Malta: Online Gaming – Hidden Treasure or Risky Business?

A positive step taken last year was the promulgation of a comprehensive set of regulations in a legal notice amending the Lotteries and Gaming Act. Such updated legislation has opened the path for the regulation of lotteries and gaming operations to reflect current trends.

In less than a year the flurry of contacts and enquiries which have bombarded practitioners from foreign operators seems to go unabated. The number of licensed companies now exceed 60 and rumour has it that last month a prominent first tier company has signed in their application.

Such first class operators usually operate in the $3 billion bracket and will augur well for the island to post itself as one of the leading lights in European gaming map. Following the issue of remote gambling regulations a number of licences were made available such as online casinos, casino-style games, betting exchanges and lotteries. The authorities have seen how other competing jurisdictions have already legislated and marketed aggressively to attract quality players to be able to generate sustainable employment and tax revenue for their country. So the obvious question to ask is whether Malta is ready and willing to milk the cash cows that can be wooed to set up their servers and management systems in Malta ? So far in a short period licensed companies generate over Lm1 billion in revenue which comes in handy for the taxman and generates over two hundred direct jobs.

It is anticipated that as the sector expands turnover will easily surpass the five billion liri mark.

All this will have a positive effect on jobs and there will be a multiplier effect helping the general economy.

Indeed positive direction should be enlisted from government agencies such as Malta Enterprise to make the process a one-stop shop.

Certainly support was given to PKF when it launched its private initiative to host the ‘ Regulation, Taxation and Location " London conference to showcase Malta among a number of competing jurisdictions next June.

At this forthcoming conference competing jurisdictions therefore have a window of opportunity to attract business opportunities from international operators wishing to relocate.

This is an interesting opportunity for investors from all corners of the globe to meet face to face with regulators and representatives from Governments of eight jurisdictions that licensed or are about to provide licensing opportunities of sportsbetting, online casinos, poker rooms, spread betting, online lotteries, bingo and bet exchanges. All selected jurisdictions have provided comparative information based on a common set of questions, which were asked of them by the event organizers. From a cursory glimpse of such answers one can immediately fathom at face value the legal, regulatory and fiscal advantages and disadvantages. In other words it is a wishing-well answer to operators who want to look before leaping into an exotic jurisdiction.

What is so unique in the remote gaming regulations that has classified Malta as an attractive EU jurisdiction? The simple answer is that the proposed licence application and taxing charges coupled with prudent regulation to protect players funds has been well received.

Malta charges 0.5% betting tax on turnover and a monthly charge of Lm3,000 for a class 1 gaming license on a five year renewable licence. This tax is capped at this rate irrespective of the turnover.

The remote Gaming Regulations 2004 offers four classes of Remote Gaming Licenses; Class 1 Remote Gaming License is a remote gaming license, Class 2 Remote Gaming License is a remote betting office license or a remote betting exchange office license, Class 3 Remote Gaming License is a license to promote or abet gaming from Malta, and Class 4 Remote Gaming License is a license to host and manage remote gaming operators, excluding the licensee himself.

Special concessionary rates apply for those software vendors applying for a class4 license. Notwithstanding that promotion was sparse ,it is evident that an increasing number of investors started showing interest in locating to Malta . Undoubtedly investors are encouraged now that the bandwidth facilities doubled due to Vodafone investment in a secondary submarine cable.

Concurrently there has been serious enquiries from blue chip operators who are keen to use Malta as a hub for web farming and data transmission PKF has been approached by investors who wish to invest in a hub concept linking the island to Europe and North America by the provision of collocating and hosting services. But can we rest on our laurels ? Certainly not . To quote one example the British are moving fast to become one of the most trusted and respected online gaming jurisdiction in the world. Recognising the potential of the British market, only sites that are licensed and registered with the Gambling Commission and who have hosted their equipment in approved jurisdictions would be permitted to advertise in the UK.

