakers (including the writer of this paper) over all three days. My attendance at both conferences, plus private meetings and discussions during my two weeks "Down Under", has broadened my knowledge and perspective about the problems and opportunities presented by the World Wide Web and other emerging technologies, not only to gambling operators and regulators, but also to government policy makers, social activists who may be concerned about gambling, and the citizens who might wish to participate in gambling through new and convenient means.

It is my intention, in this article and subsequent articles, to share what I have gleaned from this interaction. (Subsequent articles will highlight details of various governmental initiatives in Australia, plus the specific papers presented at the Australasian Conference.) I am grateful to Interactive Gaming News for providing me this forum.

The reader should be mindful that my background includes over 25 years as participant in, and then consultant to, the racing and wagering industries principally (plus involvement with other forms of gambling.) During that time, I have participated in the implementation of most product and technological innovations in these industries. I believe my experience over the years has been broad enough to permit me to observe and comment about all forms of gambling. Here, then, is a somewhat simplified overview.

Pitfalls and Potentials for Internet Gambling

In both Australia and the United States, the following problems with the advent of Internet gambling have been acknowledged:

  1. A country or state's policy against permitting one or more forms of gambling is directly undermined by the ease in which its citizens can access the Net and find gambling sites.

  2. Where a particular form of gambling has been legalized and exclusive licenses issued to favored parties (e.g., only race tracks with live racing; only government-operated lotteries; only charitable or non-profit gaming), the Net provides a means for non-licensed operators to reach the bettors directly.

  3. Where a particular form of gambling has been legalized and regulated, even on a non-exclusive basis, the Net provides a means for an operator to bypass that regulatory scheme and provide gambling opportunities directly to the bettors.

  4. Any remote gambling (Internet, telephone, etc.) can be expected to lessen attendance and turnover at walk-in gambling premises.

  5. Access to Internet gambling by underaged citizens may be less capable of control and regulation.

  6. Unfettered Internet gambling denies the state the ability to protect its citizens against unfairness, cheating, invasion of privacy and consumer fraud.

  7. Last, and definitely not least, gambling is a source of revenue for governments and local industries, and unauthorized Internet gambling lessens the value of this revenue source.

In contrast to the pitfalls of Internet gambling, which are virtually universally condemned in their extreme, analysis of the potential benefits of Internet gambling may depend in part on a pre-conception about the relative merits of any form of gambling and its expansion to a new and convenient distribution medium. Here are some potential benefits:

  1. A country or state that legalizes and regulates one or more forms of Internet gambling sets the ground rules for how and when its citizens will participate, and thus has a better chance (than outright prohibition) of seeing its policy decisions and regulatory scheme adhered to.

  2. Where licenses were previously issued to favored parties in order to enhance their business, licensing these parties as Internet operators will further enhance and help to preserve their monopolistic market share.

  3. Even where no monopoly is maintained for favored licensees, it may still be possible to subsidize these enterprises by passing on costs to others. And preexisting licensees are offered the opportunity to compete via this new distribution medium.

  4. A policy of legalizing, regulating and licensing provides incentives for the licensees to subscribe to the policy standards set by regulation, including background investigations of individuals or companies, plus reviews of hardware, software, and other mechanisms utilized in outcome determination, customer information and the transfer of funds.

  5. Internet technology may assist in preventing access by minors, as compared to walk-in premises, but the burden will in part be shifted to the player/account holder to safeguard his (her) access codes.

  6. In the area of "problem gaming", there may be a greater opportunity for control or intervention on-line, than gambling via traditional means.

  7. Interactive wagering has the potential to reduce operator costs, compared to systems of "traditional" telephone betting. It can also improve the quality of service offered to customers, both by freeing up employees from merely accepting wagers to actually offering customer assistance, and in utilizing new techniques in aid of the customer's needs and preferences.

  8. As in-home presentation of live races expands (dedicated racing channels here or coming to Australia, New Zealand, England, United States and other countries), complementary interactive wagering will take on even greater importance, via the Internet as well as other technologies, including "through the television" interactive wagering now in use by Churchill Downs with ODS/TVG.

  9. Legalization of Internet gambling will help maintain or enhance revenue derived from gambling.

  10. "There is a window of opportunity to grab and maintain a large slice of the pie."

Australia's Approach to Gambling

Even during my first visit to Australia back in 1977, it was clear that gambling is part of the main stream of Australian life. There is no apparent stigma attached to this form of entertainment. Racing throughout the country is carried, live, by radio or by television. (It is my understanding that in the 1970s, a Saturday night variety show was built around live racing between the variety acts.) On Melbourne Cup day (the first Tuesday in November for the past 130 years), the whole country comes to a halt for the three minutes duration of the feature event at Flemington racecourse. Betting on other sports is also accepted without fear for the moral fabric of Australian society. The transition from race and sports "wagering", to casino "gaming" (in urban centers) was just not that big a deal! In addition, government's share of revenue derived from gambling (quoted at the conference as being as much as 10% of total government revenues in one state) is proportionately much higher than in the United States.

Attitudes towards gambling are not very different among the various Australian states, as they are across states in the USA. It is this fairly homogeneous sentiment that provided the backdrop for Australian policy makers and regulators to consider the advent of Internet gambling. The issues, of course, are pretty much the same as over here, but the response has not been!

The United States' Approach to Gambling

There is no question that "Gambling" is a major leisure-time activity in the United States. As a National Gambling Commission stated in 1974 in the very first sentence of its Final Report, "Gambling is inevitable."

Nevertheless, gambling is not a mainstream American activity. Most state constitutions proclaim that Gambling is illegal, and then proceed to carve out exceptions (pari-mutuel racing, charitable gambling; government-run lotteries, and so forth.) Until the last decade or so, race tracks or casinos were usually built at tourist centers, or locations apart from urban populations, so that would-be customers had to make a conscious decision to go out of their way to play the games.

