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In just 16 years Gibraltar has drawnupon its reputation as a wellregulated and tax competitivecommercial environment to createan archetypal on-shore licensingjurisdiction for its eGamingcommunity.

By placing a continuing emphasis uponlicensing only the best, mostcommitted and most consumerconscious operators, Gibraltar is nowhome to 25 internationally renownedremote gaming companies. Today, theyaccount for more than 20 per cent ofits GDP and represent almost 60 percent of the UK’s remote gamblingpresence in Europe, with more tocome.

On the 11th April, 2013 at the CaletaHotel, the third KPMG eGamingSummit drew upon Gibraltar’s renownas a centre of global eGaming by onceagain providing a forum within whichkey stakeholders could gather togetherto discuss the present and futurestatus of the sector.

The Hon. Gilbert Licudi QC, Ministerfor Education, Financial Services,

Gaming, Telecommunications andJustice kindly opened the Summit witha welcome address, which outlinedGibraltar’s commitment to ensuringthe safety, transparency andresponsiveness of the jurisdiction inthe face of challenging times for thisdynamic industry. Following aregulatory update by Gibraltar’s Headof Gambling Regulation, Phill Brear, themorning’s sessions then continued tofocus upon legislative and licensingissues, with a particular focus upon thelikely impact of social gaming.Highlights included an internationaldelegation of representatives fromDLA Piper as well as a spirited addressby Kevin de Haan QC on the prospectof a cohesive pan-European regulatoryregime. KPMG’s Archie Watt thenopened the afternoon session with anaddress which commended thesolidarity of the domestic eGamingsector in preparing for the challengesthat lay ahead. Mr Watt thenintroduced the afternoon session asfocusing predominantly upon issuespertinent to the wider eGamingindustry, including payment solutions,economic development, and the 4thMoney Laundering Directive. KPMG’s

Sue Rossiter and the RemoteGambling Association’s Simon Trussleralso provided a fascinatingpresentation on the potential pitfalls toboth governments and operatorsarising from implementing a new taxstructure for online gaming. TheSummit closed with a ‘heavyweight’final panel session, moderated byPeter Montegriffo of Hassans, on theoutlook for eGaming.

This report seeks to summarise theday’s events with a view to capturingthe expertise and enthusiasm presentthroughout the 2013 Summit. KPMGwould like to take this opportunity toonce again thank the speakers anddelegates who attended, all of whomcontributed to its great success. Welook forward to seeing you all nextyear.

KPMG employs a number of eGamingindustry specialists both in Gibraltarand globally and is committed tocutting through the complexity of thisconstantly evolving industry.

Introduction

A word fromthe SponsorUniquely housed 500 metres withinthe Rock of Gibraltar itself, ourGibraltar Data Centre reflects whatwe believe is the sense of security,permanence and innovationpervasive throughout Gibraltar’sentire eGaming sector.

The jurisdiction plays a significant partin our Global Private Network andrepresents a compelling choice forcompanies wishing to become part ofone of the world’s most sophisticatedand socially engaged eGamingcommunities.

Continent 8 Technologies providesaward winning co-location, networking,cyber security and managed servicesto the online gaming industry. Oursponsorship reflects our commitment

to remaining at the forefront of thisexciting and dynamic industry.

Continent 8 was proud to be a part ofthe day’s events and we look forwardto next year’s KPMG eGaming Summitin Gibraltar.

Richard EbbuttContinent 8 Technologies

The Hon Gilbert Licudi QC isGibraltar’s Minister for Education,Financial Services, Gaming,Telecommunications and Justice. Hewelcomed delegates and provided aquick summary of the importance ofthe eGaming sector.

In the midst of challenging times forlicensees and in response to whichGibraltar (under the auspices of itsBetting and Gaming Association)intends to mount a challenge to theUK’s proposed point of consumptiontax under EU Law, Minister Licudiopened the 2013 KPMG eGamingSummit with a spirited address.

“This is an event which is clearly andfirmly established in our yearlycalendar”, he began. “It is, of course,no secret that Gibraltar is a worldleader in online gambling. Thereputation, the quality and thestanding of our operators is absolutelyfirst class, and our operators deserveto be congratulated for the responsiblemanner in which they undertake theirbusiness. That has been one of the keyfactors that have helped shapeGibraltar into a jurisdiction that is theenvy of many around the world.”

Minister Licudi continued in confirmingthat Gibraltar has become a jurisdictionthat others look to and seek to learnfrom, particularly with respect to the

regulatory standards that it enjoys as alicensing jurisdiction. Heacknowledged the work and successof Gambling Commissioner Phill Brearand his team of regulators for therelationship and the rapport they havebuilt up with the industry, and theefforts made in striking the difficultbalance between protecting theinterests of customers and allowingoperators to go about their business.

Drawing upon comments made duringhis opening address at the 2012 KPMGeGaming Summit in Gibraltar, MinisterLicudi then reiterated the GibraltarGovernment’s commitment tolicensing only the best operators in theworld. “That has been the cornerstoneof the Government’s remote gamingpolicy”, he confirmed. “That is still theposition today, and that is a policy thatwill continue in the future. It is, in fact,that cautious and selective approachthat has seen expressions of interestby very well known brand names andwhich has resulted in several newlicences being granted last year.Indeed, it is my expectation thatseveral further licences will be grantedover the course of this year foroperators that are considered fit to jointhe selection of incumbent licensees,of which Gibraltar is justly proud.”

“As we all know, this is an industrythat is dynamic and ever-changing”,

Minister Licudi continued, “and I’vealways said that, despite our position,there is never any room forcomplacency. There is no question,therefore, of Gibraltar ever being ableto say ‘we’ve done it, we achieved ourplace at the head table of globaleGaming’. You don’t need me to tellyou that in this industry, no-one in theprivate sector, and certainly noGovernment, can ever relax.”

Minister Licudi explained thatchallenges to the industry are everpresent, whether in the form ofjurisdictional competition, legislativechange, or the proposed introductionof taxation. “But there will, of course,be other challenges”, he continued. “Itis clearly the case that the EU poses achallenge to all of us, and it is achallenge that we are alreadyconfronting. You will have heard of theGovernment’s attendance in Brusselsjust a few weeks ago, with the ChiefMinister’s speech specificallyconcerning gaming and callingprecisely for that coherent EU policy.We demanded the right, because it isa right, for operators to demandunhindered access to the whole of thesingle market. Whatever thechallenges may be in this industry,there will always be new opportunitiesthat present themselves. We arecertainly hopeful and we expect thatthe EU challenge will become an EU

The Hon Gilbert Licudi QC Minister

Gibraltar Government

ConferenceOpening

The Hon Gilbert Licudi QC

opportunity, with access to greater,more liberalised and, indeed, properlyregulated markets.”

Looking further afield, Minister Licudinoted that new opportunities arealready materialising in areas such asthe United States, with limitedintrastate gambling now being allowedin states such as Nevada and NewJersey. “And -Gibraltar operators arealready taking advantage of thoseopportunities”, Minister Licudiconfirmed. “Now there is talk ofagreements between the US andother jurisdictions to create a globalmarket of gambling jurisdictions. Thoseare the opportunities that Gibraltarmust be first in line to explore andexploit.”

He continued, “last year at the Summitwe had representatives of HMTreasury and HM Revenue andCustoms, who were here to explainthe UK Government’s take on thesupposed need for the point ofconsumption tax. And it is actuallygood to have such representativeshere in Gibraltar so that they are left inabsolutely no doubt of the strength offeeling in opposition to that tax. Andthey should also be left in no doubt ofone particular point; this is not anemotive reaction simply to greatertaxation. This is an opposition based onwell reasoned arguments on the

flawed basis of this proposed tax. Letme assure the industry of the GibraltarGovernment’s resolve and of itscommitment to continue to supportour operators in whatever way we can,to continue to lobby, to continue toadvance arguments in every availableforum as we have already been doing.”

Minister Licudi explained that he hadalready discussed this issue with threeUK ministers on this issue whileGibraltar’s Chief Minister had alsoraised the issue with UK PrimeMinister, David Cameron and hasmade submissions to the selectcommittee on Culture, Media andSport. “And those efforts will continue,because the game is on and the battlehas not yet been won. Whateverhappens, there is one thing of which Iam absolutely certain, that Gibraltarwill continue to lead the way in remotegambling and Gibraltar will continue tobe that shining beacon at which thewhole world will look and seek toemulate. We have already earned thatpre-eminent position and theGovernment will continue to work withthe industry to make absolutely certainthat we keep it that way.”

“You don’t need meto tell you that in thisindustry, no-one inthe private sector,and certainly noGovernment, canever relax.”

Phill Brear was appointed as Head ofGambling Regulation for Gibraltar inOctober 2007 following two years asDirector of Operations with theBritish Gambling Commission.

In July 2011, he was appointed asGibraltar’s Gambling Commissionerin addition to his existingresponsibilities. Having played aleading part in the roll-out of the UKGambling Act and gained experienceacross the breadth of the Britishgambling industry, the switch toGibraltar, ‘home to the world’sleading online gambling operators’,brought a new set of challenges, withGibraltar’s adoption of its newGambling Act. Since his appointmentPhill has steered through a series ofchanges to the regulatory regimewhilst working closely with operatorsand their representatives on a widerange of operational andorganisational issues. Phill is alsoresponsible for liaising with bodiesas challenging as US regulators andthe European Commission.

Now a regular and popular speaker atGibraltar’s KPMG eGaming Summit,Mr Brear introduced his presentationas an annual regulatory review whichprovides a privileged overview ofevents from the perspective of theGambling Division and how they mayor do impact domestic arrangementsfor licensees and peripheral industries.Mr Brear also expressed his intentionto cover additional issues pertinent totoday’s industry, most notably theregulatory ramifications of socialgaming.

Licensing

Turning first to licensing, Mr Brearconfirmed to the Summit that interestin Gibraltar licenses is growing at arate never before experienced.“Surprisingly”, he remarked, “we havecompleted only four new additions thisyear, but that still equates to a 20 percent increase. One was the

reconfiguration of the Gala CoralGroup, we also opened the BallyTechnologies offices, likewise withShuffle Master, and finally theintroduction of Amaya through theiracquisition of Ongame. Each is verydifferent and each is underpinned by acommitment to Gibraltar’s values.”

“At the same time”, he continued, “wehave no fewer than ten companies indifferent stages of discussions forlicensing. Some of these may notcomplete, although I suspect thataround half will over the next 12months and I expect that, by this timenext year, we’ll have at least 30 B2Band B2C licences – all readily, if notinstantly, recognisable names in theremote gambling landscape.”

Mr Brear explained that each licenseecreates a varying amount of work forthe Gambling Division throughout theyear and that, overall, it is thesecondary activity of licence renewalsthat creates the most as Gibraltardraws more and more into theapprovals process each year. As such,he emphasised that the GamblingDivision does need to assert regulatorypressure on partner companies. “Wehope it’s no more than a light andunambiguous touch”, he explained,“but it is increasingly necessary asindustry supply options and productsmultiply. We have a strong evidencebase now to prove that, such is thediversity of supply, we need to domore in order to ensure the standardsof those suppliers. I would like tothank those who work with mycolleagues on licensing for yourpatience and efficiency.”

Customer Complaints

“With around twenty B2B licences,we now service in the region of 10million registered customers inGibraltar”, Mr Brear enthused. “But thecustomer complaint rate remains fairlyconstant, with only three or four

Phill BrearGambling Commissioner

The Regulator’s Update andPerspective on Social Gaming

“We have no fewerthan ten companiesin different stages of

discussions forlicensing”.

Phill BrearGambling Commissioner

contacts each week, boiling down toone or two complaint forms eachmonth. Out of around 200 complaintseach year, the vast majority are of nosubstance and are quickly withdrawn –frustrated attempts to cheat etc. Butsome do require more extensiveinvestigation, and to establish whetherthe customer has been treated fairlyand properly remains our priority.”

Mr Brear then explained that allinvestigations are conducted inmeticulous detail to ensure that allconceivable ‘trapdoors’ between theGambling Commission and the truthare closed and secured. By definitionthese investigations are inevitablyinternational, occur frequentlythroughout the EU, although lessfrequently in the UK, and whilst a highproportion are from troubled gamblerswho have made an error of judgement,a small proportion are customers onthe receiving end of errors fromoperator staff or weaknesses in ITsystems.

“Within that there remains atroublesome and constant trickle ofhigh value and, at times, verysophisticated attempts to subvert theindustry’s security control systems”,Mr Brear warned delegates. “Some ofthese cases are worth millions. Andtogether, from the weaknesses,failures or misjudgements of somecustomers, through to organisedattempts to extort money, theyillustrate the breadth and depth of thecustomer base and the need for theindustry to remain vigilant andcontinue to invest equally in customerservices, customer protection andsystems security. Moreover, theydemonstrate the need for operators tobetter attempt to communicate witheach other in order to deny anyattempts to cheat.”

Mr Brear then went on to explain thathe continues to receive a steadystream of SARs, or suspicious activityreports, copied to the GamblingDivision and the Gibraltar FinancialIntelligence Unit. “A significantproportion of these are leading topolice interventions across the world”,he reassured the Summit. “Many arefound to be unusual activity reports,rather than suspicious activity reports.Likewise the consolidated reporting

system provides a less steady streamof incidents of less consistent value.That is a good measure of both thesmall volume and value of fraud in theindustry as well as the industry’scommitment to bear down on it at atime when many others would haveyou believe the issue is endemic.”

