attorney, honored lawyer of Ukraine, managing partner of the attorney association “Bogatyr and Partners”
A year has passed since gambling was legalized in Ukraine. During this time, the state budget of Ukraine received the first billion hryvnias from the gambling business. And about it recently reported Gambling and Lottery Regulatory Commission (CRAIL).
How does this number characterize the quality of the regulator? Let’s try to analyze the intermediate results.
The topics of the gambling business and the Forex market are among the most relevant in the Ukrainian IT environment. These directions of “IT business” make up a significant part of it, and therefore we tried to understand their legal regulation. First of all, they were interested in various aspects of online casino activity.
In fact, the Ukrainian online casino license covers only the Ukrainian market, and its use in most EU countries, Great Britain and the USA will inevitably lead to criminal prosecution. That is, in these countries you need to get your own license.
Most of the gambling business will continue to remain in Curaçao, Malta and Gibraltar due to the significant regulatory risks that business in Ukraine faces on a daily basis.
Of course, if the target audience is Ukrainian players, then you will have to get a Ukrainian B2C license.
From the point of view of sports betting, Malta and Cyprus are more attractive, whose licenses extend to the EU and, accordingly, to more wealthy players. With companies from these jurisdictions, the processing of electronic payments will be much easier.
So does it make sense for Ukrainian, and even more so, international IT developers of software products in the gaming business to receive a Ukrainian “showcase” B2B license?
Rather, it has more regulatory and tax risks than benefits.
The issue of the ability of Ukrainian users to choose where to play and where to invest on the Internet is debatable from all points of view.
We have the opportunity to invest, buy goods and services all over the world, and here is a regulator that will try to create obstacles for us to buy some EU service. Is this fair?
The situation with foreign forex companies was similar.
The Ukrainian regulator simply prints a message that this or that foreign company is a scam project, while the National Commission for Securities and the Stock Market (NCSCFR) does not even make formal decisions that could be appealed to an administrative court.
In general, the issue of Cross Border Services (the possibility of providing trading services on the Forex market) in the EU is regulated much better than the gambling business.
Another problem of Ukrainian legislation is the lack of regulation of aleatoric legal relations that would regulate gambling and betting contracts.
The current weak Civil Code does not regulate provisions on obligations arising from gambling, which creates legal uncertainty and the impossibility of effective legal protection. This question applies equally to both the gambling business and the Forex market.
In fact, there are no legal enforcement mechanisms in case of winning or losing.
Such legal uncertainty gives law enforcement officers a wide field for the possibility of interpreting the actions of the organizers of the gambling and forex business, incriminating them for fraud and other types of crimes.
History of bans
The prohibition of the gambling business, which was installed in Ukraine back in 2009, people’s deputies canceled it.
A year ago, on August 13, 2020, a rather extensive law came into force Law “On state regulation of activities related to the organization and conduct of gambling”.
He was supposed to replenish the state budget, restore the lost sector of the economy, create new jobs and even overcome the shadow market of the entertainment industry, which (as the developers assured) is “an integral part of civilization”.
Today in Ukraine it is allowed to organize and conduct gambling games:
- in casino gambling establishments;
- in an Internet casino;
- in bookmakers and on the Internet (bookmaking activity);
- in halls of slot machines;
- in poker on the Internet.
But all these types of economic activity can be carried out (Part 1, Article 2 of the Law) only if the economic entity fulfills three conditions:
1) obtaining relevant licenses by the gambling organizer;
2) his use of certified gaming equipment and online systems;
3) connecting this equipment to the State online monitoring system.
On April 6, the relevant Licensing conditions entered into force (Cabinet resolution dated 31.03.2021 #300), April 9 – List of gaming equipment subject to certification (KRAIL decision dated 04/01/2021 No. 128), and on June 16 – procedures for the formation and maintenance of registers in the field of organization and conduct of gambling (KRAIL decision dated 04.22.2021 #167).
But during the year of the law, the regulator did not manage to ensure the creation of the State Online Monitoring System.
So far, they have only developed a draft decision of the Commission on requirements for the State online monitoring system and sent it for interdepartmental approval.
A key surveillance tool
According to the law, the state system of online monitoring is the main tool for the implementation by the Authorized Body, which is KRAIL, of the functions of state supervision (control) over activities in the field of organization and conduct of gambling.
And the licensees are obliged to connect the relevant gaming equipment to this system.
The system itself must contain, in terms of each gambling establishment, each gambling equipment and each gambling game conducted, as well as in terms of the gambling period (day, week, month, quarter, year), information on:
- each bet accepted in a gambling game;
- returned rates;
- payment of gambling winnings.
All operations in the system must be recorded in real time, indicating the moment (second, minute, hour, day, month, year) of their implementation.
Accordingly, the systems of gambling organizers must contain relevant information and transmit it to the state system in real time. And it is forbidden to conduct gambling without using the online system of the gambling organizer, which is connected by communication channels with the State online monitoring system.
New opportunities
What do we have in connection with this today in practice?
