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1 Introduction

In just 16 years Gibraltar has drawn Gaming, Telecommunications and Sue Rossiter and the Remote upon its reputation as a well Justice kindly opened the Summit with Gambling Association’s Simon Trussler regulated and tax competitive a welcome address, which outlined also provided a fascinating commercial environment to create Gibraltar’s commitment to ensuring presentation on the potential pitfalls to an archetypal on-shore licensing the safety, transparency and both governments and operators jurisdiction for its eGaming responsiveness of the jurisdiction in arising from implementing a new tax community. the face of challenging times for this structure for online gaming. The dynamic industry. Following a Summit closed with a ‘heavyweight’ By placing a continuing emphasis upon regulatory update by Gibraltar’s Head final panel session, moderated by licensing only the best, most of Gambling Regulation, Phill Brear, the Peter Montegriffo of Hassans, on the committed and most consumer morning’s sessions then continued to outlook for eGaming. conscious operators, Gibraltar is now focus upon legislative and licensing home to 25 internationally renowned issues, with a particular focus upon the This report seeks to summarise the remote gaming companies. Today, they likely impact of social gaming. day’s events with a view to capturing account for more than 20 per cent of Highlights included an international the expertise and enthusiasm present its GDP and represent almost 60 per delegation of representatives from throughout the 2013 Summit. KPMG cent of the UK’s remote gambling DLA Piper as well as a spirited address would like to take this opportunity to presence in Europe, with more to by Kevin de Haan QC on the prospect once again thank the speakers and come. of a cohesive pan-European regulatory delegates who attended, all of whom regime. KPMG’s Archie Watt then contributed to its great success. We On the 11th April, 2013 at the Caleta opened the afternoon session with an look forward to seeing you all next Hotel, the third KPMG eGaming address which commended the year. Summit drew upon Gibraltar’s renown solidarity of the domestic eGaming as a centre of global eGaming by once sector in preparing for the challenges KPMG employs a number of eGaming again providing a forum within which that lay ahead. Mr Watt then industry specialists both in Gibraltar key stakeholders could gather together introduced the afternoon session as and globally and is committed to to discuss the present and future focusing predominantly upon issues cutting through the complexity of this status of the sector. pertinent to the wider eGaming constantly evolving industry. industry, including payment solutions, The Hon. Gilbert Licudi QC, Minister economic development, and the 4th for Education, Financial Services, Money Laundering Directive. KPMG’s

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The Hon Gilbert Licudi QC Minister Gibraltar Government

The Hon Gilbert Licudi QC

The Hon Gilbert Licudi QC is regulatory standards that it enjoys as a Minister Licudi continued, “and I’ve Gibraltar’s Minister for Education, licensing jurisdiction. He always said that, despite our position, Financial Services, Gaming, acknowledged the work and success there is never any room for Telecommunications and Justice. He of Gambling Commissioner Phill Brear complacency. There is no question, welcomed delegates and provided a and his team of regulators for the therefore, of Gibraltar ever being able quick summary of the importance of relationship and the rapport they have to say ‘we’ve done it, we achieved our the eGaming sector. built up with the industry, and the place at the head table of global efforts made in striking the difficult eGaming’. You don’t need me to tell In the midst of challenging times for balance between protecting the you that in this industry, no-one in the licensees and in response to which interests of customers and allowing private sector, and certainly no Gibraltar (under the auspices of its operators to go about their business. Government, can ever relax.” Betting and Gaming Association) intends to mount a challenge to the Drawing upon comments made during Minister Licudi explained that UK’s proposed point of consumption his opening address at the 2012 KPMG challenges to the industry are ever tax under EU Law, Minister Licudi eGaming Summit in Gibraltar, Minister present, whether in the form of opened the 2013 KPMG eGaming Licudi then reiterated the Gibraltar jurisdictional competition, legislative Summit with a spirited address. Government’s commitment to change, or the proposed introduction licensing only the best operators in the of taxation. “But there will, of course, “This is an event which is clearly and world. “That has been the cornerstone be other challenges”, he continued. “It firmly established in our yearly of the Government’s remote gaming is clearly the case that the EU poses a calendar”, he began. “It is, of course, policy”, he confirmed. “That is still the challenge to all of us, and it is a no secret that Gibraltar is a world position today, and that is a policy that challenge that we are already leader in online gambling. The will continue in the future. It is, in fact, confronting. You will have heard of the reputation, the quality and the that cautious and selective approach Government’s attendance in Brussels standing of our operators is absolutely that has seen expressions of interest just a few weeks ago, with the Chief first class, and our operators deserve by very well known brand names and Minister’s speech specifically to be congratulated for the responsible which has resulted in several new concerning gaming and calling manner in which they undertake their licences being granted last year. precisely for that coherent EU policy. business. That has been one of the key Indeed, it is my expectation that We demanded the right, because it is factors that have helped shape several further licences will be granted a right, for operators to demand Gibraltar into a jurisdiction that is the over the course of this year for unhindered access to the whole of the envy of many around the world.” operators that are considered fit to join single market. Whatever the the selection of incumbent licensees, challenges may be in this industry, Minister Licudi continued in confirming of which Gibraltar is justly proud.” there will always be new opportunities that Gibraltar has become a jurisdiction that present themselves. We are that others look to and seek to learn “As we all know, this is an industry certainly hopeful and we expect that from, particularly with respect to the that is dynamic and ever-changing”, the EU challenge will become an EU

3 “You don’t need me to tell you that in this industry, no-one in the private sector, and certainly no Government, can ever relax.”

opportunity, with access to greater, flawed basis of this proposed tax. Let more liberalised and, indeed, properly me assure the industry of the Gibraltar regulated markets.” Government’s resolve and of its commitment to continue to support Looking further afield, Minister Licudi our operators in whatever way we can, noted that new opportunities are to continue to lobby, to continue to already materialising in areas such as advance arguments in every available the United States, with limited forum as we have already been doing.” intrastate gambling now being allowed in states such as Nevada and New Minister Licudi explained that he had Jersey. “And -Gibraltar operators are already discussed this issue with three already taking advantage of those UK ministers on this issue while opportunities”, Minister Licudi Gibraltar’s Chief Minister had also confirmed. “Now there is talk of raised the issue with UK Prime agreements between the US and Minister, David Cameron and has other jurisdictions to create a global made submissions to the select market of gambling jurisdictions. Those committee on Culture, Media and are the opportunities that Gibraltar Sport. “And those efforts will continue, must be first in line to explore and because the game is on and the battle exploit.” has not yet been won. Whatever happens, there is one thing of which I He continued, “last year at the Summit am absolutely certain, that Gibraltar we had representatives of HM will continue to lead the way in remote Treasury and HM Revenue and gambling and Gibraltar will continue to Customs, who were here to explain be that shining beacon at which the the UK Government’s take on the whole world will look and seek to supposed need for the point of emulate. We have already earned that consumption tax. And it is actually pre-eminent position and the good to have such representatives Government will continue to work with here in Gibraltar so that they are left in the industry to make absolutely certain absolutely no doubt of the strength of that we keep it that way.” feeling in opposition to that tax. And they should also be left in no doubt of one particular point; this is not an emotive reaction simply to greater taxation. This is an opposition based on well reasoned arguments on the

4 The Regulator’s Update and Perspective on Social Gaming

Phill Brear was appointed as Head of reconfiguration of the Gala Coral Phill Brear Gambling Regulation for Gibraltar in Group, we also opened the Bally October 2007 following two years as Technologies offices, likewise with Gambling Commissioner Director of Operations with the Shuffle Master, and finally the Gibraltar Government British Gambling Commission. introduction of Amaya through their acquisition of Ongame. Each is very In July 2011, he was appointed as different and each is underpinned by a Gibraltar’s Gambling Commissioner commitment to Gibraltar’s values.” in addition to his existing responsibilities. Having played a “At the same time”, he continued, “we leading part in the roll-out of the UK have no fewer than ten companies in Gambling Act and gained experience different stages of discussions for across the breadth of the British licensing. Some of these may not gambling industry, the switch to complete, although I suspect that Gibraltar, ‘home to the world’s around half will over the next 12 leading online gambling operators’, months and I expect that, by this time brought a new set of challenges, with next year, we’ll have at least 30 B2B Gibraltar’s adoption of its new and B2C licences – all readily, if not Gambling Act. Since his appointment instantly, recognisable names in the Phill has steered through a series of remote gambling landscape.” changes to the regulatory regime whilst working closely with operators Mr Brear explained that each licensee and their representatives on a wide creates a varying amount of work for range of operational and the Gambling Division throughout the organisational issues. Phill is also year and that, overall, it is the responsible for liaising with bodies secondary activity of licence renewals as challenging as US regulators and that creates the most as Gibraltar “We have no fewer the European Commission. draws more and more into the approvals process each year. As such, than ten companies Now a regular and popular speaker at he emphasised that the Gambling Gibraltar’s KPMG eGaming Summit, Division does need to assert regulatory in different stages of Mr Brear introduced his presentation pressure on partner companies. “We as an annual regulatory review which hope it’s no more than a light and discussions for provides a privileged overview of unambiguous touch”, he explained, events from the perspective of the “but it is increasingly necessary as licensing”. Gambling Division and how they may industry supply options and products or do impact domestic arrangements multiply. We have a strong evidence for licensees and peripheral industries. base now to prove that, such is the Mr Brear also expressed his intention diversity of supply, we need to do to cover additional issues pertinent to more in order to ensure the standards today’s industry, most notably the of those suppliers. I would like to regulatory ramifications of social thank those who work with my gaming. colleagues on licensing for your patience and efficiency.” Licensing Customer Complaints Turning first to licensing, Mr Brear confirmed to the Summit that interest “With around twenty B2B licences, in Gibraltar licenses is growing at a we now service in the region of 10 rate never before experienced. million registered customers in “Surprisingly”, he remarked, “we have Gibraltar”, Mr Brear enthused. “But the completed only four new additions this customer complaint rate remains fairly year, but that still equates to a 20 per constant, with only three or four cent increase. One was the 5 Phill Brear Gambling Commissioner Gibraltar Government

