Online gaming in Germany – a legal minefield

Author: George Mangion
Published on Business Today 1st April 2019

One thing I can tell readers is that online gambling is popular in Germany. More importantly, not a single German has ever got in trouble by placing a bet over the internet.

Having said that, Germany is one of those places where it’s definitely illegal to host a gaming site, but the legality of just placing bets online is uncl ear. Legal battles in Germany mostly revolve around the right of operators to offer their services to the public.

The difficulty in discussing the German market is that the laws have experienced a great deal of turbulence in recent times. Adding to the confusion is the ability of each state to regulate gambling how it sees fit. Many will tell you that Germany has a mix of wide-reaching national laws regulated by more limited state laws.

Up until 2008, online gambling was unregulated in Germany. As can be expected, the laws previous to 2008, didn’t address the internet in any way. Things changed when the Interstate Treaty on Gambling was passed in 2008. This effectively banned all forms of online gambling other than sports betting and horse racing offered by state-owned monopolies.

As can be seen in this article, some forms of betting are allowed in some states while most others are banned. It was more than six years ago that I travelled to the German state of Schleswig-Holstein where at an impromptu organised conference, I enjoyed listening to a debate by experts on the topic of online licenses that were planned to be issued on an exclusive basis in this northern state.

Looking back with nostalgia, one lauds the legislative adventure pioneered by Schleswig-Holstein which led to the issue of a limited number of gaming licenses. These licenses are still valid but they are limited in scope to the territory of Schleswig-Holstein and were due to expire in 2018.

From January 2012 until February 2013, the state of Schleswig-Holstein pursued its own gambling policy, which included granting online casino and sports betting licences at the same time, omitting to join the complete ban instituted by the other 15 states in the Interstate Treaty. No doubt, this unilateral move created an anomaly and it was in March 2017 when there was a collective drive by all leaders of Germany’s 16 Bundesländer to regularise the situation.

They voted to approve a new Interstate Treaty on Gambling. This had to take effect on 1st January 2018. In essence, the Interstate Treaty generally prohibits the operation and brokerage of online games of chance. The only exceptions concern sports betting, horse race betting and state lotteries.

Online casinos therefore are not currently licensable. Such restrictions were challenged under the EU law and test cases have instituted more pressure on Germany to relax its online prohibition. Slowly, this led to reforms that were initiated by the 16 Lander at the end of 2016. Unfortunately, these are referred to as minimalist reforms since they only concern sports betting.

But an over-arching condition of the Interstate legislation required the unanimous approval of each state’s legislature. The fly in the ointment was that legislators in Schleswig-Holstein voted to opt out of the treaty. In a curious twist of legislative history, Schleswig-Holstein had announced its intention to team with the state governments in North Rhine-Westphalia, Rhineland-Palatinate and Hesse on a new regulatory scheme based on its own original licensing regime. It hoped the rest of the states would eventually join.

Sadly, the horse was taken to the water but refused to drink. All this in a country with the largest economy in the EU family and it is not a surprise how online prohibition has consistently led to the industry’s growing impatience with the country’s 16 states in their failure to put together a cohesive strategy.

In fact, only three years ago, the EU ruled that Germany cannot continue to penalise or restrict unlicensed foreign operators, because it made it impossible for them to acquire licenses. The only exemption was Schleswig-Holstein, which as stated above, has challenged the rest and allowed for online casino licences to be issued.

The good news for gaming operators that went through the trouble of getting licensed in 2012/3, this empowered them to operate under a six-year license. These included real money casino games and poker to players within the state of Schleswig-Holstein until end 2018.
As things stand now, online gambling is largely outlawed across Germany with the exception of the two dozen or so operators who signed licenses to operate in Schleswig-Holstein. There are no other legal gaming sites in the 15 Bundesländer and there’s no way to obtain a valid license to offer games.

Recently talks started to pave the way for an interim solution. This agreement opens the way for the state of Hesse to start accepting applications for sports betting licences. The state of Schleswig-Holstein which had previously broken away from the inter-state treaty to set up its own online gambling licensing system which expired last year, will grant a short extension to its 23 licence holders till June 2021.

Quoting Steinkrauss (managing director of Merkur Sportwetten): “A new licensing process will take place with permits beginning in 2020 without a limit on the number, but would only be valid until June 2021, which is a quite unreasonably short time-frame.” He said that the agreement was no more than “an interim plaster rather than a long-term solution”.

