Original URL: http://www.theregister.co.uk/2006/11/21/antigua_wto_bet/

Tiny Antigua grabs the US by its illegal, online dice

Fighting for survival and poker

By Burke Hansen

Posted in Media, 21st November 2006 16:59 GMT

Analysis The Unlawful Internet Gambling Enforcement Act of 2006 was rammed through Congress by the Republican leadership in the final minutes before the election period recess. According to Sen. Frank R. Lautenberg (D-NJ), no one on the Senate-House Conference Committee had even seen the final language of the bill. The Act is title VIII of a completely unrelated bill, the Safe Port Act, HR 4954, dealing with port security - Professor I Nelson Rose of Whittier Law School, Gambling and the Law: The Unlawful Internet Gambling Enforcement Act of 2006 Analyzed

Has the time actually come for Congress to read its own legislation?

In the wee hours before Congressmen could head off for their election year recess, they managed to churn out a mound of unread anti-gambling legislation. In their haste to vacate, the lawmakers added fuel to a smoldering trade dispute between the tiny island paradise of Antigua and the superpower to the north. While the conflict centers around online gambling, it could well end up disrupting the businesses of companies such as Microsoft and Google, if the US is unable to fend off the bully Antigua.

The legislation in question primarily sought to restrict access to online gaming sites for American players by criminalizing financial transactions between American financial institutions and the sites in question. It has, however, had the unintended consequence of strengthening Antigua’s hand in its dispute with America before the World Trade Organization (WTO) over the supply of cross border gambling services. As Mark Mendel, Antigua’s lead attorney in the case explained to El Reg:

The new legislation strengthens our arguments that the US permits domestic remote gambling but not foreign remote gambling, as it has a number of ‘carve outs’ for domestic operations that cannot apply to foreign ones. It is just further evidence of the discriminatory effect of US laws and the [American] government’s enforcement of them.

In its hurried attempt to penalize the foreign-based online gaming outfits without offending the American-based horse racing and Indian casino industries, Congress managed to bring into bold relief the crux of Antigua’s claim against the United States – namely that American law treats foreign suppliers of gambling services differently than its own. Such equitable treatment between trading partners forms the backbone of the WTO, and, if Antigua has its way, American intellectual property owners will ultimately pay the price for the American government’s refusal to open its market to at least certain types of internet gambling.

Cohen’s Flight

The history behind the long and bitter battle Antigua has waged for access to the American gambling market begins with the unfortunate story of Jay Cohen - the onetime president of the World Sports Exchange (WSE) (an online gambling outlet based in Antigua) - who has become the poster child for all that is wrong with American gambling law.

Prior to founding the World Sports Exchange, Cohen had been gambling legally for years in the United States, earning a lucrative living as an options market trader on the floor of the Pacific Stock Exchange in San Francisco. In 1996, Cohen resigned his position and moved to Antigua, where by early 1997 he and business partner Steve Schillinger had an online gaming operation up and running.

Cohen modeled his business on New York State’s Offtrack Betting Corporation, which operates under an exception to the federal government’s anti racketeering Wire Act. That exception allows the use of interstate phone lines for the placement of bets provided that the wager is legal in both jurisdictions - where the bet is made and where it is received. For instance, someone in Atlantic City, New Jersey can place a wager with someone in Las Vegas, Nevada since gambling is legal in both jurisdictions.

That same reasoning underpins the Interstate Horseracing Act, a civil statute that allows interstate wagering on horseracing. With gambling legal in Antigua at his headquarters, Cohen claimed cover under the exception to the Wire Act. He also believed that all of the servers were located in Antigua, which meant that his business was outside of US jurisdiction.

Not surprisingly, the Department of Justice saw the situation a bit differently. In 1998, the US Attorney for the Southern District of New York indicted Cohen and 21 others for violation of the Wire Act. The indictment claimed that the advertising by WSE in American newspapers and magazines provided sufficient jurisdiction to bring Cohen under American law.

