International Pooling Networks: What are the regulatory issues?

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1 International Pooling Networks: What are the regulatory issues? By André Wilsenach, Executive Director, Alderney Gambling Control Commission André Wilsenach Background Network or business-to-business ( B2B ) gaming is an established form of remote gambling that pools the customers from different business-to-customer ( B2C ) operators to play against each other on one B2B network. It is generally used in peer-to-peer or community gambling such as poker or bingo, but can also be used to pool rake from player bets against the house in order to build progressive jackpots, in effect, a significantly greater jackpot than any one operator can offer alone. Peer-to-peer gambling requires high volume player participation and financial liquidity in order to operate successfully and many B2C operators will therefore rely on arrangements with a B2B network as they have insufficient liquidity as stand-alone entities. The recent concept of international pooling operates along the same lines as existing network gaming, but with the added distinction of pooling players from different jurisdictions onto a single gaming platform. Currently there is a presumption against this happening and although some national regulations may allow cross-jurisdictional pooling in theory, there is a lack of international standards and regulatory cooperation to provide operators with the certainty they need to invest in international pooling networks to tap into this prospective international market. Operators are increasingly looking to regulators to come up with a solution that will provide a secure framework to enable investment in international pooling. This paper proposes a solution to remove the regulatory uncertainty for those operators who wish to participate in international pooling networks and who are keen to adhere to the very highest international standards set by those regulators who are interested in regulating this business. Why is there a need for international pooling? Operators have long recognised that the key to growing the overall size of the market in relatively mature regulated gambling environments is the ability to introduce high levels of liquidity into the market, which creates a network effect that is greater than the sum of the parts. There is also player demand to increase the breadth of skill of players in peer-to-peer or community forms of gambling such as poker by allowing players from different jurisdictions to play 24 European Gaming Lawyer Spring Issue 2014

2 against one another. Therefore, enabling international pooling would increase the overall market size by providing a substantial increase in liquidity, increasing the numbers and breadth of players on a platform and the potential value of jackpots on offer. For players, the introduction of an international network would increase player choice, in number and type of peer-to-peer games available (due to increased liquidity), provide access to higher jackpots and more tournaments and thereby increase overall player satisfaction. A good example of this and one that is critical to the attractiveness of an internet poker room is the choice of tables at the incoming player s chosen buy-in. From a regulatory perspective, national regulators involved in international pooling arrangements will be serving the needs of the market that they seek to regulate by providing a responsible and regulated international environment in which players can enjoy gambling. They are also facilitating the growth of the overall market place in a structured and regulated manner, with the related incremental benefits in increased revenues through gaming duties and other taxes. Key issues for regulators On the face of it, multi-jurisdictional pooling networks potentially give rise to a number of potential issues for regulators. These fall broadly into the following categories: Licensing: how to meet each jurisdiction s suitability requirements across an international network; Player protection: how to maintain adequate player protection across more than one jurisdiction; Game security and fairness: how game play between customers across jurisdictions will be effectively monitored and reported, including dispute resolution, credit assurance and payment protection; and Taxation: how to meet local jurisdictional requirements for player ownership, player residence and taxation/gaming duties on point of sale/consumption. Regulatory requirements of B2B network providers and B2C platform partners Most regulators of the online gambling industry around the world are in the process of understanding the implications of international pooling for their own regulatory frameworks. Considering that this concept requires regulators to consider activities occurring outside their jurisdictions raises new but exciting challenges for regulators who in the past had no reason to extend their regulatory reach and approach beyond their own borders. To understand how international pooling will impact a jurisdiction s regulatory framework it is important to understand the different roles of the B2B network provider and B2C platform partners in order to assess the risks associated with the various components of an international pooling network. This is an area to which Operators are increasingly looking to regulators to come up with a solution that will provide a secure framework to enable investment in international pooling. the egambling Working Group, a sub-group of the International Association of Gaming Regulators, has given some considerable thought. The following page has an exposition of the level of risk associated with the functions that are typically performed by a B2C platform partner and/ or B2B network provider. From this assessment, it is evident that the B2C platform partners are largely responsible for player acquisition and therefore the entity contracting with the player. They are responsible for registering the player and generally perform the marketing and underage vetting and also ensuring player due diligence. They will also process player deposits and withdrawals. The network operators, on the other hand, will typically host the players registered by the platform partner and provide European Gaming Lawyer Spring Issue