Europe

“At the European level it is, of course,almost two years since the GreenPaper (the European Commission’s‘Green Paper On Online Gambling inthe Internal Market’) was introduced,and six months since the action planwas announced”, Mr Brear observed.He went on to explain that just twoweeks prior to the Summit, a draftEuropean Parliament Internal MarketCommission report emerged whichendorsed an action plan that reflectsthe Green Paper. “So whilst the lack oftravel is frustrating, there ismovement, and no one shouldunderestimate the antipathy within theEU political bureaucracy towards thatmovement. For many people, noprogress is the preferred option.”

On a similar note, Mr Brear notedwhat he described as the ‘elephant inthe room’ with regards to the UK’slicensing and point of consumption taxmodel. “The saga drags on”, heremarked, “seemingly to culminate inDecember of next year. When theconcept of universal UK licensing wasfirst declared in 2010, it was prettyclear that no heed of reliable evidencewas going to be taken, only that whichwas most convenient. It is safe to saythat legal certainty can be an elusiveconcept.”

Putting to one side the evidence baseof and contentious legal issuessurrounding the Gambling (Licensingand Advertising) Bill, Mr Brearexplained that public policy issueshave yet to be picked up by politicians,pressure groups, and the media. “Itmay undergo the scrutiny ofparliament if and when the billemerges, but somehow I doubt it willget the attention it deserves. Thereality is that it is a side issue forgovernment and it is a side issue forthe media”, he warned delegates.

“The point I want to make about theBill is that it is self-evidently amendinglegislation, therefore it is what it addsto and takes away from the 2005Gambling Act which requiresillumination and examination.” MrBrear remarked that from a political,public policy and regulatoryperspective it is a ‘clever bill’ which isas far reaching as the very act it seeksto amend, in terms of changing theface, volume and regulation of remotegambling in the UK, Europe and therest of the world. “The bill rewrites therule book on remote gambling”, heobserved, “but not in a way that offersbenefits to consumers, governments,or the established and regulatedindustry. Rather, it has the means andpotential to ensure that everybodycurrently in the system loses out.”

“In my view, the bill creates ‘brassplate Britain’ for the remote gamblingindustry. It commits the UK to being aremote gambling licensing hub, and Iemphasise here licensing, for little elsewill need to be there – no equipment,very few staff, and no real functionality– that’s the new model.” Mr Brearexplained that as a result of theproposed amendments, the UK willoffer itself as a licensing hub to Europeand almost anywhere else in theworld, with all the benefits that simplyissuing licences brings. “And whilstthat may seem to be attractive tothose who don’t understand how thisindustry works, even those attractionsare not likely to materialise or besustained”, he warned.

“This fundamental change in directionhas enjoyed no visible communicationor debate by those responsible for itsrectification, there’s no reference to itanywhere. Indeed, much of it wasactually invisible until the bill and theminister’s commentary on it werepublished in late 2012. Since then,attention has focused upon thedefective process, the lack of evidenceand the potential legal challenges.”

The White List

Turning briefly to the related topic ofthe UK’s White List which, whenintroduced as part of Section 331 ofthe Gambling Act 2005, forbade allterritories and jurisdictions locatedoutside the EEA, UK and Gibraltar toadvertise gambling products in the UK,

Mr Brear noted that the Gambling(Licensing and Advertising) Bill also“scraps that”. “Now I am not anadvocate of the White List”, heremarked, “it was poorly established, ithas been poorly administered, andpoorly managed. The White List hasencouraged a race to the bottom interms of the reality and the applicationof regulatory controls. It was the UKregulators’ first foray into internationalremote gambling regulation and it hasfailed to deliver to the UK public whatthe Gambling Act 2005 promised –allowing instead elements of criminalbehaviour, an abandonment of duediligence and the misappropriation ofcustomer funds on an industrial scale.”

“The White List is broken”, hecontinued, “it has been suspended forthree years. But the outcome of thisblurring is the scrapping of the conceptof jurisdictional approval on the basisthat the UK regulator can do a betterjob than the white listed regulators.Instead, companies will be basedthousands of miles away where thatregulator has no presence orrelationship whatsoever. Put quitesimply, the bill proposes licensing andregulation which in practise will beconducted at massive arm’s length.”

Mr Brear explained that there is littledoubt that this provision is designed topermit respected and established USoperators to obtain UK licences whilstmaintaining the weight of theiroperations in the US. However, heexpressed his concern that otheroperators in other jurisdictions willabuse that model. “The UK already hasover 3,000 licence holders”, heobserved, “it does not have themechanism or the resources to keeptrack of them all, over extendeddistances or even within the UK. TheUK bill stands to dilute and further taintthe supply base in the UK. It willincrease costs, depress margins, andforce efficiencies of outsourcing andrelocation outside of the UK to a muchgreater extent than at present. HMRCmay gain two or three hundred millionin POCT, but it loses far greateramounts in corporation andemployment tax. Indeed, those thatsurvive will have even greaterincentives to re-domicile themselvesinto more tax friendly jurisdictions.”

Social Gaming

While just two years ago many werediscussing the potential of socialmedia as a resource for eGaming, few,as Mr Brear observed, consideredsocial gaming as part of their agendas.“This, however, is now a conferencesubject in its own right”, he enthused.“At the moment we have confusion -with references to freegaming, socialgaming and free betting – usuallywithout the target of thosediscussions being agreed. This is nothelpful to the public or the regulatedgambling industry.”

“Social gaming is at a much earlier andfaster stage of evolution. In the last sixmonths, supposedly the three biggestlaunches of social gaming have allinvolved companies in Gibraltar –Gamesys with Friendzy, 888 withBingoHappy and Bwin. Party withZyngaPlus. But of course these are notsocial gaming: these are licensed andregulated gambling, accessible andmarketed through social mediachannels.” Mr Brear explained thatregulators’ interest lies in whether ornot these advertising channels areopen to abuse by the public, suppliers,affiliates, associates or the carrier,thereby widening the scale ofunderage problem gambling or othernegative issues.

“So my first and strongestobservation, and the one that hasdominated discussions with ouroperators, is that the marketingcontrols applied to the customer basehave to be carried out as neatly and astightly as is feasible. They have to besmart because without them you’realmost certainly setting yourself up fora media and maybe a regulatory fall.”

“My second point is where the gameand presentation is not licensed andregulated gambling, but is gamblingthemed and involves payment to play –where a paid for activity offers thechance of winning a non-monetisableprize. Again, free and practice playgaming have their own issues, but thefreemium model of obtaining paymentto gain plays, awards, status symbols,game levels, or other features, isnudging ever nearer to a dividing linebetween gambling and non-gambling

entertainment. My concern here isthat some non-regulated suppliers seeno risk in testing where that boundarylies and, in the absence of regulatoryintervention, may move products andplayers over the line.”

Mr Brear then warned the Summit ofthe growing social betting market,explaining that, generally, these areestablished by un-regulatable supplierswhich are deemed to provide servicesthat are not gambling. “But they areencouraging and providing the facilityto loosely registered customers to betamongst themselves on events whichinclude professionally informed fixedodds and betting exchange type bets.So the player base of such sites is anobviously fertile ground for recruitingnew real betting customers. Again, wewould advise a very high degree ofcaution to every licensed operatorstepping into these waters.”

In closing, Mr Brear remarked ongrowing concerns over the use ofsocial gaming platforms to createcustomer databases in countries inwhich the operator has no existingpresence. “At one level, this is anentirely legal practice in that it is notgambling. However, within thosetarget markets the practice may wellbe seen in a different light; I’m alreadyhearing noises within the EU that suchactivities, simply because of theirpotential to engage with the licensablegambling population, are unwelcome.So I would like to emphasise thatwishing social gambling was apolitically neutral commercial activitywill not make it one. It has to be verycarefully managed by the regulatedindustry.”

By way of introduction, Mr Ketteleyexplained that the purpose of themorning’s panel was to explore thedifferences in regulation between anumber of key markets and to drawa comparison between jurisdictionswhich are all currently at differentstages of regulation.

He noted that Italy, Spain and the UKare currently regulated while Germany,at the time of writing, is in the processof regulating. “It’s an ever movingevolution”, Mr Ketteley remarked, “andthat’s something we want to try todraw out today.”

“By 2005/06 there were a handful ofplaces that were largely regulatingonline gambling”, he continued. “Theywere jurisdictions which saw the needto house and give a home to a growingindustry and Gibraltar took the lead informulating a regulatory regime whichhas become, as we all know, a worldleader in the market. But as time wentby we saw a number of challenges atEuropean level as a very lucrativeprivate sector and a protectionistpublic sector came head-to-head in anumber of member states. That,coupled with the challenging economictimes that we’re all facing, has led to anumber of jurisdictions embracingregulation. But these regulatoryregimes are all inconsistent, and that’sthe problem.”

Mr Ketteley then went on to note thateach jurisdiction represented at thepanel was culturally very different andthat this informed the position ofgambling in each respective society.This in turn frames regulation withineach jurisdiction and the ways in whichit may develop in the future. Drawingupon this observation, therefore, MrKetteley asked each panellist to firstelaborate upon the ways in whichregulation was driven by culturalattitudes towards gambling in theirhome jurisdictions.

Albert Agustinoy: Mr Agustinoyexplained that gambling in Spain hastraditionally been a secondary concern.Ten years ago, gambling as a pursuitwas considered old fashioned andregulation was consequently limiteddue to its being almost whollycontrolled by what he termed a ‘statemonopoly’. “So if you wanted togamble you had the lottery, footballpools, and some casinos, whichcertainly did not attract a growingaudience at all. This approach changed,however, with the introduction ofonline gaming, the introduction of newgaming platforms and also a newenvironment that clearly connectedwith a new audience.”

Mr Agustinoy then went on to explainthat this has resulted in a change inthe perception of online gambling. Thesports betting market has changed andgrown very popular among the mass

Spanish audience while online pokernow attracts many more sophisticatedusers such as university students andyoung professionals. “So gambling hasbecome a very popular pastime due toits increased availability and diversity,although it should be noted that 80 percent of the market is still controlled bythe state monopoly so we have a longway to go.”

In stark contrast to what could beconsidered a relatively permissiveSpanish regime, the German regimeappears to be very protectionist. Isthis fair to say?

Patrick Schwarzbart: “It is veryprotectionist”, Mr Schwarzbart agreed.“In Germany we also have a verytraditional background in gaming butthis concerns specific types. Forexample we have a very strongtradition of horse-race betting, a sectorwhich has been regulated for over ahundred years and is also open toprivate operators, while we also have avery strong sector for gaming machineoperators. But I think the intention ofthe regulator has been to protect theposition of the lotteries to a largeextent and that can clearly be seen asprotectionism.”

Mr Schwarzbart explained thatGermany had made good progressconcerning the regulation of gamingtypes such as poker and could at onepoint have been considered liberal in

Morning Panel Session: The Evolution of RemoteGambling RegulationModerated by:

Stephen Ketteley - Partner, DLA Piper

Albert Agustinoy - DLA Piper, Madrid

Giulio Coraggio - DLA Piper, Milan

Patrick Schwarzbart - DLA Piper, Munich

its approach. However, he also noted:“I find it very interesting that theregulator is not now adapting to newmarket offerings, to the interests ofthe market, or to the interests of theplayer. The stark contrast betweenSpain and Germany is that whereas inSpain gaming is seen as part of theentertainment industry, I always getthe feeling that the German regulatorconsiders gaming as something thatplayers need to be protected from.Somehow remote gambling is seen asa threat by regulators, to the statelotteries and also to the players.”

Italy as a regulated market alsoappears to be embracing onlinegaming rather than trying to protectany other interests in the market, isthis true?

Giulio Coraggio: “I think it’sinteresting to note the commentsmade about the old fashionedgambling industry”, Mr Coraggiobegan. “My contention is thatgambling in Spain was not oldfashioned, part of it was justunregulated, so the Spanish werealready playing on unlicensedplatforms and now do the same onlicensed. The regulators simplyprovided a more secure environmentfor players. In Italy we too tried toregulate although it took time becauseregulators were not at first sure howto accommodate the needs ofplayers.”

“There is also a general understandingin Italy that the only way to fightagainst unlicensed operators is to keeptaxation low. Low taxation is a greatway to compel operators to work in asecure environment. Throughout therest of Europe, however, there is still alot of very negative publicitysurrounding online gaming andgambling in general. A lot of this is, ofcourse, due to misinformation and I dounderstand that regulators are gettingmore knowledgeable about how thesector works, about the need toprotect players, to bring them into asafe environment and to makeregulations more suitable foroperators.”

Do you think Italy is succeeding inallowing the industry to flourishwhile protecting the player? Do youthink that balance is right or wrong?

Albert Agustinoy: Mr Agustinoyagreed with Mr Coraggio on the factthat, if there is a demand for gaming,an online environment is eitherregulated properly or becomes a blackmarket environment. “In Spain wehave a good departure in thatregulators are able to operate within afully regulated market and we havefound that while the black market hasbeen reasonably low, in the case ofonline slots or other types of gamesthat have not been regulated thedegree of black market incidentsremains quite high.”

Mr Agustinoy explained that simply byusing a VPN [Virtual Private Network],or similar online tool, any Spanish usercan gain access to these types ofunregulated games. “So I wholly agreethat regulation must certainly ensure adegree of protection and at the end ofthe day this is a win-win situation foreveryone – the player gains a well-protected system, the operators havethe insurance that they know the rulesof the game, and the whole industrybecomes more reliable and istherefore more trusted as a form ofentertainment.”

What is the relationship likebetween the regulators, thelegislators and the industry in as faras educating your regulators as towhat they need to consider?

