SUBMISSION BY PROFESSOR JOE KELLY BEFORE THE TRADE AND
INDUSTRY PARLIAMENTARY PORTFOLIO COMMITTEE HEARING ON AMENDMENTS TO THE
NATIONAL GAMBLING ACT 2004
22 AUGUST 2007
Honourable chairperson and members of the
portfolio committee
I had intended to address this gathering
in person today on the matter of amendments to the National Gambling Act 2004,
in my capacity as a leading authority on gambling legislation, and in
particular legislation governing Internet-based or online gambling.
Unfortunately, medical circumstances have dictated that it is impossible for me
to travel to
I am a professor of business law at the
It is common knowledge that
But I fear that the Bill that has been
introduced to regulate online gambling contains several flaws that need to be
addressed before it passed into law, and wider processes of research and
consultation need to be followed. Problem areas cover a wide range of topics,
including issues of taxation, player protection, compliance with international
conventions and treaties, consideration of existing land-based casino
operations, pending international litigation around online gambling, problem
gambling, enforcement, licensing, certification, regulation of both local and
external interactive gambling operators, dispute resolution, solvency
guarantees, and the like.
It is imperative that, as with the
promulgation of existing legislation in 1996 and 2004,
I trust that my submission will assist
this honourable committee in formulating the best possible legislative
solutions to the regulation of online gambling for
Yours faithfully
Professor Joe Kelly
WRITTEN SUBMISSION
Introduction
The
It is essential that any interactive gambling
legislation comply with international treaties such as the World Trade Organisation,
as well as multi-national bodies such as the European Union. It is also
important that
It would be difficult for operators to develop a
uniform list of excluded countries. First, some countries only ban foreign
interactive horseracing or foreign lotteries in order to preserve a national
monopoly. Second, the countries which prohibit interactive gaming will rarely
take action against a foreign operator unless it has a physical presence in
that country. Those exceptions, such as
It is suggested that:
1. Any list
of prohibited countries concerning wagering from that country be a national
list
2. It not be
the function of the player to state he is not in violation of national law if
the player wishes to wager at South African licensed entity
3. Operators
have an affirmative duty to ensure that all players are at least 18 years old
4. A tax
rate of not more than 2 percent be levied on profits, which is separate from
annual licensing taxes or administrative levies
5. A dispute
resolution procedure be drafted, with the National Gambling Board (the “Board”)
being the agency of last resort
6. There is
language in the Act that would ensure the solvency of all operators
7. There be
a national self-exclusion list with a six-month minimum term
8. Provisions
be drafted that would require Board approval for any substantial licensing or
other material change of ownership
9. The Board
consider player utilisation of credit cards, as well as accounts from an
authorised financial institution
10. Internet
gambling should not enjoy advantages over the existing gambling industry
11. Illegal
casinos are prevented from masquerading as Internet gambling sites
12. Land-based
casinos that have already proven suitability and solvency be allowed to start
Internet operations with a minimum of red tape
13. External
operators must be subject to rigorous checks before being given approval
14.
Communication platforms must not be exclusive
15.
Interactive intermediaries be clearly defined
16. The good
neighbour policy be reconsidered
17. The law be
enforced
18. Hacking
and illegal transactions be prevented
19.
Outsourced providers be regulated
20. Online
player accounts be reconsidered
21. Duplications
of inspections be avoided
22. Personal
licences be simplified
Many countries regulate interactive gambling, but with
an amended Internet gambling law,
1.
Internationally,
there is not uniformity of approach in terms of regulating Internet gambling.
In addition, international agreements and treaties present challenges to
countries seeking to introduce regulation, and international litigation is pending
in this regard.
(a)
World
Trade Organisation
Sect. 1A. In
applying this Act, consideration may be given to —
(a) foreign
and international law; and
(b) international
conventions, declarations and protocols relating to gambling (National Gambling
Amendment Bill, proposed changes, July 26, 2007).
This would
mean that
37A(1) The Minister may, by
regulations made in accordance with section 87 and after considering the
criteria set out in this section, prescribe the maximum number of interactive
gambling licences that may be granted in the Republic.
(b)
European Union
The
European Union is presently in litigation or considering litigation against
about a half-dozen member states who want to restrict certain online gambling
to licensed national monopolies and keep out licensed gaming operators from
other member countries. The European Court of Justice, i.e. through its Gambelli and Placanica decisions, has also placed limitations on an Internet
gambling monopoly by any national EU member. Should
(11)
11A(e)(1) An interactive provider must—
(a) not
permit a person to participate in an interactive game unless that person…
(iv) obtain a statement confirming that a player is
not resident in a country that prohibits interactive gambling.
