Rolling the dice – or not – Gambling in Ukraine (Again)

In August an entry appeared relating to the almost certain legal return of gambling to Ukraine.

For those readers unaware, gambling was made illegal under Prime Minister Tymoshenko in 2009 following a fire at a Dnepropetrovsk gambling den that resulted in the deaths of 9 people.  Indeed some readers may consider a complete national ban on gambling as a result of that incident something of an overreaction – but Ms Tymoshenko was Prime Minister at the time and as with all populists (of which she is the personification of the definition), overreaction rather than proportionality – for example an investigation, the firing of police chiefs and fire safety inspectors, licensing officials etc – was the result.

Needless to say gambling across the nation continued – though thereafter illegitimately.

There is now something of a crackdown on illicit gambling dens by the Ministry of Interior.

Over the past ten days it claims to have raided and closed 130 gambling establishments – or 13 per day.

This is of course the tip of the iceberg nationally, and indeed the Ministry of Interior has stated throughout 2016 the anti-gambling operation will continue with local police chiefs to face disciplinary action and/or dismissal for turning a blind eye (or in many cases protecting) these illicit businesses.

The law is the law of course, and the police are there to enforce it – however the more cynical will note that the Ministry of Finance on 1st December submitted a Draft Bill to the Verkhovna Rada on the legalisation of gambling once again.  Some will therefore perhaps ponder whether this crack down is a clearing of the unlicensed decks prior to legalisation and licensing.

The problem – or one of a very long list of problems – with the newly proposed gambling law, is that it in no way encourages – or even allows – the illicit gambling establishments to go legitimate.

Your author, to be blunt, knows nothing about gambling.  Whether gambling is legalised in Ukraine once more – or not – is therefore personally irrelevant to a point.  The relevant point being, that if it is to be legalised once more, then the legislation should be good, well thought out, enforceable, and promoting international best practice.  To be equally as blunt, the Ministry of Finance Draft Bill fails spectacularly to do anything of the sort.  It is flawed from beginning to end, and this despite months and months of attempted international best practice input from the international gaming industry that has seemingly been completely and utterly ignored.

Having admitted complete ignorance of gambling, it is perhaps wise to defer to a friend of this blog that was (and remains) part of the lobby and would-be advisory group that attempted (and clearly failed) to guide the Ministry of Finance.

A few key points (27 in all – and ignoring the minor points) regarding the significant flaws within the proposed MinFin gambling disaster pending Verkhovna Rada deliberation:

