The View from Victoria, Australia

Interactive Gaming News is watching events closely in Australia. While Queensland has begun moving forward with licensing and regulating interactive gambling, other states are just beginning the process. One veteran of the interactive gaming efforts in Australia is Brian Farrell, manager of Gambling Operations & Audit for the Victorian Casino and Gaming Authority. He was integrally involved with the National effort among gaming ministers in the country which designed a national regulatory framework to deal with this issue. Brian was gracious enough to give IGN an update on events in Queensland as well as the text of his presentation at a recent interactive gaming conference.

The Ministers' announcement of this national regulatory framework back on 3 October 97 noted s that the cooperative approach proposed in the "National Model" was endorsed in principle subject to the drafting of "suitable" legislation). Farrell told IGN, "The current status in Victoria is that we are adapting the Queensland Interactive Gaming (Player Protection) Act into a draft Victorian Bill for consideration by Government. If the resultant Bill is acceptable to Government, it is expected to be put before Parliament in the second half of the year."

But, the process is not as simple as it appears. Farrell added, "The Queensland Act leaves a lot of important issues to be set by subordinate 'regulations' and, in Victoria, those issues will have to be resolved and clearly set out in any Bill that goes to Parliament."

In the mean time, Brian Farrell spoke recently at a conference on the topic and here is the text of his speech.

INTRODUCTION

According to the programme, I have been asked to talk on five topics related to internet gambling. I have slightly adjusted the order from that in the programme and intend to deal with them as follows -

• Current gambling legislative models
• Pressures placed on regulators by the advent of internet gambling
• The various responses throughout the world
• The Australian response
• Future blue prints for internet gambling regulation

CURRENT GAMBLING LEGISLATIVE MODELS

What characterises almost all current gambling controls and legislative scheme is directed at destination gaming.

In legalising destination gambling of all forms, it has been some comfort to the public policy makers that players had to leave home to participate. Having to make the effort of going to the newsagent, gaming venue or casino is a deliberate and considered decision rather than an ill considered impulse that might occur on the spur of the moment when a product is consistently "in your face" as you go about your usual business or home activities.

Destination gambling is 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 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 control the location of ATMs and Eftpos terminals

The current gambling legislative models are also characterised through the role of the regulator and the environment in which gambling regulation has developed.

Gambling regulators have two clear objectives:-

• firstly and most importantly, the regulator is charged with protecting the interest of those players who access regulated gambling products. This usually covers such areas as ensuring the games are conducted fair and honestly and by people who are of good repute. It also involves ensuring that players receive their proper entitlements and ancillary activities such as advertising are carried out in a responsible manner.
• the second role of the regulator is to achieve Government determined outcomes. These, of course, can be wide and varied and often, particularly in the legislative framework, these are not clearly stated or not stated at all.

A further important characteristic of the current regulatory structures is that, in Australia, gambling regulation is carried out on a State by State basis particularly when looking at the regulators' role in achieving Government desired outcomes. This has led to some major differences in the gambling industry from State to State and is particularly apparent when you consider the differing timelines that each State and Territory has legalised the now common gambling products such as :-

• wagering and bookmaking on racing
• lotteries
• casinos
• poker machines
• bingo
• sports bookmaking

To further diversify the industry structures (and the regulatory environment) as each State has elected to legalise various products it has been done 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 America, this motivation often manifests itself when some States have permitted video lottery terminals at race tracks whilst they remaining illegal at other locations.
• Tax revenue - often 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.

A further feature of the current legislative structures that needs to be acknowledged is that a substantial number of our gambling providers either still are or started out as a State owned enterprise. For these organisations, the role of the regulator was achieved through ownership and often not spelt out in legislation.

Of more recent times, with the moves throughout Australia to privatise many of the TABs and lotteries, Governments are now having to come to grips with having to define the role of the regulator as opposed to being able make ad hoc decisions as the owner. This last point is made as a lead into an acknowledgment that we do have precedents in Australia for telecommunications based gambling. In particular 30 years of telephone betting with TABs.

However, this came about at a time when all TABs were State owned and before any external regulatory framework was in place. As such, this experience only provides a small amount of assistance in tackling internet gambling.

We also have a rapidly increasing market of telephone-based gambling through TV competitions and trade promotions. However, these are developing outside of a clear regulatory framework and also provide no guidance on internet gambling regulation.

In summary, the current legislative structures are:

• individual to each State
• dependent upon the gambling being location based.

PRESSURES ON REGULATORS

Now, along comes the internet !!!!!

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 even if they win.

In summary, the pressure is on for gambling regulators is 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.

WORLD-WIDE RESPONSES

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 US) 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 month, the FBI issued warrants against fourteen persons for allegedly providing bookmaking services into the US, from off-shore 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 some 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.

Many 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.

AUSTRALIAN RESPONSE

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

April 1995 - The Chief Executive Forum of Australasian Gaming Regulators established a short term working group to look at impact of telecommunications based gambling. That group initially focused 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 Model 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 19 March and awaits only proclamation to become law.

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

FUTURE BLUE PRINTS FOR INTERNET GAMBLING REGULATION

To cover this topic, only the Australian Model will be examined as to date there has not been any other worthwhile model proposed.

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.

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, in particular 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 statewide Tattslink jackpots in Victoria's clubs and hotels. In both cases, 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 be 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 is that its primary purpose model is to protect the interests of players who utilise gambling products provided under the model through:-

probity 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. This 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 licences. 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 overseas 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. 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 too stringent account establishment rules and audit trails to be of any assistance to the criminal element trying to wash illicit or unexplained income.

ISSUES STILL TO BE RESOLVED

A common complaint by potential internet gambling providers is that regulators expect too much in terms of verifying each player's identity at the time of establishing their registration. This is easy to do if the player fronts up in person to the operator's office (or someone who is acting as the operator's agent). This is also a convenient time to issue a digital signature, encryption key or other individual identifier to ensure the integrity of all future transmissions between the player and the operator over the internet.

However, this poses a real problem if you intend to do this totally online , as will be the case with overseas players. There is one clear message to potential internet gambling operators - solve the problem and stop asking for dispensation. Player identification is a cornerstone of the model upon which many other controls rest. To relax requirements for anybody on the basis they are, or claim to be, from overseas would simply create easy way for minors to access the product. It can be made clear now that unless potential providers are able to adequately address all issues they will remain just that - potential providers.