Very few
jurisdictions prohibit all interactive gambling. How can a player in the
(c) International reciprocity
(1) Suggested changes: List
of prohibited countries
The minister must
(11) 11A(2)(b) from time to time, publish a list of foreign countries
from which an interactive provider may accept accounts for the purpose of
movement of funds in the manner contemplated in subsection (1)(a)(ii).
While this
is beneficial in preventing suspicious transactions, it might make more sense
to publish a list of countries from which a South African operator may not accept players or accounts.
2.
Statement
by player of legality
(11) 11A(b) not
make interactive gambling facilities available to a player unless there has
been recorded, in the prescribed manner and form, in respect of that player —
(iv) a statement that the law of
the country within which the player primarily resides, does not prevent or
disqualify the player from playing interactive games.
Very
few jurisdictions prohibit the player from wagering (such as Hong Kong, the State
of
3. Underage declaration is insufficient
(11)
11A(b)(iii) a statement that the player is at least 18 years old.
It
is important that the operator obtain verification of proof of age, especially
since a crucial area of concern is the “protection of children” (Statute 1.6).
It would also be advisable to include a provision that any prize won by an
underage player would be forfeited and given to compulsive gambling education
(expand on Section 16(2) or be forfeited to the state (Section 16(4)). This is
especially important since
4.
Tax
It is
imperative that
In the
interests of fairness and consistency, and bearing in mind that they will
invariably have an advantage over land-based casinos because they will have far
less to pay in infrastructural development and maintenance and staff costs,
interactive operators should pay a rate of tax no less than those paid by
land-based casinos.
In addition,
consideration should be given to the taxation of both local and approved
external operators on all transactions undertaken with people in
5. Dispute resolution and complaint procedures
– are they adequate?
Sect.
9. Dispute resolution and complaint procedures
6B. (1) If there is a dispute arising out of an interactive game or any
matter in relation thereto, either party may, within the prescribed period,
refer the dispute to the board for resolution.
(2)
The board must resolve the dispute in accordance with the prescribed complaints
resolution procedure.
This would
be an administrative nightmare, with the Board becoming deluged with
complaints, often about a “bonus” promised by the operators. The operator must
have an internal complaint resolution procedure. Should the customer be
dissatisfied, he/she should be encouraged to refer the dispute to binding
arbitration conducted by an entity such as eCOGRA.
6. Purpose of the Act
Sect. 4.2A. The purpose of the Act is to---
add
section “J”
“ensure
that all licensed operators are financially solvent to ensure that winnings are
paid.”
This could
be accomplished by requiring a bond or surety of $100 000 (reserve
requirement). Nothing hurts the credibility of a jurisdiction as an operator
becoming insolvent.
Unlike land-based
casinos, operators will invariably not hold large physical assets that could be
attached in terms of insolvency actions. Guarantees must be put in place to
protect gamblers from being unable to claim winnings, and governments from
receiving taxes.
7.
Amendment
of Section 14 of Act 7 of 2004
14.
Section 14 of the principal Act is hereby amended by the substitution for
subsection (12) of the following subsection:
“(12) Every licensee authorised to make a gambling
activity available to the public must —
(a) make
available at all of its licensed premises and on its website —
(i)
the prescribed form to be used by a
person wishing to register as an excluded person in terms of subsection (1).
The Act
allows a prescribed person to cancel at any time. This might result in
interactive chaos. The period should be at least six months and once excluded,
the player should be prevented from playing by all licensed South African
operators.
8. Transfer of licence
There must
be provisions requiring an operator to obtain Board approval for any
substantial change in the ownership of the licence. This is especially
important to a player who should be given the option of cancelling his account
where there has been a substantial change in the ownership of the operator.
Thus, Section 20 should have 33(j) added, whereby Board approval would be
required for any substantial change in licence ownership.
9. Authorised Financial Institution
11A.
(1) An interactive provider must —
(a) not
permit a person to participate in an interactive game unless that person—
(i) has nominated an account held with an
authorised financial institution for the movement of funds into and out of the
player account; and
(ii) has set a limit on the funds that may be
transferred from that person’s nominated account into the player account, in
the prescribed manner, for the purpose of participating in interactive games;
This
is certainly a way of minimising any suspicious transactions or money-laundering.
However, Internet gamblers might not want a financial institution to be aware
they are gambling. Would not credit cards, unlike electronic cash, also be
effective in minimising suspicious transactions since they create a paper
trail?
