PublicationsGlobal Gaming Exposition - Las Vegas International Masters of Gaming Law Symposium The International Masters of Gaming Law (“IMGL”) strives to educate its members and other gaming professionals in cutting edge developments in gaming law around the world. On September 19, 2003, IMGL in conjunction with the William S. Boyd School of Law at the University of Nevada, Las Vegas, will sponsor a symposium on Cross-Border Issues in Gaming. It will be held at the Richard Tam Alumni Center at the University of Nevada, and will explore emerging issues in cross-border casino advertising, marketing taxation and operations. For more information and to register for the symposium, please contact Angela Spall at 702-383-8858 or aspall@lionelsawyer.com. In Canada, Internet gaming is one of the fastest growing areas of gaming. There are no reliable statistics available as to the extent of Canadians currently online, however, publicized estimates are varied and show that in North America, anywhere from 20 – 47 million people have access to online resources. Worldwide the numbers are between 90 million and 117.5(1) million. In addition, no reliable statistics are available as to the extent of participation of Internet gaming by Canadians. A 1999 Canada West Foundation survey found that less than 0.5% of Canadians who placed bets had done so through the Internet, suggesting that in 1999 few Canadians placed bets online(2). A more recent study, conducted in 2001, shows that 85% of Canadians who placed bets had done so online(3) . These extremely divergent numbers illustrate either the unreliability of the statistics, or the gargantuan growth of the industry. Federal law permits provincial governments to conduct and manage lotteries
and games of chance that are operated on or through a computer, such
as Internet casinos. However, the provincial governments cannot license
private entities to engage in the same activities. Furthermore, an Internet
gaming enterprise conducted and managed by any provincial government
could not take bets from residents of other provinces without the consent
of the other provincial governments. The Starnet Decision Starnet was incorporated in Delaware. Through a number of wholly owned subsidiaries, it conducted its operation from a location in Vancouver, British Columbia. One of these subsidiaries was incorporated in British Columbia. The other subsidiaries were incorporated in Antigua, where online gaming is legal and Starnet had an online gaming licence. Starnet had developed software in Canada to facilitate online gaming and had through one of its subsidiaries provided online gaming to Canadians. Using false identities and credit cards, the police engaged in online gaming offered by Starnet’s licensees. Their winnings were received in the form of credits to the credit cards and also by cheques. Starnet officers, located in Vancouver, signed some of these cheques and mailed them from their Vancouver offices. Starnet’s Vancouver operation consisted of computer servers and computer applications, operating on computer systems, which when accessed by the Internet, enabled persons to engage in gaming or betting. Users seeking to wager had to first access these British Columbia based servers before being redirected to begin any gaming offshore. Many of the gaming websites developed by Starnet’s employees were hosted in British Columbia. Users downloaded software to their PCs from these sites. The registration and control of the domain name servers for many of the licensee pages were also controlled and physically located in Vancouver. As the police investigation revealed, the role of the Canadian subsidiary and its operations in Vancouver was pivotal in this enterprise. Approximately 100 people were employed by the Canadian subsidiary and were located in offices in Vancouver. Only four employees were working offshore. The Canadian subsidiary developed the server and client software packages, which enabled users to engage in online gaming. Further, it was responsible for the ongoing administration of the services, applications and computer systems. Canadian gamers were far less important to the profitability of the operation, representing only four per cent of Starnet’s online gamers in 1999. Nevertheless, and quite significantly, Starnet did allow Canadians to place bets on its site. Several Canadian residents held multiple positions in the various companies related to Starnet. These people were determined to be the corporation’s controlling mind in the various aspects of the enterprise. This enabled the Crown to ascribe the corporate criminal liability of the various subsidiaries to Starnet under the alter ego theory. As noted, Starnet pled guilty to a charge under Section 202(1)(b) of the Code which makes it an offence to “keep or knowingly allow to be kept in any place under his control any device for the purpose of recording or registering bets or selling a pool, or any machine or device for gambling or betting”. The required elements of this offence are: “keeping”, and the presence of a “device… for gambling or betting.” Starnet’s plea agreed that “device” could be interpreted to include all the computer servers, applications and systems which clients would have access in order to begin “gambling or betting.” Starnet’s “devices” were kept in Vancouver. To “keep” means more than mere possession; it means possession that results in making the gaming machine or device available for use by the public(5). This means that the device must be somehow usable by the public for the purposes of gaming. In Starnet, the servers and applications in question were kept in Vancouver and the gaming activities provided by those devices were made available to Canadian users. As a result the element of “keeping” was established. After being charged but prior to the hearing, Starnet changed the structure of its operations in order to comply with the Code. Starnet was placed under the umbrella of a British holding company. Completely new management was put in place, and a new management committee was established in Antigua. A new company called Starnet Systems was created to operate all the gaming activity from Antigua. Starnet Systems handled all the day-to-day gaming and financial activities. The devices that allowed punters to engage in gaming were moved out