Gamblog.co.uk - Gambling & Casino Blog

An In Depth Study Of Online Gambling.

Only for the die hard gamblers because it is very long, but very good indeed.

The aim of this study is to look at the way bookmakers, and the gambling industry as a whole, are regulated and the problems that can occur through the lack of regulation in certain areas.

It is by no means exhaustive but we hope it will act as a catalyst for debate.

Throughout history, from the pastimes of ancient Pompeii to those of the twentieth century, gaming has presented its appeal to all sections of society and also its inescapable problems. This statement rings true for all forms of gambling such as betting and lotteries as well as gaming.

The Law in the UK relating to gambling is in the process of a much needed overhaul. In 2000 the Government appointed Sir Alan Budd to conduct a report into the reform of the UK?s gambling laws.

The Gambling Review Body was instructed with the task of scrutinising the current legislative and regulatory framework and asked how the law should be changed to bring it up to date with the rapid changes the industry has experienced in recent years. The report was published in July 2001. The Government has taken on board these recommendations and published its key objectives in its response A Safe Bet For Success published in 2002.

Gambling is a pastime that is enjoyed by many in the UK, three quarters of the population (33 million adults) have taken part in some form of gambling activity in the last year. Gambling is also big business in the UK. A KPMG study found that the total amount wagered on all gambling in the UK in 1998 was over �42 billion, the gross gaming yield from this amount was �7.4 billion.

A study published in 2001 by the Office for National Statistics showed that non-retired single men spend on average �140 a year on gambling. This equates to 2.5% of all expenditure on travel and leisure. Men in this group spend more on gambling than they do on toiletries and beauty products (50% more).

Considering the rigorous testing that all toiletries and beauty products have to go through before they are allowed on the shelves, and the fact that men choose to spend more on gambling, their interests should be protected. With the very large sums of money involved it is necessary to ensure that the industry is regulated correctly and that punters are not put at a disadvantage. After all if there was no punter, then there would be no industry at all.

The current laws were first enacted over 30 years ago. No one could have anticipated the changes that would occur over the intervening years to alter the shape of gambling, not only in the UK, but across the world.

The advent of the internet has meant many changes to the way the gambling industry operates. The internet has provided increased competition and easier access to the market as the provider needs no physical presence to accept bets via the internet.

In the last five years or so the advent of the betting exchange has shaped the gambling industry. Betting exchanges would not be possible without the internet.

Many firms chose to set up or relocate their operations to offshore locations to take advantage of the tax benefits. They then offered punters in the UK tax free betting via their website. This prompted the Government to change the way in which bookmakers were taxed to tempt them back onshore.

Many operations that have had solely internet based betting facilities have found it hard to cope in this competitive environment and have subsequently folded, owing large sums of money to punters. These problems could be addressed through increased regulation of bookmakers.

Gambling has always been seen as a way to launder money, but it is perhaps not the most effective. "There are numerous methods of money laundering - the shrewdest criminals tend to use the banking system, and racing is regarded as being one of the least sophisticated systems."

In the aftermath of the September 11th terrorist attacks on the United States, money laundering became a big issue because it was clear that the terrorists had been laundering money to finance their regimes. This has prompted the U.S. to try to outlaw online gambling as they see this as a way of money laundering.


The Current Legislative Position and The Gambling Review

(i) Overview of the Current Legislative Position and Introduction to the Gambling Review.

The current gambling legislation is contained in several different statutes. The most important ones being the Gaming Act 1845, the Betting, Gaming and Lotteries Act 1963 and the Gaming Act 1968. The Government felt that the law was in need of reform and had to be brought up to date.
In the words of Tessa Jowell the Secretary of State for the Department for Culture Media and Sport, "the modernisation of our gambling laws is long overdue." In 2000 the Government appointed Sir Alan Budd to conduct a review of the legislation on gambling in the UK. This was completed in 2001 and the Government produced their response in 2002.

The Gambling Review Body made 176 recommendations; some of the more significant and relevant ones will be looked at in this study.
The key objectives of gambling law and regulation, set out in the review body?s report and endorsed by the Government, are:

(a)Gambling should be crime free, honest and conducted in accordance with regulation
(b)Players should know what to expect and be confident that they will get it and not be exploited
(c)There should be adequate protection for children and vulnerable persons.

These key objectives will be kept in mind when looking at the proposals the Government has put forward and whilst looking at some areas where the Government may have overlooked them.

The main proposal is to streamline the legislation and consolidate it into a single Act of Parliament covering all categories of gambling activity, except the National Lottery Acts. The Government feels that the current statutes are a mess, "repeated piecemeal amendment of the law relating to gambling has been an unwelcome feature of the deregulation procedure."

The aim is to create a new, simple to understand statute that is up to date but which is also flexible to meet changes in the industry. The Gambling Commission will be set up to act as the statutory regulator and will be responsible for the licensing and regulating of all forms of Gambling from casinos, bookmakers and betting exchanges to all other forms of commercial gambling.

The Government feels that "in the interests of fairness and efficiency there is a need to bring all operators of commercial gambling within a single system of licensing and regulation" except spread betting. Spread betting is regulated by the Financial Services Authority, but this will be reviewed once the Gambling Commission has been established and begun its work. Spread betting will be looked at later when we discuss the control of clients assets held by bookmakers.

(ii) Gambling Debts to Become Legally Enforceable.