6 contacts each week, boiling down to system provides a less steady stream “The point I want to make about the one or two complaint forms each of incidents of less consistent value. Bill is that it is self-evidently amending month. Out of around 200 complaints That is a good measure of both the legislation, therefore it is what it adds each year, the vast majority are of no small volume and value of fraud in the to and takes away from the 2005 substance and are quickly withdrawn – industry as well as the industry’s Gambling Act which requires frustrated attempts to cheat etc. But commitment to bear down on it at a illumination and examination.” Mr some do require more extensive time when many others would have Brear remarked that from a political, investigation, and to establish whether you believe the issue is endemic.” public policy and regulatory the customer has been treated fairly perspective it is a ‘clever bill’ which is and properly remains our priority.” as far reaching as the very act it seeks Europe to amend, in terms of changing the Mr Brear then explained that all face, volume and regulation of remote investigations are conducted in “At the European level it is, of course, gambling in the UK, Europe and the meticulous detail to ensure that all almost two years since the Green rest of the world. “The bill rewrites the conceivable ‘trapdoors’ between the Paper (the European Commission’s rule book on remote gambling”, he Gambling Commission and the truth ‘Green Paper On Online Gambling in observed, “but not in a way that offers are closed and secured. By definition the Internal Market’) was introduced, benefits to consumers, governments, these investigations are inevitably and six months since the action plan or the established and regulated international, occur frequently was announced”, Mr Brear observed. industry. Rather, it has the means and throughout the EU, although less He went on to explain that just two potential to ensure that everybody frequently in the UK, and whilst a high weeks prior to the Summit, a draft currently in the system loses out.” proportion are from troubled gamblers European Parliament Internal Market “In my view, the bill creates ‘brass who have made an error of judgement, Commission report emerged which plate Britain’ for the remote gambling a small proportion are customers on endorsed an action plan that reflects industry. It commits the UK to being a the receiving end of errors from the Green Paper. “So whilst the lack of travel is frustrating, there is remote gambling licensing hub, and I operator staff or weaknesses in IT movement, and no one should emphasise here licensing, for little else systems. underestimate the antipathy within the will need to be there – no equipment, EU political bureaucracy towards that very few staff, and no real functionality “Within that there remains a movement. For many people, no – that’s the new model.” Mr Brear troublesome and constant trickle of progress is the preferred option.” explained that as a result of the high value and, at times, very proposed amendments, the UK will sophisticated attempts to subvert the offer itself as a licensing hub to Europe On a similar note, Mr Brear noted industry’s security control systems”, and almost anywhere else in the what he described as the ‘elephant in world, with all the benefits that simply Mr Brear warned delegates. “Some of the room’ with regards to the UK’s these cases are worth millions. And issuing licences brings. “And whilst licensing and point of consumption tax that may seem to be attractive to together, from the weaknesses, model. “The saga drags on”, he failures or misjudgements of some those who don’t understand how this remarked, “seemingly to culminate in industry works, even those attractions customers, through to organised December of next year. When the attempts to extort money, they are not likely to materialise or be concept of universal UK licensing was sustained”, he warned. illustrate the breadth and depth of the first declared in 2010, it was pretty customer base and the need for the clear that no heed of reliable evidence “This fundamental change in direction industry to remain vigilant and was going to be taken, only that which has enjoyed no visible communication continue to invest equally in customer was most convenient. It is safe to say or debate by those responsible for its services, customer protection and that legal certainty can be an elusive rectification, there’s no reference to it systems security. Moreover, they concept.” anywhere. Indeed, much of it was demonstrate the need for operators to actually invisible until the bill and the better attempt to communicate with Putting to one side the evidence base minister’s commentary on it were each other in order to deny any of and contentious legal issues published in late 2012. Since then, attempts to cheat.” surrounding the Gambling (Licensing attention has focused upon the and Advertising) Bill, Mr Brear defective process, the lack of evidence Mr Brear then went on to explain that explained that public policy issues and the potential legal challenges.” he continues to receive a steady have yet to be picked up by politicians, stream of SARs, or suspicious activity pressure groups, and the media. “It The White List reports, copied to the Gambling may undergo the scrutiny of Division and the Gibraltar Financial parliament if and when the bill Intelligence Unit. “A significant emerges, but somehow I doubt it will Turning briefly to the related topic of proportion of these are leading to get the attention it deserves. The the UK’s White List which, when police interventions across the world”, reality is that it is a side issue for introduced as part of Section 331 of he reassured the Summit. “Many are government and it is a side issue for the Gambling Act 2005, forbade all found to be unusual activity reports, the media”, he warned delegates. territories and jurisdictions located rather than suspicious activity reports. outside the EEA, UK and Gibraltar to advertise gambling products in the UK, 7 Likewise the consolidated reporting Mr Brear noted that the Gambling Social Gaming entertainment. My concern here is (Licensing and Advertising) Bill also that some non-regulated suppliers see “scraps that”. “Now I am not an no risk in testing where that boundary advocate of the White List”, he While just two years ago many were lies and, in the absence of regulatory remarked, “it was poorly established, it discussing the potential of social intervention, may move products and has been poorly administered, and media as a resource for eGaming, few, players over the line.” poorly managed. The White List has as Mr Brear observed, considered encouraged a race to the bottom in social gaming as part of their agendas. Mr Brear then warned the Summit of terms of the reality and the application “This, however, is now a conference the growing social betting market, of regulatory controls. It was the UK subject in its own right”, he enthused. explaining that, generally, these are regulators’ first foray into international “At the moment we have confusion - established by un-regulatable suppliers remote gambling regulation and it has with references to freegaming, social which are deemed to provide services failed to deliver to the UK public what gaming and free betting – usually that are not gambling. “But they are the Gambling Act 2005 promised – without the target of those encouraging and providing the facility allowing instead elements of criminal discussions being agreed. This is not to loosely registered customers to bet behaviour, an abandonment of due helpful to the public or the regulated amongst themselves on events which diligence and the misappropriation of gambling industry.” include professionally informed fixed customer funds on an industrial scale.” odds and betting exchange type bets. “Social gaming is at a much earlier and So the player base of such sites is an “The White List is broken”, he faster stage of evolution. In the last six obviously fertile ground for recruiting continued, “it has been suspended for months, supposedly the three biggest new real betting customers. Again, we three years. But the outcome of this launches of social gaming have all would advise a very high degree of blurring is the scrapping of the concept involved companies in Gibraltar – caution to every licensed operator of jurisdictional approval on the basis Gamesys with Friendzy, 888 with stepping into these waters.” that the UK regulator can do a better BingoHappy and Bwin. Party with job than the white listed regulators. ZyngaPlus. But of course these are not In closing, Mr Brear remarked on Instead, companies will be based social gaming: these are licensed and growing concerns over the use of thousands of miles away where that regulated gambling, accessible and social gaming platforms to create regulator has no presence or marketed through social media customer databases in countries in relationship whatsoever. Put quite channels.” Mr Brear explained that which the operator has no existing simply, the bill proposes licensing and regulators’ interest lies in whether or presence. “At one level, this is an regulation which in practise will be not these advertising channels are entirely legal practice in that it is not conducted at massive arm’s length.” open to abuse by the public, suppliers, gambling. However, within those affiliates, associates or the carrier, target markets the practice may well Mr Brear explained that there is little thereby widening the scale of be seen in a different light; I’m already doubt that this provision is designed to underage problem gambling or other hearing noises within the EU that such permit respected and established US negative issues. activities, simply because of their operators to obtain UK licences whilst potential to engage with the licensable maintaining the weight of their “So my first and strongest gambling population, are unwelcome. operations in the US. However, he observation, and the one that has So I would like to emphasise that expressed his concern that other dominated discussions with our wishing social gambling was a operators in other jurisdictions will operators, is that the marketing politically neutral commercial activity abuse that model. “The UK already has controls applied to the customer base will not make it one. It has to be very over 3,000 licence holders”, he have to be carried out as neatly and as carefully managed by the regulated observed, “it does not have the tightly as is feasible. They have to be industry.” mechanism or the resources to keep smart because without them you’re track of them all, over extended almost certainly setting yourself up for distances or even within the UK. The a media and maybe a regulatory fall.” UK bill stands to dilute and further taint the supply base in the UK. It will “My second point is where the game increase costs, depress margins, and and presentation is not licensed and force efficiencies of outsourcing and regulated gambling, but is gambling relocation outside of the UK to a much themed and involves payment to play – greater extent than at present. HMRC where a paid for activity offers the may gain two or three hundred million chance of winning a non-monetisable in POCT, but it loses far greater prize. Again, free and practice play amounts in corporation and gaming have their own issues, but the employment tax. Indeed, those that freemium model of obtaining payment survive will have even greater to gain plays, awards, status symbols, incentives to re-domicile themselves game levels, or other features, is into more tax friendly jurisdictions.” nudging ever nearer to a dividing line between gambling and non-gambling 8 Morning Panel Session: The Evolution of Remote Gambling Regulation

Moderated by: Stephen Ketteley - Partner, DLA Piper Albert Agustinoy - DLA Piper, Madrid Giulio Coraggio - DLA Piper, Milan Patrick Schwarzbart - DLA Piper, Munich

By way of introduction, Mr Ketteley Mr Ketteley then went on to note that Spanish audience while online poker explained that the purpose of the each jurisdiction represented at the now attracts many more sophisticated morning’s panel was to explore the panel was culturally very different and users such as university students and differences in regulation between a that this informed the position of young professionals. “So gambling has number of key markets and to draw gambling in each respective society. become a very popular pastime due to a comparison between jurisdictions This in turn frames regulation within its increased availability and diversity, which are all currently at different each jurisdiction and the ways in which although it should be noted that 80 per stages of regulation. it may develop in the future. Drawing cent of the market is still controlled by upon this observation, therefore, Mr the state monopoly so we have a long He noted that Italy, Spain and the UK Ketteley asked each panellist to first way to go.” are currently regulated while Germany, elaborate upon the ways in which at the time of writing, is in the process regulation was driven by cultural In stark contrast to what could be of regulating. “It’s an ever moving attitudes towards gambling in their considered a relatively permissive evolution”, Mr Ketteley remarked, “and home jurisdictions. Spanish regime, the German regime that’s something we want to try to appears to be very protectionist. Is draw out today.” Albert Agustinoy: Mr Agustinoy this fair to say? explained that gambling in Spain has “By 2005/06 there were a handful of traditionally been a secondary concern. Patrick Schwarzbart: “It is very places that were largely regulating Ten years ago, gambling as a pursuit protectionist”, Mr Schwarzbart agreed. online gambling”, he continued. “They was considered old fashioned and “In Germany we also have a very were jurisdictions which saw the need regulation was consequently limited traditional background in gaming but to house and give a home to a growing due to its being almost wholly this concerns specific types. For industry and Gibraltar took the lead in controlled by what he termed a ‘state example we have a very strong formulating a regulatory regime which monopoly’. “So if you wanted to tradition of horse-race betting, a sector has become, as we all know, a world gamble you had the lottery, football which has been regulated for over a leader in the market. But as time went pools, and some casinos, which hundred years and is also open to by we saw a number of challenges at certainly did not attract a growing private operators, while we also have a European level as a very lucrative audience at all. This approach changed, very strong sector for gaming machine private sector and a protectionist however, with the introduction of operators. But I think the intention of public sector came head-to-head in a online gaming, the introduction of new the regulator has been to protect the number of member states. That, gaming platforms and also a new position of the lotteries to a large coupled with the challenging economic environment that clearly connected extent and that can clearly be seen as times that we’re all facing, has led to a with a new audience.” protectionism.” number of jurisdictions embracing regulation. But these regulatory Mr Agustinoy then went on to explain Mr Schwarzbart explained that regimes are all inconsistent, and that’s that this has resulted in a change in Germany had made good progress the problem.” the perception of online gambling. The concerning the regulation of gaming sports betting market has changed and types such as poker and could at one grown very popular among the mass point have been considered liberal in

9 “I find it very interesting that the regulator is not now adapting to new market offerings, to the interests of the market, or to the interests of the player.”

its approach. However, he also noted: “There is also a general understanding Mr Agustinoy explained that simply by “I find it very interesting that the in Italy that the only way to fight using a VPN [Virtual Private Network], regulator is not now adapting to new against unlicensed operators is to keep or similar online tool, any Spanish user market offerings, to the interests of taxation low. Low taxation is a great can gain access to these types of the market, or to the interests of the way to compel operators to work in a unregulated games. “So I wholly agree player. The stark contrast between secure environment. Throughout the that regulation must certainly ensure a Spain and Germany is that whereas in rest of Europe, however, there is still a degree of protection and at the end of Spain gaming is seen as part of the lot of very negative publicity the day this is a win-win situation for entertainment industry, I always get surrounding online gaming and everyone – the player gains a well- the feeling that the German regulator gambling in general. A lot of this is, of protected system, the operators have considers gaming as something that course, due to misinformation and I do the insurance that they know the rules players need to be protected from. understand that regulators are getting of the game, and the whole industry Somehow remote gambling is seen as more knowledgeable about how the becomes more reliable and is a threat by regulators, to the state sector works, about the need to therefore more trusted as a form of lotteries and also to the players.” protect players, to bring them into a entertainment.” safe environment and to make Italy as a regulated market also regulations more suitable for What is the relationship like appears to be embracing online operators.” between the regulators, the gaming rather than trying to protect legislators and the industry in as far any other interests in the market, is Do you think Italy is succeeding in as educating your regulators as to this true? allowing the industry to flourish what they need to consider? while protecting the player? Do you Giulio Coraggio: “I think it’s think that balance is right or wrong? Giulio Coraggio: Mr Coraggio began interesting to note the comments by noting an interesting comparison made about the old fashioned Albert Agustinoy: Mr Agustinoy made last year which showed that the gambling industry”, Mr Coraggio agreed with Mr Coraggio on the fact illegal gaming market in the Italian began. “My contention is that that, if there is a demand for gaming, casino sector was almost €10 billion gambling in Spain was not old an online environment is either more profitable than the legal market fashioned, part of it was just regulated properly or becomes a black simply because slots were not legal. unregulated, so the Spanish were market environment. “In Spain we The regulator responded that it was already playing on unlicensed have a good departure in that largely powerless as a result but urged platforms and now do the same on regulators are able to operate within a licensed operators to point out which licensed. The regulators simply fully regulated market and we have organisations were operating illegally. provided a more secure environment found that while the black market has “Regulation in that respect has since for players. In Italy we too tried to been reasonably low, in the case of improved, so operators must work regulate although it took time because online slots or other types of games with the regulators for a better regulators were not at first sure how that have not been regulated the environment. This is proof that the to accommodate the needs of degree of black market incidents lobbying can work from both sides.” players.” remains quite high.”