Giulio Coraggio: Mr Coraggio beganby noting an interesting comparisonmade last year which showed that theillegal gaming market in the Italiancasino sector was almost €10 billionmore profitable than the legal marketsimply because slots were not legal.The regulator responded that it waslargely powerless as a result but urgedlicensed operators to point out whichorganisations were operating illegally.“Regulation in that respect has sinceimproved, so operators must workwith the regulators for a betterenvironment. This is proof that thelobbying can work from both sides.”

“I find it veryinteresting that theregulator is not nowadapting to newmarket offerings, tothe interests of themarket, or to theinterests of theplayer.”

Albert Agustinoy: Mr Agustinoyadded that, from his experience, a keystrategy for building relationships withregulators lies in explaining theindustry to them from an operator’sperspective. “It may seem obvious,but detailing the particulars of gamesand the ways in which the industryoperates can greatly facilitatelicensee/regulator relations”, heremarked. “We must let them know ofthe more reasonable solutions foroperators and the ways in which theycan be applied. This is a key factor inevangelising the industry because weoften find ourselves in challengingsituations simply because of a lack ofmutual understanding.”

Germany is obviously the hot topicof the moment. What is the currentsituation with the evolving regimethere?

Patrick Schwarzbart: Mr Schwarzbartexplained that there is still a lot ofmovement with regards to regulatorydevelopment in Germany butexpressed his desire to first step backand address the issue of dialoguewithin the domestic German industry.“We had this short window ofopportunity in Germany not too longago and the regulators there had avery open ear for the industry”, henoted. “They were very interested inregulating the market and within thatperiod of just eighteen months almostfifty licences were issued. In otherregulatory areas, however, specificallythose responsible for issuing andmonitoring sports betting licences, wehad a very different experience. Talkingto regulators we felt that licensing andregulation was just a task to get overand done with, and I came away withthe impression that they don’t reallywant to regulate the market. So I thinkit’s now a very difficult situation withrespect to a dialogue between thosetwo parties.”

With respect to taxation, MrSchwarzbart then observed thatoperators have always argued againsta turnover-based tax. Nevertheless, theGerman federal legislator decided to

introduce such a tax on sports bettingand on a point of consumption basiswhich, he noted, imposes somedifficulties for operators to providecompetitive betting in Germany. “So,again, there is a question mark behindthat tax”, Mr Schwarzbart remarked.“Was it really introduced to regulatethe market or rather to protect theincumbents? Is the true intention ofthat tax not to have remote operatorsstruggle to provide competitive terms?Currently, the state monopoly hasbeen suspended and there is theopportunity for up to twenty licencesto be issued for sports betting. Thisprocess has been going on sinceAugust, 2012 and we are now in thefinal stages of invitation and conceptpresentation. The regulator will sooncome to a decision as to whichoperators will receive a licence and,since the European tender, there maybe an opportunity to appeal thesedecisions. But those 130 out of 150applicants that do not receive a licencewill probably face the same problemsas they have in the past: will they stillrisk enforcement actions to offer theirproducts in the German market?”

What is the current situation withthe unregulated market in Spain?What can we do about it?

Albert Agustinoy: “I think that theregulated market is something of aprivate club”, remarked Mr Agustinoy,who explained that, under Spanish law,the operation of non-licensed gamingactivity may still result in extensivesanctions. “The regulator has been invery direct contact with paymentprocessors, internet services providersand others in order to cut the blackmarket supply as quickly as possible.I’m aware of ISPs already beingprovided with a number of IPaddresses to be blocked, which is farfrom a complete solution, but therehas been some significant counteraction even to block aspects such asthe payment of prizes. So there is ablack market but that still remainsquite low.”

A number of people are talkingabout the use of black lists foroperators which, I understand, Italyhas had for some time. Has thatbeen successful?

Giulio Coraggio: Mr Coraggioexpressed his concern that the use ofblack lists to assist regulators inblocking domain names is thwarted bymany unlicensed operators changingtheir domain names on an almost dailybasis. “It is not IP address blocking soit’s very easy to bypass. Even some ofthe other measures put in place arenot being enforced at the moment andif the solution does not come from theindustry then it is unlikely that thesolution will be effective.”

Lots of jurisdictions have verydifferent views on how to regulatethe social gaming aspect of theindustry: could you elaborate uponyour respective experiences of this?

Giulio Coraggio: Mr Coraggioexplained that the problem lies in theblurring of the boundaries betweentraditionally licensed remote gamingactivities and increasingly diversesocial gaming formats. Moreover, heexplained, gambling is still defined in aparliamentary act making it difficult toinclude social gaming within what isnow an accepted definition ofgambling.

Of course skilled gaming isregulated in certain ways and manysocial games would, in most cases,not necessarily be consideredskilled.

Giulio Coraggio: “Skilled gaming isregulated in the case of prizes in kindor prizes in cash. When there is noprize there is no regulation, however.So the question is, if the gamblingregulator does not regulate the sector,does it fall under consumer protection?These are the issues that need to beaddressed if we are to ensureadequate customer protection throughregulation.”

An internationally acknowledgedexpert in all aspects of e-commerceregulation, Kevin de Haan QC is aspecialist in Consumer Protectionand Gambling Law, particularlywhere an element of PublicInternational or EU Law is involved.Having led the team that drafted theGibraltar Gambling Act, Kevin hasbeen closely involved in thedevelopment of the online gamblingindustry since its inception in the1990s and is recommended as aleading Silk in four practice areas byThe Legal 500 and Chambers andPartners Directory.

A highly regarded and impassionedspeaker, Mr de Haan opened hispresentation by congratulating theprevious panellists for highlighting thedifficulties of attempting to reach aconsensus about regulation on a pan-European basis. “We have very, verydifferent systems internationally”, heexplained, “and the speakershighlighted one major problem, whichis that of definition.” Mr de Haanobserved that the UK has historicallyregulated gambling according to thedefinitions of what he described asdifferent gambling ‘products’ – betting,gaming, lotteries, and skill basedgames. In other jurisdictions, however,definitions are completely different. InGermany, for example, Mr de Haanidentified considerable overlapbetween what the UK would conceiveof as skilled betting and gaming, withthe German concept of games ofchance. “So what I’m trying to say is

we are all speaking a differentlanguage in terms of the products thatwe are dealing with.”

“So what I want to try to do is look athow we could possibly move towardsa pan-European system of regulationbecause that must be the ultimategoal”, he continued. “If you look at thenotion of harmonisation within the EU– the creation of a level playing fieldwithin a single market where everyoneabides by the same rules and no one isgiven a competitive advantage overanother – how can that be achievedwith the gambling market?”

A Brief History

Mr de Haan observed that remotegambling in particular is at issuebecause it is the only form of gamblingthat crosses land frontiers and raisescross-border issues. He thenexplained, however, that “we cannotlook at how to arrive at a consensuswithout first exploring the history ofregulation.” Drawing upon Britain’shistory of land-based gambling inparticular, Mr de Haan noted that thedomestic gambling industry was atone point almost entirely in the handsof ‘the mob’: “every east-end gangsterwanted to have a stake in one of themany illegal gambling clubs aroundLondon and so, on the back of a RoyalCommission, the decision was takento bring gambling into the regulatedfold. For the first time, therefore, wehad the possibility of having thecreation of betting offices, the first

legal casinos in the UK, and we had agreater number of society lotteriesunder the gambling legislation of the1960s.”

Still in its embryonic stages oflegislation, however, this systemretained a ‘trial and error’ approach. Inthe absence of a gamblingcommission, regulation was in thehands of the police and the magistrate,meaning that there was no mechanismin place either to protect the public orto promote gambling, which was stillregarded as a social evil permittedsimply because of the existence of anunregulated market. “The ‘60slegislation was a partial success”, Mrde Haan noted, “but the problem wasit led to an explosion of casinos inLondon and those again fell into thehands of organised crime. So, by thelate 1960s, there was real publicconcern about the regulation ofgambling in the UK.”

As a result, in 1968 the UKGovernment enacted the GamblingAct, which eventually created theGambling Board. Over severaldecades, as Mr de Haan explained, theUK’s gambling industry wassubsequently and gradually broughtinto order; the industry developed andthe UK arrived at a situation, by thetime the Budd Report was published,gambling was entrusted to a vibrantprivate sector subject to carefulregulation by the Gaming Board in itsareas of competence.

Kevin de Haan QC

A Coherent EU Policy onCross-Border RemoteGambling Issues - TheImpossible Dream?

A Change in Attitudes

“We saw, on the back of that, a seachange in public attitudes towardsgambling”, Mr de Haan enthused.“Gambling was originally regarded as asocial evil, something to be avoidedand supressed. But Budd [Sir AlanPeter Budd, GBE, a prominent Britisheconomist] looked at the social sceneand realised that the public were nowbeginning to regard gambling as a partof the leisure industry. The biggest seachange that affected these attitudeswas the shift in regulation. Previouslythe regulator’s sponsoring departmentwas the Home Office but this thencame under the DCMS, or theDepartment of Culture, Media andSport. It probably, however, bestbelongs now under the control ofthose government departments thatdeal with the regulation of business,because the one thing that theEuropean Court has recognised is thatthe provision of gambling services isthe provision of financial services –and that is precisely what they are.”

The UK

“In the UK, we now have a regulatorwhich is responsible for regulating thewhole of the gambling industry – notjust gaming but also lotteries, prizecompetitions and products of thatnature”, he continued. “But we have asituation in the UK now where a greatdeal of the expertise on the GamingBoard was lost, largely due to the wayin which it was set up. The GamingBoard was originally established inLondon but was later moved toBirmingham, meaning that a largebody of staff already set up in Londonwas asked to move 120 miles away.I’m not saying that there isn’t still agreat deal of expertise in the GamblingCommission, only that a lot of theoriginal expertise and experience thatthe Gaming Board brought to the tablewas lost.”

Jurisprudence

Mr de Haan continued in expressinghis suspicions that the UKGovernment’s proposal for a duallicensing system is driven, in truth, bytaxation. “I suspect that the DCMSwas handed a document saying ‘weneed to raise £X billion from the onlinegambling industry, how do we do it? –and that’s a very difficult brief. So let’shead back to the jurisprudence of theCourt of Justice of the EuropeanCommunities [CJEC].”

Most cases that appear before theCJEC, as Mr de Haan described, startin the national courts of the MemberStates. The Member State introducesa measure which is restrictive offreedom of establishment or freedomto provide services, among others. Anoperator or commercial enterprisetherefore complains to the nationalcourt arguing that the nationalmeasure is inconsistent with theprovisions of the relevant EU Treaty. Itthen falls to the national court tointerpret EU law. The national court caninterpret EU law on its own basis i.e.give its own interpretation, but whereit needs assistance there is aprocedure where the matter can bereferred to the European Court ofJustice in Luxembourg for apreliminary ruling on the meaning ofthe relevant provision of EU law. TheCourt of Justice may not rule onwhether the national measure iscompatible with EU law but it does onoccasions give very strong direction tothe national court on whether themeasure is compliant with theprovisions of the treaty.”

European Court Rulings

“Now what we’ve seen to date is aseries of peaks and troughs in theEuropean Court”, Mr de Haanobserved. “If you start out withSchindler, which is the very early case

on lotteries and which established thatgambling was a financial service, thecourt there said that because of thecurious nature of lotteries a largemargin of appreciation has to be givento Member States in what measuresthey introduce to regulate gamblingand what degree of penetration of thenational market they allow to operatorsestablished in other Member States -and Schindler was really a restrictivedecision. But we later moved on fromSchindler to cases such as Gambelliand were virtually looking at apassporting of licences throughoutEurope – things looked very bright.”

“But then, of course, we come downto Santa Casa da Misericórdia, thecase concerning Portuguese gamblingmonopoly, which is greatly embeddedin Portuguese culture”, he continued. “Idon’t think Santa Casa really set anygreat precedents - it was a case verymuch based on its own facts - but ifyou then move on to the more recentdecisions in Stoss and particularly thevery important HIT and HIT LARIXcase on land-based gambling, I thinkwe’re seeing a move back towards amore open and less restrictiveapproach and the giving of a smallermargin of appreciation to MemberStates.”

Evolution

“One of the great things to emergefrom the Stoss decision in particular isthat it has highlighted a lot of hypocrisyin the way that gambling is regulated.If you have a system whereby yourMember State gives over the provisionof gambling services to a statemonopoly or a state sponsoredmonopoly, yet you rely on thatmonopoly to aggressively promote itsservices to members of the public, youcannot then complain that if you allowother operators in other licensingstates to come in they might pose athreat or danger to vulnerable people.”

Mr de Haan then warned the Summitthat a key problem with the EuropeanCourt remains its lack of understandingof the online gambling industry.Although as a sector it has generatedmore cases than any other form ofcommercial activity within theEuropean community, anunderstanding is only now beingformed. “I think now the penny isslowly beginning to drop in Europe andI think that one sees that in the HITand HITLARIX case”, he remarked.

“It makes very interesting reading ifyou are interested in seeing how theapproach of the European Court ofJustice has evolved over, effectively,two decades. If you read that you’llsee that Advocate General Mazak issaying ‘yes, you can introducerestrictive measures but thosemeasures have got to beproportionate’. In other words, first ofall they must be no more restrictivethan is absolutely necessary and theymust be effective for the realisation oftheir policy objective. If a MemberState seeks to justify the introductionof a restrictive measure to deal with aparticular problem, say the preventionof gambling addiction or fraud, it mustproduce evidence of the existence andextent of that problem before thenational court – because it is thenational court that decides the facts.That is why I think the UK’s case fordual regulation will fall down, becausethe evidence is just not there.”

