bet365, China, Gibraltar and the pesky press9th October 2014 9:39 am GMT
bet365 has been the talking point of the week as judgment day approaches for the UK’s move to a Point of Consumption regime.
“It’s moving towards a world where there is no grey, it is all black and white,” former IGT Interactive head (and now Playsino CEO) Alex Kelly first said this to me three years ago. I am not sure if it was an original thought but it was a snappy line that has stuck with me to this day.
It is perhaps the biggest bone of contention and angst this industry has as it emerges from the shadows of unregulated markets and into the brave new world of regulated markets. There are some that still use it as a stick to beat market leaders such as bet365 and PokerStars.
Those using the stick (The Guardian’s recent attack on bet365 for accepting bets from China is a great example) should consider that operators such as bet365 spend a lot of money on lawyers. When their lawyers produce opinions they are not in the habit of ignoring them.
So bet365’s statement to The Guardian is likely to be absolutely accurate: “There is no legislation that expressly prohibits the supply of remote gambling services into China by operators who are based outside China.”
Of course different lawyers will tell you different things. This is where the concept of “grey markets” appears. Another lawyer might look at China’s Foreign Investment Catalogue and see gambling as prohibited. He or she might then apply this to all forms of gambling. He or she might look at the Chinese Welfare and Sports Lotteries as monopolies and assume everything else is illegal.
The Guardian was keen to point readers towards a 2005 judicial interpretation of Article 303 of China’s Criminal Law, which states that whoever, for the purpose of reaping profits, sets up gambling websites on the internet or acts as an online gambling agent will be regarded as “opening gambling houses”, which is the sin punishable under the law.
However, the Chinese government does tend to send mixed messages. There are anecdotal stories about crackdowns with Chinese citizens being arrested and then there is the world’s biggest gambling centre in Macao. While the Communist Party cannot officially condone gambling it lets it prosper in Macao and elsewhere. China’s transition to capitalism has been fraught with these legal grey areas. Often it will let something fly that is not expressly legal until it deems it problematic and then it will crack down. Often it will not.
Ultimately, bet365’s analysis would appear quite right. It is worth repeating. Read it closely: “There is no legislation that expressly prohibits the supply of remote gambling services into China by operators who are based outside China.”
It really is not grey. It is right there in black and white.
Gib gains from PoC
Of course, The Guardian article was not really about the legality of online gambling in China. It was an effort on somebody’s behalf to derail bet365’s UK licence application. Who was this somebody? Probably a competitor. Trust me, it normally is. However, on this issue of grey markets, the Gambling Commission has been fairly clear.
“It is not about defining grey or black as such, but much more about understanding the operator’s approach to operating in grey and black markets and what action they took to avoid acting illegally. If an operator has a history of flouting laws then it will raise questions about their suitability to hold a licence in the future if the same key people are still involved. Our view is that most operators of scale will be able to demonstrate their suitability in this regard,” a Gambling Commission spokesperson told us when asked to clear up the issue.
Again, it is patently obvious that bet365 has hired lawyers to give it a legal opinion and it has come to the conclusion that it is not acting illegally. The company does not take bets from Hong Kong for example, which has passed modern legislation that explicitly prohibits it from operating.
Until China passes some modern legislation explicitly prohibiting internet gaming by foreign companies – as Singapore has just done – then it will continue to take Chinese citizens’ bets. Similarly, Norway has yet to pass legislation but its government has made its position abundantly clear by writing to operators to tell them they are not operating legally.
Numis analyst Ivor Jones posted an interesting note this week, suggesting that if bet365 is granted a UK licence then other operators might consider piling into China. It is likely that companies such as Ladbrokes, which already has some Chinese exposure via its AGTech joint venture, would be there already if they thought it desirable. In its 2012 prospectus, Playtech claimed that 3.6 per cent of gross income was generated by licensees’ operating in China. Microgaming chief executive Roger Raatgever has been salivating over the possibilities in Asia since a visit to the region last year.
There is little in the UK licensing regime that should cause a massive change of policy with regards to white, grey or black markets – at bet365 or at competitors such as Ladbrokes or William Hill. The bookmakers are under enough political pressure right now, they could probably do without the headlines bet365 got in The Guardian, no matter how misguided they might be.
Just because grey markets are a red herring, it does not mean that operators are not facing a big challenge in adjusting to the UK’s change from a point of supply (PoS) jurisdiction to a point of consumption (PoC) jurisdiction.
Regulus Partners principal analyst Paul Leyland points out the reason most clearly in a recent blog on the subject: “A regulator which gains its authority from a government of consumers [such as the UK] is essentially answerable to those consumers: probity is the key reason for existence. A regulator which gains its authority from an offshore jurisdiction [such as Gibraltar] is principally concerned about jobs and economic impact: business is the key reason for existence.”
Therefore, businesses in PoS jurisdictions get fairly light touch regulation. Hence, why the GBGA operators are all upset about the UK’s switch. But it is also the reason why Gibraltar exists as a hub for gaming companies and the UK’s switch to PoC, far from making Gibraltar less relevant, makes it more so.
For operators such as bet365 with its 170-odd jurisdictions around the world, in addition to its licences in Denmark, Italy, Spain and (presumably) the UK, it needs a point of supply jurisdiction, where regulations are less onerous. Remember, around 75 per cent of bet365’s revenue comes from overseas (according to its own submissions to parliament). It would be ludicrous to submit your whole business to regulations designed to protect UK consumers.
As Leyland points out, PoS jurisdictions have other benefits: “Gibraltar (and other locations) offers a concentrated pool of industry veterans, attractive personal tax rates, a solution to the VAT problem (gambling companies in the EU have to pay VAT on services but cannot recover it since they do not charge it), low corporation tax, and comparatively limited additional licensing requirements.”
So bet365 is moving around 100 operations jobs to its Gibraltar office, which has always housed its gaming team and will now take in the sports betting gang. It is likely that just less than half of those jobs will be filled by people transferring from the Stoke HQ and the rest will be new hires. Stoke will continue to be the head office with around 2,000 staff manning its customer service centre and other central functions.
So everyone needs to make some adjustments for PoC. Tomorrow we will find out the result of the Gibraltar Betting & Gaming Association’s judicial review attempt. Win or lose, PoC is here to stay. It will happen in the UK and it will happen elsewhere. That doesn’t necessarily queer the pitch for the likes of Gibraltar. PoC might even happen in China. But don’t hold your breath.