10 Albert Agustinoy: Mr Agustinoy introduce such a tax on sports betting A number of people are talking added that, from his experience, a key and on a point of consumption basis about the use of black lists for strategy for building relationships with which, he noted, imposes some operators which, I understand, Italy regulators lies in explaining the difficulties for operators to provide has had for some time. Has that industry to them from an operator’s competitive betting in Germany. “So, been successful? perspective. “It may seem obvious, again, there is a question mark behind but detailing the particulars of games that tax”, Mr Schwarzbart remarked. Giulio Coraggio: Mr Coraggio and the ways in which the industry “Was it really introduced to regulate expressed his concern that the use of operates can greatly facilitate the market or rather to protect the black lists to assist regulators in licensee/regulator relations”, he incumbents? Is the true intention of blocking domain names is thwarted by remarked. “We must let them know of that tax not to have remote operators many unlicensed operators changing the more reasonable solutions for struggle to provide competitive terms? their domain names on an almost daily operators and the ways in which they Currently, the state monopoly has basis. “It is not IP address blocking so can be applied. This is a key factor in been suspended and there is the it’s very easy to bypass. Even some of evangelising the industry because we opportunity for up to twenty licences the other measures put in place are often find ourselves in challenging to be issued for sports betting. This not being enforced at the moment and situations simply because of a lack of process has been going on since if the solution does not come from the mutual understanding.” August, 2012 and we are now in the industry then it is unlikely that the final stages of invitation and concept solution will be effective.” Germany is obviously the hot topic presentation. The regulator will soon of the moment. What is the current come to a decision as to which Lots of jurisdictions have very situation with the evolving regime operators will receive a licence and, different views on how to regulate there? since the European tender, there may the social gaming aspect of the be an opportunity to appeal these industry: could you elaborate upon Patrick Schwarzbart: Mr Schwarzbart decisions. But those 130 out of 150 your respective experiences of this? explained that there is still a lot of applicants that do not receive a licence movement with regards to regulatory will probably face the same problems Giulio Coraggio: Mr Coraggio development in Germany but as they have in the past: will they still explained that the problem lies in the expressed his desire to first step back risk enforcement actions to offer their blurring of the boundaries between and address the issue of dialogue products in the German market?” traditionally licensed remote gaming within the domestic German industry. activities and increasingly diverse “We had this short window of What is the current situation with social gaming formats. Moreover, he opportunity in Germany not too long the unregulated market in Spain? explained, gambling is still defined in a ago and the regulators there had a What can we do about it? parliamentary act making it difficult to very open ear for the industry”, he include social gaming within what is noted. “They were very interested in Albert Agustinoy: “I think that the now an accepted definition of regulating the market and within that regulated market is something of a gambling. period of just eighteen months almost private club”, remarked Mr Agustinoy, fifty licences were issued. In other who explained that, under Spanish law, Of course skilled gaming is regulatory areas, however, specifically the operation of non-licensed gaming regulated in certain ways and many those responsible for issuing and activity may still result in extensive social games would, in most cases, monitoring sports betting licences, we sanctions. “The regulator has been in not necessarily be considered had a very different experience. Talking very direct contact with payment skilled. to regulators we felt that licensing and processors, internet services providers regulation was just a task to get over and others in order to cut the black Giulio Coraggio: “Skilled gaming is and done with, and I came away with market supply as quickly as possible. regulated in the case of prizes in kind the impression that they don’t really I’m aware of ISPs already being or prizes in cash. When there is no want to regulate the market. So I think provided with a number of IP prize there is no regulation, however. it’s now a very difficult situation with addresses to be blocked, which is far So the question is, if the gambling respect to a dialogue between those from a complete solution, but there regulator does not regulate the sector, two parties.” has been some significant counter does it fall under consumer protection? action even to block aspects such as These are the issues that need to be With respect to taxation, Mr the payment of prizes. So there is a addressed if we are to ensure Schwarzbart then observed that black market but that still remains adequate customer protection through operators have always argued against quite low.” regulation.” a turnover-based tax. Nevertheless, the German federal legislator decided to 11 A Coherent EU Policy on Cross-Border Remote Gambling Issues - The Impossible Dream?

Kevin de Haan QC

An internationally acknowledged we are all speaking a different legal casinos in the UK, and we had a expert in all aspects of e-commerce language in terms of the products that greater number of society lotteries regulation, Kevin de Haan QC is a we are dealing with.” under the gambling legislation of the specialist in Consumer Protection 1960s.” and Gambling Law, particularly “So what I want to try to do is look at where an element of Public how we could possibly move towards Still in its embryonic stages of International or EU Law is involved. a pan-European system of regulation legislation, however, this system Having led the team that drafted the because that must be the ultimate retained a ‘trial and error’ approach. In Gibraltar Gambling Act, Kevin has goal”, he continued. “If you look at the the absence of a gambling been closely involved in the notion of harmonisation within the EU commission, regulation was in the development of the online gambling – the creation of a level playing field hands of the police and the magistrate, industry since its inception in the within a single market where everyone meaning that there was no mechanism 1990s and is recommended as a abides by the same rules and no one is in place either to protect the public or leading Silk in four practice areas by given a competitive advantage over to promote gambling, which was still The Legal 500 and Chambers and another – how can that be achieved regarded as a social evil permitted Partners Directory. with the gambling market?” simply because of the existence of an unregulated market. “The ‘60s A highly regarded and impassioned A Brief History legislation was a partial success”, Mr speaker, Mr de Haan opened his de Haan noted, “but the problem was presentation by congratulating the it led to an explosion of casinos in Mr de Haan observed that remote previous panellists for highlighting the London and those again fell into the gambling in particular is at issue difficulties of attempting to reach a hands of organised crime. So, by the because it is the only form of gambling consensus about regulation on a pan- late 1960s, there was real public that crosses land frontiers and raises European basis. “We have very, very concern about the regulation of cross-border issues. He then different systems internationally”, he gambling in the UK.” explained, however, that “we cannot explained, “and the speakers look at how to arrive at a consensus highlighted one major problem, which As a result, in 1968 the UK without first exploring the history of is that of definition.” Mr de Haan Government enacted the Gambling regulation.” Drawing upon Britain’s observed that the UK has historically Act, which eventually created the history of land-based gambling in regulated gambling according to the Gambling Board. Over several particular, Mr de Haan noted that the definitions of what he described as decades, as Mr de Haan explained, the domestic gambling industry was at different gambling ‘products’ – betting, UK’s gambling industry was one point almost entirely in the hands gaming, lotteries, and skill based subsequently and gradually brought of ‘the mob’: “every east-end gangster games. In other jurisdictions, however, into order; the industry developed and wanted to have a stake in one of the definitions are completely different. In the UK arrived at a situation, by the many illegal gambling clubs around Germany, for example, Mr de Haan time the Budd Report was published, London and so, on the back of a Royal identified considerable overlap gambling was entrusted to a vibrant Commission, the decision was taken between what the UK would conceive private sector subject to careful to bring gambling into the regulated of as skilled betting and gaming, with regulation by the Gaming Board in its fold. For the first time, therefore, we the German concept of games of areas of competence. had the possibility of having the chance. “So what I’m trying to say is creation of betting offices, the first 12 A Change in Attitudes Jurisprudence on lotteries and which established that gambling was a financial service, the court there said that because of the “We saw, on the back of that, a sea Mr de Haan continued in expressing curious nature of lotteries a large change in public attitudes towards his suspicions that the UK margin of appreciation has to be given gambling”, Mr de Haan enthused. Government’s proposal for a dual to Member States in what measures “Gambling was originally regarded as a licensing system is driven, in truth, by they introduce to regulate gambling social evil, something to be avoided taxation. “I suspect that the DCMS and what degree of penetration of the and supressed. But Budd [Sir Alan was handed a document saying ‘we national market they allow to operators Peter Budd, GBE, a prominent British need to raise £X billion from the online established in other Member States - economist] looked at the social scene gambling industry, how do we do it? – and Schindler was really a restrictive and realised that the public were now and that’s a very difficult brief. So let’s decision. But we later moved on from beginning to regard gambling as a part head back to the jurisprudence of the Schindler to cases such as Gambelli of the leisure industry. The biggest sea Court of Justice of the European and were virtually looking at a change that affected these attitudes Communities [CJEC].” passporting of licences throughout was the shift in regulation. Previously Europe – things looked very bright.” the regulator’s sponsoring department Most cases that appear before the was the Home Office but this then CJEC, as Mr de Haan described, start “But then, of course, we come down came under the DCMS, or the in the national courts of the Member to Santa Casa da Misericórdia, the Department of Culture, Media and States. The Member State introduces case concerning Portuguese gambling Sport. It probably, however, best a measure which is restrictive of monopoly, which is greatly embedded belongs now under the control of freedom of establishment or freedom in Portuguese culture”, he continued. “I those government departments that to provide services, among others. An don’t think Santa Casa really set any deal with the regulation of business, operator or commercial enterprise great precedents - it was a case very because the one thing that the therefore complains to the national much based on its own facts - but if European Court has recognised is that court arguing that the national you then move on to the more recent the provision of gambling services is measure is inconsistent with the decisions in Stoss and particularly the the provision of financial services – provisions of the relevant EU Treaty. It very important HIT and HIT LARIX and that is precisely what they are.” then falls to the national court to case on land-based gambling, I think interpret EU law. The national court can we’re seeing a move back towards a interpret EU law on its own basis i.e. The UK more open and less restrictive give its own interpretation, but where approach and the giving of a smaller it needs assistance there is a “In the UK, we now have a regulator margin of appreciation to Member procedure where the matter can be which is responsible for regulating the States.” referred to the European Court of whole of the gambling industry – not Justice in Luxembourg for a just gaming but also lotteries, prize preliminary ruling on the meaning of Evolution competitions and products of that the relevant provision of EU law. The nature”, he continued. “But we have a Court of Justice may not rule on “One of the great things to emerge situation in the UK now where a great whether the national measure is from the Stoss decision in particular is deal of the expertise on the Gaming compatible with EU law but it does on that it has highlighted a lot of hypocrisy Board was lost, largely due to the way occasions give very strong direction to in the way that gambling is regulated. in which it was set up. The Gaming the national court on whether the If you have a system whereby your Board was originally established in measure is compliant with the Member State gives over the provision London but was later moved to provisions of the treaty.” of gambling services to a state Birmingham, meaning that a large monopoly or a state sponsored body of staff already set up in London monopoly, yet you rely on that was asked to move 120 miles away. European Court Rulings monopoly to aggressively promote its I’m not saying that there isn’t still a services to members of the public, you great deal of expertise in the Gambling “Now what we’ve seen to date is a cannot then complain that if you allow Commission, only that a lot of the series of peaks and troughs in the other operators in other licensing original expertise and experience that European Court”, Mr de Haan states to come in they might pose a the Gaming Board brought to the table observed. “If you start out with threat or danger to vulnerable people.” was lost.” Schindler, which is the very early case 13 “The future lies in mutual respect and mutual recognition of the regulatory systems that exist within the European Union at the moment.”

Mr de Haan then warned the Summit “Well I think we all know the answer “And I think in that one might see the that a key problem with the European to that”, he remarked. “The change is seeds of a move towards a pan- Court remains its lack of understanding tax driven. In a situation where the UK European regulatory regime.” of the online gambling industry. Treasury is very strapped for tax Although as a sector it has generated revenues it is looking around to see “Even if a few Member states signed more cases than any other form of where additional revenues can come up to that and adopted common commercial activity within the from. And if you really want to tax the standards, that enhanced cooperation European community, an industry effectively you have got to might, in due course, form the basis understanding is only now being license it.” for some form of pan-European formed. “I think now the penny is regulatory system. But my view is that slowly beginning to drop in Europe and Where does that take us? we are never going to see a European I think that one sees that in the HIT Gambling Commissioner. We are never and HITLARIX case”, he remarked. going to see a totally harmonisation Mr de Haan observed that the UK directive. The future lies in mutual development is almost a microcosm of “It makes very interesting reading if respect and mutual recognition of the the problems that any regulator in any you are interested in seeing how the regulatory systems that exist within Member State is likely to face in trying approach of the European Court of the European Union at the moment. to justify the introduction of restrictive Justice has evolved over, effectively, That is, I feel, the only way that we are measures. “We will go on until we two decades. If you read that you’ll going to move towards a coherent have some form of harmonised see that Advocate General Mazak is system and a consistent system for system in Europe”, he observed, “with saying ‘yes, you can introduce the regulation of online gambling a toing and froing between the restrictive measures but those within Europe.” Commission. But where do we start in measures have got to be trying to establish a regulatory regime proportionate’. In other words, first of that will work throughout Europe? It’s all they must be no more restrictive very difficult because of the than is absolutely necessary and they differences in the structure of the must be effective for the realisation of industry and the regulatory regimes in their policy objective. If a Member different countries. But there are State seeks to justify the introduction features that are common to all of of a restrictive measure to deal with a them and you can always find that the particular problem, say the prevention goals in any regulatory system are of gambling addiction or fraud, it must consistent with Section 1 of the produce evidence of the existence and Gambling Act 2005 – keeping gambling extent of that problem before the crime free, ensuring that gambling is national court – because it is the fair and transparent, and protecting national court that decides the facts. children and vulnerable people. It That is why I think the UK’s case for ought to be possible.” dual regulation will fall down, because the evidence is just not there.” Where is the way Evidence forward?

