The french online gambling market: analysis of the draft french gaming law

The French online gaming market is opening up to competition: the French Government is in the process of enacting a legislation liberalising the online gaming market under the pressure of both the European Commission (hereinafter referred to as the “Commission”) and the fast-moving environment on the Internet where online gambling operators are already present and offer games of chance to french consumers.

The present memorandum will briefly summarize the main features of the Draft French Gaming Law (currently under discussion at the French Parliament) and will put a particular emphasis on the following issues:

1. Is the future licensing and tax regime viable?
2. Is France a real opportunity for new entrants?
3. Is the new regime compatible with EU law?

Main features of the Draft French Gaming Law

In order to safeguard social order and to prevent addiction, wagers, winnings and the average rate of return to the players will be limited. In a preventive way, operators will have to insert apparent objective messages on their websites about the prohibition to play for minors and the risks related to gambling activities.

– The opening will be limited to online horse race betting, sports betting and games consisting of shared games which depend on skill, whereby the player, after the intervention of chance, demonstrates his/her will and decides, in relation to the strategy adopted by the other players, to use a strategy which is likely to increase his / her chance of winning (for example online poker);

Thus, lotteries, virtual slot machines, “spread betting”, “betting exchange”, betting on virtual competition and casino games in which consumers play against the bank (roulette, blackjack, etc…) are excluded from the opening since they are considered to be too dangerous in light of maintaining public and social order, i.e. said to be too addictive;

– The online Games Regulations Authority, ARJEL, independent public authority, will be specially created to regulate the remote gambling market. This Authority will be in charge of:

1. Monitoring compliance with the objectives of the policy of games accessible via the internet;
2. Proposing a cahier des charges (list of requirements established by the ARJEL)to the government for each type of license (see below);
3. Preparing the licence request files for online gaming operators and attributing the licenses;
4. Auditing for compliance by operators with legislative and regulatory measures and clauses of the reference terms that they are subjected to;
5. Carrying out surveillance of online operations and participating in the fight against illegal game sites and against fraud; To that end, the ARJEL shall be entitled to block access to illegal websites by a direct injunction addressed to Internet Service Providers as well as to block financial transactions of illegal online gambling operators;
6. Enacting rules regarding the audit of technical and financial data for each online game or bet;
7. Determining, where appropriate, the technical parameters of online games within the framework of rules set by the decrees;
8. Proposing legislative and regulatory modifications to the Government;
9. The license will only be granted to online operators complying with the regulations contained in the cahier des charges setting general requirements for all operators and specific clauses according to each type of licenses, namely sports betting, horse race betting or circle games (such as poker or baccarat);

For instance, all operators will be required to provide information and guarantees concerning their identification, their experience in the gambling industry, the transparency of their shareholding, the measures they will implement to fight against fraud and money laundering, to authenticate online payment, and to protect children or process personal data, etc;

– Licenses will only be granted to operators established in a Member State of the European Union or the European Economic Community. Operators whose headquarters are based in one of the states featuring on the list of non co-operative tax havens made by the Organisation for Co-operation and Economic Development or whose main shareholders are based in one of the States featuring on this, cannot be granted a license to provide their services in France;

– Operators will have to operate from an internet website accessible through a first level domain name with a “.fr” ending;

– All data related to gambling activities, all data exchanged between players and operators and data linked to the identification of gaming or betting events, should be available on a mirror server based in France and eventually provided through an operator representative in France;

– The license will be granted for a period of five years. It is renewable. It is not transferable. A specific agreement will be requested for each type of games operated by the licensee;

– The tax rate will be calculated on the amount of the wagers: the total sums outlaid by players and punters. The winnings, invested by the latter in the form of new bets, will be equally taxed. The taxation is set according to the following scheme:

* 8,5% for sports betting;
* 15,5% for horse racing betting;
* 2% for online poker.

Once the Draft French Gaming Law is enacted, the ARJEL will need another few months to be efficient and begin to grant licenses. According to Eric Woerth, France will not start granting online betting licenses in the beginning of 2010 as initially contemplated. Due to a delay in the legislative process caused, among other things, by the Commission’s detailed opinion, rendered on June 8th, 2009, the Draft French Gaming Law is unlikely to enter into force as from January 1st, 2010. In any event, it should enter into force by the beginning of the World Football Cup in South Africa at the latest.