In an effort to clear his name and legitimize the online gaming industry, Cohen voluntarily flew to New York City to fight the charges against him. The judge tossed his jurisdictional objections at his preliminary hearing, and a jury convicted Cohen on all counts. The onetime nuclear engineering student at Berkeley became the first person to be convicted in the United States for running an internet gambling business, while his former business partner Schillinger remained in Antigua, a fugitive from US law.

There was, however, a twist.

During his trial and subsequent appeals, Cohen’s arrest and conviction became something of a cause celebre in the online gaming world. Shortly after arriving at the Federal Penitentiary in Nellis, Nevada, Cohen received an anonymous letter arguing that American gambling laws were not in compliance with the WTO’s General Agreement on Trade in Services, which had come into effect three years earlier. The United States, which had been the driving force behind the GATS trade talks in the first place, suddenly and awkwardly seemed to be out of compliance with the very trade agreement it had fought so hard to enact. Faced with the indictment of twenty or so leading businessmen, Antigua’s legal team took action.

Pull out your GATS

The first GATS case based entirely on trade in services to go before the WTO for arbitration would prove strange indeed.

The WTO panel convened by Antigua back in 2003 concerned itself with a variety of Federal and State legislation covering gambling and the use of various means of electronic media to place wagers, most notably the same Wire Act that provided the Feds cover to go after Jay Cohen and the WSE in the first place. Antigua claimed in its initial filing that the US was in noncompliance with the requirements for trade reciprocity set out in the GATS since it allowed gambling within its borders while prohibiting foreign providers from accessing the enormous American market.

The Panel Report that followed ruled that the US had in fact agreed to be bound by the cross-border provision of gambling services, that it was in violation of those agreements, and that noncompliance could not be justified by recourse to Article XIV of the GATS, which allows a country to opt out of trade that would violate local morals or taboos, or endanger public health or safety. This same exception allows Muslim countries to ban the import of alcohol.

Whether such an argument has any merit is debatable - according to a recent report in the LA Times, only 4 per cent of Americans wagered online last year, compared with 25 per cent who visited a “brick and mortar” casino. Such statistics would seem to belie any argument that the online character of the gaming services offered by countries like Antigua offers a particularly pernicious threat to public morals.

Nevertheless, the US appealed under Article XIV, and the Appellate Body with some degree of modification upheld the rulings of the original panel, although it did note that were the US to make all remote or interstate gambling illegal, it would be able to fall back on Article XIV as an affirmative defense and prohibit foreign suppliers from offering gambling services. It’s all about reciprocity, you see.

Then the stalling began. The US insisted that new legislation would need to be drafted, and that it would need 15 months to come into compliance, even though prior to the prosecution of Jay Cohen in 1998 it was the official opinion of the DOJ that internet gaming was not covered by the Wire Act. Over Antigua’s objections, the US was given until April 3, 2006 to comply with the ruling.

April 3, 2006 came and went.

We are the Deciders

As only the United States can, it simply ignored the ruling and then redefined the meaning of compliance. The Recourse to Article 21.5 of the DSU by Antigua and Barbuda, submitted recently by aforementioned Antiguan counsel Mendel, notes that this was the first time in WTO history “that an implementing party (WTO lingo for the losing party in a dispute) has announced itself in compliance with the recommendations and rulings of the Dispute Settlement Body of the WTO (the “DSB”) without having done anything at all.” (Emphasis theirs)

Then came the final indignity - legislation pushed through under cover of night that not only ignored completely the WTO ruling regarding reciprocity for trade in services, but eviscerated the financial guts of the entire industry.

This Port Act is out of control

The Unlawful Internet Gambling and Enforcement Act of 2006, as the notorious amendment to the Safe Port Act is officially known, not only restated the validity of the Wire Act and the IHA - the problematic laws that had provided the basis for Antigua’s victories before the original WTO panel and on its subsequent appeal - but the new legislation also lashed out at ISPs, advertisers, and just about anyone who would benefit in any conceivable way from online gambling.

