Seeds of hope despite the war

Introduction

The true legalization of gambling in Ukraine is a recent development, and despite the war with Russia, this process has not stopped. The Commission for the Regulation of Gambling and Lotteries, the operators of the newly created market, and society as a whole understand the necessity not only to withstand the conditions of martial law but also to continue and complete the gambling reform initiated before the invasion

A History of Gambling Regulation in Ukraine

On August 13, 2020, the Law of Ukraine “On State Regulation of Activities Regarding the Organization and Conduct of Gambling” (the Law) came into effect. This date can be considered as the birth of the Ukrainian gambling market, as gambling had been prohibited in the country for almost eight years prior to this date. Before prohibition, there had been a gambling market in Ukraine, but there was no specific regulation implemented by the government. Regulation during that time was carried out through general legislative acts that also regulated other business sectors, sometimes even using acts from the Soviet era. As a result, the regulation did not consider the specific nature of the gambling industry, the need to minimize social risks associated with its existence, and many other factors. This situation led to a significant number of violations by gambling operators, uncontrolled proliferation of gaming halls and unregulated access to vulnerable segments of the population, including minors. The absence of any culture of responsible gambling consumption in society, the unregulated nature of the industry, and other factors caused a serious social outcry, and condemnation of gambling, ultimately resulting in its complete prohibition.

Throughout the period of the ban, gambling continued to exist illegally, and in line with the experience of most developed countries in the world, the need for regulation was recognised. There was a renewed attempt to legalize the gaming market with the state’s involvement, taking into account past mistakes. Thus, a special law was passed and a dedicated regulatory body was established to create conditions for the launch of the market and to regulate it based on the fundamental standards and requirements outlined in the Law. The launch of Ukraine’s legal gambling market was received very positively by numerous foreign operators who viewed Ukraine as a country with great potential for gambling development in Eastern Europe. However, the adoption of the Law was insufficient for the full opening of the market to foreign operators, as it required legislative changes in the field of taxation, which until now has not aligned with the provisions of the Law and created a rather opaque gambling taxation system in Ukraine.

Launch of the market despite the unresolved tax issues

During the first few months of operation of the newly established Commission for the Regulation of Gambling and Lotteries ( the Commission), the Licensing Conditions w ere adopted in accordance with the Law, and in February 2022, the first legal gambling operators appeared in Ukraine, both in the online and offline sectors. Certain weaknesses and ambiguities identified in the initial stages of market launch, as well as uncertainty over gambling taxation, did not hinder applications to obtain gambling licenses.

In total, from 2021 to 2023, the Commission issued a total of 4,633 licenses for gambling activities. The issuance of licenses generated the equivalent of US$89.2 million for the state budget. The demand for gambling licenses was not affected by the high cost of licenses, despite Ukraine being among the most expensive compared to other jurisdictions. The high cost of licenses, as stipulated by the Law, became part of a consensus that made it possible to launch the market without the automated state system for monitoring gambling revenue (SSOM), which, according to the Law, is supposed to fully control the Gross Gambling Revenue (GGR) of every operator. The Law requires each operator to connect its online system to the SSOM to enable the Commission to monitor all betting operations, the payout of winnings, and overall gaming revenue 24/7. By launching the market without the SSOM, the legislators anticipated that any potential losses to the state budget resulting from the lack of any controls over GGR would be compensated by the high cost of operating licenses.The cost of gambling licenses is expected to decrease by a factor of three once the SSOM is implemented by the Commission.

The newly established market and potential foreign investors were eagerly awaiting the swift resolution of taxation issues. However, in the spring of 2021, most license-holding operators began their actual operations. By February 2022, the necessary changes to the tax legislation were ready for approval by the Ukrainian Parliament, but on February 24, a war broke out that changed everything.

