EU liberalisation… a challenge for Malta gaming industry

How important is the gaming industry for our jobs and economic wellbeing, particularly at a time of euro crisis?

Perhaps few know the challenges facing our thriving gaming industry and of course, given the instability associated with the news of a snap election it may not ruffle any feathers. How important is this industry for our jobs and economic wellbeing, particularly at a time of euro crisis? The answer is that it grew exponentially since the first sports betting licence was issued in 2001. True in the early stages of its growth very few appreciated its potential contribution to provide quality jobs. Equally damning is the fact that 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 of Malta and the business editor was not so enthusiastic in giving me more space, yet 10 years later we have seen the road to Damascus again... now with the top audit firms and most commercial lawyers up to their eye balls tendering their professional services and earning decent fees.

Even at a political level, it took a while for the finance minister to declare that the contribution towards our GDP is substantial and helped in no little way to lift us from recession in 2009. Now with over 600 licences issued the industry is an established one and is paying for the sin of its huge success... it obviously needs to take a sharp look on its planned trajectory to assure its continued growth. All this success came with little publicity funded from the public purse. With hindsight, I vividly remember how my requests for sponsorship to promote Malta on international fora were not entertained by the old Gaming Board (then run by ex-Lotto officials).

At the first international conference - which PKF organised in Barcelona in 2002 jointly with the organisers of ICE - it had requested no funds from the regulator but simply asked them to send its CEO to introduce Malta as a hub and its growing IT facilities. In such early days, when no licenses were yet issued it was tough to beat stiff competition from other jurisdictions such as UK, Dublin, Isle of Man and Channel Islands.

Sadly, I recall how PKF's request was granted but the Gaming Board official never turned up in Barcelona (citing a busy schedule with the Lottery privatisation trips) even though John Dalli (former finance minister) promised us his full support. Still, over the past 10 years PKF (untainted by the political hierarchy) continued to team up with top foreign conference specialists to promote Malta in countries as remote as Miami, Montreal, Toronto, Dublin and London. Today there are over two hundred sites of local practitioners who provide visitors with assistance in setting up a licensed operation in Malta. Even the big four audit firms who previously shied away from the 'shady' business have converted and recently invested heavily in specialised CISA trained staff to conduct both financial and IT audits as mandated by Companies Act, or the Lotteries and Gaming Authority. The industry has become the envy of others in Brussels and its success has been helped by a complimentary structure of gaming tax tariffs which is competitive even with offshore Caribbean countries where regulation is thin on the ground. Gaming taxes in Malta are subject to a tax-capping mechanism limiting it annually to €466,000 per licensee. Over the years, I still remember operators attracted to invest first ask about the quality and redundancy of broadband services which at that time were provided via a single submarine cable to Sicily operated by Maltacom.

The need for a stronger infrastructure was evident and the private sector - namely Melita and Vodafone - invested millions to improve their services. It was no coincidence that the revised 2004 Remote gaming regulations came into force a few weeks after the island joined the EU and heralded four types of licenses all without any de minimis restrictions. Malta was then a pioneer in a technological age armed with intelligent regulation over the internet, which was completely different from the pen-and-paper approach previously wielded by the old gaming board when overseeing land-based casinos or a national lottery. Thus, a sterling job was done to structure a new Lotteries and Gaming Authority, replacing the old Gaming Board in 2004. The Authority was born with its first politically appointed chairman (a litigation lawyer specialising in defending the Nationalist party in power for libel cases). Over the years, the legislation was fined tuned to face a technological savvy industry assuring high levels of consumer protection, fraud prevention measures, prevention of money laundering and responsible gambling. "Amongst other things, an applicant needs to be fit and proper, and needs to implement various processes such as anti-fraud processes, risk management, anti-money laundering processes, data protection, etc. In granting a license, the LGA has a whole array of sophisticated pre-licensing and post-licensing checks and controls while its structure includes trained staff on IT inspections, investigations, and enforcement, including a dedicated anti-money laundering function.

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 gaming in America which sent the poker industry in a tailspin.

Still, Malta enjoyed a unique advantage in Europe as most member States except Britain operated their own gaming monopolies and prohibited applications for remote gaming licenses.