Is the future licensing and tax regime viable?

The Draft French Gaming Law provides that taxation shall be based on wagers rather than on gaming gross revenue; the latter being much more adapted especially for poker operators. In application of the above, imposing a 2% tax on global wagers would amount to tax around 60% of their gross revenue.

It is likely that this will be considered as very little incentive for most operators to offer their services on the French online gaming market. In addition, this system could be considered as a barrier to the freedom to provide services within the EU.

Is France a real opportunity for new entrants?

Following completion of the contemplated reform, France should remain an attractive market for new entrants.

However, several issues will have to be addressed in order to improve the attractiveness of the French online gaming market.

First, as noted above, the proposed tax regime is likely to constitute a deterrent for foreign online gaming operators willing to penetrate the French online gaming market.

Second, the requirement to designate a fiscal representative in France seems to be disproportionate in the light of the aim pursued: in this regard, an appropriate system of ex post surveillance/notification requirements would be more suitable to attain the legitimate aim pursued, namely an efficient tax collection.

Third, operators established in “proper jurisdictions” outside the EU, such as Alderney or the Isle of Man, should be allowed to apply for a license since their home jurisdictions offer an equivalent level of protection for players.

Is the new regime compatible with EU law?

Following the notification (in accordance with Directive 98/34/CE) of the Draft French Gaming Law, the Commission rendered its detailed opinion on June 8th, 2009.

The French authorities are urged to clarify and amend some of the provisions of the Draft French Gaming Law in order to ensure its compatibility with EU law.

* The first objection relates to Article 16 of the Draft French Gaming Law and the system put in place for granting licenses. According to the Commission, this rule restricts the freedom to provide services (Article 49 of the EC Treaty). To be compatible with European law the French authorities are requested to clarify to which extend they will take into account the requirements of the legal system under which the operator is already licensed (home country).

* The second objection pertains to Article 52 of the Draft French Gaming Law which provides for an obligation for all licensed operators to obtain consent from the operating right owner of the sport event. According to the Commission, such a requirement could constitute a restriction to the freedom to provide services, as the betting offer would become less attractive.

* The third remark questions the justification of Article 8 of the Draft French Gaming Law: French Government has to prove the necessity of this restriction. According to this provision, a maximum payback ratio is foreseen, whereby the Commission considers this might constitute an infringement to the freedom to provide services. In this respect, the French authorities are urged to adduce evidence concerning the link between the rate of return and fight against addiction.

* The last objection is related to Article 39 of the Draft French Gaming Law which provides for an obligation to have a fiscal representative established in France. Such a requirement might constitute a restriction to the freedom to provide services, notwithstanding the contention of the French Government that this provision is aimed at ensuring an effective fiscal supervision. Such a contention is not acceptable (see Commission v. France judgement C-334/02) considering that such an obligation is disproportionate and can be replaced by less restrictive measures.

The Belgian House of Representatives approved the Belgian Draft law ignoring the Commission’s opinion

On July 16th, 2009, the House of Representatives (Lower Chamber of the Belgian Parliament) has approved the Belgian Gaming Draft law (hereinafter referred to as the “Draft law”). The Draft law must still be approved by the Senate (Higher Chamber of the Belgian Parliament). The Senate’s discussion of the Draft law is scheduled for the beginning of the new parliamentary year in October, 2009.

On July 16th, 2009, the House of Representatives (Lower Chamber of the Belgian Parliament) has approved the Belgian Gaming Draft law (hereinafter referred to as the “Draft law”). The Draft law must still be approved by the Senate (Higher Chamber of the Belgian Parliament). The Senate’s discussion of the Draft law is scheduled for the beginning of the new parliamentary year in October, 2009.

The underlying principle of the Draft law is the prohibition of exploitation of games of chance. However, the aforementioned Draft law derogates from the above-mentioned prohibition by a licensing system. Due to the expansion of the scope of application of the Draft law, bets (whether fixed-odd or mutual), games of chance offered via the Internet and gaming media should be subject to a mandatory licensing regime. The Belgian Gaming Commission should be the sole competent administrative authority to grant licenses under the future legal framework.

