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GOVERNMENT OF PALAU Office of the President Koror, Palau

NEWS RELEASE August 22, 2000

After conferring with legislators, members of his cabinet, and other advisors, and following an open forum on the matter, President Kuniwo Nakamura today signed Internet law RPPL 5-45, opening the way for the Republic to allow the operation of Internet gaming enterprises based in Palau.

The new law gives the President the authority to negotiate and enter into agreements granting one exclusive concession to operate a "virtual pachinko" game and one exclusive concession to operate an "Internet digits lottery game" from Palau. Each game would be playable only via the Internet and only by persons accessing the games from outside Palau. The "virtual pachinko" game would mimic the pinball-like game, which is extremely popular in Japan.

The "Internet digits lottery game" would allow players to attempt to select numbers, which match those generated by a computer program. In return for the concession, the operator of the game would pay at least $2.5 million per year to the Republic, with the funds specifically earmarked for the Palau National Scholarship Fund, the Palau Community College Endowment Fund, a trust fund (to be established) for health care for the citizens of Palau, the Civil Service Pension Plan, and the Palau National Direct Housing Loan Program.

Additionally, in lieu of revenue taxes, the game operators would pay a commission of four percent (4%) of their gross receipts after any payouts to game winners. The duration of each of the initial concession agreements could be for a maximum of seven years. All other terms will be subject to negotiation.

In order to ensure that the operators of the game concessions would not run afoul of existing laws, the law also amends Title 17 of the Palau National Code.

Chapter 16 of that title provides that "(e)xcept as herein specified, all forms of gambling shall be prohibited in the Republic." Although the Internet gaming law specifies that no access to the games shall be allowed from within Palau, it nonetheless contemplates that the operations of the games will be centered in Palau.

Therefore, the question arose as to where the playing of the games would occur: would the play occur in the remote country where the participants played on their computer or would it occur in Palau where the operators managed the games and sent out the signals representing the games? Rather than wrangle with that issue, the law merely amends 17 PNC §1601 to include the Internet games (under certain narrow circumstances described by the amendment) as exceptions to the prohibition on gambling.

In signing the legislation into law, the President noted that there were several flaws with the bill as drafted. However, because the bill grants the President great discretion in setting the final terms of any concession agreements, the President declared that "many of these difficulties can be addressed through careful negotiation and drafting of any concession agreements. Proper framing of the agreements will be able to correct most, if not all, the problems I see with the act as drafted."

The President also stated that the flexibility built into the bill and the opportunity for the OEK (legislature) to revisit the issue as Palau gains experience and understanding of the Internet business environment provided additional safeguards against negative impacts from the law.

The President also acknowledged the moral issues which some citizens had raised with him. In his letter to the leadership of the Olbiil Era Kelulau, he explained that "(w)hile I respect their concerns and appreciate their honest expression of their views, I do not believe that Internet gambling of the type envisioned by this legislation will have significant moral impact on the Republic of Palau."

The President pointed out that the games operators would be required to block access to their sites from within Palau and that there are hundreds of websites which already offer some form of Internet gambling. As President Nakamura stated, Palauans have had unrestricted access to those sites for years. Nonetheless, according to the President, "to date, I am unaware of any erosion of the public good resulting from Palau’s access to those sites. As a result, I must conclude that the moral fiber of our people is strong enough to withstand the potential evil influences of Internet gambling."

President Nakamura’s letter to the OEK reporting his decision on the bill also recognized the possible negative reaction from the international community. As he noted, however, no jurisdiction has been blacklisted or otherwise sanctioned based on Internet gambling alone.

Instead, President Nakamura explained, jurisdictions, which had been penalized by the international community, had numerous other problems in their financial sectors and Internet gambling was merely one more area of concern for the entities, which took action against those nations.

"In fact, it is worth noting that there are a number of countries which serve as hosts for Internet gambling operations yet still maintain very good international reputations."

In contrast to the shortcomings reflected in the language of the bill, the President identified several direct and collateral benefits, which could accrue under the framework established by the bill. The need for Palau to find and pursue alternatives to traditional economic development patterns appeared to be of particular significance to the President’s decision. Emphasizing the need for the Republic to explore innovative and dynamic ways to become a full participant in the new global economy without sacrificing the nation’s environment, President Nakamura described Internet-based businesses as an extremely promising option for doing so.

"By opening the door for the gaming concessions, Palau can begin to gain valuable insight and experience in the operations, pitfalls, and potential of such businesses. Such learning will enable Palau to attract other ‘e-businesses’ (the term used to describe Internet-based businesses) and, to the extent the operators us local talent, could give individual Palauans experience and knowledge which can assist in future efforts to market Palau as a technology-friendly site for investors."

In short, according to President Nakamura, "(b)y successfully pursuing this development path, the Republic could serve as an example of the right way for a developing island nation to take advantage of the benefits of the Internet and significantly enhance its international reputation and stature."

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