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Online Gaming Regulations

Online Gaming Regulations

Although the regulatory regime for land-based gaming operations is well established in many countries, the gaming laws in such countries will not necessarily have been amended to take account of the Internet and the ability to offer gaming services online. Consequently, there is uncertainty as to the legality of online gaming in most countries and in certain others it is regarded as illegal either per se or unless licensed by the local authorities. In several countries, local regulators are willing to license and regulate local and often state-owned operators, but prohibit foreign operators. In many cases, it is argued that this is to protect the tax and gaming revenues of the relevant government rather than any social or moral protection for residents.

Authorities in certain jurisdictions have taken indirect steps to restrict online gaming by seeking to prevent or deter banks, payment processors, media providers and other suppliers from transacting with and providing services to online gaming operators. The application or enforcement (or threat of enforcement) of gaming laws or regulations, or a change in sentiment by regulatory authorities on the enactment of new legislation prohibiting or restricting online gaming or services used by online gaming businesses or the taking of such indirect steps, may severely and adversely impact the business and financial position of online gaming companies. The legality of customers engaging in online gaming is also uncertain in a number of countries.

Nonetheless, customers in such countries have proved willing to engage in online gaming despite the fact that they may be prohibited by their domestic law from doing so.

If online gaming were liberalized, or licensed and regulated however, particularly in the US, online gaming companies would be likely to face increased competition from large land-based operators and Internet companies that may not currently offer such services as a result of the regulatory restrictions.

The Directors recognise that the Group faces significant regulatory risks in the United States. In this respect, the Directors take comfort from the following:

to date, the Department of Justice's stance that the provision of online gaming to US residents is a violation of US federal laws has, in large part, been based on the Wire Act. However, in the MasterCard International Inc. case in 2002, a federal appellate court concluded that the Wire Act does not prohibit non-sports Internet gambling, the statutory language clearly requires that the object of the gaming be a sporting event or contest and that a reading of the case law leads to the same conclusion;

there is an apparent unwillingness or inability on the part of relevant authorities to bring actions against businesses with no physical presence in the United States;

save in respect of a cease and desist email received by the Group from the Attorney General of Louisiana in January 2005, the Group has not received any notification that the Department of Justice or any other US authority is currently considering bringing any further action against the Group or the Directors or that any such action is imminent;

it is possible that state and local laws that prohibit or restrict online gaming and related services are a violation of the so-called dormant commerce clause of the US Constitution, which provides that state and local regulation of interstate activities is an impermissible restriction on interstate commerce and therefore a violation of the Commerce Clause of the US Constitution;

it is possible that federal, state and local laws that prohibit or restrict online gaming and related services are a violation of US obligations under international trade treaties;

proposals to enact legislation to prohibit online gaming and/or the provision of payment processing services to online gaming operators in the US have faced objections and opposition from various interested parties, including the racing, lottery and land-based casino industries, and have, to date, failed to gain sufficient support to be passed;

the bills currently being proposed by Congressmen Goodlatte and Leach, seeking to prohibit online gaming and /or the use of credit cards, electronic fund transfers, bank transfers and other payment instruments and mechanisms to fund online gaming are likely to face difficulties in gaining sufficient support to be enacted, as with previous attempts to introduce legislation restricting online gaming activity and related services; and

PartyGaming has been advised that, if actions were to be pursued against PartyGaming or its Directors in the US, there are jurisdictional issues regarding the imposition, adjudication and enforcement of US law against PartyGaming or its Directors, as the relevant operating companies are not incorporated in the US and do not have tangible assets or any physical presence there.

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