Gambling on the Internet

8 October 1997

In many ways, our legal system is ill-equipped to deal with the problems raised by the Internet. Gambling on the Net highlights many of these issues. It gets so complicated that it's impossible to answer even the most basic questions about the legality of gambling on the Net. If you get two experts in a room and ask them if it's legal to gamble on the Internet, you may just get three different answers.

The difficulty with Internet law generally is that the legal framework within which we work domestically and internationally was never designed for instant and imperceptible interstate and international communication. When you're surfing, you have few cues that tell you whether you're communicating with a computer down the street or across the world.

Go to a gambling site such as the Golden Palace Online Casino at (Disclaimer: I know nothing about the Golden Palace. They may be reputable or not. I'm just using them as an example.) First, do you know what state the casino is in? Hint — you just took a trip out of the country. I dug around the site a bit and my best guess is that I should welcome you to St. John's, Antigua, West Indies.

One obvious risk of international travel is that you subject yourself to a foreign legal system while you're on their soil. If you have a car accident or business dispute, you may find yourself dealing with their criminal or civil justice system.

What makes the Net different is that international "travel" is as easy as typing "goldenpalace" into Netscape. And when a foreign casino fails to pay you when you win, what exactly are you going to do about it? Are you going to sue in Antigua? And what if it turns out that the operation underlying that pretty web site consisted of a computer in somebody's garage?

History of Online Gambling

The birthday of online gambling was August 18, 1995 when the first online casino, Internet Casinos, Inc. (ICI) went live. This is an industry with incredibly good economics. While it might cost hundreds of millions to build a resort casino that employs thousands, they developed ICI for $1.5 million and employed only 17 people.

This is an industry that's made quite a splash in just two years. Today, there are countless gambling sites on the Net. State attorneys' general are getting a headache trying to figure out how to regulate this activity.

Several states recently brought legal actions against gambling sites for violating state laws prohibiting gambling within the state. These states will argue that although the computer hosting the gambling site is outside of their state, the bet occurred in their state and therefore their law had been broken. It's an interesting legal theory, but nobody knows if it's a winner.

In March, in an attempt to address this issue, Senator Jon Kyle, R-Ariz., introduced a new bill in the Senate to extend current prohibitions against telephone bets and wagers to include Internet wagers.

According to Senator Kyle, as reported in the "Electronic Information Policy and Law Report," Internet gambling is a "million-dollar-a-year activity that is unregulated and largely illegal if done in other venues." He predicted that it could become a billion-dollar venture by 2000.

The bill includes a provision encouraging the President to negotiate cooperation agreements with foreign countries in cases involving foreign violators.

Now, while extraditing a violator of American gambling laws to the United States from wherever may feel fine, what if it's an American being extradited to Iran or Iraq for violating their law while on American soil. Are you still feeling OK about this concept of violating a foreign country's law without ever setting foot in that country?

Server Side Regulation

The Internet may have developed after our legal system with its conflicting framework of state, federal and international law, but we have to find a way to make it all work. I think that you make it work by analogizing to the system that we have now. It may not be perfect, but it can work.

As I sit here in Florida today, my actions are generally governed by Florida and, to a lesser extent, Federal law. If I leave the state, I generally leave Florida law behind. The law of whatever state I'm in now governs my conduct. If I leave the country, I generally leave all American law behind.

I know that this scenario has problems, but we learn to live with it. If I don't like the law in a particular place, I don't go there. It's simple.

The problem with Internet law is that it keeps getting into the same loop. If the bettor is in Florida, the computer that's hosting the Internet casino is in Antigua, and the message carrying a bet travels through five states and three countries on its way to Antigua, then whose law governs the transaction? If it's illegal to gamble in Florida, can Florida impose its law in Antigua? What about the five states and three countries in the path of the message? Can they impose their law?

Let's break the loop. Let's answer the question. Let's "KISS" (keep it simple and stupid) it.

The law at every level should clearly state that all Internet transactions are governed by the law of the place where the server is physically located if three requirements are met. (The "server" is the computer on which a web site and its information physically live.)

First, the country where the server is located must recognize this rule of law.

According to Alan Koslow, who leads the Entertainment and Gaming Department of the law firm Becker and Poliakoff, P.A., and who represents numerous casinos, manufacturers of gaming equipment and racetracks in the United States and the Caribbean, "For this to work, there must be nearly universal agreement that the gaming took place at the server's location not where the gambler is sitting with his computer. In other words, the gambler's country must not seek to impose its laws on Internet sites hosted in other countries."

Secondly, the Internet site in question must clearly, accurately, and prominently state what jurisdiction it's in and, lastly, state that the laws of that jurisdiction govern all transactions with that Internet site. By giving these notices, the virtual visitor, like a real life physical visitor, has been warned that they have left their home law behind and are now being governed by some foreign law. Whether in real or virtual life, if you don't like the law there, don't go there. It's simple.

This may not be a perfect answer, but the alternative is that endless loop of "whose law applies?"

Regulate Online Gambling

I have no study to back this up, but common sense tells me that given a choice between an online casino based in and governed by the law of Antigua, and an online casino based in and governed by the laws of an American state, most Americans will choose the latter.

Whatever your opinion about gambling, the cold, cruel reality is that any attempt to regulate people's Internet activities from the privacy of their homes is going to be about as satisfying and successful as Prohibition. It's doomed to fail.

Some states have chosen to legalize casino gambling. Today, I can visit these places and legally gamble without fear of criminal prosecution by my home state of Florida. We need to expand this concept to the realities of today's online world. A virtual visit to a legal casino should be governed by the laws of the place where the casino's server is located.

This analysis takes us back from a virtual world to the real world where our legal system works well enough. Legal, regulated and taxed gambling operations are certainly better than the unregulated foreign operations that move American money offshore with operations that are sometimes fraudulent.

Today we have uncertainty on basic issues of legality and clashes between the laws of various nations. Server side regulation ends all that. Whether your visit is virtual or physical, the law of the server should govern. Now you have legal certainty.

Copyright 1997 Mark Grossman -