Feature: Legal and commercial issues in the Asian online gambling market - January 2007  

The Unlawful Internet Gambling Enforcement Act (UIGE Act), the US legislation that led to the implosion of the mainstream US online gambling market, was an indisputable blow to the industry. However, in a proactive, entrepreneurial and pioneering sector, Asia is seen by many as the ideal replacement market, explains Tom Lippiett, a solicitor at Berwin Leighton Paisner LLP, and proud Exeter City FC fan.

This view about the Asia region has been fuelled by the combination of massive populations and a huge appetite for (and cultural history of) gambling. The land-based boom in Macau is an indicator of the revenues that can be generated in the region while the liberalisation of casino gambling in Singapore and the introduction of a licensing region in the Philippines has led many to conclude that historically strict approaches to gambling are relaxing.
The industry re-focus is well-timed. Online gambling has not previously even been a viable commercial option in many parts of Asia given the limited access to the internet, and particularly broadband services, yet the US fallout comes at a time when high-speed internet access in Asia is growing dramatically. However, despite an increasingly permissive technical infrastructure, the legality of providing online gambling services remains questionable in some Asian jurisdictions and explicitly criminal in others. Whilst post UIGE Act optimism in the European Union has been energised by support from the European Commission in its role as guardian of binding legal principles, cultivation of Asia as a genuine online gambling market is still seen by some to be risky. Some governments in the region are deemed to be unpredictable and the reliance on cash transfers and local partnerships can be problematic.
Despite the hurdles, significant inroads into Asia are currently being made by certain Western operators. Betex, the AIM-listed online gambling company, enjoys significant joint-venture betting franchises in China, while, on 20 December 2006, fellow AIM-listed software designer Playtech announced that it had agreed a five year software licensing agreement with China’s leading gaming group, Sino Strategic International to become the first major distributor and promoter of Texas Hold’em Poker in the Chinese market.

Overriding issues for operators seeking to target Asia

Presence: the distinction between passive and active operation

The bottom line is that a company legally licensed in a jurisdiction that provides online gambling services accessible in an Asian jurisdiction is unlikely to be prosecuted, especially given the lack of enforcement or extradition treaties between the East and West. (It should be noted that from a UK perspective the ease of extradition to the US from the UK (as highlighted by the NatWest three extradition) was a consideration in many major operators’ decisions to end their US activities.) However that is not the same as saying that the jurisdictions in which the content is accessed would regard such supplies (or indeed use of such supplies by punters) as lawful.
It is questionable whether a jurisdiction can criminalise acts lawfully taking place abroad especially where that jurisdiction does not have the reach and power of, for example, the US.
However most of the Asian jurisdictions criminalise gambling by making it illegal for the end user to actually participate. This not only gives rise to ethical issues but also the fact that any attempted extraterritorial reach of jurisdictions will be augmented by any accessory offences (such as aiding and abetting) it can level against the operator. This is despite the fact that enforcement against individual bettors is unusual save in cases where there are gatherings on physical premises or those prosecutions aimed at public officials (especially in the China) or professional gamblers.
Moreover, even if an operator is based and licensed many thousands of miles from its target markets, it will invariably require professional agents or partners in the territory to both collect cash and market the business. This leads to the risk not only to having a business relationship with a person or entity who may face criminal charges but a disruption to business too. In addition, there are exchange control rules throughout Asia that mean that cash transfers, essential to any online business based outside of Asia receiving its funds, are difficult and in some cases criminal.

The absence of internet-specific law

The majority of Asian jurisdictions outlaw gambling but not specifically online gambling (except arguably Hong Kong). To the extent that online gambling is not prohibited, it is arguably permitted. This, however, is not a wholly robust argument to rely on as there can be no guarantee that local courts will not interpret such activities to breach local laws (particularly when pressured by wider political or cultural concerns) even where those laws particularly refer to bricks and mortar activity. Indeed businesses should ask the question why, if online gambling could be argued not to be prohibited by laws predating the internet, the market is not already saturated.

