Canada: Internet Gaming Poses Challenges for Financial Institutions

Article by John Tuzyk and Dawn Jetten, ©2006 Blake, Cassels & Graydon LLP

Recent U.S. developments have highlighted issues relating to Internet gaming in Canada and the legal position of businesses located in Canada, such as financial institutions, which provide services relating to Internet gaming.

A number of recent U.S. developments have focused attention on the legal status of Internet gaming. The British Chief Executive of BetonSports PLC, a publicly-traded company in Britain which owns a number of Internet sportsbooks and casinos, was recently arrested in the United States and charged with offences relating to violations of the U.S. Wire Act and other U.S. federal legislation. In addition, the United States House of Representatives has approved legislation that restricts the conduct of Internet gaming in the United States. Although the position of U.S. federal government officials has been that offering Internet gaming to U.S. residents is illegal, the new U.S. legislation makes it explicit that the U.S. Wire Act prohibitions apply to Internet gaming. It also criminalizes the processing of payment for Internet gaming, and would prohibit banks, credit card companies and payment processors from engaging in such transactions. The legislation is subject to U.S. Senate approval. As many Canadian credit card issuers and merchant transaction processors use payment processors located in the U.S., this may indirectly affect Canadian cardholders and merchants.

Under the Canadian Criminal Code, most activities relating to what would commonly be referred to as gambling, including recording or registering bets, controlling money relating to betting, engaging in the business or occupation of betting, providing information intended for use in connection with betting, or sending, transmitting or delivering messages by certain means conveying information relating to betting, are illegal.

The Criminal Code provides for certain exceptions to the prohibitions on gambling. Among the best-known of these are:

• provincial governments may conduct and manage games of chance; this is the exception which allows for the operation of commercial casinos and lotteries by Canadian provincial governments
• pari–mutuel wagering
• certain types of gaming carried on by charitable organizations, subject to provincial regulation.

Another significant exception from the Criminal Code prohibition on gambling is private bets between individuals.

Other exemptions from criminal liability exist, for example, where products used in gambling (such as software) are developed or manufactured in Canada, but sold for use in jurisdictions where such use is not illegal.

It appears clear that if all aspects of an Internet gaming transaction occurred within Canada, subject to the exceptions noted above, an offence would occur under the Criminal Code provisions relating to gambling noted above.

However, there is no court decision which clearly confirms that Internet gaming offered to Canadian residents from Web sites and operations outside the country will offend the Criminal Code provisions.

While Canadian courts do not generally exercise jurisdiction over crimes committed outside of Canada, the courts have held that a criminal offence would be subject to their jurisdiction if a significant portion of the activities constituting the offence take place in Canada. This is referred to by the courts as a "real and substantial link". For example, in a case under securities legislation, businesses which were located and operated outside of a province were found to be in violation of the securities laws of the province, because the individuals whose business was solicited from outside the province were resident in that province. Similarly, courts have held that Canadian copyright law may apply to Internet Web sites even if they originate from a source outside of Canada.

In addition, in a case applying the Criminal Code gambling provisions, the Supreme Court of Canada held that a lottery licensed by the Province of Prince Edward Island could not be offered to Canadian residents through the Internet, as the exemption under the Criminal Code only related to activities in that province, and not to gaming offered from a Web site in that province to all Canadian residents via the Internet.

Although not entirely free from doubt, the weight of authority would suggest that, as the "recipients" of the activity are in Canada, the courts may well find that offering Internet gaming to Canadian residents constitutes a criminal offence committed in Canada.

However, existing legal authority suggests that the Criminal Code does not permit service of criminal process on a person located outside of Canada. This means that, even if it could be established that an offence had occurred in Canada, those to be charged with the offence would have to be located in Canada for criminal process under the Criminal Code to be served on them.

Of significance to financial institutions are the provisions of the Criminal Code which provide that anyone who aids or assists in any manner in anything that is an offence under the Criminal Code provisions relating to gambling has also committed an offence.

It is important to note that, for a person to be charged for aiding or assisting an offence, it is not necessary that the person actually committing the offence – the principal – also be charged and convicted. Accordingly, if it was determined that offering Internet gaming to Canadian residents was illegal under the Criminal Code, even though it was offered from a Web site outside Canada by individuals who could not be served with criminal process and thus could not be charged, those in Canada facilitating such transactions could presumably be convicted of aiding or assisting such an offence.

The courts have held in "aiding and abetting" cases that the definition of "aiding" requires that the accused assist or help the principal and the accused intended the consequences that flowed from the aid. It has been held that to be convicted of aiding, the accused must have knowledge of, or a wilful blindness to, the activity in question.

Although the matter is not entirely free from doubt, if, as appears to be the case, offering Internet gaming to Canadian residents is illegal under the Criminal Code, there is a risk that financial institutions who knowingly transmit or process payments directly to Internet gaming operators, or to Internet payment processors known to facilitate payments to Internet gaming operators, from Canadian residents could be prosecuted for the offence of aiding or assisting in an offence under the gambling provisions of the Criminal Code. In many cases, it may be difficult for a financial institution to know if a credit card transaction or Internet money transfer transaction is being made in respect of an Internet gaming transaction. However, in some circumstances this may be obvious.

Accordingly, although to our knowledge no Canadian resident person or organization has been convicted of, or charged with, an offence under the Canadian Criminal Code for aiding or assisting in the offering of Internet gambling to Canadian residents, a risk for such liability exists.

As Canadian provincial governments, in particular, generate significant revenue from the operation of commercial casinos, lotteries and other forms of gambling, they have a significant financial incentive to discourage assistance by Canadian entities in Internet gaming offered to Canadian residents and so they may seek the enforcement of such provisions in the appropriate circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.