It was an icy cold wind that greeted me at Hamburg airport on my way to attend a specialised gambling conference organised by Awedacity last week. This conference is a harbinger of gambling liberalisation on Teutonic soil and it comes as a pleasant surprise that one of Germany’s states is paving the way to regularise the online gaming market.
Schleswig-Holstein is in the north of the country, close to Hamburg. It made history by becoming the first German state to liberalise its gaming laws. Previously, it had formed part of an inter-state treaty signed by 16 states which, for the past three years, has outlawed all forms of online gambling apart from horse racing. The rebel state has broken ranks and managed to have its own legislation approved by the EU Commission and will be rolling out the red carpet for new licences.
At the conference, many speakers applauded the initiative taken by Schleswig-Holstein and this was mirrored in the speech of Guido Schlutz, a senior government official in the Interior Ministry of Schleswig-Holstein. Other speakers included Dr Joerg Hoffman from Melchers, Wulf Hambach from Hambach & Hambach and Prof. Christian Koenig, a director for European Integration Studies in Bonn. Subjects included legal and other steps necessary to apply for a licence and the detailed explanations on the method of authorisation together with the technology aspects, annual fees and gaming duty payable. One interesting topic was the certification method to be used where operators are requested to have their “black box” or SAFE installed. This is an exciting new technology that enables the regulator (or a bona fide third party) to monitor and verify at random all data streams.
The conference had a special section on the latest developments in scientific studies and behaviour therapy on self-exclusion, under-age gambling and assisting pathological gamblers. The message given to all attendees was that Schleswig-Holstein is not waiting for the other 15 states to get their legislation in tune with the EU but will be validating licences to cover all German regions from March. This is a breakthrough in gaming liberalisation and, as will be shown later in this article, follows the moves taken last year by Denmark. This liberalisation has seen the majority of EU states issuing their own licences as a prerequisite to allowing foreign operators to enter their markets.
The classic issue is what happens to operators who are fully licensed in one EU state (such as Malta) and are paying corporate/gaming taxes in that state while offering bets to other countries? Will this liberalisation mean that operators have to incur double taxation and licence fees? Can a mutual recognition facility be in place within the 27 EU states so as not to frighten off bona fide licensed operators and indirectly encourage the build-up of underground and unregulated business?
Regrettably, even though a Green Paper on gambling was commissioned by MEP Michel Barnier last March, there is little hope of reaching an equitable formula among the 27 member states. Ideally, this would effectively apportion the gaming revenue between the “home” state where the operator is licensed and the “host” state where is the player is resident.
In many European Court of Justice cases, a number of very important decisions have been taken in this respect (Gambelli et al) which recognise that the blocking of cross-border gambling services cannot be exercised unless in a proportional way, and then only when the state can prove that it wants to protect its citizens from abusive criminal activity and under-age gambling. Still, the legal path for justifying cross-border gambling services is not straightforward. Article 52 (1) provides an exception to the main rule by stating that this “shall not prejudice the applicability of provisions laid down by law, regulation or administrative action providing for special treatment for foreign nationals on grounds of public policy, public security, or public health”. There is, therefore, a grey area where countries can still block foreign operators licensed in third countries on the grounds of public policy, public security or public health. This has enabled countries such as The Netherlands, Germany, France and Italy to jealously protect their gambling monopoly and for a while prohibit operators from EU-licensed jurisdictions from entering. Member states were thus justified in imposing restrictions on the principle of the free movement of services within Europe, to the extent that, in the absence of harmonisation of rules (gambling is excluded from the services directive) across the EU, one member state is not obliged to recognise an operator of games legally registered in another state. This ambiguity has led to a number of ECJ legal cases with decisions of a mixed interpretation such as the recent Santa Casa judgement in Portugal (or BWin case).
Naturally, as can be imagined with the onset of a global recession in 2007/8, it awoke governments to the realisation that there is money to be made if they partially or fully liberalise their gaming markets and start issuing licences. This has seen Italy issuing its first licences for poker (among others) in time to fill its state coffers when a terrible earthquake hit Aquila. The future for European licences was assured as a number of countries joined the race to liberalise their monopolies. The first to copy Italy was France, and Spain, Denmark, Germany and South Africa followed. Britain was always inclined to issue licences following its enactment of the revised Gaming Act that came into force in late 2007.