Cultural issues

This is not a case of one model fits all and operators cannot patronise Asian punters and/or expect that the Western model does not need to be bespoke and customised for the various territories. Local consultants for example advise that translations of certain content by non-local Asians is a common and fatal mistake. Moreover online casinos rely heavily on their customers’ faith in reliable random number generators (RNGs). It appears, however, that such confidence in even heavily regulated and audited RNGs does not extend to the Asian market: a customer-base which is both suspicious of electronic number generation and superstitious in its gambling habits. This has led to the boom of the live streaming casinos (which can cater for concerns by, for example, showing live broadcasts on a TV screen in the shots that are streamed to show that the broadcast is live). In short, operators need to rethink and repackage their standard products.

Technical problems

It is worth bearing in mind the likelihood, with increased exposure, of an Asian-facing operator being subjected to distributed denial-of-service (DDOS) attacks in a region where organised technological crime (and the inevitable ransom requests) is a pressing issue. Start-ups cannot, therefore, compromise on security.

Cash

The lack of traditional payment methods in the various regions means that businesses are reliant on moving large sums of cash. Cash transactions have in recent years been seen as a byword for money laundering, overlooking the fact that bulk legal betting even in countries such as the UK has been cash based with no know-your-customer (KYC) checks. On the basis that the agency system will mean (like all forms of pyramid selling) that the operator will never know the ultimate end user he will have to be satisfied of the probity of the individuals with whom he directly deals and from whom he receives cash placing an onus on them to do likewise further down the chain. This not only enables operators to satisfy any KYC issues but also to guard against monies being managed by tainted operations.
Currency controls are more tricky because if an operator has a large customer base in a jurisdiction where there are strict currency exchange controls (for example China and Malaysia) it cannot close its eyes to the fact that some entity in the ‘pyramid’ will have moved cash out of the territory in breach of the law. Despite the fact this is frequently done, operators are entirely dependent upon the arrangements made by local partners and it would be best practice for an operator to satisfy itself of the legitimate trades and set offs that are made by businesses to facilitate cash transfers.

Current local regulatory havens

The Cagayan region of the Philippines is the only Asian jurisdiction currently to licence online gambling. Therefore, in the absence of a Cagayan licence (or, albeit unlikely, a domestic operating licence), operators in Asia need to obtain a licence in a Western jurisdiction. Indeed, given the potential criminality of the operators in their target jurisdiction such distance may be preferred. Simply holding a licence ‘in Asia’ is not a passport to unhindered access to the Asian market, and all the restrictions discussed above remain.

The possibility of future deregulation

This is an area that should be monitored. Ideally, Asian jurisdictions will gradually permit private operators to provide services into countries unhindered, and in this respect operators should keep a close eye on developments in Macau. However, any deregulation may be (and in the short term is far more likely to be) simply an extension of what we have seen in China - namely select private operators working closely with government ‘endorsed’ entities. However, if other jurisdictions follow the Philippines licensing example, we could see an odd (and wholly unsatisfactory) criss-cross effect where Asian jurisdictions licence operators to provide services in other Asian jurisdictions, but not the licensing jurisdiction itself.

Conclusion

Whilst Asia has an indisputably vast potential as an online gambling market, there will be huge value to Western operators taking a step back and adopting a more patient, locally sensitive approach to their far-Eastern operations. Therefore patience and sensitivity is likely to breed far greater prosperity than attempts to treat the Asian market as a gold rush.

For more information on the content of this article, betting and gaming regulatory or general commercial contract advice, please contact Tom Lippiett at tom.lippiett@blplaw.com.
Headed by Hilary Stewart-Jones and David Collins, Berwin Leighton Paisner offers a full service regulatory, commercial and corporate service to clients and has been ranked number one in the betting and gaming sector by the Legal 500 for the last six years.

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