More Enlightenment from Australia

Interactive Gaming News continues to come across some interesting ideas being generated out of Oz. Attached is a speech by two of the leading gaming regulators who have been spearheading the interactive gaming progress we see in Australia. We run it the full text about the regulatory challenges which internet gambling presents to government oversight and how they can best be dealt with.

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Regulatory Challenges - The State Perspective

(A presentation by Brian Farrell and David Ford at the Gambling, Technology and Society Conference (May 1998)

INTRODUCTION

The theme of this conference "Gambling, Technology and Society -Regulatory Controls for the 21st Century" is a very appropriate subject as gambling regulators the world over are confronted with new technology changing the shape of what we regulate and a discernible growth in public perceptions about the negative aspects of the availability of regulated gambling

The topic assigned to us - "Regulatory Challenges - State Views' - has provided us with a wide scope to address these issues. In order to provide some structure to today's presentation we intend to first have a look at where we are at today in terms of gambling regulatory structures and then look at the challenges that gambling regulators face in regulating gambling products as -we move towards and into the 21st century.

We will then spend a little time on one example of how regulators are attempting to meet some of these challenges through the proposed model for regulating internet and interactive gambling.

CURRENT GAMBLING REGULATION

What characterizes almost all current gambling controls models and their legislative schemes world wide is that they are directed at destination gaming.

In legalizing destination gambling of all forms it has been some comfort to the public policy makers that players had to leave home to participate. The effort of going to the newsagent, gaming venue or casino is generally a deliberate and considered decision. "Impulse buying" is then limited to decisions about what games to play and how much to spend.

• Despite some difficulties along the way, and a need for constant vigilance, destination gambling is relatively easy to regulate. As regulators we have built all of our controls upon there being a physical location where the player and the gambling provider exchange information or money. This gives us a place where we can intervene and influence the operation of the product. By controlling the place where the product is offered we have been able to -
  
  
• control the type of site at which the product is offered, e.g. newsagents, TABs, clubs, hotels, etc;
  
  
• control the availability of the products to minors, often by simply excluding minors from the location;
  
  
• control the general availability of a product e.g. by limiting the number of sites, the number of gaming machines per site or as is the case in Victoria by limiting the total number of gaming machines throughout the State;
  
  
• protect providers from competition and thus allow collection of monopoly rent taxes;
  
  
• control the actual products offered through rules of the game and player return percentages; and
  
  
• control the proximity of ATMs and Eftpos terminals in relation to gaming products.
  
  

A defining characteristic of gambling regulation in Australia and central to today's topic is that it is carried out on a State by State basis and each State and Territory has over time legalized the now common gambling products such as:-

• wagering and bookmaking on racing;
  
  
• lotteries
  
  
• charitable gaming;
  
  
• casinos;
  
  
• club and hotel poker machines (except Western Australia);
  
  
• bingo; and
  
  
• sports bookmaking.
  
  

However, as each State and Territory has legalized each of these products it has done so For a variety of different reasons including -

• To combat illegal operations through providing a better alternative - usually where the existence of legal operators have clearly indicated the existence of a market demand.
• Tourism and economic development - as exampled by Governments seeking major tourism infrastructure developments associated with most Australian casinos.
• To support an ailing industry - such as the introduction of poker machines in clubs and hotels in Queensland, Victoria, South Australia and Tasmania. In the USA, a number of States have permitted video lottery terminals at race tracks whilst they remaining illegal at other locations.
• Tax revenue - often - although not always - a significant reason in allowing any new gambling product. In Australia revenue from gambling taxation is becoming more and more important for individual State budgets due to the narrowing of their revenue base. Whilst some segments of the community see this revenue stream as abhorrent, States will likely have to rely to some degree on gambling revenue unless there is a major restructuring of the Commonwealth and State taxation arrangements.

The effect of different reasons for legalizing each form of gambling in each of the jurisdictions has led to some very different industry structures in each State and Territory. This has especially been the ease in the poker machine industry.

A couple of examples of these differences will suffice.

