The European commission warns France against the blocking of financial flows from online gaming

On November 30, 2007, France notified, on the basis of directive 98/34/EC laying down a procedure for the provision of information in the field of technical standards, the draft decree taken pursuant to the law on the prevention of the delinquency which requires financial institutions to block transfers of funds from unauthorized gambling websites.

Blocking financial flows from unauthorized gambling websites

The draft decree thus provides, through provisions which will be codified under Articles R. 565-1 to R. 565-4 of the monetary and financial code, that the minister of finances and the minister of interior draw up a list of persons identified as organizing a prohibited gaming and betting activity on the French territory for which a prohibition to carry out transfers of funds has been decided. This system would prevent persons who play illegal games to receive their profits.

However, a departure from this prohibition is envisaged when the financial institutions will not have sufficient information to identify the unauthorized online gambling operators. Moreover, the decree provides the methods according to which the ministers will eventually accept the requests of putting aside the prohibition which could come from the persons organizing unauthorized gambling activities, when the latter prove that certain transactions they initiate are realized within the framework of operations which are not prohibited on the French territory.

European commission opposed to the project

The European commission has just addressed, last February 29, a detailed opinion to France, thus prolonging standstill period to March 31, 2008.

This prolongation means that France is not authorized to adopt the decree before the expiry of this date. France must during this time submit a report to the European commission to explain how it will take into consideration the detailed opinion (withdrawal of the text, justification of its preservation or amendments to certain provisions in order to make it compatible with the rules governing the internal market).

The Commission will then appreciate the actions to be undertaken against France according to its response, by indicating if the measures may eliminate the barriers to free movement of goods, freedom to provide services or freedom of establishment of the operators of services which would have resulted from the adoption of the text, or if the justification put forward for its preservation proves to be acceptable.

Free movement of capital in question

The European commission considers that the draft decree is a restriction of the free movement of capital principle enshrined in Article 56 of the EC Treaty.

In order to comply with EC law, these restrictions must be justified by reasons of overriding general interest and be:

•- Non discriminatory

•- Proportionate with this objective

•- Necessary to achieve the objective pursued: in this case, France puts forward an important danger for public order (money laundering) and for social order (risk of addiction).

It should underlined that the European commission has just opened an infringement procedure against Germany, which treaty relating to gambling that came into effect on January 1, 2008 also implements measures to block the transfers of funds from and to unauthorized gambling wesbites.

For the Commission, this system does not comply with Article 56 (2) of the Treaty which prohibits restrictions on payments.

The Commission also considers that when a profit is due to the player, the transaction is a transfer of money necessary for the execution of a service, so that its prohibition is also a restriction to the free movement of capital principle provided by Article 56 (1) of the EC Treaty.

The Commission had already warned Germany by the sending of a detailed opinion in May 2007, which is similar to the one which was sent to France, against the potential unlawfulness of such measures. However, the justifications put forward by Germany did not appear to be acceptable.

What next?

If France decides to ignore the detailed opinion and adopt the decree, the Commission could launch a new infringement procedure against this Member State, which thus would come in addition to the pending one.

Nevertheless, such evolution seems very improbable insofar as France is currently in negotiations with the European commission to suggest a model for a regulated opening-up of is online gambling market.

A meeting must thus take place in March between them which could lead the Commission to accept the fact France blocks financial flows initiated by operators which do not hold a French license or which are not recognized by France, this in exchange of a regulated opening-up of its online gambling market. In short, these measures would be applied to authorized European operators but to unauthorized operators only…

Not to forget that France will access the presidency of the European Union next July and will certainly wish by then to have put a term to its conflict with the European commission.

To be continued…

New Decision by the BGH (German Federal Court of Justice) on Betting Law: Legal History or U-Turn?

On Monday 14 February, the I. Zivilsenat (first division for civil matters) at the Bundesgerichtshof (German Federal Court of Justice) dismissed in four cases action filed by state-run gambling providers (among others Westlotto) against private sports betting providers holding GDR and EU licences (among others bwin). In its press release, the BGH headlined: “Old cases of offering and operating sports bets do not constitute a violation of competition”. Initial press reports state that “the flood of law suits against providers of sports bets was thrown out on Thursday by the Bundesgerichtshof (BGH)”.