As regards online gambling, all operators, who would like to organise and exploit games on the Internet, should also be exploiting such games offline in order to obtain the corresponding license under the prospective legal framework.

The European Commission has rendered, on June 29th, 2009, its detailed opinion on the Draft law whereby it requested an explanation from the Secretary of State Carl Devlies on two features ((i) licensing regime for online gambling operators and (ii) the need to take into account the conditions fulfilled in the home Member State) of the Draft law.

Consequently, serious doubts persist as to the compatibility of such a provision with the freedom to provide services guaranteed by Article 49 of the EC Treaty. In this regard, it seems that such a provision is justified neither on the grounds of treaty-based justifications nor on the basis of mandatory requirements. Suffice it here to point out that there are less stringent measures to provide for adequate protection of players.

Furthermore, the requirement that the licensee must first have an offline license and the server must be located in Belgium in order to obtain a license to operate games on the Internet in Belgium is maintained (Article 25 of the Draft law) by the current version of the Draft law, contrary to what one might have expected following the Commission’s detailed opinion which strongly objected to this feature of the Draft law. It is worth recalling that Ulys Law Firm, prior to the Commission’s detailed opinion, had expressed its concerns about the compatibility of this feature with EU law.

As regards the need to take into account the conditions fulfilled in the home Member State, when it comes to assessing the conditions that must be met to obtain a license to operate games on the Internet in Belgium, the Draft law’s silence on this point remained unchanged notwithstanding the Commission’s criticism. Once again, it is worth recalling that Ulys Law Firm, prior to the Commission’s detailed opinion, questioned the validity of such an approach in the light of the so-called conditional recognition principle.

Consequently, it is highly likely that the Draft law will be amended by the Senate in order to take into account the European law.

Momentum growing for a shift in US policy

There are now 50 members of Congress who have signed on as co-sponsors of the Internet Gambling Regulation, Consumer Protection and Enforcement Act (H.R. 2267), a legislation introduced by Rep. Barney Frank (D-MA), chairman of the House Committee on Financial Services.

Jeffrey Sandman, spokesperson for the Safe and Secure Internet Gambling Initiative, said that momentum is growing for a shift in US policy and a rewrite of US Internet gambling laws.

“We also expect an increased spotlight on Internet gambling as a way to augment federal revenues and help cover the cost of necessary policy initiatives,” he said.

Among the bipartisan group of 50 co-sponsors are many senior ranking representatives, including George Miller (D-CA), chairman of the Committee on Education and Labor; John Conyers (D-MI), chairman of the Committee of the Judiciary; Charles Rangel (D-NY), chairman of the Committee on Ways and Means; Edolphus Towns (D-NY), chairman of the Committee on Oversight and Government Reform; Pete King (R-NY), ranking member of the Homeland Security Committee; and Ron Paul (R-TX), vice-chairman of the Oversight and Investigations subcommittee.

The list of supporters will continue to grow as more representatives are educated on the subject and increasingly hear from their constituents that Internet gambling regulation presents the only viable way to protect consumers, since attempts to prohibit the activity have completely failed, said Sandman.

Rep. Frank’s bill would establish a framework to permit licensed gambling operators to accept wagers from individuals in the U.S. and mandates a number of significant consumer protections, including safeguards against compulsive and underage gambling, money laundering, fraud and identifying theft.

Additional provisions in the legislation reinforce the rights of each state to determine whether to allow Internet gambling activity for people accessing the Internet within the state and to apply other restrictions on the activity as determined necessary. The legislation also would allow states and Native American tribes with experience in regulating gambling to play a role in the regulatory process.

It is estimated that collecting taxes on regulated Internet gambling would allow the US to capture much-needed revenue in an amount ranging from $48.6 billion (excluding online sports gambling) to $62.7 billion (including online sports gambling) over the next decade.

Judgement goes in favour of Amalgamated Racing

Alphameric Plc has shared that the Court of Appeal dismissed an appeal against a High Court verdict related to its joint venture Amalgamated Racing Ltd.