Ultimately, as Mr de Haan explained, “An initial way forward might be in the there is a distinct lack of evidence to creation of a European code of justify the sea change in the new UK practise and this needs regulators to approach because the Gambling Act get together”, Mr de Haan emphasised almost institutionalises the passporting in conclusion. He explained that the of licenses into the UK from European industry is starting to see the seeds of jurisdictions, “so why are they cooperation in, for example, a recent changing it?” meeting of four regulators to try to use the procedures for enhanced cooperation in article 239 of the treaty. 14 Introduction to the Afternoon Session

Archie joined KPMG Gibraltar from “Stuart is then going to be followed by Archie Watt KPMG London, where he was Michael Tobin of Continent 8”, Mr Watt recruited as an IT Advisory Director continued. “Michael has been Head of eGaming in the Information, Communication instrumental in creating the Continent KPMG Gibraltar and Entertainment practice, with a 8 brand and is a very strong supporter particular focus on online gaming of the sector. With their global clients. Archie worked on the footprint, Continent 8 can provide bwin/PartyGaming merger and he hosting facilities where and when you has also worked on a number of need them and here in Gibraltar, acquisitions in the gaming sector together with GibTelecom, they can and the public listings of 888, provide hosting facilities and Playtech and PartyGaming, amongst bandwidth that is the envy of many others. Archie is a regular other territories. Michael is going to contributor to sector publications impart some insight into the and recently co-authored the report importance of entrepreneurship and Online Gaming: A Gamble or a Sure economic development on a global Bet? scale and that surely will provide some food for thought this afternoon.” “I’ve been involved Having expressed his thanks for the morning’s presentations and “I’ve been involved in the eGaming in the eGaming congratulated delegates for their sector for fourteen years now, and one enthusiasm during the geographically of the things that I’ve come to realise sector for fourteen focused session, Mr Watt introduced over that time is that it constantly the afternoon’s proceedings as a evolves. Legal and regulatory issues years now, and one sector focused examination of the are constantly changing, but you are wider issues operators face and how adapting, and that is the most of the things that to prepare for the challenges and remarkable thing of all about this opportunities that lie ahead. sector”, he enthused. With allusion to I’ve come to realise regulatory evolutions such as FATCA, “The first presentation will be by or the Foreign Account Tax Compliance over that time is Stuart Ballan of Counting House, an Act, Mr Watt then drew the attention organisation which really ‘gets’ the of the Summit to Peter Howitt’s that it constantly sector”, Mr Watt began. “He is going to forthcoming presentation on the 4th be talking about the fundamental Money Laundering Directive. “One of evolves.” changes in payments regulation and the more eye-catching proposals in methodology, a very important topic that draft text concerned extensions to because, after all, the only way for the our compliance requirements industry to make money is by getting concerning PEPs, and this is just one money on to the sites. If there is a of the things that we later hope to new trend in payment methods or address.” technology and you’re left behind the curve, your competitors will gain a “After coffee we have two more significant advantage. And we all know presentations which I’m sure will keep what happens in this industry to those you on the edge of your seats”, Mr who get left behind.” Watt continued. “Sue Rossiter of the Remote Gambling Association and Simon Trussler of KPMG will be talking 15 about tax. I’m fortunate enough to have already seen the presentation that Sue and Simon will be presenting this afternoon and I can honestly say that the concept of operators being able to maximise revenue while Governments can, at the same time, maximise tax take is truly an exciting prospect.”

Mr Watt then described his pride in being able to introduce what he described as a ‘heavy-weight’ panel session to close the day. Moderated by Peter Montegriffo of Hassans and featuring GBGA Secretary Simon Howitt of Ramparts Law, Michael Carlton, CEO of Victor Chandler International, Kevin de Haan QC and Adam Craig, group director of tax at bwin.party; together they would tackle the outlook for eGaming within the context of an increasingly fractured European regulatory framework and new opportunities in the US and China.

Archie Watt Head of eGaming KPMG Gibraltar 16 Hot Issues in the Payments Industry

Stuart Ballan Head of Sales - Middle East Counting House Ltd.

Stuart Ballan, MBA (Kellogg- part of a €10 billion bailout solution. decision of the past can dramatically Recanati) is Head of Sales for the “It was a very quick war”, Mr. Ballan affect what you can and cannot do Middle East at Counting House Ltd. explained, “But in this case, innovation today. There are many jurisdictions He has over 25 years of business became the lifeline of companies that where you can license and you make and B2B experience, including his had lost the ability to take deposits and decisions based on the balance sheet own entrepreneurial ventures, payments, more or less overnight.” at the time, but things change. In working for a leading gaming Germany, for example, changes to operator, for an acquiring bank and, “Similarly, there has been more AML guidelines combined with currently, for a leading-edge PSP progress in the financial world in the ambiguity have triggered real changes with global coverage. Based in Tel last ten years because of internet to payment processors which, in turn, Aviv, he is a keen cyclist and a gaming than there has in the last has a material impact on operators.” published children’s book author. hundred”, Mr. Ballan continued. “Most of that has been driven by the Mr. Ballan explained that these Fundamental changes in payments eGaming sector and a lot of other changes were triggered by German regulation and methodology are again industries have benefited as a result. legislators being reprimanded for their afoot. What are their implications for It’s critical to the success of any anti-money laundering practises in operators and professionals? eGaming operation to be able to send sports and casino betting. “Since then, and receive money from people using there have been drafts and re-drafts, Mr. Ballan began his presentation by methods that are convenient to players sections and subsections, and this providing an introduction to Counting and operators alike. And we have to do serves to create even more House Ltd., which provides payment so within a growing, extremely uncertainty and ambiguity”, he processing services predominantly to confusing and ambiguous regulatory observed. Mr. Ballan drew upon the the eGaming industry. Counting House environment.” example of a past requirement for all is part of a group of companies that for players to be authenticated by face to nearly 20 years, has provided similar Such is the extent of this ambiguity, face verification and later to submit by services to many industries, including Mr. Ballan explained, that the payment email, notarised verification in the form direct marketing, publishing, processing industry has been forced to of passports and driving licenses, all of eCommerce, Forex, affiliates and respond with a degree of creativity which measures were driven by charitable organisations. within a fractured regulatory regulatory ambiguity, yet were environment that has in some cases blatantly impractical. War Creates Innovation resulted in non-compliance. “Some of “One of the concerns in Germany that is good for the industry, however, surrounded anonymous deposits and and today I’m going to be talking about withdrawals; all the cash-type payment Mr. Ballan stated how “war creates some of the pressing issues and their methods that can’t be tracked the way innovation”, giving the example that solutions.” credit cards can be, etc. The impact there have been more advances in was that the payment providers aviation in two world wars, including withdrew services for non-EU licensed the jet engine and the nuclear bomb, Anti-Money Laundering gaming operators within Germany. So than in any twenty year period free of what I want to discuss is the decision war. “To begin, I was very pleased to note the payment providers made and why that my presentation on AML is they did so.” Mr. Ballan began with an example of a consistent with this morning’s more recent ‘war’: the Cyprus banking observations about what’s happening crisis, where Counting House created in Germany”, he continued. “And it is in AML EU or Non-EU? and launched an emergency package line with this theme that I’d like to within 24 hours of the Cypriot discuss, not just how AML can affect “If you are an EU licensed operator, it’s government announcing its intention where your operations are licensed okay to take payments using payment to levy all Cypriot bank deposits, as today, but also how your licensing methods such as a PaySafeCard, Skrill 17 “There has been more progress in the financial world in the last ten years because of internet gaming than there has in the last hundred.”

Stuart Ballan Head of Sales - Middle East Counting House Ltd.