Evidence

Ultimately, as Mr de Haan explained,there is a distinct lack of evidence tojustify the sea change in the new UKapproach because the Gambling Actalmost institutionalises the passportingof licenses into the UK from Europeanjurisdictions, “so why are theychanging it?”

“Well I think we all know the answerto that”, he remarked. “The change istax driven. In a situation where the UKTreasury is very strapped for taxrevenues it is looking around to seewhere additional revenues can comefrom. And if you really want to tax theindustry effectively you have got tolicense it.”

Where does that take us?

Mr de Haan observed that the UKdevelopment is almost a microcosm ofthe problems that any regulator in anyMember State is likely to face in tryingto justify the introduction of restrictivemeasures. “We will go on until wehave some form of harmonisedsystem in Europe”, he observed, “witha toing and froing between theCommission. But where do we start intrying to establish a regulatory regimethat will work throughout Europe? It’svery difficult because of thedifferences in the structure of theindustry and the regulatory regimes indifferent countries. But there arefeatures that are common to all ofthem and you can always find that thegoals in any regulatory system areconsistent with Section 1 of theGambling Act 2005 – keeping gamblingcrime free, ensuring that gambling isfair and transparent, and protectingchildren and vulnerable people. Itought to be possible.”

Where is the wayforward?

“An initial way forward might be in thecreation of a European code ofpractise and this needs regulators toget together”, Mr de Haan emphasisedin conclusion. He explained that theindustry is starting to see the seeds ofcooperation in, for example, a recentmeeting of four regulators to try to usethe procedures for enhancedcooperation in article 239 of the treaty.

“And I think in that one might see theseeds of a move towards a pan-European regulatory regime.”

“Even if a few Member states signedup to that and adopted commonstandards, that enhanced cooperationmight, in due course, form the basisfor some form of pan-Europeanregulatory system. But my view is thatwe are never going to see a EuropeanGambling Commissioner. We are nevergoing to see a totally harmonisationdirective. The future lies in mutualrespect and mutual recognition of theregulatory systems that exist withinthe European Union at the moment.That is, I feel, the only way that we aregoing to move towards a coherentsystem and a consistent system forthe regulation of online gamblingwithin Europe.”

“The future lies in mutual respect andmutual recognition of the regulatorysystems that exist within the EuropeanUnion at the moment.”

Archie joined KPMG Gibraltar fromKPMG London, where he wasrecruited as an IT Advisory Directorin the Information, Communicationand Entertainment practice, with aparticular focus on online gamingclients. Archie worked on thebwin/PartyGaming merger and hehas also worked on a number ofacquisitions in the gaming sectorand the public listings of 888,Playtech and PartyGaming, amongstothers. Archie is a regularcontributor to sector publicationsand recently co-authored the reportOnline Gaming: A Gamble or a SureBet?

Having expressed his thanks for themorning’s presentations andcongratulated delegates for theirenthusiasm during the geographicallyfocused session, Mr Watt introducedthe afternoon’s proceedings as asector focused examination of thewider issues operators face and howto prepare for the challenges andopportunities that lie ahead.

“The first presentation will be byStuart Ballan of Counting House, anorganisation which really ‘gets’ thesector”, Mr Watt began. “He is going tobe talking about the fundamentalchanges in payments regulation andmethodology, a very important topicbecause, after all, the only way for theindustry to make money is by gettingmoney on to the sites. If there is anew trend in payment methods ortechnology and you’re left behind thecurve, your competitors will gain asignificant advantage. And we all knowwhat happens in this industry to thosewho get left behind.”

“Stuart is then going to be followed byMichael Tobin of Continent 8”, Mr Wattcontinued. “Michael has beeninstrumental in creating the Continent8 brand and is a very strong supporterof the sector. With their globalfootprint, Continent 8 can providehosting facilities where and when youneed them and here in Gibraltar,together with GibTelecom, they canprovide hosting facilities andbandwidth that is the envy of manyother territories. Michael is going toimpart some insight into theimportance of entrepreneurship andeconomic development on a globalscale and that surely will provide somefood for thought this afternoon.”

“I’ve been involved in the eGamingsector for fourteen years now, and oneof the things that I’ve come to realiseover that time is that it constantlyevolves. Legal and regulatory issuesare constantly changing, but you areadapting, and that is the mostremarkable thing of all about thissector”, he enthused. With allusion toregulatory evolutions such as FATCA,or the Foreign Account Tax ComplianceAct, Mr Watt then drew the attentionof the Summit to Peter Howitt’sforthcoming presentation on the 4thMoney Laundering Directive. “One ofthe more eye-catching proposals inthat draft text concerned extensions toour compliance requirementsconcerning PEPs, and this is just oneof the things that we later hope toaddress.”

“After coffee we have two morepresentations which I’m sure will keepyou on the edge of your seats”, MrWatt continued. “Sue Rossiter of theRemote Gambling Association andSimon Trussler of KPMG will be talking

Archie WattHead of eGaming

KPMG Gibraltar

Introduction to theAfternoon Session

“I’ve been involvedin the eGaming

sector for fourteenyears now, and one

of the things thatI’ve come to realise

over that time isthat it constantly

evolves.”

about tax. I’m fortunate enough tohave already seen the presentationthat Sue and Simon will be presentingthis afternoon and I can honestly saythat the concept of operators beingable to maximise revenue whileGovernments can, at the same time,maximise tax take is truly an excitingprospect.”

Mr Watt then described his pride inbeing able to introduce what hedescribed as a ‘heavy-weight’ panelsession to close the day. Moderated byPeter Montegriffo of Hassans andfeaturing GBGA Secretary SimonHowitt of Ramparts Law, MichaelCarlton, CEO of Victor ChandlerInternational, Kevin de Haan QC andAdam Craig, group director of tax atbwin.party; together they would tacklethe outlook for eGaming within thecontext of an increasingly fracturedEuropean regulatory framework andnew opportunities in the US and China.

Archie WattHead of eGaming

KPMG Gibraltar

Stuart Ballan, MBA (Kellogg-Recanati) is Head of Sales for theMiddle East at Counting House Ltd.He has over 25 years of businessand B2B experience, including hisown entrepreneurial ventures,working for a leading gamingoperator, for an acquiring bank and,currently, for a leading-edge PSPwith global coverage. Based in TelAviv, he is a keen cyclist and apublished children’s book author.

Fundamental changes in paymentsregulation and methodology are againafoot. What are their implications foroperators and professionals?

Mr. Ballan began his presentation byproviding an introduction to CountingHouse Ltd., which provides paymentprocessing services predominantly tothe eGaming industry. Counting Houseis part of a group of companies that fornearly 20 years, has provided similarservices to many industries, includingdirect marketing, publishing,eCommerce, Forex, affiliates andcharitable organisations.

War Creates Innovation

Mr. Ballan stated how “war createsinnovation”, giving the example thatthere have been more advances inaviation in two world wars, includingthe jet engine and the nuclear bomb,than in any twenty year period free ofwar.

Mr. Ballan began with an example of amore recent ‘war’: the Cyprus bankingcrisis, where Counting House createdand launched an emergency packagewithin 24 hours of the Cypriotgovernment announcing its intentionto levy all Cypriot bank deposits, as

part of a €10 billion bailout solution. “It was a very quick war”, Mr. Ballanexplained, “But in this case, innovationbecame the lifeline of companies thathad lost the ability to take deposits andpayments, more or less overnight.”

“Similarly, there has been moreprogress in the financial world in thelast ten years because of internetgaming than there has in the lasthundred”, Mr. Ballan continued. “Mostof that has been driven by theeGaming sector and a lot of otherindustries have benefited as a result.It’s critical to the success of anyeGaming operation to be able to sendand receive money from people usingmethods that are convenient to playersand operators alike. And we have to doso within a growing, extremelyconfusing and ambiguous regulatoryenvironment.”

Such is the extent of this ambiguity,Mr. Ballan explained, that the paymentprocessing industry has been forced torespond with a degree of creativitywithin a fractured regulatoryenvironment that has in some casesresulted in non-compliance. “Some ofthat is good for the industry, however,and today I’m going to be talking aboutsome of the pressing issues and theirsolutions.”

Anti-Money Laundering

“To begin, I was very pleased to notethat my presentation on AML isconsistent with this morning’sobservations about what’s happeningin Germany”, he continued. “And it is inline with this theme that I’d like todiscuss, not just how AML can affectwhere your operations are licensedtoday, but also how your licensing

decision of the past can dramaticallyaffect what you can and cannot dotoday. There are many jurisdictionswhere you can license and you makedecisions based on the balance sheetat the time, but things change. InGermany, for example, changes toAML guidelines combined withambiguity have triggered real changesto payment processors which, in turn,has a material impact on operators.”

Mr. Ballan explained that thesechanges were triggered by Germanlegislators being reprimanded for theiranti-money laundering practises insports and casino betting. “Since then,there have been drafts and re-drafts,sections and subsections, and thisserves to create even moreuncertainty and ambiguity”, heobserved. Mr. Ballan drew upon theexample of a past requirement for allplayers to be authenticated by face toface verification and later to submit byemail, notarised verification in the formof passports and driving licenses, all ofwhich measures were driven byregulatory ambiguity, yet wereblatantly impractical. “One of the concerns in Germanysurrounded anonymous deposits andwithdrawals; all the cash-type paymentmethods that can’t be tracked the waycredit cards can be, etc. The impactwas that the payment providerswithdrew services for non-EU licensedgaming operators within Germany. Sowhat I want to discuss is the decisionthe payment providers made and whythey did so.”

AML EU or Non-EU?

“If you are an EU licensed operator, it’sokay to take payments using paymentmethods such as a PaySafeCard, Skrill

Stuart Ballan Head of Sales - Middle East

Counting House Ltd.

Hot Issues in thePayments Industry

and cash-type anonymous payments.But if you are a non-EU licensedoperator it’s not”, Mr. Ballan observed.“So all EU is good, all non-EU is bad?”,he continued. Drawing the attention ofthe Summit to a presentation slide, hethen showed that Gibraltar, Cyprus andMalta are classified as EU jurisdictions,whereas the Isle of Man, Alderney,Guernsey, Costa Rica, Curacao and theBritish Virgin Islands are non-EUjurisdictions. “So there is a clearinconsistency in AML impact herewhen we consider the current bankingcrisis in Cyprus, (EU licensed)compared to the Isle of Man, say,which is highly regarded for itsregulatory framework and increasinglyso every day, yet is non-EU licensedand such payment methods werewithdrawn. This is an example of howa decision made years ago can actuallyaffect operations today.”

Germany Rationale

So why did payment processorswithdraw their services from non-EUlicensed operators? Mr. Ballanexplained that payment providers wantto be approved for future Germanygaming regulation, so the last thingthey need is to be on the “wrong side”of the German regulator. “There was

minimum risk in processing for EUlicensed operators, as Germangambling regulation is not compliantwith EU law due to provisions madefor the free movement of goods. So apayment processor or an EU operatorcan always claim it’s acting incompliance with EU law, knowing anyargument to the contrary can only beaddressed in court, with paymentproviders and operators being in astrong position to win. However, bydefinition, the non-EU licensedoperators are outside of EU law anddon’t want to play with fire.”

So what was the cost? Mr. Ballanexplained that payment providerssubsequently removed selectedservices from operators based in non-EU jurisdictions, resulting incompanies such as Paddy Power andPKR, for example, losing some of theirpayment deposit capabilities. “And thiswas all the result of complex, everchanging and ambiguous AMLguidelines influencing decisionsconcerning where to license madeyears before.”

Gaming ‘vs’ Financial

“Within the gaming and financialindustries there is an ‘identity crisis’for companies in the binary options,Forex and lottery messengerindustries, that don’t want to bepainted with the same brush as thegaming companies”, Mr. Ballanobserved. “And this battle is basedaround the demands of the acquiringbanks and the credit card schemes. Itwas discussed earlier that thelegislators and the regulators either donot understand what these industriesare, or perceive them differently, andthis is a constant battle. Companies inthese three industries are constantlybattling to not be identified as‘gaming’, because paymentsprocessed as such would suffer higherdeclines and geographical limitations,consistent with the gaming industry.At a detailed level, it all comes downto merchant codes.”

Mr. Ballan explained that with everytransaction processed via a credit card,a four digit MCC code is passed to thebanks. So, when you buy yourgroceries at the local supermarket, theMCC code used to identify thistransaction effectively tells the banksit’s a purchase of perishable goods in

Stuart Ballan Head of Sales - Middle East

Counting House Ltd.

“There has beenmore progress in thefinancial world in thelast ten yearsbecause of internetgaming than therehas in the lasthundred.”

the retail industry, and that the goodsare unlikely to be returned, and thatthe consumer is unlikely to claim (s)hedidn’t make the transaction. “But thebattle here is that the binary optionsand lottery messenger industries wantto get acceptance from the acquiringbanks and card associations, Visa andMasterCard for example, to not beprocessed as gaming, as firstly, manybanks decline the online gaming MCCcode (7995), and secondly, becausesuch payments will probably not beprocessed in countries that havebanned eGaming, thereby materiallyreducing the industry size.”

Lottery Messenger

“I live in Israel”, explained Mr. Ballan,“and if I decide to buy a ticket for theUK lottery, I’ve got two choices: I caneither fly to the UK myself to buy aticket, at a cost of hundreds of pounds,or I can take advantage of a growing,global industry that allows me to goonline and legally buy a ticket for thesame UK lottery (and for many others),paying a small premium on the ticketprice for the service.”

