Cyber-Fortress Europe
 
 Italy's ban on foreign operators opens a new front in Europe's battle for a 'common market' for gambling
 
 
   
  When it was approved in 1987, the Single European Act was acclaimed as the crowning touch to the work begun with the Treaty of Rome, extending the unfettered movement of goods to include people, capital and services in a true European Common Market. As it was imagined by the visionary pan-Europeanist Jacques Delors, president of the European Commission at the time, the realization of this "great market without frontiers" was to be complete by 1992.
 
  February's hotly disputed vote in the European Parliament on a new directive on the free movement of services - which powers like France and Germany didn't want, and which now specifically excludes gambling - illustrates how far, 13 years later, the European Union still has to go to catch up with Delors' vision.
 
  This was made abundantly clear recently in Italy, home of the landmark Gambelli decision in the European Court of Justice. Gambelli was supposed to hasten the end of gambling's dominance by government-sponsored monopolies. On the contrary, within days of the EP's vote on the Services Directive, Italy brought into force laws that require telecommunications and Internet service providers to block content from operators not licensed in the country, effectively barring more than 600 Web sites from taking bets in Italy's E500 million online market. Providers failing to comply face fines ranging from E30,000 to E180,000 per violation.
  
  Response to the blackout has varied. The silence from the lottery and casino sectors was indicative of tacit approval as both hold strong views about national sovereignty when it comes to gambling. Both opposed the remote sector's bid to include gambling in the Services Directive, which the European Casino Association, representing about 800 properties continent-wide, warned would "inevitably lead to an unrestrained opening of national markets of games of chance."
 
  Ron Goudsmit, vice chairman of the ECA and a vice president of the Dutch government monopoly Holland Casinos, applauded the exclusion. "This is in line with what we've been supporting and what we had been asking for. When it comes to free trade in services, casinos, or gambling in general, should be exempted because of its special nature in the areas of consumer protection, social order, that sort of thing, which each country should control for themselves."
 
  If you look at Antigua's battle with the U.S. Justice Department in the WTO, or the bill proposed by Rep. Bob Goodlatte (R-Va.) in the U.S. Congress to outlaw Internet gambling in its largest world market, it's clear that Europe is not unique in the view that gambling occupies a social and commercial gray area - a dimension particuliere - which, though permissible by special governmental dispensation, may contain conditions designed to protect the public, conditions which naturally will vary with social, cultural and political circumstances.
 
  There is a lot at stake in this position. Gambling is a E75 billion business in Europe, most of it in lotteries, which either are owned and operated by governments or under exclusive government licenses. Sports betting, which is legal almost everywhere, albeit for the most part under the same conditions (the UK being the significant exception) has fed a boom in online wagering, aided by broadband penetration and augmented more recently by the explosive growth of online poker. Remote gambling revenues have grown about 1,000 percent worldwide the last five years to more than US$10 billion, and Europe accounts for about 37 percent of it, second only to North America.
  
  "Up to the early '90s it didn't matter," explained gaming law specialist Tony Coles, a senior partner with London-based solicitors Jeffrey Green Russell. "If you wanted to gamble in France you went to France, if you wanted to gamble in Germany you went to Baden Baden. What changed all that was the Internet. Suddenly it was possible to offer gambling services across borders."
 
  It is not likely Delors would have disputed this national prerogative, esteemed in EU law as the doctrine of "subsidiarity". Nor has it ever been questioned by the European Court of Justice. In Her Majesty's Customs and Excise v. G. Schindler and J. Schindler, the 1994 decision that set the tone for every decision to follow, the court dismissed an appeal by a private German operator that wanted to compete in Great Britain against the National Lottery. The court upheld the position that nations reserve "a sufficient degree of latitude to determine what is required to protect players and, more generally, in the light of the specific social and cultural features of each Member State, to maintain order in society. ...It is for them to assess not only whether it is necessary to restrict the activities of lotteries but also whether they should be prohibited, provided that those restrictions are not discriminatory."
 
  This last clause, picked up in 2003 in Gambelli, has been seized on by the online sector in its uphill battle against a towering protectionist tradition.
  