In Victoria, clubs and hotels have been able to access the same number of poker machines-on a similar (albeit, in the tax sense, not identical) manner. In Queensland, there has always been a considerable disparity (initially, it was between 10 machines for hotels and 250 for clubs). In NSW, hotels have only recently gained access to poker machines at all, and then only in very limited numbers, where there are no limits on clubs.

In South Australia, monitoring is done by an independent body, effectively owned by the club and hotel industries. In Victoria, this function has been privatised to two licensed operators. The Queensland Government has, to date monitored all machines in that State, although this will change from 1 July when 8 licensed operators will begin to perform this role. NSW has yet to have monitoring arrangements in place, although Government policy is for monitoring to be done by a privatised TAB.

Tax rates differ a little between clubs and hotels in Victoria, not at all in South Australia, and considerably in NSW and Queensland.

In short, before considering the regulatory challenges of the future it need tote-recognized-that-the historical regulatory approach to gambling in Australia has been:

• unique to each State; and
  
  
• dependent upon the gambling (and hence the regulation) being location based.

REGULATORY CHALLENGES

Many of the challenges facing state regulators as we move towards the close of the century can be summarised into four key areas - acceptance, convergence, globalisation and technology.

The strong growth in gambling expenditure and the range of product available has followed a general community acceptance of gambling as an integral and legitimate part of the leisure and entertainment industry. It is, however, a conditional acceptance, and growth beyond community acceptance will see a backlash which may undermine it. This is well illustrated by the media comment which invariably follows the release of the Tasmanian Gaming Commission's statistics each year. This phenomenon has again been seen in headlines in only the last couple of weeks. It is also reflected in the decision by the Commonwealth Treasurer to appoint the Productivity Commission to conduct an enquiry into certain aspects of the gambling industry.

Regulators, as creatures of Government and (frequently) advisers to Government on gambling policy, have to increasingly bear in mind social and economic implications of each proposal for further expansion of the industry in framing their advice to Government. This is especially important when any major expansion in gambling is contemplated, as there seems, on the face of it, to he a strong correlation between rapid expansion in gambling opportunities and community backlash.

Acceptance has also been related in the past to the strong ties between Government and the gambling operations State Lotteries and TABs are the classic examples here. The gains from gambling were clearly seen as going back to the community through hypothecation of revenues to "good causes". As Government's disentangle themselves from State-owned operations and move to allowing private sector operators to take on new forms of gambling, the perceived gap may widen, even though actual community benefits may in fact increase.

The implication of these trends is clear. Further development of gambling opportunities will inevitably run the gauntlet of a "public interest test" however informal that may be. Providing adequate advice in this area of potential social division is not a simple task for regulators.

The industry has seen a growing trend towards product convergence - the previously unique product niches and markets are no longer clear (Keno in TABs, TABs in pubs and clubs, electronic jackpot devices on casino table games, linked Keno, linked Bingo, electronic 'instant' tickets, virtual 'everything'). Blurred distinctions, markets and providers lead to difficulties for regulators in handling 'boundary disputes' as competition increases for the gambling dollar.

This issue is compounded by the various exclusivity granted by governments to gambling providers over the years. As an example, the Golden Casket Lottery Corporation in Queensland has a statutory monopoly on the provision of lotteries in that State. Given the very broad definition of lottery", great care will need to be exercised in the approval of games under other legislation (e.g. the wagering, Art Unions or Interactive Gambling Acts) to ensure that this exclusivity is honoured.

As in so many industries today, the gambling industry is characterised by rapidly increasing globalisation. Gambling companies and their products are no longer confined to one country. This trend is a double edged sword for regulators. On the one hand, the dominance of large, often publicly listed companies particularly in the casino industry assists by ensuring that many pairs of eyes are watching corporate behaviour - not just the gaming regulators. Relevant corporate law requirements, the structure of the financial markets, and the expectation of shareholders all assist.

On the other hand, it becomes increasingly difficult - and expensive - for any one jurisdiction to effectively regulate the affairs of a company with operations across several continents.