Drawing the attention of the Summitto the associated slide, Mr. Ballan thennoted that he had chosen to typesetthe words ‘lottery messenger’ in redand green respectively “because Ithink that perfectly sums up theindustry – What do you see when youlook at these two words? The word‘lottery’ or the word ‘messenger’?”Mr. Ballan explained that thecompanies within this industry are, inessence, couriers – they have nobusiness relationship with the actuallotteries. “All they are doing is takingonline orders and sending couriers tobuy the tickets for you. So are they inthe lottery or gaming business, or, likeFedEx, in the courier/messengerbusiness?”

“The problem is the banks andregulators do not understand, so theyhave been forcing these transactionsto be processed as gaming, or 7995,rather than 4215 for freightforwarders, drastically reducing thesize of the industry for the reasons Iexplained earlier. Let’s take anexample. You go into a newsagent andbuy a newspaper, a chocolate bar anda lottery ticket, and you pay by creditcard. In most countries this wouldn’tbe processed as a gaming transaction,whether you included the lottery ticketin your ‘basket’ or not. But when youmove on to the online world of lotterymessenger, suddenly the same lotteryticket purchase is classed as gaming,and processed as 7995, yet both thenewsagent and the online lotterymessenger companies clearlyperformed the same service of being acourier type channel for a lottery ticket,purchased through a valid retail outlet.This is a huge industry, that themajority of people have yet todiscover, and what we’re trying to doat the moment amongst all this chaos,ambiguity and confusion is to createand deliver a legal solution forprocessing the industry as non-gaming, thereby providing the platformto enable rapid industry growth.”

The USA

Turning to the increasingly topicalsubject of gaming in the USA, Mr.Ballan noted that Nevada, Delaware,and New Jersey are imminently (at thetime of the summit) expecting tolegalise online poker and casino.However, these three states representjust 4 per cent of the US population,so how will the other 96% be able topay and play? Mr. Ballan then drew theattention of the Summit to a graphdepicting the share price of a well-known, public eGaming companybetween 4th February and 1st April2013 and noted that, following NewJersey’s announcement of its intent tolegalise eGaming, the share price had

“Increasingambiguity and these

ever changingguidelines and rules

breed creativity,however, they also

breed non-compliance, and that

cannot be good forthe industry in theregulated market.”

increased by 50 per cent during thatperiod. “I saw many attendees at ICE2013, London, celebrating the rise oftheir personal assets during thatexhibition. But given that share pricesrepresent future earnings, which inturn come from cash, have youstopped to think about how the futureUSA gaming players will actually makethe deposits that will generate theseearnings? It turns out, payments forUS gaming remains undecided andambiguous.”

Credit Cards in the USA

Generally speaking, as Mr. Ballanobserved, 80 per cent of US non-gaming transaction are made usingcredit cards, “the American public isused to using credit cards, and it’s notfor us to try to force them to pay indifferent ways, that they are notcomfortable with. So how will creditcards be used? Unfortunately, foroperations that might be only monthsaway, today, we still don’t know.”

“If you live in New York, but nextweek, you’ll travel to Nevada, for a‘gaming weekend’, do you have to waituntil you arrive in Nevada to depositfunds, or can you do so from home,work, or on the train, when in NewYork? We don’t know”, Mr. Ballanstated.

“I mentioned earlier that paymentprocessing in credit cards is driven byfour-digit merchant codes, and thatgaming uses 7995, which has beenblocked in the USA for years. Will theUS suddenly start accepting 7995transactions? If so, only when initiatedin one of the 3 licensed states, or fromanywhere? How practical would it beto allow 7995? It turns out, credit cardsin the US are generally issued on anational level rather than a state level –so it’s not as if you can get a Nevadaissue credit card to identify justNevada players. Furthermore, even ifthe issuing banks said yes to ‘gaming

ready’ or 7995 cards, it would takeyears to slowly implement, as thesame banks spent years blocking suchtransactions. Untangling the web theybuilt would be far from simple. We alsocan’t assume that only Nevadaresidents would play, or that non-Nevada residents would not bank witha Nevada bank, or that a Nevada bankwould be able to trace where apayment is coming from – so it’sextremely complicated.”

Mr. Ballan then noted that one optionis for MasterCard to allow use of its9754 code, currently used for legalhorse and dog racing, for US gaming.However, there’s no decision fromMasterCard.

Similarly, other deposit methods suchas PayPal are still unconfirmed, whileACH, a payment method prone tofraud, is expected to be a key initialdeposit method. Many alternativemethods such as eWallets, pre-paidcards, PaySafeCards, Skrill andNeteller, meanwhile, still have to beregistered for eGaming use in the US.“With the launch of US gaming on thenear horizon, the whole subject ofgaming deposits in the US is filled withuncertainty.

So, yes, the share price jumped 50%on the news of the US marketsopening up soon. But clearly, there’sstill a lot of work to be done for thegaming operators to accept thedeposits that will be the future fuel fortheir earnings.”

To Close

In closing, Mr Ballan drew theattention of the Summit to a slidedepicting a struggling tug-of-war team.“For me, this picture sums up thegaming industry: we see many peopleshouting independently at one another,whilst digging their heels in – the AMLorganisations, the acquiring banks,card associations, regulators,compliance, operators, players, etc.The result is the pain you see on theirfaces, resulting from different partiespulling as hard as they can, in differentdirections. We, as the gaming industry,and as payment processors, need tomeet the needs of all these shouters,in a world where what they areshouting about is usually muffled andconstantly changing. Today, we havemultiple payment methods that haveappeared in response to globaldemand for fast, secure, guaranteedpayment, in gaming, and beyond.Whereas this increasing ambiguity andthese ever changing guidelines andrules breed creativity, however, theyalso breed non-compliance, and thatcannot be good for the industry in theregulated market.

Banks fear the every changing rules;regulators are faced with constantsteep learning curves and workloads;and operators want efficient paymentproducts, yet the less the merrier, toreduce integration. The only option isto bring together these disparateparties and try to formulate lessambiguous requirements and simplerand more secure means for operatorsand players to process theirtransactions. Doing so would be betterfor banks, governments, players andoperators”

Michael is co-founder of Continent 8Technologies PLC and the creator ofthe "Continent 8" brand. He is aCertified Public Accountant byprofession and an entrepreneur bynature. He is a former Director ofEmpire State Development, the leadeconomic development agency forNew York State. Michael is agraduate of Montreal’s McGillUniversity.

A key figure in the global eGamingcommunity and a noted speakerworldwide, Mr Tobin began his eagerlyanticipated presentation by introducingdelegates to the history of Continent 8Technologies and its role within theindustry. “The whole concept ofContinent 8”, he explained, “evolvedwhen my co-founder, Jay Stubina, andI were students together at McGillUniversity many years ago. In the late1990s we both realised that we hadmissed the dotcom boom and askedourselves how we could get involvedin online. So we came up with aconcept based on a combined theoryof the death of the nation state andthe creation of supranationalcommercial zones and megatrends.We called it the ‘eighth continent’ orContinent 8: what we’ve become iseGaming’s multi-jurisdictional hostingsolution.”

“The moves we have made have beenvery much based on the needs of ourcustomers”, Mr Tobin continued.“Many different solutions have alsocome from our work with a lot ofdifferent jurisdictions however, so wehave also become a fiduciary toregulators and advisors togovernments because they see us asa neutral, objective and knowledgeablepart of the e-commerce world. Wehave recently been consulted by andwill be presenting in Delaware at theend of the month and this is becausethey see that we are in a position to

help them to provide a platform fortheir state lottery licensees. We arealso working with parties in California,New Jersey, Florida and New York and,of course, we are working in locationsthroughout Europe with regards toexpanding licenses based on thesecurity and accessibility ofinfrastructure. Not everything stays thesame in this industry, as Gibraltar iscurrently experiencing with the pointof consumption tax, and we have to beentrepreneurial in order to alloweconomic development opportunitiesto take place for private business andfor governments.”

“So Continent 8 allows companies tohave a global, single source supplier ina complicated world both regulatory-wise and technology-wise”, Mr Tobincontinued. “We host, we co-locate, wedo disaster recovery, networkmanagement, positioning, and we areone of the early adopters of methodsto protect clients from DDos, orDistributed Denial of Service, attacks.This again came as a result of theneeds of our customers who felt theywere under threat from these sorts ofattacks and we said ‘let them come’.”

Mr Tobin then explained that Continent8 currently operates from ninelocations around the world althoughthe company’s main points ofpresence are to be established inNorth America. London, Paris, NewYork and Dublin are each host to majordata centres while Montreal is hometo Continent 8’s original data location.“We headquartered, when we leftMontreal for the first time, in the Isleof Man for a number of reasons andwe continue to operate a data centrethere”, Mr Tobin also explained. “Whilewe look forward to making Gibraltarour ‘rock’ for a number of reasons. Buta lot of our reasons to locate arepredicated upon where our customersneed to be and where we are invited

“We have recentlybeen consulted by

and will bepresenting in

Delaware at the endof the month and this

is because they seethat we are in a

position to help themto provide a platformfor their state lottery

licensees.”

Michael Tobin Co-founder and ChiefExecutive Officer

Continent 8 Technologies

Entrepreneurial andEconomic Development

to be by our regulators in order tocontrol and manage licensee bases.”

Gibraltar

“Here in Gibraltar we have a very nichelocation. We were introduced to theisland a number of years ago and knewat that time that it was becoming ajurisdiction of choice for a lot of veryimportant companies, most of whichare here today”, Mr Tobin enthused.“But it has also become a verychallenging location from a technicalpoint of view.” Mr Tobin explained thatContinent 8 acquired the uniquelocation of the Ministry of Defence’sold communication centre, which islocated at the heart of the rock ofGibraltar. Many had tried to initiate anddevelop the site but did not have thetechnical capabilities to realise its fullpotential. “We acquired the site at atime when its ownership had beentransferred to the GibraltarGovernment and have turned it in to avery unique location which, of all ourlocations, has garnered the mostapplause and mythology. But of coursethis, often exaggerated, speculationhas become a very importantmarketing tool and has served toshowcase our technical abilities acrossthe globe, and not just for eGamingcompanies.”

The Isle of Man

Mr Tobin explained that the Isle ofMan’s past economic developmenttheme, ‘freedom to flourish’, wassomething that initially attractedContinent 8 to establish itsheadquarters in the well-respectedjurisdiction. “In our technology basedindustry with an eGaming focus, ourconcern was ‘how do you takesomething as unregulated andseemingly unregulatable as theinternet and combine it with

something that was almostoverregulated, as land-based gamblingthen was?’. That’s the value propositionwe had in the early days. This was bornvery much out of our experience inselecting a jurisdiction which allowedus to provide technical and regulatorysolutions to our customers and the Isleof Man has since become a criticalcomponent in our network.”

“Our decision to create a base in Maltawas again in answer to the needs ofour customers who were looking toestablish themselves using an EUlicence”, Mr Tobin explained. “Wecontinue to operate in Malta andprovide what is probably the bestnetwork for our customers there. Theease with which people are able to geton and off the island is also a majorfactor in its success, as it has beenhere in Gibraltar. Working closely withGibtelecom, the fibre infrastructure weconnected in to provided alternativeroutes even to our providers as well asmanaged networks.”

Dublin

Mr Tobin explained that key factors inthe decision to develop a site in Dublinthis year include its technologicalrenown as well as the importance ofdiversifying a company’s reach. “Moreand more people are in multiplelocations, you cannot be reliant uponone single site”, he remarked. “So weprovide that neutral vehicle forcustomers both in terms of theirtactical and their regulatory needs andthis extends to London, Paris,Guernsey and Montreal.”

Points of Presence

“Points of presence where ournetwork connects also serve asadvanced locations where we can offerunique services to customers thatneed to be located in thesejurisdictions. We are also in Belgiumand Taiwan and, for the last couple ofyears, have also been dealing with alot of data centre requirements for LasVegas, Chicago and Miami inanticipation of inter-state lotteries, forexample. A unique location that we’rejust initiating at the moment is also theUS Virgin Islands which can be, fromour perspective, considered the US’sMalta. We’re working very closely withthe US Virgin Islands Government todevelop a product for them. In thiscase the government may want tooutsource a lot of their IT managementto us and this is, again, becoming akey business area alongside datamanagement and protection. So in allcases, what we do is driven by ourcustomers.”

Client Services

“As many of you know”, Mr Tobinexplained in closing, “client servicesoverall are something that your marketteams work very hard to identify anddefine. So we work very closely withour customers to provide case specificvirtualisation solutions in multiplelocations. In the sense that Imentioned earlier, we function verymuch as an entrepreneurial company.Operating online means you must beready to react which is why we remainin close contact with jurisdictions andoperators to respond to their needs. Itis important to be an entrepreneur asthe world changes and we continue toencourage the customer to makethose associations with Continent 8.”

Michael Tobin Co-founder and Chief Executive Officer

Continent 8 Technologies

Ramparts Law is a European lawfirm based in Gibraltar andspecialising in cross-bordercorporate, commercial andregulatory matters relating to e-commerce, technology, gaming,financial services and tax. It wasfounded by Peter Howitt, a solicitorwho has worked in the e-commerce,gaming and financial servicessectors for over 10 years. The firmadvises entrepreneurs and multi-national corporations (inc. NASDAQand FTSE listed companies) inrelation to local and internationalcommercial projects. Peter qualifiedin England and Wales as a Solicitorin 2002 and in Gibraltar, 2012. Peteris also the Chief Executive Officer ofthe Gibraltar Betting & GamingAssociation and the Secretary of theGibraltar E-Money Association.

