A high-risk gamble

The online gaming industry, by definition, involves a gamble. And this week’s events have clearly demonstrated what a high-risk gamble this can be for countries that rely too heavily on this industry as a primary economic motor.

It has now emerged that a number of Malta-based betting companies had direct connections to the ‘Ndrangheta, the notorious Calabria criminal organisation often described as the Calabrian mafia.

Italian police have identified 39-year-old Mario Gennaro, who is registered at a Pendergardens address at St Julian’s, as the mastermind behind a web of illegal online betting and gambling in Italy on behalf of the ‘Ndrangheta. It is understood that the criminal organisation used these multi-million legal betting operations for money laundering and tax evasion purposes, exerting what the Italian media describe as an “economic power of gigantic proportions”.

So far, six Italian nationals who were living in Malta – including Gennaro – have been arrested under a European Arrest Warrant, and will be deported to Italy to face charges of money laundering and criminal association. 

The Malta Gaming Authority has since suspended with immediate effect the licenses of Uniq Group Limited (Betuniq) and Betsolution4U Limited, which allegedly controlled 1,500 gaming and betting agencies across Italy through their Malta-based operations.

The news has understandably shaken Malta’s complacency regarding an industry which, lucrative though it undeniably is, inevitably entails serious risks. Like other small European member states, successive Maltese governments have been keen to capitalise on a recent crackdown on the industry in larger countries such as France and (ironically) Italy.

Through tax incentives and other amenable adjustments, Malta has succeeded in attracting many of the companies displaced by restrictions in other jurisdictions… without, it would seem, pausing to consider why those jurisdictions had enacted such prohibitive legislation in the first place.

To be fair, Malta was among the first European countries to enact legislation to regulate the industry. But from the outset, this was a risky economic strategy to pursue. 

Even without scandals such as the ‘Ndrangheta connections that have come to light, the gaming industry is in itself dependent on the creation of advantageous tax conditions. Companies tend to set up shop where it pays them most and while Malta has clearly competed well in this arena, there is nothing to prevent other countries from undermining our competitiveness in future, by offering more concessions and incentives than we can afford.

This makes the entire industry fickle by its very nature. No country can comfortably rely on a sector that traditionally moves according to the prevailing fiscal winds. Yet the online gaming industry now accounts for 10% of Malta’s GDP, suggesting a level of dependence that can only be described (in gambling terms) as a high-odds bet.

One can therefore question the wisdom of Malta’s economic policy, even before taking into account the implications of the recent developments. One possible example of the risks involved would be Cyprus, which in 2013 experienced a financial crisis many economists attribute to the country’s oversized financial sector. Luxembourg is understood to face similar questions regarding the long-term viability of its own financial sector. 

Should Malta encounter similar problems in future, it is perfectly possible that the International Monetary Fund might enact measures to rein in the island-state’s financial services sector, as it had done with Cyprus.

Considering that Malta’s financial sector represents a larger percentage of national GDP than Cyprus’s, a number of questions clearly need to be asked, questions that have so far been studiously avoided by politicians and economists alike. 

Is Malta’s financial services sector too large as a proportion of its GDP? If so, could this sector be next in line for scrutiny by the European Commission and IMF, as examples of oversized industry segments that need to be pruned back? 

The emergence of links to organised crime can only make such questions harder to ignore. But on a more immediate level, it has also tarnished Malta’s reputation in the one sector where reputation is a crucial factor. 

Malta has always prided itself on prioritising reputable business over quantity in terms of companies registered. The registration of a number of mafia-owned companies, operating under licence in Malta since 2010, does not exactly inflate this sense of pride.

Indeed, damage has already been done. A number of unrelated Maltese companies have conjointly issued a statement to distance themselves from the scandal, simply because their names are similar to one of the indicted betting companies. 

On a wider level, the international media attention already attracted by this controversy can only cast a shadow over the entire industry, raising questions about Malta’s role therein.

The immediate question, then, is whether the local authorities are being vigilant enough to ensure that this already fickle industry is at least above suspicion. Legislation to this effect exists, but without the necessary enforcement and due diligence it is insufficient to protect Malta’s reputation affecting an industry that accounts for one-tenth of its total economic output. 

If nothing else, the ‘Ndrangheta connection should serve as a warning shot fired across the bows. The Malta Financial Services Authority, and any other legal entities setting up fiduciary companies with no due diligence, would do well to heed the warning.