Regulators also need to be aware of the world-wide implications of their decisions - Aristocrat's difficulties in Colorado and the intense interest in them both throughout the US and the various Australian jurisdictions exemplify this.

There is also a reverse side of the coin for those regulated. Many now need to meet regulatory requirements in several (perhaps as many as 40) jurisdictions. This places an enormous burden, as each jurisdiction inevitably has its unique requirements. The challenge for regulators is not to lower our standards, but to simplify and consolidate processes as far as possible. This is not simple in an environment where individual jurisdictions jealously guard their right to control access to the industry, but the Australian experience with the National Gaming Machine Standards indicates that progress is possible where there is a conceded will.

The technology of the gambling industry has come a long way from the 'sprigs and cogs' of the early lottery drawing devices, or even the early mechanical poker machines. As more and more gambling is technology based, regulators need to enhance skills to understand and regulate highly technical equipment and systems.

There is little doubt about the pervasiveness of technology in the gaining industry today. Just a couple of illustrations will suffice -

• Poker machines are now really computers. They are, in turn, monitored by other computers and we are not far from the day when games will be able to be downloaded from large libraries at the player's convenience rather than having to be built into the machines. Computers also manage (and often determine) jackpots.
  
  
• Lotteries throughout Australia are "on-line" as are Keno and TABs. Lottery draws, keno draws and virtual races all have results generated by computers.
  
  
• Even traditional casino games are not immune. As well as having electronic derivatives, table games are also being "enhanced" by the addition of technologically based add-ons - the jackpot arrangements for Caribbean Stud are probably the best known example.
  
  

This massively increased dependence on technology fundamentally changes the way regulators need to do business, requiring an entirely different approach to game approvals and on-going oversight. There is little purpose in having a field force of inspectors watching over a network of linked computers in an on-going way! With technology comes the demand for very different skills - maths of a different kind (and level), programming and communications, IT audit, etc. These skills are difficult to obtain and even more difficult to retain (a particular issue for those of us with "in-house" evaluation facilities).

On the other hand, the increasing use of technology is not without its benefits. It brings good audit trails, centralised management, continual verification and so forth. The regulator does have the opportunity to focus more on the evaluation of data than its collection.

Of the technological challenges facing regulators, probably the most complex for us to address is the whole issue of the Internet and interactive gambling. The Internet itself brings together all of the issues raised - the level of community acceptance for a distribution mechanism which includes the prospect of home gambling, a full range of potential products without regard for the traditional distinctions associated with location based gambling, global reach and an intrinsic dependence on technology.

INTERNET GAMING REGULATION

The approach taken by State and Territory Regulators in addressing the challenges arising from internet gambling is an interesting case study.

The Internet is "virtual" and unlike destination gambling it does not provide regulators with a place where it is easy to intervene between the player and the provider. It is also run on infrastructure that is regulated by a different level of Government.

Nevertheless, internet gambling is already here and regulators must find a way to deal with a situation where gambling products can be delivered over a telecommunication network that has no cognisance of (let alone respect for) State borders or local rules.

A further complication is that the current gambling sites on the internet are offered by people whose probity has not been subject to the tests that apply to regulated Australian operators and their games have not been subject to the intense technical testing applied by regulators in the Australian industry. Accordingly, a distinct possibility exists that Australians accessing these sites:-

• could be dealing with criminals or the criminally influenced
  
  
• could be playing games which are rigged and
  
  
• might never be paid if they win.
  
  

Gambling regulators are challenged to adapt to a situation where our traditional controls are rendered useless and to do so in an environment which challenges the traditional thinking of Governments that they have power to have total control over the actions of the residents in their jurisdiction.

SO WHAT HAS BEEN THE REACTION TO THIS CHALLENGE AROUND THE WORLD.

United States

In the USA the response has been consistent - BAN IT.

The most dramatic example is the "Kyl Bill' in the US Senate which seeks to make any telecommunications based betting across State lines or internationally (from the IJS) illegal. Interestingly the Bill seeks to make it an offence for both the provider and the player.