America's attitude towards gambling was shaped in large part by early settlers' embrace of "the Protestant ethic", and later by somewhat paranoid fears of "organized crime." In recent times, attitudes have truly changed about gambling as an acceptable form of entertainment for the adult population and an acceptable form of business for corporate America. But there is still a social and moral stigma about gambling, hardened by reasonable (if overemphasized) concerns with regard to access by minors, problem gambling, consumer fraud against the players, etc.

In the early 1960s, driven by concern that the mob was financing its nefarious activities from gambling riches, Congress enacted what we now call the "Wire Communications Act". [18 U.S.C.1084] (Briefly, the Wire Act attempted to curtail (illegal) gambling activities across State lines if such activities included use of wire communications facilities.) Readers at all familiar with the current debate about the "Kyl bill" will be well familiar with this statute, since it is the underlying legislation that Senator Kyl is seeking to alter, and is also the subject of alleged violations in recent indictments against Internet gambling operators.

In 1978, four years after issuance of the Report by the National Gambling Commission referred to above [formally called the Commission on the Review of the National Policy Towards Gambling), Congress enacted the Interstate Horse Racing Act of 1978. [15 U.S.C. 3001; I was a principal participant in the formulation of that legislation.] The IHA established a framework for permitting race bettors in one state to place wagers on races run in a different state, but only if the racing industry participants ("host" track, horsemen at that track, host state regulating commission, "guest" or receiving state regulatory commission) gave their consents to such transaction. For purposes of this paper there are two significant things about the IHA. First, it served as launching pad for the institutionalization of interstate pari-mutuel wagering pools - now the norm rather than the exception - and the legalization of interactive account wagering in eight American states.

Second, in the IHA, Congress formally embraced the findings of the 1974 National Gambling Commission: that to the greatest extent possible policy decisions on gambling should be within the province of the separate states rather than the federal Government. Here is the pertinent language:

The Congress finds that -

    (1) States should have the primary responsibility for determining what forms of gambling may legally take place within their borders.

    (2) The Federal Government should prevent interference by one State with the gambling policies of another, and should act to protect identifiable national interests; and

    (3) In the limited area of interstate off-track wagering on horseraces, there is a need for Federal action to ensure States will continue to cooperate with one another in the acceptance of legal interstate wagers.

Different states have responded to the federal "hands-off" policy towards gambling in different ways. Utah and Hawaii still prohibit all forms of gambling. All other states permit some form of gambling. State policy makers determined what citizens in their state could do legally, provided generally effective regulatory schemes for their legal gambling, and until very recently were content in the knowledge that - even if Nevada or New Jersey permitted most forms of gambling and other states permitted games not legal in their state - it remained unlawful (and technologically difficult or impossible) for their citizens to gamble via these other forms (unless they physically left this state and purposely traveled to the other jurisdiction.) And if citizens were participating in illegal sports betting, well maybe it can't be eradicated but at least it isn't legal.

In the 1990s, widespread deployment of new technologies has changed the landscape forever. State policy makers, regulators, and law enforcement officers no longer have the assurance that if they ban a form of gambling, their citizens can't get access to it. With the advent of Internet gambling, the opposite is true. Technology in gambling is spreading quicker than government's current ability to make policy decisions about it, or to regulate it. It was this frustration and concern that led the National Association of Attorneys General (NAAG) to conclude that federal legislation would be warranted to - at least - slow down the spread of Internet gambling until policy makers in each state could determine what should be done about it.

The approach of the IHA was to prohibit interstate or foreign wagering on horse racing, unless the respective states agreed otherwise. The approach of the Kyl bill is to prohibit interstate or foreign wagering via the Internet, period.

Contrasting Federal Policies

There are some significant differences between Australian law and philosophy with regard to gambling, and its counterpart in the United States. In Australia, there has never been a bar for residents of one state wagering into legal operations in another state (although there are limitations on cross-state advertising.) Of course, it is just this form of wagering that is attacked by the existing Wire Act and the proposed Kyl bill. In contrast, a speaker at the Conference noted that the Australian federal government has not expressed any intention to intervene in this free flow of wagers across state lines. Such policy served as the underpinning for the model of regulatory oversight that was proffered in 1997.

A second aspect of that policy, to be discussed in detail in succeeding articles, is that there is similarly no bar to the free flow of wagers from overseas, and the Model would permit Australian licensees to accept such gambling, even if such activities were against the law of the country where the player were located (as in the Kyl bill!)

Another significant difference is that the Australian Regulatory Model has as a key objective, "facilitating the offering of interactive home gambling products," and removing state and territory imposed limits on the "ability of Australian based service providers to effectively market their products..." Such a proactive attitude by government officials towards gambling is beyond the comprehension of even the most optimistic of American proponents of Internet gambling, who would hope - at best - for neutrality at the federal level accompanied by a clear reaffirmation of the right of the individual states (separately or working together) to determine their own policies toward Internet gambling.

The Australian National Gaming Regulatory Model is an important and valuable document, both for what it does, and for what it doesn't do. (For instance, it is not generally understood over here that the Model specifically excludes from its scope pari-mutuel wagering products of the type already legalized and offered by the TABs via telephone betting, as well as fixed odds betting on racing and sports by bookmakers licensed by states and territories.)

In the next article, I will review some important aspects of the Model, the legislation recently passed in Queensland based upon that Model, and comments made at the Conference by persons involved with gambling regulation in Australia.

The views expressed in this and subsequent articles are, or course, solely those of the author and do not necessarily reflect the views of anyone else.

Separate Approaches to Internet Gambling in Australia and the United States is republished from iGamingNews.com.
Michael Shagan
Michael Shagan