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OEC International E-Commerce & E-Gaming - David versus Goliath

By Offshore-E-Com Editorial
22 October, 2012

With flexible and responsive regulatory systems and low or zero rates of taxation, it is not surprising that the internet gaming industry has a found its home offshore. Those jurisdictions which have invested in an appropriate legal framework and advanced telecommunications infrastructure have generally reaped the benefits of the rapid growth in this sector over the last decade. The tiny Caribbean territory of Antigua and Barbuda, and the Mediterranean island of Malta, a member of the European Union (EU), are two such jurisdictions. However, legislative and regulatory developments in the United States and the EU have put the very existence of the internet gambling industry in these places under threat, with disastrous economic consequences, actual in the first case and potential in the second.

Antigua and Barbuda

Earlier this month, the government of Antigua and Barbuda announced that it is to collaborate with the jurisdiction's remote gambling industry - what is left of it at any rate - in an attempt to resolve a decade-long trade dispute with the US, which has all but shut out offshore gambling providers from its market and cocked a snook at the World Trade Organisation (WTO) in the process. Having exhausted all legal mechanisms to get this vital market back though, Antigua is still facing what look like insurmountable odds, barring a sudden and unlikely change of heart in Washington.

Regulation and Tax

The establishment of an online gaming sector in Antigua and Barbuda has taken not inconsiderable investment given the jurisdiction's limited resources. According to the Antigua and Barbuda Investment Authority, over 3,500 individuals (out of a population of 100,000) have experience or have had specific training in the industry. The islands are also well connected; there are three Internet Service Providers providing high speed international private leased circuits and the jurisdiction is linked to two separate undersea fibre networks: the Eastern Caribbean Fibre System and the South Caribbean Fibre.

Antigua and Barbuda was in fact one of the first jurisdictions to license interactive gaming and wagering companies in 1994. The Division of Gaming is the regulatory body under the Financial Services Regulatory Commission responsible for the oversight of all aspects of the offshore gaming industry in the jurisdiction. Internet gaming companies are classified as ‘Financial Institutions' and are therefore subject to the jurisdiction's Anti-Money Laundering laws and Caribbean Financial Action Task Force requirements. The regulatory framework for these companies is contained within the International Business Corporations (IBC) Act and the Interactive Gaming and Interactive Wagering Regulations.

Operators are also of course attracted to Antigua and Barbuda because of its low taxes. IBCs are fully exempt from all direct taxes in respect of trading, investment or commercial activity as well as from withholding taxes and stamp duty. There is an annual government fee for registration of an Antiguan IBC, which can be carried out by a locally registered trust company, an accountant or attorney, which at USD300 compares favourably with other offshore jurisdictions. Internet gaming licensees pay 3% tax on their net win. However, they entitled to deduct software licensing or software development costs from their net win, and benefit from a maximum cap of USD50,000 per month on taxes.

Besides this framework of offshore business structures, Antigua & Barbuda also provides a series of separate tax incentives for qualifying investors, as laid down in the Fiscal Incentives Act. Depending on the type of business involved, these give investors potentially long tax holidays. 

Battling the Odds: Antigua's Fight With the USA

By the year 2000, the number of internet gambling licensees in Antigua and Barbuda had grown to 93, and the jurisdiction's industry was turning over USD1.7bn - well over three times the gambling revenues recorded in 1999. At this point, internet gambling employed 1,600 people in Antigua, and the jurisdiction had a 60% share of the global market. This was, however, the high water mark for the industry in Antigua, and after the US began to take a number of law enforcement actions from 2001, the number of licensees began to plummet.

While the Wire Act of 1961 makes the taking of wagers across state lines illegal, there was no obvious legal impediment to stop a person in the US from accessing and using an internet gambling website based offshore. A major turning point came, however, when the US government successfully managed to convict Jay Cohen, the founder and CEO of Worlds Sports Exchange, which was licensed in Antigua, under the Wire Act.

More bad news for Antigua followed swiftly. In June 2002, under pressure from Congress and the law enforcement authorities, Citibank, the US's largest credit card issuer, agreed to block online gambling transactions from using its credit cards. Then in August, New York Attorney General Eliot Spitzer reached a settlement with PayPal Inc. that barred state residents from using the service to gamble online. Shortly afterwards, Paypal refused to accept all betting transactions by its members, as did Visa and Mastercard, causing major problems for the 1,500 or so internet betting and gaming sites providing services to the US, most of which were based in offshore jurisdictions.