10. Having a level playing field
Land-based
casino operators in South Africa have in the past 12 years undergone the most
stringent of vetting, are stringently policed, pay billions of rands in taxes annually,
have invested over R12-billion in infrastructural development, have met or
exceeded BEE targets, have established one of the world’s foremost responsible
gambling programmes, and managed to sustain over 30 000 jobs. Internet-based
gambling operations will by comparison offer few jobs and little in the way of
infrastructure development, allowing for better payouts. The potential for
drawing people away from land-based casinos, and risking all that has been
achieved so far, is great.
Therefore,
it would be fair to expect that Internet gambling operators should meet all the
stringent standards required of land-based gambling operations, as listed
above.
11. Preventing illegal casinos
12. Land-based casinos going online
Thought
should be given to established land-based casinos being allowed to establish
online gambling operations without having to undergo a fresh, and unnecessarily
bureaucratic, licensing process. As well as persons licensed by the Board and
approved external interactive operators, only persons who hold casino licences
issued by provinces should be allowed to offer Internet gambling.
13. Regulation of external operators
Like
South African-based operators, foreign-based or external operators should also
be subject to a strict approval process before being permitted to engage in
interactive gambling with people in this country. By the same token,
consideration should be given to subjecting external operators to all the
stringent requirements demanded to local operators in terms of BEE, probity,
taxation, regulation, job creation, responsibility, and so on.
14. Access to communication platforms
Online
gambling is possible in a wide variety of ways, from computers and modems, to
cellphones. A potential conflict arises should telecommunications providers
become involved in interactive gambling operations, and could derive unfair
benefits as a result, such as favourable rates or the prevention of access to
certain communication platforms by other interactive operators. Care should be
taken to ensure that such benefits do not occur.
15. What is an interactive intermediary?
The
Bill is incomplete on what constitutes an interactive intermediary, providing
only for providers who participate in the game. But what about games where the
provider is only the intermediary, and does not participate in the game?
16. Gamblers from areas that prohibit online gambling
The
Bill makes provision for not allowing persons in jurisdictions that prohibit
online gambling to register for South African interactive operations. Thought
should be given to revising this “good neighbour” provision, as it could bar
South African operators from accessing lucrative markets such as the US – at
their own risk.
17. Enforcement of the law
The
Bill should contain provisions to police any activity supporting unauthorised
gambling, and make existing provisions more enforceable.
18. Hacking and illegal transactions
Electronically-based
gambling operators are vulnerable to hackers and the corruption, intentionally
or otherwise, of software. The manipulation of software should therefore be
criminalised by the Bill, and provision made for any game played on corrupted
software to be declared void.
19. Outsourced providers
No
provision is made in the Bill for the official approval of providers to whom an
interactive operator has outsourced any specific operations. Without outsourced
providers being licensed or approved, proper regulation cannot be attained.
20. Online player accounts
According
to the Bill, each player will be required to have a bank account. Administratively
this could be very difficult, but it provides for the greatest security for the
player. Perhaps provision should be made for operators to hold an account into
which players can make deposits, provided they guarantee any liabilities on the
account,
21. Avoiding duplicate inspections
The
Bill proposes to amend the National Gambling Act so that the Board has
exclusive jurisdiction to inspect licensees. But the Bill is not specific about
interactive licensees only, and duplication of inspections concerning licences
issued and inspected by provinces could occur. This issue should be addressed,
as duplication is unnecessary and costly, and contrary to government policy.
22. Simplifying personal licences
There
are a few issues surrounding personal licences. Firstly, employees of
interactive gambling operations should be based in a single province, and
therefore it is not necessary for them to apply for national personal licences
unless they work in more than one province. Secondly, the proposal in the Bill
that the definition of “interactive gambling licence” includes employees, is at
odds with the rest of the gambling industry and should be reconsidered,
Thirdly, the Bill provides for two categories of national employee licence for
interactive gambling, whereas only one category exists for land-based gambling.
This should also be reconsidered,
Conclusion
It
is correct that Internet gambling be regulated. It is far better to have a situation
in which interactive operators can be properly and stringently policed, than
one in which they are a law unto themselves. It is clear that the proposed Bill
is well-intentioned, and seeks to apply the necessary regulation to interactive
gambling.
But
it is also clear that the Bill is not yet on target, and I have identified a
large number of issues that I believe need to be addressed before it is, Issues
such as taxation, licensing, external operators, enforcement, and standards. There
are many aspects that the Bill does not address or adequately address. There is
the ongoing problem of international litigation stemming from non-adherence to
international agreements. More research is needed into the commercial and
socio-economic impacts of regulating interactive gambling, and more
consultation between stakeholders needs to take place. Importantly, care should
be taken to prevent the legalisation of interactive gambling from putting
existing gambling operations at risk.
As
I have mentioned,
I
thank you.