A key recommendation of the Governments report is to make all gambling debts legally enforceable. This move will change the position that has been in place for over 150 years, s.18 of the Gaming Act 1845 states "All contracts or agreements, whether by parole [verbal] or in writing, by way of gaming or wagering, shall be null and void; and no suit shall be brought or maintained in any court of law or equity for recovering any sum of money or valuable thing alleged to be won upon any wager"

The rationale for this rule is that the courts do not have time to lend themselves to trivial matters such as gambling disputes. "However laudable the sport may be, we have far more serious matters to attend to" was how LP Boyle put it in 1848.

The Government feels that the provision in the 1845 Act is open to abuse and exploitation. This is very true, as anyone in the business of accepting wagers from the public could refuse to settle bets that have been struck because the contracts are not legally enforceable.

This would obviously damage their reputation and no one would wager with them again, but it would leave many punters out of pocket. The new provision will work both ways, punters will be able to have recourse to the courts to obtain payment and gambling operators will be able to sue punters who owe money.

This provision really only favors the punter, as a bookmaker will very rarely allow you to bet on credit. Since the 1845 Act was brought into force bookmakers insisted on receiving cash in advance from punters and it will be very unlikely that they will put 150 years of good business practice out the window because of this new proposal.

In fact many bookmakers have opposed this change to the law. Channel 4 racing pundit John McCririck has expressed his support to the changes, "I've always believed that the betting industry should be subject to the same safeguards and responsibilities as other industries" he goes on to say that "It has always amazed me that the bookmaking industry has always opposed it."

The Internet is Posing Challenges for the Regulators

(iii) The Internet is Posing Challenges for the Regulators

With the advent of the internet some problems have arisen because the current law was not suited to deal with the way in which the internet works. "From a public policy perspective, the potential of the Internet to offer unregulated, unlicensed and low or no tax gambling has been causing concerns to many" for some time."

The position relating to bookmakers is relatively simple. Bookmakers have been able to accept telephone bets for many years, therefore bets via e-mail or a website would not be prevented.

It would be illegal for Casinos or other gaming operations to set up a website in the UK. This is because under s.9 of the Gaming Act 1968, gaming must take place on licensed or registered premises and under s.12(1)(a) "no person shall participate in the gaming if he is not present on the premises at the time when the gaming takes place there."

There is no legislation in the UK that makes it illegal or prevents residents of the UK from gambling on the internet from their own home. It is perfectly legal for a UK resident to gamble money on an online casino operating outside of the UK.

Many of the familiar high street names such as William Hill or Stanley?s have set up offshore websites offering gaming to the UK public. The Gaming Board feels that "such complexities and inconsistencies in legislation are unsatisfactory, raise difficulties for regulation and regulators and puzzle and perplex the licensed gambling industry."

The Gambling Review Body also came to this conclusion and the "Government supports" that the prohibition of online gambling by British customers would be an entirely unrealistic objective, even if it were thought to be desirable."

This situation of companies not being able to establish websites for gaming is very similar to when bookmakers at the end of the twentieth century moved their betting businesses to offshore locations. This allowed them to offer betting free of general betting duty (even the Government run Tote set up a base in Malta, allowing tax free bets).

At first the Government tried to put down the severity of the exodus but soon realised that they were losing a large chunk of revenue. In late 2001 the general betting duty, which imposed a tax on individual betting transactions, was abolished and a 15% tax on gross win profit was introduced.

This was exactly what the bookmakers had wanted and shows the bargaining strength that they had. Coming back onshore was what the bookmakers wanted as they were unable to advertise their offshore businesses in the UK and operating from these less regulated jurisdictions meant a loss of regulatory certainty that the UK can offer.

The Government doesn?t want to make the same mistake twice, and is keen to regulate and license online gaming rather than lose out on the revenue. "On past showing one can anticipate that the authorities here will prove themselves to be both sensible and pragmatic" the future for a successful and compliant British online gaming industry looks rosy indeed.

(iv) Gambling Kitemark to be Established

The Government proposes that all forms of online gambling should be permitted and regulated. During the Government?s consultation period, after the publication of its report, concerns were raised about the rapid proliferation of potentially under-regulated, non-UK gambling sites.

These concerns should be dealt with through proper regulation of the UK online betting industry; this will allow punters to bet with confidence on the internet.

The Governments plan is to establish a Gambling Commission kitemark which will be displayed on the operators website to ensure that punters know that the website is regulated and licensed by the Gambling Commission. They also plan to set up a portal on their website through which punters can have direct links to regulated sites.

(v) When will these Proposals be Implemented.

The Government plans to bring the new Gambling Bill before Parliament in the 2003-2004 session, but as with all new Bills there is strong competition for parliamentary time.

The full extent of the changes to the law may not be felt for another 2-3 years. Some of the lesser changes, such as the lifting of the restriction on alcohol on the gaming floor in casinos, will be implemented much sooner.

The Government should also encourage operators to anticipate the changes to the law so that the transition will be as smooth as possible. This should particularly be encouraged when dealing with the criminal element of gambling such as money laundering and insider trading.

Betting Exchanges: Person-to-Person Betting

(i) What Are Betting Exchanges?

Betting exchanges are a relatively new phenomenon in the betting industry and are becoming more and more popular as a betting medium. Betting exchanges have emerged from the ability of the internet to link people together from all areas of the world.
In a betting exchange there is no bookmaker, punters bet with each other - "person-to-person" - and the exchange acts as the middle man providing the medium for punters to trade with one another, taking a commission on the net winnings.

Punters have the option to "back" a certain event, as they would usually do with a bookmaker. They also have the option to "lay" an event, effectively becoming the bookmaker, by offering odds to someone else. "Laying" an outcome is effectively "backing" it not to win. Concerns have been raised that the ease of which these bets can be placed may encourage a criminal involvement.