Last year, Amalgamated successfully defended proceedings in the High Court over allegations that it had acquired certain media rights by violating UK competition law and the EC Treaty, Alphameric said in a statement. The claimants petitioned against the High Court’s decision and the matter came before the appeals court in May. Alphameric is a 50% shareholder in Amalgamated, its joint venture with Racecourse Media Services Ltd.

Bookmakers William Hill, Ladbrokes and Bookmakers’ Afternoon Gaming Services had claimed that Turf TV, run by Alphameric Gaming and Racecourse Media Services Ltd (RMS), itself owned by companies representing 31 of Britain’s 59 racecourses, was the product of an illegal cartel under both UK and European competition law. It has been highlighted that the bookmakers themselves have an interest in SIS FACTS, the successor to SIS, which held the sole rights to TV within licensed betting offices for 20 years until 2007. The bookmakers also had concerns over Turf TV’s pricing structure.

Betfred, which was involved in the 2008 case, settled out of court and in April signed a five-year agreement with Turf TV.

Produced for licensed betting offices in the United Kingdom and the Republic of Ireland, The Turf TV betting channel features exclusive live coverage from most of the premier events and festivals in the British Horse Racing Calendar, selected international racing events and is coupled with a complimentary suite of virtual events.

Betfair challenges Dutch Payment Blocking in Court

This article was previously published in IGamingBusiness.

BETFAIR, one of the world’s leading online betting companies, has started legal action against the Dutch government in a court case which could result in a claim for damages running into millions of Euros.

The decision follows a letter from the Dutch Ministry of Justice urging Dutch banks to terminate their relationships with online gaming operators. The letter implies that facilitating transactions between Dutch residents and online operators is illegal. If the banks comply with the Ministry’s request, this would block access to the services of Betfair and many other gaming operators licensed in other EU-Member States.

Background of the payment blocking

The payment blocking is one of the latest battlefields for remote operators in the Netherlands. The first battle revolved around injunction proceedings instigated by the Dutch sports betting and casino monopolists (De Lotto and Holland Casino) against several online operators. These operators were ordered to cease offering gaming to Dutch residents. The operators all claimed that the Dutch gaming policy violates European law, and in the main proceedings between De Lotto and British bookmaker Ladbrokes, the highest court for civil matters referred questions to the European Court of Justice (ECJ) in June 2008. The second battle took place in the administrative courts, following rejected applications for Dutch gaming licences. Before the highest administrative court, Betfair already gained a preliminary referral to the ECJ in May 2008. Other measures that were announced in the wake of the transaction blocking are a media blocking and the announcement that the Ministry filed reports against at least three online operators with the Prosecution Department, which may eventually lead to criminal proceedings.

Online gaming operators are not alone in their fight against the Dutch gaming policy: the European Commission asked the Dutch authorities in February 2008 in its Reasoned Opinion to alter several provisions of the Gaming Act, because it considers the sports betting monopoly to violate European law.

The Ministry decided not to follow the demands of the European Commission. Instead, the Ministry of Justice decided to put its foot down and announced several measures to counteract online operators, amongst which the transaction blocking. Boards of banks and payment service providers are told that their institutions commit illegal activities by facilitating transactions to online operators. In its letters to the financial institutions, the Ministry asks them to make sure that the relationships with the industry are terminated: this has resulted in at least on bank to cease providing transactions to the industry. It must be noted that the authorities did not introduce new regulations to implement this payment blocking: instead, the general prohibition on ‘promotion of illegal gambling’ is said to include a prohibition on providing financial transactions to (illegal) operators.

Critique on Payment Blocking

Besides the European Commission’s critique on the sports betting monopoly and the referrals from Dutch courts to the ECJ, signs are appearing in other EU-Member States that these payment blockings themselves are incompatible with European law. In the national arena, the far-stretching interpretation of the Dutch regulations to also include the prohibition on providing transactions is criticized by lawyers and bankers alike. We elaborate more on these arguments hereunder.

