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Michael Shagan

The Future of International Interactive Wagering: One Developing Scenario

4 December 2002

This article is based upon a presentation given in September 2002 at the Global Gaming Expo in Las Vegas, as part of a panel on pari-mutuel wagering titled "The Next Threshold: Telephone and Internet Wagering." I was asked to provide a "snapshot" of some of the highlights, concerning interactive wagering, with regard to what has been going on outside the United States in a constantly changing landscape, and I took the opportunity to relate these international activities to the counterpart developments on this side of the pond.

I approach this topic from the perspective of an active observer of, and participant in, the management of commercial wagering activities over the past 30 years. Much of my professional activities center on the pari-mutuel racing industries, both directly and indirectly. Nevertheless, I believe my observations and conclusions are free from being too overly culture-bound by these affiliations, and that the conclusions I reach may have a broader application in seeking the proper international framework for the orderly expansion of interactive wagering.

Some of the issues addressed in this paper are also addressed, in a different context, in the course of three articles published in 1998 by Interactive Gaming News under the general heading, "Internet Gambling - Problems and Opportunities." They are individually titled: "Separate Approaches in Australia and the United States"; "Australia's Current Efforts to Legalize and Control Internet Gambling"; and "The Search for an International Model for Internet Gambling." I am grateful to IGN for having made this forum available for the publication of those articles, and equally so for the publication of this new presentation.

Several years ago I gave a presentation in Las Vegas, during which I mentioned that account wagering activities based in the island nation of Vanuatu had impacted the pari-mutuel turnover wagered in the Australian state of New South Wales by some 4 percent of the total normal racing turnover. At that earlier time, this wagering was handled only through telephone account wagering, not yet Internet systems.

This past April, the Australian federal minister for racing and gaming commented that the resulting effective revenue reduction is on the order of 10 percent, costing the racing industry some AU$350 million per year.

Australia’s racing industry is not alone in suffering from such extraordinary “cannibalization” of its local betting handle. It is officially estimated that the Hong Kong Jockey Club suffers a loss of US$6.4 billion, attributed to what Hong Kong authorities refer to as "high-tech and illegal bookmakers" (i.e. illegal local activities, plus off-shore operations).

Let's talk a little more about these two jurisdictions.

There was an early expectation that Australia would lead the way towards a well-constructed and well-regulated state-based system of Internet gambling. In fact, notwithstanding the public policies of some countries being opposed to their citizens placing wagers via the Internet, one highly regarded Australian gaming regulator stated that, with regard to inter-jurisdictional Internet gambling and the money that could be made, "There is a window of opportunity to grab and maintain a large slice of the world pie."

Despite this attitude, the resulting carefully crafted Australian model for Internet gaming and resulting legislation in a number of Australian states, the Australian federal government first imposed a moratorium and then enacted the current prohibitions on such activities.

It is significant to note, however, that in contrast to Internet gaming, interactive wagering--both by phone and the Internet--was not barred and is still being conducted.

Consider the theoretical range of interactive wagering activities, available either by phone or computer, that could involve either a customer in Australia, or an interactive wagering provider located in Australia:

  • Residents of Australia can make wagers either
    • on racing events in Australia; or
    • on foreign racing events, taking place in another country.

  • And these Australian residents can do this either
    • with a system provider licensed by and located in Australia; or
    • with a system provider located outside of Australia.

  • Also, persons outside that jurisdiction can make wagers either
    • into system providers in Australia, on Australian racing events; or
    • into Australian providers on foreign racing events.

None of the Australian interactive or Internet gaming statutes previously passed by these states have been repealed. The Australian federal prohibition renders them inactive for gaming, but not for wagering. However, based upon the interplay of these previous statutes and some new protectionist laws passed at state level (for instance in New South Wales), Australian residents may not place wagers with a provider located outside of Australia, and those foreign providers may not advertise their services in New South Wales. As one person put it, "If you don't pay our tax, you can't use our media."

In addition, these off-shore providers, now deemed to be conducting unauthorized activities if involving Australian-based customers, may not utilize the banking services in Australia. Also, the Australian banking and credit card industry is currently going through pretty much the same kind of review process and resulting recommendations for restrictive practices we've been seeing in the United States, with regard to the utilization of these services for betting. An important distinction, however, seems to have been drawn between providers that are legal and licensed within Australia, where credit cards are okay, and offshore providers whose activities are unlawful under the scheme of these new laws, for which the blocking of credit card use is being considered.