  
 'Too complex, too political'
  
  Prosecutore della Repubblica v. Piergiorgio Gambelli arose from the arrest of an Italian agent who was employed by Stanleybet International, a division of UK-based Stanley Leisure, to transmit sports wagers online, an activity the government alleged was illegal, neither Stanleybet nor Gambelli possessing an Italian license. It was the first Internet gambling case taken up the ECJ. Since Schindler had already established that gambling is a legitimate "service" under the meaning of the Treaty of Rome, it was left to the court to clarify this in light of the cyber-technologies that were revolutionizing the industry. Basically, Gambelli asserted that competitive restrictions imposed for the sake of public interest must, as a matter of EU law, be proportionate to that end. The court looked at the lucrative businesses governments are engaged in in aggressively marketing their gambling monopolies and declared them to be disproportionate. Moreover, the court said, such promotional activities cannot be justified on the basis of their value to the public revenue.
 
  However, the court stopped short of taking infringement action. Out of respect for Schindler and the doctrine of subsidiarity, it referred the case back to the Italian courts for a determination. The Supreme Court of Italy promptly found no disconnect with EU law. The Dutch Supreme Court made a similar finding last year in a challenge brought by Ladbrokes. A regional court in Germany has likewise found against BetandWin. In France, which in a fit of "economic patriotism" last year set barriers to foreign acquisitions in gambling and a host of other "sensitive" industries, the Court of Appeal in Paris has upheld a ban against an online operator out of Malta, Zeturf, which had been taking race bets in competition with the government monopoly Pari Mutuel Urbain.
 
  As all of his relates to Italy's current assault on cyberspace, clearly the view prevails that the borderless technology of the Internet does not strip governments of their power to determine the forms of gambling they will allow and the terms of its access to the public, which of course implies a power to impose arbitrary limits on competition, whether that be foreign or domestic, terrestrial or online.
 
  Said Cole, "You have the principle of subsidiarity, which is that gambling is regulated by the individual countries. This was agreed by the European Council, the prime ministers, in the early '90s. But gambling is a commercial activity and under the treaty protection of free movement of goods and services. But then 'subsidiarity' says no. Thus you have conflicts. The ECJ was brought in to rule on this issue of the treaty versus 'subsidiarity'. The European Commission is caught in this conflict."
 
  As for the commission, "It seems like they're looking for excuses not to take on any of these complaints," said Justin Franssen, an attorney with the Amsterdam firm of Van Mens & Wisselink. "It has to do with fear, I think, of public perceptions, and the fact that they don't know - what is the effect on markets, how will it affect the markets? - you have 25 markets, all of them very diverse."
 
  Franssen, who late last year won a potentially significant case in a lower Dutch court challenging Holland Casinos' monopoly on behalf of French operator Tranchant, has discussed the issues with the office of Internal Market Commissioner Charlie McCreevy. "I have a strong impression that they just don't know what to do," he said. "It is too complex, too political."
 
  The online operators contend that their goals are vastly misunderstood.
 
  "People talk about liberalization - we're used to working in a regulated environment," said Adrian Morris, finance director for Stanleybet. "What about a situation where bookmakers could apply for licenses under national regulations and operate in accordance with them? If we could do that there wouldn't be all this debate over cross-border services. As an operator you would prefer to establish yourself freely in a fair and regulated market."
  
  Cross-border services exist as an "alternative," he said, only because these have been forced on the operators.
 
  The European Betting Association, a Brussels-based trade group of a dozen or so bookmakers, said its members are being victimized by "alarmist nonsense".
 
  "One must not confuse change with chaos," the association said. "All EBA members are willing to operate in a competitive and fairly regulated EU market. ... The concern of Member States should not be the onset of healthy competition but of the increasing prevalence of offshore-based operators. It is surely more important to provide EU citizens with enough choice to ensure that they are not attracted to products that are beyond the legal control of Member States."
 
  In a prepared statement released by the Remote Gambling Association, Chief Executive Clive Hawkswood said, "All operators in the RGA are licensed for gambling purposes within the European Economic Area.  They adhere to high standards of regulation and social responsibility. There is no legitimate reason why they should not be allowed to provide their services to Italian residents." 

