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Efforts to fight illegal action need to be stepped up

Dr Andrew J. Zammit, Managing Partner of GVZH Advocates

iGaming operators need to pay closer attention in order to not break the law; while tighter enforcement should be the new norm, says Andrew J. Zammit, Managing Partner of GVZH Advocates.

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How would you describe the industry’s attitude towards matters such as regulation and compliance?

The iGaming industry has matured significantly in recent years. In fairness, the attitude before was that operators could afford to be more relaxed because the regulatory framework was far more lenient. Now after almost 20 years’ existence of this industry, certain principles have been established. Operators have no choice, they have to comply. Very high profile cases have been referred to the European Court of Justice, which has essentially begun creating a framework of principles that affect gaming operators in Europe. Companies cannot afford to have their reputation tarnished. The truth today is that industry executives have also got to be very careful. Prison is a real risk for executives targeting certain markets in breach of applicable restrictions in those target markets. However, it is also true that the regulatory framework throughout Europe is still taking shape and several uncertainties still exist, thus offering opportunities to those operators willing to take higher degrees of risk.

What are the recent trends in the industry from a legal perspective?

We can see that companies are still looking at Malta as a base to access European markets. They are not targeting a specific market, but are just seeking a European presence, picking up players on a ‘reverse solicitation’ basis. Our firm receives enquiries from operators based in several European countries, but also from other jurisdictions as far afield as the US, the Philippines and Australia. We have also experienced an increase in requests from operators in Gibraltar that are considering a back-up plan to hedge against the consequences of Brexit. It is in fact surprising that a Malta licence is still so much in demand since one would have expected us to reach a point of semi-saturation. However, now that the dust seems to have settled after the introduction of licences in the UK, France, Italy and Spain, attitudes seem to have changed. Rather than rushing into licence applications in every country that introduces regulation, companies carefully assess their market share and the risk involved, as well as the potential revenue, before venturing into certain markets. In this scenario, they see Malta as a good entry point to Europe because it still offers access to many markets. It is absurd to expect small operators and start-ups to get licensed in every single country. The set-up and compliance costs would be astronomical and effectively unachievable for start-ups. Often companies only apply for licences in a particular country once their pool of players in that country grows. As lawyers we tend to maintain a very risk-averse position in guiding our clients through the regulatory minefield and establishing prudent business practices in the light of legal and regulatory developments and trends. Certain operators however tend to have a much higher risk tolerance and choose to undertake certain risks to achieve their commercial objectives. An entrepreneur is a risk taker by nature. This is how the industry has grown.

How has the nature of start-ups changed from the start-ups you were dealing with a number of years ago?

Today’s start-ups are much more international. They are from further afield; as I mentioned earlier we see operators from geographical markets like the US, Australia and the Philippines, the latter two being markets we have not seen very much before. These companies are not necessarily start-ups; they are already established operators in these jurisdictions and are now looking to Europe as the next frontier they want to test. This is one of the most profound changes we are experiencing. A few years ago, we were almost exclusively dealing with companies that we were all familiar with because they were from continental Europe. Currently, we are also seeing companies based in Curaçao looking at Malta. They too want to find new growth avenues in Europe.

How is this trend influencing the way you work? Are law firms changing themselves to account for that?

Yes, we certainly have had to adapt. Due to the cross-border nature of the business, we are now plugged into a strong network of correspondent firms that help support us. We actually belong to industry-specific networks and are very aware of the fact that we need to select counterparts in other countries based on their expertise. We are also continuously looking to improve our technologies and processes to keep improving the quality and efficiency of our offering.

How would you describe the legal landscape in Europe to a start-up ready to launch?

It is still very fragmented and confused because the European Union keeps disappointing us about the illusion of the single market that we are trying to build, and iGaming is an area where national interests take hold. There is an element of hypocrisy among member states, they don’t want to have gambling on their soil but are eager to grab the tax revenue from it. Every country has its own approach to iGaming. Malta is already depicted as the opportunistic bad boy. The truth is that the Malta Gaming Authority (MGA) has been a very proactive regulator. I am happy to say that even 12-14 years down the line we have not had any real high-profile scandals. Quite on the contrary, we are now seeing private equity houses look at iGaming operators as viable investment opportunities. This is indicative of how the general perception of the industry has changed.

What is your comment on the scandal that hit Malta’s gaming sector in 2015, when several iGaming companies were accused of money laundering and suspected links to the Calabrian mafia?

As a small country, we have always been very sensitive about our reputation, but this was a collective failure. There are so many relationships that these companies must have struck in order to operate from Malta. Auditors, lawyers, service providers, banks and the MGA – all checkpoints appear to have failed and this is what I find most shocking. This sent shockwaves across the industry. I think the key issue here was that most firms narrowed money laundering down to the client acceptance process with a check-box approach. However, it is crucial to also monitor how a client behaves in the course of their business relationship. I believe that this case really drove this point home, causing service providers to take a more pro-active approach towards money laundering risks.

Some say Malta has some of the best laws aimed at preventing money laundering and other forms of financial crime but lacks enforcement. What’s your opinion?

I could not agree more. There are already rules that enable confiscation of assets in the law as it stands now, but little enforcement. With Malta as a financial centre, is it conceivable that we are having such low rates of investigations and prosecutions? We must uphold the rule of law, and there must be enforcement if we are going to be perceived as a serious place to do business. The only way forward in my view is total openness and transparency.

What are the biggest issues that your iGaming clients are dealing with at the moment?

The treatment of gaming services for VAT purposes is probably at the top of the list. The VAT landscape is so fragmented and inconsistent these days. Breaking down sales country-by-country is a lot of administration. When it comes to how you should be attributing the input part of your expense, VAT recoverable or not recoverable, things get somewhat nebulous and difficult to manage. It is a matter of constant discussion with our clients.

Have there been any cases where big countries like Germany, for example, have gone after people on VAT issues?

We have not seen any of this happening, but it is an interesting perspective on how things could evolve. If a country has a weapon to use, they will resort to that weapon sooner or later.

Finally, we are seeing many iGaming companies doing Stock Exchange listings. Do you believe there is an opportunity for the Malta Stock Exchange (MSE) to attract business?

This is a great vision, but realistically speaking, listing in the UK or Sweden is preferred among iGaming companies because of the immediate recognition of the London Stock Exchange or the Stockholm Stock Exchange by investors. However, I feel that the Malta Stock Exchange has potential to attract international investors, and the Exchange’s current board is working hard towards making the MSE more international.

Andrew is the Managing Partner of GVZH Advocates. Andrew heads GVZH’s corporate, mergers and acquisitions, technology, and banking and finance practices. He graduated from the University of Malta in 1999 (Doctorate of Laws) and subsequently pursued a Masters of Law degree at the London School of Economics and Political Sciences (LSE) in the areas of Company Law, Financial Services Regulation, The Law of International Finance and International Trade Law, which he completed successfully in 2000.

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