and cash-type anonymous payments. minimum risk in processing for EU Gaming ‘vs’ Financial But if you are a non-EU licensed licensed operators, as German operator it’s not”, Mr. Ballan observed. gambling regulation is not compliant “Within the gaming and financial “So all EU is good, all non-EU is bad?”, with EU law due to provisions made industries there is an ‘identity crisis’ he continued. Drawing the attention of for the free movement of goods. So a for companies in the binary options, the Summit to a presentation slide, he payment processor or an EU operator Forex and lottery messenger then showed that Gibraltar, Cyprus and can always claim it’s acting in industries, that don’t want to be Malta are classified as EU jurisdictions, compliance with EU law, knowing any painted with the same brush as the whereas the Isle of Man, Alderney, argument to the contrary can only be gaming companies”, Mr. Ballan Guernsey, Costa Rica, Curacao and the addressed in court, with payment observed. “And this battle is based British Virgin Islands are non-EU providers and operators being in a around the demands of the acquiring jurisdictions. “So there is a clear strong position to win. However, by banks and the credit card schemes. It inconsistency in AML impact here definition, the non-EU licensed was discussed earlier that the when we consider the current banking operators are outside of EU law and legislators and the regulators either do crisis in Cyprus, (EU licensed) don’t want to play with fire.” not understand what these industries compared to the Isle of Man, say, are, or perceive them differently, and which is highly regarded for its So what was the cost? Mr. Ballan this is a constant battle. Companies in regulatory framework and increasingly explained that payment providers these three industries are constantly so every day, yet is non-EU licensed subsequently removed selected battling to not be identified as and such payment methods were services from operators based in non- ‘gaming’, because payments withdrawn. This is an example of how EU jurisdictions, resulting in processed as such would suffer higher a decision made years ago can actually companies such as Paddy Power and declines and geographical limitations, affect operations today.” PKR, for example, losing some of their consistent with the gaming industry. payment deposit capabilities. “And this At a detailed level, it all comes down was all the result of complex, ever Germany Rationale to merchant codes.” changing and ambiguous AML guidelines influencing decisions So why did payment processors Mr. Ballan explained that with every concerning where to license made withdraw their services from non-EU transaction processed via a credit card, years before.” licensed operators? Mr. Ballan a four digit MCC code is passed to the explained that payment providers want banks. So, when you buy your to be approved for future Germany groceries at the local supermarket, the gaming regulation, so the last thing MCC code used to identify this they need is to be on the “wrong side” transaction effectively tells the banks of the German regulator. “There was it’s a purchase of perishable goods in 18 the retail industry, and that the goods “The problem is the banks and are unlikely to be returned, and that regulators do not understand, so they the consumer is unlikely to claim (s)he have been forcing these transactions didn’t make the transaction. “But the to be processed as gaming, or 7995, battle here is that the binary options rather than 4215 for freight and lottery messenger industries want forwarders, drastically reducing the to get acceptance from the acquiring size of the industry for the reasons I banks and card associations, Visa and explained earlier. Let’s take an MasterCard for example, to not be example. You go into a newsagent and processed as gaming, as firstly, many buy a newspaper, a chocolate bar and banks decline the online gaming MCC a lottery ticket, and you pay by credit code (7995), and secondly, because card. In most countries this wouldn’t such payments will probably not be be processed as a gaming transaction, “Increasing processed in countries that have whether you included the lottery ticket banned eGaming, thereby materially in your ‘basket’ or not. But when you ambiguity and these reducing the industry size.” move on to the online world of lottery ever changing messenger, suddenly the same lottery Lottery Messenger ticket purchase is classed as gaming, and processed as 7995, yet both the guidelines and rules newsagent and the online lottery “I live in Israel”, explained Mr. Ballan, messenger companies clearly “and if I decide to buy a ticket for the breed creativity, performed the same service of being a UK lottery, I’ve got two choices: I can courier type channel for a lottery ticket, either fly to the UK myself to buy a however, they also purchased through a valid retail outlet. ticket, at a cost of hundreds of pounds, This is a huge industry, that the or I can take advantage of a growing, breed non- majority of people have yet to global industry that allows me to go discover, and what we’re trying to do online and legally buy a ticket for the compliance, and that at the moment amongst all this chaos, same UK lottery (and for many others), ambiguity and confusion is to create paying a small premium on the ticket cannot be good for and deliver a legal solution for price for the service.” processing the industry as non- the industry in the gaming, thereby providing the platform Drawing the attention of the Summit to enable rapid industry growth.” regulated market.” to the associated slide, Mr. Ballan then noted that he had chosen to typeset the words ‘lottery messenger’ in red The USA and green respectively “because I think that perfectly sums up the Turning to the increasingly topical industry – What do you see when you subject of gaming in the USA, Mr. look at these two words? The word Ballan noted that Nevada, Delaware, ‘lottery’ or the word ‘messenger’?” and New Jersey are imminently (at the Mr. Ballan explained that the time of the summit) expecting to companies within this industry are, in legalise online poker and casino. essence, couriers – they have no However, these three states represent business relationship with the actual just 4 per cent of the US population, lotteries. “All they are doing is taking so how will the other 96% be able to online orders and sending couriers to pay and play? Mr. Ballan then drew the buy the tickets for you. So are they in attention of the Summit to a graph the lottery or gaming business, or, like depicting the share price of a well- FedEx, in the courier/messenger known, public eGaming company business?” between 4th February and 1st April 2013 and noted that, following New Jersey’s announcement of its intent to legalise eGaming, the share price had 19 increased by 50 per cent during that ready’ or 7995 cards, it would take To Close period. “I saw many attendees at ICE years to slowly implement, as the 2013, London, celebrating the rise of same banks spent years blocking such In closing, Mr Ballan drew the their personal assets during that transactions. Untangling the web they attention of the Summit to a slide exhibition. But given that share prices built would be far from simple. We also depicting a struggling tug-of-war team. represent future earnings, which in can’t assume that only Nevada “For me, this picture sums up the turn come from cash, have you residents would play, or that non- gaming industry: we see many people stopped to think about how the future Nevada residents would not bank with shouting independently at one another, USA gaming players will actually make a Nevada bank, or that a Nevada bank whilst digging their heels in – the AML the deposits that will generate these would be able to trace where a organisations, the acquiring banks, earnings? It turns out, payments for payment is coming from – so it’s card associations, regulators, US gaming remains undecided and extremely complicated.” compliance, operators, players, etc. ambiguous.” The result is the pain you see on their Mr. Ballan then noted that one option faces, resulting from different parties is for MasterCard to allow use of its Credit Cards in the USA pulling as hard as they can, in different 9754 code, currently used for legal directions. We, as the gaming industry, horse and dog racing, for US gaming. Generally speaking, as Mr. Ballan and as payment processors, need to However, there’s no decision from observed, 80 per cent of US non- meet the needs of all these shouters, MasterCard. gaming transaction are made using in a world where what they are credit cards, “the American public is shouting about is usually muffled and Similarly, other deposit methods such used to using credit cards, and it’s not constantly changing. Today, we have as PayPal are still unconfirmed, while for us to try to force them to pay in multiple payment methods that have ACH, a payment method prone to different ways, that they are not appeared in response to global fraud, is expected to be a key initial comfortable with. So how will credit demand for fast, secure, guaranteed deposit method. Many alternative cards be used? Unfortunately, for payment, in gaming, and beyond. methods such as eWallets, pre-paid operations that might be only months Whereas this increasing ambiguity and cards, PaySafeCards, Skrill and away, today, we still don’t know.” these ever changing guidelines and Neteller, meanwhile, still have to be rules breed creativity, however, they registered for eGaming use in the US. “If you live in New York, but next also breed non-compliance, and that “With the launch of US gaming on the week, you’ll travel to Nevada, for a cannot be good for the industry in the near horizon, the whole subject of ‘gaming weekend’, do you have to wait regulated market. gaming deposits in the US is filled with until you arrive in Nevada to deposit uncertainty. funds, or can you do so from home, Banks fear the every changing rules; work, or on the train, when in New regulators are faced with constant So, yes, the share price jumped 50% York? We don’t know”, Mr. Ballan steep learning curves and workloads; on the news of the US markets stated. and operators want efficient payment opening up soon. But clearly, there’s products, yet the less the merrier, to still a lot of work to be done for the “I mentioned earlier that payment reduce integration. The only option is gaming operators to accept the processing in credit cards is driven by to bring together these disparate deposits that will be the future fuel for four-digit merchant codes, and that parties and try to formulate less their earnings.” gaming uses 7995, which has been ambiguous requirements and simpler blocked in the USA for years. Will the and more secure means for operators US suddenly start accepting 7995 and players to process their transactions? If so, only when initiated transactions. Doing so would be better in one of the 3 licensed states, or from for banks, governments, players and anywhere? How practical would it be operators” to allow 7995? It turns out, credit cards in the US are generally issued on a national level rather than a state level – so it’s not as if you can get a Nevada issue credit card to identify just Nevada players. Furthermore, even if the issuing banks said yes to ‘gaming 20 Entrepreneurial and Economic Development

Michael is co-founder of Continent 8 help them to provide a platform for Michael Tobin Technologies PLC and the creator of their state lottery licensees. We are the "Continent 8" brand. He is a also working with parties in California, Co-founder and Chief Certified Public Accountant by New Jersey, Florida and New York and, Executive Officer profession and an entrepreneur by of course, we are working in locations nature. He is a former Director of throughout Europe with regards to Continent 8 Technologies Empire State Development, the lead expanding licenses based on the economic development agency for security and accessibility of New York State. Michael is a infrastructure. Not everything stays the graduate of Montreal’s McGill same in this industry, as Gibraltar is University. currently experiencing with the point of consumption tax, and we have to be “We have recently A key figure in the global eGaming entrepreneurial in order to allow community and a noted speaker economic development opportunities been consulted by worldwide, Mr Tobin began his eagerly to take place for private business and anticipated presentation by introducing for governments.” and will be delegates to the history of Continent 8 Technologies and its role within the “So Continent 8 allows companies to presenting in industry. “The whole concept of have a global, single source supplier in Continent 8”, he explained, “evolved a complicated world both regulatory- Delaware at the end when my co-founder, Jay Stubina, and wise and technology-wise”, Mr Tobin I were students together at McGill continued. “We host, we co-locate, we of the month and this University many years ago. In the late do disaster recovery, network 1990s we both realised that we had management, positioning, and we are is because they see missed the dotcom boom and asked one of the early adopters of methods ourselves how we could get involved to protect clients from DDos, or that we are in a in online. So we came up with a Distributed Denial of Service, attacks. concept based on a combined theory This again came as a result of the position to help them of the death of the nation state and needs of our customers who felt they the creation of supranational were under threat from these sorts of to provide a platform commercial zones and megatrends. attacks and we said ‘let them come’.” We called it the ‘eighth continent’ or for their state lottery Continent 8: what we’ve become is Mr Tobin then explained that Continent eGaming’s multi-jurisdictional hosting 8 currently operates from nine licensees.” solution.” locations around the world although the company’s main points of “The moves we have made have been presence are to be established in very much based on the needs of our North America. London, Paris, New customers”, Mr Tobin continued. York and Dublin are each host to major “Many different solutions have also data centres while Montreal is home come from our work with a lot of to Continent 8’s original data location. different jurisdictions however, so we “We headquartered, when we left have also become a fiduciary to Montreal for the first time, in the Isle regulators and advisors to of Man for a number of reasons and governments because they see us as we continue to operate a data centre a neutral, objective and knowledgeable there”, Mr Tobin also explained. “While part of the e-commerce world. We we look forward to making Gibraltar have recently been consulted by and our ‘rock’ for a number of reasons. But will be presenting in Delaware at the a lot of our reasons to locate are end of the month and this is because predicated upon where our customers they see that we are in a position to need to be and where we are invited 21 Michael Tobin Co-founder and Chief Executive Officer Continent 8 Technologies

to be by our regulators in order to something that was almost Points of Presence control and manage licensee bases.” overregulated, as land-based gambling then was?’. That’s the value proposition “Points of presence where our we had in the early days. This was born Gibraltar network connects also serve as very much out of our experience in advanced locations where we can offer selecting a jurisdiction which allowed “Here in Gibraltar we have a very niche unique services to customers that us to provide technical and regulatory location. We were introduced to the need to be located in these solutions to our customers and the Isle island a number of years ago and knew jurisdictions. We are also in Belgium of Man has since become a critical at that time that it was becoming a and Taiwan and, for the last couple of component in our network.” jurisdiction of choice for a lot of very years, have also been dealing with a important companies, most of which lot of data centre requirements for Las are here today”, Mr Tobin enthused. Malta Vegas, Chicago and Miami in “But it has also become a very anticipation of inter-state lotteries, for challenging location from a technical “Our decision to create a base in Malta example. A unique location that we’re point of view.” Mr Tobin explained that was again in answer to the needs of just initiating at the moment is also the Continent 8 acquired the unique our customers who were looking to US Virgin Islands which can be, from location of the Ministry of Defence’s establish themselves using an EU our perspective, considered the US’s old communication centre, which is licence”, Mr Tobin explained. “We Malta. We’re working very closely with located at the heart of the rock of continue to operate in Malta and the US Virgin Islands Government to Gibraltar. Many had tried to initiate and provide what is probably the best develop a product for them. In this develop the site but did not have the network for our customers there. The case the government may want to technical capabilities to realise its full ease with which people are able to get outsource a lot of their IT management potential. “We acquired the site at a on and off the island is also a major to us and this is, again, becoming a time when its ownership had been factor in its success, as it has been key business area alongside data transferred to the Gibraltar here in Gibraltar. Working closely with management and protection. So in all Government and have turned it in to a Gibtelecom, the fibre infrastructure we cases, what we do is driven by our very unique location which, of all our connected in to provided alternative customers.” locations, has garnered the most routes even to our providers as well as applause and mythology. But of course managed networks.” Client Services this, often exaggerated, speculation has become a very important Dublin “As many of you know”, Mr Tobin marketing tool and has served to explained in closing, “client services showcase our technical abilities across Mr Tobin explained that key factors in overall are something that your market the globe, and not just for eGaming the decision to develop a site in Dublin teams work very hard to identify and companies.” this year include its technological define. So we work very closely with renown as well as the importance of our customers to provide case specific The Isle of Man diversifying a company’s reach. “More virtualisation solutions in multiple and more people are in multiple locations. In the sense that I Mr Tobin explained that the Isle of locations, you cannot be reliant upon mentioned earlier, we function very Man’s past economic development one single site”, he remarked. “So we much as an entrepreneurial company. theme, ‘freedom to flourish’, was provide that neutral vehicle for Operating online means you must be something that initially attracted customers both in terms of their ready to react which is why we remain Continent 8 to establish its tactical and their regulatory needs and in close contact with jurisdictions and headquarters in the well-respected this extends to London, Paris, operators to respond to their needs. It jurisdiction. “In our technology based Guernsey and Montreal.” is important to be an entrepreneur as industry with an eGaming focus, our the world changes and we continue to concern was ‘how do you take encourage the customer to make something as unregulated and those associations with Continent 8.” seemingly unregulatable as the internet and combine it with 22 The 4th Money Laundering Directive and Its Potential Impact to Online Operators