Mr Howitt opened his presentationwith a brief explanation of the 4thMoney Laundering Directive which,although still in draft form, is set tohave a significant impact upon theonline gaming and the financialservices sectors. Mr Howitt observedthat at a very high level the 4th MoneyLaundering Directive could besummarised as follows: “There is riskbased evidence driven AML party inEurope… and nearly everyone isinvited.”

The Details

The 4th Money Laundering Directive,Mr Howitt explained, covers gamblingentities and takes a very risk basedapproach (RBA), requiring lots of riskbased assessments. Essentially anextension of the 3rd MoneyLaundering Directive (published in theOfficial Journal of the European Unionon the 25 November 2005), it containsa number of practical elements that

have yet to be decided. In practicalterms, it is unlikely to have anoperational impact for obliged entitiesuntil after 2016. It is likely to impactregulators, governments, operatorsand licensed firms, and represents asignificant gear-change to a more EUfederal and state approach to AML,where all key stakeholders haveobligations to a risk based approach.Overall, it is positive for the onlinegambling industry, Mr Howitt assuredthe Summit. This is due to the specificinclusion of online gambling in thedirective for the first time, whichenables the industry to demonstrate tothose that remain sceptical of itsintegrity that it adheres to the samehigh standards as leading financialinstitutions. Mr Howitt emphasised,however, that it is important not tounderestimate the potential risk offurther cross-border legal confusion,the law of unintended consequencesand the possibility of misuse of AMLlaws to restrain cross-border trade.

Stated Objectives

The stated objectives of the draft areto:• reduce cross-border complexity

• safeguard against criminality andterrorism

• safeguard economic prosperity

• contribute to financial stability andsoundness of the financial system

• ensure consistency between EUand international rules (particularlythe FATF recommendations)

• increase the consistency ofnational rules (although we’re stillnot seeing harmonisation, anevidence driven approach mayfacilitate a move towards this goal)

Peter Howitt Ramparts Law

The 4th Money LaunderingDirective and Its PotentialImpact to Online Operators

“It is not clear why,in a directive which

is basically saying‘you do the work to

find out what therisk is’, they see fit

to hard-codemeasures which

make it seem thatgambling is a muchhigher risk than any

other activity.”

• introduce a harmonised criminaloffence of money launderingacross Europe (and certainty of thepredicate offence of tax relatedcrimes)

Whereas previously only land basedcasinos were covered in moneylaundering directives, all onlinegambling operators will be covered aspart of the 4th instalment. The generalapproach of the directive, Mr Howittexplained, is to set some commonstandards but leave Member States,regulatory bodies and obliged entities,which include gambling operators, totake detailed risk assessments andensure adequate measures are put inplace which are commensurate withrisk for country sectors, transactionsand customers. “It is less prescriptivethan the 3rd Money LaunderingDirective in many ways and this is tobe welcomed”, Mr Howitt remarked.“It doesn’t seek to set in stone ajudgement on what is considered tobe high or low risk but allows for adetailed risk assessment to beconducted at various operator, nationaland supranational levels. Mostpositively, it aims very much at cross-border implementation, sharing andstandards, however with minimumlegal harmonisation in most respects itcould lead to greater inconsistencies.”

Main Changes

Mr Howitt explained that the use ofsimplified due diligence is to besignificantly reduced. There is also achange in customer due diligencethresholds for cash transactions from€15,000 to €7,500 and a minimum setof principle-based rules foradministrative sanctions. Tax crimesare now included as a predicate

offence for defining criminal activityand all companies are also nowrequired to hold and share informationon beneficial ownership. This is largelyto ensure that there are nojurisdictions in Europe that can becompared to, for example, the BritishVirgin Islands.

National Risk Assessments arerequired and national measures are tobe taken with closer cross-border co-operation between financialintelligence units, the EuropeanBanking Authority and othersupranational bodies. “Quite frankly”,Mr Howitt remarked, “cross-borderissues between financial intelligenceunits have been a major problem interms of reporting and the sharing ofinformation and there has also, in thepast, been a problem with knowingexactly who to report to.”

Customer due diligence measurescontinue to allow for simplified,standardised and enhanced duediligence and it will also be much moreevidence and multi-variant risk basedwhen determining risk and themeasures to be taken in mitigation.The use of the 3rd CountryEquivalence White List has also beenremoved. This is due to the movetowards a risk based approach.“Interestingly they have also removedthe ‘in principle’ simplified duediligence waiver”, he added.

There is to be an increase in PEP(Politically Exposed Person) checking,both domestic and international, whichwill lead to increased requirements forobliged parties to ascertain risk andmitigate against it.

Gold Plating

Because it is not a maximumharmonisation directive, MemberStates can also gold plate the directiveor implement it with additionalmeasures. “This is something aboutwhich the industry should be veryconcerned”, Mr Howitt urged theSummit. “This is not something thathas been put there for the gamingindustry, but is the result of publicpolicy issues, however the ability togold plate the directive upontransposition is obviously somethingthat is open to abuse.”

Member states are supported bysupranational EU supervisory bodies,including the European BankingAssociation and Europol, and are alsoobliged to share assessmentsbetween each other. “This increase inreliance upon supranational bodies isone of the things I like most about thedirective”, Mr Howitt noted. “It is doingmuch more of the work in terms ofharmonisation and coordination acrossborders than has been donepreviously. This will make it easier forindustry operators within the sector tobe able to gain a better sense of theotherwise fragmented AMLenvironment.”

Recitals of Interest

Gambling is defined as ‘any serviceinvolving wagering in games of chanceincluding those with an element of skillsuch as lotteries, casino, poker and betting transactions’.

Mr Howitt noted that Recital 13 of thedirective was interesting in itsspecificity, due to its stating that ‘theuse of the gambling sector to launder

Peter Howitt

the proceeds of criminal activity is ofconcern’. “It is interesting in a directivethat is predominantly evidence and riskbased that we have this sentence,which gives no indication that it wasbased on assessment or evidence”, heremarked. “It is of some concernbecause it is a presumption.”

“Gambling operators are also going tobe subject to a lower threshold forcash transactions. The normalthreshold is €15,000, soon to be€7,500 but the gambling threshold is€2,000, which will be applied towagers and winnings. It is not clearwhy, in a directive which is basicallysaying ‘you do the work to find outwhat the risk is’, they see fit to hard-code measures which make it seemthat gambling is a much higher riskthan any other activity.”

Recital 23 allows for obliged entities torely on 3rd party introducers orpartners to carry out customer duediligence, although regulatoryobligations remain with the obligedparty. Recital 31 provides for dataprotection for sensitive sharing ofinformation for fraud prevention,although the current draft does notextend these measures to gamblingobliged entities, only the financialinstitutions. Operators may still benefitfrom the inclusion of PSPs, “Theindustry must come together ondeciding how to lobby for influence onthis over the next couple of years,because there is no reason whygambling operators are included inmany of the restrictive measures andthen dropped for many of the benefitsand rights contained within thedirective”, Mr Howitt urged theSummit.

Articles of Interest

Article 4 provides that Member Statescan extend the scope to morecategories of obliged undertaking (goldplating) while Article 5 provides thatMember States can also adopt stricterprovisions. Article 7 states thatMember State risk based approacheswill be used to consider the applicationof these additional measures by localobliged entities. Member States mustalso ensure that obliged entitiesassess AML and terrorism financingrisks, taking into account variousfactors including customers, countries,products, services, transactions anddelivery channels, according to Article8. “Interestingly, in Article 8, it may beappropriate to require an independentaudit of these policies and procedures,the results of which are to be madeavailable at all times. Operators shouldbe aware of this change”, Mr Howittadvised the Summit.

Germany

Moving towards a conclusion, MrHowitt explained that “the majorissues I see are that it is all aboutcross-border communication andcompliance for the online industry.Some operators will already be moresophisticated than others and will beaware that they are already subject toAML in multiple territories. For others,it may come as a surprise that thereisn’t as much harmonisation withinEuropean law as you would expect.”

“Under AML principles, thepresumption is that the Home Stateregulator regulates obliged entities andthe AML laws of that State. You shouldbe aware that other states that youprovide services to on a remote basis,

“The major issues Isee are that it is allabout cross-border

communication andcompliance for the

online industry.Some operators will

already be moresophisticated thanothers and will be

aware that they arealready subject to

AML in multipleterritories.”

may implement a different approach.So, in addition to business andconsumer laws, you need to belooking at the anti-money launderingrequirements that are applicable inother territories. The use of Host StateAML can also apply when you areusing local agents - again dependingon the approach by local MemberStates.”

Electronic Money –lessons learned

“I don’t want to be consideredscaremongering here when I talkabout the risks to be considered”, MrHowitt emphasised. “But, just briefly,in 2000 the 1st E-Money Directivecame into force and intended to openup certain stored value paymentproducts wider than just the bankingsector. There was very poor uptake inEurope compared to that anticipated,with some notable exceptions such asin the UK private sector and the Italianpublic sector. Many countries did notsupport/understand the industry orapprove operators for the sector andunfortunately the legislation waspoorly drafted and had manyunnecessary commercial restrictions.This forced the European Parliament tointroduce the 2nd E-Money Directive in2009 with maximum harmonisationmeasures to avoid fragmentation orthe gold plating of some operationalrequirements.”

“Interestingly”, he continued, “despitethe purpose of the 2nd directive clearlybeing to open up the market forregulated electronic money, inGermany they decided to use this asan opportunity to increase restrictionson electronic money. This was a shock:such a regulatory approach may be thenorm for online gambling but it wasnot expected in the more integratedfinancial services sector. The e-moneysector was already on its seconddirective with harmonisation measuresintended to encourage that industry.Germany's AML structure is based onthe normal AML territoriality principle,which means they could not enforcethe new AML provisions againstforeign EMIs. Given Germany'sresistance to the e-money sector,however, it had no domestic EMI's andmany German companies hadobtained a licence in the UK in order topassport back into their cultural home-base. Germany therefore focused onsevere limitations for any locallyestablished distributors or agents ofEMI's and made it almost impossiblefor EMI's to work with local petrolstations, shops etc. where prepaidcards would usually be sold. The e-money sector tried to reason with theGerman authorities and it could beargued with some justification thatGermany’s transposition looked like anexercise in bad faith given the purposeof the 2nd Directive. Germany wasable to implement the 2nd Directive insuch a way that it led to an estimated

decline of about 60% in the German e-money market. Ironically, therefore,Germany failed to support the e-money industry when it started,failed to grant e-money licences tolocal companies, failed to transposeEuropean law requirements properlyand then appeared aggrieved that it didnot have control and oversight over itsown domestic market who weretransacting with EMI’s in othercountries – a familiar story for onlinegambling.”

“With this in mind, the eGamingindustry must, therefore, demand asupranational authority that isresponsible for gambling in Europe. It must engage with relevantsupranational bodies for gambling toissue guidelines on applicable AMLrules for cross-border operators and toensure no unwarranted extension ofAML obligations to partners. Finally, itmust prepare for the potential misuseand lack of understanding of the sectoras well as the plain poor transpositionof the directive in a manner thatrestricts cross-border operators,particularly where local gambling lawrestrictions are currently deemedunlawful under European law.”

“Many countries did not support /understand the industry or approveoperators for the sector and unfortunatelythe legislation was poorly drafted and hadmany unnecessary commercialrestrictions.”

Sue joined the Remote GamblingAssociation in January 2012 whereshe is responsible for policydevelopment, government relationsand special projects. Previously shewas Head of Policy at the UKGambling Commission and headedup the Gordon Moody Association,which supports problem gamblersto overcome their addiction.

Simon is a Director in KPMG’sEconomics & Regulation practice.He is experienced at advisingcompanies and policy makers on theeconomics of excise taxation in thegambling, alcoholic drinks andtobacco markets. He has alsoadvised companies and taxauthorities in numerous tax disputesincluding VAT, landfill taxation andtransfer pricing cases. Simonworked recently for the RemoteGambling Association where he leda team analysing the economicimpact on sports betting in Italy of agross profits tax relative to aturnover tax. The report, whichcontained new and detailedeconomic research on the relativemerits of the two taxes, built onearlier KPMG reports on the marketsin Spain and Cyprus. Simon hasalso advised lottery operators onregulatory and commercial matters.

Sue Rossiter introduced the jointpresentation as an examination of howthe UK’s proposed taxation regime andits tax rate levy may result in a rangeof pitfalls that undermine the UKGovernment’s policy intentions. Sheexplained that KPMG has undertaken anumber of studies for the RemoteGambling Association (RGA) on thetaxation of remote gambling in variousjurisdictions and drew the attention ofthe Summit to a recent report entitledAn assessment of the impacts of agross profits tax on Italian sportsbetting. Ms Rossiter explained that thereport was issued to a Spanishregulator to submit that new tax levelsare required to prevent the rise ofunlicensed operators and had beenvery well received in both technicaland local press.

Ms Rossiter then identified four keyfactors which inform an individual’sdecision to bet with a given operator;three of which are influenced by tax:

• the quality of the onlineexperience: including ease of use,availability and social experience

• prices: including pay-out ratios,cost of sign-up, rates

• advertising and marketing: brandrecognition

• bonuses, free bets and top-ups:used to attract, retain and revivecustomer accounts

Additional Taxation

“For the most part”, Ms Rossiterobserved, “it is the discretionaryspend that is influenced by a raise intax levels on a particular product, sothere is little change to the quality ofthe online experience. Thedevelopment of a site is usually a sunkcost and is not very frequentlyimpacted by additional or ongoingexpense. It’s the three other areas thatdo have an impact on the customer:prices will rise as the tax is passed onto them, advertising will be reduced,and top-ups and bonuses will also bereduced as discretionary spend falls.”