3 For players, the introduction of an international network would increase player choice, in number and type of peer-to-peer games available (due to increased liquidity), provide access to higher jackpots and more tournaments and thereby increase overall player satisfaction. the gambling game. Therefore, they are responsible for fairness of the game and will monitor the gambling activity to ensure there is no collusion and chip dumping occurring. In this context it is worth pointing out that some network providers provide what is often referred to as an end-to-end solution which means that the network provider also fulfills the role of B2C partner, whilst other network operators are solely responsible for operating the gambling platform where they contract with B2C partners across international borders in the different home jurisdictions. Considering the risk associated with the different role and functions of the B2C and B2B operators within an international pooling network it can be expected that licensing and regulation will increasingly becoming extraterritorial in that both B2C and B2B operators, irrespective of whether they are corporately and/ or physically based in the home jurisdictions, will become subject to licensing and regulation in instances where they interact with the players of the home jurisdictions. The European scenario The poker industry in Europe is in decline. In the main, this is caused by the requirement of Member States to constrain the industry to national borders and identity. The same situation prevails elsewhere in the world as well. Most industry observers have come to realise that this approach has to change if the industry is to survive and government revenues are to be sustained. In recent months a group of regulators from six EU Member States have held several multi-lateral discussions in the hope to find a common approach towards regulating cross-border pooling networks in Europe. A resolution however seems as far away as when the process commenced. It must be presumed that the most obvious sticking point in any such multilateral discussions is that the regulators feel that their standards should be matched by the others, and unfortunately entrenched positions seldom allow this to happen. The effect would, in the short term, imply that regulators would have to cede that others may have better or superior systems in place and in the long-term it would reduce the influence of each regulator if standards were harmonised. It can also be presumed that the issues surrounding tax would be a sticking point and also the fact that none of the major poker platforms are located in the major economies would present them with difficulties. There are, of course, other governmental policy positions at play as well. Therefore, it is unlikely that the industry is going to see a solution coming from these discussions anytime soon. Is there a way forward? Alderney, as a jurisdiction, has been considering the international pooling landscape for some time and has come up with a solution which might address most of the above sticking points. Having considered the outcome of discussions we have held with several home jurisdictions over the last year, it is evident that the regulatory approach best suited to accommodate international pooling networks ought to be based on the following three assumptions: Participating jurisdictions and their regulatory bodies should not be required to amend their licensing regimes to participate in an international pooling arrangement. In particular, the regulatory requirements in the various participating jurisdictions pertaining to player protection should remain the sole responsibility of the player s home regulatory body; Any taxes or duties imposed in the home jurisdiction should remain the sole preserve of the tax and regulatory authority in those jurisdictions; and Technical standards applicable to the gaming platform which networks with the various B2C platform partners in the home jurisdictions should comply with, as a minimum, the standards imposed by the regulatory bodies in all the jurisdictions involved. Following from the above, there remain a limited number of minor points to be agreed on in order to ensure the successful regulation of any such pooling arrangement on a multi-jurisdictional basis: 26 European Gaming Lawyer Spring Issue 2014

4 RESPONSIBILITY Player registration Age verification Information security and sharing Facilitating game play Responsible gaming Payment system Protection of player funds Complaints and dispute resolution Cheating / collusion detection Money laundering B2C PLATFORM PARTNERS 90% 100% A player registers on a website and submits required player details (name, address, bank account). Player vetting processes are carried out at this stage. financing, collusion, cheating, underage and problem gambling incident. N/A Access to sensitive functionality such as player information is appropriately controlled. Contracts between platform partners and network providers must contain sufficient information sharing provisions to identify responsibility and enable the required action for any suspected money laundering, terrorist Primary responsibility for handling any problem gambling issues such as direct contact with the player, providing spend limits, self-exclusion and identifying problem gamblers. The platform partner can see some activity that may indicate problem gambling including all gambling activity for which it is fully responsible. The platform partner can also see problematic account/wallet activity e.g. a customer frequently changing credit/debit cards or increasing financial limits. The platform partner cannot see activity within the game, but can see movement of funds between the general account/ wallet. To get the full picture the network provider is required to communicate to the platform partner any instances of suspected problem gambling behavior within the gameplay. account. Age verification checks are completed based upon information provided by the player. During the registration process payment details are provided by a player (e.g. visa card, mastercard) who deposits money into the main gambling In order to ensure adequate player protection in the event of a platform partner suffering financial distress, the platform partner may be required by the network provider to maintain an ongoing security deposit with the network provider as an effective control against non-payment. The platform partner will generally handle any first line complaints / disputes from the player, but may have to obtain information from the network provider if it relates to specific in-game transactions. 10% The platform partner will hold the personal information on their players. Whilst the only information that will normally be transferred to the network provider is the user name, IP address and fund amount, the platform partner is required to respond to all reasonable requests for further information from the network provider when cheating or collusion is suspected. The platform partner can detect aspects under their control so may identify suspicions based on the player due diligence checks or gambling account transactions (e.g. funding gambling account from one source but withdrawing to another). The platform partner must comply with the money laundering requirements of the jurisdiction that they are licensed in. B2B NETWORK PROVIDER 10% N/A The network provider is only given a player identity code number when a player is sent to the network. Access to sensitive functionality in facilitating game play is appropriately controlled. Contracts between platform partners and network providers must contain sufficient information sharing provisions to identify responsibility and enable the required action for any suspected money laundering, terrorist financing, collusion, cheating, underage and problem gambling incident. 100% Whilst the network provider does not have direct contact with a player nor know what other gambling the player participates in, the network provider is responsible for identifying player patterns within gameplay that could indicate a problem gambler and then reporting these to the platform partner. The network provider is also responsible for ensuring that they have adequate programs in place to identify reckless or irresponsible play, including all reasonable security norms e.g. spotting collusion / chip dumping. The game is fair and played according to game rules. This would include making assurance of all RNG operations where appropriate. This also includes the administration of player table allocation, player pairings and player locations. Adequate controls that are required in order to maintain the overall integrity of the game include sufficient controls over risks of unsuitable ownership and criminal influence, risks of employees influencing gameplay and adequate game testing. Although the network provider does not have direct contact with the player, they are responsible for assisting the platform partner with the complaints / disputes process and providing all reasonable information on gameplay to enable dispute resolution. The network provider is required to set the level of security deposit required from each platform partner in order to ensure adequate player protection. Any such security deposits must be maintained separately from the network provider s own funds and may only be used in the event of default by the relevant platform partner. Although the network provider does not have direct contact with the player, they are responsible for assisting the platform partner with the complaints / disputes process and providing all reasonable information on gameplay to enable dispute resolution. 90% The network provider is responsible for reviewing patterns of behavior (ideally in conjunction with the platform partner as required) that may indicate cheating or player collusion. For example, this may include reviewing player IP addresses to identify players from the same household. Network providers will be required to have appropriate collusion detection techniques based on IP address, machine ID, user names and playing behavior which will be used as required in conjunction with player details provided by the platform partner. The network provider will review patterns of behavior (in conjunction with the platform partner as required) that may indicate suspicious activity (e.g. chip dumping). The network provider must comply with the money laundering regulations in multiple jurisdictions. Source: egambling Working Group, IAGR European Gaming Lawyer Spring Issue

