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The International Masters of Gaming Law INTERNET GAMING: A LOOK AT ONLINE GAMBLING IN CANADA Michael D. Lipton, Q.C. June 2002 Canadians are gambling online. Online gambling is illegal in Canada. Despite this fact, it is very difficult to regulate Internet gambling in Canada. One of the most important new trends to affect the gaming industry is Internet gambling. The world’s first online casino, Internet Casinos, Inc. (ICI), arrived in force on August 18, 1995 with 18 different casino games, online access to the National Indian Lottery, and plans to launch an Internet sports book. Internet gambling offers all the excitement of traditional gambling but has the added advantage of the convenience of gambling from home. All that is required is a personal computer and connection to the Internet. Gambling sites are open for business 24 hours a day, attracting the consumer with flashy Web sites. Most of the Internet gambling companies are located offshore to thwart government prosecution. For example, ICI operates out of the Turks and Caicos Islands. Bettors can either send cash through one of the companies offering secure payment systems for the Internet or open an offshore account. Bets can be as low as a nickel for certain slot machines and go into the thousands of dollars. The economics are tremendous. Whereas it might cost US$300 million to build a new resort casino which employs thousands, ICI’s virtual casino was developed for only US$1.5 million and employs only 17 individuals.(1) The financial allure is enormous. There are no reliable statistics available as to the extent of Canadians currently online, however, publicized estimates are varied and show anywhere from 20 to 47 million people wired in North America and between 90 million and 117.5 million around the globe.(2) In addition, no reliable statistics are available as to the extent of participation of Internet gambling by Canadians. A 1999 Canada West Foundation survey found that less than 0.5% of Canadians who gamble had gambled through the Internet, suggesting that in 1999 few Canadians gambled online.(3) A more recent study, conducted in 2001, shows that 85% of Canadians who gamble have gambled online.(4) These extreme numbers illustrate either the unreliability of such statistics, or the gargantuan growth of the industry! Canada has a unique policy structure. Unlike many international counterparts, gambling operates exclusively under the control of the provincial and territorial governments. A consequence of this decentralized structure is the lack of national or comparative data on gambling as a whole. In Canada, the number of Internet gambling sites has leapt from 15 in 1997 to more than 250 by the end of 1998. By comparison, in the United States, the number of Internet gambling sites has increased from 700 sites in 1999 to 1,400 in 2000, and 1,800 in 2001. Canadian law allows only the provincial government and some charities to run gambling operations. It is now clear that this law, section 207 of the Criminal Code of Canada (“the Code”), makes it illegal to operate, or place a bet through, an offshore Internet casino. The Code specifically restricts the way in which Internet gambling can be introduced. Provincial governments are permitted to operate computer-based lottery schemes like Internet gambling but they cannot licence others to do so. Further, any province that did wish to offer Internet gambling could not take bets from out of province residents unless that other province allowed it. Finally, any type of gambling on the Internet would have to be legally available in Canada, leaving the most popular type of online gambling – single event sports betting – prohibited. Players and operators thought that they could circumvent the Canadian gambling laws by setting up offshore accounts – which would be as simple as typing in credit card information while online. However, a recent decision by the Supreme Court Appeal Division of the province of Prince Edward Island, judgment rendered April 24, 2002, Reference Re: Earth Future Lottery [2002] P.E.I.J. No. 34 (QL) (“Earth Lottery Reference”) held that in order for a lottery to be lawful it must be conducted and managed in the province. The Earth Lottery Reference concerned the lawfulness of an Internet lottery scheme established by a charitable organization in P.E.I. 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 Prince Edward Island participate in the lottery using its interactive website through their home computers. The Supreme Court said that section 207 of the Criminal Code, which does permit some extra-provincial activities relating to gaming, such as the making, printing and transporting of anything to be used in a place where it would be legal, does not authorize extra-provincial marketing and, in effect, the lottery would illegally invade other provinces’ gambling turf. Key Findings (5) There are over 100,000 places to make a bet in Canada. Canadians and visitors can choose to gamble at 38,252 VLTs, 31,537 slot machines, 32,932 lottery ticket centres, 1,880 bingo halls with permits, 59 permanent casinos, 70 race tracks (20 with slot machines) and 107 teletheatres. The total net profit, or what the governments keep after expenses and commissions are paid, for provincial and territorial governments was $5.5 billion in 1999/2000. Gambling leads “sin” tax revenues for the provinces. At $5.5 billion, provincial net gambling revenue is just shy of the $5.9 billion that the provinces net from sales of alcohol and tobacco combined. Total gross profits, or the amount left over after players’ prizes have been paid but before expenses have been paid, were estimated at $9 billion by Statistics Canada for 2000. Looking at the difference between the gross and net figures, a big chunk of revenue, $3.5 billion, is the cost of operating gambling. On average, gambling contributes 3.41% of all provincial revenue sources. The provinces that benefit most from gambling activity are Nova Scotia (5.08%), Saskatchewan (4.68%), Alberta (4.58%), and Newfoundland (4.41%). The average total loss for each adult on provincially-run gambling is nearly $400. Manitoba ($491.87), Quebec ($475.69), and Nova Scotia ($470.76) generate the most per adult profit from their gambling activities, and BC ($181.93) and PEI ($277.90) the least. Charity–run gambling in Canada generated $712 million in net revenue in 1999/2000. Combined with the $5.5 billion in net revenue made by the provinces, total net revenue from gambling in Canada was $6.3 billion in 1999/2000. In total, charities generated about 11% of all gambling revenue and governments the remaining 89%. Combined, the provinces spent over $28 million on problem gambling treatment programs in 1999/2000, or about $1.20 for every adult Canadian. No province (except PEI) spent more than 1% of their gambling revenue on problem gambling treatment, education or prevention programs. These numbers are likely to increase in the near future as on May 6, 2002, a Quebec court authorized Canada’s first class-action lawsuit over problem gambling, and a flood of similar lawsuits is expected. Justice Roger Banford of the Quebec Superior Court ruled that a case against Loto-Quebec, the provincial gaming corporation, may proceed to trial as a class action.(6) The case is spearheaded by Jean Brochu, who says he gambled away tens of thousands of dollars playing video lottery games and stole $50,000 to cover his debts. The suit alleges that up to 119,000 Quebecers are pathological gamblers, although only about 240 have joined the class action so far. The plaintiffs demand as much as $625 million in damages to cover counselling and legal fees, alleging Loto-Quebec knew or should have known that its video lottery terminals created dangerous addictions. It is believed that this suit will prompt similar cases in other provinces. Also foreseeable in the near future are third-party lawsuits against gambling operators. Groups who have been embezzled by gambling-addicted workers are likely to begin suing gaming corporations. Gambling activity in Canada employs an estimated 47,500 persons as either regulators or operators of gambling for government or within gaming management companies. One of the key strengths of gaming probably lies in the income-generating power of the industry, thus ensuring its continued support by local municipalities, provincial and federal governments. The fact that charities, hospitals and cultural projects benefit from the money poured into the gaming industry gives the industry an added boost. According to Alan Schnieder of Rolling Good Times, a gambling information site on the Internet, “Canada is the number one country for designing and providing gaming software”, although it is illegal to operate an Internet gaming site in Canada. For the online gambler, the industry’s lack of regulation should raise some bright red flags. Online gambling is a risky business, as the player has no real idea of who is running the Web site and how to contact the company should the need arise. For example, how do gamblers know these companies will deliver their winnings should they actually beat the odds? And how do they know those odds are fair when every turn of the card and spin of the wheel can be electronically manipulated? (it is technically possible to install a secret algorithm in the software program that pulls more 21s when the house falls behind in blackjack.) There are many unknowns in online gambling, such as how long has the company been in business, are the odds promised the odds actually played, and so on. Nevertheless, the players are continuing to be lured by the better odds being offered by the Internet casinos, and by the greater convenience of playing in the privacy of home. Although virtual gaming over the Internet uses slot machines and cards that are not real, the money is. And while the winners receive cheques through the mail, (although several online betting operations have already become notorious for shorting their customers) the losers have already shelled out hundreds if not thousands of dollars to play. “In essence, someone can lose their shirt without leaving their home”, warns Bill Ursel of Problem Gambling Community. It is estimated that by 2004 the Internet gambling market will pull in $7.4 billion in revenue through gambling operations as well as through related software sales.(7) The expansion of online gambling in Canada poses new challenges to law enforcement. Many of organized crime’s criminal activities such as drug trafficking, money laundering and enterprise crime offences are financed by illegal gaming profits. Even if authorities decided to act, however, enforcing vague rules on the World Wide Web, which moves across borders faster than any roulette wheel can spin, may prove impossible. 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 gambling. (1) Dave Mayfield, First Virtual Casino Plans Spring Opening, The Virginian Pilot, March 26, 1995. Michael D. Lipton, Q.C. is senior partner with Elkind, Lipton & Jacobs LLP, a Toronto, Canada law firm. His areas of specialty are litigation, gaming and tourism and travel law. He is a member of the International Association of Gaming Attorneys and the International Masters of Gaming Law. He can be reached at (416) 367-0871 or by e-mail at mdliptonqc@aol.com |
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