Now for Hong Kong:

In support of its racing industry, and the incredible amount of revenues raised for government, for charities and for racing industry participants, the following activities are among those prohibited under new amendments to the Hong Kong Gambling Ordinance, promulgated as of April, 2002:

It is prohibited:

  • for offshore providers to open or maintain a deposit account for a Hong Kong resident;

  • for offshore providers to receive a bet placed from Hong Kong;

  • for a Hong Kong resident to place a bet with any unauthorized provider, wherever located, or make a deposit in Hong Kong with any unauthorized provider;

  • for an unauthorized provider to advertise its services in Hong Kong; and

  • for anyone to "broadcast on TV or radio any odds or tips relating to a horse or dog race on which betting has not been authorized in Hong Kong, [for the period within] 12 hours preceding the conduct of that race."

In mid September, the Hong Kong Jockey Club and the Japan Racing Association announced their coming to terms on a "good neighbor policy." According to the Australian Associated Press, when this agreement takes effect in December, "from that time neither party will accept bets from, or target residents in, the jurisdiction of the other party, nor will they solicit, market, or advertise their product in the other jurisdiction without authorization."

Lawrence Wong, chief executive of the Hong Kong Jockey Club, commented, "This good neighbor policy establishes a cooperative structure for regulation of cross-border gambling. It's the first time that there is a framework for international cooperation against unauthorized, uncontrolled, and unlimited gambling... Our landmark agreement with the JRA is an excellent starting point for such international cooperation."

Masayuki Takahashi, president of the Japan Racing Association, added, "Promoting the good neighbor policy will enable each country to secure its financial basis in the industry and eventually bring sound development worldwide... I strongly hope that all racing authorities around the world will adopt this policy in the future and a framework for international cooperation against illegal gambling is established."

As reported in the Thoroughbred Times, at an October meeting in Paris of the International Federation of Horseracing Authorities, "Heading the list of key issues were threats faced by racing throughout the world as Internet and account wagering options multiply, a future action plan to define a 'good neighbor policy' and commercial terms regarding international simulcasting and wagering...”

In the course of the discussion, Andrew Harding, Australian Racing Board Executive Officer described the Good Neighbor Policy as "the first major step to an international solution ... It would be an international compact binding every signatory to respect the international integrity of every other signatory with respect to wagering, an agreement by racing authorities across the world that we will treat each other as good neighbors should."

The comments of D.G. Van Clief Jr., Breeders’ Cup Limited president, concerning international simulcasting, were also reported: "In the long run, the international exchange of signals by racetracks and between countries is more likely to help than harm our global industry. The danger we face is not from each other, but from outsiders who have no stake in our community, in live horse racing, or in Thoroughbred breeding and the agricultural lifestyle it supports."

As of November 2002, IGN listed 72 jurisdictions that have some system of licensing and permitting online gambling. Note that "licensed" does not necessarily mean "regulated." In some cases, a fee paid permits the provider to have equipment or operations based in a jurisdiction, but without a corresponding true system of regulatory oversight.

But even for those jurisdictions that do attempt to maintain rigorous regulatory systems, the fact remains that most of them do not respect the prohibitions or limitations of other jurisdictions. They make no distinction as to whether their licensees can accept transactions from residents of countries that frown upon such conduct by their citizens. These licensing jurisdictions also do not consider whether their licensees pay taxes or any user fees to the sport or racing industry underpinning the wagering event, in the jurisdictions where the wagering customer is located.

Another new development that I want to briefly relate involves territories of the United Kingdom, such as the Isle of Man, and especially Alderney.

Both of these jurisdictions permit interactive providers to operate there and to accept wagers from other jurisdictions. A number of American companies are establishing licenses in one or the other of these locations. But an interesting development occurred this past July in Alderney.

The commission that oversees "Electronic Betting Centre Licenses" for Alderney revised and added to its conditions of license. I quote from the official notice:

"Condition 6... has been introduced as a result of the decision last month of the Supreme Court of the United States of America not to review the conviction of Jay Cohen for offences in relation to the Wire Act. … The Commission has concluded that the way in which sports betting activities of electronic betting licensees is conducted with persons in the United States ... renders these activities unlawful in the United States. Consequently, the Commission has decided that it is both necessary and expedient to prohibit such unlawful activity being conducted under the terms of the Alderney license."

The next chapter of this unfolding story took place last August, when Sportingbet, a major online gambling company, announced that it was pulling its operations out of Alderney. The British media reported that Sportingbet left because Alderney changed the terms of Sportinbet's license. Under the new terms, Sportingbet would be acting illegally if it took bets from customers in the United States--even if it processed these bets in Costa Rica, which it did.

What can we deduce from all of this?

First, the Internet does not respect borders. It is not difficult for someone to find the opportunity to gamble via the Internet, whatever the attitude of the local government.

