Striking Developments in the Italian Gaming: Market Liberalisation Mission Accomplished

Undoubtedly the last four month were the busiest ever in terms of striking developments in the Italian gaming market. Such a boost to an otherwise traditionally patchy and slow-paced regulatory process was due to the combined effect of tragic events (the earthquake that rocked a Central Italy historic city called L’Aquila last April) and the Treasury’s permanent hunt of fresh taxable revenues to heal the Budget deficit.

Undoubtedly the last four month were the busiest ever in terms of striking developments in the Italian gaming market. Such a boost to an otherwise traditionally patchy and slow-paced regulatory process was due to the combined effect of tragic events (the earthquake that rocked a Central Italy historic city called L’Aquila last April) and the Treasury’s permanent hunt of fresh taxable revenues to heal the Budget deficit. These two factors together led to the completion of the domestic gaming market liberalisation process the Italian authorities had begun in the summer 2006.

Soon after the L’Aquila quake, the Berlusconi cabinet pledged to quickly rebuild the town by launching a highly-prioritised, very ambitious and predictably expensive reconstruction plan whose exceptional funding instruments were identified in a governmental emergency decree dated 28 April 2009 (“the Abruzzo Decree”) promptly converted with a few amendments by the Parliament into Law No. 77 of 24 June 2009. One of the most relevant chapters of the Abruzzo Decree deals with measures concerning the gaming sector which can be summarised as follows:

1. Legalisation of online fixed odds games of chance (online casinos and Vegas-style games)
2. Legalisation of online poker and ring games
3. Mandate to AAMS (the Italian gaming regulatory authority) within 60 days from the enactment of the Decreto Abruzzo, to regulate betting exchange, betting on virtual events and video lottery games (“VLTs”). Actually all such games had already been legalised in 2006 yet AAMS had since failed to implement the relevant rules so they had been laying for long time in a sort of regulatory limbo
4. Introduction of an unprecedented profit-based tax regime with a flat 20% rate applying to all new games listed above other than the VLTs. This provision is of paramount importance as it paves the way to the launch of games that otherwise could have never been offered in Italy given its penalising turnover-based tax regime which notably will continue to apply to sports and horse races betting, bingo, lotteries and skill games (including online poker tournaments that will thus continue to be taxed at 3% of the total tournament buy-ins sold by the operator)

AAMS is currently in the course of implementing the regulations concerning all the new games covered by the Decreto Abruzzo and while it will probably miss the 60-day deadline assigned to it by the government, it can still can be expected that the new rules will fall in place some time in the autumn season.

In the meantime, on 4 August 2009 another important governmental emergency decree was published in the Official Gazette of Laws and Regulations pushing urgent measures to tackle the worldwide economic crisis that is badly gripping Italians too (“the Anti-crisis Decree”).

One of the most important revenue-raising provisions is set out at article 21 of the Anti-crisis Decree wherein a lottery tender is called for the award of up to four brand new licences when the current exclusive one, held by Lottomatica-owned Consorzio Lotterie Nazionali, expires in 2010. These are the main tender guidelines on which basis AAMS will within 30 days have to draw up and issue the tender paper:

· Licensees will be entitled to an 11,90% fee (including the 8% fee due to the selling points) charged on all sold lottery cards
· Payout no higher than 75%
· Irrespective of the number of actual licence bidders (1 to 4), the minimum guaranteed bid (“MGB”) revenue will have to fetch €500 mln for the current year and to €300mln for 2010 (the MGB payment may be split in two instalments payable respectively in 2009 and 2010)
· Each licence bidder will have to set up an exclusive distribution network of no fewer than 10.000 selling points to be activated by no later than 31 December 2010
· Licences will last 9 years and may be extended only once. The 9-year duration period will be split in two phases respectively of 5 and 4 years. At the end of the first period AAMS will evaluate each licensee’s performance and subject to positive assessment thereof, it will allow the licensee to carry on for the second and final 4-year period

Article 21 of the Anti-crisis Decree also deals with the VLTs establishing that AAMS will have to take immediate steps to start the VLTs testing phase that will be initially limited only to the 10 operators currently holding a licence to remotely connect the terrestrial network of slot machines to the AAMS centralised system. Eventually AAMS will call a fresh VLT licence tender open to national and EEA-based bidders subject to certain operational terms as well as to payment of an €15.000 licence fee per each VLT terminal to be connected.

