Maretha Eksteen
BA LLB
Legal adviser, Boland PKS, a division of BoE Bank Limited
Introduction | Legislation | The jurisdictional issue | Affected parties | Enforcement | Conclusion | Author biography
1. Introduction
1.1 Statistics

Just three of the literally hundreds of web sites that currently offer some form of gambling on the Internet are www.casinobar.com, www.greatlakescasino.com and www.castelcasino.com. The potential reach of online casinos is tremendous, taking into account the number already in existence (and this number is constantly growing), together with the fact that the number of people having access to the Internet increases daily.

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The growth of the Internet, both in respect of the number of web sites and the number of users, is such that any statistics or forecasts are of little use, because no sooner have they been published than they are overtaken by actual figures and events. For the purposes of this chapter it suffices to say that Internet gambling affects millions of people world-wide, be it in their position as gamblers, casino operators, Internet service providers (ISPs), banks, government officials or otherwise.
1.2 The legal position before Internet gambling
Gambling has always been a controversial issue and views on the topic differ, from gambling being regarded as a social evil to its being seen as a perfectly acceptable activity. But whatever your personal view on the issue is, gambling has traditionally been either prohibited, or when allowed, heavily regulated by governments around the world. In the United States for example, gambling is prohibited in most states and in the few states where it is allowed, it is strictly regulated by law, and these laws are scrupulously enforced.

In South Africa there has been a complete prohibition on gambling until very recently. Under new legislation gambling is allowed, but as is the case in the United States, it is subject to heavy regulation.

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Before Internet gambling appeared on the scene, it was fairly easy to catch offenders and to enforce gambling legislation. The Internet has turned the entire situation upside down.
1.3 The problems presented for the law by Internet gambling
Gambling on the Internet presents several problems for the law. Since gambling has always been a heavily regulated industry, it is probably appropriate to mention its regulation as the first problem. How do you regulate something that takes place on a medium that knows no national borders and that relies on technology that the law simply cannot keep up with, especially when the issue at stake is something that no-one seems to be able to agree on?
 
Another question that arises is that of jurisdiction. Who has jurisdiction if the casino operator is situated in one country, the ISP in another, the bank/settlement house in another and the gambler in yet another country?
 
But probably the biggest problem presented by the Internet is that of enforcement. This problem has two different aspects. The first is the problem of policing the Internet in order to catch offenders. The content of web sites will have to be inspected to catch online casino operators and Internet access and use will have to be monitored to catch online gamblers. This raises the issue of privacy and to what extent it may be invaded (see further chapter 13). The second aspect of the enforcement dilemma can be summarised in the
following question: Once jurisdiction has been established and an order obtained, how do you enforce such an order against someone who lives or operates in another country?
 
These issues, and where possible suggested solutions or answers, are discussed in more detail below.
2. Legislation
2.1 International
When gambling opportunities first became available on the Internet, attempts were made by some attorneys general in the United States to prohibit or regulate it under existing legislation. Most notable of these was the federal Wire Act, which determines:
“Whoever being engaged in the business of betting or wagering knowingly uses a wire communication facility for the transmission of interstate or foreign bets or wagers, or information assisting in the placing of bets and wagers, on any sporting event or contest, or for the transmission of a wire communication which entitles the recipient to receive money or credit as a result of bets or wagers, or for information assisting in the placing of bets or wagers, shall be fined under this title or imprisoned not more than two years or both.” 1

As can be expected, there are difficulties in applying these provisions to the Internet. For example:

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  • It can be argued that the intention of the above legislation was to refer only to telephone communication (the Act was passed in 1961, long before the advent of the Internet).
  • The question arises whether the creation of a web site on the Internet constitutes “transmission” under the above section.
  • Only the casino operator can be prosecuted under this section, not the gambler, and the casino operator is usually the one situated outside the United States.
In 1996 both the United States Senate and the House of Representatives overwhelmingly approved the creation of a commission to study the effects of gambling, and Internet gambling in particular, and to recommend appropriate measures to Congress.
 
As a result of the above the United States Senate passed a bill in July 1998, approving the Internet Gambling Prohibition Act of 1997 by a vote of 90 to 10. In October 1998 the Senate Judiciary Committee also approved the Act after making certain amendments and it now only awaits the approval of Congress before coming into operation.

Section 474 of the Internet Gambling Prohibition Act provides that it:

“shall be unlawful for a person to place, receive, or otherwise make a bet or wager, via the Internet or any other interactive computer service in any State”.

This applies even in states where gambling is legal and thus constitutes a total prohibition of Internet gambling. The Act also addresses the issue of jurisdiction and will have the effect that international casino operators may be subject to liability in the United States.