It is submitted on the website of the regulator lists business entities that have received the right (purchased licenses) to carry out the activities of organizing and conducting gambling games, a list of institutions that carry out certification of gaming equipment (which includes gaming machines, gaming tables, including with a roulette wheel, online gambling organizer system, card shuffling machines).
Registers of organizers, as the procedures for their formation and maintenance were approved relatively recently, are still under development.
But there is still no valid act that would be the basis for connecting gambling equipment to the State Online Monitoring System, as well as the system itself (the third of the conditions necessary for legal gambling business in Ukraine).
However, criminal liability in the updated Article 203-2 of the Criminal Code is provided only for the organization or conduct of gambling without a license by a person who does not have the appropriate status.
Therefore, with regard to the rest of the violations, including the part of the direct prohibition to conduct gambling without using the online system of the gambling organizer, which is connected by communication channels with the State online monitoring system, you can not worry.
On the contrary, the lack of supervision under such conditions probably opens wide opportunities for conducting “business” by representatives of the regulator together with trusted licensees. Without accounting and excessive tax burden.
In connection with this, an interesting nuance of the Law on State Regulation of Activities Regarding the Organization and Conduct of Gambling Games is the fact that the legislator, defining the tasks of the Cabinet of Ministers, did not set specific deadlines for ensuring the functioning of the State Online Monitoring System.
At the same time, the change in tax rates on income from activities related to the organization and conduct of gambling is directly linked to the commissioning of this system (see Clause 8 of the Final and Transitional Provisions).
And the fact that the gambling business, despite the lack of all the necessary conditions, is still being conducted in Ukraine is sufficiently evidenced by at least the number of advertisements of online casinos and other gambling establishments that ordinary citizens encounter every day.
Agreement with the EU? Didn’t hear
In connection with the raised problem, it is impossible not to mention agreement on the association between Ukraine and the European Union, which, since it was ratified by the Law, is an integral part of national legislation and is mandatory for implementation, in particular, by state bodies.
The obligations taken by Ukraine in the international agreement violate at least two interesting issues related to the regulation of the gambling business.
- Do citizens of Ukraine have the right to play in foreign online casinos on the Internet, which are registered on the territory of the European Union?
- Do Ukrainian business entities that have received licenses for online casino activities in accordance with the requirements of the Law have the right to conduct their activities and provide services for consumers located on the territory of the European Union?
We addressed these questions to the regulator, who, unfortunately, did not give direct answers.
The Commission for the Regulation of Gambling and Lotteries reported the general norms of the law and, referring to Part 7 of Art. 24 of the Law, noted that it is illegal to distribute, provide access to, offer to download or otherwise distribute in Ukraine websites, mobile applications and/or other gaming equipment for participation in gambling, if such websites, mobile applications and/or other gaming equipment provide access to the servers or databases of persons who are not organizers of gambling within the meaning of the Law is prohibited. And this entails criminal liability.
In general, it should be noted that there is no special legislation on gambling and its taxation in the EU, but there are separate EU directives that contain definitions of the terms and features of taxation with separate taxes that are covered by the relevant directive.
Thus, Appendix XXVIII to Chapter 4 “Taxation” of Chapter V “Economic and sectoral cooperation” of the Agreement between Ukraine and the EU stipulates that Ukraine undertakes to gradually bring its legislation closer to the EU legislation regarding the application of the Directive of the Council of the EU dated 28.11.2006 N 2006/112/ EU on the common system of value added tax within 5 years from the date of entry into force of the Agreement.
In accordance with Article 135 of Chapter 3 “Exemption of other types of activities from taxation” of this Directive, Member States exempt bets, lotteries and other forms of gambling business under the conditions and taking into account the restrictions established by each Member State.
The VAT Committee of the European Union in 2015 also approved the Recommendations on the collection of VAT from companies in the field of gambling business spread on the Internet, in which it noted that, according to the mentioned article of the Directive, member states are given the right to freely decide whether the exemption from taxation applies to all gaming business services or only some part.
Also, member states are free to determine where and under what conditions such services can be provided on their territory.
Summarizing the above, we can come to the conclusion that negative personnel selection, a state of legal uncertainty, when the regulator delays the preparation of regulatory acts necessary for the full launch of the gambling business in Ukraine, created significant corruption risks in the department’s activities.
The regulator has not decided on the European choice and compliance with the Agreement between Ukraine and the EU.
Since the state system of online monitoring does not work today, the figure of 1 billion hryvnias of income from the gambling business, announced by KRAIL on the eve of the anniversary of the relevant law, is the sale of licenses to business entities that, after an eleven-year ban, never received opportunities for legal earnings.
But the commission should actually be ashamed of this figure. After all, the potential of the gambling business is an order of magnitude higher!
Exactly 10 billion hryvnias per year during the adoption of the law was evaluated direct loss of state budget revenues due to the sudden and irreversible ban on the gambling business at the time.
So the Gambling and Lottery Regulatory Commission is effectively bluffing.
The lack of a proper legal framework for legal business and the loss of 9 billion hryvnias of potential budget revenues can be considered the true results of the year of the law and the activities of KRAIL. And this should be the immediate basis for the Accounting Chamber and the State Audit Service to implement measures of state financial control of KRAIL.
Volodymyr Bogatyr
