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.

The European Commission’s Detailed Opinion on the Draft Belgian Gaming Law

On June 29th, 2009, the European Commission (hereinafter referred to as the “Commission”) has requested from Belgium further explanation in connection with the Draft Belgian Gaming Law. The Commission’s attention is particularly focused on two features of the Draft Belgian Gaming Law and requests that, if appropriate, the features in question be amended so as to be compatible with EU law. Accordingly, the standstill period has been extended during an additional month in accordance with Directive 98/34/EC of the European Parliament and of the Council laying down a procedure for the provision of information in the field of technical standards and regulations and of rules on information society services (hereinafter referred to as the “Directive”).

The story so far

On March 27th as part of the process aimed at removing technical barriers at European level, the Belgian Government notified to the Commission the Draft Belgian Gaming Law that had been approved by the Council of Ministers.

The above-mentioned notification triggers a standstill period of three months during which the Commission and the competent authorities of other Member States can review the Draft Belgian Gaming Law and study it. During this standstill period, the Commission may make objections on the Draft Belgian Gaming Law in accordance with the Directive. In this respect, the Commission sent a detailed opinion, on June 29th, 2009, to Belgium whereby the latter is asked to provide further information on two features of the Draft Belgian Gaming Law and, if appropriate, to amend the features in question so as to be compatible with EU law.

The Commission’s contention is briefly presented below.

First, the Commission emphasizes the need to take into account the conditions which had already to be met 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. According to the Commission, the intention is not to automatically grant a license to the licensees who operate legally in another Member State but to avoid “the duplication of safeguards that have already been met in the home Member State”.

Second, the Commission criticizes 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.

Belgian authorities are expected to discuss the Draft Belgian Gaming Law with the Commission in the upcoming weeks in order to reach a compromise and adopt the aforementioned Draft Law at the Parliament.

Analysis from an EC law perspective

It is our understanding that the Commission’s detailed opinion relies on sound EC law principles and settled case law of the ECJ1 in the field of both the freedom of establishment and the freedom to provide services with respect to gambling activities in the EU

As regards 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, it seems clear that this requirement of the Draft Belgian Gaming Law is incompatible with both the freedom of establishment and the freedom to provide services enshrined in Articles 43 and 49 of the EC Treaty.

First, the aforementioned feature of the Draft Belgian Gaming Law imposes an unnecessary burden on foreign gaming operators willing to penetrate the Belgian market in terms of costly investments (e.g., setting up a legal entity incorporated under Belgian law, costs related to the re-location of the server facilities in Belgium) in comparison with the incumbents. Accordingly, the Belgian market will be less attractive for new entrants thereby constituting an impediment to both the freedom of establishment and the freedom to provide services as interpreted by a settled case law of the ECJ.

Second, it is our understanding that such a requirement could not be justified on the basis of either treaty-based justifications (enshrined in Article 46 of the EC Treaty) or mandatory requirements in accordance with the ECJ’s case law. In this regard, it seems to us plausible to argue that fight against money laundering and players’ addiction (see Gambelli and Placanica rulings referred to above) can be achieved by less stringent measures, such as an appropriate monitoring system, which would not go beyond what is necessary to attain the legitimate aim pursued.

As regards the Commission’s opinion concerning 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, it is undeniable that such an approach is consistent with both the freedom to provide services (Article 49 of the EC Treaty) and the so-called “conditional recognition principle”.

The wording of Article 49 of the EC Treaty is quite straightforward and needs not to be addressed here.

With regard to the “conditional recognition principle”, it is worth recalling that it is settled case law of the ECJ that a host Member State needs to take account of the conditions fulfilled in a home Member State when the former assesses whether to grant a license to exercise a regulated activity in its jurisdiction. In this connection, it is undisputed that Belgium should be entitled to elaborate its own gaming legislation (with a national licensing regime) but must nevertheless take into account the licenses and requirements set out by other Member States. Thus, any EU-based operator should be eligible for a license in Belgium, without being required to establish (e.g., set up a legal entity incorporated under Belgian law) in Belgium. The best way to achieve this is to generalize the cooperation agreements between the EU gaming regulators so that a licensee in Member State A would obtain more easily (simplified procedure) its license in Member State B. The same system of cooperation agreements should be advocated with respect to “proper jurisdictions” outside the EU (e.g., Alderney, Isle of Man).

To conclude, the above-mentioned principle is the only viable regime, a compromise between (i) pure protectionist systems (e.g. the Netherlands), which deny any value as regards other EU licenses and (ii) pure liberal systems (e.g., the United Kingdom), which apply without restrictions the mutual recognition principle.

1ECJ, Schindler, 24 March 1994, C-275/92; ECJ, Läärä, 21 September 1999, C-124/97; ECJ, Zenatti, 21 October 1999, C-67/98; ECJ, Gambelli, 6 November 2003, C-243/01 ; ECJ, Lindman, 13 November 2003, C-42/02; ECJ, Placanica, 6 March 2007, C 338-04.