Winter 2009

Unless the ECJ surprises us this September with a judgement in which it makes it clear that the principle of mutual recognition of licenses obtained in another Member State should apply within the EU, it now seems clear that over the next twelve months new regulatory models could be in place in a number of Member States.

France, Belgium and Denmark all currently have advanced stage draft bills which the governments of those respective jurisdictions propose to introduce to regulate the online betting and gaming industry. There have been considerable changes in the regulatory landscape in Italy.  Spain, it is rumoured, is now really making some progress with getting a draft law together in spite of the difficulty of reconciling the expectations of its 17 autonomous communities. The Dutch Justice Ministry, after attempting to scare banks from processing gambling related transactions and angering the British Trade Minister, has said that it intends to set up a commission to investigate the possibility of “legalising” online gaming.

All of the above jurisdictions have traditionally, some with more fervour than others, defended their right to maintain monopolies in the gaming and betting industries. Of the above Italy already requires and the others are proposing to introduce regulations which require an operator to be licenced by a local regulatory authority in order to  “legally” offer its services online to customers within their territory.

Of course this is far from an ideal scenario. Carving up Europe into a multitude of separate regulatory systems for a business which because of the very medium through which it is carried out is borderless is also not the most sensible. A strong argument can definitely be made that Member States which seek to do so disregarding equivalent licenses issued by other Member States act beyond their right to safeguard the interest of their public.

Still, liberalisation in jurisdictions the national laws of which are to date still strictly monopolistic is welcome. At least, that provides more of the certainty which business requires and the possibility for operators to advertise in markets where currently they are restricted to marketing online. I say that such a change is welcome but of course that is so provided that such market “opening” results in a truly level playing field which allows for commercially viable operations.

Viability depends on several things especially in markets which are becoming increasingly competitive and are struggling in the present economic climate. The level of tax, the possibility to diversify products and the flexibility for operators to make use of technology to run efficient operations are all key.

Similar issues arise in respect of every jurisdiction which regulates or proposes to regulate our industry and to highlight some of these I have focused below on what I consider to be some of the most topical regulatory developments in Italy and France, two of the jurisdictions which I know best and two of the largest traditionally monopolistic jurisdictions in Europe.

Italy

Of all EU Member States Italy is the jurisdiction which has provided us with the backdrop for perhaps the most important ECJ decisions on online gaming and betting.  It has also been without any doubt the leader amongst the traditionally monopolistic states in Europe to “open” the betting and gaming market and, since the Italian government’s first initiative to licence the provision of online skill games in 2006 in the wake of the Gambelli judgement, it has come a long way. This is due in good measure to a realisation that it is impossible to ban an industry for which there is great consumer demand and which it is practically impossible to block from a technological point of view.  It is also due to the fact that opening the market further will bring additional and now badly needed revenues to the state coffers.

During the past couple of years Italy has opened the tap bit by bit but in the last few months the Italian parliament has adopted some very significant changes which have significantly widened the product market, partially improved the basis of taxation and addressed certain elements of Italian law which clearly conflicted with the EC Treaty and the ECJ’s interpretation of it.

Once all of the decrees and technical regulations required to be implemented under the recently adopted statutes have been set out it will be possible for online operators to offer within Italy and on a .it site bingo, betting exchanges, cash games of poker and other card games, certain casino type games and fixed odds bets on simulated events in addition to the current offer of sports betting, horseracing, card game tournaments and scratch and win type instant lotteries.  In terms of products there will now be a more or less level playing field between all online operators.

Casino type games of chance, card cash games, betting exchanges and bets (fixed odds and pool) on simulated events will be taxed at 20% of gross profits.  Tax on sports betting, horse racing and card game tournaments will remain unchanged, so levied on stakes, at least for the time being.

There is much to say in favour of a profits based taxation model but of course the higher the percentage of taxation the less interesting it becomes.  20% is not low and since this rate has been introduced on products which were not previously available in Italy it is hard to make a comparison with tax paid on existing products, the basis of which is turnover.  If Italy moved to tax gross profits in all areas, it seems that even at a 20% tax rate that would be an improvement on the existing position. It would also be added incentive for operators which to date are reluctant to obtain an Italian licence to do so and for operators which already have a licence to invest more in the Italian market.  The bottom line however is that 20% would still be 5% higher than the UK’s 15% betting and gaming duty and even the largest operators in the UK have found it hard to live with that. They have chosen to move elsewhere in Europe or offshore.

