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Is Online Gambling Legal?

Throughout the course of the past two decades the global gambling industry has experienced an evolution, with technological advancements driving the industry toward new frontiers by spawning more efficient and effective alternatives for delivering gambling offerings and services. The most notable example is the development of “Remote Gambling”, which generally refers to offering wagering services to customers remotely by way of the internet or other communication devices. Remote Gambling has matured into a multibillion-dollar per year industry, with market penetration in virtually every corner of the world including the Canadian market. In mature and regulated markets, such as the United Kingdom, technological advancements continue to drive gambling operators and providers to expand the market by embracing and developing the potential of additional mediums, such as mobile devices, to reach end-users with their products, offerings and services. Mobile Gaming or “M-Gaming”, as it has become known, is a subset of Remote Gambling, and primarily refers to gambling or wagering on a mobile device, such as cellular phones or smart phones.

Foreign operated Remote Gambling operators have successfully penetrated and continue to target the Canadian market with their online or I-gaming products and offerings. However, unlike the other “legal” markets, the Canadian M-Gaming market remains untouched. It is uncertain whether or not the Canadian M-Gaming market will receive the same type of aggressive targeting that the Canadian Personal Computer (“PC”) focused Remote Gambling market has experienced. One might speculate that, given the high degree of success experienced by Remote Gambling operators in the Canadian market and the prevalence of Canadian cell phone and smart phone users, the Canadian M-Gaming market will experience the same targeted emphasis experienced by the PC based segment of the Canadian Remote Gambling market.

Despite the fact that the Canadian market does not license or regulate foreign operators and providers who provide their gambling facilities to Canadian end-users, the Canadian market remains attractive to these providers because of the low player acquisition costs and the legal viability of entering the market. Foreign owned and operated providers rely on what has become known as the “Foreign Operator Principle” to legally access and provide their services online to the Canadian market. Assuming that operators and providers who provide M-Gaming products and services will eventually target the Canadian market, it is equally likely that they will also rely on the same “Foreign Operator Principle” to justify the legality of marketing Canadian facing M-Gaming products.

 

“Foreign Operator Principle”

The “Foreign Operator Principle” is essentially a jurisdictional position which relies on Section 6 of the Criminal Code of Canada (the “Code”). Simply stated, the foreign operators who maintain their operations entirely outside of Canada and whose only contact with Canada is communicating with and allowing end-users located in Canada to access their servers and consequently their services, take the position that the gambling related provisions found in Part VII of the Code do not apply. They justify this position by suggesting that the requisite elements to make out an offence do not take place within the borders of Canada to the degree of connectivity necessary to warrant jurisdiction of the Code. In other words, foreign operators generally take the position that there is an insufficient legal nexus between their activities and Canada to warrant criminal indictments under the Code. A top level analysis reveals that it is likely that the same reasoning and conclusions are available to provide foreign operators with the legal justification to provide foreign operated M-Gaming offerings to Canadian Customers.

Generally speaking, subsection 6(2) of the Code provides that no person shall be convicted of an offence that was committed outside Canada. Barring certain statutory exceptions to this general rule, the inquiry into the determination of whether or not a given activity is “committed in Canada” and has the nexus required to attract jurisdiction necessitates an inquiry as to whether or not there is a “real and substantial link” between the elements comprising the offence and Canada. Underpinning the logic in support of the “Foreign Operator Principle” is the assumption that an end-user accessing gambling services from theircomputer within Canada is not enough to bring the activities of the operators within the jurisdiction of the Code. The determination of whether or not licenced Remote Gambling operators who maintain and communicate with Canadian customers via the internet is enough, on its own, to bring the activities within the jurisdiction of the Code has never been adjudicated upon by a Canadian Court, nor has any foreign Remote Gambling operator who provides such services been the object of a criminal prosecution by the Canadian authorities.