  
  The 'copycat effect'
  
  The online operators claim the Finance Act 2006, as the Italian law is titled, violates two of the core commercial guarantees of the Treaty of Rome - Article 43 protecting "freedom of establishment" and Article 49 providing for "freedom of services" - plus EU directives governing telecommunications, data protection and transparency and prior notification of technical standards - and also recent ECJ case law, mainly Gambelli.
 
  Betting exchange giant Betfair, one of 30 members of the London-based Remote Gambling Association, blasted the law as "the technological equivalent of book burning."
 
  "The new law not only restricts our ability to offer services but our fundamental right of commercial free speech," said spokesman Mark Davies. "Censorship for the benefit of a local monopoly is a disgrace."
 
  "We need the [European] Com-mission to do something and to accept and discharge its responsibilities," said Didier Dewyn, secretary general of the EBA. "Urgent action is needed unless they want the EU business community to believe that the Internal Market is a joke."
 
  What can the Commission do? It can investigate, and it is, armed with a complaint several operators filed in Brussels back in November, a month before the Finance Act was approved by the Italian Parliament. It will issue an opinion, assuming nothing changes in the interim, and if the opinion is that a violation of EU law has occurred, it will set down the conditions for the Italian government to remedy it and provide the government an opportunity to respond. In the last resort, the Commission can bring an infringement action to the European Court of Justice and recommend a penalty or fine. Once the matter comes before the ECJ the process starts all over again.
 
  There are estimated to be eight or more complaints like this against Member States that appear to be stalled in the machinery of the EU while the commission waits for the release this month of a draft study by the Swiss Institute of Comparative Law, which was being partially funded by Stanley Leisure and has been discounted already in French circles as biased. Stanley has since withdrawn its support.
 
  The commission's hesitation is both a measure of the determination of governments to keep a tight rein on their national gambling markets, as Franssen suggested, and of the great disharmony that persists in what is supposed to be a single continent-wide economy.
 
  "Obviously it is a very complex undertaking to bring together 25 sovereign states," said Cole. "Firstly, the European Union is not a federation. It is not like Canada, the United States or Australia. It is a hybrid entity created purely by a treaty of member states. All remain sovereign and can do whatever they want."
 
  Hawkswood complained, "It takes so long to get anything through the courts or the Commission, the damage is usually done already."
 
  Alternatively, aggrieved parties can sue in local courts, and many have. In Germany the stage was set last month for a Federal Constitutional Court ruling on the government's betting monopoly that has had all interested parties in this great debate looking toward Berlin. The high court was reported to be leaning toward opening the market.
 
  Stanleybet, meanwhile, has been embroiled in another Italian case before the ECJ, Placanica, that is almost identical to Gambelli, and the company has taken the Italian route yet again to oppose the Finance Act. Claiming the Act "flagrantly ignores the Gambelli ruling," Stanleybet has asked a regional court to annul the applicable provisions and impose damages. Morris said if they lose at the regional level they believe they have a shot with the ECJ -"because the weight of the case law is what has come from the Court of Justice."
 
  "There is more weight there than with a higher Italian court," he added, "but that's an option as well."

  
  Other operators also are considering suing.
 
  "This is not the end of anything," said Cole. "It's not even the end of the beginning. It's going to run and run and will run for decades."
 
  Then there is the fear that should the Finance Act stand, other states will be tempted to copy it, a possibility fraught with implications.
 
  "Copycat effects are very present," said EBA spokesman Torbj”rn Ihre. "We haven't heard anything. But probably [other states] are studying this very closely to see what happens."
 
  "If the challenges succeed, they won't do it," Morris said. "If they don't succeed, which would be staggering, then it is hard to say. But anything is possible in law."
  
  
 Sidebars:
 
 View from the States
  
 The $5 billion question:  Will Congress fail to regulate or fail to prohibit?
  
 
  
 In the last decade, anti-gambling legislators in the U.S. Congress have proposed various mechanisms to prohibit online gambling, from making it the responsibility of Internet service providers to anointing the financial services industry as the Internet police. The Justice Department has threatened media companies with potential charges of aiding and abetting a crime for accepting online gambling advertisements.
 
