Is it a Safe Bet?

by Kate O'Connell, Olswang

Introduction

1. In an article in May 2000 ("Is it a safe bet? Legal and regulatory issues for online and interactive betting" - see http://www.olswang.com/sport/safebet_article.html), we described the complex legal and regulatory issues in the UK in relation to online and interactive betting. These affect all those involved in the provision of betting services via the Internet or interactive television, from the providers of links or other access to bookmakers (including television broadcasters, sports websites, ISPs and WISPs (Wireless Internet Service Providers)), to the bookmakers themselves. Matters are not helped by the many "grey areas" that have become apparent as the existing legislation struggles to cope with new technologies which do not fall within the strict legal wording of the various prohibitions and restrictions imposed on betting and gaming services.
2. We reported on a number of highly relevant developments in the legal/regulatory world back in May, including the announcement of the British Government's Gambling Review, and clampdowns in the US in terms of prosecutions of offshore providers of betting and gaming services to US citizens. This 2001 Update describes changes since then.
3. As we flagged last May, new technologies have made it easy to site betting and gaming services offshore and potentially out of the reach of the taxman. This has clearly been a major force behind many of the recent regulatory developments. In particular, after months of discussion with the industry, this month has seen a fundamental development for the providers of betting services (both traditional bricks and mortar providers, and online/interactive providers) in the UK as a result of tax changes in the Budget. This Update reviews those changes and the knock on effects these are likely to have in terms of bringing bookmakers back on shore.
4. Finally, the long awaited guidance on interactive television services, an area of fundamental importance to bookmakers (as witnessed by BSkyB's recent results, which showed some £37 million of interactive revenues, of which £33 million was attributable to betting), raises some issues for those wishing to provide or link to betting services on television.

   Regulation of services broadcast via television

5. As we noted in our May summary, general betting laws apply to both interactive and internet betting services (although there are "loopholes" by virtue of which many restrictions will not apply to online or interactive services - and this is one of the issues being considered by the Home Office's Gambling Review). In addition, television services (including interactive) are also regulated by the Independent Television Commission (the "ITC") - which regulates content and scheduling of television programmes and advertisements. For example, the ITC currently imposes certain restrictions on advertising and sponsorship relating to betting. In contrast, the ITC does not intend to regulate the Internet.
6. For interactive services, the ITC's stated intention (set out in its consultation paper of February 2000) was to simplify its existing regulatory requirements wherever possible, and to adopt a "flexible" regulatory stance. The final Guidance was published on 12 February 2001. However, restrictions and prohibitions on the advertising of certain services (including betting) on linear television services, which we had understood would be abandoned for interactive services, appear to have been retained. This is discussed in more detail below.
7. The ITC's original distinction between dedicated services and enhanced programme services remains:
   • dedicated interactive services: the ITC describes these as services "accessed in their own right", usually through an EPG, and typically consisting of shopping mall-type services and entertainment services such as betting and gaming;
   • enhanced programme services: those which enable interaction with linear programmes, including editorial enhancements to programmes, advertising enhancements to programmes, and advertising enhancements to advertisements. (While the ITC's Guidance does not expand on this definition to give examples, clearly some programme or advertising enhancements may include betting products or services).
8. The Guidance excludes the Internet - "pure Internet-via-TV services lie outside the scope of this policy statement". The ITC's view appears to be that its light touch approach to dedicated interactive services means a minimal risk of distorting the market between these services (usually selected by viewers from within a "walled garden") and "material from the generality of the Internet". This is probably right.

   Dedicated interactive services

9. The ITC considers that viewers will expect "rather less" protection in relation to dedicated interactive services, although it acknowledges that this area will require ongoing research as the market develops. Echoing the provisional conclusions in its consultation paper, the ITC considers that detriments to viewers from such services are likely to arise where services are misleading, offensive or harmful - matters addressed more by general law than broadcasting regulation. In light of the perceived lower levels of protection required, the ITC proposes just two requirements for such services:
   • content provided by a broadcaster to, for example, a shopping mall, falls within the scope of that broadcaster's licence because it lies within its responsibility and control. While the ITC does not advocate pre-vetting, it will operate a "notify and remove" policy for misleading, offensive or harmful material. The ITC does not regulate the content of broadcasters' websites, or press releases or other "offline" products, so this is a new regulatory departure - why should news provided by an ITC licensee (say, BSkyB) on Open be treated differently than news supplied by, say, The Guardian newspaper? The rule is not obviously tied to use of a "broadcast" brand. It does not even seem to matter if the content is unbranded or carries a separate brand;
   • viewers must not be misled about whether or not the ITC regulates a particular service. In particular, viewers must understand when they are leaving regulated content. Transparency is paramount.
10. The ITC intends to communicate informally to licensees any major content problems brought to its attention - but will leave it to the broadcasters and advertisers to decide how to deal with the issue.

