Farm Town

Some news on First Cagayan from Bloomberg. Look at the story — it says just one licensed casino in the Cagayan freeport is drawing $13 million of bets a day. Phew!

It’s 11 p.m. and inside an office building on the northeastern tip of the Philippines a dozen people place wagers on blackjack and baccarat. No matter how much they bet, none of the gamblers will win — or lose — a thing.

They are all proxy bettors, making wagers on behalf of patrons who track the action and issue instructions from outside the country by way of a live Internet link.

“There is no place like this in Asia yet,” said Kan Goh, general manager of Eastern Hawaii Leisure Co., which operates the casino in Santa Ana, a town of 20,000 fishermen and farmers.

Cagayan Freeport, a 12-year-old special investment zone that includes Santa Ana, is using the gaming provisions in its charter to chase a slice of the estimated $12 billion wagered over the Internet each year. The zone is the first Asian jurisdiction to legalize online casinos, giving it a head start in the race to lure the region’s bettors.

The zone targets Chinese gamblers who helped Macau overtake Las Vegas as the biggest casino market last year, said Jose Mari Ponce, chairman of Cagayan Freeport, who rented his office to Eastern Hawaii as a temporary home. Harrah’s Entertainment Inc. and MGM Mirage, the largest casino operators, so far have failed to persuade the U.S. Congress to let them take Internet wagers.

Games & Amusements

Sooner or later, things would have come to a head.

We wrote in March that there could be a legal challenge mounted to see if the GARS language (games, amusements, recreational and sports) in the law that created a couple of the country’s special economic zones is wide enough to encompass gambling.  

Well, now Pagcor is formally complaining that PeJI, an entity operating within the Zambo ecozone handing out online gambling licenses, has no right to issue such licenses. Pagcor has sent a cease and desist order to PeJI, saying it has no right to issue gambling permits; PeJI says it has a legal opinion from the Philippine justice secretary that it has the authority to do so. PeJI is ignoring Pagcor.

I’m betting that this will reach the courts. And it won’t stop at a lower court, eventually winding its way to the Supreme Court. If it does, the Supremes should once and for all clarify what it is that “amusements” and “games” covers. Do those terms encompass gambling?

Christopher Arnuco, presidential assistant on trade and vice chair of the Zamboanga City Special Economic Zone (ZSEZ) and Freeport Authority, said gambling operations inside the ecozone were covered by a legal opinion from the Philippines Justice Secretary Raul Gonzalez.
 
ZSEZ authorities have already issued a license to Philippine E-gaming Jurisdiction Inc. (PeJI), which maintains an office at the zone’s Technical Enterprise Building B in Barangay San Ramon here, to control e-Gaming and other related activities “conducted within and from the Zamboanga Special Economic Zone (ZSEZ) pursuant to Republic Act No. 7903.”
 
Under the license, PeJI was empowered to receive and process all applications for and award e-Gaming licenses to business operators.
 
But the Philippine Amusement and Gaming Corp. (Pagcor) has ordered ZSEZ authorities to stop PeJI’s operation as it is illegal and contrary to their sole mandate to issue such licenses.  And the directive had been ignored.
 
Arnuco insists “…we are authorized under the law to operate, even casino for that matter. What we did was to ask Secretary Gonzalez … and he issued a legal opinion saying that yes we are allowed to do so on May 8, 2007 in reply to an earlier letter by ZSEZ chair Georgina Yu.”
 
Arnuco said Gonzalez told them that “contrary to Pagcor’s assertion, the Zamboanga Ecozone Authority possessed power to issue licenses to would-be locators/investors intending to operate tourism-related activities, including games, amusements and recreational sport facilities, including online/Internet gambling casinos among others, within the Zambo ecozone.
 
“After all, gambling is defined as the act or practice of betting, or the act of playing a game and consciously risking money or other stakes on its outcome, which to us, is squarely within the phrase of games and amusements and recreational and sports,” Arnuco quoted Gonzalez as saying.

Legal Competition II

Let’s take a walk through the legislative landscape, and examine the specific laws which created our special (gaming) economic zones.  

RA 7903, officially known as the Zamboanga City Special Economic Zone Act of 1995,  created the ZamboEcozone Authority. This is one of many zones that have mushroomed throughout the archipelago, of which the more famous ones are in the former U.S. bases, Subic and Clark. The zones are legal jurisdictions carved out from the rest of the Philippines, on the premise that a special zone able to provide abundant tax breaks can attract more businesses to locate in the country, thereby creating more jobs than would otherwise have been created.   

Section 7 of the governing law for the  ZamboEcozone Authority states its powers and functions, of which the relevant clause is this:  

(f) To operate on its own, either directly or through a subsidiary entity, or license to other tourism-related activities, including games, amusements and recreational and sports facilities;

Take note of that language. We’ll revisit it soon.  

On the other hand, there is Republic Act 7992, otherwise known as the Cagayan Special Economic Zone Act of 1995. Section 6, the relevant ”Powers and Functions” section, says:

(f) To operate on its own, either directly or through a subsidiary entity, or license to others, tourism-related activities, including games, amusements, recreational and sports facilities such as horse racing, dog racing, gambling casinos, golf courses, and others, under priorities and standards set by the CEZA;

Note that the CEZA law does not directly state that it can do Internet gambling; there is no language prohibiting it either. What it does state is that CEZA can license “sports facilities such as horse racing, etc.” under the umbrella of “tourism-related activities.”  Is that umbrella wide enough to encompass Internet gambling?