Server location, which had long been a bone of contention, is no longer an issue as servers facing Italy can now be hosted anywhere in the EEC subject to the requirement for AAMS to have a real time record of gaming transactions and also a real time record of player registration.  A licensee can be an entity established in the EEC without the need to have a head or operational office in Italy.

Another important development is the introduction in Italy of further responsible gaming measures which are in line with industry best practice.

Sanctions for those taking business without a licence and with a licence but not in accordance with AAMS’ technical regulations have also been beefed up with risk of imprisonment of up to 3 years for those taking online business from Italy without an Italian licence.  Such a measure would have certainly been deemed disproportionate by the ECJ prior even to the latest Italian reforms.  The picture is now perhaps a bit less clear cut but a strong argument can be made that these sanctions are still by far excessive.  The maximum term of 3 years imprisonment is a long time indeed when one considers that this is the punishment which potentially applies to an operator which has one or more licenses with as more stringent licence conditions in another Member State.  It is understandable that the Italian government would want to impose sanctions as a disincentive to those not licensed by AAMS.  However, criminal sanctions and especially imprisonment seem disproportionate to both the nature of the activity being sanctioned and the objective that the sanction seeks to achieve.

Although Italy has come a long way it is hoped that the momentum of change will continue.  Apart from the need for a revision of the criminal sanctions which have just been introduced another few key points come to mind: for instance it not yet clear that AAMS fast tracks licenses obtained by an applicant in another Member State, the limit on licenses which it is authorised to issue could be removed and a reasonable profits based tax regime could be introduced to cover all products.

France

France’s “controlled” opening of its online betting and gaming market which was scheduled for January 2010 is now to take place by June 2010. The proposed legislation is not technology neutral so it does not cover telephone betting, satellite or mobile.  A lot of work has obviously been put into the draft bill but some of the most controversial aspects of regulation such as payment system blocking have been left to be dealt with in subsidiary legislation.

The products covered by the bill and which a holder of French gaming licenses will be able to offer to the French market if the bill is adopted in its present form are pool betting on horses, sport betting (pool and fixed odds) and society/skill games including poker (both tournaments and cash games).  No mention is made of casino games and it seems that these products are to remain under the preserve of the French gaming and sports betting monopoly, La Française Des Jeux which could give rise to a possible claim of discrimination.

In line with the position in Italy at present, the horse racing and sports events on which betting will be allowed will be controlled by the regulatory authority, which in France will be called Autorité de Régulation des Jeux en Ligne (“ARJEL”). Betting will only be permitted on real events and live betting will be subject to strict controls.

The French bill does not require that an operator should be established in France in order to obtain a licence from the new regulatory authority.  Establishment in any EEA member state would suffice provided that that state has a double tax treaty with France which includes a clause on administrative assistance in the fight against fraud and tax evasion.  However, to be granted a licence an operator must have a representative in France responsible for compliance with license and fiscal conditions and this fact has been criticised been the European Commission (“Commission”) in a reasoned opinion presented to France earlier this year as representing an obstacle to the free movement of services.

The Commission has also asked France to clarify the proposed requirement for operators to have real time back up of play data situated in Metropolitan France (i.e. in that part of France situated in Europe and not in any of its overseas territories).  The objective of this provision is clearly to enable ARJEL to have access to player and transactional records for various compliance purposes including tax.  It is worth noting that access to such data is also required by regulatory authorities in other jurisdictions; Malta, Italy and Alderney included.  In Italy for instance it is necessary for an AAMS licensed operator to plug in to the Italian Finance Ministry’s ICT branch and for transactions to be routed through that network without the need for an operator to have servers located on Italian soil.  However, the French bill seems to require operators to actually host mirror servers in France. This would entail significant costs for operators already established in another Member State and would be a requirement disproportionate to the objective it seeks to achieve, especially in view of technologies available and which could allow ARJEL to have access to such data without an operator having to install servers in France.

France’s proposal to limit the maximum return to customers to between 80-85% of stakes has also come under fire from the Commission. France’s argument in introducing such a threshold is that it serves to prevent addiction to gambling. The Commission quite rightly believes that this could constitute an obstacle to the free provision of services apart from it being inconsistent with there being a minimum threshold on returns to customers imposed on operators of gaming machines in France.