    Enhanced programme services

11. Consistent with its consultation paper approach, the ITC considers that viewer expectations as to regulation/protection will be higher for enhanced programme services, accessed directly from "traditional" programmes, than for dedicated services. In particular, viewers will have exercised fewer active choices before viewing the service, which might lead them to expect that the level of regulation applicable to the services would be more akin to that for linear services. Indeed, the ITC is particularly concerned that viewers may regard interactivity as part of an underlying programme.
12. However, taking a laudably commercial approach, and recognising that a degree of commercial exploitation is needed if the costs of providing interactive television enhancements are to be met, the ITC has established a "set of simplified ground rules" based on elements of its existing Codes.
13. The ground rules address three main areas identified by the ITC:
    • a requirement for licensees to be responsible for the material they transmit, including all enhancements over which they exercise control and any interactive icon present in a programme or advertisement;
    • transparency: a requirement to make viewers aware of the different status of material, e.g. whether it is within the editorial control of the broadcaster or not, and whether there are any costs of choosing to interact (e.g. cost of telephone calls);
    • linking commercial content to programmes. In particular, the ITC's current rules on undue prominence (interactive icons should not be branded and should not be positioned or otherwise used so as to encourage undue prominence of a product appearing in a linear programme) and the rules on separation of advertising and editorial content will apply:
      • viewers must not be permitted to go straight from a programme to a single advertisement (the "two clicks" rule);
      • advertising material should be distinguishable from content;
      • traditional restrictions for specific categories of programmes and specific advertisements will be carried over from the linear to the interactive environment.
14. These three regulatory areas are expanded into 13 detailed "ground rules" for enhanced programme services set out in Annex A to the Guidance.
15. For these "enhanced" services, the ITC favours a "two clicks" approach in order to "protect" viewers, as in conventional services, from certain services or advertising. Because advertising or services displayed when the viewer first opts to interact with a programme will not have been specifically selected by the viewer, but will be akin to a traditional advertising break, these should be regulated in the same way as advertising breaks now and viewers should have to make a second active choice to see purely commercial content. Beyond the 'first click', however, the viewer will have made a conscious decision to go to a commercial site so more relaxed rules will apply, akin to those for shopping mall services.
16. Of the ITC's 13 Rules, however, it is perhaps Rule 9 which could cause the greatest issues both for linear broadcasters who wish to allow their viewers to interact with betting services, and for the providers of such betting services. Rule 9 prohibits any advertisement or other commercial content contained on an enhancement for products or services that cannot be transmitted in and around programmes in a linear environment. Rule 9 would thereby appear to apply the linear advertising restrictions in Rule 18 of the ITC's Code of Advertising Standards and Practice to interactive services. Rule 18 states that advertisements for betting and gaming services (except football pools, bingo and permitted lotteries) are "not acceptable". Rule 9 of the ITC's Guidelines is therefore potentially very significant for broadcasters, such as those with sporting content, who wish to provide betting opportunities for their viewers.
17. In light of the fact that betting and gaming services are clearly seen as a driver for interactive television services, it would seem bizarre if this rule could be construed to prevent any indication in a programme enhancement that betting was available. From discussions with the ITC it appears that there is no objection to betting and gaming services themselves being made available, but only to the " promotion" of such services. Icons etc. will obviously need to be labelled and/or branded in order to inform viewers what services they might expect to access. The ITC's view appears to be that such "information" should not be deemed to be promotion or advertising. However, there is clearly a fine line to be drawn between advertising the service and directing viewers to it.
18. As the prohibition on advertising betting services on broadcast media apparently comes from the Home Office, it may be that a liberalisation of betting in the UK, widely expected to be the result of the Gambling Review Body's ongoing Review, will result in a relaxation of this restriction. In the meantime, however, broadcasters and betting service providers must bear in mind this Rule and endeavour not to cross the "fine line" into "promotion" of betting services.
19. In the very short term, therefore, the ITC's proposed regulatory stance will make a difference to how betting services are regulated on television compared to the unregulated internet, but only where those services are linked to an underlying broadcast programme (which is likely to be the case where broadcasters seek to recoup the large sums expended on sports rights through revenue sharing arrangements with betting service providers). In contrast, the "light touch" regulation for stand-alone dedicated interactive services would not appear to be too far removed from the regulation free world of the Internet.

