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The Online Gambling Industry in the Isle of Man

26 November 2001

By Miles Benham

Sept. 20, 2001 will go down as an important date in the history of the development of the Isle of Man's online gaming industry. At 2:30 p.m. the Minister for the Department of Home Affairs announced that the first three Online gambling licenses were being granted to MGM, Sun International, and Littlewoods.

At the October sitting of the island's parliament, the Minister obtained Parliament approval for the granting of an additional nine licenses to applicants who are able to satisfy the department's stringent background checks and regulations.

Now that the granting of an additional nine licenses have been approved, applications are being received from large international corporations which are able to meet the strict regulatory requirements of the new legislation. The Licenses are being granted under the Online Gambling Regulation Act 2001, which is an interesting piece of legislation, as it not only gives the department power to grant online casino licenses, but it also paves the way for the department at its discretion to consider granting special licenses for virtually any form of gambling, including lotteries and spread betting on shares.

The Legislation

In considering the new legislation, it is important to understand the political climate in which the legislation was passed. The Isle of Man has a population of around 75,000 and boasts full employment. While the island is an area of lower taxation, it does not consider itself to be a tax haven, as Isle of Man residents and companies are subject to direct taxes which range from 12 percent to 18 percent and indirect tax in the form of a value added tax of 17.5 percent on the purchase of certain goods and services. The island has a full infrastructure, national health service and the provision of state pensions, all of which are paid for through the collection of taxation revenues.

As the island has the benefit of full employment, its politicians wish to ensure that any new industries that are attracted to the island will not in any way damage the booming economy or create wage inflation. The online gambling legislation has been specifically aimed at the higher "blue chip" end of the market, and seeks firms of substance, which are able to operate in a highly regulated and protected environment. One of the aims of the legislation is to protect the persons betting on the online casino sites to ensure that they will always be guaranteed their winnings, and that the games are fair and have not been rigged.

The Regulations

The legislation achieves this through the careful use of regulations which provide for independent third party checks of the license holder's computer systems and games by qualified auditors, statisticians and government bodies, such as the island's Gambling Commissioners and the Financial Supervision Commission, which also regulates the island's banks.

After payment of an application fee of £80,000, the license holders are required to set up a £2 million security deposit from an island-based bank or insurance company, which is effectively the government's insurance to ensure that all bets will be paid as and when they fall due.

When the initial licenses were being granted, it was made clear that the sum of £2 million is subject to periodic review, and will depend upon the size and turnover of the bets on the license holders sites.

In addition to the security deposit, the license holders must establish a formal gaming reserve for gaming which is aimed to protect the license holder against a run of bad luck and to ensure that the customers are paid out after a large win. The gaming reserve is to be calculated according to the following formula:

Roulette: 5,000x the maximum stake permitted "en plein."
Blackjack: 100x the maximum stake permitted per box.
Dice: 200x the maximum stake permitted on a line bet.
Baccarat: 100x the maximum stake.
Punto Banco: 100x the maximum stake.

When more than one site is operated, the amount needed for a second site is taken as 25 percent of the amount needed for the first site, and no further additional reserve need be held for additional sites.

It is hoped that the requirement for the license holders to maintain substantial reserves will set out the island-based license holders from the competition in the various unregulated jurisdictions, as they will be able to boast to their customers about the safety and security their site offers, and as it is regulated and operated from the Isle of Man, their winnings are safe.

Designated Official

All license holders are required to have a designated official who will be resident at all times on the island. The designated official will be required to liaise with the gambling commissioners and assist them with their day to day monitoring of the Internet site, and to ensure that at all times the license holder is complying with the regulations. The license holder is also required to maintain its servers on the island, and the servers themselves will be subject to inspection by the gambling commissioners on a regular basis.

Taxation

The license holders, in addition to the payment of Isle of Man corporation tax and the license fee, are required to pay a gross gaming yield of 2.5 percent. Gross gaming yield is defined as being the total amount of all bets or stakes made, and the prices of all chances sold, less the value of all winnings and prizes due in the course of the online gambling.

Legal Jurisdictions

Although online gaming is a world-wide industry, and a number of other jurisdictions allow bets to be taken from anywhere in the world, it is a condition of the Isle of Man licenses that the license holders do not take bets from any country where online gambling is illegal. In practice this will mean that the license holders will not be allowed to take bets from the United States, and the Department of Home Affairs has made it very clear that these restrictions will be actively enforced, and it is likely that any license holders contravening these restrictions will immediately lose their licenses. It is subsequently no surprise that applicants for the licenses are generally world-wide firms, which have no intention to take play from illegal jurisdictions and feel satisfied that there is sufficient custom available in other jurisdictions where online gambling is legal.

Gambling Debts Enforceable

As a further protection for users of the online casino sites, the legislation has abolished the age old restriction that gambling debts are not enforceable. The legislation specifically provides that contracts entered into in the course of online gambling are now enforceable on the island. In the case of a dispute between the player and the license holder as to the player's entitlement to winnings, the players will be able to present their cases before the island's courts for determination by an independent judge.

If the claim is for under £5,000 then the player will be able to bring his claim through the island's small claims arbitration procedure. This gives access to an independent arbitrator and the procedure actively discourages the use of legal representatives appearing on behalf of their clients. The procedure is designed to let the parties argue the dispute in person so as to keep the costs to a minimum and allow access to the courts for individuals of limited means.

Anti Money Laundering

The prevention of money laundering is a concern for all jurisdictions and the island possesses some of the world's most strict anti-money laundering regulations, which are actively enforced by the island's Financial Supervision Commission.

Licenses are being granted subject to the requirement that the license holder complies with the anti-money laundering codes and guidance notes.

The legislation and codes require the license holder to "know your client" by obtaining suitable identification documentation from the player.

The current legislation and codes do not appear to have been drafted with online business in mind, and as a result parts of the codes do not currently fit comfortably within an online environment, and appear cumbersome and out dated. The legislation gives the Department of Home Affairs the power to bring out new codes which can be specifically tailored for an online environment and it is believed that new codes for online business are currently being considered.

The online environment itself and its ability to permanently record every single transaction by the player, a feat which cannot be practically carried out in a land based casino, calls for a different regulatory approach to be taken to the control of money laundering through online casinos.

The regulators and the draftsmen face the challenge of applying the existing codes and drafting new ones in a practical and innovative way, so as to bring the protection offered by the anti-money laundering legislation into an online environment that works, but does not restrict the operation of the business. Failure to adopt a practical approach to this issue will simply allow the unregulated jurisdictions to continue to dominate the industry, as over regulation by the island's authorities would make the island's license holder's businesses non-competitive.

There is a need for common sense on this issue, as players need to be protected and money laundering needs to be stopped and this will not be achieved until the reputable operators set up in jurisdictions such as the Isle of Man where strong player protection and active anti-money laundering regulation is in place. Until this happens, the money launders and unscrupulous operators will be able to operate from the numerous unregulated jurisdictions in the knowledge that anyone who wants to gamble in an online casino will have to do it with them, as there is nowhere else to go.

The island's regulators have the challenge of applying the island's strict anti-money laundering regulations in an online environment, which allow this new industry to thrive, but at the same time prevents its abuse by money launders.

The Online Gambling Industry in the Isle of Man is republished from iGamingNews.com.
Miles Benham
Miles Benham