International Bar Association - Cancun Conference - Sports and Gaming Law
The Past, the Present and the Future for Legal Internet Gaming in Canada
October 30, 2001
Presented by Stanley W. Elkind, Q.C.

I am obliged to my partner, Michael D. Lipton, Q.C., who wrote and delivered a speech earlier this year upon which my presentation today to the IBA has been based and adapted.

No discussion of the present and the future of Internet Gaming in Canada would be complete without a thorough understanding of the past.

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 or federal government.

Under Part VII of the Canadian Criminal Code ("Code") enacted by the federal government and applicable to all of Canada, 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 and I will paraphrase where necessary.

• to use or knowingly allow a place under one's control to be used for the purpose of recording or registering bets,
• to 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;
• to record or register bets;
• to 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;
• to provide information intended for use in connection with book-making on any horse race, fight, game or sport;
• to advertise, print, publish or otherwise give notice of any offer, invitation or inducement to bet on the result of a contest;
• to willfully and knowingly transmit any messages by ... telephone that convey any information relating to book-making or is intended to assist in book-making.

In addition to the offences under sections 201 and 202 of the Code, it is also an offence under section 206 of the Criminal Code to:

• 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;
• conduct, manage or be a party to any scheme by which any person or 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.
• Notwithstanding that these sections of the Criminal Code were enacted to deal with bricks and mortar types of gambling operations, they are patently appropriate to Internet gaming and therefore Internet gaming in Canada is illegal, subject to one exception, which I will refer to shortly.

Pari-mutuel wagering on horse racing
Pursuant to section 204 of the Criminal Code bets made through the agency of a pari-mutuel system on running, trotting or pacing horse-races are not illegal if the bets or records of bets are made on the race-course of an association conducted at that race course in Canada, or subject to the approval of the Canadian government outside Canada and provided that certain regulations under the Code are complied with.

Or stated another way section 204 is an exemption section as it provides that sections 201 and 202 do not apply to certain pari-mutuel betting enterprises which are organized and supervised under the auspices of the federal Minister of Agriculture. Thus permitting traditional wagering on horse racing.

For the purposes of the Criminal Code, an association means one that is incorporated pursuant to federal or provincial legislation and that owns or leases a race-course at which horse races are conducted in the ordinary course of its business.

Bets made in accordance with regulations under the Criminal Code in a betting theatre or by telephone call to a race course of an association or to a betting theatre are deemedJ to be made on the race-course of the association.

In February 1998, The Ontario Jockey Club, one of the largest race-course associations in Canada, sued the Attorney General of Canada seeking an order setting aside the decision of the Executive Director of the Canadian Pari-Mutuel Agency. That decision refused to amend the permit of the Jockey Club to include permission to accept wagers on horse races run by the Jockey Club through on-line personal computer betting, i.e. without the attendance of the person placing the bet at the race course. The Executive Director refused the request claiming that to grant it would be to contravene section 204 of the Criminal Code.

The Ontario Jockey Club claimed that when an on-line system is used, "bets made or records of bets made" are made on the race-course, where the races are held. Alternatively, if bets are not made on the race-course. records of bets are so made and this was sufficient for the on-line system to fall within the exemption set out in section 204 of the Criminal Code.

During the case both parties conceded that the purpose of section 204 was to prohibit illegal off-track book-making and to ensure that betting occurs through a regulated and approved pari-mutuel system at a race-course.

The Ontario Jockey Club was of the view that the proposed on-line system met those policy objectives while the Attorney General of Canada was of a different view.

The Federal Court of Canada ruled against the Jockey Club of Ontario. It decided that bets may only be made at a race-course, betting theatre or through telephone calls to a race-course or betting theatre and predicated upon the statutory meaning, there was nothing in the Criminal Code or regulations to support any other type of explanation.

Therefore, on-line betting on horse races is still illegal in Canada although I understand intensive lobbying efforts are under way to influence the federal government to amend the legislation.

Whether amendments to permit this type of activity, similar to what has occurred in Louisiana, Oregon and other U.S. states, will be made in Canada remains to be seen.

Exception to Prohibition
A major exception to the prohibition against Internet gaming is found in section 207(a) of the Criminal Code. It states that it is lawful for:

the government of a province of Canada either alone or in conjunction with another province, to conduct and manage a lottery scheme in that province or in that and another province in accordance with any law enacted by the legislature of that first province.

Under section 207(4) a lottery scheme is defined to be or a proposal or a scheme or plan, device, contrivance or operation described in section 206 whether or not it involves betting, pool selling or a pool system, of betting and it specifically provides that a provincial government "may" conduct and manage a lottery scheme "on or through a computer". As a result, at the present only a provincial government may operate an on-line lottery scheme. However, none have done so to date.

The Kahnawake Mohawk Indian Tribe
Any discussion of gaming in Canada must of necessity include the Mohawk Indian Tribe known as the Kahnawake Mohawks. Notwithstanding the provisions of the Criminal Code which confer jurisdiction only upon a provincial government to operate an on-line lottery scheme, the Kahnawake Mohawk Indian Tribe, whose territory is south of Montreal in the Province of Quebec, has asserted that it is a "sovereign nation" and as such has jurisdiction to issue its own gaming licenses. I understand that the Indian Tribes in the U.S.A. have and are taking similar postures.

It has established a Kahnawake Gaming Commission and hired a former New Jersey gaming regulator to draft a licensing code. It is reported to be charging $10,000 (U.S.) to host a site plus a percentage of the profits generated.

According to reports, among its licensees is Golden Palace Casino - rated by Greenfield On-line as one of the most popular of 40 leading gambling sites - which boasts it now handles 15 million bets a week.

Currently, the Kahnawake Mohawks play host to about 10 cybercasinos.