    The Internet

    Extra-territoriality

20. The global reach of the Internet can be a headache for regulators and their fiscal regimes. This was clearly demonstrated last year by the World Sports Exchange case in the US where the US authorities acted "extra-territorially" to convict a director of World Sports Exchange when he visited the USA, even though his site was lawful under Antiguan law where it was based. This conviction was achieved under a law which prohibits the use of telephone lines for illegal purposes (in the majority of US states, sports gambling is illegal).
21. Various steps have been taken in the US to attempt to introduce legislation, such as the Kyle Bill, which, if enacted, would ban online betting. However, in each case the proposed "ban" seems to get undermined by various concessions granted to numerous lobbyists, each out to protect their gambling interests. Meanwhile, the position, as stated by the US Attorney General, Janet Reno, is clear: "the Internet is not an electronic sanctuary for illegal betting. For internet betting operators everywhere, we have a simple message: you can't hide online and you can't hide offshore".
22. In the UK, bookmakers have taken different stances. Ladbrokes International, for example, the Ladbrokes online arm, will not take bets from the US. By contrast, others (e.g. SportingBet) will take such bets, relying on the fact that the transaction takes place where the web servers are located and where the risk management and payment transaction takes place.

    Tax and the Internet - the UK position

    What is a permanent establishment for tax purposes?

23. As witnessed by this month's Budget (discussed below), tax is a key driver where betting is concerned. The UK's Inland Revenue has publicly stated its policy that a website on a server is not, by itself, a permanent establishment for tax purposes, i.e. it is not a taxable presence:
    • a website of itself is not a permanent establishment; and
    • a server is insufficient of itself to constitute a permanent establishment of a business that is conducting e-commerce through a website on that server regardless of whether the server is owned, rented or otherwise at the disposal of the business¹.

    Prohibition on advertising offshore betting services in the UK

24. If you are connected with the provision of offshore betting services, you must also bear in mind the revenue-protecting provisions of section 9 of the Betting and Gaming Duties Act 1981 - the subject of a case and subsequent appeal to the Court of Appeal brought by the Gibraltar-based bookmaker, Victor Chandler - which prohibits offshore bookmakers from advertising their services in the UK. Following the case, this prohibition will apply whether you are promoting your services via television or via the Internet.
25. When Victor Chandler moved his betting operations offshore to Gibraltar with Victor Chandler International offering "tax free" betting to UK punters, he sought a ruling to determine if the prohibition on advertising contained in section 9 included electronic media advertising - specifically Teletext. The High Court initially ruled in favour of Victor Chandler, and, following that first ruling, Teletext - and Skytext - commenced accepting advertisements from Victor Chandler International and a host of other offshore bookmakers. However, the decision was subsequently overturned by the Court of Appeal.
26. Section 9(1) of the Betting and Gaming Duties Act 1981 provides as follows:

    "Any person who -

    (a) conducts in the United Kingdom any business or agency for the negotiation, receipt or transmission or bets to which this section applies, or

    (b) knowingly issues, circulates or distributes in the United Kingdom, or has in his possession for that purpose, any advertisement or other document inviting or otherwise relating to the making of such bets....

    shall be guilty of an offence." The bets referred to are, broadly, fixed odds and pool bets made with offshore bookmakers or totalisators.

27. The Court of Appeal found that information was, in its own right, when transmitted, a document that was "issued, circulated or distributed" in breach of the prohibition. The wording of section 9 comes from earlier legislation in place well before fax, teletext and the Internet were contemplated. Consequently, the Court of Appeal interpreted the word "document" on an "always speaking" basis, and found that what Victor Chandler International was doing was "within the mischief" at which section 9 was aimed (i.e. protecting revenue) and that "information stored electronically in a computer bank or in some other form of database" was a document². The Victor Chandler advertisements, "by finding their way to television screens in this country" therefore breached the prohibition.
28. While the Court of Appeal's decision was limited to advertising via teletext from offshore in relation to betting, the reference to "information stored electronically in a computer bank or in some other form of database" makes it difficult to deny that the judgement is equally applicable to other modes of advertising, including via the internet.

    What are the UK regulators doing to stop the drain offshore?

