Publications

Global Gaming Exposition - Las Vegas
September 17, 2003

Internet Gaming in Canada
by Michael D. Lipton, Q.C.

Criminal Prohibitions Against Gaming in Canada

• Canada is a confederation consisting of 10 provinces and 3 territories. Each has its own provincial or territorial government. As well, Canada has a central (federal) government.
  
• Part VII of the Canadian Criminal Code (“Code”), federal legislation applicable to all of Canada, creates offences potentially applicable to many facets of operating a commercial gaming enterprise, whether on the Internet or otherwise.
  
• It is an offence under section 201 to keep a common gaming or betting house or to be found in such a common gaming or betting house.
  
• Under Section 202(1) it is an offence to (paraphrase):

  » use or knowingly allow a place under one’s control to be used for the purpose of recording or registering bets,

  » import, make, buy, sell, keep in any place under one’s control any device or apparatus for the purpose of recording or registering bets or any machine or device for gambling or betting;

  » record or register bets;

  »engage in book-making or in the business or occupation of betting or making any agreement for the purchase or sale of information intended to assist in book-making;

  » provide information intended for use in connection with book-making on any horse-race, fight, game or sport;

  » advertise, print, publish or otherwise give notice of any offer, invitation or inducement to bet on the result of a contest;

  » willfully and knowingly send, transmit, deliver or receive any message by radio, telegraph, telephone, mail or express that conveys information relating to book-making, pool-selling, betting or wagering, or that is intended to assist in book-making, pool-selling, betting or wagering; or

  » aid or assist in any manner in anything that is an offence under this section.

• In addition, section 206 of the Code creates a number of offences relating to lotteries and specified games of chance. It should be read together with the exemption of section 207. Section 206, paraphrased, states it is an offence to:

» make, print, advertise or publish, or cause or procure to be made, printed, advertised or published, any proposal, scheme or plan for... in any way disposing of any property by lots, cards, tickets or any mode of chance whatever; (s.206(1)(a))

» sell, barter, exchange or otherwise dispose of, or cause or procure, or aid or assist, in the sale, barter, exchange or other disposal of, or offers for sale, ...any lot, card, ticket or other means or device for advancing, lending or otherwise disposing of any property by lots, tickets or any mode of chance whatever; (s.206(1)(b))

» knowingly send any article that is used or intended for use in carrying out any device or scheme for disposing of any property by… any mode of chance whatever; (s.206(1)(c))

» conduct or manage any scheme, contrivance or operation of any kind for the purpose of determining who, or the holders of what lots, tickets, numbers or chances, are the winners of any property so proposed to be advanced, lent, given, sold or disposed of; (s.206(1)(d))

» conduct, manage or be a party to any scheme by which any person on payment of any sum of money shall become entitled under the scheme to receive from the person conducting or managing the scheme a larger sum of money than the sum or amount paid or given by reason of the fact that other persons have paid or given any sum of money under the scheme. (s.206(1)(e))

» dispose of any goods, wares or merchandise by any game of chance...in which the contestant or competitor pays money or other valuable consideration; (s.206(1)(f))

• Although these sections of the Code were enacted to deal with bricks and mortar types of gambling operations, they may be applicable to Internet gaming.

Exception to Prohibition

• One type of Internet gaming is clearly legal in Canada – gaming conducted over the Internet by the government of a province – ss. 207(1)(a) and (b) of the Code. It is lawful:

  (a) for the government of a province, either alone or in conjunction with another province, to conduct and manage a lottery scheme in that province or in that and the other province in accordance with any law enacted by the legislature of that province;

  (b) for a charitable or religious organization, pursuant to a licence issued by the Lieutenant Governor in Council of a province or by such other person or authority in the province as may be specified by the Lieutenant Governor in Council thereof, to conduct and manage a lottery scheme in that province of the proceeds from the lottery scheme are used for a charitable or religious object or purpose.

• “Lottery scheme” is defined (ss. 207(4)) as a game, proposal, scheme, plan, device, contrivance or operation described in section 206, whether or not it involves betting, pool selling or a pool system of betting. Subsection 207(4) specifically provides that a provincial government may conduct and manage a lottery scheme on or through a computer, but may not license others to do so.

The Internet and Criminal Jurisdiction Under the Code

• Will Canadian justice system exert jurisdiction over gaming conducted over the Internet, where only some of the relevant activities occur on Canadian soil?
  
• No definitive answers can be given as to the legality of any particular fact situation. Canadian criminal jurisdiction has yet to be considered in light of Internet activity.

