Grey markets and suitability under scrutiny: part two

From 4 April the Gambling Commission’s foreign reporting requirements will change. Harris Hagan partner Bahar Alaeddini explains how licensees should respond.

In the July/August 2017 edition of iGaming Business I wrote about planned changes to the Gambling Commission’s (GC) requirements regarding the reporting of foreign jurisdictions, the GC’s intensified focus and implications for operators.

The driving concern behind these changes remains suitability to hold a licence. The nub of the changes is as follows:

• the removal of the foreign jurisdiction section of the regulatory returns form, for remote operators, from April 2018; and
• the addition of a new licence conditions and codes of practice (LCCP) key event requiring all licensees to report group jurisdictional revenue from 4 April 2018.

From 4 April 2018, the following key event replaced the regulatory returns question on foreign jurisdictions:

“The requirement is to notify the GC at such time as the group becomes aware of the change and focuses on upon a significant or sustained change in the group’s revenue profile by jurisdiction.” Let’s unravel this new requirement.

Who does it apply to?
It applies to all GC licensees and, therefore, includes those with non-remote licences only. This is different from the regulatory returns requirement that applied to remote licensees only.

What does “significant or sustained change” mean? The focus is on “significant or sustained change in the group’s revenue profile by jurisdiction”. Therefore, the GC does not expect a small-scale or short-term change, for example, just exceeding the 3% threshold, to be disclosed if it is not expected to apply on a sustained basis. In relation to B2Cs, this could be as a result of sporting event.

In relation to remote gambling, B2Bs are expected to use their best efforts to establish the location of the player and the GC appreciates that this may not be possible in some cases.

“Group revenue” is interpreted to mean all gambling revenues across the group. Unlike the current regulatory returns question that relates to remote activities carried out in reliance on a GC operating licence only, the group means all remote and non-remote gambling activities.

Non-gambling activities (such as hotel revenues or social gaming revenues which do not trigger a licence in the UK) should not be included.

Only external revenues should be used (those appearing in consolidated accounts), therefore, intra-group revenues (for example, for the supply of gambling software) should be excluded.

As a rule of thumb, if the activity is a licensable gambling activity in the UK it should be included as part of the calculation of the group’s gambling revenue.

Examples:

• Operator A, a hybrid gambling operator (i.e. one with B2B and B2C activities) will report only once even though the group holds multiple non-remote and remote GC licences, and include both its B2B and B2C gambling revenues worldwide when calculating its group revenues.
• Operator B, a high-impact operator that is a land-based bookmaker and also an online betting operator, and holds multiple GC licences. Again, this operator would only report once and include both land-based and online gambling revenues worldwide when calculating its group revenues.
• Operator C holds multiple GC licences, supplies gaming machines and provides casino games via a remote games server, both revenue streams across the group (and worldwide) should be totalled, together with any other gambling activities not performed in the UK (for example, operating a bingo hall in South America) to calculate the group revenues.
What reporting period should be applied?

The “usual reporting period” means the group’s financial reporting period, for example, when an annual report is published.

The notification is triggered as soon as the group becomes aware that a jurisdiction accounts for more than 3% (or 10% for small operators).

For example, if an operator’s financial reporting (corporate) cycle is annual, the GC would expect it to review its foreign jurisdictional profile annually and report any key event as soon as after the 3% (or 10%) jurisdiction has been identified.

The Operator eServices section on the GC’s website will be updated to create a new option in the drop-down menu, which will then open a free text box to add details.

In my view, depending on their foreign activities, this new key event is unlikely to affect many larger operators, particularly those with substantial gambling activities worldwide.

My reasoning is that group revenues are so broadly defined that it would take a large amount of revenue, in one particular jurisdiction, to trip the 3% threshold. The bottom line is that the GC is increasingly interested in what operators are doing at home and away.

Bahar Alaeddini is a partner at Harris Hagan and specialises in all aspects of online and land-based gambling law. She advises major B2C and B2B operators, start-up operators, investors and financial institutions on licence applications, investor due diligence, compliance issues, Gambling Commission requirements and investigations, voluntary settlements and Panel reviews. She is a member of the International Association of Gaming Advisors.

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