All In: The Importance of International Consensus to the Regulation of Internet Gambling

Josh La Vigne, Associate Editor, Michigan Journal of International Law

Addressing Internet gambling provokes substantial debate. The two options for completing this task are prohibition and regulation. Due to the strong moral arguments against gambling in general, the debate involves much more than innocuous technical concerns in attempting to reach the “right” answer. This post will approach the issue from the viewpoint that regulation is the proper avenue and discuss some of the barriers involved in implementing a regulation strategy. These barriers include the “borderless nature” of the Internet, differing opinions on the morality of gambling, and variance in tax rates among jurisdictions. At the base level, regulation by a single country will likely be insufficient. Due to the “borderless nature” of the Internet, efforts to regulate Internet gambling would be severely undermined, if not completely ineffective, without some type of international consensus.[1] Due to the aforementioned nature of the Internet, providers of online gambling services are free to locate in the jurisdiction of their choice and reach users all over the world. Without international regulation, providers are free to dodge regulations of one country or state by simply moving to another jurisdiction with fewer restraints and regulations. [2] International consensus is necessary to “enforce guidelines, manage licensing, and ensure payment of winnings across international borders.”[3] Because total harmonization of regulations among participants is highly unlikely, some level of “mutual recognition” between countries will be necessary in order to draw the approval of a substantial number of countries.[4] This entails an incredibly delicate balance of regulation and relaxation. On one hand, mutual recognition allows flexibility for each country to tailor the regulation of online gambling to their specific situation.[5] On the other hand, mutual recognition can undermine regulation if it is taken too far, and one country excessively relaxes its regulations in pursuit of its own individual gain.[6] One issue making international consensus much harder to achieve is the wide variance in responses to gambling among jurisdictions. In the United States, the individual states are primarily responsible for regulation, and each state has views ranging from prohibition to allowing only specific activities.[7] Responses to online gambling amongst states in the European Union follow a similar pattern, ranging from relatively no restriction to near complete restriction.[8] Variation in the level of restriction may stem from the lack of consensus on the risks online gambling entails, with “divergence in opinion [centering] on the issues of criminality and increased potential for addiction.”[9] This focus on deeply held moral beliefs stresses the need for mutual recognition and the allowance of slight tweaks to the system of international regulation.[10] Further, there is a lack of research on the psychological effects of online gambling or its potential effect on criminality, leading to uncertainty surrounding the extent of online gambling’s effect on society.[11] Researching the financial characteristics involved in online gambling is also very problematic. This stems from the fact that “online gambling is still a largely invisible industry” with a “questionable legal status and [an] absence of regulatory bodies to which commercial online gaming operators must report.”[12] Lastly, the variance in tax rate is perhaps the most substantial barrier to international consensus. In Australia alone, tax rates on online gambling in the various territories range from eight percent to 50 percent.[13] Similar variation exists among the European Union Member States.[14] Such variation allows for “tax jurisdiction shopping,” where providers locate themselves in the most favorable jurisdiction, resulting in a loss of tax revenue for other jurisdictions.[15] To avoid this, “some degree of tax harmonization” is necessary to reach an international consensus on regulation.[16] This creates a very compelling need to reach an international consensus among as many jurisdictions as possible to avoid the problem of a nonparty undercutting the agreement with more favorable tax rates and a lower level of regulation. In conclusion, a number of substantial barriers stand in the way of reaching an expansive international consensus on the regulation of Internet gambling. Jurisdictions may need some leeway to tweak regulations to best suit their individual situations, but close attention must be paid to ensure they are not subverting the regulatory system. Seeing that strong moral viewpoints are in play, convincing a large number of jurisdictions to join in also poses a big challenge to international consensus. Finally, harmonizing taxation among the jurisdictions may prove to be the most daunting barrier. Without some level of tax harmonization, a system of international regulation will likely fall victim to tax jurisdiction shopping, which would undermine the system’s effectiveness. Should providers choose to locate in a jurisdiction that is not party to the consensus as a result of jurisdiction shopping, the system is likely to be ineffective. Reaching the necessary consensus entails substantial transaction costs. The decision of whether regulation efforts are truly worth it may come down to weighing these costs against the tax revenue that each jurisdiction could derive from regulation, versus letting these tax benefits go unrealized under systems of prohibition.