There was very little mention of betting exchanges in the Governments report, A Safe Bet For Success, other than that the Gambling Commission will be responsible for licensing and regulating them. The lack of mention of betting exchanges in the report is probably due to the rapid increase in their popularity during the period that the report was being conducted and since it has been published.

When Betfair first came onto the scene in April 2001 about $1m of bets were being matched a week, today that figure is more like $50-$60 million. This is money that punters would usually be betting with traditional bookmakers on the internet so obviously concerns have been raised over the legality of the exchanges by the more established bookies.

Betfair's popularity can also be shown by the usage of their site. The Betfair website is the third most visited gambling website by UK internet users for the month ending March 2003. The two websites in front of Betfair are the Casino On Net and William Hill sites and the Ladbrokes site is down in sixth.

(ii) The Reasons for the Rapid Growth in Exchange Betting.

The main advantage of betting via an exchange is that the odds available are nearly always better than the traditional bookmakers are offering. Internet punters are at great advantage because they can see via comparison websites the odds for many sporting events compared against many competing bookmakers and the exchanges.

If you search for the best odds for a given event on these sites you will find that the price being offered on betting exchanges is the most competitive.

Generally bookmakers work to an overround of about 110%, a simple example is an event where there is a 50-50 chance of either result occurring such as the toss of a coin, there is an evens chance that it will be heads and an evens chance that it will be tails.

A bookmaker won?t offer you evens on the event, but instead he will offer odds of 5/6, meaning for every 6 you stake you will win 5. This is how the bookmaker makes his money.

On a betting exchange the odds on offer are very competitive, this is because there are no set profit margins as punters are betting with each other. Typically for any sporting event that attracts a lot of interest such as an English Premier League match or a horse race at Cheltenham the overround of the book on the exchange is generally no more than 101%.

It is no wonder that punters are using the exchanges more and more as an alternative to the traditional betting mediums.

Another attraction that the betting exchanges have over the traditional bookmakers is that punters can "lock in" profits on the exchange. For example if a punter backs an event early at odds of 10/1, but then nearer the start of the event the odds have shortened to 5/1, the punter can lay the bet at 5/1 guaranteeing a profit.

(iii) The Legality of Exchange Betting:

(a) The Bookmakers view.

There has been an ongoing debate between the major bookmakers and the betting exchanges over the legality of the exchanges. William Hill chief executive David Harding complained to the Department of Media, Culture and Sport in the summer of last year claiming that Betfair?s business was contrary to the provisions under the Betting, Gaming and Lotteries Act 1963.
He claimed that punters were acting as unlicensed bookmakers because they were able to lay bets on the exchange. William Hill's executive chairman John Brown, who claims that the current state of legislation is "ridiculous", echoes his concerns.

Under s.2 of the 1963 Act "no person shall act as a bookmaker on his own account unless he is the holder of a permit authorising him so to act (in this Act referred to a "bookmakers permit") which is for the time being in force; and if any person acts as a bookmaker in contravention of this subsection he shall be guilty of an offence." It is clear that acting as a bookmaker without a permit is an offence, but what exactly does "acting as a bookmaker" mean?

Under s.55(1) of the 1963 Act a "bookmaker" means any person other than the Totalisor Board who ::
whether on his own account or as servant or agent to any other person, carries on, whether occasionally or regularly, the business of receiving or negotiating bets or conducting pool betting operations ::
or by way of business in any manner holds himself out, or permits himself to be held out, as a person who receives or negotiates bets or conducts such operations.

The rationale behind the argument that David Harding has put forward is that punters, by laying events (such as horse racing) on an exchange, are acting as illegal bookmakers i.e. without the required permit.

The exchanges are providing the medium for these bets to be placed and it is argued that they are aiding and abetting a criminal offence. William Hill are not the only people to put forward the case against betting exchanges, Rodney Brack the chief executive of the Levy Board also agrees.

?On the assumption that any person laying a bet requires a bookmakers permit, and all permit holders are liable to make a levy contribution, that would cover betting exchanges. If they don't obtain a bookmaker's permit, they must be betting illegally.?

It is possible for punters to "lay" an event without using an exchange. As we have said to "lay" an event is to back it "not to win". You can do this with an ordinary bookmaker. In an event where there are only two outcomes such as a tennis match, if you back player A to win you are effectively saying that player B will not win. There is nothing illegal about this.

The same is true in an event where there is more than one outcome such as a football match. If you think team A will not win, you can back team B and also back the draw, this is the same as "laying" team A on an exchange.

The Government rejected the complaint made by William Hill until the new Gambling Commission was in place and then the matter would be looked at again. The Government did not want to take the step of ensuring that all participants of betting exchanges should become licensed bookmakers.

The issue has not been tested in the courts so it is unclear as to what the outcome would be. John O?Reilly, the managing director of Ladbrokes is also unsure as to the legality of person-to-person betting but the problem for the traditional bookmakers will not go away ?even if it was ruled illegal, UK based exchanges would simply go offshore.? This is exactly what the major bookmakers have done in the past to avoid the wrath of the Government as we have seen above.

The Betting Exchanges view

(b) The Exchanges view.

The exchanges are keen to counter these arguments, put forward by the traditional betting industry. The founder of Betfair Andrew Black says, "the legislation is quite clear that it is not illegal for two people to bet with each other, and that's what is happening with us.
Customers are betting with us as the underwriter." He also says "centuries ago, betting started between individuals, and then needed market makers -bookmakers- when it got bigger. Now, in our sense, it has come full circle, though it's not going to appeal to everyone."