29. In spite of the Court of Appeal ruling, the UK authorities' response following the case has been limited. This is despite the fact that banner advertisements on, and hypertext links from UK websites to offshore betting sites that were hastily pulled following the appeal decision have been creeping back onto the Internet. However, the regulators and the Treasury have been working with the industry to address the problem of the flood of bookmakers to offshore locations, and the consequent drain on Treasury revenues. The Chancellor's Budget, announced on 6 March 2001, which announced the abolition of betting duty, is likely to put an end to the seemingly laissez-faire attitude of the regulators to enforcement of the advertising prohibition.
30. General betting duty (currently 6.75%) will, from 1 January 2002, be replaced with a tax levied on the gross profits (defined as the difference between the stakes placed with them and the winnings they pay out) of bookmakers. Gross profits tax will be set at 15%, which reportedly equates to a betting duty equivalent of some 3%.
31. The intention of the Treasury and HM Customs & Excise is that this reform will "create the right competitive environment for British-based bookmakers to develop their business domestically and internationally, and give punters a better deal".
32. This reformed tax structure makes it possible for bookmakers to absorb the tax and to end the 9 per cent "deduction" that they currently charge on stakes, which means that punters will pay no tax. The authorities beeve that this will make it possible for UK bookmakers to develop their domestic and international business from an onshore base, competing from a position of strength in the growing global market for telephone and Internet betting. The expectation is for "significant growth" in betting turnover in the medium term and potential future revenue streams. In addition, the reform is intended to "remove any incentive for illicit gambling" and to "help eradicate the illegal untaxed market in betting" which HM Customs & Excise estimates is worth approximately £500 million per year.
33. Following the Budget, the largest UK bookmakers have said that they will relocate their offshore operations to the UK. By the time the new tax charge is introduced (the Government's stated intention is that this should be no later than 1 January 2002), the Government expects that the biggest bookmakers will have brought their offshore operations back to the UK.
34. Victor Chandler is reportedly holding out against a relocation onshore. The Guardian newspaper on 5 March quotes him as saying, "The stable door has been opened and the horse has bolted." However, one would imagine that the Treasury at least will favour an increased focus by HM Customs & Excise on exercising their powers under section 9 of the Betting Gaming and Duties Act 1981 to ensure that he and other offshore operators are prevented from advertising their services within the UK by any means, including the Internet. Such an approach - which would clearly encourage repatriation of the offshore businesses - would be a stark contrast with the "wait and see" policy that Customs & Excise appear to have been operating to date in relation to such operators, in spite of their "victory" against Victor Chandler in the Court of Appeal. On 29 June 2000, Victor Chandler's petition for leave to appeal from the Court of Appeal's decision was dismissed by the Appeal Committee of the House of Lords.
35. An alternative route for challenging the prohibition in section 9 of the Betting and Duties Gaming Act 1981 may lie in challenging its legality under EU law. However, for technical reasons this may not be open to Victor Chandler³. There is a widely held belief that the UK's legislation breaches the provisions on free movement of services. If successfully challenged, the legislation would need to be repealed. However, bringing such challenges is costly. If the big UK-based bookmakers all agree to close down their offshore operations and remain fully onshore, it may be that the newer players are unwilling to fight this battle alone. In addition, by now, such players may already have established sufficient brand awareness amongst UK punters that their need for advertising space in the UK is not significant. Certainly, this seems to be Victor Chandler's view on the new tax, "The punter will always suffer. Meanwhile, VCI offers as good a service but with better odds. People are still going to find us, even if government restricts our advertising."

    UK Gambling Review

36. Finally, on 16 February 2000, the Government initiated a wide-reaching Gambling Review. The Gambling Review is a wide-ranging review of the gambling legislation which is now more than 30 years old. It is expected to make recommendations on the nature and extent of regulation for gambling activities in Great Britain.
37. The Review is common to both Internet and interactive television services. Its terms of reference include "the desirability of creating an environment in which the commercial opportunities for gambling, including its international competitiveness, maximise the UK's economic welfare" and "the implications for the current system of taxation, and the scope for its further development".
38. The intention is that the Review Body should report this summer, with the full report being made to the Home Secretary in June 2001. Information on the progress of the Review, and of submissions made to it, is available on the Gambling Review's website, at http://www.gamblingreview.gov.uk.

    Conclusion

39. The gross profits tax is due to come into effect on 1 January 2002. In order for the Budget changes to work, the next few months should see the major UK bookmakers closing down their existing offshore operations and bringing them back on shore. However, it is not yet clear what effect the reported attitude of offshore players such as Victor Chandler will have. One must assume that Customs & Excise will start enforcing the advertising ban under the Betting and Gaming Duties Act 1981. Accordingly, broadcasters and others providing links to offshore betting services should be reviewing those links to ensure that they are not in breach of the prohibition. However, whether, as Chandler suggests, the stable door is being closed after the horse has bolted remains to be seen.

Footnotes:

¹The policy announcement was made by the director of the Inland Revenue's international division as a conference in Lisbon and was reported in a recent Inland Revenue press release.

²Lord Justice Chadwick stated that "by the transmission of electronic impulses in a combination, or language which the recipient system can read, the sender is creating a document on the recipient database".

³As a Gibraltar-based bookmaker, Victor Chandler cannot show that its activities affected by the law amount to trade between EU Member States (Gibraltar being a British Dependent Territory). An effect on inter-state trade is required before an action can be brought under EU law.

Kate O'Connell is an associate in Olswang's Competition/Regulatory Group. Olswang is a law firm based in London and Brussels, and focusing on the telecommunications, media and technology sectors. For further information, see http://www.olswang.com.