Last but definitely not least, on 29 July 2009 Law no. 88 of 7 July 2009 (“Law 88/09”) carrying the new remote gaming (ie. online, mobile and interactive television) frame rules became effective. At the time this article is being written AAMS has not yet implemented the relevant regulations and relevant licensing requirements although it is expected that also this process like the others quoted above will not take too long.

The main features of the Italian-style remote gaming as re-shaped under Law 88/09 can be listed as follows:

· A specific AAMS-granted, 9-year licence is required for the offer of remote gaming services
· The one-off cost of the licence is €350.000 payable upon licence issuance
· The remote gaming licence currently covers: fixed odds/pool sports and horserace betting, skill gaming (including online poker and any other card tournaments which are all eligible for skill gaming classification), online scratch-and-win (subject to a sub-distribution agreement with the current exclusive lottery licence holder), and online bingo, BUT
· When AAMS regulates fixed odds games of chance (ie online casino) online poker and other cash games, bets on virtual events and betting exchange, these games too will be included in the remote gaming licence. Such regulatory process is expected to be completed in the autumn 2009
· The AAMS licence is open to any applicant based in an European Economic Area jurisdiction (“EEA” ie. European Union countries plus Iceland, Norway and Liechtenstein). Up to 200 fresh remote gaming licences in addition to the existing ones may be granted by AAMS
· The licence may be issued directly to a foreign applicant provided it holds an EEA passport
· The licence may be issued even to a non-operator (such a startup or a company coming from a totally different business) subject to (i) release in favour of AAMS of an €1,5 million bank guarantee and (ii) a certification by an independent authority that the applicant holds all required technological infrastructure and management resources to run the licence
· Remote gaming services can only be offered to Italian residents through a dedicated platform identified by the ’.it’ suffix which must be fully linked up the centralised system ran by AAMS (via its technological partner SOGEI) so that each bet/wager placed by an Italian customer can be recorded, monitored, tracked, validated and taxed
· Provision of remote gaming services from a foreign-based ‘.com’ platform to Italian residents is strictly forbidden and subject to the blacklist restrictions mentioned in the previous chapter as well as to prosecution
· Whoever offers online gaming services in Italy without holding an AAMS-granted licence is subject to imprisonment from 6 months up to three years
· Whoever organises, offers and takes remote bets in Italy on any games regulated by AAMS but in a way other than that required by the AAMS rules, is subject to arrest from three months up to one year and to a fine ranging from €500 to €5000 even if the violator does hold an AAMS licence
· Foreign-based AAMS licensees are allowed to keep their gaming servers abroad provided they are located in the EEA space and a full, real time connection with the AAMS centralised system is in place
· The software running on all games offered on the ‘.it’ platform must be certified by an AAMS-approved testing laboratory

The very peculiarity of the Italian-style remote gaming model is that the operators’ platforms must be interconnected with the AAMS centralised system and database at all times for bet validation, compliance checks and taxation purposes. In practice this control system works as a three-way system where all player-related information received by the operator must be conveyed in real time on to AAMS that, if all required data have been collected, will validate the bet/wager and send a signal back to the operator who may then take the bet/wager and process it.

Tax-wise, as already mentioned above the model that will soon be enforced by AAMS is a blend of turnover-based (“TOB”) and gross profit-based (“GPB”). The following games will continue to be subject to TOB taxation (relevant applicable rates in brackets): sports betting (3,5% on average), horserace betting (nearly 10%), skill-gaming (3% flat), bingo (nearly 23,8%) and lotteries. All brand new remote games soon to be regulated by AAMS namely online poker and ring games, online poker, betting exchange and bets on virtual events, will instead be subject to GPB taxation at a flat 20% rate.

Altogether the three landmark pieces of legislation discussed above (Decreto Abruzzo, Anti-crisis Decree and Law 88/09) the enabled the Italian to brilliantly – or should we rather say smartly – achieve a dual goal: collecting more (and big) money from the gaming industry while further opening up the market and definitely modernising the laws and regulations on the gaming business.