of Canada. Links to Canada were significantly reduced. The company also ceased offering betting access to Canadians. In essence, the Starnet decision indicates that an online gaming operation that has sufficient connections to Canada may be successfully prosecuted under the Code. Before the restructuring, Starnet’s connections to Canada were indeed substantial. The devices, the controlling mind, the majority of the staff and services were located in Vancouver and gaming services were available to Canadians. It is possible that Starnet might have been prosecuted even in circumstances where the “public” to whom the device was made available for the purposes of gaming did not include the Canadian public. In the 1970 case of R. v. Chapman, 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 was only extended to persons outside Canada. Similarly, it is possible that a prosecution under the gaming provisions of the Code could succeed even where Canadians were denied the ability to place bets using the gaming services provided from Canadian territory. The Prince Edward Island Reference As previously noted, only provincial governments are permitted to conduct or manage lotteries or games of chance operated on or through a computer. This provincial authority is limited by the recent decision of the Court of Appeal for Prince Edward Island Reference Re: Earth Future Lottery [2002] P.E.I.J. No. 34 (QL) (“Earth Lottery Reference”). The Court of Appeal held that a lottery conducted by a province is unlawful unless it is conducted and managed only “in the province,” and as such a lottery is unlawful where residents of other Canadian provinces may participate in it online, as it is no longer being conducted and managed only “in the province.” The Earth Lottery Reference concerned an Internet lottery scheme established by a charitable organization in P.E.I., licensed by the provincial government. A key aspect of the lottery was its proposed use of the Internet as a means of accessing the global market and having persons physically located outside PEI participate in the lottery using its interactive website through their home computers. The Court found that section 207 of the Code, which permits extra-provincial activities relating to gaming, such as making, printing and transporting anything relating to gaming and betting to be used in a place where it would be legal, does not authorize extra-provincial marketing. In deciding the case, the Court had to determine whether the Earth Fund lottery was “a lottery scheme in that province [PEI],” such that section 207(1)(b) of the Code authorized the PEI government to grant the Earth Fund a licence to conduct the lottery. This issue was considered apart from the question of whether the Earth Fund lottery was “operated on or through a computer” within the meaning of subsection 207(4)(c) of the Code. The Court found that the Earth Fund Lottery would violate the conditions set for the exemption created by ss. 207(1)(b) of the Code. The decision concluded that while the Internet lottery would be “based in” PEI, it was intended to “operate and carry on business in the worldwide market,” and therefore would not be “a lottery scheme in that province” pursuant to ss. 207(1)(b). This conclusion was drawn without examining such factors as the location of the servers or the administration facilities, or the jurisdiction where money would change hands. There was no indication of how these factors should be considered in determining the jurisdiction of Internet activity under the Code. As a result, the decision lacked an analysis of what factors determine whether an Internet activity is “based in” a given jurisdiction, and of the legal consequences which flow from that characterization. Accordingly, the Earth Lottery Reference case is of limited assistance to lawyers seeking to advise their clients concerning the length and breadth of the jurisdiction of the Code where the server and operations are located offshore, or where an Internet gambling operation involves a mix of Canadian and offshore elements. On March 11, 2003, the Supreme Court of Canada dismissed the appeal lodged by Earth Lottery Reference.(6) It is regretful that Canada’s highest court did not take the opportunity to decide some of the complex jurisdictional issues which PEI referred to the court, which are important not only to Internet gambling, but also to the law relating to criminal activity over the Internet in general. An upcoming case before the Supreme Court of Canada on copyright law will likely focus the Court’s attention on issues relating to the question of when in law, an activity has sufficient connecting factors with Canada to come under the provisions of Canadian federal law. The reasoning used by the Court to determine the reach of Canadian copyright law in dealing with Internet publications may have strong application to determining the reach of Canadian criminal law in dealing with Internet gaming.(7) Although the laws in relation to gaming are dealt with under federal legislation, Canada’s federal political structure provides that gaming is regulated by provincial and territorial governments. This position was recently confirmed by the Supreme Court of Canada in a decision rendered January 30, 2003, where the Court rejected the contention that a Manitoba law governing the location of video lottery terminals (“VLTs”) in the province was ultra vires (beyond the powers of) the provincial government.(8) The Court affirmed that the regulation of gaming has a “clear provincial aspect” under the Canadian Constitution.(9) Conclusion It is estimated that by 2004 the Internet gaming market will generate US$7.4 billion in revenue through gaming operations as well as through related software sales.(10) Canada’s federal and provincial laws are inadequate to deal with the onslaught of virtual gaming. Provincial governments are limited in their ability to prosecute foreign-based casino operators operating in cyberspace. Since the existing legal framework is inadequate to deal with a global, intangible entity, new legal, technological and political solutions will have to be crafted in order to protect Canadians from the substantial externalities posed by online gaming. (1) Source: See http://www.casino.org
July 8, 2003
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