The reason for America's hardening stance against internet gambling was overtly driven by the fear that such websites were at risk of being used by criminals to launder funds and evade taxes, and provide a direct pipeline of dollars into terrorist hands. This, of course, took on extra significance following 9/11. As Congressman Jim Leach, who sponsored legislation that would make it illegal for all financial institutions to accept payments related to online gambling operations, put it: "The very characteristics that make the Internet such a valuable resource are also the reasons why it has such a huge potential to impinge on the stability of the American family, American financial institutions and our national security".

All this had the effect of decimating the industry in Antigua and Barbuda, and by 2002, the number of active internet gambling licensees in Antigua had dropped to 38. The jurisdiction's government decided not to take things lying down however, and it announced in March 2003 that it was taking the US government before the Grievance Committee of the WTO for restraining and interfering with the jurisdiction's online gaming and sports book industry.

According to then-Prime Minister Lester Bird, over 80% of the jurisdiction's e-gaming and sportsbook firms had left by 2003 as a result of the anti-offshore sentiment in Washington. “I would say that we have lost about USD30 million as a result of the constant attack upon the industry by members of the US Congress, the Leach Bill and the taking on board by the US government in preventing corresponding banks to deal and operate with these different activities which we feel are particularly legitimate,” he said. “America is the largest gambling country in the world so how can they then be so unctuously self-righteous, to use their power to destroy the niches that we are having, trying to develop some kind of diversification in our economy. It is unfair and therefore we are going to take them before the WTO.” Little did Bird know however, that Antigua would still be fighting its corner a decade later, despite the consistent backing of the WTO.

Antigua and Barbuda is basing its claim on the WTO's General Agreement on Trade in Services (GATS), and the government argues that the US is violating its commitment to fellow WTO members under GATS by prohibiting the provision of cross-border gambling and betting services. In July 2003, Antigua and Barbuda was granted a right to a hearing by the WTO Dispute Settlement Body (DSB) and the preliminary report issued by the panel in March 2004 leaned towards Antigua. But this provoked an angry response from the US authorities. Speaking on behalf of the US Trade Representative's department, spokesman Richard Mills revealed that: "We intend to appeal and will argue vigorously that this deeply flawed panel report must be corrected by the appellate body".

In May, 2004, the WTO seemed set to uphold the complaint made by Antigua & Barbuda. The ruling when it came was rather unclear, but tilted in favour of Antigua. Unsurprisingly, the US launched an appeal against the decision.

This extended the dispute for another year, but, the 127-page decision issued by the WTO appellate body in May 2005, while partially reversing the earlier decision on the matter, still concluded that US measures were “inconsistent with the General Agreement on Trade in Services” and recommended that the US bring these “into conformity with its obligations under that agreement”. Mark Mendel, lead legal counsel for Antigua's case, observed that: “The impartial dispute resolution machinery of the WTO has functioned as we had expected. Justice has been served and potential compliance issues facing various US corporations and the US Department of Justice will now be resolved in a manner favorable to fair and responsible international commerce.” However, Washington took a completely opposite view of the ruling, and acting US Trade Representative at the time, Peter Allgeier, even said that “US restrictions on internet gambling can be maintained” as a result.

In July 2006, Antigua and Barbuda requested the formation of a compliance panel at the WTO in connection with the dispute. Antigua told the DSB that the US had been busy passing legislation that was directly and unequivocally contrary to the DSB rulings. In December that year, a three-man dispute resolution panel established by the WTO heard submissions by Antigua and the US over Antigua's claim that the US had failed to implement a previous WTO ruling that the US should adjust its legislation to allow a level playing field for internet gaming for foreign companies. However, the jurisdiction was soon to experience another blow, and the Antiguan government expressed shock and dismay at the passage by Congress of the Unlawful Internet Gambling Enforcement Act of 2006 in September. While expanding domestic opportunities for legal gaming in the US, the legislation effectively banned all international and inter-state online gaming, by making it illegal for banks and credit card firms to make payments to such internet operations. The provisions were tacked by then-Senate Majority Leader, Bill Frist (R-Tenn) onto an unrelated bill on port security.

