E-Commerce and E-Gaming Feature - The Isle of Man
By Offshore-E-Com Editorial
16 April, 2013
Located in the Irish Sea between the North West of England and Northern Ireland, the Isle of Man's economy rests solidly on the provision of offshore financial services to wealthy individuals and multinational corporations in a low-tax environment. However, e-commerce, and in particular e-gaming, has quickly grown to become the second pillar of the island's economy.
The Development of E-Commerce
Many offshore jurisdictions had grand ambitions in the early days of the Internet's development to become hubs for e-commerce. From a tax point of view, with these businesses able to access markets in high-tax countries without needing a physical presence to sell their services there, the Internet and offshore seemed to be the perfect fit. Very few offshore jurisdictions have followed these plans through. The Isle of Man, however, is one of the exceptions.
The island's Government was one of the first to put in place a legislative framework for e-commerce. The Isle of Man Electronic Transactions Act, which received Royal Assent in June 2000 and was effective from November 2000, is based on Australian legislation, which is in turn based on the model issued by the United Nations Commission on International Trade Law. Its purpose is to enable electronic commerce to be put on the same legal footing as paper-based commerce, as well as removing any legal impediments to the use of electronic communications with public authorities.
The Government has also been leading efforts to encourage growth of the e-commerce industry. The Isle of Man's first Director of E-Commerce took office in late September 2000, with responsibility for coordinating the development, promotion and implementation of an e-commerce strategy for the island. In June 2001, the government's e-commerce division published a report which set out in detail the Island's approach to becoming one of the world's leading e-commerce centres and most advanced 'e-societies'. Entitled 'The E-Commerce and E-Society Strategy Report,' it obtained the approval of the island's parliament, the Tynwald, and was actively promoted by the government.
Substantial investment in upgrading the Isle of Man's telecommunications infrastructure has also taken place, so that the entire island is now broadband enabled. The island's telecoms infrastructure also features a network of data centres which include disaster recovery facilities. Indeed, it is said by the Government that the resilient nature of the Isle of Man's infrastructure is epitomised by the fact that there is no single point of failure. If a fault occurs then the Island's 'self-healing ring technology' kicks in to enable seamless transition to switch to alternative power or data routing.
The Isle of Man has also been used in recent years as a test-bed for new technologies and was at the forefront of the launch of both 3G and 3.5G services. Manx Telecom was the first European operator to launch a 3G mobile service and the first in the world to launch a 3.5G mobile service.
This heavy investment in the Isle of Man's technological base has undoubtedly paid off. The e-business sector now accounts for 12% of the island's gross domestic product - making it the second largest contributor to GDP behind insurance. And with its combination of low taxation, favourable regulation, its proximity to the European Union and world class telecoms infrastructure, the Isle of Man has become a natural base for the burgeoning e-gaming industry.
According to the Manx E-Gaming Survey 2013, conducted in January by the Manx E-Gaming Association, the jurisdiction's e-gaming sector is currently in a very healthy condition, and is poised for more growth throughout the year.
The latest survey shows that in 2012 there were 775 people were employed in the sector - up from 230 in 2006 - and this figure is forecast to rise to over 850 during the year. Excluding any multiplier effects, direct expenditure on the Isle of Man by the sector in 2012 was GBP175m, a figure estimated to rise to almost GBP200m during 2013, contributing some GBP18m in taxation to the Isle of Man Treasury.
The survey shows that prospects for new business in the sector remain positive with increasing numbers wanting to secure an Isle of Man licence or start up a non-licensable operation in the island.
As of mid-2012, there were 45 online gambling licence-holders in the Isle of Man.
Back in 2006, a report by the IT consulting firm Charteris identified the Government's decision to introduce a 0% corporate tax regime, coupled with a cap on personal income tax at a maximum level of GBP100,000 per annum as key in transforming the Island into a leader on the e-commerce front.
Other factors noted by the report which have been crucial to the growth of e-commerce in the jurisdiction include: increased off-Island competition as a result of the licensing of Cable & Wireless, which has led to lower bandwidth costs; provision of world-class hosting facilities in the form of Manx Telecom's Douglas North facility; evidence of clustering in the online gambling sector and the beginnings of "stickiness" of operators in the sector; a number of "excellent sales wins", including Microgaming, Poker Stars and Inca Gold; and clear signs of significant improvement in collaboration between business and Government on e-business and economic development issues.