It obviously doesn't appeal to either William Hill as we have seen or to John Schreck, a consultant to the Hong Kong Jockey Club who has described exchanges as "faceless bootleggers raping the sport". There is confusion over the wording of the current legislation and as such the exchanges are currently operating in a "grey area".

The exchanges are operating by allowing punters to "lay" bets. The legislation requires that bookmakers "receive" the bets. This is where the problem lies, is "laying" a bet the same as "receiving" a bet? If not, users of betting exchanges cannot possibly be classed as acting as bookmakers.

Betting exchanges are acting as a middleman allowing punters to bet with one another. The legislation also states that bookmakers "negotiate" bets. There is no negotiation on an exchange as the bets are just matched against one another.

To be licensed as a bookmaker you have to satisfy the licensing authority that you are a "fit and proper person" to carry out the business of bookmaking. The bookmakers argue that punters on exchanges are not subject to the same tight regulations that they have to abide by when being granted with a permit.

John Brown says, "you have to pass a test of whether you are fit and proper. The police look into backgrounds, it keeps organised crime out, it keeps money laundering out". While there is no specific legislation relating to betting exchanges, Betfair and other exchanges have taken out bookmakers permits.

Andrew Black says Betfair have done this "because we want to show that we are doing things properly to build up customer confidence. We see ourselves as a fully paid up member of the industry." Betfair also don?t allow you to bet on credit, you have to have the funds in your account to cover any bets that are placed.

Edward Wray, chief executive of Betfair says "we don't let people bet on the system without having money in their account to cover the full liability of the bet." This ensures that all punters on the exchange will be paid, so there is no worry that winning punters will lose out. The only real concern, that users are not fit and proper persons, is the criminal element.

(v) Are Betting Exchanges Open to Abuse?

Jeremy Philips, director of security of the Jockey Club, says "any system offering profit simply from a horse getting beaten is vulnerable to exploitation and abuse." John Schreck has also said "there is something inherently wrong to back a favoured horse to lose."
It seems John Schreck has missed the point, as this is what every bookmaker does on a daily basis on hundreds of favoured horses. However, bookmakers are more visible unlike punters on the exchange. There is nothing stopping someone with specific knowledge of a horse?s performance, such as a jockey or a stable from laying bets on an exchange.

There are also concerns that jockeys may be tempted to "stop" a horse after laying it on the exchanges, this is a primary concern of the Jockey Club. Betfair has called for legislation to be implemented to outlaw jockeys and trainers from laying bets on the exchanges.

Chief executive of Betfair Edward Wray is keen to work with the Jockey Club and welcomes legislation, he feels it would "rubber-stamp" what they are currently doing. He quashes fears of the anonymity of the layers on the exchange, "the assertion that bets are totally anonymous is incorrect".

While the details are not made public to other users, every transaction on our site is logged and stored indefinitely. As a result, the movement of funds is easily traceable. Betfair director of communications Mark Davies claims that Betfair has a "better forensic trail than has ever existed in bookmaking [and] we actually support the integrity of horse racing in a way that previously has never been possible".

(vi) The Governments Stance.

Although punters who use exchanges are not licensed as bookmakers and have therefore not passed the "fit and proper" test, it is clear that because of the way that Betfair conducts its business punters are protected.

An unnamed Government source has told the Racing Post that the Governments objectives are to protect punters and keep criminals out. He says "in terms of guarantee of payment, it is hard to argue that punters are worse off with betting exchanges than with traditional bookmakers".

This is because Betfair ensures that the punters can meet their liabilities before betting. He goes on to say, "as far as combating criminality goes, exchanges offer better protection against money laundering than racecourse bookmakers or betting shops. There is no cash betting and a better audit trail".

The Government is aware that betting exchanges need to be regulated and licensed in some way, but they are unlikely to require every user to become a licensed bookmaker. They are likely, once the Gambling Commission is set up, to examine the systems they have in place to ensure the users are "fit and proper".

Regulation of Clients Assets Held On Deposit

(i) Casualties of the Dot Com Crash in The Gambling Sector

The internet is a highly competitive marketplace. This is true in all areas of e-commerce, not just the gambling sector. According to a study by www.sportsbusiness.com there are 1800 plus e-gambling operators worldwide.
In a competitive environment such as this, it will be difficult for firms to survive. In the last five years or so we have experienced a dot com boom across all areas of the internet. Many of these startups have fallen to the wayside after realising that the internet streets aren?t paved with gold; the gambling industry is no exception.

In recent years we have seen several internet bookmakers collapse leaving punters owed hundreds of thousands of pounds. In the summer of 2002 the bookmakers Netbetsports and Luvbet went bankrupt. These firms had a relatively high profile within the industry, Luvbet had been set up by Cork based bookie Gary O'Halloran and Netbetsports were sponsors of the Huntingdon Mascot Grand National.

Luvbet were one of the first bookies to realise that basing a website ?offshore? meant that they could offer tax free betting to clients in the UK and Ireland. Luvbet developed quite a pioneering profile, offering early prices on English and Irish horse racing and developed a strong loyal customer base.

They had 10,000 active accounts when they closed after three and a half years trading. Punters were owed "a substantial six figure sum." It is estimated that the amount owed to punters is significantly more than what was owed when Bowman Racing went bust in 1997.

Netbetsports also got off to a good start with the online punters. "Right from the outset the newcomer had the look of something faintly too good to be true. Daily offers of outstanding each way terms, eye catchingly high bet limits, and tax free betting when tax was still at nine per cent."