  Rep. Jim Leach (R-Iowa) is again trying to interrupt the money flow to Internet gambling sites and has introduced a bill to prohibit the use of credit cards or any other instrument of U.S. financial institutions in Internet gambling transactions. Rep. Bob Goodlatte's (R-Va.) Unlawful Internet Gambling Enforcement Act 2005 would amend existing federal law (specifically, the 1961 Wire Act) by expanding the definition of "communication" to include the Internet and expanding the definition of "bet" or "wager" to include games "predominately subject to chance." 
 
  While Leach's legislation has seen no activity, Goodlatte already has more than 100 co-sponsors for his bill, strategically gaining momentum from tales of the dubious activities of disgraced Washington "super lobbyist" Jack Abramoff.
 
  The assertion from congressional adversaries is that Abramoff - who represented a company in the online lottery industry - bribed Tony Rudy, an aide to then-House Majority Leader Tom Delay to help defeat an Internet gambling prohibition bill in 2000. The reality is that lobbying by the National Indian Gaming Association, various state lotteries, many Internet service providers and the Interactive Gaming Council defeated the legislation.  Nonetheless, there is a perception among some Republicans that they need to atone for the 2000 vote. In a three-way race for the position of House majority leader, one of the candidates, Rep. John Shaddegg (R-Ariz.), proposed a five-point plan for ethical reform of the House. Point No. 3 is for Congress to pass an Internet gambling prohibition bill. Many Republican lawmakers seem to think that they can compensate for the excesses of the Abramoff era and perhaps deflect criticism over ethics by complying. 
 
  The fact is that whether because of pressure from federal and state authorities or because of their own initiatives, most major U.S. financial institutions already block Internet gambling transactions. For several years, it's been rare to find a U.S. credit card that can be used to deposit funds at an online casino. As for the Goodlatte bill, a federal court has ruled that 1960s-era anti-gambling laws only apply to sports betting and not to casino games of chance. So while the position of proponents of an online gambling prohibition in Congress continues to lack credibility and substance, the Abramoff scandal has placed the online gambling industry in a difficult position. And as has been the case with previous such legislation over the past 10 years, a substantial misunderstanding of Internet gaming and of the Internet itself is driving it.
 
  An increasing number of initial public offerings and stock exchange listings for online gaming operators - and the growing number of consumers signing up to play at trustworthy online gambling web sites - reflect the maturation of online gambling into a multibillion-dollar industry. Congressman Leach himself told colleagues that Americans will bet $5.9 billion on Internet gambling this year, while the chief executive of a major online casino and sports betting firm estimates that 12.5 million Americans wager online.
 
  The shortsighted and unrealistic stance of the U.S. government fails to provide these consumers the same protections they get in real-world casinos, denies millions of dollars of business opportunity to U.S. casino companies and keeps Wall Street firms from participating in an expanding industry, whose public offerings on the London Stock Exchange have triggered lucrative underwriting businesses. Also, state governments have been deprived of millions of dollars in potential tax revenue that could accrue from legalization and regulation.
 
  Congressional opponents' unsubstantiated claims of online gambling as a hotbed for money laundering and terrorist financing - and for compulsive and underage gambling - have grown stale. The purported concerns of these politicians would be better served if they would work with responsible operators - including the regulated Las Vegas casino firms that would like to compete in this segment - to mitigate social problems and prevent access by minors. Isn't it time for Congress to realize that real protections will only be offered by licensing and regulation and not by prohibition?

  
Rick Smith is executive director and Keith Furlong is deputy director of the Interactive Gaming Council, a leading trade association, based in Vancouver, Canada, for the international interactive gaming industry, with membership operating or supplying services to most of the reputable gaming and wagering sites on the World Wide Web. Additional information about IGC, including membership details, can be found at the association's Web site, www.igcouncil.org.
  
    
 View from the UK
 
 Time for a worldwide meeting of the minds on e-gambling
  
   
  
  DeGaulle opposed until his death the idea that Great Britain belonged in an economic union of Europe. He wasn't thinking of gambling. But it may strike observers on both sides of the Channel as amusing that this should emerge as yet another issue where the UK's orientation toward open markets finds it at odds with several of its fellow EU states.
 
