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Kindly sponsored by

The Isle of Man is one of the world’smost attractive jurisdictions for thelicensing and running of aneGaming business.

The KPMG eGaming Summit, held atthe Mount Murray Hotel on 23rdNovember 2010, recognised and builtupon this strength by bringing togetherkey players from the industry, serviceproviders and members of theGovernment to discuss the future ofthe sector locally and globally.

The morning session was opened byThe Honourable Allan Bell, Minister ofthe Department of EconomicDevelopment, and focused on the Isleof Man as an eGaming jurisdiction. A number of key speakers fromGovernment and the private sectordiscussed how the Isle of Man is ‘agood place to play’ and how to ensureit remains competitive in a globallygrowing industry. The afternoonsession then focused on broaderissues affecting the industry as awhole, such as regulation, insuranceand future trends. It drew to a closewith a panel of experts fieldingquestions from the delegates. Over 150 delegates attended theevent.

This document summarises thepresentations of the various leadingindustry figures who spoke on the day,as well as the questions and answersin the afternoon panel session.KPMG’s hope in publishing thisdocument is to retain the momentumand dialogue generated by the event.We would also like to take this finalopportunity to once again thankeveryone who took part andcontributed to making the Summitsuch a success.

KPMG employs a number of eGamingindustry specialists both in the Isle ofMan and globally and is committed tocutting through the complexity of thisconstantly evolving industry.

Introduction

A word fromthe SponsorAt Continent 8 Technologies webelieve the Isle of Man is the perfectlocation for eGaming and eBusinessinfrastructures.

The Island’s AAA Sovereign CreditRating, stable, supportive Governmentand world-class telecommunicationsinfrastructure ensure that. That’s whyour multi-jurisdictional model forhosting and managed services linksthe Isle of Man to our data centres inEurope, North America and Asia viathe Continent 8 private network.

As such, we are deeply committed tothe eGaming community on the Island,and we are proud to have been asponsor of this Summit. It was anexcellent opportunity to deal with themajor issues affecting the industry

today. We have supported KPMG inproducing this report in order to do ourbit to keep the Isle of Man at the topof the global list of premier eGamingjurisdictions.

I hope you find it an interesting read.

Richard Ebbutt

Continent 8 Technologies

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The Summit was opened by TheHonourable Allan Bell, the Isle ofMan’s Minister of the Department ofEconomic Development.

In recognising the increasingimportance of the eGaming industry tothe Manx economy, he showcased theIsland as “A Good Place to Play” andcalled on delegates to buildrelationships, knowledge andencouraged collaboration betweeneGaming companies, service providersand the Manx Government in order tocapitalise on the Island’s significanteGaming credentials.

Mr Bell began by saying how delightedhe was with the huge attendance andsaid that the timing of the Summit wasvery appropriate. In contrast to theglobal economic events of the last twoor three years, the most recent Isle ofMan Treasury figures for 2008/9showed net growth of the Island’seconomy in real terms of 4.7%. “TheIsle of Man won’t go into recession onthe back of that,” he declared. Yet itwas vital for a small economy, such asthe Isle of Man, to be more diversifiedand to pursue new opportunities. Inrespect of the eGaming industry, thisfitted the bill perfectly.

He said previous attempts at the startof the millennium to develop thegambling industry had falteredbecause the Isle of Man

misunderstood that focussing onterrestrial casinos was very differentfrom eGaming. Other jurisdictions hadstolen a march as a result. But sincethen, Government had got its acttogether and started talking tocompanies about where theopportunities lay. Governmentrestructuring, and in particular theformation of the new Department ofEconomic Development (DED) in April2010, was also a significant step inhelping the economy to diversify.

“We have now put in place a structureon the island which has allowed theeGaming industry to grow andprosper,” said Mr Bell.

It wasn’t just big operators that wouldbenefit. Opportunities had beencreated in a diverse range ofbusinesses such as hosting andsoftware which had developed asresult. The overriding concern,however, was protection of the Isle ofMan’s reputation as “a well regulated,blue chip, AAA-rated jurisdiction to dobusiness in, free from rogueoperators.”

