German Online Casino Looks To Loophole in Internet Gambling Ban

by James Kilsby, GamblingCompliance Ltd., April 8th, 2008

A Casinos Austria-owned online casino will soon begin to offer its games to residents in the German state of Lower Saxony following a court victory last week, despite the general prohibition on internet gambling in Germany under the Interstate Treaty which came into force in January 2008. The Treaty’s draconian provisions may mean the internet casino is short-lived, but its very existence could further undermine the already maligned Treaty, say legal experts.

Rainer Chrubassik, managing director of Casinos Austria’s Spielbanken Niedersachsen GmbH (SNG), says that SNG has begun preparations for the launch of a full suite of online casino games following the decision by the Higher Administrative Court of Luneberg last Thursday. The court rejected an attempt by the state of Lower Saxony to appeal a decision issued in August of last year which upheld SNG’s right to offer internet casino gambling in the state.

SNG was acquired by Casinos Austria International in 2005 and currently holds a licence to operate the 10 land-based casinos in Lower Saxony. The terms of that licence also include the possibility of offering online casino games, but state authorities have refused to grant SNG final permission to proceed.

The court last week agreed with SNG that the law applicable at the time of SNG’s application did not impose any prohibition on internet gambling services in Germany, and that Lower Saxony therefore had no right to deny SNG authorization to develop an online casino. However, the ruling did not take into account the Interstate Gambling Treaty which came into force on January 1, 2008.

The Interstate Treaty establishes a general prohibition on the use of the internet for all forms of gambling in Germany (except horserace betting) but was not at issue in the SNG hearings as the Luneberg court received Lower Saxony’s reasoning before the treaty came into effect, says Claus Hambach, founding partner of Munich-based law firm Hambach and Hambach.

Therefore, it remains possible that Lower Saxony could launch new proceedings against the online casino website, he said. Alternatively, the court may decide that it has already issued a definitive ruling on the SNG case and refuse to hear a new challenge.

“It is hard to predict what will happen as offering an online casino definitely breaches the wording of the Interstate Treaty, but SNG could not be subject to criminal law as it is in possession of a valid state licence,” Hambach told GamblingCompliance.

SNG said in a press release that it expected to be permitted to operate regardless of the new treaty as applicable gambling legislation in Lower Saxony specifically “permits the operation of an online casino for and in the state of Lower Saxony.” SNG is only permitted to offer its online casino games within state borders.

The case of those looking to overturn the new treaty will be strengthened if SNG is able to launch its own, legitimate internet casino within Germany, according to Hambach. Certain online gaming websites, including the state-owned Wiesbaden online casino and Irish bookmaker Paddy PowerPortfolio have already withdrawn from the German market as a result of the new treaty. But even though the treaty has sought to outlaw internet gambling, conflicting court rulings have allowed operators such as Bwin e.K., which has an old GDR sports betting licence, and now possibly SNG, to continue in operation.

“Everywhere we have these small islands where the authorities cannot enforce the new treaty, which suggests it will not be possible to achieve interstate treaty’s stated aims,” Hambach said.

According to Chrubassik, it will be impossible to maintain a blanket ban on internet gambling in Germany, and the state treaty’s player protection aims would be better served by regulation.
“It is impossible to implement a ban on internet gaming sites. The clock cannot be turned back on the reality of the internet,” he said. “Only licensed internet gaming sites can meet regulatory channeling requirements and prevent players from turning to illegal, unregulated sites. [SNG] are committed to these requirements.”

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The Higher Administrative Court of Baden-Württemberg voices serious doubts as to the consistency of politics in the area of games of chance in Germany

In a case represented by the law firm Hambach & Hambach, the Higher Administrative Court of Baden-Württemberg (VGH) allowed an appeal against a dismissive judgement by the Administrative Court (VG) of Karlsruhe. Just as in the previous resolution dated 12 Feb. 2008, leave to appeal was also granted in these parallel proceedings in a resolution dated 3 Mar. 2008 (ref: 6 S 1408/07), due to substantial doubts as to whether politics regulating games of chance in Germany are implemented in a consistent way.

The plaintiff requested a declaration stating that its licence – issued for Great Britain – is also valid in the German Federal State of Baden-Württemberg, and that this licence is to be regarded as a licence in the sense of section 284 StGB (Strafgesetzbuch – German Criminal Code). The VG of Karlsruhe dismissed the claim, stating as the reason that the sports betting monopoly in Germany was in compliance with European law. It assumed that the restrictions of the freedom of establishment and the freedom to provide services, which resulted from the state monopoly, were implemented in compliance with community law. It was wrong to assume that the VGH in the next instance would back this decision, which is what it had done during the transitional period up until 31 Dec. 2007.

However, the VGH now has an entirely different evaluation of the new legal situation. In its reasons for the decision, the VGH explains that considerable doubts remain with regard to the statements made by the VG on the case, as it had been questioned conclusively in the proceedings whether the evaluation of a consistent and systematic contribution to the limitation of betting activities, which is necessary for a justification of a state monopoly under community law, must be based only on the state’s betting politics or whether it should also be based on the state’s entire politics relating to games of chance.

“Should the latter be the case, or have to be seriously considered, it could not be finally decided on the basis of the determinations made by the Administrative Court, whether the differing restrictions can be justified by the differences existing in the markets for the respective games of chance.”

It can be seen from this comment that the VGH wishes to take the pending statement from the ECJ into consideration for the decision-making process for this judgement. In the meantime, eight cases have been suspended, and questions regarding the interpretation of community law have been submitted to the ECJ requesting a reply (most recently: VG of Schleswig in proceedings in the main action, resolution dated 30 Jan. 2008).

This obvious U-turn by the court of appeal is to be welcomed, as the Court had – as recently as November 2007 – been of the opinion that a consistent and systematic restriction of betting politics could be assumed (resolution dated 5 Nov. 2007, 6 S 2223/07 par. 19). This re-alignment can also be noted for other courts of appeal; for instance, the VGH of Hesse also decided in favour of suspensions in similar cases (e.g. ref. 7 A 14/08), as it held that this was the only way to ensure the priority of application of community law.

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.