European critique on similar measures

France received a detailed opinion from the European Commission in 2007 following a draft decree that contains a payment blocking. Germany implemented the Inter State Gambling Treaty in January 2008, which contains (amongst other things) a payment blocking. This treaty (a federal law) was subsequently criticized by the European Commission in a Letter of Formal Notice, inter alia for being a restriction to the free movement of capital, guaranteed by article 56 of the EC-Treaty.

Although the critique against the German and French payment blockings was a direct result of new (draft) regulations, the European Commission can also take actions against the Dutch payment blocking, even though it is the result of a new interpretation of the existing regulations. The European Commissioner for the Internal Market, mr. Charlie McGreevy, was quoted in the largest Dutch newspaper ‘de Telegraaf’ as stating that this measure violates the European Treaty. According to Commission spokesman Oliver Drewes, McGreevy requested the services involved to carry out an investigation into the bank embargo. Drewes also stated that the bank embargo will be included in the currently pending infringement proceedings.

Critique on the interpretation of the Gaming Act to include a transaction blocking

In legal literature, the Ministry’s position that the current regulations forbid providing transactions is criticized: the parliamentary history of the Gaming Act does not mention financial transactions, and from the explanatory memorandum to the Gaming Act, it is clear that the provisions were actually intended for, inter alia, intermediaries that sold participation slips in foreign lotteries. It does not seem to include a prohibition to facilitate payment transactions.

The Dutch Banking Association (NVB) stated that it does not agree with the Ministry’s position. It considers the interpretation of the Gaming Act wrong, and stated the Ministry should first obtain a criminal conviction before banks could be asked to implement the payment blocking. The NVB also stated that banks fear claims if they cease servicing these particular clients. Nevertheless, at least one bank has complied with the Ministry’s demands.

The Minister himself even made statements in parliament that can be explained as saying that the current regulations do indeed not forbid the provision of financial transactions. He stated that if his letters to the banks do not have the desired effect, he will introduce legislation similar to the American UIGEA. If the current regulations would already prohibit financial transactions to operators, such new legislation would obviously be redundant.

Betfair’s actions

Betfair is arguing that the Dutch Ministry of Justice commits a tort, under Dutch law, by making the request contained in its letter. Betfair is arguing in these proceedings that the Dutch government, by taking such a step, is acting in breach of European law (ie in breach of the principles of the freedom to provide services in the EU and the free movement of capital in the EU).

This civil action is aimed at obtaining a declaratory judgment to the effect that the recent actions of the Ministry of Justice (financial blocking by calling for a boycott by financial institutions) and the underlying policy are unlawful. Betfair may then continue the proceedings with a claim for damages.

In addition, as European law is relevant to this case, Betfair has also made an official complaint to the European Commission, which may lead to separate infringement proceedings against the Netherlands. Betfair also urged the Commission to proceed with its current infringement proceedings against the Netherlands relating to the sports betting monopoly.

What’s in the Crystal Ball?

Betfair is betting on two horses: the law suit against the State and the complaint with the European Commission. It will be an interesting race that may end with one or both of these horses ending up in the highest European Courtroom in Luxemburg.

The lawsuit

It will be hard for the civil courts to ignore the Dutch referrals that are currently pending before the ECJ. If the judges are unsure on the effects of European law on the payment blocking, this may lead to a third set of preliminary questions that specifically target the lawfulness of the payment blocking.

If the payment blocking is considered unlawful by a civil court, this will strike at the roots of the gaming policy. This may lead the Ministry to go for an ‘all or nothing’ strategy, which will encompass criminal prosecution. Another option might be an increase of the Ministry’s current efforts to create legal online gaming opportunities: an investigation into the regulation of online gaming and its possible licensing procedure is announced. The outcome of this investigation may lead to licensing opportunities for the industry.

The complaint

If the European Commission acts upon this complaint, it is possible that the complaint will boost the infringement procedure against the Netherlands, which will – according to EC spokesman Oliver Drewes – also include the payment blocking. It is generally expected that the current Commission will not proceed with the infringement proceedings. It will depend on the next Commission – especially on the Commissioner for the internal market – whether or not the Netherlands will be dragged before the ECJ.

Justin Franssen

Aernout Kraaijeveld