David v Goliath on Online Gambling

David v Goliath on Online Gambling November 24, 2006

As some of you may know, the tiny island of Antigua has brought charges with the World Trade Organization against the United States over its anti-online gambling policies. Under the General Agreement on Trade in Services (GATS), an international agreement that the US championed a few years ago and got passed, all signatories must engage in what is called trade reciprocity. That means that a nation cannot pass laws that allow their citizens to purchase goods and services from vendors within the country but prohibit them from purchasing those goods and services from outside the country.

Even before the passage of the Unlawful Internet Gambling Enforcement Act a few weeks ago, Antigua had already brought charges against the United States for being in non-compliance with GATS because of the arrest and prosecution of several gaming company executives over the last couple years. But the passage of the UIGEA only strengthened their case with the WTO because it explicitly priveleged certain types of domestic online gambling, such as off track betting on horse racing, while banning such gambling from abroad.

The first WTO panel to hear the accusations convened in 2003 and ruled against the US. The United States tried to invoke Article XIV of the GATS agreement, a provision that allows for exceptions to the agreement where something would violate local taboos or morality, or endanger public health and safety. Under that provision, for example, Muslim nations can ban the importation of alcohol. But since the US allows gambling, even online gambling, in a thousand different forms this is hardly a credible argument to make and the WTO panel didn’t buy it. This report explains what happened next:

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.

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.

So what happens now? The WTO has to determine what sanctions will be placed on the US.

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.

The LA Times reported a couple weeks ago on this issue and said the following:

ts application of anti-racketeering laws has landed Washington in the high-stakes WTO dispute with countries that have legalized Internet gaming. In the challenge brought by Antigua and Barbuda and joined by the European Union, Japan, Taiwan and Canada as third parties, the WTO ruled last year that because the U.S. failed to impose a consistent ban on cross-state betting, it was obliged to open its market to foreign competition. A U.S. appeal is expected to be decided early next year.

According to the office of the U.S. trade representative, Washington’s position is that nothing need be done for the time being.

“Either they rule with us or they don’t. I’m not in a position to talk about hypotheticals,” spokesman Sean Spicer said of the impending decision.

Antiguans see that pose as a stalling tactic.

Because researchers here can find no case in which the U.S. failed to eventually comply with final trade rulings, Finance Minister Errol Cort said he was confident that the U.S. would, after an indeterminate face-saving period, embrace rather than try to eradicate the Internet market.

I think that’s more and more likely myself. The smartest thing we could do at this point is explicitly legalize online gambling and set up a gaming commission to ensure the legitimacy of the games. We can regulate and tax the industry and all those companies set up overseas now would run over one another to be the first ones to say that they’re an American company under the jurisdiction of American regulation.

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