Ramparts Law is a European law have yet to be decided. In practical Peter Howitt firm based in Gibraltar and terms, it is unlikely to have an specialising in cross-border operational impact for obliged entities Ramparts Law corporate, commercial and until after 2016. It is likely to impact regulatory matters relating to e- regulators, governments, operators commerce, technology, gaming, and licensed firms, and represents a financial services and tax. It was significant gear-change to a more EU founded by Peter Howitt, a solicitor federal and state approach to AML, who has worked in the e-commerce, where all key stakeholders have gaming and financial services obligations to a risk based approach. sectors for over 10 years. The firm Overall, it is positive for the online advises entrepreneurs and multi- gambling industry, Mr Howitt assured “It is not clear why, national corporations (inc. NASDAQ the Summit. This is due to the specific and FTSE listed companies) in inclusion of online gambling in the in a directive which relation to local and international directive for the first time, which commercial projects. Peter qualified enables the industry to demonstrate to is basically saying in England and Wales as a Solicitor those that remain sceptical of its in 2002 and in Gibraltar, 2012. Peter integrity that it adheres to the same ‘you do the work to is also the Chief Executive Officer of high standards as leading financial the Gibraltar Betting & Gaming institutions. Mr Howitt emphasised, find out what the Association and the Secretary of the however, that it is important not to Gibraltar E-Money Association. underestimate the potential risk of risk is’, they see fit further cross-border legal confusion, Mr Howitt opened his presentation the law of unintended consequences to hard-code with a brief explanation of the 4th and the possibility of misuse of AML Money Laundering Directive which, laws to restrain cross-border trade. measures which although still in draft form, is set to have a significant impact upon the Stated Objectives make it seem that online gaming and the financial services sectors. Mr Howitt observed The stated objectives of the draft are gambling is a much that at a very high level the 4th Money to: Laundering Directive could be • reduce cross-border complexity higher risk than any summarised as follows: “There is risk based evidence driven AML party in • safeguard against criminality and other activity.” Europe… and nearly everyone is terrorism invited.” • safeguard economic prosperity The Details • contribute to financial stability and soundness of the financial system The 4th Money Laundering Directive, • ensure consistency between EU Mr Howitt explained, covers gambling and international rules (particularly entities and takes a very risk based the FATF recommendations) approach (RBA), requiring lots of risk based assessments. Essentially an • increase the consistency of extension of the 3rd Money national rules (although we’re still Laundering Directive (published in the not seeing harmonisation, an Official Journal of the European Union evidence driven approach may on the 25 November 2005), it contains facilitate a move towards this goal) 23 a number of practical elements that Peter Howitt

• introduce a harmonised criminal offence for defining criminal activity Gold Plating offence of money laundering and all companies are also now across Europe (and certainty of the required to hold and share information Because it is not a maximum predicate offence of tax related on beneficial ownership. This is largely harmonisation directive, Member crimes) to ensure that there are no States can also gold plate the directive jurisdictions in Europe that can be or implement it with additional compared to, for example, the British Whereas previously only land based measures. “This is something about Virgin Islands. casinos were covered in money which the industry should be very laundering directives, all online concerned”, Mr Howitt urged the National Risk Assessments are gambling operators will be covered as Summit. “This is not something that required and national measures are to part of the 4th instalment. The general has been put there for the gaming be taken with closer cross-border co- approach of the directive, Mr Howitt industry, but is the result of public operation between financial explained, is to set some common policy issues, however the ability to intelligence units, the European standards but leave Member States, gold plate the directive upon Banking Authority and other regulatory bodies and obliged entities, transposition is obviously something supranational bodies. “Quite frankly”, which include gambling operators, to that is open to abuse.” Mr Howitt remarked, “cross-border take detailed risk assessments and issues between financial intelligence ensure adequate measures are put in Member states are supported by units have been a major problem in place which are commensurate with supranational EU supervisory bodies, terms of reporting and the sharing of risk for country sectors, transactions including the European Banking information and there has also, in the and customers. “It is less prescriptive Association and Europol, and are also past, been a problem with knowing than the 3rd Money Laundering obliged to share assessments exactly who to report to.” Directive in many ways and this is to between each other. “This increase in be welcomed”, Mr Howitt remarked. reliance upon supranational bodies is Customer due diligence measures “It doesn’t seek to set in stone a one of the things I like most about the continue to allow for simplified, judgement on what is considered to directive”, Mr Howitt noted. “It is doing standardised and enhanced due be high or low risk but allows for a much more of the work in terms of diligence and it will also be much more detailed risk assessment to be harmonisation and coordination across evidence and multi-variant risk based conducted at various operator, national borders than has been done when determining risk and the and supranational levels. Most previously. This will make it easier for measures to be taken in mitigation. positively, it aims very much at cross- industry operators within the sector to The use of the 3rd Country border implementation, sharing and be able to gain a better sense of the Equivalence White List has also been standards, however with minimum otherwise fragmented AML removed. This is due to the move legal harmonisation in most respects it environment.” towards a risk based approach. could lead to greater inconsistencies.” “Interestingly they have also removed the ‘in principle’ simplified due Recitals of Interest Main Changes diligence waiver”, he added. Gambling is defined as ‘any service Mr Howitt explained that the use of There is to be an increase in PEP involving wagering in games of chance simplified due diligence is to be (Politically Exposed Person) checking, including those with an element of skill significantly reduced. There is also a both domestic and international, which such as lotteries, casino, poker and change in customer due diligence will lead to increased requirements for betting transactions’. thresholds for cash transactions from obliged parties to ascertain risk and €15,000 to €7,500 and a minimum set mitigate against it. Mr Howitt noted that Recital 13 of the of principle-based rules for directive was interesting in its administrative sanctions. Tax crimes specificity, due to its stating that ‘the are now included as a predicate use of the gambling sector to launder 24 the proceeds of criminal activity is of Articles of Interest “The major issues I concern’. “It is interesting in a directive that is predominantly evidence and risk Article 4 provides that Member States see are that it is all based that we have this sentence, can extend the scope to more which gives no indication that it was categories of obliged undertaking (gold about cross-border based on assessment or evidence”, he plating) while Article 5 provides that remarked. “It is of some concern Member States can also adopt stricter communication and because it is a presumption.” provisions. Article 7 states that Member State risk based approaches compliance for the “Gambling operators are also going to will be used to consider the application be subject to a lower threshold for of these additional measures by local online industry. cash transactions. The normal obliged entities. Member States must threshold is €15,000, soon to be also ensure that obliged entities Some operators will €7,500 but the gambling threshold is assess AML and terrorism financing €2,000, which will be applied to risks, taking into account various already be more wagers and winnings. It is not clear factors including customers, countries, why, in a directive which is basically products, services, transactions and sophisticated than saying ‘you do the work to find out delivery channels, according to Article what the risk is’, they see fit to hard- 8. “Interestingly, in Article 8, it may be others and will be code measures which make it seem appropriate to require an independent that gambling is a much higher risk audit of these policies and procedures, aware that they are than any other activity.” the results of which are to be made available at all times. Operators should already subject to Recital 23 allows for obliged entities to be aware of this change”, Mr Howitt rely on 3rd party introducers or advised the Summit. AML in multiple partners to carry out customer due diligence, although regulatory territories.” obligations remain with the obliged Germany party. Recital 31 provides for data protection for sensitive sharing of Moving towards a conclusion, Mr information for fraud prevention, Howitt explained that “the major although the current draft does not issues I see are that it is all about extend these measures to gambling cross-border communication and obliged entities, only the financial compliance for the online industry. institutions. Operators may still benefit Some operators will already be more from the inclusion of PSPs, “The sophisticated than others and will be industry must come together on aware that they are already subject to deciding how to lobby for influence on AML in multiple territories. For others, this over the next couple of years, it may come as a surprise that there because there is no reason why isn’t as much harmonisation within gambling operators are included in European law as you would expect.” many of the restrictive measures and then dropped for many of the benefits “Under AML principles, the and rights contained within the presumption is that the Home State directive”, Mr Howitt urged the regulator regulates obliged entities and Summit. the AML laws of that State. You should be aware that other states that you provide services to on a remote basis, 25 “Many countries did not support / understand the industry or approve operators for the sector and unfortunately the legislation was poorly drafted and had many unnecessary commercial restrictions.”

may implement a different approach. “Interestingly”, he continued, “despite decline of about 60% in the German So, in addition to business and the purpose of the 2nd directive clearly e-money market. Ironically, therefore, consumer laws, you need to be being to open up the market for Germany failed to support the looking at the anti-money laundering regulated electronic money, in e-money industry when it started, requirements that are applicable in Germany they decided to use this as failed to grant e-money licences to other territories. The use of Host State an opportunity to increase restrictions local companies, failed to transpose AML can also apply when you are on electronic money. This was a shock: European law requirements properly using local agents - again depending such a regulatory approach may be the and then appeared aggrieved that it did on the approach by local Member norm for online gambling but it was not have control and oversight over its States.” not expected in the more integrated own domestic market who were financial services sector. The e-money transacting with EMI’s in other Electronic Money – sector was already on its second countries – a familiar story for online directive with harmonisation measures gambling.” lessons learned intended to encourage that industry. Germany's AML structure is based on “With this in mind, the eGaming “I don’t want to be considered the normal AML territoriality principle, industry must, therefore, demand a scaremongering here when I talk which means they could not enforce supranational authority that is about the risks to be considered”, Mr the new AML provisions against responsible for gambling in Europe. Howitt emphasised. “But, just briefly, foreign EMIs. Given Germany's It must engage with relevant in 2000 the 1st E-Money Directive resistance to the e-money sector, supranational bodies for gambling to came into force and intended to open however, it had no domestic EMI's and issue guidelines on applicable AML up certain stored value payment many German companies had rules for cross-border operators and to products wider than just the banking obtained a licence in the UK in order to ensure no unwarranted extension of sector. There was very poor uptake in passport back into their cultural home- AML obligations to partners. Finally, it Europe compared to that anticipated, base. Germany therefore focused on must prepare for the potential misuse with some notable exceptions such as severe limitations for any locally and lack of understanding of the sector in the UK private sector and the Italian established distributors or agents of as well as the plain poor transposition public sector. Many countries did not EMI's and made it almost impossible of the directive in a manner that support/understand the industry or for EMI's to work with local petrol restricts cross-border operators, approve operators for the sector and stations, shops etc. where prepaid particularly where local gambling law unfortunately the legislation was cards would usually be sold. The e- restrictions are currently deemed poorly drafted and had many money sector tried to reason with the unlawful under European law.” unnecessary commercial restrictions. German authorities and it could be This forced the European Parliament to argued with some justification that introduce the 2nd E-Money Directive in Germany’s transposition looked like an 2009 with maximum harmonisation exercise in bad faith given the purpose measures to avoid fragmentation or of the 2nd Directive. Germany was the gold plating of some operational able to implement the 2nd Directive in requirements.” such a way that it led to an estimated

26 Unintended Consequences: The Pitfalls of Gross Profits Taxation and Similar Economic Strategies

Sue Rossiter Simon Trussler Director of Projects and Policy Director, Economics and Regulation Remote Gambling Association KPMG

Sue joined the Remote Gambling Sue Rossiter introduced the joint Additional Taxation Association in January 2012 where presentation as an examination of how she is responsible for policy the UK’s proposed taxation regime and “For the most part”, Ms Rossiter development, government relations its tax rate levy may result in a range observed, “it is the discretionary and special projects. Previously she of pitfalls that undermine the UK spend that is influenced by a raise in was Head of Policy at the UK Government’s policy intentions. She tax levels on a particular product, so Gambling Commission and headed explained that KPMG has undertaken a number of studies for the Remote there is little change to the quality of up the Gordon Moody Association, Gambling Association (RGA) on the the online experience. The which supports problem gamblers taxation of remote gambling in various development of a site is usually a sunk to overcome their addiction. jurisdictions and drew the attention of cost and is not very frequently the Summit to a recent report entitled impacted by additional or ongoing Simon is a Director in KPMG’s An assessment of the impacts of a expense. It’s the three other areas that Economics & Regulation practice. gross profits tax on Italian sports do have an impact on the customer: He is experienced at advising betting. Ms Rossiter explained that the prices will rise as the tax is passed on companies and policy makers on the report was issued to a Spanish to them, advertising will be reduced, economics of excise taxation in the regulator to submit that new tax levels and top-ups and bonuses will also be gambling, alcoholic drinks and are required to prevent the rise of reduced as discretionary spend falls.” tobacco markets. He has also unlicensed operators and had been advised companies and tax very well received in both technical and local press. Mr Trussler then took over from Ms authorities in numerous tax disputes Rossiter in explaining some of the including VAT, landfill taxation and Ms Rossiter then identified four key conclusions of the economic and transfer pricing cases. Simon factors which inform an individual’s market data research conducted in worked recently for the Remote decision to bet with a given operator; partnership with the RGA over the past Gambling Association where he led three of which are influenced by tax: few years. “The results and findings a team analysing the economic we’re going to be talking about are impact on sports betting in Italy of a • the quality of the online very, very robust and take into account gross profits tax relative to a experience: including ease of use, detailed economic theory, socio- turnover tax. The report, which availability and social experience economic research, economic and contained new and detailed • prices: including pay-out ratios, market data, and are scalable to economic research on the relative cost of sign-up, rates changes in the market structure - merits of the two taxes, built on • advertising and marketing: brand whether it’s a monopolistic market or a earlier KPMG reports on the markets recognition competitive market, or somewhere in in Spain and Cyprus. Simon has • bonuses, free bets and top-ups: between”, he assured the Summit. also advised lottery operators on used to attract, retain and revive regulatory and commercial matters. customer accounts 27 Sue Rossiter Simon Trussler