In April 2007, the WTO DSB concluded that the US had failed to comply with the 2005 ruling that it should change its legislation banning payments to offshore gaming web-sites. In a minutely argued report, the Panel comprehensively dismissed all attempts by the US to wriggle out of the need to bring its laws into conformity with the GATS, either by banning equivalent domestic betting transactions, or by allowing parity for overseas transactions. However, the US reacted to the latest ruling by simply side-stepping it. The WTO treaty allows a country to withdraw commitments to open its services market to foreign investors; and to get around the latest ruling, the US therefore rescinded one of its services agreements. "We did not intend and do not intend to have gambling as part of our services agreement," stated Deputy US Trade Representative John K. Veroneau, in an announcement that shocked many observers. "What we are doing is just clarifying our commitments."

Under the WTO's GATS Article XXI rules, any country withdrawing its market access must provide compensation to affected countries that maintains a general level of mutually advantageous commitments, not less favourable to trade than that provided for in schedules of specific commitments prior to the negotiations. The US negotiated settlements with four of the eight nations seeking compensation - the EU, Japan, Canada, and Australia, providing compensation in the form of market access to US domestic postal services, warehousing, R & D, and technical testing sectors. But Costa Rica, Macao, India and Antigua did not reach an agreement with the US over the withdrawal of its gambling commitment, as the above market sectors offered by the US were of no commercial interest to those countries.

As far as Washington is concerned, its legal manoeuvre effectively ended the case, and it declined to challenge the official adoption of the internet gambling ruling by the WTO dispute panel. The US also argued that it was exempt from negotiating compensation to governments because internet gambling was never explicitly mentioned in the negotiations of the early 1990s.

However, in July 2007, it was announced that the WTO Dispute Resolution Panel would examine the jurisdiction's case for compensation. Antigua had been seeking some USD3.4bn from the US government in recompense for the damage that shutting out its online gambling operators from the US market had done to the local economy. In the event the WTO awarded the jurisdiction the right to take compensatory measures worth USD21m per year. The islands would be allowed, for instance, to disregard intellectual property rules under TRIPS (the trade-related aspects of intellectual property rights agreement) in order to sell US-generated content such as films and music on the open market. Mendel welcomed the WTO's decision: “I am pleased that the panel approved our ability to cross-retaliate by suspension of intellectual property rights of United States business interests,” he said. “That has only been done once before and is, I believe, a very potent weapon.” However, Finance Minister Dr Errol Cort gave a more downbeat assessment: "Although we are pleased that the extraordinary sanction of the suspension of intellectual property right protection for US interests has been given to us - only the second such authorisation in WTO history - we are disappointed by the portion of the decision limiting our annual compensation to such a mere fraction of our industry's lost revenues."

With all legal avenues seemingly exhausted, Antigua has in recent years tried a different approach, notably by engaging directly with the US government. Talks between representatives from Antigua and Washington, which began at the end of the Bush administration in 2008, did not progress Antigua's cause though. And the situation would appear equally as bleak under the Obama administration, despite the assurances of USTR Ron Kirk, who told Prime Minister Baldwin Spencer earlier this year that “the United States remained committed to working with Antigua and Barbuda in finding a solution to the case”.

In 2012, Antigua felt it had little choice but to try and enlist the help of the WTO's Director General, Pascal Lamy, in its attempt to persuade America to change its mind. According to Ambassador Colin Murdoch, the permanent secretary in Antigua and Barbuda's Department of Trade, Industry and Commerce, Lamy “appeared keen” to preserve the legitimacy of the WTO dispute settlement system and to have the WTO play a positive role in the outcome.

It was said that Lamy is awaiting a substantive response from the United States on the matter. But judging by Washington's previous actions on this issue, this could be a long wait, both for Lamy and for Antigua.


Like Antigua and Barbuda, Malta was one of the world's first jurisdictions to put in place a regulatory structure for the online gambling industry. But unlike Antigua, the industry in Malta has been relatively unaffected by the US ban on offshore e-gambling; indeed, the sector has seen rapid growth in recent years and is thriving. However, it is very much the threat that could be around the corner, in the form of the European Commission's nascent plans to regulate online gambling, that is starting to cast an uncertain cloud over one of Malta's most successful economic sectors.