According to experts on gaming law, the vague language of the poorly drafted (and apparently unread) bill has greatly expanded the scope of who may be criminally liable for internet gaming transactions. In its eagerness to squeeze the online gaming market, while at the same time protecting horse tracks, riverboat gambling operations and Indian casinos at home, Congress cast a wide net over just what behavior is covered by the legislation - all the better to keep everyone in line. After all, since it is impossible for the US to exercise direct jurisdiction in places like Antigua or Costa Rica, why not go after the low hanging fruit it does have direct jurisdiction over?

As Professor I. Nelson Rose, an internet gaming law expert at Whittier Law School in Southern California, puts it,

The greatest danger here would seem to be with affiliates. Any American operator can be easily grabbed. This includes sites that don’t directly take bets, but do refer visitors to gaming sites. If the affiliate is paid for those referrals by receiving a share of the money wagered or lost, it would not be difficult to charge the affiliate with violating this law, under the theory of aiding and abetting. Being a knowing accomplice and sharing in the proceeds of a crime make the aider and abettor guilty of the crime itself. The federal government could also charge the affiliate with conspiracy to violate this new Act.

The other danger lies with search engines. Although California-based Google does not take paid ads, punching in “sports bet” brings ups many links to real-money sites. This new Act expressly allows a federal court to order the removal of “a hypertext link to an online site” that is violating the prohibition on money transfers. But what prosecutor would want to be ridiculed internationally for trying to prevent Google from showing links?

In spite of the broad stroke of the legislation, its primary focus is clearly to scare American companies away from having anything to do with offshore gaming companies, rather than actually prosecuting anyone. Nonetheless, it is only a matter of time before a federal prosecutor tests the limits of the act. Last week, the Queens’ District Attorney’s office, after a major internet gambling bust in New York City, announced that it was including the web design company that designed and set up the gambling site in the network of conspiracy and racketeering charges against the principals. The ISPs that hosted the site and the software companies that supplied the software are also under indictment.

Chris Costigan, the publisher of the gambling news site Gambling911.com, noted to El Reg that the New York City investigation into the gambling site Playwithal.com predated the Congressional legislation, but it’s hard not to see the federal prosecutors in the Southern District of New York licking their chops at the thought of the extra leverage provided by the possibility of casting an ever expanding Federal net.

Although the fear of doing federal prison time is a powerful disincentive for those under American jurisdiction, the economic squeeze on the internet gaming industry has also had the desired effect on what was Antigua’s second largest industry after tourism. The LA Times noted recently that more than 3,000 people in Antigua and Barbuda, or 10 per cent of the workforce, have lost jobs since the late 1990s, when U.S. politicians and social conservatives set their sites on taking down the online gaming community. Antigua’s gambling revenue, which topped out at $90m in 1999, fell to $20m last year. Only 44 of the 200 online gambling companies registered in Antigua since 1994 are still toughing it out after the recent collapse in online gaming activity in the wake of the recent American legislation.

Early next year, when the Dispute Resolution Body finally finishes with each side’s arguments, Antigua will undoubtedly win its claim that the US is still noncompliant with the prior WTO rulings in the case, but the question of how to compensate Antigua for its economic losses remains. What kind of leverage does a small country like Antigua and Barbuda have against the last superpower?

Under one provision of the WTO, a party is allowed to suspend its obligations (“concessions,” in WTO-speak) to another signatory if sanctions alone prove insufficient, and Antiguan authorities are already talking of following the example of Ecuador, which threatened to start selling black-market copies of EU merchandise, if the EU refused to comply with the original panel ruling on banana tariffs. Indeed, the EU and Japan have filed briefs supporting the Antiguan position.

That darling of the American political class, enormous American based intellectual property rights holders, such as Microsoft or Universal Studios, will be sore if the United States cannot come to some kind of resolution in its dispute with little Antigua and Barbuda. Furthermore, the fact that the primary proponent of the GATS round of trade talks would prove so stubborn when faced with an adversary ruling would seem to indicate that a rough road lies ahead for a more general worldwide liberalization of trade in services.

The vindication sought by Jay Cohen eight years ago may finally be at hand. ®

Burke Hansen, attorney at large, heads a San Francisco law office.