An argument which perhaps has not been made sufficiently in respect of returns to customers is that regarding consumer rights. There is no doubt that the vast majority of customers play for fun and not out of any compulsion.  Problem gambling is a reality but it is one which can be dealt with in other ways. Should not consumers be entitled to the best offer possible from a licensed operator? When regulating the premise cannot be that everybody has a gambling problem which the state is trying to discourage. If that is so it would certainly be inconsistent with the efforts of FDJ and PMU to increase their revenues over the past years. The obvious risk from a regulatory perspective is of course that as the market becomes more sophisticated customers will seek better offers from “offshore” operators not subject to such caps.

We have seen over the past years that attempts to control or deny access to operators not licensed in a given jurisdiction has not had the success that those implementing it would have desired.  ISP blocking is far from fool proof and attempts to restrict movements of money to and from payment services providers including banks would clearly go against another of the freedoms afforded by the EC Treaty, the free movement of capital and payments.

It is unclear what France’s intention is in respect of online payments.  The bill as revised by the Assemblee Nationale’s Finance Committee contains an article which prohibits operators from accepting payments other than by bank transfer, bank card or cheque. The intention seems to be to exclude PayPal, other e-wallets and generally other payment system out of a fear that payments would become untraceable. The bill also contains an enabling provision which would allow the French government to introduce legislation to block payments. Of course France was chastised by the Commission back in 2007 when it attempted to introduce legislation which would make the processing of payments received from and made to an online betting and gaming operator illegal.  That proposed regulation was subsequently withdrawn.  The events unfolding  in connection with the Dutch Ministry Of Justice’s instructions to banks not to process payments from online gambling operators serve to show that, apart from possible challenges under European law, attempting to block banks from processing payments could also lead to bi-lateral issues between Member States.

Another controversial point in the French bill is the proposed creation of a new intellectual property right for sport federations over the activities which they organise.  The bill requires operators which want to take bets on particular sports events to obtain a licence to do so from the organisers of those events.  Effectively French sporting federations have been elevated to the level of “affiliates” and, although they will have to ensure that they do not engage in anti-competitive practices it seems like they would be free not to grant such a licence to any one or more operators with which they thought best not to contract.

What has been said above in respect of levels of taxation applies equally and perhaps even more to France than to Italy.  The proposed French gaming and betting tax model is completely stakes based. Apart from the 8.5% sports betting tax the bill proposes a 15.5% tax on horse racing and a 2% tax on poker.  These tax levels together with the maximum threshold of returns to customers will probably lead to only four to five large and fully committed operators being able to compete in the French market with the rest folding or choosing to operate in France without a French licence.

There are aspects of the French bill which are sound. For instance it is solid in terms of responsible gaming and incorporates many of the measures in respect of player protection which the industry has already accepted as best practice.  It also provides a mechanism for consultation between operators and the regulator.  However, there is still a lot of work to be done to fine tune the legislation in order for it to comply with EU law and provide for a commercially viable marketplace.  The postponement of the target for implementation is hopefully a positive indication that the French government is aware of the work that still needs to be done and that it won’t seek to push the legislation through without considering the Commission’s and the industry’s concerns on the topics referred to above.

 

Moving forward

Most of the issues surrounding the progressive opening of the Italian market and the proposed opening of the French market which I have attempted to illustrate above are broadly the same issues which arise in respect of every market “opening”.  The sensible resolution of these issues is key for the viability of a business in our industry and is also vital to those jurisdictions seeking to regulate for them to attract applications from existing operators.

In a regulatory landscape such as that taking shape right now the larger and more committed operators will almost certainly seek to obtain licenses in their main markets if those markets are open to competition.  However, the higher the tax levels and the more burdensome the restrictions in terms of products and returns to customers the likelier it is that customers in those jurisdictions will choose to play with operators regulated in other Members States, third countries or, worse, not regulated at all.

As Italy is showing the carrot and the stick method can work but the carrot needs to be juicy enough. That is, it can work in the short term to medium term but finally, carrot, stick and all that notwithstanding the fact remains that this is an industry which is cross border by nature and the only sensible means of regulating it in the medium to long term is with a clear cross border solution. Unfortunately several opportunities have been missed and that is not where we are heading at the moment.  It may be quite a few more years and several more ECJ decisions before we get there.

Author:

James Scicluna(james.scicluna@whpartners.eu)

First Published in

European Gaming Lawyer, Winter 2009

Link:

http://www.gaminglawmasters.com/magazines/european/EGL%20