Not many realise the exponential growth achieved in the online gaming industry over the past five years. I still remember when the first rules introducing a limited spectrum of sports betting licences were issued by the old Gaming Board in 2001. It was then very much a paper based approach as regulators were seasoned lottery and land-based casino specialists. The Internet had not yet invaded their privacy and no iPods graced their executive desks. In fact, I still remember senior members of the Gaming Board labelling the Internet as the devil incarnate when it came to regulating it. Little did they realise that within six years the nascent industry would grow to 325 active gaming licences held by 220 registered companies and that it was thanks to the foresight of legislators and the unbridled energy of a number of pioneers (mainly sole practitioners) who tirelessly lobbied politicians to speed up the change to remote gaming mode.
The figures were confirmed by the Ministry of Finance in a recent press report. Such was the fruit of their success, amid the trials and tribulations which saw them organise overseas conferences practically financed by sole practitioners (there was a limited budget from official sources). This placed Malta at the forefront of a global igaming hub. We were amateurs in IT infrastructure. Initially, not even the single submarine broadband cable was sufficient to take the load and create redundancy. In spite of this handicap, efforts to attract international operators went unheeded. Strangely, there were no banks strong enough to handle the traffic. I remember that my firm was the first to licence a top listed Australian sports betting company that relocated to Malta. Then, the big law and audit firms had shied away from the industry, branding it as too risky to handle. But money talks and swiftly changes ingrained prejudices.
Today one reads the published audited accounts of gaming operators in Malta and they invariably carry the signature of the Big 4 audit firms. The baptism was complete. I remember that in 2002 a local English language newspaper was wary about published my articles aimed to create an awareness on a budding Internet based industry that would in future provide 5,000 highly paid jobs (exceeding the aggregate workforce of Air Malta + Shipyards + lower carbon footprint). In 2009 it helped increase GDP to 3.7 per cent when all around us countries reported negative growth.
Is it time for rejoicing? Definitely, but we cannot rest on our laurels and since 2004 many European countries have learned the lesson that monopolies run by the State are not the best answer to milk the highest quota of revenue for the country ‘s coffers. Now, almost 10 new jurisdictions are claiming to be the cat’s whiskers when it comes to player protection, protection of minors and all profess fair gaming. Recently, such market leaders include the Channel Islands, Ireland, Isle of Man, Gibraltar, UK, Spain, France, Belgium, Italy and Denmark. To a different degree, each have liberalised their markets and toned down the entry restrictions previously protecting inefficient state gaming monopolies. Observers decry the fact that any formal EU policy initiative on gambling remains the exclusive domain of the European Commission − although there is some degree of uncertainty as to how the Council’s deliberations in the area might affect the appetite of the new Commission to proceed with its formal infringement investigations.
Furthermore, court judgments out of the European Court of Justice (ECJ) have broadly challenged the right of member states to block entry unless this is done on valid public policy reasons and appear to be proportionate. Since its September decision, the ECJ has intensified its scrutiny of cross-border gambling issues and held formal proceedings on cases referred from courts in Holland, Germany, Sweden and Austria. Recently, ECJ received further guidance from Advocate General Yves Bot – the ECJ’s chief adviser on ‘Bwin Liga v Santa Casa’ – on a case involving the German/Maltese sports-betting operation, Winner Wetten. In brief, the Winner Wetten case is now appealing a prohibition order handed down by a German court in North-Rhine Westphalia in 2006, claiming the action was invalid as Germany’s sports betting restrictions failed to comply with EU law at the time. It is interesting to note that in his formal opinion, Advocate General Bot suggested the German court should await guidance from the ECJ on pending German cases before Europe’s highest court before it assessed the compatibility of German gambling legislation with EU law. This guidance is expected anytime this month.
However, Advocate Bot rejected arguments put forward by a number of member state governments suggesting that EU states could not stay their obligation to comply with European law during a period of transition towards a new gambling regulatory framework. In France, there is the PMU, the horserace betting monopoly which was also targeted by the (ECJ). Not many regret that it is continually attacked by private companies struggling to gain a decent slice of France’s lucrative online betting market. In the absence of any overreaching pan-European legislation, public and private operators have resorted to firing legal salvos to resolve often bitter disputes over who is in the right on cross-border gambling.
At the same time, online gambling markets in Europe’s 27 member states have grown in disparate ways. It was opportune for Internal Market Commissioner Michel Barnier to issue a Green Paper last year. The Commissioner was reported to have said that “the on-line gambling market in the EU continues to grow rapidly and generates important revenues that are sometimes channelled to good causes”. The Green Paper is expected to pave the way for fuller consultation about liberalisation of the market while it seeks to ensure the market for on-line gambling services is well-regulated for all.
At the time of issue, Sigrid Ligne, secretary general of lobby group European Gaming and Betting Association, said the standards would provide “invaluable input” into the Green Paper and help bring a regulated environment across national borders. Gambling operators and stakeholders will be asked to give their views on how to regulate a market estimated to have generated revenues of €11 billion in 2013. EU-wide consultation ends on 31 July. All this talk about liberalization has moved the tectonic plates harnessing monopolies and created a mild tsunami of opportunities for bona fide operators who geared up to apply for licences and be among the first to be regulated by the authorities. Naturally, the hunt for the best jurisdiction is a popular topic at many international conference/seminar that highlighted the merits of moving business to a low tax and well regulated location.
As an example, many chose Malta while others located servers in other islands and attractive domiciles. Only recently we read that UK betting exchange giant Betfair has followed William Hill and Ladbrokes offshore to Gibraltar. Critics of the higher taxed UK gaming set-up have urged the Chancellor to do something to lure the big cats home. In the UK budget, Chancellor George Osborne has strongly hinted that their pleas has not fallen on deaf ears. Despite indications to the contrary, the UK government will act on offshore operators in the near future although few hope any reduction in obtrusive 15 per cent gross profits tax (GPT) on online betting. Quoting James Hollins of Evolution Securities, he pointed out that “in the medium-term, we expect the UK government to re-capture lost GPT with the introduction of new legislation”. While UK is still battling to entice operators back home, it wants to tone down its Controlled Foreign Companies (CFC ) rules. Thus, it announced a special tax concession for offshore companies which repatriate their operators. This announcement was made last week during the budget speech showing the resolve of UK government’s for CFC reform to focus on a more territorial tax system. Once implemented it only taxes profits from UK activities, rather than maintaining the existing CFC concept of attributing foreign profits to UK tax unless they fall within specific exemptions. Budget 2011 launched a concessionary low tax of under six per cent on CFC tax revenues.
To conclude, it appears that the penny has dropped for most European countries and that it pays to open borders to bona fide business. At a time when recession has severely hit the budgets of many governments most are trying to rein in the deficit. Analysts agree that the remote gambling goose looks ripe for plucking, but please do it in a gentle manner to elicit the least amount of hissing.
Mr Mangion is a partner in PKFMALTA, an audit and business advisory firm.
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