But it is worth noting that CEZA’s language is much more explicit than ZSEZA’s.  Again, ZSEZA’s enabling law merely states that it can do ”games, amusements, and recreational and sports facilities.”

How wide is the GARS language? Is it wide enough to include Internet gaming and gambling? The chief regulator of all gambling in the country is known as the Philippine Amusement and Gaming Corp., abbreviated to Pagcor, so ZamboZone proponents can argue that the terms “amusement” and “gaming” encompass gambling.  

This isn’t all semantics. Given the nature of the Philippines, there’s always the risk that someone will challenge both CEZA and ZSEZA. And whatever court challenge may appear will eventually go all the way to the Supreme Court. That process will take several years; in the meantime, those that do establish online casinos can make hay while the regulatory sun is shining.

Legal Competion

Ahh, competition. It brings out the best in us; it forces us to perform at a higher level than we would absent a competitor.

More than two hundred years ago a man by the name of Adam Smith wrote,

“Rivalship and emulation render excellency, even in mean professions, an object of ambition, and frequently occasion the very greatest exertions.” 

Or if you prefer a shorter, more direct quote from the man:  

“Monopoly…is a great enemy to good management.” 

If it is thus for industries, is it thus for governments?  

It’s no secret that the Philippines is now attracting much attention because of its ability, or more accurately, for a certain corporation’s ability, to hand out gambling licenses to online casinos.

Yet if the monopoly of handing out licenses, which is a government function, is granted to a private entity, should it then be subject to the same competitive conditions as business? When capitalists smell blood in the water, no monopoly goes unchallenged.  

So now, instead of just First Cagayan, which bills itself as “Asia’s First Gaming Jurisdiction,”  there is a southern counterpart called PeJI, for Philippine eGaming Jurisdiction, Inc.

Here’s the writeup from PeJI:

A new eGaming Jurisdiction has emerged from ASIA…

HONESTY, RELIABILITY, INTEGRITY

Welcome to Philippine e-Gaming Jurisdiction Inc. (PeJI)!

WANT INCOME TAX HOLIDAY or AN EXEMPTION FROM CORPORATE INCOME TAX?

The Philippine E-gaming Jurisdiction Inc. (PeJI) is powered by Republic of the Philippines Zamboanga Special Economic Zone (ZSEZ) and has the Master License to regulate and control eGaming and other gaming related activities conducted within and from the Zamboanga Special Economic Zone (ZSEZ).

PEJI receives and processes all applications for and awards eGaming licenses to business operators. It regulates and monitors all activities inside the ZSEZ.

PeJI is engaged in the active pursuit of the development of gaming and e-gaming businesses in the Zamboanga Special Economic Zone (ZSEZ). PeJI encourages participants with its commitment to the delivery of stable EcoZone governance and a strong regulatory environment, supported by an extensive range of attractive business advantages and benefits.

The Philippine E-gaming Jurisdiction Inc. has collaborated with the private sector to ensure that all necessary gambling and e-gaming infrastructure is in place. The Ecozone has world-class Technical Capabilities and Full Service Manpower Assistance to address the needs of the international gambling and e-gaming community.

CEZA’s Legal Basis

If you’ve ever wondered how the Cagayan Economic Zone Authority, via First Cagayan Leisure and Resort Corporation , can hand out licenses to online casinos and what the legal foundation is for the Authority’s authority, here’s one answer in Manila Bulletin:

But how is CEZA able to offer online gambling without
infringing the license of Pagcor and encountering the legal
roadblocks that have doomed the earlier effort of Sage?

CEZA officials pointed as legal basis a provision of
Republic Act 7922, the law that created the special economic
zone and which was passed in 1995 with Sen. Juan Ponce
Enrile as the main author.

Section 6 (f) of the said law gave the CEZA the right “to
operate on its own, either directly or through a subsidiary
entity, or license to others, tourism-related activities,
including games, amusements, recreational and sports
facilities such as horse racing, dog racing, gambling
casinos, golf courses, and others, under priorities and
standards set by the CEZA.”

UIGE Acts, Asia Rejoices

Here’s an analysis of what the US has wrought after passing its Unlawful Internet Gambling Enforcement (UIGE) Act.

The land-based boom in Macau is an indicator of the revenues that can be generated in the region while the liberalisation of casino gambling in Singapore and the introduction of a licensing region in the Philippines has led many to conclude that historically strict approaches to gambling are relaxing. The industry re-focus is well-timed. Online gambling has not previously even been a viable commercial option in many parts of Asia given the limited access to the internet, and particularly broadband services, yet the US fallout comes at a time when high-speed internet access in Asia is growing dramatically.

So  all those servers that used to take bits & bytes from the U.S. are hopping on a plane, traveling to Asia where a gambling license – and enough bandwidth – is available.

The solicitor from UK says:

The Cagayan region of the Philippines is the only Asian jurisdiction currently to licence online gambling. Therefore, in the absence of a Cagayan licence (or, albeit unlikely, a domestic operating licence), operators in Asia need to obtain a licence in a Western jurisdiction.

Then again, even those watching the industry may not be able to keep up with the pace of change. Check out this site.