"Connecting Factors" Test

• R. v. Libman, – Supreme Court of Canada – An offence is subject to criminal prosecution in Canada if “a significant portion of the activities constituting the offence” took place in Canada, thereby establishing a “real and substantial” link between the offence and this country.

  (1985), 21 D.L.R. (4th) 174 (S.C.C.)

• Facts of Libman: Fraudulent telephone sales solicitation scheme operated from Canada. Victims were residents of U.S.A., induced to purchase worthless shares in Central American mining companies, sending money to offices in Central America. Accused would attend at locations outside Canada where he would meet with his associates, and receive his share of the proceeds, some of which would end up back in Canada. Accused was convicted.
  
• Libman fact scenario appears to indicate that a conviction of a person may result for acts undertaken in Canada in pursuit of a commercial gaming enterprise even where Canadians are prevented from gaming or placing bets or wagers. See also the 1970 case of R. v. Chapman,2 in which the Ontario Court of Appeal held that a fraudulent scheme initiated and realized in Canada was an offence committed in Canada, even though the inducements made under the fraud were only extended to persons outside Canada.
  
• See also case law under ss. 202(1)(i) of the Code, which concerns sending, transmitting, delivering or receiving messages by radio, telegraph, telephone, mail or express that conveys information relating to book-making, pool-selling, betting or wagering or that is intended to assist in book-making, pool-selling, betting or wagering. In R. v. Ede, the trial judge indicated a willingness to convict the accused under ss. 202(1)(i) for providing information relating to pool-selling, despite the fact that both the pool-selling and the sporting events upon which it was based occurred in the U.K.

  [1970] 3 O.R. 344 (Ont. C.A.)
  [1993] O.J. No. 1250 (Ont. C.A.); trial decision of Fraser P.C.J., November 3, 1992 (Ont. Prov. Ct.)
  

Reference Re: Earth Future Lottery Case

• In 2002, Prince Edward Island Court of Appeal and Supreme Court of Canada had opportunity to consider jurisdictional issues dealing with both the Internet and the gaming provisions of the Code, but both declined to do so. Reference Re: Earth Future Lottery.
  
• In Reference Re: Earth Future Lottery, a Canadian, non-profit charitable corporation located in PEI, called the Earth Fund, launched a fundraising lottery with plans to sell tickets via the Internet. Earth Fund intended to promote and advertise the lottery outside of PEI. As noted earlier, a province may, under ss. 207(1)(b) of the Code, grant a licence to a charitable organization “to conduct and manage a lottery scheme in that province.” However, ss. 207(1)(b) of the Code does not apply to lottery schemes “operated on or through a computer” (ss. 207(4)(c) of the Code).
  
• Question raised by case: (1) Was this “a lottery scheme in that province [PEI],” such that section 207(1)(b) of the Code authorized PEI to grant the Earth Fund a licence?
  
• PEI Court of Appeal chose to answer the question exclusively on the wording of section 207 of the Code, without examining the “connecting factors” between the lottery and PEI, such as the location of the server, the location of administration facilities, and the jurisdiction where money will change hands.
  
• (Earth Fund took position that the Internet lottery would be conducted and managed in PEI, because the computer server running the Website, the administration of the lottery, the credit-card approvals, and lottery drawings would all be situated within the province)
  
• Scheme held to be illegal since the activity was outside the strict language of the exemptions found in section 207 of the Code. This finding upheld on appeal by the Supreme Court of Canada, without comment.
  

• A copyright case soon to be considered by the Supreme Court of Canada may shed some light on the issue of how the “connecting factors” test in Libman applies to the Internet context re gaming, betting or wagering offences. Federal Court of Appeal in SOCAN v. Canadian Association of Internet Providers(4) made it clear that in determining the jurisdiction of Internet activity, the single factor of the location of the host server was not determinative. The most relevant “connecting factors” relevant to an Internet activity were held to be “the location of the content provider, the end user and the intermediaries, in particular the host server.” Also, the purpose of the legislation will be considered. Since the purpose of copyright legislation was protecting copyright “in the Canadian market,” the location of the end users of the Internet activity was held to be the most important single factor: Are they part of the Canadian market? Court held:

  “…a [real and substantial] connection [to Canada] will surely exist when each of the [two] end nodes, namely the content provider, the communicator of the material, and the end user, is in Canada.” (5)

• Applying SOCAN logic to Internet gaming, that means the purpose of Code in barring gaming must be considered. According to R. v. Nelson,(6) the purpose of gaming, betting and wagering sections of Code is “preventing persons from attempting to profit from the gaming of others.”(7) Manitoba Provincial Court determined that the offences created under ss. 201 and 202 were intended to criminalize only commercial gambling, and further extended this interpretation to apply to “the entire complex scheme set out in ss. 197 – 209 of the Criminal Code, for the control and regulation of gambling in Canada.”(8) These findings were left undisturbed on appeal to the Manitoba Court of Appeal.
  