“But before I go into conclusions it’s has to hand over a certain number of profits. Under a gross profits tax worth thinking about the different cents depending on the tax rate. So in regime, we would expect the same types of tax that are contenders”, Mr that respect it’s no different from an prices to the customer and the same Trussler emphasised. “The first type of increase in the marginal costs of sales figures as without the tax.” tax is the turnover tax, which is a tax operating a business. Now, a a profit on stakes or gross money wagered maximising company balances two before payout [tax revenues = tax rate things when faced with an increase in Initial Propositions x stakes]. The second type of tax is the cost. First, the gaming operator will try gross gaming revenue tax, which is a to pass on that cost to the customers “So our first conclusion is that the tax on stakes less prizes or gross to preserve its margin, but the turnover tax is expected to result in money wagered after payout but consequence of that is lost sales. higher prices and lower sales volumes before expenses [tax revenues = tax Second, maintaining sales and market and the gross profits tax does not. Our rate x stakes x (1-PPR)]. The reason I share. So what one would normally second conclusion is that the gross bring this tax up is that gross gaming expect to see in the case of turnover profits tax is capable of raising more revenue taxes are often talked about tax is some pass-on, but not tax revenues from individual firms than as if they are a gross profits tax, but a necessarily full pass-on, and the extent the turnover tax. This is because lower gross gaming revenue tax is different to which this pass-on will take place sales result in a lower tax base.” because it’s a tax on stakes less depends on the nature of the market prizes. Finally, a gross profits tax is a and the price sensitivity of customers.” “Our third proposition is that there will tax on gross gaming revenue less be at least as many active firms under other operating costs, and those a gross profits tax as under a turnover operating costs involve the cost of The similarity between the turnover tax regime”, Mr Trussler continued. serving a customer or providing a tax and the gross profits tax is that the “The logic behind that is under a gross transaction, and may also include, for formal incidence again lies with the profits regime there will be a higher example, some proportion of IT costs gambling operator, Mr Trussler price/payout ratio, so a higher total and service costs as well as the observed, “but that is pretty much important other costs like bonuses and where the similarity ends. The gross market demand. It must, therefore, be free bets. These are all important costs profits tax is a tax on the gross profits possible for at least as many firms to for gambling operators.” of the industry, and if there are no operate under a gross profits tax.” Mr Trussler then explained that the first gross profits attached to an extra sale Mr Trussler then observed that it fundamental about the turnover tax is there are no taxes imposed. There is follows from propositions two and the formal incidence on the gambling no way that a gambling operator could three that more tax revenues can be operator. “Effectively”, he remarked, increase its prices after the imposition raised from a gross profits tax than “for every Euro staked the operator of a gross profits tax and increase its from a turnover tax and reiterated that

28 29 “what we need to see are ways of ensuring that consumers who turn to the internet to gamble are afforded the protection they need while governments get the duties they are owed.”

this conclusion is backed up from Internet Penetration and The Laffer Curve detailed economic theory and market analysis. “This is not to say that there Tax Structures Mr Trussler then took over in explaining will be no distortions to the market that it is not important simply to under the gross profits tax but that we Taking over from Mr Trussler, Ms implement the right tax structure, it is would expect the largest market Rossiter explained that online also important to ensure that the tax distortions to come from the turnover gambling was not born out of the rate is properly set. Under any form of tax, and the lowest potential tax desire to avoid tax but was the result tax, he observed, an excessive tax rate revenues as a consequence.” of the efficiency with which individuals has the potential to distort the market, could gain access to a popular market have unintended consequences and “The fifth and final proposition is that product. Rising levels of internet frustrate policy objectives. “The most the greater the threat of gamblers penetration in both the developed and famous articulation of the relationship switching to offshore, developing world, she observed, also between tax rates and tax revenues is duty-avoiding alternatives, the more mean that as individuals gain increased known as the Laffer Curve. It is turnover tax revenues will be eroded”, access to the internet so too is there famous not because Arthur Laffer Mr Trussler explained. “And this, as an increase in providers of online invented it, but because Laffer drew DLA Piper noted this morning, is services. the curve on a napkin in the 1970s, because you can’t fight gravity. If showed it to Donald Rumsfeld, and it people can swap to a cheaper, duty Turning the attention of the Summit to informed a large part of United States avoiding alternative they will do it. a recent KPMG report entitled Online fiscal policy throughout the 1980s.” If any organisations have a chance to Gaming: A Gamble or a Sure Bet?, Ms turn a profit by serving that need, they Rossiter then explained that there The vertical axis of the Laffer Curve will do it. For hundreds of years, with was, until recently, limited opportunity graph showed tax revenues and the tobacco and alcohol, this has been the for gamblers to switch to offshore duty horizontal axis showed the tax rate. A case. From a policy point of view that avoiding alternatives. “One of the key zero tax rate therefore shows zero tax means that as more gamblers switch findings”, she continued, “was that the revenues because there is no tax base. offshore, the tax base will be reduced gambling industry is progressively Equally, if tax rates are too high, there and frustrate the Government’s moving into new markets, those will also be no tax revenue because revenue raising policy objectives. markets are increasingly being consumers will not make any It also means that some gambling licensed, and what we need to see are purchases, either because they simply activity potentially goes unregulated – ways of ensuring that consumers who stop buying or switch to an alternative so there is everything to lose when turn to the internet to gamble are product. you get the tax rate and structure afforded the protection they need wrong.” while governments get the duties they “When you start from a zero tax rate are owed.” and you increase the rate a little bit, it will increase the price of the product “Internet penetration is growing in line or service by a little bit, so tax with the increased availability of revenues will go up a little bit”, Mr technologies and services as well as Trussler explained. “If you increase the global population figures”, Ms Rossiter tax again, it will increase a little bit continued. “So what we’re seeing again. Some people will stop buying here is more people coming online, the product or service because of an more people gambling online, and the increase in price, but not very many. potential for more revenue to be But if you carry on increasing the tax collected. We expect numbers to rate, it will erode sales by so much that increase and we expect more people successive tax rates will eventually to come from unregulated jurisdictions start to decrease revenues. Between to fill in the gaps where there aren’t these two extremes there is a curve - efficient controls.” the Laffer Curve - and there is a sweet spot at the apex which is the tax revenue maximising rate of taxation.” 30 “The application of the Laffer curve to In Closing “One of the things a turnover tax on online gambling is obvious. The Laffer curve tells us that Moving towards a conclusion, Ms that concerns us, if it is important to not set an excessive Rossiter explained that tax is not the tax rate. This applies equally to a gross only thing that affects the costs of a they are included in profits tax, but the mechanism is a bit business. The full range of costs to a different. We all know that operators regulated operator include licence the taxable base, is invest in customers by advertising and fees, gambling taxes, administrative promotions and the payoff is profits costs, compliance costs, business the bonus. It’s what from new customers. There are also taxes, amongst others, meaning that further investments in bonuses and tax needs to be considered holistically customers expect, other promotions to maintain and and be administratively efficient. grow customer demand, so we make it’s part of an an investment for future payoff. “One of the things that concerns us, if Anything that reduces that payoff they are included in the taxable base, operator’s retention reduces the incentive to invest in new is the bonus”, she explained. “It’s what customers and maintain or grow the customers expect, it’s part of an strategy and we business and this will reduce the tax operator’s retention strategy and we base as a consequence. An excessive believe that an operator’s marketing believe that an gross profits tax will erode operators’ strategy should be considered exempt incentive to acquire and maintain from tax. Another issue surrounds operator’s marketing customers by such a large amount consumer protection. For most that total tax revenues will be governments the regulation of online strategy should be undermined. So, again, there is a tax gambling is not just about taxation and rate that balances higher tax revenues a licensing regime allows consumer considered exempt per unit of sales with maintaining a standards responsibility. If consumers sufficiently large tax base.” from tax.” are forced to gamble offshore, however, then those benefits that the Mr Trussler then remarked that the Government hopes to introduce will increased availability of offshore not be shared.” (unregulated) operators exacerbates the problem. Increased availability of a “Administrative efficiency is also lower priced supply pushes the sweet important”, Ms Rossiter continued. spot down and to the left towards “It’s no good having a relatively low lower rate and lower revenue levels: level of tax if the cost of collecting it is “so if you get the tax rate wrong now, very high, so we say keep it simple, with an increasing availability of duty ensure low costs of collection are avoiding offshore gambling operators, passed on, and encourage electronic it’s almost inevitable that the problem registration and returns filing.” of customers switching to lower priced, duty avoiding alternatives will “Finally”, Ms Rossiter added, “with the grow. And that’s why I think tax point of consumption tax comes the authorities need to take this quite risk of double taxation, which is a seriously.” major issue for multinational companies. Mutual recognition of double tax regimes is, therefore, very important and, where appropriate, there needs to be double taxation relief otherwise there may be casualties within the industry.”

31 “The application of the Laffer Curve to a turnover tax on online gambling is obvious. The Laffer Curve tells us that it is important to not set an excessive tax rate.”

32 Afternoon Panel Session: The Outlook for Gaming

Moderated by: Peter Montegriffo - Partner, Hassans Peter Howitt - Secretary, GBGA Kevin de Haan QC Adam Craig - Group Director of Tax, bwin.party Michael Carlton - Chief Executive, Victor Chandler International

Peter qualified as a Barrister in 1982, the adaptation of the industry. Then terms of leadership, employment, becoming a partner of Hassans in there is, of course, the impact of social taxes and all the things that go with 1988. His area of expertise is in gaming which will undoubtedly have a them.” commercial, gaming and private transformational effect on the industry client matters. He has also been and its competitive environment.” Adam Craig: “Fragmentation also closely involved in drafting brings with it a high level of numerous changes to Gibraltar's What are your views on the threats complexity”, Mr Craig added. “And, of legislation in trusts, financial or weaknesses we face in the course, taxation adds to that services and gaming areas. Peter's eGaming industry? complexity and creates a new knowledge of these fields has led challenge to our operating model. It him to contribute to a large number Peter Howitt: Mr Howitt opened by starts with Italy and France, and then of articles and books on Gibraltar's first addressing his concern about anti- Spain follows and the UK follows and legal system and financial services money laundering legislation and its you suddenly encounter a fundamental sector. He has also regularly spoken potential misuse. “Operators face the challenge to the economics. What that at international conferences relating threat of simply not getting the means is all those things that were to these areas of practice. Peter was requisite support at European level. core to our business model, such as Gibraltar's Minister for Trade and The UK’s bill demonstrates, for affiliates and bonuses, have to go all Industry, with responsibility for example, that territories which had because of the tax pressures imposed economic development and previously been leaders in free market on margins.” financial services between May 1996 regulation will risk damaging their and February 2000. reputation and industry with Michael Carlton: Mr Carlton explained questionable measures. Overall, I think that, despite the regulatory and tax Before inviting each of the panellists to we all know that the issues lie with a aspect being important factors to identify, in swot analysis terms, the lack of understanding of online gaming focus upon, it is also important to weaknesses and threats within today’s at political level and, with respect to consider the impact of inconsistency in eGaming industry, Mr Montegriffo the potential for lobbying et cetera, a regulation across territories. observed that in an ‘existential sense’ lack of commercial awareness of the “Regulation is something we all look the sector is one that not only issues at stake. I’m not sure that for and respect”, he observed. “It continues to innovate and grow but is people within the European Parliament strengthens our products and our also here to stay. “The question, and the Commission always procedures, but when it becomes therefore, is what the sector will look understand that, in their efforts to deal inconsistent and you’re operating in like in five or ten years’ time”, he with sometimes quite parochial multiple jurisdictions it becomes very remarked. “In that respect, we will concerns, they are perhaps losing sight difficult. That then leads to a deflection address the regulatory landscape, the of other positives that European of resources from positive, issue of taxation, and the impact of companies are leaders of, and that’s commercial, money making activities technology in facilitating change and something we need to think about in to compliance and regulatory activities.