In its 2004 decision, the previous instance, the OLG (Higher Regional Court) of Hamburg had made reference to the so-called “Schöner Wetten“ decision of the BGH and had stated in the headnote:

“The only basis for the evaluation of the question of a violation of competition is the lack of a domestic licence. The question as to whether the applicable provisions of the laws of the respective Federal State are unobjectionable under European law and/or whether the process of issuing licences is actually being conducted free of discrimination, is not decisive, at least from the point of view of competition law. (Court’s headnote).”

Now, in its most recent press release dated 14 Feb. 2008, the BGH states as follows:

“(…) the previous instances had held that the prohibition of illegal gambling, enforced by penalties, does not violate European Community law nor German Constitutional Law. (…) The Bundesgerichtshof has not assented to this evaluation. The landmark decision by the Bundesverfassungsgericht (Federal Constitutional Court) dated 28 March 2006 (1 BvR 1054/01) is said to mean that the state betting monopoly in Germany, in the legal and actual form it had taken during the decisive period of time before 28 March 2006, represented a disproportionate interference with the freedom of profession of persons interested in professional activities of this kind, this therefore being inconsistent with Art. 12 paragraph 1 GG (Grundgesetz – German Constitution). At the same time, it represented an unjustified restriction of the freedom of establishment and the free movement of services guaranteed under Art. 43 and 49 EC. Due to the state betting monopoly’s inconsistency with the Constitution and with Community law during the period of time before the judgment of the Bundesverfassungsgericht on 28 March 2006, Section 284 StGB (Strafgesetzbuch – German Criminal Code) could not be applied to the offering of sports bets in the cases to be decided here, where acts carried out in the years 2003 to 2005 are to be considered (so-called “old cases”).”

This means that, while the BGH in the “Schöner Wetten” decision in 2004 expressly demanded a German betting licence in order to exclude the applicability of Section 284 StGB, it now abandons this principle and turns to Community law.

Thus, if the new state treaty on gambling also violated Community law, an EU licence would be sufficient to exclude the applicability of Section 284 StGB, and thus a violation of competition. And a lot speaks for this inconsistency with EU Community law:

In the letter to the German Federal Government initiating infringement proceedings against the German Federal Government, the EU Commission states among other points that Sections 284, 285 and 287 violate the free movement of services guaranteed under Art. 49 EC.

Furthermore, a violation of the German gambling monopoly against Art. 43, 49 EC is being examined by the European Court of Justice, after referral of this question to the ECJ by the VG (Administrative Court) of Schleswig in a decision achieved by the law firm Hambach & Hambach.

The new decision by the BGH has far-reaching significance beyond competition law and beyond the so-called “old cases“. The highest German court for civil matters unambiguously subjected the central provision of the entire gambling law to the priority of application of Community law. This also is of decisive importance for the legal situation under the new state treaty, a fact which has also been confirmed by the European Commission in its most recent letter.

Hambach & Hambach Law Firm obtains referral to the ECJ

As already mentioned in our press release of 31 January 2008, the Administrative Court of Schleswig-Holstein (VG Schleswig-Holstein) decided to stay the main proceedings brought by Hambach & Hambach Law Firm, its subject matter being the validity of a European license for a sports betting offer in Schleswig-Holstein and to refer the relevant Community Law questions for a preliminary ruling by the ECJ.

Background on the Administrative Court of Schleswig-Holstein’s Gambling Monopoly Decision of 30 January 2008

In the course of the oral hearing the Administrative Court of Schleswig Holstein already voiced its legal opinion that a sports betting monopoly can only be justified by the goal of fighting compulsive gaming, if all legal provisions and factual regulations of a Member State with respect to the entire gaming market – and not only to those concerning the sports betting- and lottery monopoly – are made the subject of the examination as to a systematic and coherent gaming limitation. The judge drew a very graphic comparison on this: In the case that a state ban or monopoly on wine and beer were to be justified by the dangers of alcoholism, it would hardly be coherent, if other alcoholic beverages such as Schnapps would keep being available over the counter.

