Online gambling hub sprouts north of PH

By Melvin G. Calimag

(Editor’s note: With the Cagayan freeport zone in the news again because of alleged car smuggling, we are re-publishing this story which the author first wrote for a newspaper in September 2005).

In the sleepy fishing town of Sta. Ana, the northernmost municipality in the province of Cagayan, a new kind of IT activity — something which the Philippines itself has yet to experience — is emerging: online gambling.

The Philippines, a deeply conservative Catholic country, is not exactly familiar with online gambling, which is basically casinos and lotteries operated via the Internet. Perhaps the only idea of Filipinos have of it is the failed and short-lived attempt of a company called Sage to introduce online gambling in the country a few years back.

But unknown to many, a Filipino-led company has set up at the Cagayan Special Economic Zone and Free Port (CSEZFP) in Sta. Ana town where it now operates — or is about to operate, according to its chief executive officer — an online gambling hub.

The company, First Cagayan Leisure and Resort Corporation, has been awarded by the zone’s administrator, the Cagayan Economic Zone Authority (CEZA), with a “master license” to operate “Internet gaming.”

This master license allows First Cagayan to issue seven-year licenses to foreign entities to operate online gambling. In a June 2003 interview, Albee Benitez, president of First Cagayan, told Judi Kelly of www.GamblingLicenses.com that the company is in a position to issue as many licenses as possible.

Benitez said the application fees are $40,000, with $25,000 refundable should the applicant not be successful. “The application fee includes the first year’s annual fee. In the second and subsequent years, annual fees are set at $40,000 per annum and includes up to $15,000 as an advance against future taxes. Taxes are set at 2 percent of gross win.”

First Cagayan, in its website, lists seven foreign corporations that have been given licenses to host their services at the economic zone.

The company’s website also said: “First Cagayan regulates and monitors on behalf of CEZA all operators of Internet gaming in the Zone; it receives, processes, and issues licenses on behalf of CEZA.”

Documents provided by CEZA on registered enterprises at the ecozone showed that First Cagayan has an initial capital investment of $128,000, with a total of 17 employees. It also listed Bayview Technologies Inc. as a locator with the investment capital of $10,000 although the website of First Cagayan classifies the company as its licensee.

According to CEZA, licenses are given only to offshore-based corporations in order not to intrude in the territory of Pagcor (Philippine Amusement and Gaming Corporation) which has the sole mandate to operate legalized gambling in the country.

This means that only players based in other countries are able to access and place bets on the online casino games hosted at the CSEZFP.

“Operators cannot accept bets originating from within the territorial jurisdiction of the Philippines and/or on sporting events held within the country,” its website said.

Legal basis

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.”

As early as 1997, legal debates have already been conducted relating to the establishment and operation of casinos within the eco-zone. All of these seemed to have been resolved in favor of the legality of the provision.

And while the law did not specifically cite “Internet gaming” or “online casino” as among those classified as tourism-related activities, the CEZA said it has already resolved this issue through legal discussions, including one it conducted with Pagcor.

Due to this provision, the Cagayan eco-zone is currently the only eco-zone in the country that has the legal capacity to host and issue online gambling license to offshore companies, the CEZA said.

As for First Cagayan Leisure and Resort Corp, the company has hired the services of topnotch gaming lawyers to make sure it is standing on firm legal ground. Apart from the resident corporate legal counsel, Katrina Nepomuceno, the company recently appointed Frank Catania, a New Jersey-based gaming lawyer, as its legal consultant.

Lucrative area

Online gambling, or what it calls interactive gaming, is a lucrative niche market which the CEZA said it wants to promote as a core business for locators. This strategy is the reason why it crafted the “rules and regulations” and “code of practice” for interactive gaming early on.

The master license it gave to First Cagayan is the first step towards accomplishing that goal, although it is still not clear whether the company has actually started its operations or has yet to complete its IDC (Internet data center) at the eco-zone.

Rene Nunez, CEO of First Cagayan, said his company is still on the process of putting up its facility and will officially launch the hosting services for online gambling in the next few months.

Nunez initially agreed to grant an interview to share the company’s plans but changed his mind and requested that the questions be sent instead via e-mail. Questions were sent to him but he did not answer.

A visit by at the eco-zone complex in Sta. Ana, Cagayan and interviews conducted with First Cagayan staff confirmed that the company’s full hosting facility has yet to be installed.

But an information posted in its website said the company has partnered with telecommunications companies such as Pacific Century Cyber Works, AsiaNetCom, Teleglobe, and PLDT to offer “high quality, high speed direct Internet connectivity from fractional E-1, E-1 (2Megabits per second), DS3 (45Megabits per second), up to STM-1 (155Megabits per second) at competitive prices.”

It also quoted a speech of CEZA administrator Jose Mari Ponce during the 2005 Global Interactive Gaming Summit and Expo held last June in Montreal, Canada in which Ponce said First Cagayan “offers state-of-the-art Internet data center facilities in Cagayan and also in Manila providing scalable server hosting services, secured environmental and climate control, and reliable power and backup power supply.”

“Together with our partners, First Cagayan has access to the most diversely-routed, highest-capacity IP backbone in the Asia-Pacific region, with direct connectivity to the US and Europe,” Ponce was also quoted as saying.

Whether the facility is ready or not seems immaterial at this point for offshore operators as long as they have their “interactive gaming license.” One such recipient, Zipang Group, proudly features in its website a PDF version of the certificate issued by First Cagayan in behalf of CEZA.

Air of caution

While CEZA, and consequently First Cagayan as the master licensor, appear to have the necessary legal foundation to issue licenses for offshore-based online gambling operators, a prominent Internet lawyer said the CEZA should exercise diligence in giving out licenses as these may be exploited by unscrupulous entities.

“The Philippine government, through CEZA, may unwittingly give these companies the legitimacy to operate legally,” said Jesus “JJ” Disini, president of the Internet and Society Program of the UP College of Law.

Disini, who is also the author of the implementing rules and regulations of the E-Commerce Law, said it is the Philippines who would be put on the spot should an operator commit any violation since its certificate was issued by the Philippine government.

In the website of First Cagayan, it said that although offshore operators are “required to domicile themselves” in the Philippines, eco-zone rules do not require them to incorporate a Philippine company. “They only need an interactive gaming license and register as CSEZFP enterprise with the CEZA.”

However, Disini said there seems to be no problem in allowing offshore-based online gambling firms to host their services here as long as they do not offer the games to the local population.

“It’s just like multinational companies hosting their back-up data in IDCs located here in Metro Manila or e-commerce websites being hosted here but whose clients are transacting abroad,” he said.

In the same interview with www.GamblingLicenses.com, First Cagayan’s Benitez said the company has instituted strict rules before an operator is given a license.

“Firstly, a license will not be issued until the operator’s software has been tested and certified by a recognized testing agency. We have put in place a comprehensive reporting system along with stringent security measures that ensure the operation and its software are fair and remain accountable,” he stated.

With regard to measures that would ensure players would be paid with their winnings, Benitez said operators would be required to maintain sufficient funds in a bank account to meet player winnings.

“These funds will be monitored by the regulator. In the event of a dispute, the regulator will arbitrate in all cases. There are severe penalties involved for operators that do not comply with our code of practice,” he added.