33 “Operators face the threat of simply not getting the requisite support at European level. The UK’s bill demonstrates, for example, that territories which had previously been leaders in free market regulation will risk damaging their reputation and industry with questionable measures.”

34 “Regulation is something we all look for and respect”, he observed. “It strengthens our products and our procedures, but when it becomes inconsistent and you’re operating in multiple jurisdictions it becomes very difficult.”

All of us spend a tremendous amount UK automatically triggers an obligation out. Who knows what we’ll see when of time dealing with regulation and to register with HMRC for general we have a general election? I imagine compliance in multiple jurisdictions betting duty or gaming duty or the political landscape will be very and I’ve been sitting here thinking whatever. So I think that it is an different, we may even be talking UKIP ‘why would anybody want to enter this unlikely scenario but theoretically and a flat tax”, he remarked. industry now?’ We want to encourage possible for those reasons. The good people to come into this industry practical obstacles to it are Adam Craig: Mr Craig then took the but we’re putting up barriers to stop considerable.” opportunity to remind the Summit of a them.” very important forthcoming VAT Adam Craig: “I don’t share the change which will provide that VAT be Kevin de Haan: “Good operators want optimistic view of Kevin I’m afraid”, Mr charged on a place of consumption to be regulated,” Mr de Haan began. Craig warned the Summit. “I think that basis. “In the past we may have been “No-one wants to operate in the Wild HM Treasury would eagerly implement able to convince ourselves that we’re West and I think that one of the a tax knowing that it might only be dealing with exempt supplies but it greatest challenges the industry faces able to collect from the bigger may well be that Member States begin is in educating people to that end. operators and deal with the to take a different view, if they haven’t I never cease to be shocked at some consequences afterwards. There is done so already, on that particular of the rubbish I read in the press and currently no impediment, there are big issue as far as electronically supplied even sometimes in official numbers at stake and there is a feeling gambling is concerned. I also think it’s documentation. I don’t recognise amongst some political figures that in no coincidence that the point of what’s being said about online some ways the coming situation is fair, consumption tax is supposed to be gambling in the public sphere. So I even if they don’t really know how to introduced at roughly the same time think it’s not just a legal campaign, it’s make it legally fair.” as this VAT measure will be coming in.” a hearts and minds campaign to educate people that this is a compliant Michael Carlton: Mr Carlton agreed industry that is not out to seduce the with Mr Craig, adding that there is a vulnerable gambler or bring in the political will and desire to fix a remote young gambler to the industry, quite angle, whether legally possible or not, the opposite in fact. So I think and push the measure through. education is absolutely key.” Peter Howitt: Mr Howitt added that What is the likelihood of the UK the UK measure was in line with the introducing a point of consumption potential for countries to concentrate tax regime? less upon the regulatory issues and more upon taxation. Kevin de Haan: Mr de Haan expressed his view that although it is Kevin de Haan: Mr de Haan agreed, theoretically possible, the introduction stating that “there is perhaps one of a point of consumption tax is other political dimension to this in that unlikely. “I say that because from a the Government has pitched its flag to practical standpoint it is so much this particular vehicle of introducing a easier to impose a tax regime on an tax on the back of regulatory change. overseas operator if you require them This whole basis for the imposition of to be licensed within the jurisdiction, new regulation is flawed but we have because you automatically have a to remember that the hourglass for presence. The licensing system in the this particular administration is running

35 36 “What’s going on here is a solution looking for a problem, and the problem isn’t there.”

Can I ask about competitive threats What significance do you attach to Michael Carlton: Mr Carlton agreed in terms of the position in Europe: the UK’s role in this? with Mr Craig in that there are various how do you see the competitive opportunities to make emerging undermining of the European Michael Carlton: “I think it’s markets more easily accessible to the industry playing out and from where disappointing for a country that has incumbent operator. “I think we have do you think the real threats are been at the forefront of regulation, in to look towards consumer behaviour coming? the same way that Gibraltar has for the and how that’s changed with the last 20 years or longer, to suddenly introduction of mobile, for example, Adam Craig: “I think that private turn its back on that successful model. which is the latest major opportunity. operators may have more courage to It’s a shame and a lost opportunity.” I’m amazed at the industry and how pursue opportunities in markets that adaptable and innovative it really is, public companies no longer really Kevin de Haan: “And it’s for no good and I think that as long as we retain focus on. The public operators are reason, that’s the point here”, Mr de that creativity we can respond to new much more interested in focusing their Haan agreed. “The UK has had the opportunities. That’s where the growth resources on those jurisdictions which freest, most open and most diverse will be and we have to take advantage are taxed and regulated: the US gambling market in Europe for of that.” market, for example.” decades and we’ve had the lowest incidence of problem gambling, of Kevin de Haan: “China is a vast Are we effectively throwing the penetration by criminal elements, and untapped market with huge potential towel in on a pan-European regime? so on. What’s going on here is a and if that ever opens up it will change solution looking for a problem, and the the landscape beyond recognition”, Mr Michael Carlton: Mr Carlton problem isn’t there.” de Haan added. expressed his regrets that, in his opinion, regulatory fragmentation will Where do you see the new Adam Craig: Mr Craig agreed with the remain throughout Europe; however opportunities in today’s imperative to respond to cultural he remained positive that there is a marketplace? changes in the marketplace, remarking growing understanding about shared that “our sector is still pushing poker issues between licensing jurisdictions. Adam Craig: “Operators will have and slot machines; it’s no wonder “I think the current economic relatively unknown new competitors in we’ve been taken by surprise by social pressures that individual countries are the US such as Caesar’s and MGM gaming. With social, gaming is exciting facing are forcing them down a and so on”, Mr Craig remarked. again and it’s accessible.” particular route at the moment”, he “Especially for the public operators, warned the Summit. “It’s very difficult the US is going to be very capital to move from that when you have intensive and demand a high degree of economic demands placed upon you focus on our own businesses. We are that force you to act in a certain way. I in a very secure position with the think there is a general understanding licences we have in our core but I don’t think anything will happen jurisdictions, but we are faced with a over the next five years.” lot of distractions that take away the excitement of some of the emerging markets such as China that some privately owned companies enjoy and which we can’t touch.”

37 “China is a vast untapped market with huge potential and if that ever opens up it will change the landscape beyond recognition.”

How potent is social gaming to Question from the floor: What is the put your data packets. There are lots of operators as they diversify into likelihood of Europe really engaging things that you can do with cloud broader forms of entertainment? with regulators in forming technology which can have significant something which resembles a pan- benefits to the industry.” Michael Carlton: “I think it’s one of European regulatory regime? the tools we have to look at”, Mr Adam Craig: Mr Craig added that Carlton urged the Summit. “It’s now a Kevin de Haan: Mr de Haan remarked there are also some quite high barriers natural extension of the ways in which that, in his opinion, the formation of a to entry in the market and that internet people communicate with one another, cohesive pan-European regime is a real sourced or crowd funding just as they do using a telephone or possibility, however one that is not opportunities are a particularly new face to face. You can’t ignore it, you going to happen for the next five to ten and exciting complement to the have to embrace it, and the key, years. “I think, ultimately, it’s a solution eGaming industry. although I’m not quite sure what that that has to be adopted because this With reference to the 4th Money key looks like at the moment, is how fragmentation cannot go on Laundering Directive: how you monetise it.” indefinitely, particularly as the important is it that gambling has European Union expands.” Peter Howitt: Tackling the topic from a been brought into the mainstream legal perspective, Mr Howitt What significance do you attach, if through inclusion in such regulatory approached social gaming in light of any, to the possibility of measures? the approach to categorisation of infringement proceedings against Peter Howitt: “I hope I haven’t come gambling as a form of financial service. Member States being relaunched by across as being too negative because “With financial services you have a the European Commission? overall I do think it’s a good thing for tiered approach to a range of activities, Kevin de Haan: “I would say they the industry”, Mr Howitt enthused. it’s not all or nothing, and for those need to get on with it. They may have “There are some risks as we’ve seen who have gone to the expense of been announced in October but some with the German e-money example having a gaming licence I think being of these proceedings have been and I think operators need to be aware able to provide the backbone for social running for some considerable time. I of this. That is why it is important to gaming operators would be beneficial know that it takes a long time for develop relationships between to help manage the regulatory issues these things to happen at Commission stakeholders to make sure that we do concerning social gaming.” level but we’re coming now to three or have these supranational bodies who Kevin de Haan: “We may have a four months after the announcement can be responsible for lobbying and for sleeping crocodile syndrome here and I don’t see any movement. If saying ‘this really is nonsensical’ or where suddenly someone will wake up they’re serious about it, they need to ‘this could help the industry if and snap and we’ll suddenly be stuck do it.” approached in this particular manner’. with a load of new proposals”, Mr de It is true that a large part of the Are there any other obvious Haan agreed. “I think this lack of approach to the industry has thus far technological leaps that the industry understanding will pose a problem to not been based on any evidence and is adopting other than mobile? gambling regulators and we need to we need to be in a position to educate watch this space, particularly as social Peter Howitt: “The obvious one to me and guide people towards that end. gaming is something that is attractive seems to be the increased use of the Due to the evidence based approach to a younger audience than perhaps Cloud and what it has brought to the that will be required, bringing eGaming we’re used to in conventional online industry. It is enhancing our ability to into the AML fold can only be a good gambling. I also think that the way in control cost and scalability as well as thing for the future of the industry.” which the industry handles social slice and dice data to put it in various gaming is going to be key to the locations depending upon regulatory reaction of the regulators. There is no requirements. It can be hugely cost doubt that there is a huge window of effective and can have significant tax opportunity here.” advantages depending on where you 38 Closing Words

Russell Kelly Director: Audit & Advisory KPMG Isle of Man

Russell joined KPMG in 1993 and Mr Kelly continued in observing that In closing, Mr Kelly took a moment to has worked for KPMG in the Isle of this year’s event marked the third in a reiterate KPMG’s commitment to Man, Gibraltar, London and Jersey. series of KPMG eGaming summits in Gibraltar and to explain the team’s His client experience encompasses Gibraltar, which have swiftly become position on what he described as “a financial services, some of the most popular and jurisdiction which remains at the telecommunications, real estate and engaging events in the industry forefront of the eGaming industry both e-gaming. calendar. “The industry is so fast in terms of the quality of its paced and so kind to us, really, with its technological infrastructure and Russell also undertakes transaction different innovations and challenges e-business community, and the lasting services and ISAE3402 work which that putting a programme together is integrity of its regulatory regime”. includes acting for clients with relatively straightforward”, he respect to acquisitions, disposals remarked, “there is always something “A lot of you may know that we and flotations; in particular he has of great interest to talk about and I am re-established our offices here in 2008 advised on flotations on the LSE, confident that we will be able to field and Micky Swindale has been AIM, Luxembourg and New York an equally fascinating and expert instrumental to our position here over Stock Exchanges. Russell acts for a selection of speakers on topics equally a number of years”, he enthused. “I am number of e-gaming operators and pertinent to the industry, both globally pleased to announce that Micky has key service providers to the e- and domestically, this time next year.” been appointed as Managing Director gaming sector in the Isle of Man and of our Gibraltar practice and will be Gibraltar. Mr Kelly then took the opportunity to working with the support of our thank the day’s sponsors - Hassans, resident team both here and in the Isle Mr Kelly concluded the day’s events by Callcredit, Counting House, Continent of Man. I would like to offer my drawing a parallel between discussions 8 Technologies, Intelligent ID and congratulations to Micky and my surrounding the likelihood of Gibtelecom - for their generosity and thanks to all of you who here today. pan-European regulatory cohesion and support throughout the process before We look forward to seeing you all next his own experiences within the expressing his gratitude to the year.” financial services industry over past speakers and panellists who helped decades. “I think I concur with you in make this year’s eGaming summit yet that I wouldn’t hold my breath on the another resounding success. “Finally I prospect of pan-European would like to say a big thank you to my harmonisation. If we look at the team at KPMG and at Ashgrove financial services industry, despite the Marketing for putting all of this European Commission’s together”, he added. categorisation, we’re still trying to harmonise that industry 30 years on so, as Kevin said, we could well be facing a ten year wait before any meaningful developments take place.”

39 Russell Kelly Director: Audit & Advisory KPMG Isle of Man

“The industry is so fast paced and so kind to us, really, with its different innovations and challenges that putting a programme together is relatively straightforward”, he remarked.

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