The online gambling black market – at what cost?

Introduction

In recent months there has been an increase in discussions around the subject of the online gambling black market. Invariably these have focused on the degree to which regulators are aware of the issue and the extent to which they are meaningfully and practically acting to mitigate against it. This paper intends therefore to address these questions.

What is the ‘Black Market’?

For the purposes of this paper, the ‘Black Market’ is a coverall term for a situation where online gambling and/or sports betting products are offered within a defined territory, without the requisite licence or authorisation and where such a licence or authorisation is clearly and lawfully required by an established, recognised and dedicated regulatory body.

The black market is also referred to as the ‘illegal’ market. Generally, and in the context of this paper, the black market is distinct from ‘grey’ or ‘unregulated’ markets which broadly speaking, inter alia, lack clear, local territorial licensing requirements for online gambling products. Consequently, such offerings are, arguably, legally defensible. Within the black market itself there is also a nuanced difference between black marketers which are licensed under a regulatory regime and those which are not licensed at all. In instances where there is some type of licence in place this will necessarily be from outside the country in which the online products are offered. Usually the regulating authority will have lesser requirements in many respects, compared to (a) other such more legitimate regulatory regimes and (b) the regulatory authority in the territory in which the online products are offered. These requirements often relate to Anti- Money Laundering, Source of Wealth, Age Verification and Affordability checks.

The benefits of holding a licence, in addition to lending a degree of ‘legitimacy’, relate mainly to the ability to process financial transactions. However, whilst it is more difficult to access Payment Service Providers (PSPs) in instances where no licence covers the online offerings, there is ample evidence to show that, despite this, many unlicensed operators still manage to move money in terms of deposits and withdrawals. This is either because there are PSPs who are prepared to run the risk of providing services to them or that other methods of payment such as cryptocurrencies are being used.

The role and responsibility of regulators

When assessing the effectiveness of a regulatory body in tackling the black market, it is crucial to look closely at the purpose of regulating the online gambling and sports betting industries.

At its simplest, regulation achieves, or at least should achieve, two fundamental outcomes:

1. The protection of customers;
2. The generation of fiscal revenue.

By extension, any regulatory body which is not achieving these outcomes could, arguably, be labelled ‘irresponsible’, or ‘not fit for purpose’.

The link between the black market and irresponsible regulation

It is reasonable to conclude that, to a large extent, the proliferation of black market products within a certain territory is an indication of regulatory failure. This will be more fully addressed below. That said, it is important to understand that regulators are not solely responsible for the laws, rules and regulations relating to online gambling and are, depending on the territory, empowered or constrained by politicians and legislation. This may limit what they can and cannot do.

Between them, politicians, legislators, judiciaries, enforcement agencies and regulators all have a duty and responsibility to their respective territorial residents to ensure that the black market is as limited as possible. Whether we are talking about regulators per se or the source of regulatory requirements, they will all henceforth be referred to as ‘regulators’.

Onerous administrative processes

One of the reasons that customers elect to gamble on black market sites is that many regulatory regimes apply overly invasive and administratively complicated onboarding processes, for example, relating to affordability and source of wealth.

Simply speaking, your average online gambling customer wants an entertaining, seamless and quick experience, where money is deposited, wagered, and, in the event of a win, easily withdrawn. Any justification that these relatively invasive checks are necessary on the basis of social responsibility or prevention of crime is lost on this customer base.

Linked to this is an increasing belief among many consumers that how their money is earned and spent is nothing to do with governmental authorities or the ‘nanny state’. This is one of the reasons that cryptocurrency has increased in popularity over the last decade and should not be ignored.

Negative effect of commercially non-viable regulation on the industry

In addition to overly invasive onboarding checks, a commercially non-viable regulatory regime will display one or more of the following features:

• Relatively high gaming and other applicable fees and taxes Considering the associated costs of running a commercially viable online gambling business, there is a consensus in the industry that direct gaming tax should fall somewhere between 15 percent and 25 percent of GGR;
  • In some regulated territories the relevant regime applies additional taxes and fees such as corporate tax and high licence fees over and above the gaming tax. In some instances, depending on the relevant system of government, this could be a combination of State and Federal taxes;
  • The net effect of all these fees and taxes can be the difference between entering or not entering a market.
• ‘Localisation’ requirements increase the cost
  • In some regulated territories the relevant regime requires the setting up of a local entity and/or the employment of a certain number of local employees in a local physical location. This can also extend to a local gaming server requirement;
  • Some regimes stipulate a certain level of ‘socio-economic’ contribution to the local economy.
• Complex technological requirements
  • Some regulatory regimes have introduced their own technology relating for example to self-exclusion or reporting. This often leads to additional costs as well as technical development and integration issues.
• Overly restrictive marketing limitations
  • Complete bans on gambling marketing in some regulated territories (e.g. Italy) and proposals relating to such an absolute ban in others (e.g. Netherlands) mean licensed industry players struggle to acquire new players and are not able to advertise their regulated, safer, products.
• Placing too much emphasis on the wrong voices
  • Charitable, religious and other altruistic or socially responsible groups often take a hardline position on gambling, especially online gambling calling for material intervention or limitations or even an outright ban. Regulators are prone to placing too much emphasis on these voices. At times, this can lead to complex consultation processes, thereby delaying the launch of a regulatory regime.
• Prohibition