The US reaction is not just at the Federal level. The association of Attorney Generals representing most of the States fully supports the "Kyl Bill". Individually, the Attorney Generals of Minnesota and Missouri have launched out of State actions against internet gambling operators under their "local" consumer protection laws. These actions were based upon an allegedly false and misleading statement on the gambling operator's Web page that betting with the operator was legal no matter where you were at the time.

Earlier this year the FBI issued warrants against fourteen persons for allegedly providing bookmaking services into the US, from offshore locations, over the internet or telephone in contravention of a 1950s "Interstate Wire Act".

Europe

In Europe and the UK the response has been mixed with some countries moving towards banning and seine countries offering internet gambling licences but making the licence conditional upon only allowing players from within their jurisdiction to access the products. However, some smaller countries are providing licences directed towards the global market - the Liechtenstein lottery being an example.

Rest of the World

Some small countries are openly providing internet gambling licence to attract investment. For most of these obtaining a licence involves a one off fee and no further regulatory action. It is suggested that whilst the licence might be issued the internet server of the gambling provider is often actually located in the US. Interestingly some of the licences issued actually prohibit the licensee from dealing with the residents of the licensing jurisdiction.

Many other countries are taking a wait and see approach but favour regulation rather than attempting to ban internet gambling. Many countries, particularly those where the PC up take is low and modems rare, simply do not care.

Australia

Finding ways to regulate interactive gambling has been on the agenda of the Australian Gaining Regulators for nearly three years and in understanding the Australian response it needs tube recognised that Australian gambling regulators are without doubt the most cooperative group of gambling regulators world-wide.

April 1995- The Chief Executive Forum of Australian Gaming Regulators established a short term working group to look at impact of telecommunications based gambling. That group initially focussed on telephone based trade promotions and pay TV but changed its attention to the internet which was the first medium to provide the interactivity necessary for on line gambling.

September 1995- working group reported, recommending the development of a cooperative approach, involving all Australian jurisdictions. Representatives of all State and Territory Treasuries also discussed the issue during this period.

January 1996- Ministers from all jurisdictions met in Melbourne and agreed that officers should proceed to develop a set of principles for a national regulatory model.

April 1996- the Northern Territory Parliament received a Report from a Select Committee on the impact of Broadband Communication Services on the Northern Territory's Racing and Gaming Industry. One recommendation was "That State and Territory Governments adopt a common set of immutable principles, based on sound prudential control and open competition, to support the expansion of competitive gaming product."

May 1996- Ministers from all States agreed to a broad set of principles. Officers instructed to develop a detailed regulatory model.

May 1997- Ministers again met and endorsed the release of a Discussion Paper for public comment. That paper was the "Draft National Regulatory Mode/for Interactive Home Gambling Products". Each jurisdiction was to seek the views of its Government and respond by 30 September 1997.

October 1997- The Hon Roger Hallam, Victoria's Gaming Minister formally announced that the Victorian Government had determined to endorse the cooperative approach proposed in the regulatory model.

March 1998- Queensland Treasurer Mrs. Joan Sheldon introduced into State Parliament "Interactive Gaming (Player Protection) Bill based on the regulatory model. This legislation will be used as a guide by the other Australian States and Territories that legislate to join the cooperative-scheme proposed in the model. That Bill was passed on 18 March and awaits only proclamation to become law.

The clear message here is that a regulatory rather than a prohibitive response is occurring.

PROPOSED AUSTRALIAN REGULATORY MODEL

The model was designed in an environment of threats and opportunities.

THREATS

Developing telecommunications technology and the uptake of interactive broadband -services -will result in increasingly more players having free access to interstate and overseas gambling products. As mentioned earlier, this will occur in circumstances where there will not be any ability to intervene in transactions between a player and the gambling service provider.

Also as mentioned earlier, most currently available internet gambling products are offered by providers who have not undergone probity checks and whose games are untested.

A further and significant threat is that to the high standards set by Australian gambling regulators, particularly the setting of technical and game fairness criteria. The Australian standards are second to none in the world of gambling regulation if Australia lets anyone else set the standards for internet or interactive gaming they will be lower and will potentially undermine the high levels applicable to current gambling forms.