Furthermore, the UK's decision to "white list" the Isle of Man under the Gambling Act 2007, and the presence of a well-developed network of service providers and peripheral activities such as marketing, software and IT providers with experience in e-Gaming business have acted as a catalyst for growth in the sector.
Regulation and Licencing
The Gambling Supervision Commission (GSC) regulates all online gambling activities based in the Island.
The core principles the Commission upholds are to: ensure that the services offered by licence holders are fair and that players receive their true winnings; to keep the gambling industry crime free; and to protect the young and those at risk.
The GSC is also responsible for the licensing and regulation of land-based gambling operations (casino, amusement and slot machines, betting offices and lotteries).
The primary legislation regulating the online gambling industry is the Online Gambling Regulation Act 2001, commonly abbreviated to OGRA, which covers all games where: they use telecommunications (phones, internet, servers, etc); they involve players betting money (or money's worth); and the games incorporate any element of randomness or chance.
The GSC also has a duty to protect the reputation of the Isle of Man as a well regulated gambling jurisdiction; it must also where possible ensure that the Island's economic interests are protected.
In addition to compliance with OGRA, operators who intend to establish in the Isle of Man must satisfy the following criteria:
- They must establish a Manx company
- They must have at least 2 local directors, who must be individuals and not corporate entities
- They must appoint at least one resident Designated Official (DO), or where that Designated Official cannot reside in the Isle of Man, an Operations Manager (OM)
- They must either register players on Isle of Man servers or they must operate under a network services licence which obliges them to establish the network services in the Isle of Man
- Gambling and trading accounts should be located in a bank in the Isle of Man
Where the Commission suspects that an operator is coming to the Isle of Man in order to benefit from the advertising privileges the Island enjoys in the UK then it will expect the operator to relocate a significant part of its operation to the Island.
It reserves the right to decline applicants who appear to be creating a nominal Isle of Man presence purely in order to advertise in the UK their parent or sister organisations located elsewhere in the world.
The following types of online gambling require an OGRA licence:
- Betting exchanges
- Online casino games (roulette, blackjack, slots, etc)
- Live dealing
- Peer to peer games (poker, bingo, backgammon, Mah-jong, etc)
- Mobile phone betting
- Fantasy football (or similar)
- Financial trading (but not spread betting)
- Pari-mutuel and pool betting
- Network gaming
- Certain "spot-the-ball" style games
- Network services
There is a GBP5,000 fee payable by the applicant at the beginning of the licencing process. The annual cost for a five-year OGRA licence starts at GBP5,000 for a sub-licence (obtained in cases where the Isle of Man-based business uses the technology platform of an existing Isle of Man full-licence holder), rising to GBP35,000 for a standard licence and GBP50,000 for a network services licence. The licence application process typically takes 10 to 12 weeks to complete.
In May 2011, the Isle of Man's Economic Development Minister Allan Bell welcomed confirmation of the special safeguards in place to protect the money of customers of online gambling operators licensed in the Isle of Man.
In a statement issued on May 8 the GSC said all its current licence holders were complying with the mandatory licensing requirement to keep players' deposits and winnings separate from the funds used by the operator to conduct its business. This means that any player could withdraw from their gambling account at any time, subject to the normal regulatory checks.
The confirmation was as a direct result of US authorities' criminal proceedings against Pokerstars - along with two other, non-Isle of Man-based companies - after allegedly creating sham payment-processing frameworks to unlawfully provide Internet gambling services to the United States.
The Manx Gambling Supervision Commission on May 9 stated:
"All Isle of Man licensees must separate their players' deposits and winnings from the funds that the operator uses for conducting its business. This is a mandatory licensing requirement for Isle of Man online gambling operators."
"The Commission can confirm that all of its current licence holders are complying with these requirements and any players who wish to withdraw money from their gambling accounts should be able to do so at any time subject to the checks required to comply with anti-money laundering, anti-terrorist financing and know-your-customer laws."
In July 2011, the Isle of Man launched a new Network Services Licence for business-to-business e-Gaming operators.
This new level of licence is available under the existing Online Gambling Regulation Act 2001 and is designed to recognize the business-to-business relationships that many gaming operators now have. The licence aims to provide Isle of Man-based gaming operations the opportunity to make their platform available to business customers around the world.
