US online gaming law causes headaches for Canadian service providers

Canadian firms were quick to react to news on September 30 that the United States Congress had passed a proposed piece of legislation ostensibly banning Internet gambling, and one US academic says their fears of retribution from the US government might be well-founded. "The only country where the lawyers say there might be some fear of extradition if you’re an online entity is Canada," notes Joe Kelly, a professor of business law at the State University of New York at Buffalo, in the wake of the Unlawful Internet Gambling Enforcement Act’s passage through the US legislature. Although he admits it’s unlikely that attorneys with the US Department of Justice would use an extradition request to bring foreign citizens to trial on US turf, "it is possible that the Canadian government might extradite somebody to the United States if the United States says you are violating federal law." The new act targets gaming operators doing business on the Internet, other than in the currently exempt areas of inter-state horseracing and in-state gambling in jurisdictions such as Nevada. Specifically. It homes in on the process of moving money around electronically for the purpose of gambling, making it especially worrisome to payment processing firms, online banks, wire transfer services and other quasi-financial institutions. "The bill does criminalize the actions of any gaming operator who accepts financial transactions, such as credit cards, electronic cash, cheques, et cetera, from any American player," explains Kelly. One of those institutions is Optimal Group Inc., a Montreal-based e-payment provider whose shares are listed on the US Nasdaq exchange. It owns more than three-quarters of FireOne Group plc, a London UK-based payment processor catering to the online gaming industry. "The enactment of the Unlawful Internet Gambling Enforcement Act of 2006 will have a significant negative impact on the business and results of operations of FireOne Group, and therefore the company," an October 2 media release from the firm reads. On October 11, the company announced that FireOne Group would "immediately cease to process settlement for transactions originating from United States consumers that may be viewed as related to online gambling." However, Kelly says FireOne’s competitors in the e-payment business, such as Isle of Man-based Neteller plc, have decided to stay the course and continue to act as intermediaries between gamblers and online services willing to take their bets. "Punters are ingenious in finding ways of avoiding these requirements," Kelly says. He cites an example from several years ago, when money transfer firm Western Union cracked down on gamblers using their service to wire cash to online casinos and other gaming operations. "What players did was simply have the money wired to insurance companies at the same address," he says, a practice many Western Union agents turned a blind eye to. "I’m sure there’ll be ways to get around this bill." Kelly also notes that a firm’s exposure to the new US law may depend on its capital structure, namely whether it’s publicly traded on a stock exchange or privately held. He points to the examples of two UK online wagering and gaming sites, Sportingbet PLC and Leisure & Gaming PLC, both publicly traded firms which have sold their operations catering to US bettors for US$1. "The reason why so many of these UK companies are so nervous is that they’re publicly traded companies – they’re on the AIM and they can’t afford to operate in a grey area of law where there might be a threat of prosecution," Kelly says. "On the other hand, if there’s a private company that does everything offshore, I don’t think they have much to fear from the United States, as long as their executives don’t decide to travel to America," he says, referring to the high-profile arrest of BetOnSports PLC chief executive and British citizen David Carruthers in Dallas this summer (CNM, July 25/06). The Unlawful Internet Gambling Enforcement Act became law on October 13, when it was signed by President George W. Bush. However, there is a 270-day coming-into-effect window, which began the day Bush approved the legislation and during which the US government must create regulations for enforcing the act’s provisions. The act has its roots in two earlier bills: the Internet Gambling Prohibition Act, sponsored by Republican policitians Congressman Bob Goodlatte and Senator Jon Kyl, and the Unlawful Internet Gambling Funding Prohibition Act, which was put forward by Congressman James Leach. However, Kelly says Goodlatte has announced his intention to introduce an amendment to the US’ Interstate Wire Act of 1961 – which is currently interpreted as rendering just sports betting operations illegal – that would criminalize all gambling. As such, Kelly adds, it could mean that the US Congress realizes that the Unlawful Internet Gambling Enforcement Act is less than airtight when it comes to shutting down all forms of online gaming, wagering and gambling where US citizens are concerned. "The bill language in a number of different provisions makes it clear that it is only criminalizing something that is already illegal under federal or state law, or that it does not add anything to that which is already legal," he notes. "If the present law that was signed by Bush did prohibit any new type of gambling, there’d be no need to amend the Wire Act." "The question is , what exactly was accomplished? In my opinion, almost nothing," Kelly says.

US online gaming law causes headaches for Canadian service providers

Broadcast | October 18, 2006

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