Netbetsports had 16,000 punters with web accounts and a further 1,300 registered with their telebetting service when they closed after only 23 months trading. From the liquidators report it is believed that punters are owed in the region of �100,000. One London punter was owed �45,000 winnings from the World Cup in 2002. It has also been suggested that the liabilities on Brazil winning the World Cup totaled �70,000.

The realisation of assets of netbetsports is expected to raise no more than �30,000, which is expected to settle accounts for the Crown. Paul Moorhouse, chief executive of netbetsports, had suggested in the year previous to his firms collapse that directors should be personally liable for customers? account funds (this statement was made in the wake of the Betachance collapse in early 2001 after only 7 months in business).

(ii) How are Assets Held on Deposit Looked After?

As mentioned earlier gambling contracts are unenforceable by virtue of the Gaming Act 1845. Bookmakers therefore have required punters to deposit funds with them before placing a bet. How does the bookmaker look after this money?

Currently there are no regulations in the UK that stipulate that bookmakers should keep client funds separate from the rest of the business. This is not the case if you are depositing money with a financial institution such as a bank or a spread betting firm. These firms are regulated by the Financial Services Authority, which ensures that your deposits are safe as the firms are subject to very strict financial controls.

When a client deposits funds with an internet bookmaker the money immediately becomes part of the firms working capital. This means that the bookmaker can use this money to pay for the every day running of the business. This is a dangerous situation for the bookmaker to be in.
On one hand he has access to vast cash reserves held on deposit to use for the business but on the other the money is not really his. Until the client has "lost" the money held on deposit by gambling it with the bookmaker the money should still belong to the client.

If the client wins with the bookmaker he may be put in a position where he is unable to honour the bet because the deposits have been used as working capital. The likeliness is that the bookmaker will be able to honour the bets struck but in the long run he is walking a tightrope as the funds can easily disappear if not managed correctly.

It is said that ?working capital planning is a key part of overall financial planning.? Clearly if client deposits can be treated as working capital it cannot be controlled effectively. Good financial planning on the part of the bookmaker should not take account of money that is held on deposit, but as the law stands the bookmaker is perfectly entitled to use funds in this way.

The money that you deposit with a bookmaker in reality becomes his; you may find that you have lost before you have even had a chance to place a bet.

(iii) Why Have Bookmakers Been Unable To Cope?

The incidents highlighted at the start of this chapter regarding Luvbet and Netbetsports were clearly caused by bad money management by the respective firms and a lack of separation of client?s deposits from the firm's accounts.

Michael Singer, former chairman of the now defunct National Association for the Protection of Punters (NAPP) explains how the internet firms operate. "What tends to happen is that all moneys go into the one account. This enables bookmakers to use deposit money to shore up the business if they find themselves in financial difficulties."

Looking again at the liquidator?s report of netbetsports it clearly states that customer funds were not held in individual accounts but were deposited in the company?s merchant and current accounts.

Netbetsports have cited betting exchanges as one of the reasons of their own demise. They feel exchanges have contributed to the downfall because of the increasing numbers of punters that are betting on the exchanges resulting in less money flowing through the books of the ordinary internet bookmakers.

This view is shared by Bruce Millington he says that "Betfair, whose spectacular and utterly deserved success is probably the chief contributor to the downfall of other online bookies." The rise of the exchanges is not the sole reason for the downfall of these internet bookies.

The fact that Netbetsports only had an online presence was a contributory factor. They were trying to take on already well established bookmaking operations without a secure financial footing of their own. When Betsmart closed their internet site, as it was unsuccessful, Chisholm Racing, who had set up the site, was able to honour all the bets that had been struck because they had an established business behind them.

(iv) Calls For New Legislation.

These recent incidents have led to calls for internet bookmakers to be subject to stricter controls on how they look after client?s deposits. Michael Singer has described the way that clients are being treated in the wake of these collapses as a "major scandal".

He feels that "when punters place a bet with an internet bookmaker their deposit money should be placed in a separate account and be ringfenced." In the wake of these collapses leading internet bookmakers Blue Square and Sportingbet (the world?s biggest online gaming organisation) have announced that they ringfence clients? deposits, winnings and unsettled bets.

Blue Square issued a statement shortly after the collapse of these bookmakers saying "it would like to make it clear that their 300,000 registered users have always enjoyed ringfenced accounts to the extent that clients deposits, winnings and unsettled bets are held in separate bank accounts" which are nominated as "Trust Bank Accounts."

There is no mention of forcing bookmakers to ringfence clients deposits in the Governments report A Safe Bet For Success. This could be due to the fact several of these collapses occurred during the reports research period, but there were several casualties before the research began.

It is not just the internet bookmakers who have had problems when it comes to paying money owed to punters. Bowman's, Front Line Racing, SP Racing and First-Past-The-Post-Betting, all land based bookmakers, collapsed at the end of the 1990's owing punters thousands of pounds.

These firms were in operation several years before the betting exchanges took off, so what excuses do they have? The answer to this question is unclear, but if their finances were more tightly regulated then punters would have had a greater chance of seeing their money again.

It is clear that it is time for the Government to do something about the problem of regulating clients assets held on deposit by bookmakers. Luvbet and Netbetsports are not the only dot com bookmakers that have gone bust, there have been several others, and there is no shortage of disgruntled punters who would welcome a change in the law.