The cost of the new licence is GBP50,000 per year plus GBP5,000 per overseas customer. Duty will be paid on retained profit at a maximum rate of 1.5%.
It is anticipated that this new business model will not only attract new and larger businesses into the Isle of Man but it will also increase opportunities for those businesses already based on the island to develop relationships with companies across the globe.
Commenting on the launch, Garth Kimber, Head of e-Gaming Development at the Isle of Man government, said:
"The introduction of this level of licence gives us the ability to satisfy every model of gaming business in the Isle of Man from those selling their platform capabilities to other businesses to those with direct customers. Our system is now in three tiers; Network Services Licence, Standard Licence and Sub-Licence. The level of licence required is dictated by the type of business-to-business relationships a company intends to pursue and covers all gaming activities from sportsbook to poker and involves the same application process. All levels of licence are still processed in a maximum of 12 weeks."
"The creation of this new licence demonstrates our ability to keep pace with the dynamism of the e-gaming industry without over complicating licencing. There remain many activities such as software downloads and marketing for example, which can be carried out without the need for a licence as we are focussed on the key issues of regulation, protecting players by ensuring their funds are protected and that games are fair. We must continue to adapt our regulation and approach not only to ensure continued protection for players on our licenced sites but to remain a commercially attractive jurisdiction to all kinds of gaming business. Our close working relationships with customers and with the Regulator, Steve Brennan and his team at the Gambling Supervision Commission are central to this."
Commenting on this latest development, Minister for Economic Development, Allan Bell, said:
"I look forward to welcoming the additional business opportunities that will come from this new development. The strengths of the Isle of Man as an e-Gaming licensing jurisdiction continue to match the needs of some of the world's leading gaming businesses but we cannot afford to rest on our laurels. This development opens the door to more diverse businesses and will only be positive in terms of economic value and eventually job creation for the island."
Alex Downie, Department of Economic Development member representing e-Gaming, added:
"The delivery of the Network Services Licence is a prime example of the collaborative approach that the Isle of Man adopts in developing the e-Gaming sector. It's only through talking to the industry that we can hope to continue to meet their needs into the future."
E-gaming is a boom industry at the moment, and the Isle of Man has risen rapidly to become one of the world's leading e-gaming jurisdictions. However, there are some uncertainties on the horizon as a result of regulatory developments in the UK, the EU and the US.
Named on the UK's e-gaming "white list" in August 2007, this endorsement allowed e-gaming companies based in the Isle of Man to market their services in the UK and gave the jurisdiction a reputational boost.
As Kimber observed at the time: "The UK white list is a crucial benefit to the Isle of Man. The UK's Gambling Act 2005, implemented next month, will ban companies based outside the EU from marketing into the UK. Having been added to the white list, companies licensed in the Isle of Man will now be excluded from this restriction and will be able to advertise into the UK for both the terrestrial and remote markets.
He added: "Our inclusion clearly demonstrates that as well as being commercially and technologically attractive the Isle of Man has established and maintained good standards of legislation, regulation and probity similar to those required by the UK in their jurisdiction. We have a high threshold on quality."
However, the new Government elected in the UK in 2010 signalled that it wanted to take a new direction with the regulation of gambling, particularly of the offshore variety.
The UK Government published the long-anticipated draft legislation in December 2012. This will introduce new licensing requirements on offshore gambling operators and regulate gambling services provided to UK consumers on a point of consumption basis, rather than on the current place of supply basis. Offshore operators will also be expected to contribute to the cost of regulating gambling in the UK by paying more tax.
The legislation, the Draft Gambling (Licensing and Advertising) Bill, will amend the Gambling Act 2005, and will require all operators providing services to the British market, whether based in the UK or abroad, to hold a Gambling Commission license allowing them to target their services and advertising to British consumers. The proposed changes will mean phasing out the "white list." There will instead be no geographical limitations on the provision of a Gambling Commission license, allowing operators from anywhere around the globe to obtain the necessary permissions. However, the new law places the onus on gambling firms to provide evidence that their home market is sufficiently regulated.
The UK Government has assured that Operators in well-regulated jurisdictions - and it must be assumed that the Isle of Man is considered a well regulated jurisdiction - whose regulators can provide, for example, the necessary compliance information, will not face significant increases in licensing costs. Those whose regulators cannot provide such information will need to pay the compliance costs associated with being subject to the same requirements as other Gambling Commission licensees.