Regulation and Tax

Legislation was passed in Malta as early as 2000 enabling online betting centres to be set up in the country, and Malta became the first EU member state to regulate internet gambling when it acceded to the Union in 2004, with its Remote Gaming Regulations under the Lotteries and Other Games Act 2001.  The Lotteries and Gaming Authority, which was established in 2002, is responsible for the governance of all gaming activities in Malta including casino gaming, commercial bingo games, commercial communication games, remote gaming, sports betting, the National Lottery and non-profit games. The Authority states that its role is to ensure that gaming is “fair and transparent to the players, preventing crime, corruption and money laundering and by protecting minor and vulnerable players". There are four classes of licence available to operators in Malta which cover casino-type games, fixed odds betting, peer-to-peer games, poker networks, betting exchanges and online lotteries. There is also a licence available for software vendors who want to provide management and hosting facilities on their gaming platform.

While Maltese taxes are by no means the lowest in the world, or even in the EU for that matter, they are very competitive in relation to many EU member states, and provisions in the Income Tax Act have been written specifically for international companies. The amount of tax paid by online gaming companies located in Malta depends on the type of licence they hold: Class 1 licence holders pay EUR4,660 for the first six months, then EUR7,000 per month thereafter; Class 2 firms involved in fixed odds betting pay a 0.5% tax on the gross amount of bets accepted; Class 3 licence holders pay a 5% tax on real income; and Class 4 licence holder pay no tax in the first six months of operations, then EUR2,330 per month for the following six months, and EUR4,460 per month thereafter. The maximum amount of tax payable annually in respect of any one licence is EUR466,000. In 2011, application and annual licence fees are EUR2,330 and EUR8,500 respectively for all classes of licence.

It is not surprising then, to find that the combination of a well-developed regulatory regime, advanced telecommunications infrastructure, and relatively low taxation has attracted a large number of companies from around the world, including Stanley Leisure, William Hill, Ladbrokes, Paddy Power, Unibet, GC Sports, International Allsports, and Eurofootball. According to the gaming regulator's 2011 industry update, by the end of 2009 Malta had attracted 330 remote gaming companies and processed over 500 licences. These businesses employ about 5,200 people in Malta, and service around 10% of the world's internet gaming market. In 2008, gross gaming revenue amounted to 7.82% of Malta's gross domestic product (GDP) for that year - 11 times more than the EU average, which stood at just 0.68% of GDP in the same year - and in 2009, licensees generated tax revenues for the government of EUR52.5m.

Storm Clouds Brewing From Brussels

Aside from its attractions with regards tax, regulation and infrastructure, another advantage to setting up an internet gambling operation in Malta is its membership of the EU, which allows it to compete on a level playing field under the laws underpinning the Single Market. Except that when it comes to internet gaming, the European market is anything but level. Ironically though, the EU's desire to level this playing field may ultimately be to Malta's detriment.

Currently, the gambling market in the EU is much polarised. At one end of the scale, there are liberalized markets like the UK, and at the other end there are highly-regulated, closed markets dominated by state monopolies, such as in Germany. This has the effect of shutting foreign companies out of some gambling markets in the EU - the uneven playing field. The internet however, has posed regulators at the latter end of this scale with a unique set of problems, because what's to stop an individual in sitting at his computer in Germany from accessing an internet gambling site with its servers based in Malta?

In most cases, restrictions on online gambling in certain member states are supposedly motivated by governments' desire to protect their citizens from themselves i.e. to prevent them falling into a downward spiral of gambling addiction, or to shield children from the dangers of gambling addiction. There are exceptions within the European Treaty which allow member states to restrict economic activities if they are thought to be a danger to public health or public morality. But it is clear that in the case of online gambling, there is a conflict between member states' desire to restrict gambling, especially of the online type, and the fundamental economic freedoms guaranteed by the EU Treaty, such as freedom of establishment and freedom to provide services.

As increasing numbers of cases are coming before the European Court of Justice by the online gambling industry seeking to break national monopolies and discriminatory tax and administrative regimes, the European Commission has suddenly woken up to this issue. Traditionally, the EC has been quick to step in when it thinks that a member state has breached one of these fundamental freedoms, for example taking issue with national tax provisions which discriminate against non-residents. However, while its inclination is usually towards liberalizing markets, it seems to be leaning towards a level playing field in regulation, rather than liberalization, of internet gaming in the EU. This could have serious implications for the future of one of Malta's biggest industries.

