Feasibility and Consequences of a ban on Internet gambling

John Quiggin

Department of Economics

Faculty of Economics and Commerce

Australian National University

 

 

Submission to Senate and National Office of the Information Economy Inquiries, August 2000

 

 

 

 

 

 

 

 

EMAIL John.Quiggin@anu.edu.au

FAX + 61 2 62495124

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Feasibility and Consequences of a ban on Internet gambling

 

Summary

The central purpose of this submission is to argue that

(i) a ban on Internet gambling can be implemented through prohibition of the provision of credit card and similar arrangements to facilitate such gambling

(ii) any system of regulated Internet gambling will require the imposition of similar restrictions on provision of services to non-regulated suppliers if it is to be effective.

 

Feasibility of a ban on Internet gambling

Most discussion of bans on Internet gambling has been based on the idea of creating a criminal liability for operators of Internet sites devoted to gambling, for Internet services provides facilitating gambling or for customers of online gambling services. It is evident that such an approach is unlikely to be effective and it will therefore not be discussed further.

The only point at which regulation or prohibition Internet gambling appears likely to be effective is through restrictions on payment mechanisms. In broad terms, the required approach is an extension of the long-standing common law principle under which gambling debts were not enforceable at law. More generally, the use of domestic and international financial transactions to facilitate prohibited gambling activities should also be unlawful.

Currently, most Internet gambling operators rely on credit cards as a payment mechanism. Hence, a requirement that credit card providers not give merchant facilities to operators of prohibited gambling activities would greatly restrict Internet gambling. With rather more difficulty, such a requirement could be extended to cover international payments such as bank drafts.

Sanctions and enforcement mechanisms

The sanctions required to back up a ban on provision of financial services to facilitate prohibited gambling activities:

(i) Civil remedies allowing gamblers to recover losses from financial service providers

(ii) Regulatory restrictions associated with licensing conditions for financial institutions

(iii) Criminal penalties

A combination of (i) and (ii) appears most appropriate, with criminal penalties being confined to a backup role (e.g. in the case of conspiracy to evade banking regulations).

A civil remedy would obviously be self-enforcing, in that gamblers who lost heavily would have a natural incentive to identify themselves and sue for recovery of their losses. Although regulations would require enforcement activity, it would be necessary to apply them only to the relatively small number of financial institutions operating in Australia, rather than to the potentially infinite population of Internet gambling operators and service providers.

Feasibility

Two issues of feasibility arise here. The first is whether it would be possible to prevent Internet gambling operators and their clients from using payment mechanisms outside the reach of Australian law. Clearly no ban would be perfectly effective. For example, individuals could take cash overseas, deposit it in bank accounts in unregulated jurisdictions and use those accounts to undertake gambling. Alternatively, payments could be made for apparently legitimate purposes to individuals or companies overseas, which would then be used to finance gambling.

These observations simply reflect the fact that no law is perfectly effective. Nevertheless, a prohibition on the use of credit cards and international payments to enterprises openly operating prohibited gambling enterprises would be sufficient to deter all but the most determined customers from using prohibited Internet gambling services, especially in view of the wide availability of legal gambling services.

The second issue, which arises particularly with respect to the creation of a civil remedy is whether banks would have the technical capacity to identify operators of prohibited gambling services and refuse to provide them with necessary financial services. In the absence of this technical capacity, there is a danger that banks could be sued or otherwise sanctioned despite having acted in good faith, because they were unaware that a particular customer was operating an illegal gambling service.

This is an issue which requires further investigation. Nevertheless, in view of the distinctive patterns of payments associated with an international gambling operation (large numbers of payments to and from individuals) it seems unlikely that the difficulties will prove overwhelming.

Feasibility of regulation

Much of the case for regulating, rather than prohibiting, Internet gambling is based on the claim that various beneficial outcomes can be achieved if Australian providers of Internet gambling services are appropriately regulated. These outcomes include:

(i) assurance of quality and fair operation of games

(ii) restrictions on gambling by minors

(iii) restrictions on access by problem gamblers including self-exclusion and gambling limits

(iv) additional domestic tax revenue

(v) additional export income

It may reasonably be assumed that competitive pressures will ensure that most jurisdictions which permit Internet gambling will provide adequate assurances that bets will be honoured and that games will be fair. Hence, apart from first-mover advantages which tend to be ephemeral, there is no reason to suppose that gamblers will prefer to use Australian sites in preference to overseas sites if the latter offer better odds or less restrictions on access. Hence, in the absence of restrictions on the operation of overseas gambling service providers that do no satisfy Australian regulations, those regulations will prove ineffectual.

The problem of gambling by minors is not a serious one, but only because restrictions on credit card use and the enforcement of debts apply to minors as a matter of course. By contrast, it is likely that problem gamblers who have sought to exclude themselves from regulated Australian venues will be targeted by unregulated providers of gambling services based in overseas jurisdictions. Unsolicited advertisements for such services are already routinely sent on a mass mailing (‘spam’) basis to holders of email accounts. It seems likely that as database technology improves such advertisements will increasingly be targeted at vulnerable groups.

The problem of international tax competition has also been ignored by most advocates of regulated Australian provision of gambling. Australian casinos have been forced to offer more favourable odds to ‘high rollers’ because these gamblers can easily transfer their custom to casinos overseas. In the absence of restrictions, any Internet gambler can take their business to the operator offering the most favourable odds, regardless of their physical location.

It follows that, in any country which permits unrestricted access to Internet services, the market will ultimately be captured by operators based in low-tax jurisdictions. Hence, the view that Australia can capture substantial export income without undermining the domestic gambling tax base is simply mistaken. More importantly, any system of regulated and taxed provision in Australia will be ineffectual without restrictions on access to providers in low-tax, low-regulation jurisdictions.

In summary, unless effective restrictions are imposed on the provision of gambling services by operators who do not satisfy Australian regulatory standards, such standards will be entirely ineffectual and will serve purely cosmetic purposes. Australian governments will be able to claim to uphold high standards while shifting the problems to unregulated overseas operators. Similarly, in the absence of restrictions, international tax competition will undermine the Australian tax base. Such restrictions will require the same enforcement mechanisms as would outright prohibition.

Consequences of prohibition of Internet gambling

The consequences of prohibition of Internet gambling may be divided into two basic groups. First, there are domestic consequences of restricting access to a particular gambling form. These issues have been discussed in the Productivity Commission report and elsewhere.

A more important issue relates to the international consequences of measures restricting the capacity of gambling operators based in foreign jurisdictions to provide gambling services to Australians. These issues will arise, in one form or another, whether restrictions are imposed as a result of a policy of domestic prohibition or as a backup to a system of domestic regulation.

The nature of the international consequences of prohibition will depend to a great extent on the outcome of the current debate in the United States. If the United States adopts a policy of prohibition it will almost certainly be enforced primarily through civil actions against credit providers. Hence, there will be little difficulty in applying such a regime in Australia. By contrast, if the United States legalises Internet gambling, it is likely to apply pressure through the World Trade Organisation and other venues to obtain access to international markets/.