“1) The International Gaming community has not been consulted in forming the draft law. Hence the draft law is not to international standards. Briefing notes were sent to those responsible for drafting the law but they do not appear to have been taken into account.
2) The law has been written without the benefit of gambling expertise; without knowledge of how the gambling industry truly works. It is inflexible to technological changes in future.
3) The law is isolated. It has no reference to a Governmental policy on gambling so cannot be assessed as to whether it fulfills those policy targets.
4) Similarly it has no outputs. It does not state what is expected once enacted. Yet, if one reads the law and applies it in the context of prevailing conditions it quite clearly favours vested interests.
5) It is exclusive. It tries to tackle problem gambling on the street by excluding anyone not comfortable with walking into a four / five star hotel. This “James Bond” model is naive. Using some of the license fees to set up gambling education and clinics would be more pragmatic. Failure to earmark funding for education and the treatment of problem gambling at this stage with robust proposals means that such measures will never take place. It requires a mature market to self-regulate and that does not exist in Ukraine.
6) Most countries require hotels as part of a casino development to encourage tourism, to offer tourism facilities not available in the specific locale. But this draft law is the opposite. It has no economic regeneration /tourism at it’s hub. 
7) On the contrary, it is only favouring three hotel owners in Kyiv: Premier Palace, Hilton and the owner of two venues (Fairmont and Intercontinental) but who fortuitously who also runs Borispil ? another designated casino venue. Why is the requirement not extended to all hotels regardless of star rating? Why a room requirement? Why hotels at all as most modern casinos operate as part of an entertainment and leisure complex?
 From an economic standpoint most hotels in Ukraine were not built to take into account having casinos so the space available in most is between 2-3000 sqm. This by modern casino standards is small and raises the issue of whether these casinos will be truly viable as a business just for gambling or instead used to launder money. 
9) Consider the following information published publicly by the United Kingdom Gambling Commission last week:   As at 31st March 2015 in the UK there were: 146 casinos operating with max 20 machines. 2 casinos operating max 150 machines. 20,990,000 visits total.   5,569 tables total, 2,822 machines total.  Casino table win was £992,250,000. Gaming Machine win was £168,800,000.  Gaming Duty Paid in 2014/15 was £317,554,000. Average casino (from 148) has 141,824 visitors to its 37.6 tables and 19 machines and makes £6,704,392 in Table win and £1,140,540 in Machine Win = £7,844,932 Avg.  GGY per CasinoNB Each casino paid on average of £2,145,635 in Gaming Duty making an average NGR of £5,699,297 – out of this has to come building & staff costs, marketing etc. so probably a profit of around £1m.  The licensing cost average was £23,112 per casino per year and this was used to fund the Gambling Commission itself.  The UK is not Ukraine but perhaps someone could apply that same data and principles here and conclude that classic over-assumptions of tax revenue are being made. Licensing fees are flat whereas tax increases with success.
10) No other law anywhere in the world requires table and slot machine minimums – rather the opposite – they try and enforce maximums (see above). Some casinos are fully electronic – it is not government’s role to dictate technological advances and cultural shift.
11) Similarly it is not the role of government to specify minimum staff requirements. Casinos provide trained staff for offering exceptional service and encourage repeat business – not to fill quotas. 
12) Taxation is not mentioned. Neither gaming tax, nor corporation tax, so what model is being followed? The government seems to be relying on a regular annual windfall though licensing fees. This is short-sighted as the fees are high and will not encourage growth – quite the opposite. Grant 200 licenses to online operators at 150,000 Euros each and compare that to one / two paying 1.5 million Euros. It’s a tenfold difference on fees alone. The licensing is being used as privilege.
13) No international operator will want to come into the casino market if there is no independent regulator who will tackle illegal gambling and provide a reassurance of legacy. Similarly how can an online operator be expected to pay 1.5 million Euros for a license if nobody is shutting down the unlicensed operators? (Many of whom are international) 
14) Not appointing an independent regulator will lead to corruption.
15) No independent regulator will lead to rules being interpreted rather than enforced.
16) No independent regulator means no transparency
17) No independent regulator means being shunned by peers in Europe where gambling is a well-regulated industry.
18) What do the IMF think of this as a vehicle for obtaining tax revenue in a fair, balanced and transparent manner free from corruption?
19) The investment seems to be one way – There is no mechanism for repatriation of investment dividend abroad. 
20) We recommend that licensing fees are used to finance an independent regulator; keep taxes fair and use these as the economic driver. Such a system is internationally recognized. Licensing as the driver is part of the corruption problems endemic in Ukraine.
21) With no reassurance of enforcement against illegal operators it paves the way for existing sports betting companies operating in a grey market to take total market share. As both parties have lobbied hard and with inclusion on the RADA committees this is no surprise but is hardly a fair and transparent system.
22) Online. The requirement for servers to be based in Ukraine shows that whoever wrote the law does not understand how the online industry operates. It is naive to think that the requirement for servers being based here will somehow enable them to be seized if enforcement is required. Most PC terminals in Western businesses located in Ukraine are dumb – all data is offshore or in a data cloud. However, if this is for corporate tax reasons this should be stated.
23) Lotteries. It’s brave to suggest a single lottery operator when Government officials have spent so much effort making the current lottery provider a monopoly. Suffice to say that the law will not prevent problem gambling by only allowing casinos in 4/5 star hotels if it then allows VLTs in lottery locations. The law has mixed two different offerings whereas it is usually one or the other. Walk into a lottery venue at the moment in any of the major cities in Ukraine and you will be hard pressed to differentiate it as a slot hall. Yet the government does not want slot halls. This area is being ignored and will lead to severe criticism by community and the church. 
24) What happened to horse racing? And Bingo? And Fantasy Sports? And AWPs 25?  Can a land-based poker license be given without a license in another category?
26) A multitude of technical questions are unanswered – each of which has a bearing on responsible gambling and tax revenue. Examples just casino-related include: How big is the casino within the hotel? Does it include the hotel rooms? Can I gamble on an iPad/ iwatch? Does an electronic roulette game classified as a table? How many terminals can be connected? What is the roulette spin time? Is TITO allowed? Can I use FOBTs? 
27) There are other flaws in the draft law but in the overall scale of the industry they are not worth annotating here. A well-written law to international standards would have provided a level playing field promoting a vibrant and positive gambling industry. The independent regulator would then have cast regulations to make the industry transparent, clear and operating within defined rules. Finally, in the briefing note to government on 16th October 2015 we made some recommendations – all of which have been ignored – and which now lead to the draft now presented.”

Ergo, after yesterday’s entry lauding of particular quality legislation being passed (lauded because it is all too rare), today under the legislative spotlight there is a return to the usual way below par, ill conceived, poorly crafted nonsense that is sadly expected from the Ukrainian establishment when it ignores international best practice, expert assistance, and otherwise external input.

Clearly this gambling law has been drafted by somebody who knows nothing whatsoever about gambling and is looking (somewhat hopefully) only at potential licensing revenue within the Ministry of Finance.  In fact a holistic approach to the entire gambling subject across numerous ministries would seem to be entirely absent (infrastructure, tourism, sport, policing etc).  Something of a major fail for Natalie Jaresko as Finance Minister, who if not responsible for writing it, is responsible for its submission by MinFin.

Empirically some may suggest there is something of a legislative trend.  If there is external conditionality (and finance) relating to legislation (and undoubted external input) then decent and/or good legislation emerges – if not, the usual poorly crafted legislative excrement is forthcoming from the Ukrainian elite.

Whatever the case, as the above expert/professional comments infer, the current and 2016 Ministry of Interior operation against illicit gambling is in need of a rethink – for it will not be able to conclude at the end of 2016 as envisaged when the newly proposed MinFin Draft Bill on gambling in no way assists in legalising the currently illicit – even if these establishments wanted to go legitimate.

It may be wise if somebody within MinFin pull the submitted Draft Bill and put in some serious effort at meeting international best practice perhaps – instead of reinforcing the perception that unless there is external conditionality upon proposed legislation, the Ukrainian elite is incapable and/or unwilling to pursue best international practice for the sake of the nation.