Spread Betting

Spread Betting (a)The Law Regarding Spread Betting Firms

There are already strict financial controls placed on spread betting firms who are regulated by the FSA and they are also required to obtain a bookmakers permit to operate their business in the UK.
Spread betting currently differs from ordinary forms of betting, as gambling debts under this form of betting are legally enforceable. Under s.412 of Financial Services and Markets Act 2000 (FSMA 2000) it states that "no contract to which this section applies is void or unenforceable because of the Gaming Act 1845" or any other provision which states that gambling contracts are not legally enforceable.

This provision was previously contained in s.63 of the Financial Services Act 1986 and was tested in the case of City Index v Leslie. In this case a betting debt was incurred by Leslie, as the result of bets placed on the movement of various Stock Exchanges.

He claimed that the debt was a wagering contract and therefore null and void by virtue of s.18 of the 1845 Act. It was held that the bets made by Leslie amounted to contracts for differences and were therefore recoverable by the spread betting firm. It is clear from this decision that all bets made with a spread betting firm will be legally enforceable.

When spread betting originated in the UK it was used as an alternative method of speculating on financial markets. It had advantages over other forms of financial investment as all winnings are free from UK taxes, including stamp duty and capital gains tax.

The spread betting firms soon moved into the realm of sports spread betting. Leggat L.J. in the City Index case has said that the regulation of spread betting has resulted in some transactions such as "betting on cricket scores becoming regulated which might better have remained void as wagering contracts" and suggests that the secretary of state should amend the legislation to "restrict the meaning of "contract for differences" ~ "so as to exclude betting on sporting activities".

These suggestions were never taken on board by the Secretary of State so that today you have a situation where if you place a bet on the outcome of a sporting event with an bookmaker your bet is not legally enforceable, but if you place the bet with a spread betting firm you have a legal remedy to recover any money won on that transaction.

Spread betting is a "regulated activity" by virtue of s.22 of the Financial Services and Markets Act 2000 and s.85 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.

The Regulated Activities Order lists all activities that are regulated by the FSA. Spread betting is regulated under contracts for differences, s.85(1)(b)(ii) of the R.A.O looks like this:

?Contracts for differences etc.
85. - (1) Subject to paragraph (2), rights under -
(b) any other contract the purpose or pretended purpose of which is to secure a profit or avoid a loss by reference to fluctuations in -
(ii) an index or other factor designated for that purpose in the contract.

There is no explicit mention of the words "spread betting" but it is clear that the result of a spread bet is determined by the "fluctuations in an index or other factor."

(b) The Benefits of Betting With a Spread Betting Firm.

There are several key advantages of spread betting because it is a regulated activity. Customers have access to the Financial Ombudsman Scheme if they have a complaint against the spread betting firm and they have access to The Financial Services Compensation Scheme should the firm go bust. Spread Betting Firms are also subject to the FSA's Client Asset Regime.

The Client Asset Regime is contained within s.139 of the FSMA 2000. It is designed to make a distinction between clients money and firms money, s.139(1)(a) states that the ?Rules relating to the handling of money held by an authorised person in specified circumstances ("clients money") may - (a) make provision which results in that clients" money being held on trust in accordance with the rules".
This provision creates a statutory trust in respect of client money. The firm never becomes the owner of the money, it holds it as trustee, and therefore it cannot be claimed by creditors in the event of the firm going into liquidation. Unless there is a case of fraud client money will be safe.

These provisions were highlighted in a letter to the Racing Post in the wake of the collapse of Netbetsports from Compton Hellyer. He reiterates, "spread betting firms have to maintain a capital balance similar to that of a bank, they also have to retain clients" funds as segregated balances.

Such deposits cannot be used for working capital purposes, or indeed at all by the business. Consequently, clients" deposited funds are sacrosanct". He also highlights that the operating costs of running a spread betting firm are higher than an ordinary bookmaker because of greater compliance costs, but the fact that the punter doesn't have to worry about how his deposits are being looked after is a price worth paying.

Paul Moorhouse's comments "that directors should be personally liable for customers" account funds are a good suggestion. If the Government were to seriously take this option on board, you would find that directors would start lobbying for the ringfencing of client's assets.

(vi) The Legal Position In Australia.

Australia is a federation, this means that there are both national laws and laws in each state and territory in Australia in relation to gambling regulation.

In 2001 the Interactive Gambling Act (!IG Act") was passed. This is a piece of federal legislation that sets out to prohibit the provision of internet gaming, such as casinos and other games, to ordinary Australians. It does not apply to ordinary sports betting, this is left for the State and Territory regulators.

In Australia internet bookmakers are required by law to keep clients assets separate from the rest of the business regardless of whether or not they engage in spread betting. Under the Australian Capital Territory Race and Sports Bookmaking Act 2001 subsection 23(1) (Rules for sports bookmaking) ("ACT Regulations") the rules relating to handling money held on behalf of a client are put forward clearly and simply:


?E Handling of money held on behalf of clients
1. Bank Account
1.1 Sportsbookmakers shall establish a segregated bank account specifically for the purpose of holding money on behalf of clients
1.1.1 All moneys provided by clients are to be maintained in the segregated client accounts
1.1.2 For the purposes of this section, a segregated account means an account, established for the purpose, that holds all client moneys.
1.1.3 Funds standing to the credit of the segregated bank accounts shall be treated in accordance with the provisions of the Trustee Act 1957.

These are the provisions that are in place in the Australian Capital Territory but similar provisions also exist in this regard in the other States and Territories. The rules are very similar to those that are in place in the UK with regards to spread betting.