The impact of war on the market and its regulation

After the shock of the first few months of the war, all businesses in Ukraine, including the gambling industry, began to recover and resume their operations. The occurrence of a force majeure in the form of war with Russia resulted in formal violations of the Law and of licensing conditions by operators. However, the Commission’s position was to unconditionally support existing operators and strive to preserve the newly established market. Most operators were unable to pay their annual licensing fees, and despite the Law granting the Commission the right to revoke licenses for such operators, the Commission refrained from taking such measures to maintain the market. Offline operators suffered the most significant losses, with some losing their premises and gambling equipment that remained in the occupied territories or were damaged due to shelling and combat actions. It should be noted that all operators demonstrated great resilience and made a conscious effort to avoid staff layoffs, continuing to pay salaries and assist employees who were forced to leave their homes due to the war.

Among other harmful impacts of the war were the restrictions on all entertainment activities during the evening and night hours, the lack of an uninterrupted power supply due to rocket attacks on the energy infrastructure, the absence of aviation connections and tourism, which the large land-based casinos relied upon not only in Kyiv. War places significant stress on citizens, some of whom seek solace in gambling. This threatens a sizeable increase in the number of gambling addicts, requiring additional efforts from operators, the regulator, and all members of society who must minimize the risks of gambling during the war.

Opportunities for development despite the war

Today, the Commission’s work is focused on the implementation of cutting-edge technologies for regulating the industry, such as a state online monitoring system, which is intended to become a unique tool not only for monitoring the proper payment of taxes by gambling operators but also as a source of data for market analysis. These data are crucial for the Commission to determine the priority directions for the development of the gambling industry. Representatives of the Commission presented the functionality of the state online monitoring system at the recent GREF 2023 annual conference in Bergen and received positive feedback from European Regulators regarding the system. This was very welcome and encourages further development of gambling market regulation and the market as a whole. The implementation of such a system will finally make the functioning of all market operators transparent and will mark the completion of the first stage of gambling legalization, which began before the war.

The Commission is also working closely with operators to make changes to the main Gambling Law, aiming to improve it based on on three years of legal legal enforcement experience. The ComThe Commission, like like Ukraine itself is receiving valuable and practical practical support from its colleagues at European regulators, whose regulatory expertise is highly valuable for an inexperienced regulator.

In the Commission’s efforts to improve gambling market regulation, particular attention is being given to the initiation of transparent and accessible investment instruments in the gambling market. These instruments are prerequisites for attracting foreign investments into the Ukrainian economy after the war. Primarily, this relates to the opportunities for constructing tourist facilities that will become centers for the hosting of gambling establishments. Currently, the Law provides for the possibility of obtaining an investment license for operating a casino in Ukraine free of charge for a period of 10 years. The commission is also currently working on additional opportunities for granting licenses to operators who will participate in the reconstruction of Ukraine on preferential terms.

Furthermore, the Commission is currently working on the next steps in the field of technical regulation and technical standards of the gambling industry. In this it is being provided with methodological support from internationally renowned companies that possess a high level of expertise in technical regulation.

Operators are also actively participating in initiatives aimed at enhancing the effectiveness of the principles of responsible gambling and actively engaging in efforts to improve gambling market regulation. For example, a large-scale social study, in which operators played an active role, is nearing completion. The study was conducted by the Responsible Gaming Center and was dedicated to examining the main criteria for identifying players with gambling addiction. This research is being conducted for the first time in Ukraine, and both operators and the Commission are eagerly awaiting the results. It is hoped that they will form the basis for more precise development of further measures to combat gambling addiction. In anticipation of the research results, the Commission has initiated the establishment of a permanent working group consisting of its representatives, representatives from the Ministry of Social Policy, the Ministry of Health, the Responsible Gaming Center, representatives from the medical community, and operator representatives. This working group will ensure the coordination of actions between society and the state in the fight against gambling addiction.

The presence of effective market regulation mechanisms, transparent and clear technical market regulation standards, developed and convenient control tools, as well as the regulator’s active engagement, high level of professionalism, and expertise, are necessary prerequisites for the full recovery of the gambling market after the end of the war. In turn, the development of the gambling market in Ukraine can become an important component of Ukraine’s economic recovery both directly and indirectly through the potential for tourism development and the attraction of international operators to operate in the Ukrainian market. Understanding this, the Commission, together with market operators, continues to function despite the daily realities of war and rocket attacks, and does everything possible to achieve victory and ensure the quickest recovery and prosperity of Ukraine.