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Lessani How much do you want to bet that the Internet Gambling Prohibition Act of 1997 is not the most effective way to tackle the problems of online gambling? (1998) at http://www.gseis.ucla.edu/iclp/alessani.html

In the meantime, the state of Nevada has already passed a law that specifically bars its residents from placing or accepting bets over the Internet.2

In direct opposition to the trend in the United States, a growing number of countries, including Australia, New Zealand, Liechtenstein, Gibraltar, Antigua and Costa Rica, have decided to legalise and license Internet gambling.
2.2 Local
In the United States chance is considered to be one of the elements of gambling, with the result that games of skill do not fall within the definition of gambling. In South African legislation, however, the definition of gambling is much wider. According to the National Gambling Act3, a “gambling game” means:
“any game, whether or not the result of it is determined by chance, played with playing cards, dice, gambling machines or gambling devices for money, property, cheques, credit or anything of value...”4

The National Gambling Act5 does not define a “gambling device”. It was, however, defined in the Gambling Act6, which has since been repealed. Because of this lack of definition in the National Gambling Act7, we can look at the definition as it appeared in the Gambling Act8 for guidance. In that Act a “gambling device” was defined as:

“any equipment or mechanical, electro-mechanical or electronic device, component or machine, used remotely or directly in connection with a gambling game and which brings about the result of a wager by determining win or loss”.9
I am of the opinion that it can be argued that Internet gambling that takes place within the borders of South Africa would fall within the scope of the above definition.
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The National Gambling Act,10 however, only provides broad guidelines in respect of the regulation of gambling and it is up to each province to adopt its own gambling legislation to give effect to the national legislation. The Western Cape Gambling and Racing Law11 and the KwaZulu-Natal Gambling Act12 are examples of such provincial legislation. The provincial Acts all make provision for a certain number of gambling operations to be allowed in the province, subject to the issuing of a licence by the relevant authority.
2.3 Money laundering

Under severe international pressure, South Africa has been forced to adopt anti-money laundering legislation. So far one Act has been promulgated, namely the Prevention of Organised Crime Act13 (replacing the Proceeds of Crime Act14). In terms of this Act15 any person who suspects or reasonably ought to suspect that money is the proceeds of unlawful activities, has an obligation to report the suspicion to the relevant authorities.

Get the Prevention of Organised Crime Act at
http://www.polity.org.za/govdocs/legislation/1998/index.html

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Gambling is an ideal mechanism for laundering money and this becomes even more so in the case of Internet gambling, because of the anonymity of dealing over the Internet. Several parties involved in an Internet gambling operation may be in a position to form a suspicion in respect of a specific transaction, for example the casino operator and the bank/settlement house. In the event of Internet gambling being held to be unlawful, the proceeds won in respect of it would also fall within the scope of this Act16.

Potential liability under the Prevention of Organised Crime Act17 is therefore not excluded when dealing with Internet gambling. And more anti-money laundering legislation is pending, in terms of which any transaction of a value above a specified amount will have to be reported.
3. The jurisdictional issue
One of the critical issues in the debate about Internet gambling is the question of jurisdiction. Who has jurisdiction when the casino operator is situated in one country and the gambler in another? Where does the gambling take place?
 
The casino operators’ argument is that they set up a casino (or the server on which an online casino is run) where gambling is legal and where they have the approval of the local authorities. Gambling at such a casino is therefore perfectly legal. Internet gamblers are able to place bets at this casino via the Internet and are therefore gambling at the site where the casino is situated. The casino is only bound by the laws and regulations of its host country. Placing bets cannot be illegal because, despite where they originate, bets are technically placed at the casino, which is legally licensed and taxed by the host government.
 
But is the answer that simple?
 
One of the first cases to deal with jurisdiction in the context of the Internet was that of Playboy Enterprises Inc. v Chuckleberry Publishing Inc.18 in the district court of the state of New York. The plaintiff, Playboy Enterprises, had obtained an interdict against the defendant in 1981, prohibiting it from distributing its Playmen publication anywhere in the United States, because the title of the defendant’s publication was found to be confusingly similar with Playboy’s well-known publication and established trademark.

Fifteen years later, in January 1996, the defendant created an Internet web site using its “Playmen” mark. The site was created and the server located in Italy. Playboy Enterprises filed suit in the United States, arguing that the defendant had violated the 1981 interdict by distributing its publication on the Internet.

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The court assumed jurisdiction and found in favour of Playboy Enterprises. The court’s decision was based on the argument that anyone in the United States with access to the Internet had the capacity to access the Playmen site and to view and download its pages. The court found that the defendant’s distribution of its publication on the Internet, together with its invitation to users in the United States to look at and download the images, amounted to distribution in the United States and therefore a violation of the 1981 interdict.
 
