Interstate Treaty on Gambling: Blocking orders against ISPs and banks? What the experts say

TIME Law News 2 | 2009

A commentary by Attorney at law Dr. Wulf Hambach, Founding Partner, and Attorney at law Susanna Münstermann, Senior Associate, Hambach & Hambach Law Firm.

Berlin. – Under the patronage of the Verband der deutschen Internetwirtschaft e.V. (eco) (Association of German Internet Businesses), in cooperation with the law firm Hambach & Hambach, an experts’ conference was held on 26 March 2009, dealing with the legal and technical side of demands from politicians for blocking orders for the purpose of implementing the state gambling monopoly.

Prof. Michael Rotert, Chairman of the eco board, referred to a letter from the German Federal Government to the European Commission and said that the phrase stating that “ISPs and banks will accept this as justified on their own accord, and will support the German States in the implementation of their politics” has led to considerable irritation. He explained that the state gambling monopoly is questionable from his point of view. Private providers are excluded for reasons of addiction prevention, whilst the monopolists are permitted to advertise the high jackpot sums on state-run television networks during prime time viewing on a Saturday evening.

As announced by Prof. Rotert, the expert lecturers were able to explain why neither blocking orders against ISPs nor prohibition orders against banks issued by the gambling supervisory authorities can be used as a means to implement the Inter-State Treaty on Gambling:

• There is no statutory basis for blocking orders against ISPs. The relevant provision in the Inter-State Treaty on Gambling is not a statutory authorisation.
• From the technical point of view, blocking of internet sites is simply impossible. Legal and attractive online gambling offers provide the best level of protection.
• Blocking of online gambling offers involves considerable liability risks, as it is difficult to draw the line between illegal offers and legal online games of chance, legal games of skill and legal entertainment games, and also because the state monopoly most probably is unconstitutional and contrary to European law.
• Prohibition orders against banks based on the Inter-State Treaty on Gambling are also contrary to constitutional and European law.

Attorney at law Ms. Marberth-Kubicki (specialist in criminal law and author of the reference book “Computer- und Internetstrafrecht” [Criminal law aspects of computers and the internet]) summarised the latest studies on the topic of blocking orders against ISPs, and stated in her comparison of the legal analyses that the current political discussion regarding the blocking of websites with child-pornographic content has completely gone off the rails. Doubts and concerns are promptly answered with verbal abuse.

The topic of child pornography is meant to nip in the bud any kind of criticism, even though a particularly diligent establishment of a statutory basis should be the logical consequence. Ms. Marberth-Kubicki voiced the concern that other content may also be blocked once this instrument has become generally accepted. She therefore strongly recommends the ISPs not to conclude voluntary agreements, as these are highly problematic for the providers. The intervention by the blockings into legal positions which are protected by fundamental rights require a crystal-clear legal basis. The relevant provision of the Inter-State Treaty on Gambling is not suitable for this purpose. The latest judgment given by the BVerfG (Federal Constitutional Court) regarding the confidentiality and integrity of IT systems is also to be taken into consideration.

Mr. Schaeffer (Chief Security Analyst, TÜV Rheinland Secure iT GmbH) gave a pictorial description of the structure of the internet and came to the conclusion that the possibilities of bypassing blockings and censorship are endless, as the very idea of the establishment of the internet was for it to bypass blockings independently. Blockings will only contribute to improved concealment of the networks. Online gambling should not be prohibited, but rather regulated. Providing attractive up-to-date offers which are continuously refined, will intercept the users and prevent their migration to illegal offers.

Attorney at law Dr. Hambach (Founding Partner, Hambach & Hambach Law Firm) explained from the point of view of gambling law why there are substantial liability risks involved with the blockings. In addition to the pending infringement proceedings and preliminary proceedings against the German gambling monopoly before the European Court of Justice – which is why licensed EU providers should rather not be blocked – other questions regarding differentiation remain difficult. Therefore, horse betting, games of skills and games with low stakes must not be blocked on the internet, nor must mere entertainment games. The inconsistent German gambling law should be harmonised on the Federal level, and a gambling supervisory authority should be established which monitors the offers by private providers on the internet.