This courageous court decision shortly after the coming into effect of the Interstate Treaty on Gambling shows, that the doubts already expressed by the jurisprudence in several earlier decisions to stay proceedings (VG Stuttgart, decision of 24 July 2007, VG Gießen, decision of 7 May 2007, VG Köln, decision of 21 September 2007) with regards to the conformity of the former legal situation with Community Law apply to the new Interstate Treaty on Gambling as well.

As soon as the end of last year (decision of 8 November 2007) the Administrative Court of Appeal of Hesse (Hessischer Verwaltungsgerichtshof (VGH)) had suggested that its current jurisdiction, which declared the hitherto existing measures to be sufficient, was solely based on the transition period granted by the Federal Constitutional Court’s (Bundesverfassungsgericht) sports betting decisions until 31 December 2007. The pending proceedings however are stayed, with regards to the legal questions already referred, since, in the view of the Administrative Court of Appeal, the answer to these questions referred and thus the decision on the requirement of an “overall consistency” in particular is of crucial importance.

The Administrative Court of Appeal points to the inconsistency of the state objective invoked as a justification for the state monopoly on the one hand and the actual conduct of the state as gaming operator on the other hand and cites the EU-Commission’s letter of formal notice in the infringement proceedings no. 2003/4350, para. 38. One could therefore determine that, in defiance of the increased addiction potential of casino games, the German authorities kept pursuing expansionary politics in this area. The number of licensed casinos for example had expanded from 66 in the year 2000 to 81 in the year 2005.

Regarding the fact, that the requirements of the ECJ are not fulfilled despite the Interstate Treaty on Gambling coming into effect, the court explains:

“Regarding the question of a coherent and systematic limitation of gambling, the court is therefore not capable to find that the ECJ’s requirements for enacting a valid limitation were complied with. A holistic view of all licensed and permitted offers of games of chance is obviously nonexistent. Only such a holistic view can enable the legislator called upon to comprise the perceived dangers of gaming- and gambling addiction for the individual and society and to provide the necessary remedies.”

Moreover, the Administrative Court of Schleswig explicitly explains that it does not share the opinion expressed by the Administrative Court of Appeal of Hamburg (OVG Hamburg) in its decision of 9 March 2007, but instead acted on the assumption that the ECJ’s decision of 9 March 2007 did not result in a break-up of the market into different gambling sectors. Looking at a single gambling sector one did not only have to consider prevalent sports betting but the other various forms of gambling as well. In this respect the Administrative Court of Schleswig refers to the EFTA Court’s judgement of 3 May 2007 (Landbrokes Ltd. ./. Norway; case E-3/06) and thus corrects a frequently observed misinterpretation of this judgement. This decision states that the national court must “decide on the consistency of the gaming policies”.

Amongst others, in its decision the EFTA Court addresses the question, whether it was compatible with the freedom to provide services, that a Member State provides for a monopoly system for certain gaming sectors. The Court formulates a very general answer to this, stating that a limitation of the freedom to provide services is admissible, if it is established for reasons of overriding general interest and the measures taken to achieve this objective are adequate, consistent and do not exceed the necessary extent for its implementation. The interesting question with regards to the German legal situation, that is, whether a regulation of a Member State can still be regarded as a coherent and systematic measure to allow for a limitation of the freedom to provide services, if only few gaming sectors are affected by the state monopoly, whereas those games with high addiction potential are liberalised, was not answered by the EFTA Court. The EFTA Court merely declares that, with regards to the examination of Adequacy and Consistency of a measure, it was up to the national court to assess the consistency of the gaming policies (para. 52). Moreover, the necessity of a state monopoly could be at stake, if there was only a very low protection level. The national court could use the number of licensed gambling possibilities and types to determine the existing level of protection. In particular, the number of gambling offers per week/day, the number of outlets, sales- and marketing strategies and the development of new games had to be taken into account for the assessment (para. 60). From these explications one can understand that the national court should assess the consistency and necessity of the given regulations applying a holistic view.