Probably the first case to deal with the issue of jurisdiction in the context of Internet gambling was the case of State of Minnesota v Granite Gate Resorts Inc.19 The Minnesota attorney general sought an interdict against the defendant in respect of its advertising of sports betting on the Internet. The defendant filed a motion to dismiss for lack of jurisdiction.

The defendant is a Nevada corporation, which operates only on the Internet, with its server located in Belize. In order to determine whether the court had jurisdiction, the question to be answered was whether the defendant was purposely availing itself of the market in Minnesota by its Internet advertisement activities so as to give the court jurisdiction.

Get the Granite Gate judgment at
http://zeus.bna.com/e-law/cases/granite.html

Due process in the United States requires that a non-resident have minimum contacts with a state in order for that state to have jurisdiction over such non-resident. In this case the court found the following factors to be sufficient to establish minimum contacts:

  • The advertisement on the defendant’s web site was available 24 hours a day, seven days a week and 365 days a year to any Internet user, including residents of Minnesota.
  • The web site was interactive in that it required a response from the Internet user and the records of the defendant showed that the site had been accessed by Minnesota residents and that they had responded to its solicitation.

The principle emerging from the case is that if, in addition to the accessibility of an Internet web site, there is some other contact with the state in question, it is enough to justify the court exercising jurisdiction over a foreign defendant. The decision of the circuit court was upheld on appeal.20

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The case of State of Missouri v Interactive Gaming & Communications Corp21 is yet another example of a United States court assuming jurisdiction over a defendant situated outside the borders of the particular state, but offering gambling opportunities on the Internet to, among others, residents of the state of Missouri.

The court found that it had jurisdiction over the defendant because the gambling was accessible to Missouri residents and was indeed used by a number of them. When calling a toll-free number provided on the web site, callers were advised that the gambling was legal (even for Missouri residents). The defendant’s defence that the gambling was offered by an offshore subsidiary, which placed it outside the reach of United States law, was not accepted.

Get more detail on the Interactive Gaming judgment at
http://www.phillipsnizer.com/int-art77.htm

Although South African law does not recognise the doctrine of minimum contacts in the context of jurisdiction, the United States case law discussed above gives an indication of the direction in which the law relating to jurisdiction in Internet-related matters is moving. It also sends a clear message to casino operators that set up shop in a country where gambling is legal – you are not necessarily outside the reach of the long arm of the United States legal system.
4. Affected parties
4.1 The casino operator
The United States case law makes it very clear that a casino operator may be subjected to the jurisdiction of a court in the United States, irrespective of where it is situated and where its server is located.
 
A casino operator, operating from South Africa, will also be subject to South African gambling legislation, both national and provincial, and will be exposed to the sanctions provided for in the legislation if it does not comply with licensing requirements.

Even when a casino operator is licensed to operate in a specific province in South Africa, such casino operator may find it difficult to recover gambling debts due to it in the courts in another province. This is evident from the decision of the Durban and Coast Local Division of the High Court in Sea Point Racing CC v Wilkinson.22

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In this case the applicant, a Cape Town-based bookmaker, sought to recover gambling debts from the respondent who was a businessman based in Durban. In terms of the common law a gambling debt is an obligation which is valid but not recoverable through the courts. The common law was, however, altered in this respect by legislation in both the Western Cape23 and KwaZulu-Natal,24 whose legislation respectively provides as follows:
“any debt lawfully incurred by a person after the commencement of this law in the course of gambling shall, not withstanding the provisions of any other law or the common law, be enforceable in a court of law”
and
“any gambling debt lawfully incurred by a person after the commencement of this Act shall be enforceable in a court of law.”
Notwithstanding the above provisions, the court held that the legislation in one province cannot affect the law as it applies in another province and the court therefore refused to enforce the gambling debt, which arose in the Western Cape, in KwaZulu-Natal. The court reached this decision even though the KwaZulu-Natal legislation contains a similar provision to that of the Western Cape. According to the court the KwaZulu-Natal legislation only applies to
gambling within that province.
 
It appears from the above that over and above all the problems a casino operator is faced with in respect of jurisdiction, such operator also faces an additional problem, namely that of the enforcement of gambling debts.
4.2 The bank/settlement house
The Western Cape Gambling and Racing Law,25 as an example of South African provincial gambling legislation, contains the following provision:  
“No person shall, without a licence, ... be directly or indirectly involved in the operation of any gambling business.”26

The inclusion of the word “indirectly”, in my opinion, makes the provision wide enough to include a bank that provides either of the following services to an online casino operator:

  • a loan which enables the casino operator to establish and/or run the online casino
  • settlement of gambling transactions between the casino and gamblers and vice versa
In addition to the above, the Act27 also provides as follows:
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“No person shall be exempt from liability under any provision of this Law in respect of any thing done by him or her or authorised or permitted by him or her to be done in the Province in connection with any gambling game or betting merely by reason of the fact that the management or conducting thereof is in whole or in part carried on at some place outside the Province.”28 (our emphasis) 
A bank may therefore be held criminally liable for being indirectly involved in the operation of a gambling business, irrespective of where the server of the online casino is situated. The gambling legislation of some of the other provinces contains similar provisions.