Prof. Dr. Ohler (University of Jena, Chair for Public Law, European Law, Public International Law and International Commercial Law) gave a lecture on the topic “Capping of the flow of funds – monitoring by order of the gambling supervisory authorities”, and expressed substantial doubts based on constitutional and European law.
Banks as uninvolved third parties may only be called upon to provide support in cases of the so-called “polizeilicher Notstand” (public emergency). From Prof. Dr. Ohler‘s point of view, the combat of illegal gambling cannot suffice to justify such public emergency. Also, the fact that the criteria for an automated filtering have not been defined, the lack of regulations in the Inter-State Treaty on Gambling in comparison with the act on money laundering, and concerns based on European law make it clear that the statutory regulation is inadequate.

Dr. Wulf Hambach, Founding Partner and Susanna Münstermann, Senior Associate
Hambach & Hambach

How close is France to opening up of its gambling market? – Legal Gaming Special

French Budget Minister Eric Woerth has said that the gambling market in France would be expanded to adapt “to Internet reality” and help France “get out of an unsustainable situation in which the state is losing a growing part of the betting market”.

All this may sound positive, but is the real “opening” of the market is still a long way to go?

ULYS’s partner Thibault Verbiest certaily thinks so.

“The presentation of the draft bill on 5th of March is a first step towards the opening of the French market but the harder part will have to be achieved within the next few weeks,” Verbiest told Bulletbusiness.com.

“The draft bill first has to be submitted to the Conseil d’Etat for an opinion, then presented to the French Cabinet, afterwards be notified to the European Commission in application of Directive 98/34 in (standstill procedure) and finally be discussed and voted by the French Parliament. Once the bill is enacted, the new administrative authority, in charge of enforcing the regulation of online gambling market, will need another few months to be efficient and begin to grant licences. In saying that France will start to grant online betting licences in the beginning of 2010, Eric Woerth was very optimistic,” shared Verbiest.

In an interview, Verbiest also spoke about the sort of legal access the private operators are expected to have, the possibility of a new legal battle regarding lotteries and slot machines monopoly in future and much more.

Woerth has said that illegal gambling generates €7 billion a year, and said that there were 25,000 illegal gambling websites in France, representing 75 percent of the market. Rather than banning 25000 websites, he said we’d rather give licences to those who will respect public and social order. What sort of legal access do you think private operators are expected to have in the French market considering the sign of opening up of the sector?

Since the announcement of the liberalisation last summer, Eric Woerth has repeated several times that the opening of the online gambling market will be controlled. In other words, it means that the opening will be limited and that gambling operators will have to satisfy a large number of specifications to obtain a licence. In the name of public order, operators will be required to give guarantees concerning their experience in the gambling industry, the transparency of their shareholding, the measures they will take against fraud and money laundering, and the security measures to certify online payment, protect children or process personal data, etc.

It seems that companies without experience in the gambling industry will have more difficulties to receive an agreement in France. The specifications required to obtain a licence will exclude a lot of operators.

It is being said that online operators, including non-France-based companies, will be granted five-year licences to take bets from French residents on sport and poker. Lotteries and slot machines will remain under state control. How do you assess this selective opening?

According to the draft bill, lotteries will remain under the Française des jeux monopoly and slot machines only available in terrestrial casinos. Moreover, spread betting, betting exchange or bets on virtual competitions will be forbidden. These games are known to be more risky (addiction and lack of control to avoid fraud and money laundering) than others and consequently are excluded from the opening.

Officially the European Commission has never criticised lotteries and slot machines state’s monopoly. The reasoned opinion sent to the French Government on October 2006 only concerned sports betting services. Therefore, the Government has decided to limit the opening of the market.

This restriction is not satisfying for gambling operators. Indeed, a lot of them operate sports betting services, online poker and lottery or virtual slot machines. Excluding lotteries and virtual slot machines to protect consumers, the Governmenent is being incoherent. If the Government wishes to ensure consumers’ protection, it should prohibit these games in general for both, public and private operators.

In application of EU law, the measures taken by Member States to restrict the free movement of gambling services have to be necessary, proportionate and non-discriminatory which is not the case when the market is closed in favour of public companies that do not particularly have consumers’ interests at heart. A new legal battle on the field of lotteries and slot machines monopoly could be declared by private operators in the next few months.

Industry leaders however have predicted the caveats in the bill would put off many operators. Woerth said he was proposing to impose a 7.5 percent tax on operators taking sport bets to maintain the €5bn a year it gets in receipts from the industry. He also intends to set limits on the ratio of bets that can be paid out to players in winnings. But according to the European Gaming and Betting Association, this raises questions about how economically viable the whole project will be for operators. What’s your opinion regarding the same?