  Ironically, it was Britain's resistance to foreign competition that first compelled the European Court of Justice with the 1994 Schindler ruling to bring the Treaty of Rome into the debate over cross-border gambling. For in every important case to follow in the ECJ - Laara, Zenatti, Gambelli and more recently Placanica - it has been British or British-owned companies challenging protectionism on the continent and British operators that have been prominent in the assault on gambling monopolies in the European Commission. And all this during the tenure of a Labour government.
 
  With regard to e-gambling a similarly liberal stance is now central to the process of modernization and reform under way in the UK with the 2005 Gambling Act. British policy holds that the best way to keep crime and fraud out of remote gambling, and protect the vulnerable and the underage, is to invite operators to locate on British soil where they can be licensed, regulated and taxed. The legitimacy of licenses granted in this way is thus a matter of law, as is the right of licensees to market their services and take bets anywhere in the world. As this applies to the European Union it is in line with Britain's endorsement in principle of the idea that "services" should be permitted to move as freely as goods in the Internal Market according to the laws and regulations of their countries of origin.
 
  It hasn't simplified matters that this "country of origin" principle was soundly rejected by the European Parliament in its February vote on a directive to guide the EU on the issue of free movement of services. It hasn't gotten any simpler as a result of Italian legislation that recently went into force requiring Internet service providers to block e-gambling content from operators not licensed in Italy. It won't get any simpler should either the U.S. Congress pass a bill currently before it to formally outlaw Internet gambling in the United States or should other EU countries see fit to copy Italy's approach to protect their own monopolies from foreign competition.
 
  The delicacy of the situation is reflected in the following guarded responses by Anthony Wright, a spokesman for the Department for Culture, Media and Sport, the Cabinet-level ministry that directs UK gambling policy.
 
  What is Government's position on cross-border gambling as it relates to the "freedom of services" and "freedom of establishment" guarantees of the Treaty of Rome?
 
  Wright: The Government supports the right of British operators to seek establishment in other EU countries and to offer gambling services in those countries. The Gambling Act 2005 further enables remote gambling operators to be based in Great Britain and offer their services cross-border.
 
  What is Government's response to the EP's vote to exclude gambling from the Services Directive?
 
  Wright: The Government is currently considering the European Parliament's position on the Services Directive.
 
  The draft Services Directive has done away, at least in its wording, with the "country of origin" principle, which has been endorsed by the British Government in regard to cross-border services in gambling. Can DCMS elaborate?
 
  Wright: It would not be appropriate for us to discuss this draft until we have discussed it in the [European] Council of Ministers.
 
  British-owned or British-based bookmakers have been in the forefront of the legal battle to bring down protectionist and monopolistic barriers to cross-border gambling. What is Government's position in regard to their efforts?
 
  Wright: The UK welcomes and supports all British operators' efforts to increase cross-border trade. The British gambling industry enjoys a well-respected international reputation for integrity and high social responsibility standards. Strong regulation in new growth areas will further enhance our reputation and allow British operators to lead the global online market.
 
  What is Government's position on Italy's new Finance Act and its targeting of ISPs as a means to bar operators not licensed in Italy? Does the UK support the efforts of the British-based operators challenging this?
 
  Wright: It would not be appropriate for us to comment on another Member State's sovereign legislation. However, we are aware of the issues surrounding this case and will be keeping an eye on developments.
 
  The Finance Act is similar in spirit to efforts by the federal government of the United States and some U.S. lawmakers at the federal level to ban Internet gambling in their country? What is the UK's position on the right of British companies to provide Internet gambling services in the United States?
 
  Wright: Prohibition does not work. We believe that strong regulation is the best means of protection for consumers.
 
  Wright added, however, that other countries have been "very receptive" to Britain's call for a worldwide conclave later this year "to initiate a discussion about areas such as protection of children and the vulnerable, advertising, money laundering and criminal infiltration, where we believe there is a clear need for a set of minimum international standards."
 
  If this doesn't speak necessarily to a keener understanding in Britain that the rules of the game have changed irrevocably, there does seem to be a greater willingness in the UK to embrace the fact that in cyberspace, certainly, gambling is now one more complex issue among all the other complexities globalization implies.
 
  "Understandably, there are growing fears amid the explosion of poorly regulated online gambling and the lack of measures in place to protect children and vulnerable people. We share those fears," Wright said. "This is a global problem and requires a global solution."