Authors: James SciclunaJoseph Borg

“May you live in interesting times” is reputed to be an ancient Chinese curse. These days we could probably look to any leading online gaming operator to understand why.
Until a few years ago a handful of jurisdictions worldwide regulated online gaming. In the last five years over 15 European states and two states of the U.S. have regulated or re-regulated this industry. A number of other states in the U.S. as well as some Latin American states are preparing themselves to be next in line.
The EU is currently composed of 28 European states, covering an area of roughly 4.5 million square kilometres (almost 2 million square miles) and having an aggregate population of just over 500 million people. The states forming part of the European Union are commonly referred to as “Member States”. These 28 Member States have agreed to operate a single market, which amongst other things entails the free movement of goods, services, people and capital.  17 of these states share a single currency the Euro.
However, as readers might be aware, in view of the different approaches to regulating gaming taken by individual Member States there is, at present, no duty of mutual recognition of remote gambling authorisations or licenses in the EU.
It is no secret that the ideal situation for online gaming operators would have been for regulators from different Member States to mutually recognise each other’s licences. However, it is clear that this was and remains, for the time being, politically unachievable. The next best solution would have been for regulators in different Member States to reach an agreement on common standards and technical specifications.
Unfortunately each of the Member States which have to date regulated online gaming, jurisdiction came up with its own technical specifications and compliance requirements, all of which broadly seek to achieve these same goals:
  • protection of minors and vulnerable persons;
  • ensuring fairness of the game; and
  • prevention of crime and money-laundering.
Different technical specifications and compliance requirements in each Member State trigger costly IT developments, significant investment in new infrastructure and in certain cases, modification of products. All of this coupled with high taxation have contributed to an ecosystem which can, at best, be described as challenging.
It is probably fair to say that Europe has lost an opportunity to become an example of how online gaming could be efficiently regulated cross-border utilising available technologies.
On the other hand, it must be said that the regulation of online gaming across national frontiers in the European Union has created opportunities for some; primarily incumbent land based operators and entertainment brands with a significant national presence, some of which have successfully leveraged their position onto the online gaming market in the last couple of years.
It must also be said that certain rights granted to EU companies and individuals such as the right to establish themselves in any Member State without being discriminated against by another Member State have been upheld.  This particular right is known as the “freedom of establishment”. The implication, applied to the world of online gaming in Europe, is that an online gaming group established in Malta or Gibraltar, the two leading online gaming hubs in Europe, can choose to use a company established in these jurisdictions to hold licenses issued by the national gambling regulators of most Member States.
U.S. states seem to be following the footsteps of Europe.  This can clearly be seen in the different technical specifications required by New Jersey and Nevada. One hopes that the other States that will be regulating online gaming in the coming months and years will design their regulatory framework around one of the existing models. That would mean that all States would follow either the New Jersey model or the Nevada model, making compliance in the various states more affordable and attractive.
Exceptions to the rule…?
As usual, the devil is in the detail and whereas it is correct to say that the trend in Europe is for online gaming to be regulated in line with national frontiers, there are several “ifs” and “buts” which must be made.
The premise must be that there are still three jurisdictions which do not restrict the operations of online gaming licensees to those jurisdictions’ own territories: Malta, the UK and Gibraltar.
The UK is in the process of changing its laws so that any operator taking customers from the UK will require to be licensed by the UK Gambling Commission and pay point of consumption tax.  However, it does not look like the UK intends imposing any restrictions on the territories from which its licensees take business under the proposed new regime, other than a broad obligation for them to act lawfully.
There are no fundamental changes proposed to the approach to licensing taken by Malta or Gibraltar.  Malta currently regulates around 250 operators. Gibraltar, just under 30, including several well-known brands. Both jurisdictions also require their licensees to act lawfully in terms of from where they take business, though they are likely to adopt a slightly broader interpretation of the rights granted to their licensees under EU law than many other Member States.
The right to regulate online gaming on the national territory is not an unrestricted right. It is actually a right granted by derogating from the overall principle of the free movement of services in the EU. The EU’s Courts have clearly established that it is a right which can be availed of only if certain strict requirements are met. The corollary is that where those requirements aren’t met, the principle enshrined the EU’s constitution (the Treaty on the Functioning of the European Union) that services can be provided cross-border in the EU, must apply.
By way of background, the European Commission, which can be described as the EU’s supranational executive branch of government, has several infringement proceedings pending against Member States, which it commenced due to these Member States’ failure to adopt laws and practices in the area of gaming and gambling which are in line with EU law. Where the European Commission has not given a Member State’s gambling laws a clean bill of health, that always raises a presumption that that jurisdiction’s laws actually fall foul of EU law.  Applied to the cross-border provision of online gaming, the position can often be taken that services can be provided to residents of a Member State the laws of which are not in line with EU law.
EU law aside, there are, at the time of writing, two jurisdictions that recognise online gaming licenses issued by other Member States. The UK, which will continue to do so until its laws are changed (probably sometime in 2014) and Greece which, when it adopted its own online gaming law provided for an interim period during which licenses of other Member States would be recognised. Several operators, certainly in Malta and probably also in Gibraltar, currently provide their services to residents of both the UK and Greece squarely within the provisions of those countries’ respective laws.