Some regulators have placed an outright ban on any gambling products because, for example, of cultural and religious reasons, whilst others have banned some online products such as casino.

These features, where they exist either individually or in combination, will invariably negatively affect the commercial viability of operations in a regulated regime if not render such offerings completely unviable. The consequence of such features is that operators are either unable to enter a market on a regulated basis, or that there will be limited interest in applying for a license, including among global industry leaders, creating a hole for the black market operators to fill.

It should be remembered that the leading global online gambling operators can choose, at any given time, which markets to enter and will for the most part do so based on commercial viability. Commercially non-viable regulation also has the effect of reducing channelization, which refers to the percentage of existing customers who are successfully migrated from an unregulated to a regulated site. Customers who are not ‘channelized’ are prone to seeking out alternative unregulated black market operators.

An important point has to be made here – the leading global online gambling operators fully support socially responsible gambling and advertising, socio-economic advancement, corporate social responsibility programmes, and fiscal contribution, but if regulations to achieve these aims are not thoughtfully considered, and applied in a balanced way, then the result is an increase in Black Market participation and is counterproductive.

Getting the balance right

It is clear that the black market cannot be extinguished. Any meaningful approach to this issue should therefore only talk about ‘minimization’. It is not a losing battle but regardless of any attempt to minimise it, the black market will always steal a percentage of the regulated market share. There are several reasons for this:

• Black market sites are still used to launder criminally sourced funds;
• Black market sites will always be preferred by a percentage of legitimate customers, for non-nefarious reasons, due to the relatively onerous processes and procedures put in place by regulated operators who are required, under the terms of their licence, to do so;
• Some black market sites offer games that are popular but uncertified or unlicensed;
• A proportion of customers when accessing and playing on an online gambling site are oblivious to the differences between regulated and black market sites;
• Black market sites are often marketed via social networking platforms which are increasingly used by all demographics for example Facebook, Telegram, Whatsapp and Instagram;
• Due to technological advancement, in particular artificial intelligence, black market sites can find customers as opposed to customers finding online gambling sites;
• Technological advancement also allows customers to circumvent any restrictions put in place by local authorities and Internet Service Providers.

It is correct that an online gambling licensing regime will, by its very nature, place certain restrictions and requirements on players and operators alike. Regulators should however consider how to ensure a degree of social responsibility oversight, control and protection which is not so onerous that it, by virtue of its obstacles, increases the flight of legitimate customers to the black market.

In this regard technology and operator-experience could assist, and this is also addressed more fully below.

Black market size, intervention and regulatory confusion

Rationally, one would expect all regulators to invest resources to understand the size of the black market in their respective territories. In reality this is not happening, and there are several examples recently of regulators suggesting that the black market in their territory is significantly less than the reality, when compared with other compelling statistical and empirical evidence.

Reasonably, one would expect all regulators to try to minimize the size of the black market in their respective territories, but this is only occurring in some jurisdictions, and to different extents. Considering the dual primary purpose of ‘responsible’ regulation i.e. the protection of customers and plumping the fiscal coffers, it does raise the question as to ‘why?’.

Here are some possible and plausible reasons:

1. Regulators do not have the resources to properly understand the size of the black market;
2. Regulators are concerned that reliable empirical evidence on the actual size of the black market, considering their raison d’etre is, will cause public and administrative embarrassment and highlight their inability to disrupt unlicensed operators;
3. Politicians, regulators and government have interests in protecting local monopolies, often lotteries, rather than regulated online gambling providers.

The fickle role of politics

Earlier we mentioned that, alongside regulators, politicians and legislators also bear responsibility for the increasing omnipresence of the black market. The regulation of gambling products will always be a divisive topic amongst any electorate, especially that of online gambling. Land-based gambling is less contentious arguably because of historical links between land-based casinos and political interests. This applies similarly to lotteries.

Based on a belief, mistaken or not, that online gambling is ‘evil’ because technology enables it to reach so many potential customers, politicians attempting to garner votes, refuse to add anything but restrictions of online gambling products to the lawmaking timetable. It is significant that gambling is commonly viewed as a ‘sin’ product and unpopular, to say the very least, with abolitionists and those of a more conservative slant.