Mr Trussler then took over from MsRossiter in explaining some of theconclusions of the economic andmarket data research conducted inpartnership with the RGA over the pastfew years. “The results and findingswe’re going to be talking about arevery, very robust and take into accountdetailed economic theory, socio-economic research, economic andmarket data, and are scalable tochanges in the market structure -whether it’s a monopolistic market or acompetitive market, or somewhere inbetween”, he assured the Summit.

Unintended Consequences:The Pitfalls of Gross ProfitsTaxation and SimilarEconomic StrategiesSue Rossiter Director of Projects and Policy

Remote Gambling Association

Simon Trussler Director, Economics and Regulation

“But before I go into conclusions it’sworth thinking about the differenttypes of tax that are contenders”, MrTrussler emphasised. “The first type oftax is the turnover tax, which is a taxon stakes or gross money wageredbefore payout [tax revenues = tax ratex stakes]. The second type of tax is thegross gaming revenue tax, which is atax on stakes less prizes or grossmoney wagered after payout butbefore expenses [tax revenues = taxrate x stakes x (1-PPR)]. The reason Ibring this tax up is that gross gamingrevenue taxes are often talked aboutas if they are a gross profits tax, but agross gaming revenue tax is differentbecause it’s a tax on stakes lessprizes. Finally, a gross profits tax is atax on gross gaming revenue lessother operating costs, and thoseoperating costs involve the cost ofserving a customer or providing atransaction, and may also include, forexample, some proportion of IT costsand service costs as well as theimportant other costs like bonuses andfree bets. These are all important costsfor gambling operators.”Mr Trussler then explained that the firstfundamental about the turnover tax isthe formal incidence on the gamblingoperator. “Effectively”, he remarked,“for every Euro staked the operator

has to hand over a certain number ofcents depending on the tax rate. So inthat respect it’s no different from anincrease in the marginal costs ofoperating a business. Now, a a profitmaximising company balances twothings when faced with an increase incost. First, the gaming operator will tryto pass on that cost to the customersto preserve its margin, but theconsequence of that is lost sales.Second, maintaining sales and marketshare. So what one would normallyexpect to see in the case of turnovertax is some pass-on, but notnecessarily full pass-on, and the extentto which this pass-on will take placedepends on the nature of the marketand the price sensitivity of customers.”

The similarity between the turnovertax and the gross profits tax is that theformal incidence again lies with thegambling operator, Mr Trusslerobserved, “but that is pretty muchwhere the similarity ends. The grossprofits tax is a tax on the gross profitsof the industry, and if there are nogross profits attached to an extra salethere are no taxes imposed. There isno way that a gambling operator couldincrease its prices after the impositionof a gross profits tax and increase its

profits. Under a gross profits taxregime, we would expect the sameprices to the customer and the samesales figures as without the tax.”

Initial Propositions

“So our first conclusion is that theturnover tax is expected to result inhigher prices and lower sales volumesand the gross profits tax does not. Oursecond conclusion is that the grossprofits tax is capable of raising moretax revenues from individual firms thanthe turnover tax. This is because lowersales result in a lower tax base.”

“Our third proposition is that there willbe at least as many active firms undera gross profits tax as under a turnovertax regime”, Mr Trussler continued.“The logic behind that is under a grossprofits regime there will be a higherprice/payout ratio, so a higher totalmarket demand. It must, therefore, bepossible for at least as many firms tooperate under a gross profits tax.”Mr Trussler then observed that itfollows from propositions two andthree that more tax revenues can beraised from a gross profits tax thanfrom a turnover tax and reiterated that

Sue Rossiter Simon Trussler

this conclusion is backed up fromdetailed economic theory and marketanalysis. “This is not to say that therewill be no distortions to the marketunder the gross profits tax but that wewould expect the largest marketdistortions to come from the turnovertax, and the lowest potential taxrevenues as a consequence.”

“The fifth and final proposition is thatthe greater the threat of gamblersswitching to offshore, duty-avoiding alternatives, the moreturnover tax revenues will be eroded”,Mr Trussler explained. “And this, asDLA Piper noted this morning, isbecause you can’t fight gravity. Ifpeople can swap to a cheaper, dutyavoiding alternative they will do it. If any organisations have a chance toturn a profit by serving that need, theywill do it. For hundreds of years, withtobacco and alcohol, this has been thecase. From a policy point of view thatmeans that as more gamblers switchoffshore, the tax base will be reducedand frustrate the Government’srevenue raising policy objectives. It also means that some gamblingactivity potentially goes unregulated –so there is everything to lose whenyou get the tax rate and structurewrong.”

Internet Penetration andTax Structures

Taking over from Mr Trussler, MsRossiter explained that onlinegambling was not born out of thedesire to avoid tax but was the resultof the efficiency with which individualscould gain access to a popular marketproduct. Rising levels of internetpenetration in both the developed anddeveloping world, she observed, alsomean that as individuals gain increasedaccess to the internet so too is therean increase in providers of onlineservices.

Turning the attention of the Summit toa recent KPMG report entitled OnlineGaming: A Gamble or a Sure Bet?, MsRossiter then explained that therewas, until recently, limited opportunityfor gamblers to switch to offshore dutyavoiding alternatives. “One of the keyfindings”, she continued, “was that thegambling industry is progressivelymoving into new markets, thosemarkets are increasingly beinglicensed, and what we need to see areways of ensuring that consumers whoturn to the internet to gamble areafforded the protection they needwhile governments get the duties theyare owed.”

“Internet penetration is growing in linewith the increased availability oftechnologies and services as well asglobal population figures”, Ms Rossitercontinued. “So what we’re seeinghere is more people coming online,more people gambling online, and thepotential for more revenue to becollected. We expect numbers toincrease and we expect more peopleto come from unregulated jurisdictionsto fill in the gaps where there aren’tefficient controls.”

The Laffer Curve

Mr Trussler then took over in explainingthat it is not important simply toimplement the right tax structure, it isalso important to ensure that the taxrate is properly set. Under any form oftax, he observed, an excessive tax ratehas the potential to distort the market,have unintended consequences andfrustrate policy objectives. “The mostfamous articulation of the relationshipbetween tax rates and tax revenues isknown as the Laffer Curve. It isfamous not because Arthur Lafferinvented it, but because Laffer drewthe curve on a napkin in the 1970s,showed it to Donald Rumsfeld, and itinformed a large part of United Statesfiscal policy throughout the 1980s.”

The vertical axis of the Laffer Curvegraph showed tax revenues and thehorizontal axis showed the tax rate. Azero tax rate therefore shows zero taxrevenues because there is no tax base.Equally, if tax rates are too high, therewill also be no tax revenue becauseconsumers will not make anypurchases, either because they simplystop buying or switch to an alternativeproduct.

“When you start from a zero tax rateand you increase the rate a little bit, itwill increase the price of the productor service by a little bit, so taxrevenues will go up a little bit”, MrTrussler explained. “If you increase thetax again, it will increase a little bitagain. Some people will stop buyingthe product or service because of anincrease in price, but not very many.But if you carry on increasing the taxrate, it will erode sales by so much thatsuccessive tax rates will eventuallystart to decrease revenues. Betweenthese two extremes there is a curve -the Laffer Curve - and there is a sweetspot at the apex which is the taxrevenue maximising rate of taxation.”

“what we need to see are ways ofensuring that consumers who turn to theinternet to gamble are afforded theprotection they need while governmentsget the duties they are owed.”

“The application of the Laffer curve toa turnover tax on online gambling isobvious. The Laffer curve tells us thatit is important to not set an excessivetax rate. This applies equally to a grossprofits tax, but the mechanism is a bitdifferent. We all know that operatorsinvest in customers by advertising andpromotions and the payoff is profitsfrom new customers. There are alsofurther investments in bonuses andother promotions to maintain andgrow customer demand, so we makean investment for future payoff.Anything that reduces that payoffreduces the incentive to invest in newcustomers and maintain or grow thebusiness and this will reduce the taxbase as a consequence. An excessivegross profits tax will erode operators’incentive to acquire and maintaincustomers by such a large amountthat total tax revenues will beundermined. So, again, there is a taxrate that balances higher tax revenuesper unit of sales with maintaining asufficiently large tax base.”

Mr Trussler then remarked that theincreased availability of offshore(unregulated) operators exacerbatesthe problem. Increased availability of alower priced supply pushes the sweetspot down and to the left towardslower rate and lower revenue levels:“so if you get the tax rate wrong now,with an increasing availability of dutyavoiding offshore gambling operators,it’s almost inevitable that the problemof customers switching to lowerpriced, duty avoiding alternatives willgrow. And that’s why I think taxauthorities need to take this quiteseriously.”

In Closing

Moving towards a conclusion, MsRossiter explained that tax is not theonly thing that affects the costs of abusiness. The full range of costs to aregulated operator include licencefees, gambling taxes, administrativecosts, compliance costs, businesstaxes, amongst others, meaning thattax needs to be considered holisticallyand be administratively efficient.

“One of the things that concerns us, ifthey are included in the taxable base,is the bonus”, she explained. “It’s whatcustomers expect, it’s part of anoperator’s retention strategy and webelieve that an operator’s marketingstrategy should be considered exemptfrom tax. Another issue surroundsconsumer protection. For mostgovernments the regulation of onlinegambling is not just about taxation anda licensing regime allows consumerstandards responsibility. If consumersare forced to gamble offshore,however, then those benefits that theGovernment hopes to introduce willnot be shared.”

“Administrative efficiency is alsoimportant”, Ms Rossiter continued.“It’s no good having a relatively lowlevel of tax if the cost of collecting it isvery high, so we say keep it simple,ensure low costs of collection arepassed on, and encourage electronicregistration and returns filing.”

“Finally”, Ms Rossiter added, “with thepoint of consumption tax comes therisk of double taxation, which is amajor issue for multinationalcompanies. Mutual recognition ofdouble tax regimes is, therefore, veryimportant and, where appropriate,there needs to be double taxationrelief otherwise there may becasualties within the industry.”

“One of the thingsthat concerns us, ifthey are included inthe taxable base, isthe bonus. It’s whatcustomers expect,

it’s part of anoperator’s retention

strategy and webelieve that an

operator’s marketingstrategy should be

considered exemptfrom tax.”

“The application of the Laffer Curveto a turnover tax on online gamblingis obvious. The Laffer Curve tells usthat it is important to not set anexcessive tax rate.”

Peter qualified as a Barrister in 1982,becoming a partner of Hassans in1988. His area of expertise is incommercial, gaming and privateclient matters. He has also beenclosely involved in draftingnumerous changes to Gibraltar'slegislation in trusts, financialservices and gaming areas. Peter'sknowledge of these fields has ledhim to contribute to a large numberof articles and books on Gibraltar'slegal system and financial servicessector. He has also regularly spokenat international conferences relatingto these areas of practice. Peter wasGibraltar's Minister for Trade andIndustry, with responsibility foreconomic development andfinancial services between May 1996and February 2000.

Before inviting each of the panellists toidentify, in swot analysis terms, theweaknesses and threats within today’seGaming industry, Mr Montegriffoobserved that in an ‘existential sense’the sector is one that not onlycontinues to innovate and grow but isalso here to stay. “The question,therefore, is what the sector will looklike in five or ten years’ time”, heremarked. “In that respect, we willaddress the regulatory landscape, theissue of taxation, and the impact oftechnology in facilitating change and

the adaptation of the industry. Thenthere is, of course, the impact of socialgaming which will undoubtedly have atransformational effect on the industryand its competitive environment.”

What are your views on the threatsor weaknesses we face in theeGaming industry?

Peter Howitt: Mr Howitt opened byfirst addressing his concern about anti-money laundering legislation and itspotential misuse. “Operators face thethreat of simply not getting therequisite support at European level.The UK’s bill demonstrates, forexample, that territories which hadpreviously been leaders in free marketregulation will risk damaging theirreputation and industry withquestionable measures. Overall, I thinkwe all know that the issues lie with alack of understanding of online gamingat political level and, with respect tothe potential for lobbying et cetera, alack of commercial awareness of theissues at stake. I’m not sure thatpeople within the European Parliamentand the Commission alwaysunderstand that, in their efforts to dealwith sometimes quite parochialconcerns, they are perhaps losing sightof other positives that Europeancompanies are leaders of, and that’ssomething we need to think about in

terms of leadership, employment,taxes and all the things that go withthem.”

Adam Craig: “Fragmentation alsobrings with it a high level ofcomplexity”, Mr Craig added. “And, ofcourse, taxation adds to thatcomplexity and creates a newchallenge to our operating model. Itstarts with Italy and France, and thenSpain follows and the UK follows andyou suddenly encounter a fundamentalchallenge to the economics. What thatmeans is all those things that werecore to our business model, such asaffiliates and bonuses, have to go allbecause of the tax pressures imposedon margins.”

Michael Carlton: Mr Carlton explainedthat, despite the regulatory and taxaspect being important factors tofocus upon, it is also important toconsider the impact of inconsistency inregulation across territories.“Regulation is something we all lookfor and respect”, he observed. “Itstrengthens our products and ourprocedures, but when it becomesinconsistent and you’re operating inmultiple jurisdictions it becomes verydifficult. That then leads to a deflectionof resources from positive,commercial, money making activitiesto compliance and regulatory activities.

Afternoon Panel Session: The Outlook for GamingModerated 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

“Operators face thethreat of simply notgetting the requisitesupport at Europeanlevel. The UK’s billdemonstrates, forexample, thatterritories which hadpreviously beenleaders in free marketregulation will riskdamaging theirreputation andindustry withquestionablemeasures.”