The unhappy situation for foreign operators is that the status quo will prevail in Germany for the foreseeable future. Does this mean German-facing sports betting operators holding licenses in other European Union jurisdictions can continue to serve their German punters provided they pay attention to anti-money laundering responsibilities and don’t violate advertising restrictions.

One cannot but mention the deleterious effect in the media by the publishing of the so-called “Panama Papers” in November 2017. Newspapers commented on the role of various large German banks which were involved in payment transactions for private gambling operators.

The pay-out of winnings arising from supposedly unlawful gambling could be regarded as money laundry resulting out of aiding and abetting the illegal organisation of gambling. This has added more pressure on state regulators to tighten the screws on casino operators especially where AML rules are concerned.

No doubt, it will further strengthen their resolve to maintain the status quo on the uncertain licensing regime prevailing in Germany.

George Mangion

Author: George Mangion
Published on Business Today 1st April 2019
Get in touch: | +356 21 493 041

Moneyval – big brother is watching

Author: George Mangion
Published on MaltaToday 27 September 2018

The challenges to our regulatory authorities are ongoing and in particular one cannot ignore the added scrutiny placed by an inspection this year to be carried out by Moneyval – an EU mechanism with powers to conduct ad hoc inspections. It represents a Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL) which was established in 1997, and now serves as an independent monitoring mechanism within the Council of Europe.

It is an FATF Style Regional Body (FSRB) whose main aim is to ensure that member states have effective systems to counter money laundering and the funding of terrorism in place, and that they comply with the relevant international standards. As an institution, it assesses member states’ compliance in the legal, financial and law enforcement sectors through a peer review process of mutual evaluations.

The peer review system that has been adopted is based on the FATF model, though the process is undertaken against a more extensive set of anti-money laundering standards, including the FATF Recommendations, the EU’s Fourth Money Laundering Directive, as well as the 1998 UN and 1990 Council of Europe conventions. Malta fared well in the latest inspection in 2012 with a follow-up having taken place in 2015.

Since 2015 and following the PANA reports together with the Pilatus Bank closure one may expect a deeper look by Moneyval experts who are to arrive next November. In its previous inspection, Moneyval had noted that the number of on-site visits by the regulator was low.

In addition, the absence of a national risk assessment to identify risky areas for ML/FT gave rise to concerns with regard to the effective implementation of risk-based supervisory activity. Due to such observations and other factors – these led to instigate reform at the MFSA starting with a consultation exercise among practitioners and industry at large which was carried out last year. According to the Minister of Finance this Moneyval visit is a regular one and there should not be undue speculation in the press about it.

He placated the press saying the Committee has been carrying out such evaluations locally on a regular basis over a number of years. Naturally the alleged anti-money laundering transactions at Pilatus – an Iranian bank combined with the revelations arising out of a number of leaked FIAU reports on the same bank – these have triggered an inquiry by the European Banking Authority (EBA) based on a request by the European Commission and a report from the European Parliament.

EBA was asked to verify whether it is fully equipped and free from conflicts of interest to perform its supervisory duties. It was also asked to establish whether the MFSA had fulfilled its obligations as a national supervisory authority in extending the licence to Pilatus bank. EBA concluded its investigation and recently announced that there were no infringements but MFSA needs to tighten its AML arsenal and employ more resources.

Therefore, a recent announcement by the parliamentary secretary responsible for financial services that MFSA is to undergo a legislative revamp is most welcome. This revamp started by conducting a public consultation process launched last year. In the meantime, this article is advocating that the ideal reform will result in splitting the MFSA into two authorities – one harnessing the prudential regulatory function and another entity having separate management to oversee the financial conduct of regulated bodies.

As they say – having a super-regulator is like having all the eggs in one basket. Just consider the onerous responsibility the MFSA carries for the direct supervision of all regulated firms (including banks, funds, trusts, insurance and SICAVs). This includes both prudential and conduct of business purposes and, at the same time, carries an onerous duty to take remedial and timely enforcement action against firms wherever it identifies regulatory failures. Such a restructuring has its advantages since it extends power to make judgments over whether banks’ or listed funds’ or financial products pose a risk to financial stability or are likely to cause detriment to consumers.