Many of the Australian internet bookmakers, such as Canbet and Centrebet, are regarded as amongst the best operating online. This is because punters know that they are safe when dealing with Australian firms.

The UK Government has unveiled plans, detailed above, with the aim of making the UK an attractive place to establish a global gambling operation. If the Government is truly serious about these plans, then strict financial regulations must be put in place across the whole of the betting industry.

To some extent these goals have been achieved, in April 2003 the Australian bookmaker Canbet announced that it was moving part of its operation to the UK.

The main reasons Canbet has moved part of its operation to the UK is to take advantage of:
� the way bookmakers are taxed in the UK,
� better time zones to serve their North American customers,
� a good communications infrastructure and
� a better legislative environment.
They feel that the 15% gross profits tax will give them "a big opportunity to be part of the consolidation that is going to take place in the global betting market." They plan to still comply with the ACT regulations regarding client deposits etc. and with the UK betting legislation.

Money Laundering In The Gambling Industry

(i) What is Money Laundering?

Money laundering is the process by which funds obtained from illegal activities are made to appear to have come from a legitimate source. The "dirty" money is passed through various transactions and at the end the criminal, if he can prove it has come from a legitimate source, obtains "clean" money.

After the terrorist attacks of September 11th on the United States money laundering is an issue that has come to the fore once again. Gambling has always been seen as a medium through which money can be laundered and the US Government sees online gambling as an area where this problem will manifest itself. Money laundering in the gambling industry is a problem not just for the US Government but for regulators across the globe.

(ii) The US Position: Prohibition.

In a special briefing on Money Laundering and Online Payment Systems in November 2002 John G. Malcolm, (Deputy Assistant Attorney General Criminal Division, US Department of Justice) put forward the US position as regards online gambling. It was clear from his speech that the US does not look favourably on the online betting industry.
The position of the US was put in stark contrast to that of the UK,
?the United Kingdom has opted to regulate the online gaming industry. The United States has taken a different approach, opting instead to prohibit online gambling?.

In October 2002 the US House of Representatives passed legislation to prohibit US financial institutions from handling financial transactions in relation to online gambling. The Act, The Unlawful Internet Gambling Funding Prohibition Act, follows on from a failed attempt by Congressman James Leach to include these provisions in the Anti Terrorism Bill.

The Bill never made it to the US Congress last year, but it is on the table once again for the coming year. The Bill will effectively ban internet gambling, as punters will be unable to fund their accounts by any bank instrument such as credit card, debit card or bank transfer.

James Leach has harsh words to say about online gambling, he feels it has no legitimate purpose and is a danger to society at large and he feels that his Act will help combat criminal activity through the internet.

(iii) Has the US Reacted too Quickly?

It seems that the US may have driven this legislation through in the wake of the September 11th attacks without thoroughly thinking them through. Some advocates of the Bill have claimed that online gambling operators are merely a vehicle for money laundering. But in fact a well regulated operation is probably more effective at combating money laundering than a land based operator.

In a well regulated internet casino or bookmaker a client will have to set up an account before being allowed to deposit. Obviously the operator cannot see with whom they are dealing with so it is necessary for the player to be identified.
Usually the player will have to forward copies of some form of photographic ID such as a passport or driver's license and a utility bill to confirm the address. This is a similar process that banks use when clients want to open a new account.

Online operators also have technology in place where they can tell the location of where the client is accessing the website from, any unusual patterns can be easily identified by the software. It can also be used to cross check the location of where the client claims to be based.

The online operator also makes it very difficult for someone else to gain access to a clients account or access the account details; this is done through sophisticated encryption software.

Compared to a land based Casino where it is not always necessary to set up a client account, internet operators seem to be well regulated. Even if someone was prepared to go through all of these identity checks in order to launder money via the internet, the operators have systems in place where unusual or suspicious betting patterns are recorded. Betting on the internet is not anonymous as it is on land, all transactions are logged on the website.

Another advantage that the internet operators have when combating money laundering is that they don?t deal in cash, money laundering is extremely difficult where cash is not an option. The use of credit cards provides a clear record of every transaction by the client on the internet. John Cargnello, Chief Executive Officer of Technical Systems Testing, feels that "it is quite apparent that the obstacles to laundering money in a properly regulated internet casino are enormous, if not insurmountable".

In an investigation by the Nevada Gaming Control Board published in April 2003 following a two month investigation into the Mirage casino owned by MGM Mirage. The investigation detailed 15,000 required reports went unfilled over an 18 month period.

The Chairman of the Control Board said in a press release that "as a result of our investigation it doesn?t appear that there was any money-laundering activities". This investigation highlights the fact that it is probably easier to launder money in a land based casino than on the internet.

(iv) Some Hope for the Future of Regulated Online Gambling in the US.

Not all members of the US Government are keen to outlaw online gambling; Representative John Conyers Jr. has introduced a Bill that calls for the introduction of a commission to examine the regulation of online gambling.

He has compared the Governments attempt to outlaw online gambling to the events of the 1920s when the Government introduced Prohibition to prevent people from drinking alcohol. He states his view very clearly "just as outlawing alcohol did not work in the 1920s, the current attempts to prohibit online gambling will not work, either".

The Leach Bill recommends that financial instruments such as credit cards should no longer be allowed to finance online betting accounts, this is a mistake because banks and credit card companies have strict financial controls and record keeping systems which is perfect to combat money laundering.

These kinds of regulations will force internet gambling underground and create an even larger criminal element in this area. John Conyers Jr. has also highlighted that a regulated online industry would provide an effective tax revenue for the US Government.