5 Acceptance that the player protection requirements and standards imposed by other participating jurisdictions, although slightly different, generally support the very same aims and objectives of the other participating jurisdictions; Acceptance that the registered players of their B2C operators can play with similarly verified players from other participating jurisdictions notwithstanding certain inherent country specific differences. However, that is not to say that some fundamental differences cannot be engineered out of the way by the imposition of filters. These technological filters would typically introduce controls to address very specific legal requirements which are specific to a single participating home jurisdiction but which in turn do not compromise the laws and requirements of other participating jurisdictions. An example of this would be a difference in the minimum ages of players allowed to participate in gambling in the various participating home jurisdictions. If one jurisdiction (say, a US State) insisted that 21 was the minimum age, that regulator could require his licensed operators to impose that minimum age limit across all their operations even though the age limit was different for other participating home jurisdictions, say, in the Britain or Spain where the minimum age is 18. The impact would be commercial but not regulatory as, by way of the example, whilst Britain and Spain have an 18 year age restriction it is clearly not impossible to impose a higher age restriction, something which is easily done by the network provider; The home jurisdiction has the right to licence the provider of the gaming platform wherever that platform is corporately and/ or physically located. Although this will undoubtedly result in regulatory duplication, it will give each of the participating home jurisdictions the ability to impose conditions on the B2B network provider that will satisfy their individual requirements; and Finally, the method and level of taxation is compatible with that of the other participating jurisdictions, irrespective of the different levels of taxation applicable in these jurisdictions. Alderney s role The role of offshore financial centres such as Alderney has morphed into providing a low tax base for operators to centralise their operations. International pooling presents an opportunity to provide a solution to the larger economies by providing a home for the network providers who seek respite from the heavy burden of onshore taxes (e.g. VAT and corporate taxes) and other elements constituting a cost of business. However, there are a number of points which those offshore jurisdictions will need to address and provide, such as: High levels of technical regulatory skills; Technical infrastructure to host gaming platforms and networks; Low taxes and an absence of gaming duties to avoid the jeopardy of double taxation; Trusted regulatory relationships; and Most importantly, a willingness to cooperate closely with other regulatory bodies in providing regulatory support and assistance, something which is paramount in regulating cross-border transactions. Alderney has done much work and research into the viability of the above described concept. What has been encouraging is the attitude of fellow regulators from jurisdictions where online gambling is being positively regulated, agreeing that the responsibility for the player s protection is indeed the role of the home regulator and that shared values override the need to have absolute compatible regulatory standards, something which will never be achieved. Additionally, having compared the technical standards governing gambling platforms around the world it is quite surprising how similar they are across many jurisdictions. The provision of gambling platforms which can therefore comply with multi-jurisdictional requirements is very feasible. These factors combined with a can do attitude of a small number of jurisdictions, appreciating the advantages of international pooling, is all it will take the set the ball rolling. These factors combined with a can do attitude of a small number of jurisdictions, appreciating the advantages of international pooling, is all it will take the set the ball rolling. The recent agreement between Nevada and Delaware might be the nucleus of cross-border liquidity pooling in the United States. It is just possible that when this model is seen to be workable amongst two or three jurisdictions in Europe, other regulated markets will see compelling reasons for joining and any real or imagined hindrances will simply melt away, and may even lead to pooling between jurisdictions across the Atlantic. ANDRÉ WILSENACH, has been the CEO of the Alderney Gambling Control Commission, since It is an independent and nonpolitical regulatory authority in the Channel Islands, established to license and regulate egambling in Alderney. 28 European Gaming Lawyer Spring Issue 2014