Second, there is a distinction that can be drawn between casino gaming via the Internet and wagering on live sporting events by the pari-mutuel method. While both can be legalized, it is easier to justify extending the betting franchise into interactive territory, in support of the underlying sports industry.

Third, the legal sports wagering industries, for instance pari-mutuel wagering on horse racing, are suffering greatly because of "cannibalization" of their betting handle by foreign interactive wagering providers who do not first receive permission of the industry or share the revenue in a manner similar to the current sharing of simulcast revenue, especially in North America.

Fourth, the international racing community is responding to these formidable challenges to the health of the racing industries in their respective countries.

Fifth, a number of jurisdictions are moving toward protectionist laws and rules in support of their local sports industries (and the jobs and revenues these industries generate).

Sixth, there is at least one jurisdiction challenging the notion that it is inherent to the concept of legal interactive wagering, that any "window of opportunity" must be sanctioned, even at the expense of the public policies of other sovereign jurisdictions.

It remains to be seen whether other governments will respond to the initiative undertaken by Alderney and will, instead of prohibiting Internet wagering, help launch a new model that differs from the earlier Australian model, and is centered on a limited reciprocal opportunity for offshore providers.

Here's what I mean:

  • Some in the U.S. Congress want the American model to be, in effect: "My country won't license any providers, and we will consider it illegal for your providers to accept wagers from our citizens."

  • And some in Australia want the model to be: "My licensed providers can accept wagers from your citizens whether you like it or not, but your licensed providers may not accept wagers from my citizens."

  • Why can't there instead be a model that says: "First, my jurisdiction will license Internet wagering providers, but only if they agree to respect the laws and rules of other jurisdictions. And second, my jurisdiction will permit your providers to accept wagers from my citizens, so long as in doing so all the rules of conduct, as well as taxation and industry fees that we have established, are adhered to by your licensed provider." (For those familiar with the U.S. racing industry, note that this has a lot in common with the current simulcast agreements, and suggests a globalization of "source market fees.")

This model contemplates whether the off-shore provider consents to some form of "secondary licensing" in the jurisdiction where the customer is located, perhaps including an element that has been proposed by New York State Senator William Larkin--that the foreign provider would have to register to "do business" in the customer’s state, and consent to be subject to that state’s judicial system. Here is the substantive text of Senator Larkin's bill offered in 2001 (SB 1663):

"A foreign corporation providing gambling or wagering services or activities in this state by means of any computer communication system shall be deemed to be doing business in this state and shall therefore be required to obtain authorization to do business in this state. The application therefore ... shall explicitly state that such corporation intends to provide gambling or wagering services or activities by means of a computer communication system."

If this model were to be adopted, I could see it accompanied by aspects of the Hong Kong or New South Wales protective legislation--for instance, permitting local advertising only by the cooperating offshore providers and not by others.

I suggest that this form of reciprocity between sovereign nations, leading to contracts between host sports operators (such as racetracks) and the providers, wherever they are located, captures the spirit and promise of the original Australian model, without the detrimental effects from which its own racing industry--and ours!--is suffering.

Biographical Information

Michael D. Shagan is a New York based attorney/business consultant, primarily to the racing and wagering industries. In his 32 years in this field, he helped launch the New York City Off-Track Betting Corporation in the 1970s, spent five years as VP/Business Development for Ladbroke Racing Corporation, and has been consulting full-time for 12 years. He specializes in strategic planning within a competitive environment for the entertainment dollar; the application of emerging technologies to racing, simulcasting, and wagering; plus legal analysis and legislative drafting/review.

Mr. Shagan is the author of three articles under the general title of “Internet Gambling – Problems and Opportunities” that explore attitudes and developments in Australia and the United States. Mr. Shagan was instrumental in the drafting and enactment of the federal Interstate Horseracing Act of 1978; legislation and regulations for interactive account wagering; and model legislation for multi-state simulcasting and wagering pools. He is actively involved in the development of international simulcasting and pari-mutuel wagering. Mr. Shagan is co-author of the recent study, "Time to Deregulate: The Case for Thoroughbred Racing." Mr. Shagan has lectured and testified extensively on matters relating to the racing and wagering industries.

Mr. Shagan is a member of the University of Arizona Racetrack Industry Program Advisory Council (RTIP). He is also a member of the International Association of Gaming Attorneys (IAGA), the American Society for Industrial Security (ASIS), the Thoroughbred Racing Associations' 2020 Committee where he has chaired the subcommittee on Law and Legislation, and the New York State Bar Association. He was formerly Chairman of the Pennsylvania Racing Association, and the National Association of Off-Track Betting.

The Future of International Interactive Wagering: One Developing Scenario is republished from
Michael Shagan
Michael Shagan