The project will certainly not be economically viable for all operators as France gives priority to public and social order above all.

In theory, only operators located in uncooperative tax havens will be put off. Nonetheless, for practical purposes, in the draft law, especially the tax system and the limitations of wagers, winnings and the ratio of bets that can be paid out to players in winnings, we can infer that the liberalisation will only be profitable to gambling industry leaders.

The French Government has never hidden its objectives. The goal of the opening is not to authorise every operators to provide their services in France but to legalise the activity of honest companies offering financial and legal gurantees to ensure the respect of public and social order. The consequence is that many average operators will be excluded.

Recently, you had mentioned that according to the ongoing discussion within the French government, the draft bill requires that all operators should obtain a licence in France, without respect to the fact they may already have one in another Member State. Still how do you think online gaming companies especially ones from other countries can take realistic and swift action in terms of identifying opportunities and then acting in accordance with to the local licencing regimes?

European institutions promotes a principle of mutual recognition between Member states. It means that a licencee in a Member state could obtain automatically an agreement in France. Eric Woerth has explicitly rejected this principle. Nevertheless, once the regulation of the French market will be effective and consolidate, we can expect bilateral agreement between Member states to simplify proceedings to obtain a licence.

What do you recommend as far as the gambling tax issue is concerned? France has moved to open its gambling market, but insists all licenced Internet gambling sites will pay French tax, regardless of base location. How do you think this whole issue needs to be tackled?

It is impossible to give recommendations for the moment because decrees which will specify the content of the law have not been published yet and we still do not know how exactly the rules will be enforced.

Interview with Quirino Mancini, Partner, SCM Partners – The Italian market is really a must-be-there one – Legal Gaming Special

A group like Grupo Lottomatica in its annual results for 2008 referred to the Italian Government’s “unprecedented” need for revenues as a driver for growth in its business this year.

Agreeing with the same, Quirino Mancini, Partner, SCM Partners, says the likeliest scenario in the short- /mid-run is that the Government needs to somehow fix or at least reduce the Treasury’s budget gap and this will pave the way to the legalisation and regulation of more gaming products such as online poker and other cash games.

In an interview with Bulletbusiness.com, Mancini spoke about the recent approval of the regulations by the Upper House and the future course of action on this front, chances of Italy to become a fairly flexible, and certainly improvable, regulatory model and other issues. Excerpts:

Earlier this year, you had mentioned that new online gaming regulations were being delayed despite being in the Italian regulator’s pipeline for several months now. Is there any development on that front?

The Upper House (Senate of the Republic) approved the regulations last week. They are in fact embedded in a piece of primary legislation which covers also other and unrelated matters and is aimed at implementing altogether various directives issued by the European Commission over 2008.

Such legislaion is now supposed to be reviewed, discussed and then approved also by the Lower House (House of Deputies). The relevant scrutiny process will probably start after the Easter break and will certainly take several weeks to complete.

Forecasting for gambling sector, you had recently mentioned that the deeper the recession, all the better for those anyhow engaged in the provision of offline/online gaming services in the Penisnula. But recently, shares in Italian lottery and gaming group Lottomatica fell by 5.3 percent to 12 euros after Goldman Sachs, which has a ‘buy’ rating on them, cuts the target by 10 percent to 20.3 euros. In fact, Goldman Sachs mentioned: “Despite the habitual nature of gambling, demand is not entirely impervious to economic performance”. How do you assess the overall sentiments related to gambling business specifically online at this juncture in Italy and what makes you bullish or bearish going forward?

Although the gaming sector too is suffering from the global recession times, I still take the view that solid and very diversified (in terms of both assets, operations and products) companies like Lottomatica profitably active on a worldwide scale are even today a good and reasonably safe shelter for those willing to invest their savings in the stock market, and of course Lottomatica is not the only one.

In terms of your expectations, Italy stands good chances of becoming a fairly flexible, and certainly improvable, regulatory model that other regulators could replicate elsewhere in Europe in the years to come. Can you elaboarte on what positive and negative factors are associated with liberalisation at this stage?

Quite frankly as long and as much as the Commission will not be able to harmonise the rules across Europe – something which is not exactly around the corner – I do not see any negative factors associated with a state-controlled liberalisation of the European gaming markets along the lines of the Italian regulatory model which indeed is ripe for being further refined and then exported, with some inevitable adaptations, across the Alps.