With regards to the fact that the diverging directions of statutory provisions in Germany are attributed to differing legislative authority the Administrative Court of Schleswig-Holstein explicates:

“In the opinion of the chamber federal particularities regarding legislative authority of the Federation and the states cannot justify a state monopoly applying to one sector of potential games of chance, especially since Art. 74 para. 1 no. 11 of the Constitution provides for the federal legislator’s concurrent legislative authority on sports betting and lottery matters.”

It was this deliberation that caused the Administrative Court of Schleswig-Holstein to submit this question, which explicitly includes that the diverging regulations are incoherent with regards to the danger of addiction and are attributed to the diverging legislative authority of the Federation and the states:

“Is Art. 49 EC-Treaty to be interpreted to the effect that it conflicts with a national state monopoly on the operation of sports betting and lotteries (with more than minor addiction potential) justified by the need to fight compulsive gaming, if other games of chance with considerable addiction potential may be offered by private service providers and the different statutory regulations regarding sports betting and lotteries on the one hand and other games of chance on the other hand are based on the differing legislative authority of the federation and the states?”

In case this question is answered in the affirmative by the ECJ the Administrative Court of Schleswig-Holstein asks for an additional ruling on the two following two questions:

c) Is Art. 49 EC-Treaty to be interpreted to the effect that it conflicts with a national regulation that leaves the granting of a license for the operation and the transfer of games of chance to the licensing authority’s discretion even in case that the statutory requirements for granting such a license are fulfilled?

d) Is Art. 49 EC-Treaty to be interpreted to the effect that it conflicts with a national regulation that prohibits the operation and the transfer of public games of chance via the internet, in particular, if – although limited to a transition period of one year – the operation and the transfer via the internet complying with youth- and gamer protection provisions is permitted in order to observe the principle of proportionality and to allow two commercial gaming agents, who had been operating via Internet so far, to adapt to the distribution channels to be permitted by the Interstate Treaty?

The Administrative Court of Schleswig-Holstein has thus already suggested which steps it is going to take in case that the state monopoly is declared illegal. For, even if an online sports betting operator is in principle capable of obtaining a license, it is of material importance whether the decision to grant a license is left to the authority’s discretion or if the latter must grant the license provided that all requirements are fulfilled. Following the European Commission’s deliberations on this issue, a decision based on the authority’s discretion is probably going to pose the great risk of discriminatory decisions. The same applies for the transition period for internet offers, which does first and foremost boil down to privileging German operators and thus constitutes a form of discrimination as well.

In a next step the Hambach & Hambach law firm is going to prepare a written opinion regarding the questions referred to the ECJ and is full of expectation as regards to the ECJ-proceeding.

Commission enquires about Swedish poker

On 31 January the European Commission sent an official request for information to Sweden. This investigation targets various issues relating to poker and tournaments.

In Sweden, poker games used to be exclusively offered in “offline” casinos, but in 2006 ,Svenska Spel the state gambling monopoly was granted a license for online poker.

At the same time other EU licensed operators were banned from offering online poker games and tournaments in the country. The national legislation sets restrictions and criminal sanctions for promoting and providing online poker even when providers a duly licensed in another Member State.

In addition, Svenska Spel uses very aggressive advertising methods and practices very low rakes compared to the rakes offered by average operators.

The official request for information from the European Commission, is the second infringement procedure opened against Sweden, since in April 2006 the Commission launched a similar procedure concerning the sports betting market. Further to this first infringement procedure the Swedish government had set up a committee to review Swedish gambling legislation.

In the same way as it did for the betting market, the commission will research if the restrictions placed by Sweden on online poker operators, are in conformity with article 49 of the EU Treaty, and whether the general interest objectives are consistent and systematic.

According to a consistent case law from the ECJ; Member States cannot invoke the need to restrict its citizens’ access to betting services if at the same time it incites and encourages them to participate in State lotteries or games of chance which benefit the States finances.