  (4) (2002), 218 D.L.R. (4th) 118 (Fed. C.A.)
  (5) SOCAN, supra at note 23, at 174 – 175
  (6) [1997] M.J. No. 654; affirmed [1999] M.J. No. 382 (Man. C.A.).
  Nelson, supra at note 25, at para. 97: “…s. 202(1)(b) does not prohibit gambling itself, but rather is aimed at penalizing the conduct of persons who attempt to profit from the gambling of others. Accordingly, it is argued that this provision does not prohibit the keeping of those things which an individual might use for his or her own gambling…but rather prohibits those things which a commercial operator would keep as part of his or her enterprise in profiting from the gambling of others. ”
  (8)Nelson, supra at note 25, at paragraph 106

• Accordingly, the intent and effect of an Internet enterprise, where Canadian residents either spend money, on or profit from, commercial gaming, will be considered in determining whether sufficient “connecting factors” exist to justify extending criminal jurisdiction over the activity.

Starnet Forfeits Millions in Illegal Internet Gambling Activity

• It is clearly illegal for a commercial, Canadian-based Internet gambling site to accept bets from Canadian citizens. Vancouver-based Starnet Communications International Inc. (“Starnet”) recently plead guilty to one criminal gambling count under ss. 202(1)(b), was fined $100,000 and forfeited approximately US$4-million as proceeds of crime pursuant to ss. 462.37 of the Code. Starnet, a publicly traded company, both operated and created software for Internet gambling sites. Police in BC were suspicious that Starnet was accepting online bets from Canadians and set up a police sting operation. As part of the sting, police gambled nearly US$3,000 on the company’s site.
  
• Most online gambling sites are operated offshore, where the local laws deem online gambling to be legal. Starnet kept its servers in Antigua, but one server was operated from their Vancouver office – the one serving its web pages.
  
• The case brought against Starnet was historic in Canada. Never before had such a large gambling forfeiture order been handed down, and as a result a precedent has been set that enables police and prosecutors to go after Internet gambling sites that operate in Canada. However, this will likely not address the fact that Canadians will continue to have the ability to gamble on offshore gambling sites.
  
• Now operating entirely out of Antigua, Starnet has changed its name to World Gaming, opened a corporate office in Toronto, and recently announced an active customer base of over 250,000 clientele.

The Mohawks of Kahnawake

Legality of the Activities of the Mohawks

• Kahnawake is a community of approximately 8,000 Mohawk Indians located on the south shore of the St. Lawrence River, twenty minutes from Montreal, Quebec. The Mohawk Reserve of Kahnawake presently occupies approximately 20 square miles.
  
• Notwithstanding the provisions of the Code, the Mohawks of Kahnawake have asserted that they are a sovereign nation and as such they claim jurisdiction to issue gaming licenses for lottery schemes.
  
• The Face Off - The province wants sole control over any Internet gambling from inside its borders. The Mohawks contend that despite stipulations in the Code, their inherent right to self-government allows them to operate the Internet gambling sites. The case law to date (i.e. R. v. Nelson, mentioned earlier) has repeatedly held that the inherent aboriginal right to self-government, when applied to gaming, does not include the right to operate a commercial gaming enterprise. Barring a major change in the jurisprudence, therefore, the Mohawks legal position on this matter is shaky at best.
  
• Mohawks are ignoring the gaming provisions of the Code, and are currently hosting Internet casinos on reserve. The Quebec and federal governments, together with the provincial police, have investigated the activities of the Commission. The Quebec Minister of Public Security, Serge Menard, has spoken out against the operation of online casinos in Quebec on the grounds that they are illegal: (L. Moore, Montreal Gazette.com, June 10, 2001) However, the province of Quebec has taken no action to halt the activity of the reserve, possibly due to residual tensions between the Quebec province and the Mohawks of Kahnawake from the summer of 1990, when a police raid at a Mohawk barricade near the reserve led to a stand-off between the Mohawks and the Canadian military: Ibid.
  
• The Council remains firmly committed to asserting the community’s jurisdiction over interactive gaming. The Kahnawake community wants the federal government to pass legislation designating Kahnawake, and perhaps other reserves, as Internet gaming jurisdictions. Kahnawake is so far the only North American jurisdiction to license the interactive websites. Currently, the Mohawks of Kahnawake play host to about 30 cybercasinos and remain open to discussions between themselves and other jurisdictions, including Quebec and Canada, for the purpose of harmonizing their respective legislative provisions concerning gaming.