OPPORTUNITIES

Australia is at the forefront of gambling technology and gambling regulation. The global nature of the telecommunications technologies will provide Australian based gambling providers access to markets worldwide.

Very few other countries have the regulatory experience with technology based gambling products to set up a regulatory control regime that players will trust. Of the other countries that could most are embarking on a trail of prohibition that can only prove ineffective.

There is a window of opportunity to grab and maintain a large slice of the world pie. If our current and future gambling providers are prepared to back themselves in the global marketplace the potential market is many times that currently achieved providing their products within Australia.

SIGNIFICANCE OF ADOPTING A COOPERATIVE APPROACH

A cooperative approach by State and Territory Governments is the only effective means of regulating interactive gambling products.

A non-cooperative approach is likely to result in individual States and Territories maintaining barriers to interstate products. In the short term this will limit the ability of Australian based service providers to effectively market their products to a critical mass of consumers and provide advantages to overseas based providers. In the long term a non cooperative approach can only result in the ineffective regulation of interactive gambling products and erosion of the gambling taxation revenue of all States and Territories.

Most Australian jurisdictions, for example Victoria, have an established reputation in regulating technology based gambling products. Examples of this include the technology involved in providing the myriad of linked gaming machine jackpots at Crown Casino and in the state wide Tattslink jackpots in Victoria's clubs and hotels. In both eases the level of technology is not matched anywhere else in the gambling world.

Accordingly, interactive gambling products offered from participating Australian jurisdictions will have the credibility of being regulated effectively with guarantees on the integrity of the games and the provider.

KEY ISSUES

The model recognises that regulation provides the best response to illegal gambling. Historically Australia's answer to illegal or offshore gaming opportunities has been to provide trusted, well regulated products as an alternative.

The model does not pretend that walls can be put up against the global nature of the internet. If you are in Australia and you are logged on you will have the choice of either Australian provided products or overseas provided products.

The model recognises the global nature of telecommunications and electronic commerce and proposes a cooperative and pragmatic approach to inter-jurisdictional access of interactive gambling products:-

• a licence issued in any one jurisdiction will he recognised in other participating jurisdictions without the requirement for further licensing.
  
  
• advertising by a licensed operator will be legal in all jurisdictions, provided that it conforms to regulatory requirements.
  
  
• tax will be collected by the jurisdiction where the operator is licensed. Where a player is based in one of the participating jurisdictions tax will be remitted to the State of residence of the player. The licensing jurisdiction will keep tax revenues from other jurisdictions.
  
  

PROTECTING PLAYERS

The most important Feature of the model is that its primary purpose model is to protect the interests of players who utilise gambling products provided under the model through:

probability tests

• providers will undergo licensing using the same 'suitable person' tests applicable in the casino and gaming machine environments already in place in Australia.
  
  
• games and systems will be subject to approval under rigorous standards similar to the technical standards now in place in the gaming machine environment.
  
  

player registration

• players will be required to be registered with the gambling provider prior to gambling. 1'his will involve positive proof of identity, age and place of residence.
  
  
• credit betting and play by minors will be prohibited.
  
  

problem gambling initiatives

• players will be able to set maximum bet limits or total bet limits.
  
  
• self exclusions will be allowed and will be enforced.
  
  
• cooling off periods will apply to lifting self imposed limits and exclusions.
  
  

An interesting inclusion in the Queensland legislation is a provision allowing adversely affected third parties, such as spouse of problem gambler, to apply for the problem gambler to be excluded from all sites licensed under the model. This initiative will be closely monitored and if successful might end up being applied to more traditional forms of gambling.

WILL ALL POTENTIAL PRODUCTS BE ALLOWED?

Whilst the model provides the ability to provide products across multiple jurisdictions it does not picture an open slather approach where all possible products are automatically allowed. Each proposed product will still be subject to tests of public interest and public policy by the State which licensed the provider and the other jurisdictions will retain the right not to mutually recognise a product if it is not in the public interest to give it free access into their jurisdiction.