For example, the UK, previously had a single regulator − the so-called FSA. The monolithic structure was split into two entities: the Prudential Regulatory Authority (PRA) and the Financial Service Authority was rebranded as the Financial Conduct Authority (FCA) with three areas of responsibility.

The first duty is the conduct of business supervision of banks, insurers and major investment firms followed by prudential and conduct of business and markets supervision of all regulated firms not falling within the remit of the PRA, and finally the enforcement process. It will subject banks, insurers and major investment firms to separate regulation for prudential and conduct purposes. The so-called “twin peaks” model which creates two new supervisors for regulated business has its merits if it is adopted by MFSA.

Certainly, one may appreciate that MFSA struggles to find expert staff even though it regularly trains them in various technical areas. Experienced staff may be tempted to resign to join more lucrative jobs with top law/audit firms and are difficult to replace in the short term.

As can be expected, MFSA will continue to face challenges in new areas such as IT, Blockchain and Fintech. The onset of three new VLT laws and use of guidelines in virtual currency domain has become the latest mountain to climb. It is an open secret that of late the island has faced competition from established EU centres when it comes to attract both regulated funds and insurance sectors.

It faced challenges regarding relocation of new business which moved to established EU centres in the process of seeking EU shelters to passport services due to Brexit. But not everything is doom and gloom. Observers recognise that our national AML/CFT framework is satisfactory but can be fine-tuned to become more water tight.

By the way, the authorities have conducted a National Risk Assessment (NRA) to identify our highest threats and vulnerabilities, as well as a gap assessment to identify those areas in our institutional framework which may need improvement. This is a comprehensive exercise that covers all key elements of our national framework: from supervision and intelligence gathering to investigation to prosecution and confiscation.

This NRA highlights seven initiatives, broken down into approximately 50 action points, to be implemented over the next three years. MFSA as the sole regulatory body for regulated business faces pressures to guide Corporate service providers making sure they comply with a number of directives such as the fourth and fifth AML and many others such as MIFID 2 and BEPS. In conclusion, the country needs a fair and efficient regulator to be able to maintain its competitive edge as a leading financial services centre.

It is with the combined use of pragmatic regulation, creative innovation and service diversification that can eventually lead us to surpass competition in the marketplace. On their part, practitioners pride themselves that they have upheld the highest probity standards in their quest to attract FDI. Experience teaches us how building and maintaining a good reputation can be likened to a fragile plant of slow growth.


George Mangion

Author: George Mangion
Published on MaltaToday 27 September 2018
Get in touch: | +356 21 493 041

Venture capital and crowdfunding in Europe

Venture-CapitalVenture capital is a form of financing based on the provision of equity capital from an investor, in order to finance the early stages of potential long-term growth companies in high-growth industries (for example in biomedical or IT sectors). These types of firms are too risky to be financed by banks or standard capital markets and so they need to find the required capital for the development of their project in alternative ways.

Sometimes, the contribution that the venture capital gives to the start-ups is also the managerial and technical expertise necessary to run the business. Most of the venture capitals, in fact, are composed of wealthy investors (for example retired managers) or banks that decide to share the risk of such an investment providing their expertise to entrepreneurs that have no access to the credit market or don’t have the knowledge required to manage the firm. On the other hand, the entrepreneur is influenced by the venture capitalists decisions, so he loses some independence.

Venture capital is a kind of private equity, that is to say that category of equity or debt investments addressed to firms that are not listed on a regulated market. The main form of return from a venture capital operation is given by the sale of firm shares to another owner. The exit of the venture capital can also operate with the listing of the financed company and the exit strategy usually happens in 3-7 years.

In Europe, venture capital regulation is contained in the “Regulation (EU) No 345/2013 of the European Parliament and of the Council of 17 April 2013 on European venture capital funds”, which uniforms regulation about venture capital in Europe. Every fund that use the label “European Venture Capital Fund” (EuVECA) have to direct at least 70% of its aggregate capital contributions and uncalled committed capital in assets that are “qualifying investments”. The common regulation wants to encourage the activity of venture capitals outside the national bounds and all over the Europe, in order to attract more capital and increase the amount of investments towards small and medium entities.

The exposure of a qualifying venture capital fund cannot be increased beyond the level of its capital through borrowing of cash or securities, the engagement of derivative positions or by any other means.