History of the Mohawks' Internet Gaming Activities

• In June 1996 the Mohawk Council of Kahnawake purported to establish the Kahnawake Gaming Commission pursuant to the provisions of the Kahnawake Gaming Law (the “Law”). The Commission’s mandate is to regulate and control gaming and gaming related activities that take place within or from the Mohawk Territory of Kahnawake.
  
• In January 1999, Mohawk Internet Technologies (“MIT”) was established as a “band-powered entity” (an incorporated or non-incorporated entity that is owned and controlled by an Indian Band) that would offer services to industries involved in e-commerce, including the world of cyber gambling.
• MIT is wholly owned and controlled by the Council, functioning under the direction of a four-member Board of Directors. MIT itself does not operate an interactive gaming site. MIT is the Internet Service Provider, hosting the online gambling sites on servers located on Reserve land.
• Interactive Gaming Regulations
  
  In July 1999, recognizing the need to create a regulatory environment designed specifically for the interactive gaming industry, the Commission pursuant to the regulatory powers provided to it in section 35 of the Law, purported to enact its regulatory framework, the Kahnawake Regulations Concerning Interactive Gaming (the “Regulations”). The Commission was assisted in its drafting of the Regulations by Frank Catania, former Director of the New Jersey Division of Gaming Enforcement and a world authority in the field of gaming enforcement, and by Murray Marshall, legal counsel for the Commission.
• Regulations designed to ensure that all interactive gaming and gaming related activities conducted within or from the Mohawk Territory of Kahnawake satisfy 3 basic principles:
  1. that only suitable persons and entities are permitted to operate within Kahnawake;
  
  2. that the games offered are fair to the player; and
  
  3. that winners are paid.
  
• In determining the suitability of persons and entities, all applications received by the Commission must include extensive information concerning the business entity that will operate the gaming venture as well as each of the principals associated with the entity. All applications are investigated for accuracy and completeness and subjected to rigorous probity checks conducted by an American fraud and high-risk management service, the National Fraud Center, on behalf on the Commission.
  
• In addition to probity checks, the Commission retains professional expertise to review the applicant’s software and control systems to ensure fairness, accuracy and reliability. PriceWaterhouseCoopers is employed by the Commission to audit their clients.
• To ensure operators are able to meet their obligations to players, the financial viability of an applicant is assessed at the time of an application and may be re-assessed at any time the Commission directs. The Commission charges a $10,000 annual licensing fee.
  
• The Mohawks argue Web wagering is an unstoppable force that Canada might as well profit from. The fact that they have imposed stringent Regulations on their clients ensures that the operators are “squeaky-clean” and the games are fair.

A Look Ahead at Online Industry

• The future of Internet gambling in Canada is unknown. It will depend as much on consumer tastes as on government policy or court decisions. However, government cannot ignore the growth in the industry or the huge revenues it generates and the rapid expansion of these revenues. Canada’s provincial governments face substantial challenges in determining the appropriate course of action on Internet gambling.
  
• Before Internet gaming comes to Canada, governments must be satisfied that there is a need to regulate the industry.
  
• Regulation of industry will not depend solely upon revenue needs of government. Rather, government decisions to regulate the industry will also focus upon whether there is public concern or demand for regulation of Internet gaming.
  
• Low-level studies are being undertaken by some provincial governments to determine whether there is a need from a public perspective to regulate the industry and if so, the manner of regulation including the regulatory and control framework.
  
• Having regard to the growth of the industry and the huge revenues it generates, there is a good likelihood that there is a need to regulate it.
  
• Clearly the industry cries out for legitimization in North America and its members strive for integrity and credibility.
  
• Likely that before Internet gaming is legalized throughout Canada, some provincial regulator will take the initiative to regulate the industry. Provincial regulator will enact a regulatory code of conduct under which Internet gaming companies may be registered.
  
• Such a code will certainly stipulate very high thresholds of conduct which must be attained and maintained by Internet gaming companies, however, once these companies are approved by the provincial regulator, they will be able to achieve a level of integrity and credibility similar to land based casino operators.
  
• Estimate of when this will occur.
  
• We eagerly await to see how the universe will unfold.

  
  MICHAEL D. LIPTON, Q.C.
  Elkind, Lipton & Jacobs LLP
  Barristers & Solicitors
  One Queen St. East
  19th Floor
  Toronto, Ontario
  M5C 2W6
  Canada

  Telephone: (416) 367-0871
  Facsimile: (416) 367-9388
  E-mail: MDLIPTONQC@AOL.COM

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