(v) Regulation of Online Gambling in the UK:
(a) The Current Position.In the UK the position regarding online gambling operators is split. Online casinos in the UK are currently illegal, but this will change with the new legislation. Strict anti-money laundering controls will be a feature of the legislation should the Government want to fulfill its goal of making the UK a leading gambling centre.

Bookmakers in general don't fall within the anti-money laundering controls outlined by the FSA. If reputable, they do however co-operate with various codes of conduct and report suspicious transactions to the National Criminal Intelligence Services (NCIS) Economic Crime Unit.

However in 2000 only 16 of the 18,408 reports of suspicious transactions reported were received from betting firms, and they stood accused of not doing enough to combat money laundering. Bookmakers were quick to counter this claim, Ladbrokes Sean Boyce stated that they "always notify the NCIS of anything that [they] think is untoward". In contrast the gaming industry, which covers casinos, were responsible for 300 of the reports to the NCIS.

It is clear that money laundering is a problem that affects the gambling industry. Under s.6.7 of A Safe Bet For Success it states that "measures will be put in place to prevent all forms of gambling from being used as a conduit for money laundering".

There are different ways in which this problem can be tackled as shown above, clearly regulation offers more benefits than prohibition. Adam Bates, Head of KPMG Forensic, has summed up the requirements needed of all involved in gambling industry, "what is needed to fight the global menace of money laundering is a joined up approach in which all investigating and intelligence agencies, regulators, industry bodies and businesses recognise their common interest in making sure that the UK?s high reputation as a financial and business centre remains".

It is clear that the current legislation relating to gambling is in need of an update to bring the law into line with the developments that have taken place. The old law is out of date and fails to take account of the realities of the industry.
The plan to make gambling debts legally enforceable, reversing 150 years of practice within the industry is a move which will inspire confidence in the users of the UK market.

The Government is keen to make the UK a global gambling centre and encourage large firms to locate their business here. The establishment of a kitemark by the Gambling Commission to differentiate regulated firms from unregulated will encourage firms to be subject to the regulations.

Firms displaying the kitemark will receive a greater level of public confidence than those that don?t subject themselves to the regulation.
In my view the establishment of the Gambling Commission by the Government means that the UK will be able to locate itself at the forefront of the worldwide gambling market and ensure that it is a jurisdiction that gambling operators will want to locate to.

Betting exchanges have revolutionised the online betting industry since their recent arrival on the scene. While it is clear that they have increased competition on the internet, they are still operating in a relatively grey area as regards the law. The users can act as bookmakers without the required permit.

This has caused the larger bookmakers to question the legality of the exchanges they argue that the users do not have to pass a "fit and proper" test before "laying" bets.

I would argue that the "fit and proper" test required of bookmakers under Sch.1 s.16(1)(a) of the Betting, Gaming and Lotteries Act 1963 is negated by the measures that exchange sites such as Betfair have introduced.

Betfair doesn't allow you to make bets outwith the money you have on deposit, therefore you will always be in a position to settle your debts. Betfair also has a system in place whereby every transaction that goes through the website is logged and any signs of unusual betting patterns will be reported, this will therefore deter any criminal involvement on the exchanges.

It will still be necessary for the Government to introduce some form of legislation regarding betting exchanges, so that the law is clear for others who wish to set up an exchange.

Regulation of Clients Assets Held On Deposit

As we have seen the situation regarding the regulation of clients assets is badly in need of reform. There have been too many cases of ordinary punters being ripped off for this problem to be ignored any longer. With no effective regulations on how they should look after their clients assets bookmakers have been setting up business with no regard to the liabilities that they will encounter on a daily basis.

I feel that since spread betting has been regulated since the Finance Act 1986, that there is no good reason why ordinary bookmakers are treated differently. It was highlighted by Leggat L.J. in the City Index case that sporting activities were regulated by the FSA. The Government chose to do nothing about this and allowed the practice to continue.

Why should punters who bet on the outcome of a sporting event via an ordinary bookmaker be treated less favourably than a punter who bets with a spread betting firm? There is no good answer to this question and this is why the law needs to be reformed.

Australia boasts some of the most well respected online bookmakers who are forced to comply with regulations that segregate client funds from the rest of the business. This raises the question, "if they can do it, why can't we"? Again there is no good reason why we shouldn't force bookmakers in the UK to be subject to similar controls.

Several major bookmakers have realised the benefits that ringfencing client deposits can bring. Customer confidence in their firms will increase and they will also find themselves on a secure financial footing by running the firm in a more prudent manner.
It is no coincidence that the rise of firms such as Betfair, who publicly state on their website that client funds are segregated, have coincided with the fall of mismanaged bookmakers such as Netbetsports.

Money laundering is a very serious issue, especially when it is at the centre of a debate regarding the funding of international terrorism. It is unclear whether the banning of online gambling will solve this problem, the US clearly thinks that it will. The UK has taken an opposite view to the US on this issue.

Without being insensitive to the issues regarding international terrorism I feel that the US has taken the wrong action in trying to ban online gambling. Regulation not prohibition is the way forward. As the history books will tell you the US Government failed in their attempt in the 1920s to ban the consumption of alcohol, their actions just drove alcohol consumption underground and gave criminals a ready made market to exploit.

The same will happen if the US outlaws online gambling, the effect will be counter productive, creating a higher criminal element and lead to more problems.

The UK should introduce the Gambling Commission as soon as possible and take the lead in the regulation online gambling. Hopefully the US will have a change of heart and realise that they are not only missing out on a valuable revenue stream but they are ultimately fighting a losing battle.