WILL ALL JURISDICTIONS BE PROVIDING LICENCES?

There will be different levels of adoption of the model in that Australian jurisdictions might either opt out of the model altogether or even might opt into the model but not provide any internet or interactive licenses. Simply lift their restrictions and accept back the taxes.

Some jurisdictions will actively licence providers and with that comes the added effort of putting in place the regulatory and technical controls and going to the trouble of collecting and remitting taxes.

OTHER JURISDICTIONS' PROHIBITIONS

Australian interactive gambling providers will not be required to enforce prohibitions on players participating from oversees jurisdictions that are actively trying to prohibit their residents from gambling. The taking of bets from the residents of a foreign country which prohibits internet gambling will not be considered as a grounds for action under Australian law against Australian Operator's licence.

However, that in itself is not protection against action under the laws of the foreign jurisdiction. In particular for those Australian interactive gambling providers that also have operational or product supply licences in foreign jurisdictions. For this reason some of Australia's largest gambling industry participants, if they gain interactive gambling licences, might decide not to open accounts with residents of those jurisdictions which prohibit internet gambling.

MARKET SIZE AND IMPACT ON EXISTING GAMING PRODUCTS

It is not clear how great the market is and how it will impact on existing products. One school of thought to which I subscribe is that simply offering current casino, gaming machine games or lotteries on the internet will only result in niche market penetration. The "killer" application of interactive gambling is yet to be thought up and even when it is there is no guarantee it will pass public policy test and be allowed with the regulated envelope. However, the lifting of current gambling products onto a telecommunications base will provide the delivery mechanisms for the games of the future.

I am in no better position than the next person to estimate the size of the global interactive-gambling market of the future but I would be surprised if for several years yet it remained anything but-a-junior cousin to the location based gambling products currently offered. However, given time it will no doubt be a huge global industry.

MONEY LAUNDERING

A lot has been said about the potential for money laundering in the "virtual world". No doubt this is a cause for concern for anti money laundering agencies. However, for regulated internet casinos money laundering will not be a problem.

In the virtual world where money will be exchanged for anything that can be digitised a regulated internet casino would be one of the last places a criminal would go to attempt to launder money. The true value of many things that can be digitised (such as software or information) is often impossible to quantify and in these circumstances the greatest challenge to or anti money laundering agencies will be to catch those using the intangibility of digitised "things" to legitimise illegal or unexplained income.

Regulated internet casinos will have far to stringent account establishment rules and audit trails to be of any assistance to the criminal element trying to wash illicit or unexplained income.

CONCLUSION

In this Paper, we have attempted to meet the breadth of the topic by doing a number of things

• We have attempted to set some of' the context within which gaming regulation functions within the various State jurisdictions and point to the similarities and very significant differences between those jurisdictions.
  
  
• We have summarised a number of the key challenges facing regulators, challenges arising from the environment within which gaining regulation functions and changes arising from developments within the industry itself.
  
  
• The development of the National Regulatory framework for regulating interactive gambling product has also been discussed as an illustration of one mechanism adopted to meet these challenges.
  
  

Regulating the gaming industry has always been a challenging task. Its shift from a "colourful" industry full of characters of dubious repute to one which has achieved a remarkably high level of community acceptance as a part of the leisure and entertainment experience has been in pad at least due to the success of regulators in meeting those challenges.

Before us today, we have a new set of challenges. These are not necessarily more difficult to meet, but they are certainly different. Meeting them will involve regulators

• understanding the industry we regulate and the forces driving it;
  
  
• understanding the impacts of the industry, both economic and social;
  
  
• working together, both within Australia and across the world, to solve the problems we all face;
  
  
• develop and nurture skills, either "in-house" or through outsourcing to ensure we stay abreast of technological change; and
  
  
• be willing to think laterally about solutions to problems - while many of the traditional regulatory mechanisms and processes will have universal and timeless effect, effective regulation does not sit well with a closed mind.