I still remember with nostalgia the early days of the old Gaming Board that in 2001 was contemplating the Internet revolution in casino games. It braced itself to grapple with ethereal virtual games, which appear to come through the clouds from nowhere and can be a regulator’s nightmare when it comes to identify the source or, even worse, the ownership of the game engine.

However, the government of the day was well advised not to fear the challenges of the wireless industry and set the ball in motion by getting a number of political appointees together with ex-gaming board hopefuls to draft the Lotteries and Other Games Act in 2001. Really and truly there was not much to build on in those early days when bandwidth was modest and ISPs were only just starting to invest in back end equipment. There were no banks who would lend to foreign operators who tested the waters in those pioneer days since the taboo associated with the industry was a deterrent and banks considered the sector a high risk. Again, no banks were ready to cash in on the lucrative business of credit card processing, which to this day (with minor exceptions) is all handled by overseas banks not licensed in Malta.

I recall the excitement when I was invited by our PKF office in Sydney, Australia in 2001 to promote Malta’s sports book licences (then the only category available). The trip was successful and I succeeded to license in Malta the first listed sports book operator who was operating on a license issued in Darwin

For three long years PKF had lobbied the government and wrote regular articles in the Times of Malta about the economic contribution that such a well-regulated industry can provide well-paid jobs, generate tax revenue and create a positive multiplier effect. During the three long years it took the Lotteries and Gaming Authority to research the best gaming duty and other operating rules for prospective applicants, PKF had taken a proactive role in organising the first “Small Jurisdictions” conference in 2002 as day one of a three-day event in Barcelona which was the precursor to today’s much acclaimed EIG event. Not being high in the pecking order of the political hegemony, which was swiftly attracted to the new openings, PKF tried but failed to persuade a top official of the gaming board to address the Barcelona event. The event was well attended and opened the floodgates for PKF to meet the giants of the international remote gaming industry.

In 2004, a new suite of licences covering poker, sports book, casino games and software vendors were introduced and the industry since then has grown from strength to strength. Employment generated by the regulated gaming industry grew year on year, the overall gross gaming revenue exploded while the number of licensed operators grew from 12 in 2004 to almost 250. The number of online gaming licences reached the 425 mark in 2012 when the LGA was awarded the Fast50 award for the second consecutive year, in recognition of being a regulatory body that seized innovation and diligence. Another accreditation was received in the recent ‘Austria v Omer and Dickenger’ ECJ case. In its ruling, the ECJ stated that Malta’s regulatory system is of a high level and is ‘sophisticated’, while the European Commission, in its launch of the Green Paper on the future of Online Gambling, described Malta’s success in this sector as a result of also having a strong regulatory system.

Naturally, over the past 10 years many service providers including accounting firms, law firms, ISPs, office rental companies, and reputable HR recruiting agencies mushroomed overnight. All this activity could not prosper unless a heavy investment was made by major IT companies to improve connectivity to continental Europe. This is provided through four diverse submarine cables that guarantee the IP transit is provided over multiple subsea cable links, thus minimising the risk of experiencing a loss in connectivity.

Indeed, part of the attraction of the island when compared with other better-equipped competitors is the carefully thought-out articulation of the gaming regulations embellished by a favourable tax regime. Capitalising on the regulatory approach adopted in Financial Services, another flourishing sector, one notes that gaming rules bear a strong linkage with the Anti-Money Laundering Regulations and its principles, Data Protection, anti-corruption laws in sports, cybercrime regulations, investment promotion, tax rules, advertising codes and others.

Over the years, service providers have invested heavily to update their specialisation to match the galloping pace of innovation in electronic games. The sector never looked back and successfully created new job opportunities for almost 3,000 people.

PKF has continued its drive to keep abreast with latest technological and regulatory developments both in Europe, USA and Asia. For the past seven years it co-hosted with a UK conference organiser a two-day Legal Summit in the week preceding the famous ICE famous international event in London. Other conferences were attended or organised in Dublin, Luxembourg, Milan, Rome, Paris, Toronto, Peking and Miami. But the local industry cannot rest on its laurels as competitors are noticing its progress and already a number of EU countries are shedding their monopolies and opening their doors to competition.

It is foreseeable that in the near future, other attempts will be made by EU member states to try alternative routes aimed at favouring national authorisation regimes and limiting cross-border gaming. A way forward will be better co-ordination between the LGA, its EU advisers and all governmental institutions to be adequately briefed and coordinated on the strategies of competing countries. One area that is rather sensitive to gaming sector is the subject of indirect tax or VAT. Throughout the European Union, gaming is considered an exempt without credit supply. This basically means that any VAT paid on purchases by a Maltese gaming company (like any other EU based company) is a locked cost it cannot recover. A honourable solution has evolved within the parameters of EU VAT law that mitigates the heavy burden such that as gaming operators focus on the core, licensable, gaming activities they may choose to partner with other entities for other aspects of their operations such as marketing and administration. The joint venture agreement provides for the sharing of functions and revenue generated therefrom. If the entities carrying out the supporting, non-core activities are established out of the European Union, and the place of supply of their purchases is likewise deemed to be non-EU, then the VAT cost on their purchases would be eliminated.

Another breakthrough is the recent wave of popularity with players of skill games or social gaming. For this purpose, in 2011, the Digital Games Initiative Group, which comprises Malta Enterprise, Malta Council for Science and Technology, University of Malta and the Creative Economy Working Group, engaged an external audit company to advise on the development of a national policy relating to the setting up of a Digital Games Industry. Digital games occupy one of the largest worldwide industries, accounting to over 90 per cent of the total games population, over 90 per cent of the total games of chance, which are, in comparison, simple to regulate. Complexity is the reason why no suitable legal framework is available and what is available will do nothing to tackle the incidents that threaten data security and the protection of minors, both areas that have been recently compromised. Only recently the novel idea to introduce a reduced personal tax of just 15 per cent for highly qualified foreign employees in licensed companies has started to bear fruit for those earning at least €75,000 annually and holding requisite professional qualifications.

To conclude can one sing the praises of the nascent sector without having a nagging thought about its future? Certainly it is a delicate balance that was achieved so far to attract and retain quality operators to host their servers in Malta and provide a fair and just service to online players all over Europe. The business model with a favourable tax regime is working but, as happens in all economic experiments, innovation must be on the top agenda with the new Labour government trying to reinforce a revival of its unique selling points. Can the new board at LGA put its best foot forward? The journey is long and bumpy but the rewards are generous.

 

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The writer is a partner in PKF an audit and business advisory firm