All of us spend a tremendous amountof time dealing with regulation andcompliance in multiple jurisdictionsand I’ve been sitting here thinking‘why would anybody want to enter thisindustry now?’ We want to encouragegood people to come into this industrybut we’re putting up barriers to stopthem.”

Kevin de Haan: “Good operators wantto be regulated,” Mr de Haan began.“No-one wants to operate in the WildWest and I think that one of thegreatest challenges the industry facesis in educating people to that end. I never cease to be shocked at someof the rubbish I read in the press andeven sometimes in officialdocumentation. I don’t recognisewhat’s being said about onlinegambling in the public sphere. So Ithink it’s not just a legal campaign, it’sa hearts and minds campaign toeducate people that this is a compliantindustry that is not out to seduce thevulnerable gambler or bring in theyoung gambler to the industry, quitethe opposite in fact. So I thinkeducation is absolutely key.”

What is the likelihood of the UKintroducing a point of consumptiontax regime?

Kevin de Haan: Mr de Haanexpressed his view that although it istheoretically possible, the introductionof a point of consumption tax isunlikely. “I say that because from apractical standpoint it is so mucheasier to impose a tax regime on anoverseas operator if you require themto be licensed within the jurisdiction,because you automatically have apresence. The licensing system in the

UK automatically triggers an obligationto register with HMRC for generalbetting duty or gaming duty orwhatever. So I think that it is anunlikely scenario but theoreticallypossible for those reasons. Thepractical obstacles to it areconsiderable.”

Adam Craig: “I don’t share theoptimistic view of Kevin I’m afraid”, MrCraig warned the Summit. “I think thatHM Treasury would eagerly implementa tax knowing that it might only beable to collect from the biggeroperators and deal with theconsequences afterwards. There iscurrently no impediment, there are bignumbers at stake and there is a feelingamongst some political figures that insome ways the coming situation is fair,even if they don’t really know how tomake it legally fair.”

Michael Carlton: Mr Carlton agreedwith Mr Craig, adding that there is apolitical will and desire to fix a remoteangle, whether legally possible or not,and push the measure through.

Peter Howitt: Mr Howitt added thatthe UK measure was in line with thepotential for countries to concentrateless upon the regulatory issues andmore upon taxation.

Kevin de Haan: Mr de Haan agreed,stating that “there is perhaps oneother political dimension to this in thatthe Government has pitched its flag tothis particular vehicle of introducing atax on the back of regulatory change.This whole basis for the imposition ofnew regulation is flawed but we haveto remember that the hourglass forthis particular administration is running

out. Who knows what we’ll see whenwe have a general election? I imaginethe political landscape will be verydifferent, we may even be talking UKIPand a flat tax”, he remarked.

Adam Craig: Mr Craig then took theopportunity to remind the Summit of avery important forthcoming VATchange which will provide that VAT becharged on a place of consumptionbasis. “In the past we may have beenable to convince ourselves that we’redealing with exempt supplies but itmay well be that Member States beginto take a different view, if they haven’tdone so already, on that particularissue as far as electronically suppliedgambling is concerned. I also think it’sno coincidence that the point ofconsumption tax is supposed to beintroduced at roughly the same timeas this VAT measure will be coming in.”

“Regulation is something we all look forand respect”, he observed. “It strengthensour products and our procedures, butwhen it becomes inconsistent and you’reoperating in multiple jurisdictions itbecomes very difficult.”

Can I ask about competitive threatsin terms of the position in Europe:how do you see the competitiveundermining of the Europeanindustry playing out and from wheredo you think the real threats arecoming?

Adam Craig: “I think that privateoperators may have more courage topursue opportunities in markets thatpublic companies no longer reallyfocus on. The public operators aremuch more interested in focusing theirresources on those jurisdictions whichare taxed and regulated: the USmarket, for example.”

Are we effectively throwing thetowel in on a pan-European regime?

Michael Carlton: Mr Carltonexpressed his regrets that, in hisopinion, regulatory fragmentation willremain throughout Europe; howeverhe remained positive that there is agrowing understanding about sharedissues between licensing jurisdictions.“I think the current economicpressures that individual countries arefacing are forcing them down aparticular route at the moment”, hewarned the Summit. “It’s very difficultto move from that when you haveeconomic demands placed upon youthat force you to act in a certain way. Ithink there is a general understandingbut I don’t think anything will happenover the next five years.”

What significance do you attach tothe UK’s role in this?

Michael Carlton: “I think it’sdisappointing for a country that hasbeen at the forefront of regulation, inthe same way that Gibraltar has for thelast 20 years or longer, to suddenlyturn its back on that successful model.It’s a shame and a lost opportunity.”

Kevin de Haan: “And it’s for no goodreason, that’s the point here”, Mr deHaan agreed. “The UK has had thefreest, most open and most diversegambling market in Europe fordecades and we’ve had the lowestincidence of problem gambling, ofpenetration by criminal elements, andso on. What’s going on here is asolution looking for a problem, and theproblem isn’t there.”

Where do you see the newopportunities in today’smarketplace?

Adam Craig: “Operators will haverelatively unknown new competitors inthe US such as Caesar’s and MGMand so on”, Mr Craig remarked.“Especially for the public operators,the US is going to be very capitalintensive and demand a high degree offocus on our own businesses. We arein a very secure position with thelicences we have in our corejurisdictions, but we are faced with alot of distractions that take away theexcitement of some of the emergingmarkets such as China that someprivately owned companies enjoy andwhich we can’t touch.”

Michael Carlton: Mr Carlton agreedwith Mr Craig in that there are variousopportunities to make emergingmarkets more easily accessible to theincumbent operator. “I think we haveto look towards consumer behaviourand how that’s changed with theintroduction of mobile, for example,which is the latest major opportunity.I’m amazed at the industry and howadaptable and innovative it really is,and I think that as long as we retainthat creativity we can respond to newopportunities. That’s where the growthwill be and we have to take advantageof that.”

Kevin de Haan: “China is a vastuntapped market with huge potentialand if that ever opens up it will changethe landscape beyond recognition”, Mrde Haan added.

Adam Craig: Mr Craig agreed with theimperative to respond to culturalchanges in the marketplace, remarkingthat “our sector is still pushing pokerand slot machines; it’s no wonderwe’ve been taken by surprise by socialgaming. With social, gaming is excitingagain and it’s accessible.”

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

How potent is social gaming tooperators as they diversify intobroader forms of entertainment?

Michael Carlton: “I think it’s one ofthe tools we have to look at”, MrCarlton urged the Summit. “It’s now anatural extension of the ways in whichpeople communicate with one another,just as they do using a telephone orface to face. You can’t ignore it, youhave to embrace it, and the key,although I’m not quite sure what thatkey looks like at the moment, is howyou monetise it.”

Peter Howitt: Tackling the topic from alegal perspective, Mr Howittapproached social gaming in light ofthe approach to categorisation ofgambling as a form of financial service.“With financial services you have atiered approach to a range of activities,it’s not all or nothing, and for thosewho have gone to the expense ofhaving a gaming licence I think beingable to provide the backbone for socialgaming operators would be beneficialto help manage the regulatory issuesconcerning social gaming.”

Kevin de Haan: “We may have asleeping crocodile syndrome herewhere suddenly someone will wake upand snap and we’ll suddenly be stuckwith a load of new proposals”, Mr deHaan agreed. “I think this lack ofunderstanding will pose a problem togambling regulators and we need towatch this space, particularly as socialgaming is something that is attractiveto a younger audience than perhapswe’re used to in conventional onlinegambling. I also think that the way inwhich the industry handles socialgaming is going to be key to thereaction of the regulators. There is nodoubt that there is a huge window ofopportunity here.”

Question from the floor: What is thelikelihood of Europe really engagingwith regulators in formingsomething which resembles a pan-European regulatory regime?

Kevin de Haan: Mr de Haan remarkedthat, in his opinion, the formation of acohesive pan-European regime is a realpossibility, however one that is notgoing to happen for the next five to tenyears. “I think, ultimately, it’s a solutionthat has to be adopted because thisfragmentation cannot go onindefinitely, particularly as theEuropean Union expands.”

What significance do you attach, ifany, to the possibility ofinfringement proceedings againstMember States being relaunched bythe European Commission?

Kevin de Haan: “I would say theyneed to get on with it. They may havebeen announced in October but someof these proceedings have beenrunning for some considerable time. Iknow that it takes a long time forthese things to happen at Commissionlevel but we’re coming now to three orfour months after the announcementand I don’t see any movement. Ifthey’re serious about it, they need todo it.”

Are there any other obvioustechnological leaps that the industryis adopting other than mobile?

Peter Howitt: “The obvious one to meseems to be the increased use of theCloud and what it has brought to theindustry. It is enhancing our ability tocontrol cost and scalability as well asslice and dice data to put it in variouslocations depending upon regulatoryrequirements. It can be hugely costeffective and can have significant taxadvantages depending on where you

put your data packets. There are lots ofthings that you can do with cloudtechnology which can have significantbenefits to the industry.”

Adam Craig: Mr Craig added thatthere are also some quite high barriersto entry in the market and that internetsourced or crowd fundingopportunities are a particularly newand exciting complement to theeGaming industry.

With reference to the 4th MoneyLaundering Directive: howimportant is it that gambling hasbeen brought into the mainstreamthrough inclusion in such regulatorymeasures?

Peter Howitt: “I hope I haven’t comeacross as being too negative becauseoverall I do think it’s a good thing forthe industry”, Mr Howitt enthused.“There are some risks as we’ve seenwith the German e-money exampleand I think operators need to be awareof this. That is why it is important todevelop relationships betweenstakeholders to make sure that we dohave these supranational bodies whocan be responsible for lobbying and forsaying ‘this really is nonsensical’ or‘this could help the industry ifapproached in this particular manner’.It is true that a large part of theapproach to the industry has thus farnot been based on any evidence andwe need to be in a position to educateand guide people towards that end.Due to the evidence based approachthat will be required, bringing eGaminginto the AML fold can only be a goodthing for the future of the industry.”

“China is a vast untapped marketwith huge potential and if thatever opens up it will change thelandscape beyond recognition.”

Russell joined KPMG in 1993 andhas worked for KPMG in the Isle ofMan, Gibraltar, London and Jersey.His client experience encompassesfinancial services,telecommunications, real estate ande-gaming.

Russell also undertakes transactionservices and ISAE3402 work whichincludes acting for clients withrespect to acquisitions, disposalsand flotations; in particular he hasadvised on flotations on the LSE,AIM, Luxembourg and New YorkStock Exchanges. Russell acts for anumber of e-gaming operators andkey service providers to the e-gaming sector in the Isle of Man andGibraltar.

Mr Kelly concluded the day’s events bydrawing a parallel between discussionssurrounding the likelihood of pan-European regulatory cohesion andhis own experiences within thefinancial services industry over pastdecades. “I think I concur with you inthat I wouldn’t hold my breath on theprospect of pan-Europeanharmonisation. If we look at thefinancial services industry, despite theEuropean Commission’scategorisation, we’re still trying toharmonise that industry 30 years onso, as Kevin said, we could well befacing a ten year wait before anymeaningful developments take place.”

Mr Kelly continued in observing thatthis year’s event marked the third in aseries of KPMG eGaming summits inGibraltar, which have swiftly becomesome of the most popular andengaging events in the industrycalendar. “The industry is so fastpaced and so kind to us, really, with itsdifferent innovations and challengesthat putting a programme together isrelatively straightforward”, heremarked, “there is always somethingof great interest to talk about and I amconfident that we will be able to fieldan equally fascinating and expertselection of speakers on topics equallypertinent to the industry, both globallyand domestically, this time next year.”

Mr Kelly then took the opportunity tothank the day’s sponsors - Hassans,Callcredit, Counting House, Continent8 Technologies, Intelligent ID andGibtelecom - for their generosity andsupport throughout the process beforeexpressing his gratitude to thespeakers and panellists who helpedmake this year’s eGaming summit yetanother resounding success. “Finally Iwould like to say a big thank you to myteam at KPMG and at AshgroveMarketing for putting all of thistogether”, he added.

In closing, Mr Kelly took a moment toreiterate KPMG’s commitment toGibraltar and to explain the team’sposition on what he described as “ajurisdiction which remains at theforefront of the eGaming industry bothin terms of the quality of itstechnological infrastructure and e-business community, and the lastingintegrity of its regulatory regime”.

“A lot of you may know that we re-established our offices here in 2008and Micky Swindale has beeninstrumental to our position here overa number of years”, he enthused. “I ampleased to announce that Micky hasbeen appointed as Managing Directorof our Gibraltar practice and will beworking with the support of ourresident team both here and in the Isleof Man. I would like to offer mycongratulations to Micky and mythanks to all of you who here today.We look forward to seeing you all nextyear.”

Closing WordsRussell Kelly Director: Audit & Advisory

KPMG Isle of Man

Russell Kelly Director: Audit & Advisory

KPMG Isle of Man

“The industry is sofast paced and sokind to us, really, withits differentinnovations andchallenges thatputting a programmetogether is relativelystraightforward”, heremarked.

KPMG LimitedTel +350 200 48600www.kpmg.gi

© 2013KPMG Limited, a Gibraltar limited company and a member firm of the KPMGnetwork of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The information contained herein is of a general nature and is not intended to address thecircumstances of any particular individual or entity. Although we endeavour to provide accurateand timely information, there can be no guarantee that such information is accurate as of thedate it is received or that it will continue to be accurate in the future. No one should act onsuch information without appropriate professional advice after a thorough examination of theparticular situation.

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