In Britain alone the market is expected to exceed £10 billion in 2010. The Gambling Commission plans to welcome new online gaming operators who locate their servers in Britain. The new Gambling Bill should be in place by 2007. It is remarkable that the UK is currently the third largest market for online poker, just behind the US and Japan. Gaming is one form of entertainment that is popping up with ever increasing frequency on the information superhighway. For this reason the EU Commission has embarked on a study to issue a future directive to legalize and regulate cross-border online gaming services.

Holland has a rule that its citizens who wish to gamble online must first register for a unique code that can then be monitored. If a player is determined to be gambling excessively, they may have counselling recommended, or have their access cut off. Gibraltar is the home of the largest casino site which runs Casino on Net. This company rakes in over US $1 billion a year, with estimated annual profits of $200-$300 million. Analysts say that the parent company, VHL, which runs Pacific Poker, is now considering issuing stock on the London stock exchange, with a value around $2 billion, thanks to its high profitability. It all goes to show how the gaming industry has manifested an astounding growth rate. Quoting Christiansen Capital Advisers they remark that in 1996 there were just 30 Internet gambling sites with annual revenues of $30 million while in 2004 these exploded to 1,400 sites with revenues of about $9 billion.

In Canada, running an online gambling service may be illegal, but the act of betting does not appear to be as it is almost impossible to know who is logging on to these sites. In the U.S., several credit card companies, including VISA, American Express and Citibank, and the internet payment system PayPal have said they will cut off access to their services by online casinos. With all these hurdles ,it is surprising to see how hundreds of Internet gaming and online casino sites survive out there. Possibly the reason can be attributed to the massive expansion of this leisure time and the gargantuan advances in the broadband and cellular technology, which allow players to bet on sports results via their cell phones or hand-held computers.

Certainly with the massive competition out there it is a safe bet to say that the fly-by-night operations do not last long. Online gaming is a competitive business and many casinos will offer a lot to get and keep your business. Many will offer sign-up bonuses to new customers, while some will randomly deposit money in customer accounts and others will give away vacations for specified levels of total money bet.

Certainly the risk for the operator is the ever present possibility that bets paid on credit card authorisations is reversed by punters. Visa and Mastercard rules can be very strict on protecting the rights of consumers who dispute the payments on bets that they wish to reverse. In fact reversal of sales arising out of these disputes are the biggest problem the industry faces. The industry term for this is a charge back. The only protection for the industry is to mark such players who habitually reverse their bets for no valid reason by keeping a trace of them on a fraud screen. This data will be scanned every time a new player applies for admission to a game.

Databases of suspect players are maintained by the payment gateways to protect bona fide operators from such abuses. Once the player is on the suspect list they will likely be unwelcome at every online site or casino that the list is shared with.

Remember that online casinos want to stay in business because they make money. The only way for them to stay in business is to attract players so the rationale goes that the only way for them to attract players is to operate a legitimate and honest site.

If you are of legal gambling age and understand that you are gambling for entertainment, not for profit, then the conscious decision is yours. Gambling is not a magic way to make money and the rationale should be that players enjoy gambling as a form of entertainment. Indisputably online gaming is an industry which to survive needs to make a decent profit on its operations. Although statistically speaking a player may be lucky and hit the jackpot there is always a conscious feeling that the house always wins in the end. Typically the statistical edge is in favour of the house and this varies according to the game or type of bet. To give an example ,roulette makes 5% ,Blackjack 10 % to 20% ,football and basketball ( single bets ) 19%, and horseracing about 19%. So what one may ask is new about this nascent industry and how do we rank in the pecking order of jurisdictions that licence such business ? We find that top of the list is Curacao with 246 sites whereas another popular North American jurisdiction is Kahnawake in Canada. The latter hosts 301 active sites. Definitely we need more time to catch up with these jurisdictions but predictions are bright. Having just started we need to make hay while the sun shines yet Malta would stand to gain by consolidating its own position.

Analysts recommend that no effort should be spared to sustain momentum in this field and that government bureaucracy must not stifle private initiatives that labour to attract the industry to our shores.

The writer is a partner in PKFMALTA ,an audit and business advisory firm.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.