You had also mentioned that as per the legal & regulatory policy in Italy, the authorities have sort of tried to entice foreign operators to seek a local licence by opening up the domestic market through (i) the award of a large batch of new licences and (ii) a controlled yet progressive gaming liberalisation. When you say gaming liberalisation, how competitive do you think domestic and foreign gambling companies are as of today and how do you think this is expected to change in lets say the next couple of years?

There is in my view a very close and direct relationship between clear, uniform and fair rules, on one hand, and competition on the other.

Take the Italian example which I’m very familiar with. At the moment the local market is quite packed with nearly 40 operators already holding an AAMS-granted remote gaming licence yet they are not so competitive on the domestic market nor on the international one.

Indeed at the domestic level the various restrictions still partially in place in terms of games that are already legal and regulated versus those still illegal (like gambling), and the quite burdensome administrative requirements to be complied with by all AAMS licensees make the gaming offer pretty much standard and similar from one ‘.it’ platform to another so the operators do not enjoy enough freedom and flexibility to diversify enough their offers. By contrast at international level where such Italian regulatory hurdles like (i) the domestic-only pool liquidity rule for poker tournaments and (ii) the gambling ban is not in place and therefore online casino and Vegas-style gamess are allowed, the ‘.com’ gaming sites enjoy a big advantage business/operations-wise.

In a nutshell, the key to the best competiveness for foreign and domestic gambling companies is to provide and enforce the same (pro-liberal) rules for all and I very much hope that, in addition to the money factor, this will be the other driver for AAMS to complete its market liberalisation mission.

You had recommended realistic and swift action on part of gaming operators in terms of identifying opportunities and then acting in accordance with to the local licencing regimes. How do you think companies need to approach a market like Italy as this juncture? What sort of advice would you give to them for encashing on opportunities in an earnest manner?

The local market is already crowded but there still are fairly good business opportunities in terms of consolidation and integration between local and foreign operators.

I reckon that for every foreign operator seeking Italian market entry there are out there at least three or four potentially great business opportunities in terms of acquisition, joint venture or other commercial partnership deal. It is first of all a matter of generally knowing the hard facts and key rules of the Italian gaming market, having a clear understanding of what kind of business plans one wishes to launch in Italy, what kind of profile a suitable local partner should have and then conducting all necessary and appropriate due diligence checks to ensure that no time and money is wasted in pursuing the wrong strategy and/or an unfit prospective partner.

Italy, along with parts of Spain, has been targeted by several British bookmakers as the government has begun to liberalise its betting shop industry. But in July last year, William Hill withdrew from Italy after 18 months, writing off £1m and agreeing to sell its embryonic joint venture. In this context, how do you think some of the relatively bigger and established gaming and betting companies are going to approach Italy in the time to come?

To put it very simply, the record of the last three years, the number and identity of AAMS licences granted thus far shows that from the viewpoint of most international gaming operators the Italian market is really a must-be-there one.

Almost all of them with very limited and motivated exceptions are already active here and those who are not might soon call in or come back as the case may be. Money talks and last year the Italian gaming industry altogether generated a turnover in excess of €52bn.

Interview with Dr. Wulf Hambach, Partner of law firm Hambach & Hambach – Can France trigger a stone-by-stone trend towards liberalisation in Europe?

Earlier this year, law firm Hambach & Hambach had acknowledged that the states are wounding themselves if they stick on to the old fashioned monopoly approach in times of the digital age.

Post that, there have been a couple of significant developments regarding the opening up of the online gambling sector in Europe.

While France has indicated about its plans to open up by the next year, a report was also released which urged the member states to hold talks on a “political solution” to online gambling-related problems instead of calling for new legislation by the European Commission.

Considering this it it vital to know if there is any healthy debate going on in Germany at the regulatory or political level which indicates that different stakeholders can benefit be it state, players or consumers with upliftment of ban or any restriction.

And according to Dr. Wulf Hambach, Partner of law firm Hambach & Hambach, there are positive signs as far as the liberalisation is concerned in Germany.

“I can promise you that there is indeed a healthy debate going on in Germany at the regulatory and political level. But behind closed doors as the Interstate Gambling Treaty – theoretically speaking – remains unevaluated until 2010. But believe me – many former proclaimers of the Interstate Gambling Treaty have already or are right now changing site to avoid unconvincing debates,” shared Dr. Hambach.