Either because land-based casinos and lottery products are being protected, or because the regulation of online gambling is too politically dangerous, the dangers of the black market are not laid bare in political debate, nor by extension are the issues of the lack of consumer protection and the flight of fiscal revenue offshore.

Such political expediency is therefore an enabler of the black market.

How to minimise the black market

There are a raft of measures which can be taken to reduce the number of customers registering with black market providers:

1. Regulators have to act meaningfully, reasonably and empirically

Recently we have seen many regulators publicly addressing the issue of the black market, usually referring to what they deem to be the size of the threat and the proposed solutions. Examples are the Gambling Commission of Great Britain, the Swedish Gaming Authority and the Gemeinsamen Glücksspielbehörde der Länder in Germany.

In many cases, there has been an attempt to assess the size of the black market, which in itself is problematic for a number of reasons:

• The limitations of conducting reliable research around a ‘hidden’ industry make the results inherently inaccurate;
• Different methodologies – often using proxy data or web traffic –are employed to quantify the black market;
• The lack of agreement around accurate ways to derive correct empirical data;
• The propensity of interest groups, in pushing their own agendas, to skew the data;
• A misunderstanding of the distinction between grey, black, regulated and unregulated markets;
• A lack of understanding and appreciation of the technical and other methods that black market operators employ;
• The reality that politicians and regulators, for different reasons, do not want to lay bare the real size of the black market.

 

Pressure from the regulated industry has seen an increased focus among certain regulators, for example in Germany, Sweden and Great Britain, on reducing the black market. The reality is, however, that no regulator has conducted a dedicated consultation process involving the online industry itself. In the circumstances, the is remarkable, and until it is addressed there will always be regulatory suspicion in the industry. This oversight requires further investigation and discussion.

Over and above the points already raised, gambling regulators in many jurisdictions have an outdated perspective of what their role and status is, often harbouring an ‘us and them’ mentality, with a ‘do as we say’ peremptory, police-type tone. These regulators don’t want to be seen to be talking to the industry for fear of backlash from protest groups or of not being seen to be objective.

In the absence of a working relationship with the industry it can be viewed as a greedy enemy, prepared only to discuss matters that are for its benefit. The reality is that the industry has long bought into the concept of regulation and shares almost entirely the same objectives as the regulator. So regulators are not acting meaningfully or reasonably if they are not talking to the industry which has a deep understanding of the black market and the technology being employed now, and into the future, to drive it.

Finally, we have seen examples of regulators using incorrect data to justify regulatory actions or to drive misleading messaging, fears or requirements. Examples of this include studies relating to gambling harm and the prevalence of the black market.

Regulators owe it to their licensees and their communities to be more objective.

1. Request the assistance of the Industry

An extension of the above point, engaging the industry in meaningful consultation and discussion will provide regulators with more relevant data, different solutions and alternative approaches. These could include:

• A joint industry-regulator marketing campaign drawing attention to the issue of the black market, the risks attached to playing on black market sites and ways to best access regulated sites;
• A better understanding of the methods utilised by black market operators including use of social networking sites and cryptocurrencies. This could extend to discussion of how to combat these and how to recruit tech companies payment service providers to be part of the solution
• A fuller appreciation of the regulatory agencies, banking and payment service providers, B2B providers and affiliates that are servicing, or facilitating the black market

1. Work with other regulatory bodies

This is already happening to an extent, as more regulators enter into MOUs with those in other markets to combat acts of illegality. More can be done to target the black market more actively and deliberately in tandem with other regulators with industry input so that the steps taken to reduce this market are more effective.

Investigations have shown that where black marketers operate under the cover of a ‘licence’ these tend to be from the same regulator(s). Regulators from more reputable markets should work hard to engage these regulators, encouraging them to take action against offending operators.

Conclusion

Despite the legalization of gambling around the world, the black market is still ubiquitous and shows no obvious signs of slowing down. This illegal market works against the interests of responsible regulation in that it neither protects customers, limits criminal conduct nor garners fiscal revenue. The global black market impedes and threatens the ongoing commercial viability of regulated, lawful operators, and encourages criminal activity.

For the reasons we have outlined, regulators, whilst talking about the issue are having limited success in disrupting the black market. They continue to give undue prominence to the wrong voices, misuse statistics, misunderstand the black market ecosystem and, significantly, fail to engage meaningfully with regulated operators. Regulators will only be effective in this crackdown, and be seen to be effective, when they engage meaningfully with the industry with which they share common objectives. When they do they will gain a mountain of experience and discover an eagerness to help.