Moving forward       
Exceptions aside, the need for at least some uniformity or standardisation of technical requirements across Europe is sorely felt by most operators. The European Commission recognised this in its Green Paper of March 2011, in its communication of June 2012 and with the setting up of its expert working group on gambling.  Perhaps the strongest call for closer cooperation, especially insofar as compliance requirements are concerned has come from the European Parliament in a report which it adopted in September 2013.
Interestingly, in October 2013 Malta’s Lotteries and Gaming Authority and Alderney’s Gambling Control Commission entered into a memorandum of understanding which is rather far reaching in terms of cooperation between these two regulators of the gambling industry. Alderney is not in the EU, but it is a well-known hub for online gaming which capitalised on its close historical and geographic connections with the UK. It was one of the first jurisdictions in the world to regulate online gaming specifically.  The timing may have been purposely intended in an attempt to give a sign of the sort of agreement which regulators of online gaming in and around Europe can aim to enter into with one another.
In the meantime there are legislative developments on-going in Europe which industry operators should be monitoring. These are primarily the Council of Europe’s draft Convention on the Manipulation of Sports Results (“CoE Sports Convention”) and the EU’s 4th Anti-Money Laundering Directive (“4th AML Directive”).
It is our understanding that several participants in the negotiations of the CoE Sports Convention have, amongst other things, sought to have provisions included in the draft text which might result in industry operators having to pay mandatory fees to the organisers of sports events.  Readers may recall that when France regulated its online gaming market, it had introduced an obligation for its online gaming licensees to reach an agreement with the organisers of sports events before being allowed to offer bets on those events.  At the time the sports organisations which sought to benefit from these payments argued that these funds would be applied to the honourable cause of fighting match-fixing and sports corruption.  However, their original claim was more on the lines that they had an intellectual property right in the event, a concept which has been shot down by the courts of other Member States and by the EU’s Court of Justice.  Operators should keep their eyes on the CoE Convention as they wouldn’t want this right to be sprung upon them by surprise in a roundabout way.
Another bit of law in the making is the EU’s 4thAML Directive which will bring about a number of changes for online operators. Those operators licensed in one or more European jurisdictions will already be obliged to have a number of AML measures in place and will probably find it easier to adjust to any new requirements. However, several new measures will apply across the board to all operators in the EU once the 4th AML Directive is adopted. Several of the measures proposed in the latest drafts of the 4th AML Directive require clarification.  One issue which should be clarified is whether the proposed requirement that customer due diligence should be carried out on deposits and withdrawals of 2000 Euro or more applies to single deposits and withdrawals or to aggregate deposits and aggregate withdrawals over a period of time.
Apart from laws in the making, there is at least one very important court case which might be decided in 2014 by the EU’s highest court. It concerns appeals brought by Royal Scandinavian Casino and the Danish Amusement Machine Industry Association respectively against a decision by the European Commission which effectively allowed different tax rates to be applied to the online and land based gambling industries in Denmark.
In these cases the Court will decide whether different taxation rates for online and land based gambling providers are allowed under the EU regulations on state aid. The outcome is likely to have a huge impact on what the future of taxation on gambling within the EU will look like.  It might even be a decisive factor in whether European online gambling operators can survive competition from operators from external countries in for example the Caribbean and Asia.
There are several market spaces close to or that resemble online gaming which have grown over the past few years. Social gaming is one of them. It is an area in which huge investment has been made by some of the largest gambling businesses on the planet and the subject of endless panels at industry conferences.  Fundamentally, whereas talk has always been about whether social gaming should be regulated and how it should be regulated, there seems to be a movement by all and sundry (gambling regulators included) to try and really understand whether there is anything to be regulated. The laws of most jurisdictions, certainly those with which we are familiar, require there to be consideration, an outcome preponderantly based on chance and a win in cash or monetary equivalent value. In the absence of one of these requirements there is no gambling. It seems to us that there is increased realisation that just because something looks like a duck it isn’t necessarily a duck. Developments in empirically understanding whether there are any types of social games or any aspects of social gaming which deserve the attention of regulators will be welcome.
Another space which is very close to gambling is that of binary options. Increasingly providers of binary options set up stand at gambling industry events.  Some jurisdictions do treat binary options as gambling, but others consider that this is a financial service and regulate it accordingly. Malta and Cyprus both view binary options as financial services which are caught by the Markets in Financial Instruments Directive (MIFID).  It is the financial services authorities in these jurisdictions which issue investment services licenses to binary options providers.  Both jurisdictions require holders of an investment services licence to keep high capital reserves, but on the other hand being in possession of one of these licenses allows the holder to provide its services online throughout the EU. This is a type of product which is likely to become more widespread.
Interesting developments are also expected in 2014 in Central and South America. Readers may already be aware that a number of Latin American jurisdictions are looking closely at regulating online gaming. Some have even got to stage where their regulators are starting to draft possible regulatory scenarios.  The regulation of this market in the U.S. is a strong driver for the same to occur in Latin American states.  Moving continent, the National Gaming Commission in South Africa has been given a mandate to come up with a plan for the regulation of online gaming in that country.
As 2013 did a year ago, 2014 promises to be another interesting year.