The same applies in respect of certain states in the United States. The attorney general of the state of Minnesota has, for example, issued a public statement in this regard, declaring that:
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“Internet access providers and credit card companies that continue to provide services to gambling organisations after notice that the activities of the organisations are illegal would be subject to accomplice liability.”29
4.3 The Internet service provider (ISP)
The comments made above in respect of the position of a bank or other form of settlement house that assists an online casino operator in the operation of its gambling business, albeit indirectly, also apply to an ISP that provides services to an online casino operator.
4.4 The gambler
The Internet user who gambles at an online casino does so entirely at his/her own risk. But what does this risk involve?
 
First of all the gambler may be held criminally liable if the gambling is found to be in breach of the gambling legislation of the jurisdiction where he/she resides. Second, if the gambling is held to be illegal, the gambling transaction will not be enforceable and the gambler will not be able to claim his winnings if the casino operator refuses to pay. Neither will the gambler be able to claim back money deposited with the casino operator or elsewhere (for example in the casino operator’s offshore bank) for the purpose of buying casino chips.
5. Enforcement
As can be seen from the United States case law discussed above, as well as the pending Internet Gambling Prohibition Act, the United States is determined to enforce its gambling legislation, irrespective of the problems presented by the Internet. But it remains to be seen if this quest will be successful. Technology provides one of the greatest obstacles to effective law enforcement. The sophistication of new technology, such as encryption technology, renders detection of violations over the Internet extremely difficult. And when detected, the jurisdictional hurdle must still be overcome.
 
Another problem that will hamper effective enforcement of the law is the lack of uniform regulation, with some jurisdictions banning Internet gambling and other jurisdictions encouraging it.
6. Conclusion

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The attempts by the United States to outlaw Internet gambling, and the persistence of the United States courts to enforce gambling legislation, make the future of Internet gambling very uncertain. This uncertainty extends even to Internet casinos operating legally in a country where gambling is allowed, because, as has been shown, even those casino operators may fall within the jurisdiction of United States law. 

There are still strong movements asking for either the complete deregulation of the Internet, or alternatively, for Internet gambling to be legalised but regulated. It seems clear, however, that at least for the time being, the United States is adamant not to follow any such approach.
 
As has been shown, existing gambling legislation in South Africa also makes it illegal to set up an Internet gambling operation in this country.
 
But, in spite of all the legal obstacles, I believe that Internet gambling is here to stay. With the problem of enforcement being a harsh reality, limited legalisation with accompanying regulation may yet prove to be the better answer.
Author biography  

Maretha Eksteen matriculated from Swartland High School in Malmesbury in 1988. In 1993 she completed her BA LLB at the University of Stellenbosch. She then spent one year in the United States and thereafter completed her articles at Van der Spuy & Partners in Cape Town. She has been a legal adviser at Boland PKS, a division of BoE Bank Limited, since the beginning of 1997 and concentrates on information technology and Internet law. She is currently doing her LLM degree on a part-time basis at the University of Stellenbosch.

 
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  1. Title 18 United States Code Section 1084(a) (1995) (Back)
  2. NRS Ch 465 section 9
  3. Act 33 of 1996
  4. Section 1 of Act 33 of 1996
  5. See 3 supra (Back)
  6. Act 51 of 1965
  7. See 3 supra
  8. See 6 supra
  9. Section 1 of Act 51 of 1965
  10. See 3 supra (Back)
  11. Act 4 of 1997
  12. Act 10 of 1996
  13. Act 121 of 1998
  14. Act 76 of 1996
  15. See 13 supra (Back)
  16. See 13 supra
  17. See 13 supra
  18. 1996 WL 337276 (SDNY); 1996 WL 396128 (SDNY)
  19. No C6-95-7227 (DC Ramsey County Mo 1996)
  20. No C6-95-7227 (Minn Ct App Sept 5, 1997) (Back)
  21. CV97-7808 (Cir Ct Jackson Co Mi May 22, 1997)
  22. (1999) 2 All SA 626
  23. The Western Cape Gambling and Racing Law, 4 of 1996
  24. The KwaZulu-Natal Gambling Act, 10 of 1996
  25. See 11 supra (Back)
  26. Section 67 of Act 4 of 1997
  27. Act 4 of 1997
  28. Section 72 of Act 4 of 1997
  29. Statement of Minnesota Attorney General on Internet Jurisdiction