Over the past three years, the European Commission has been associated with Internet betting-linked infringement proceedings against 10 EU countries on the basis of the “freedom of movement of services” pillar of EU law.

For its part, France has recently unveilied plans to open up its Pari Mutuel Urbain monopoly to competition in 2010.

Going by the way France has unveiled plans to open up its Pari Mutuel Urbain monopoly to competition in 2010, Dr. Hambach thinks that this also puts some sort of pressure on a country like Germany to change its outloook.

“An unspoken internal EU gaming law expert principle has always been that if one of the following hardcore cartels breaks the EU monopoly chain, in total it is broken [referring to the likes of Germany, the Netherlands or France]. France from my perspective marks the beginning of domino effect in the direction of an EU wide step-by-step or to stay in the picture “stone-by-stone” liberalisation,” said Dr. Hambach.

Future still depends upon the development of the European law

The law firm had also categorically stated that the opening up of German gambling market depends on the development of the European law level and the future decisions of the European Court of Justice.

But in a recent setback for those who are pressing for EU-wide liberalisation of the gambling industry, MEPs in Strasbourg have endorsed a report which effectively upholds the existing right of member states to control gambling and sports betting. It has emerged that MEPs have by a huge majority voted against creating an EU-wide single market for online gambling, while branding the sector a risk-factor in fraud and addiction.

As per the information available, Deputies voted strongly in favour for the report by Danish Socialist member Christel Schaldemose on the `integrity’ of online gambling. In total, 544 voted positive with 36 against and 66 abstentions. The document urges member states to hold talks on a “political solution” to online gambling-related problems instead of calling for new legislation by the European Commission, which is invited only to produce research into the sector.

Referring to the current approach, The Remote Gambling Association (RGA) has mentioned that unfortunately many people have deeply ingrained anti-gambling prejudices and, of course, there are powerful vested interests that are opposed to the opening up of markets in the EU.

Assessing the sentiments, Dr. Hambach, says he still feels the same as far as the opening up of the sector is concerned.

“If – as I assume – the ECJ in its Santa Casa case decides in favour of the freedom of services and against the (incoherent) monopolistic regime in Portugal the path towards a liberalisation in Portugal and other member states with comparable legal background is open. And the EU Parliament and its members are not empowered to restrict the principle of the EU Treaty. But the EU Gambling Directive will not be realised (at least) within the next two years considering the attitude of various MEPs,” Dr. Hambach told Bulletbusiness.com.

This report asks – indirectly – for more legislative power for the individual member states to implement as many gambling restriction tools as possible arguing with the great dangers/damages caused by especially the private e-gambling sector, said Dr. Hambach.

He added, “But the report does not have a legal (binding) character like e.g. an ECJ judgement or an EU Directive and can be seen as one of the many existing reports on the anti-gambling front. The effect of this report on Germany is – in my opinion – is: To avoid an explosion of Germany´s black Internet gambling market through the present Internet gambing ban the customer protection will be realised in Germany through a cancellation of this ban. The installation of an in every respect efficient licencing regime in 2010 or 2011 is a likely scenario in Germany – e .g. to avoid further negative consequences for Germany´s Internet users.

Going forward, he still expects a continuous step-by-step liberalisation i. e. member state by member state and not vice versa.

France to open up online gambling from next year

France will open its gambling market to competition and begin to grant online betting licences in 2010.

Online operators, including non-France-based companies, will be granted five-year licences to take bets from French residents on sport and poker. Lotteries and slot machines will remain under state control. For their part, operators will be required to provide measures that prevent children from gambling online and control addiction.

The bill would end the monopolies enjoyed by Pari Mutuel Urbain, the state horse race betting operator, and Francaises des Jeux, which runs lottery games and sport betting for the government. Pari Mutuel Urbain, had annual revenue of €9.3 billion last year. La Française des Jeux had revenue of €9.3 billion in 2007.

The minister, Eric Woerth, said the gambling market in France would be expanded to adapt “to Internet reality” and help France “get out of an unsustainable situation in which the state is losing a growing part of the betting market.”

As part of the plan, which will be presented to the cabinet at the end of the month, the government will introduce a levy of about 7.5 percent on Internet wagers on sports events and horse races, and of two percent on online poker wagers, according to the draft legislation.

The illegal online industry is worth around €7bn ($9bn) and comprises 25,000 sites, said Mr Woerth.

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