Written by Andrew Tait
The UK Gambling Commission expect their B2C licensees to carry out their own legal and regulatory due diligence on targeted territories they provide facilities for gambling to, and which generate revenues of 3% or more of their total (or 10% where global revenues are less than £5M). The test is not proscriptive but does require an assessment of the risks associated with each territory to determine if on balance, the decision to continue taking businesses from there is based on “reasonable assumptions and a coherent rationale”. Similarly B2B licensees will also need to justify where their revenues are coming from, and to specify controls they have in place to ensure that their B2C customers are not using their technologies and services to generate revenues from “grey” or especially “black” markets.
This justification only has to be made at the application stage. In addition, licensees targeting other territories under their UK license also have to specify the territorial revenue split above the 3% threshold in their quarterly regulatory reports.
In May 2015 the Gambling Commission amended its LCCP, license condition 15.2.2 to require B2C licensees to report as soon as reasonably practicable after:
“…becoming aware that a group company which is not a Commission licensee is advertising remote gambling facilities to those residing in a jurisdiction in or to which it has not previously advertised”
The UK Gambling Commission recently published the responses to its Regulatory Data Consultation, which took place at the end of 2016.
Amongst the many proposed changes coming from that consultation process, the one to license condition 15.2.2 will be of special interest to many B2C and B2B licensees.
Question 30 in the Regulatory Data Consultation asked for views on the Commission’s preferred option for the provision of group jurisdictional revenue. The Commission’s position, following the responses to this (as shown on pages 24-25 of the above referred response document) will result in the following changes:
- Removal of the requirement for B2C licenses to give a % split of revenues for all territories covered under their UK license; and
- Amends LCCP licence condition 15.2.2 to require reporting of actual revenues stemming from sustained/ meaningful generation above the 3% threshold being passed by the wider group.
The first change mentioned above is of little consequence, as many UK licensees only service UK customers under that licence, covering other territories under a dotcom or country-specific license.
The second change has far more reaching implications as outlined below and its replaces the existing LCCP requirement, to only report any instances where a group company starts to advertise in new jurisdictions above the 3% threshold – to a requirement to report actual revenues generated by the wider group in these territories.
This reporting requirement will become effective in time for the regulatory returns to be submitted in April 2018 (i.e. for the January to March 2018 quarter). It will be triggered as soon a UK licensee becomes aware of group territorial revenues passing the thresholds under its own quarterly or annual accounting. A slight alleviation of this requirement is allowed for temporary spikes of revenue above the 3% threshold.
The purpose behind this change is to reinforce the existing requirement to determine not only from where but by how much UK licensees might benefit from grey market revenues to fund marketing or other UK facing activities. As the Commission are concerned that:
“Revenues generated in “grey” markets could be used to gain a commercial advantage in Great Britain”, for example by funding marketing spend in GB.”
For instance some UK licensees may only have a token presence in the UK with the real intention of utilising their license for sponsorship deals with UK Premier League clubs, thus benefitting from substantial global TV coverage. Similarly white label arrangements also facilitate this global branding for foreign based operators.
The key test will be the determination of what is a group company. LCCP uses the same definition as set out in the Companies Act 2006, meaning any subsidiary, holding or sister (subsidiary of the same holding company) company of the licensee will be deemed to be part of the same group. Therefore structures which straddle multiple jurisdictions via specific licensee companies but under the same common holding company (even if many layers up) will be caught and as such will need to report “grey market” revenues.
The next key test will be the determination of what defines a “grey market”. To some extent this should have already been addressed at the application stage. This usually involved the obtaining of a favourable legal opinion as back-up if the Commission challenged the applicant. This application stage disclosure may be open to interpretation as to whether it in fact applies only to the applicant or the activities of the group. However the new LCCP 15.2.2 will now fully close any loophole by requiring the licensee to disclose group revenues above the jurisdictional threshold. Once the territory and associated revenues are disclosed, the licensee may face questions if the Commission has doubts over the legality of taking revenues from questionable jurisdictions. The higher the revenues the more questions that are likely to be asked.