With the UK one of the largest markets for Manx-based e-gaming operators this legislation clearly has implications for the jurisdiction, although it is hard to tell at the time of writing how hard the impact will be.
Also of significance is the fact that Brussels is taking a keener interest in e-gaming and gambling, which could lead to regulation of the sector at EU-level and transform the current patchwork of national legislation into a coherent whole.
This has the potential to simplify regulation for e-gaming companies targeting the European markets. However, it could also turn out to be something of a double-edged sword: European Internal Market Commissioner has said that Brussels is not interested in liberalising the EU gambling industry, only in ensuring that it is regulated properly, and he took a particular swipe at e-gaming firms registered in "offshore havens".
In October 2011, the European Commission published is much anticipated Green Paper entitled 'Towards a comprehensive European Framework for online gambling'. This proposed to enhance the safeguards in place to protect consumers, mitigate match-fixing and money laundering, and challenge member states' regimes that infringe EU law.
The Green Paper suggested:
- Formalizing the exchange of information and cooperation between European gambling regulators by 2013;
- Centralizing enforcement against non-compliant operators and fraudulent users at EU level, using enhanced measures, such as payment blocking and disabling access to websites;
- Adopting recommendations on common protection of consumers and on responsible gambling advertising in 2013;
- Extending the scope of the Anti-Money Laundering Directive to all forms of gambling in 2012;
- Promoting expertise exchange between regulators against cybercrime;
- Exploration of the possibility of an EU standard on gambling equipment including gambling software in 2013; and,
- The adoption of a recommendation on best practices in the prevention and combating of betting-related match fixing in 2013, which would include promoting cooperation and dialogue at an international level on the topic.
Little progress has been made in respect of these goals, however.
The legal situation with regards the provision of e-gambling services in the United States is also not completely clear. Offshore operators have effectively been banned from selling their services to residents of the US for a number of years under the terms of the Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006. Specifically, the Act prohibits gambling businesses from knowingly accepting payments in connection with unlawful internet gambling, including payments made through credit cards, electronic funds transfers, and cheques.
The US Government continues to aggressively pursue offshore-based gambling firms thought to have contravened US laws by taking bets from US residents. In the most recent example of this, on April 10, 2013, 34 individuals and 23 entities were indicted and accused of operating an illegal sports bookmaking business that solicited more than USD1bn in illegal bets. According to the indictment, the defendants conspired with others to operate internet and telephone gambling services first from San Jose, Costa Rica and then from Panama City, which took wagers almost exclusively from gamblers in the United States seeking to place bets on sports.
There has been talk that the US may liberalise its gambling laws, with the possibility that offshore-based operators may be able to access the lucrative US market. However, on the evidence of the most recent action by the DoJ, and inaction in Congress, this doesn't look likely to happen any time soon.
As far as the Isle of Man is concerned, the US ban is currently having little impact on its e-gaming sector. While it is true that a number of Manx-based operators surrendered their Isle of Man licences in response to the US crackdown some 10 years ago, the rapid growth of the e-gaming industry in the meantime suggests that this blip has been more than overcome. Legislative developments with regard to e-gaming and gambling in the US will however remain closely monitored by the Isle of Man.
The e-gaming industry in the Isle of Man is an undoubted success story, having risen to become the island's second-largest earner in the space of just 10 years or so. This has to a large extent been fuelled by the Isle of Man's low-tax status and a Government willing to put its money where its mouth is when it comes to the development of e-commerce and a suitable infrastructure to base it on. Changes to the licencing regime in the wake of the pull-out of some operators amid the US crackdown also help to turn the sector around after a shaky start, indicating that the Government is proactive in supporting the industry.
There are however some potential threats to the e-gaming industry in the Isle of Man in the shape of regulatory developments in Brussels and London, and to a lesser extent the US. But according to the Manx E-Gaming Association, one the greatest dangers at the moment is complacency.
"There can be no room for complacency as e-gaming is relatively footloose and business can easily be lost," the Association stated upon the release of its 2013 Survey. However, it concluded that the future for e-gaming on the Isle of Man "continues to look encouraging, with a good pipeline of new enquiries from companies in both licensable and non-licensable activities and the clear commitment from established entities being demonstrated by their restructuring plans."
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