One of the first signs of the possible shape of things to come occurred in June 2010, when the Maltese authorities rejected the conclusions of an EU Competitiveness Council meeting which adopted a definition of illegal gambling as: “gambling in which operators do not comply with the national law of the country where services are offered, provided those national laws are in compliance with EU treaty principles". The Maltese government says that the Competitiveness Council's definition does not properly take into account that Malta has a very advanced regulatory regime in full compliance with EU legislation.  

Malta has also taken note of some recent European Court of Justice rulings that apparently support attempts to restrict Europe-wide regulation in favour of local monopolies, and of national legislation which appears to contravene the principles of the freedom of services, such as that now in force in France, and fears that it may suffer if a new, illiberal regime is constructed at EU level.

Malta is very wary of the thrust of the Commission's Green Paper on online gambling, published in March 2011. Noting that almost 15,000 gambling websites were identified in 2008, with total annual revenues exceeding EUR6bn - with the industry expected to have doubled in size by 2013 -the Commission said that the primary aim of this exercise was to “obtain a facts-based picture of the existing situation in the EU on-line gambling market and of the different national regulatory models”.

“National legal frameworks vary enormously across the EU, with different rules applying to licensing, related on-line services, payments, public interest objectives, and the fight against fraud,” the Green Paper stated. “In order to ensure legal certainty and effective protection of EU citizens in this fast-growing cross-border service activity, it is important to evaluate how possibly differing models can co-exist within the Internal Market. The Commission seeks the views of stakeholders and wishes to collect detailed information and data on key policy issues such as organisation of on-line gambling services and enforcement of applicable laws; consumer protection and other relevant public policy challenges as well as commercial communications and payment services.”

Disconcertingly as far as Malta was concerned, Commissioner Barnier said at the time that the consultation was not about liberalization of the internet gambling market in the EU, but about ensuring that the market for online gambling services within the EU “is well-regulated for all". 

"With this Green Paper, we have launched an ambitious consultation with no pre-determined views on its possible follow-up,” Barnier said. “The online gambling market in the EU continues to grow rapidly and generates important revenues that are sometimes channelled into good causes. Its expansion must go hand-in-hand with a determination to protect our citizens, especially minors, and to ensure that offers of these types of services within the EU are sound and well-regulated. It responds to calls from the European Parliament and the member states for us to address these questions jointly.”

In a speech to the European Parliament on June 27, 2012, Barnier revealed that the Commission has decided to pursue a two-pronged strategy with regard to regulation of the industry: firstly, it will reactivate pending infringements and complaints against member states whose gambling regulation is in violation of EU law; and secondly, it will propose a number of European policy initiatives in the area of internet gambling. “The Commission is going to contact all the member states concerned by ongoing cases or complaints in order to remind them of the applicable rules and suggest that any problematic situations are rectified in line with current case law,” he said. “If blatant infringements persist, I will not hesitate to propose to my colleagues that the appropriate proceedings be taken or relaunched.” The Commission recently confirmed that there are nine pending infringement procedures and 28 new complaints against the gambling regulation of 12 different member states.

Barnier also indicated that the EC would crack down on unregulated online gambling firms offering their wares to consumers in the EU, many of which, he said, are located in “offshore havens”, without going into further detail. However, to a certain extent, this is a process that has already begun at the national level. The UK has tightened up its gambling laws viz-a-viz access to its market from offshore sources, and wagers will now be taxed on a point-of-consumption basis, bringing offshore operators under the UK gambling tax net. Similarly, in May this year, it emerged that the Spanish tax authority had directed online operators with customers in Spain to pay back-taxes under two historic laws that previously were not applied to offshore online gaming.

Where this process leaves Malta is, at the moment, unclear. The country's government argues that it already has a highly effective regulatory regime in place, and that, from its perspective, EU-wide regulation is not necessary. On the other hand, this seems to be the way that Brussels is going, and, although such pan-EU initiatives often move at a snail's pace, Brussels normally gets its way one way or another in the end. It seems highly ironic, however, that while the EU and its institutions spend so much time and resources upholding the Single Market, they might be about to trample all over the rights of a member state to be able to take advantage of exactly that same Single Market.


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