The “grey markets” and indeed black markets definition may by default be those where a reputable legal opinion from an expert gaming lawyer in that jurisdiction cannot be obtained. The legal opinion does not necessarily have to endorse the supply of gambling services but will, as described in the Gambling Commission’s own application notes: “rest on reasonable assumptions and a coherent rationale”. Given the proliferation of unregulated jurisdictions, an opinion which opens up the possibility for challenge against enforcement may suffice. Some jurisdictions may in addition make it a criminal offense for the players themselves to gamble on unlicensed or blacklisted sites. This may have money laundering implications as well as being a “grey market” reporting issue.
The actual activity in the jurisdiction will also have a large bearing on its “grey market” status. Where there is more physical presence, offline advertising and localisation of customer facing local sites and marketing, it will increase the likelihood of not only breaching questionable anti-gambling laws but might trigger more enforceable advertising and tax prohibitions.
Another important consideration when it comes to the “grey market” definition is the whether the jurisdiction is in the EU. It will be extremely difficult to justify to the UK Gambling Commission the taking of wagers from an EU state where an EU Commission approved licensing regime is in place, if the relevant group company does not hold a licence. Furthermore even if there is no effective regulatory regime in place, there may still be a point of consumption tax that can easily be enforced under EU tax cooperation treaties against a group company failing to register and pay local taxes such as VAT. Germany is a very good example of this.
Are Group B2B Activities Affected?
The change in the basis of LCCP 15.2.2 notification from advertising activity to revenue generation may have an additional consequence. The definition of advertising under LCCP 15.2.2 is very wide and covers the mere access to a local language site from which gambling can be facilitated (without necessarily having all the “bells and whistles” of local currency, payment methods, localised content, etc). However this is essentially a B2C, operator type activity, whereas the generation of revenue in grey markets can easily be achieved from B2B activity, such as licensing of gaming and back office platforms to operators in those territories willing to take the risk. Should this B2B revenue be declared? A lot will depend on the final exact wording of LCCP 15.2.2.
No doubt many gambling companies have mitigated their withdrawal from operating in grey markets by instead supplying B2B services. This is fine if they only supply to licensed operators such as monopolies or land based incumbents with sole rights to offer offline and online gambling. However if there is no licensing regime in place but they still supply to operators in what amounts to a prohibited jurisdiction, then they will per se be generating revenue from a grey market territory. Likewise if there is supply to unlicensed operators in a licensed regime.
The UK Gambling Commission does not allow its B2B licensees to supply to unlicensed UK facing operators and may question any supply to grey (and black) market B2C operators. The key question is whether the Commission will turn a blind eye to group companies of a UK B2C licensee providing B2B services to grey or black market operators.
The UK Gambling Commission and the Division of Gaming Enforcement in New Jersey are currently the only 2 regulators who address the suitability question by looking at group activity beyond the scope of their own license. This however may become a growing phenomenon as regulators begin to coordinate and exchange information between themselves.
Executives may now need to reconsider their group structures and their mix of global B2C and B2B activities. There is a fine balance to achieve and it will be necessary to continually monitor and plan for global regulatory (gambling and money laundering) and tax changes to avoid all the black holes of regulatory compliance with the UK licensing regime.
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I have over 20 years of experience in betting & gaming, regulation & compliance, intellectual property and commercial contracts. Prior to joining Gordon Dadds regulatory solutions team in 2017, I was General Counsel & Chief Compliance Offer at Mansion Group for 10 years. My key specialisms are gambling law and regulation, compliance, governance and risk management, AML policies and procedures, IT contracts and technology licensing, entertainment and media contracts and copyright licensing, sports sponsorship agreements, ecommerce and internet law. I am a member of IMGL (International Masters of Gaming Law), GBGA (Gibraltar Betting & Gaming Association) and ICA (International Compliance Association).