The entire operation is under surveillance by both the provincial and federal authorities. The issue has yet to be resolved.

The Earth Fund Lottery and the Government of Prince Edward Island
At present, the only provincial government which has tried to use section 207(4) of the Criminal Code is Prince Edward Island (PEI) which early in the year 2000 issued an interim license to an on-line lottery game. The government of PEI has taken great pains to point out that the license will be to "operate a traditional, passive lottery activity" and that the lottery is in no way connected to "Internet casino gambling". This lottery is called "Earth Fund".

In its public statements, the government of PEI has drawn a distinction between "traditional lottery" activity and "casino activity on the Internet", implying that it will not license Internet gaming that involves "interactive wagering or gambling of money for immediate pay offs". The government characterizes this "casino type of activity" as "the typical enticement that appeals to problem gamblers".

Earth Fund estimates the Earth Fund Lottery will sell between $120 to $180 million (U.S.) annually to players around the world. They wish to provide substantial prizes to be awarded monthly as well as more than 100 smaller prizes. If the lottery receives its final license, all net proceeds are to be paid to charities.

Notwithstanding the idealistic purposes of the "Earth Fund Lottery", it has encountered legal difficulties in the incipient stages. Take note that the Interprovincial Lottery Corporation ("ILC") which operates three national lottery games nationwide in Canada has sued The Earth Fund, requesting a declaration that its operations would be unlawful.

The case is still before the court and as yet undecided.

The Present Climate for Gaming in Canada
Internet gaming is global and the climate in Canada must perforce be viewed against this global background.

Growth in the on-line gaming industry has grown by leaps and bounds. In particular between 1999 and 2000:

• in Ontario the estimated industry gambling expenditures for 2000 increased from $1.5 billion to $2.2 billion;
• the number of government jurisdiction world wide that now sanction or tolerate Internet gaming increased from 47 to 55;
• the number of operating companies or governments that run these sites has increased from 200 to between 300 and 350;
• the number of software supply companies providing tools that bring gaming products to users increased from 40 to 60;
• the number of internet or online gaming sites found on the Web increased from 647 to over 1,400.

THE QUESTION FOR THE STATUS OF INTERNET GAMING IN CANADA IS: IS THE POLITICAL AND PSYCHOLOGICAL CLIMATE READY FOR INTERNET GAMING IN CANADA?
In my respectful opinion, change is occurring most assuredly.

Only 12 short years ago there were no bricks and mortar casinos in Canada and now there are over 50 such casinos, located in 7 of Canada's provinces and in 1 territory.

In 2000, Canadians spent more than $7.5 billion on legalized gaming (source: Statistics Canada, 2000).

Revenues generated by casinos throughout Canada is enormous and growing everyday.

In fiscal 1998/99, gross revenue at Ontario's 3 commercial casinos alone generated $2 billion.

In Ontario alone, there are over 16,500 slot machines in use and there were none in 1989.

British Columbia alone has 17 charitable casinos and Ontario has 3 commercial casinos, 4 charitable casinos and 11 racetracks with slot machines located thereon.

In Canada, there are 89 casino/slot gaming floors.

What if any changes will the future bring?
I submit that Governments cannot simply overlook the expansion in the industry or the huge revenues it generates and the rapid expansion of these revenues.

It appears likely that before Internet gaming comes to Canada, the various governments must be satisfied that there is a need to regulate the industry.

Government decisions to regulate the industry will also focus upon whether there is "any public concern or demand" for regulation of Internet gaming, i.e. is it in the public interest to regulate the industry? Accordingly, regulation of the industry may not depend solely upon the revenue needs of government.

There are no statistics currently available as to the extent of participation of Internet gaming by Canadians or the magnitude of problems arising therefrom. However, the vast majority of Canadians report engaging in some form of gaming each year.

I understand 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 gaming industry and the huge revenues it generates, there is a distinct possibility that there is a need to regulate Internet gaming.

Clearly, Internet gaming cries out for legitimization in North America and Internet gaming companies are struggling for integrity and credibility.

It is probable that before Internet gaming is legalized by the federal government amending the Criminal Code throughout Canada, some provincial regulatory will take the initiative to regulate the industry.

When there is both a strong need to protect the public coupled with a government need for revenue, it is extremely probable that a provincial regulator will enact a regulatory code of conduct under which Internet gaming companies may become registered.

Such a code of conduct 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 should be able to achieve a level of integrity and credibility similar to land based casino operators.

Predictions
A prediction of the content of future legislation is at best an educated guess and at worst a gamble since legislation is shaped more often by political concerns than by logic.

However, patterns are developing in the way governments are responding to the proliferation of online betting.

The federal government of Canada is in an awkward position in that it "sold" control of gambling to its provinces when it needed money to pay for the Calgary Olympics in the 1980's. At the time it appeared it was a minimum give up because at that time the only 2 major forms of gambling permitted in Canada were:

• pari-mutuel wagering on horse races and provincial lotteries.

and the Canadian federal government's position on whether Canada's First Nations, i.e. Indians and Eskimos could operate casinos on their lands was an issue best left to the provinces to negotiate - and as I have earlier observed it is still undecided.

To adequately represent clients interested in becoming involved in any way with Internet gambling, requires one to peer into a crystal ball to not only determine whether current Canadian laws primarily criminal apply but also to predict what the laws will likely look like in the future.

International Law
The nature of the Internet requires necessarily that any legal analysis include predictions of future development in international law in addition to domestic Canadian federal and provincial laws.

All of the above being said, I am more than optimistic for the future of Internet gaming in Canada. Prohibitions as history has amply illustrated simply do not work, Regulation on the other hand has and will continue to work because this is what the public wants.

I am obliged to you for your attentiveness.

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