Typically, we notice that at a press conference announcing the licences, the Danish minister for taxation announced the receipt of 70 applications in the New Year. These included heavyweights such as 888, Betfair, Bet365, Ladbrokes, PokerStars and Unibet. Turning back to Germany, with its rich gambling market, we see that Schleswig-Holstein decided not to wait – it passed a law for new licences except for lotteries. The state’s decision is expected to open up the lucrative German online gambling market, since residents of the other German states will be allowed to gamble online in Schleswig-Holstein. The unique set of laws allows operators to offer players online exchange and sports betting, online poker and online casinos in Germany. The only restriction as regards online casinos is that roulette, blackjack and baccarat will not be available. Gambling operators will have to pay a 20 per cent gross profit tax compared to the previously proposed 16.67 per cent tax on individual wagers, while the licence fee is expected to be €15,000 with annual fees ranging from €15,000 to €150,000. This compares favourably with Italy, which charges €300,000 for a composite licence. Equally exciting is the announcement last August by the Dutch Government Commission explicitly advocating the legalisation of online poker.
The wave of liberalisation spreading across the EU poses the question: will some of the 600 operators based in Malta have to start applying for third country licences? Perhaps few acknowledge the challenges facing our thriving gaming industry and, given the fickleness associated with the news of a snap election, such challenges may not ruffle any feathers among the political class. Still, one must stop and reflect on how important this industry is for our jobs and economic wellbeing, particularly at a time of impending euro crisis.
The answer is that it has grown exponentially since the first sports betting licence was issued in 2001. True, in the early stages of its growth few appreciated its potential to provide quality jobs. Equally unflattering, nobody from the elite audit or larger law firms bothered to be associated with its image. I still remember writing about it in The Times and the business editor being quite unenthusiastic about giving me more space. Yet 10 years later, most editors have been converted. Even at a political level, it took a while for the finance minister to acknowledge that its contribution to our GDP is substantial and helped in no little way to lift us from recession in 2009. The gross gaming revenue in 2008 reached almost eight per cent of our GDP. Our political leaders would be well advised to take a good look at its planned trajectory to ensure its continued growth. Nostalgically, this success came with minimum publicity funded from the public purse. I vividly remember the early days when the first applicants were modest in size.
Over the past 10 years, PKF (untainted by political connections) has continued to team up with top foreign conference specialists to promote Malta in cities as far apart as Miami, Montreal, Toronto, Dublin, Warsaw and London. Today there are myriad web sites by local practitioners hankering to provide visitors with assistance in setting up a licensed operation in Malta. The industry has become the envy of others in Brussels and its success has been helped by a complementary structure of gaming tax tariffs, which competes favourably even with offshore Caribbean countries where regulation is thin on the ground. I still recall promoting the island as a pioneer in a vastly changing technological age armed with intelligent regulation over the Internet. Thus a sterling job was done to structure a new Lotteries and Gaming Authority (LGA) replacing the old Gaming Board in 2004. The Authority was born with its first politically appointed chairman among other party affiliates/acolytes in the first board of management. Over the years the legislation has been fine-tuned to service a technologically savvy industry to ensure high levels of consumer protection, fraud prevention measures, prevention of money laundering and responsible gambling. The tempo of applications increased exponentially and we were lucky that poker was at its peak in 2004/2006 until the fateful date in late 2006 when President George Bush outlawed banking transactions involving internet gambling across America, which sent the poker industry into a tailspin.
Still, Malta enjoyed a unique advantage in Europe as most member states – apart from Britain – operated their own gaming monopolies and prohibited applications for remote gaming licences. Typically, the Berlusconi regime (through the state authority AAMS) commenced a massive blockage of all sites targeting Italy, which effectively blocked any Maltese licensed operator who was targeting Italy on the pretext that they did not own an Italian licence. Naturally, this infringed article 56 (ex article 49) of the Functioning of the European Union (TFEU) treaty on the principle of freedom of provision of services. One can attribute this decision to block entry to a protectionist stance taken unilaterally by an Italian regime that wished to retain in full all corporate and gaming taxes otherwise attributed to its territory. This abuse is still in force in 2012.
To conclude, it appears that the pendulum has swung to an extreme angle – from a complete monopoly to controlled liberalisation. This evolution has taken at least five years and will continue to develop. The question arises about the sustained future of the 600 local licences. Sceptics say the local industry is facing an austere future as more EU countries are issuing their own gaming licences (albeit at a much higher cost) as a prerequisite for allowing Malta based operators to offer cross-border business. This means double costs. It goes without saying that the key to our future stability is possibly the finalisation of the Green Paper mentioned earlier. Will it manage to solve the million dollar question: can Article 56 of TFEU regarding freedom of services be safeguarded while reaching a consensus on the sharing of pan-European gaming tax similar to the sharing of VAT dues generated in cross border trades? Only time will tell – the local industry faces a stirring yet challenging future.
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The writer is a partner
in PKF an audit and
business advisory firm