In addition to the absence of any targeted prosecution by the Canadian authorities, the position embraced by supporters of the “Foreign Operator Principle” derives further pragmatic support from the case of R v Starnet Communications (“Starnet”). In Starnet, Starnet International Inc (“SCI”), a company incorporated in the United States of America, was the target of a prosecution and pled guilty to being in contravention of s.202(1)(b) of the Code. This case is most notable to supporters of the “Foreign Operator Principle”because it demonstrates the Crown’s position as it relates to prosecuting online gaming companies by illustrating their willingness to target operations that mainly take place within Canada, and a corresponding lack of prosecutorial interest in pursuing foreign operated entities. It is not insignificant that this entity maintained servers in Canada, which facilitated gaming by hosting the applications, software and payment mechanisms. In addition, despite a multi jurisdictional corporate structure, the vast majority of employees and operations were located within Canada. Following the plea agreement, the business moved the operations entirely overseas to the UK where its existence could be legally based and was never thereafter the subject of any further prosecution from the Canadian authorities.

Foreign operators draw further pragmatic support from the Observations to the Fourth Report of the Standing Senate Committee on Legal Affairs (Bill C-13), which resulted from a dialogue between Mitchell Garber, the then CEO of PartyGaming PLC and the Standing Senate Committee on Legal and Constitutional Affairs. Amidst concerns that Bill C-13 was a misguided attempt to extend jurisdiction of the Code to foreign operated remote gambling operators, Mitchell Garber testified before the Senate Committee, seeking clarification of whether the amendments proposed in the Bill were meant to apply to licensed offshore Remote Gambling operators who maintained Canadian Customers. Garber advanced the position that the proposed amendment was not to have an “extraterritorial” effect in his testimony given on November 29 and December 6, 2007.

Ultimately the Standing Senate Committee acquiesced to the position taken by Garber regarding a potential “extraterritorial effect” which was debated, prior to the passing of the Bill amending Subsection 202(1)(i) of the Code. The Senate Committee made it clear in the legislative summary to BILL C-13 that the amendment was not enacted to extend jurisdiction or to have an “extraterritorial effect”. The purpose of the amendment, which effectively removed the provisional references to “radio, telegraph, telephone, mail or express” was to update the provision to reflect the new types of media available forcommunicating and not confine the application of the provision to communications of the type previously listed, therein.

 

M-Gaming and the Foreign Operator Principle

When discussing jurisdictional coverage of the Code, it appears that there may be no distinction of legal relevance to be made between I-gaming operators who provide and target their software and services to PC based customers and those that provide their software and services to customers utilizing a mobile device such as a smart phone or cell phone. From a jurisdictional point of view, both foreign PC based I-gaming operated providers and foreign operated M-Gaming providers have the same degree of nexus with Canada, inasmuch as they both communicate with Canadian customers. In most cases, the services are delivered in the same way; the only real difference would be that mobile phones access the internet, and consequently the services and software, through a network carrier and PC based users access the services through an Internet Service Provider (“ISP”). Assuming for the moment that in both cases the software delivered to the unit, whether the unit is a PC or cell phone, is sourced from servers overseas and that all gambling related transactions occur on the same servers, the “Foreign Operator Principle” would apply equally and its legal strength would be the same in both cases.

It is worth noting that the assessment of whether or not the Code has jurisdiction will always be highly contextual and depend on the circumstances and facts confined to each case. Thus, where a foreign operator conducts their business in a way that may add a degree or additional layer of connectivity with Canada, on top of merely maintaining Canadian customers, it is important to reassess the risks of falling within the jurisdiction of the Code and attracting criminal liability. In addition, it is vital that all gambling operators remain cognizant of the political sensitivity of the industry as a whole as it remains clear that some countries and jurisdictions, including Canada, have yet to adequately address the concerns surrounding Remote Gambling and that legislative enactments which have a substantial impact on the industry are subject to the changing winds of political climates.

Authored by Brian Thomas Hall and Cookie Lazarus.

Brian Thomas Hall is an Associate Partner at Lazarus Charbonneau.