The firms eligible as qualifying portfolio undertakings are those firms that:

  • are classified as small and medium sized entities (SME) according to EU Recommendation 361/2003,
  • are not traded on a regular market or multilateral trading facility,
  • don’t perform financial activities.

Together with the EuVECA, another important instrument to direct investments towards SME is the EuSEF (European Social Entrepreneurship Found Managers). Its task is to finance social businesses which have a positive social impact in fields like employment and labor market, social inclusion, public health etc.

These two regimes are voluntary; if the managers decides not to respect the requirements needed to benefits of such labels, national regulation continue to apply.

For crowdfunding, instead, there is not a uniform European regulation, so each country decides how to discipline it. Crowdfunding is a new form of venture capital based on raising finance via the Internet and it works by asking to a large number of people the contributions needed to finance the project. The operation is developed by three parties: the proposer of the idea, the supporters that decide to finance it and the crowdfunding platform in which promoters and supporters met each other.

The most important types of crowdfunding are equity crowdfunding and debt crowdfunding. It is essential for those types to be regulated, because they provide services that are usually regulated and reserved to banks or financial institutions. In the first case, the supporter that finance the idea has the right to receive an amount of shares that is proportional to the amount financed, while in the second case, the supporter become a creditor of the firm.

Crowdfunding regulation is different across the Europe, because it generally remains below the €5m threshold. In this case, the Prospectus Directive 2003/71/EC offers freedom to national lawmakers to implement a country-specific regime, so it could be useful to know and to compare the most important regulations.

In Italy, the first European country that developed a set of rules for crowdfunding, only innovative, high-tech, small size firms can be financed by this procedure. On the other hand European Commission intent to admit in this operation the largest number of firms and a further limit is given by the fact that in equity crowdfunding at least 5% of the share capital must be underwritten by professional investors. Moreover the existence of a secondary market in which participations can be exchanged could improve the use of this financing method.

In Germany, the crowdfunding regulation process is in progress for both equity type and debt type and it is aimed to give more protection and information to investors, as well as to provide exceptions for crowdfunding platforms from most requirements under the German Investment Product Act. In order to fulfill these tasks, an exception has been set for profit-participating loans under the threshold of €1.000.000. In this case, it is required that only a three-page fact sheet have to be provided to investors in order to make them informed about the risks and characteristics of investments. The weakness points of German regulation are the limitation of the reduced regulatory requirements only to profit-participating loans, in this way equity-based and debt-based crowdfunding are differently treated, and the limitation of maximum investment per investor set at €10.000, with restriction starting from €1.000.

In UK, the same as in Germany, the making of non-consumer loans was generally treated as a non regulated activity, so the crowdfunding lending model developed quickly. From 1st April 2014, the new regulated activity of “operating an electronic platform in relation to lending” was introduced into the Financial Services and Markets Act (Regulated Activities Order) 2001 (the RAO), defining the rules for debt-based crowdfunding. In order to operate, the debt-crowdfunding platforms have to be authorized by the FCA (Financial Conduct Authority) and the regulation is valid for loans where either:

  • the lender is an individual; or
  • the borrower is an individual and either:
  • the loan is £25,000 or less; or
  • the individual is not borrowing for business reasons.

If the FCA recognizes that a platform operates without permission, it has the power to take enforcement actions in a number of forms, which could potentially include seeking out a court order to require the platform operator to put lenders or borrowers in the same position they would have been in if they had not entered into the loan agreement. In the 2014 budget, the Government also confirmed that peer-to-peer loans would be made eligible for inclusion within Individual Savings Accounts (ISAs) and therefore subject to the tax benefits accorded to ISA, if the platform guarantees a liquid secondary market in which lenders can trade their loans.

Passing to equity crowdfunding, in order to avoid speculative investments, a cap has been fixed for individual investment equal to 10% of investor’s net investible assets. This limit is not valid for sophisticated investors and peer-to-peer loans. The FSMA requires also a prospectus to be published where transferable securities are offered to the public, but most crowdfunding transactions fall within an exemption for offers worth less than €5m in a period of 12 months. There are other exemptions that may be of use if single issues increase beyond this level.

As can be seen, crowdfunding regulation is really fragmented and different among European countries, so a common framework should be established by European Commission in order to create a European crowdfunding market, as in the venture capital case, that permits to the single platform to operate beyond its national borders.

Written by Stefano Salvatore Tomasello, PKF Malta, 11th February 2015