On top of that, in addition to keeping its national licence regime fully in place with the official blessing of the Brussels authorities, Italy also became the champion of a pragmatic and reasonably flexible regulatory model which is currently the only realistic alternative to an Europe-wide harmonisation of the licensing rules. Indeed the Italian model (including a beefed up version of the “blacklist restrictions”) seems to have been adopted with appropriate changes by other EU jurisdictions like France and Denmark which have largely drawn from it to open up their respective markets thereby combining a system of internal rules and controls still issued and enforced at local level, with less administrative red tape and lighter operational hurdles for licence applicants based and licensed in other EU jurisdictions.

All the above regulatory developments occurred (and continue to unfold) so quickly over the course of the last four months so there is little doubt, if any, that Italy is indeed the country of miracles.

Update Regarding EC Commission’s Position on Draft French Gaming Law

Following the notification procedure, the European Commission rendered its comments on the last Draft French Gaming Law as amended by the French National Assembly Commission works and after the French Government’s reply, on July 9th, 2009.
As a result, at this stage of the proceedings, the Draft Law has not yet been given green light by the EC Commission.

Following the notification (in accordance with Directive 98/34/CE) of the Draft French Gaming Law (hereinafter referred to as the “Draft Law”), the EC Commission rendered its detailed opinion on the above-mentioned Draft Law on June 8th, 2009. On September 1st, 2009, the EC Commission commented on the French Government’s reply, on July 9th, 2009, to the aforementioned detailed opinion and took into account the latest amendments of the Draft Law at the French National Assembly. As a result, at this stage of the proceedings, the Draft Law has not yet been given green light by the EC Commission.

Considering the European Commission’s comments, the latter and France are on the right way to reach a compromise regarding the Draft Law’s provisions which are alleged to be incompatible with EU law.

EC Commission’s comments on the French Government’s reply to its detailed opinion will be briefly summarized below.

• As regards Article 16 of the Draft Law providing for a licensing system with respect to online gaming operators, the EC Commission welcomed the proposal by the French Authorities to amend the wording of the Draft Law so as to take into account the requirements to which the requesting online gaming operator is already subjected in its country of establishment.

• As regards Article 52 of the Draft Law which provides for an obligation for all licensed online gaming operators to obtain consent from the operating right owner of the sport event, the EC Commission noted that the aforementioned provision applies equally to the use of French sporting events both by foreign and domestic online gaming operators. In these circumstances, the EC Commission would welcome a commitment by the French Authorities to carry out a business impact assessment two years after the entry into force of the provision in question, with a special emphasis on its impact on the free movement of services as well as the contribution of such a provision to sports development and the guarantee of integrity of the sport.

• As regards Article 8 of the Draft Law which provides for a maximum return per player ratio, the EC Commission noted that the aforementioned provision applies equally to both domestic operators and operators licensed in another Member State of the EU and the EEA. In addition, the EC Commission noted the concerns of the French Authorities relating to public and social order, but it would welcome further evidence of the appropriateness and proportionality of such a provision. In these circumstances, the EC Commission welcomed the proposal by the French Authorities to conduct a study to assess the benefits of this provision from the perspective of public and social order, within two years after the entry into force of the Draft Law.

• As regards Article 39 of the Draft Law which provides for an obligation to have a fiscal representative established in France, the EC Commission noted the response of the French Authorities about the lack of any form of assistance or cooperation in administrative levies on gambling (recovery of taxation affecting the operators of online games), and the intention to include such provisions during renegotiation of bilateral tax agreements so as to eliminate the requirement for the establishment in France of a fiscal representative.

In any event, the EC Commission will carry out an overall assessment of the Draft Law’s final version adopted by the French Parliament. The plenary session of the National Assemblee should take place the 7,8,9 October for scrutiny. Once the text is adopted by the deputees it will be transmitted to the Higher Chamber. The Government plans to see the final version of the law adopted by the end of 2009.

Furthermore, France will still have to notify the Draft Law’s implementing acts so as to enable the EC Commission to assess their compatibility with EU law. This should intervene in the beginning of 2010.

According to the Government’s expectations, the entire licensing system is likely to be operational before the Football World Cup starting in June.

Harris Hagan August Newsletter 2009

Inside this issue:

1. Sports Betting
2. Data Protection
3. Alderney’s New Licensing Regime
4. A Fair Deal for UK Licensed Operators
5. Gambling Regulatory Update

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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.