Typically we remember how France took a local operator ZeTurf to court for offering horse betting services to French citizens based on a Malta license. This was followed by a massive blockage of all sites targeting Italy by AMMS (Italian regulator) which effectively blocked all Maltese licensed operators who were targeting Italy on the pretext that they did not own an Italian license.

Naturally this infringes article 56 (what was formerly article 49) of the Functioning of the European Union treaty on the principle of freedom of provision of services. Operators woke up facing a complete and effective blockage of their Internet Protocol addresses when trying to enter the Italian domain. One can attribute this unilateral decision to block entry to the protectionist stance taken unilaterally by a State that wishes to retain in full all corporate and gaming taxes otherwise attributed to its territory. Regrettably, even though a Green Paper on gambling has been commissioned by MEP Barnier, there is little hope that an equitable formula among the 27 States is reached that will effectively apportion the gaming  revenue between the 'home' State where the operator is licensed and the 'host' State where is the player is resident. Thus, many European Court of Justice cases were decided in this respect with two very important decisions (Gambelli) which recognises that the blocking of cross-border betting services cannot be exercised unless in a proportional way, when the State can prove that it wants to protect its citizens from abuses of criminal activity and under-age gambling.

Still, the legal path for justifying cross-border betting services is not straight, as reading 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 Netherlands, Germany, France and Italy to protect their monopoly and for a while prohibit operators from EU licensed jurisdictions.

Member States were thus justified when imposing restrictions on the principle of the free movement of services within Europe to the extent that, in the absence of harmonisation of rules (gaming is excluded from the services directive) across the EU, one member State is not obliged to recognise the operator of games legally registered in another State. This state of 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.

Naturally, as can be imagined with the onset of global recession in 2007/8, this has woken up governments to the realisation that there is money to be made if they partially or fully liberalise their gaming markets and start actively issuing licenses. This has seen Italy issuing its first licenses for poker (among others) in time to fill its State coffers when a terrible earthquake hit a number of households in Aquila. The future for European licenses thus eclipsed  and as fate has it, a number of countries joined the race to liberalise their monopolies. The first to mirror Italy was France. Others like Spain, Denmark, Germany, South Africa followed whereas Britain was always inclined to issue licenses since its enactment of the revised Gaming Act which came into force late 2007. Typically, we notice how at a press conference announcing the licences, the Danish minister for taxation announced seventy applications in the New Year .These included heavyweights such as 888, Betfair, Bet365, Ladbrokes, PokerStars and Unibet. Turning to Germany, with its rich gaming market, we notice how this year one rebel German Lander - Schleswig-Holstein - decided to not wait... it passed a law for new licenses all except lotteries.

The State's decision is expected to open up the entire German online gambling market, since residents of the other German states will be allowed to gamble online in Schleswig-Holstein. The unique laws allow operators to offer players online exchange and sports betting, online poker and online casinos in Germany. The only restriction in regards to online casinos is that roulette, blackjack and baccarat games will not be available. Gambling operators will have to pay a 20%  gross profits tax, as compared to previously proposed 16.67% tax on individual wagers while the license 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 license.

In August last year, the Dutch Government Commission followed the trend, by explicitly advocating the legalisation of online poker.

To conclude, it appears that the pendulum has swung to an extreme angle... from a complete monopoly to a controlled liberalisation. This has taken at least five years and the process will continue to evolve as more legal judgements by ECJ guide the member States towards a harmonised approach in regulating the industry. The question arises on the future of the 600 local licenses. Pessimists lament the industry is facing a bleak future as more EU countries are actively issuing their own gaming licenses (albeit at a higher cost to the Malta own) as a prerequisite for allowing Malta based operators to offer cross-border business. This means double costs. The key to future stability in our nascent industry is the Green Paper mentioned earlier. Will it manage to solve the million dollar question, i.e., can Article 56 regarding freedom of services be safeguarded while reaching a consensus on the sharing of pan-European gaming tax, similarly to the sharing of vat dues generated in cross border trades? Only time will tell... otherwise the industry faces an exciting yet challenging future.

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