For more information:

http://europa.eu/rapid/pressReleasesAction.do?reference=IP/08/118&format=HTML&aged=0&language=EN&guiLanguage=en

A Black Day for the new German State Treaty on Gambling

The Verwaltungsgericht (Administrative Court) of Schleswig – like the EU Commission -thinks that EU laws are being violated and has decided to refer questions relating to European law issues in the context of the new sports betting monopoly to the ECJ.

The 30th day of the new year 2008 was, from the legal point of view, definitely anything but a good day for the advocates of the State Treaty on Gambling, which is only a few weeks old. This is because on Wednesday this week, the young Treaty was not only sharply attacked by the European Commission; the VG of Schleswig – like the EU Commission – also thinks that EU laws are being violated and has decided to refer questions relating to European law issues in the context of the new sports betting monopoly to the ECJ.

The hearing in Schleswig pertained to the law suit filed by an online provider of sports bets based in Gibraltar who – represented by Hambach & Hambach Law Firm – is looking for the acknowledgement of his European licence for the German Federal State of Schleswig-Holstein as well, as he can invoke the European freedom to provide services.

The background: According to the European Court of Justice, the freedom to provide services also applies for offers provided on the gambling market. However, restrictions to this freedom are possible, provided they are aimed at pursuing general interest objectives and provided the measures taken are suitable and proportionate. The Federal State of Schleswig-Holstein invokes the objectives stipulated in the State Treaty on Gambling, i.e. the combat of gambling addiction and the protection of minors. The private sports betting company replies that the State Treaty on Gambling above all is intended to safeguard the Federal States’ fiscal interests, and thus cannot create a consistent and systematic regulation. The area of slot machines in particular, which is especially relevant with regard to addiction issues, is not affected by the new regulation. Even when looking at the area of sports betting in isolation, the regulation lacks consistence, as (Internet) horse race betting continues to be liberalised under German Federal legislation. Also, according to a current survey by the Deutsche Hauptstelle für Suchtfragen (German Institution for Addiction Issues, Jahrbuch Sucht 2008), the addiction dangers of lotteries is 0.0%. Lawyer Ms. Münstermann states that “a monopoly can hardly be justified by reasons of player protection if the danger in the monopolised areas is close to zero, and if at the same time gambling offers which actually do present dangers are being liberalised.” Lawyer Dr. Wulf Hambach adds “The referral to the ECJ is a consistent and correct decision by the VG of Schleswig, and is definitely in our client’s best interests.”

The VG of Schleswig asks the ECJ whether consistent and systematic restrictions of the sports betting market are possible, when areas which are relevant with regard to addiction are not included in the scope of application – as is the case with the State Treaty on Gambling:

“The Chamber has expressed legal concerns as to whether the objective of preventing gambling addiction and protecting minors – on which the State Treaty between the Federal States is based – may lawfully exclude private providers from the area of lotteries and sports bets only. Other forms of gambling, for instance slot machines, which are regulated by Federal statutes, are not subject to such restrictions.”

(Source: Press release of the VG of Schleswig dated 30 Jan. .2008)

The concerns expressed by the VG of Schleswig are obviously shared by the European Commission, which makes the following consideration in its press release dated 31 Jan. 2008:

“However, it should be noted that in Germany horse race betting on the Internet is not prohibited and slot machines have been widely expanded. Moreover, advertising of games of chance by mail, in the press and on radio is still permitted.

The European Court of Justice has previously stated that any restrictions which seek to protect general interest objectives, such as the protection of consumers, must be “consistent and systematic” in how they seek to limit activities.”

(Source: Press release of the Commission IP/08/119

Link: http://europa.eu/rapid/pressReleasesAction.do?reference=IP/08/119&type=HTML&aged=0&language=EN&guiLanguage=en)

This is a body blow to the State Treaty on Gambling which will – only one month after it has come into force – not only occupy the European Commission in infringement procedures, but also the ECJ due to the referral by national courts. The 30 Jan. 2008 will probably not have been the last Black Day for the young monopoly. It may, however, be the day which heralded the beginning of the end of the new State Treaty on Gambling.