INDUSTRY ANALYSIS
Internet Gambling -- Regulate or Litigate?

The U.S. government decided recently to negotiate with, rather than litigate against, the Caribbean islands of Antigua and Barbuda (both referred to as Antigua) over the issue of online gaming. This decision came about after the U.S. lost an arbitration proceeding under the trade dispute resolution process of the World Trade Organization (WTO) in March.

The arbitration arose out of a complaint by Antigua to the WTO in the aftermath of a U.S. move in 1998 to fight Internet gambling by bringing charges against Jay Cohen, an American then living in Antigua.

Cohen was the president of the World Sports Exchange (WSE), an Internet gambling Web site operated out of Antigua and licensed as such by the government in Antigua.

On returning home to the U.S., Cohen was charged by U.S. federal authorities with contravening the 1961 federal Wire Wager Act. The basis for the charges was that he had accepted bets and wagers on sporting events from a New York resident via the Internet and via telephone.

Complaint with WTO

Despite arguing that he ran a perfectly legal and regulated gambling Web site, he was convicted. Cohen lost his appeal in the 2nd U.S. Circuit Court of Appeals in New York, and subsequently the U.S. Supreme Court declined to hear his appeal. He was sentenced to 21 months in jail, which he served, and he was released earlier this year.

In the wake of Cohen's conviction, the government of Antigua filed a complaint against the U.S. at the WTO and claimed that the U.S. was not recognizing its own global trade commitments.

Specifically, Antigua alleged that the position held by the U.S. that gambling and betting services provided by operators in Antigua to persons located in the United States is illegal was in violation of American commitments under the General Agreement on Trade in Services (the GATS). The U.S. countered by arguing that the provision of gambling and betting services to the U.S. was not a part of its commitments under GATS.

A WTO arbitration panel upheld the complaint by Antigua. The panel found that Internet gambling restrictions imposed by the U.S. did, in fact, violate U.S. commitments under GATS. The panel also rejected Washington's defense that the United States never intended to include gambling services under GATS.

With the WTO decision under its belt, Antigua has temporarily suspended its legal action because the U.S. has decided to negotiate with Antigua rather than to litigate further.

Growth Industry

Estimates are that there are 1,800 Internet gambling operations, and almost all of them are outside the United States. One estimate is that the global Internet gaming market will grow from US$10 billion in 2002 to $14.5 billion in 2006.

With figures such as these, it is no wonder that a number of countries are joining the online gambling business as opposed to trying to fight it -- for example, earlier this year, the Philippines government authorized the set-up of an online casino, which will pay half its earnings to the Philippines government.

However, the question remains as to whether the biggest customer of online gambling operations, that is, the U.S., will follow this trend.

The better approach for the U.S. might be to regulate the industry rather than fight the inevitable fact that other countries, especially smaller nations, will try to benefit from this lucrative industry, especially in light of the WTO Antigua decision.