He reported that the eGaming industrywas growing apace on the Island. 22licensees were in place with a furthereight now going through the approvalprocess and a steady flow of newenquiries in the system on a regularbasis.

"The economic forecasts for 2010showed that the industry will supportnearly 700 jobs and that makes it oneof the biggest employing sectors onthe Island," said Mr Bell.

"The total spend for the Island in 2010will be £154m;” he confirmed. “At atime when the economy is slowingdown, this investment is massivelyimportant not just to your own industrybut to the Island's wider economy aswell," he said, adding that the eGamingsector would raise £19m in taxeswhich would more than pay for theDED’s entire annual budget of £15m.

Mr Bell revealed that the averagesalary in the eGaming sector was£50,000, making it probably thehighest paid sector in the Island percapita. The ICT sector, which waslargely the eGaming sector, grew by56% in 2008/9 which Mr Bell said wasa phenomenal achievement anddemonstrated the strength of theindustry in recent years.

He said the Government hadestablished eGaming trainingprogrammes in conjunction with a localrecruitment consultancy and thesewere always considerably over-subscribed. There were waiting listswhich reflected the quality of theeGaming business and showed thatmore and more people locally werewilling to retrain in the sector because

they saw eGaming as a viable careeroption.

Mr Bell said that since the lasteGaming conference on the Isle ofMan three years ago there had been asea change in the world economy,brought about by the credit crunch thebanking crisis and the recession.General economic turmoil was on theIsle of Man’s doorstep, said Mr Bell.The World had changed. Mostcountries were looking to rebuild andGovernment were looking to replenishtheir public finances. As a result,attitudes were changing towardseGaming and former opponents nowsaw the sector as a way of developingdifferent income streams.

The worldwide eGaming industrywould be worth $29bn by 2012, hugegrowth on the 2008 figure of $20bn.

He said that competition amongstjurisdictions for eGaming businesswould undoubtedly increase and it was important that the Isle of Manrecognised these challenges and foundsolutions.

The United States was edging towardsregulation, as were France and Italyand whilst it was important to face upto increased competition, the Islandwas well placed to do so.

“The Isle of Man is in a strongposition. We have a number of worldleaders based on the Island and a highlevel of professional support here forthe industry. You have the 100%support of Government and mydepartment has the responsibility formarketing eGaming and we will beworking energetically to ensure yourbusiness grows and develops,” saidMr Bell.

Highlighting the importance of publicand private sector partnership, he saidthe DED was working closely withoperators to ensure the industrycontinued to expand on the Isle ofMan and to encourage new operatorsto be based here. “Most otherjurisdictions don’t enjoy that closeproximity of working and we have amajor advantage in plotting the wayforward,” said Mr Bell.

Nevertheless, he warned againstcomplacency. Many challenges layahead. The eGaming industry wasmobile and it was important to keepimproving conditions to ensure thatbusiness remained sustainable into thefuture. It was important that theconference debated all the issues andthe sector found solutions. Gettingtogether to build relationships andimprove collaboration was a positivemove.

Mr Bell said improving market accessas countries began to regulate wasalso vital for the Island’s eGamingindustry and whilst the Isle of Man haddone well to gain access to the UK’swhite list, which had been hugelybeneficial to the island, there wereoutstanding issues to be resolved,citing zero/ten taxation, VAT and the“thorny problem” of banking facilityprovision for many eGamingoperations. “My hope was that wewould be able to generate money forthe banks with the new businesscoming here but it is a matter of realfrustration that eGaming businesseshave had difficulty using local banks tofacilitate their business,” said Mr Bell.

In declaring the Summit officially open,Mr Bell re-iterated that eGamingpresented a great opportunity and theindustry had his and the Government’s100% support. He also recognised therole played by KPMG which was agreat supporter of the Island and werebringing the same level of energy andenthusiasm to the eGaming industry.

Allan Bell Minister of the Department of Economic Development

Isle of Man Government

WelcomeAddress

“The Isle of Man isin a strong position.We have a numberof world leadersbased on the islandand a high level ofprofessional supporthere for theindustry.”Allan Bell

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Russell Kelly works with a numberof eGaming clients providing auditand advisory services.

Mr Kelly set the scene by statingKPMG was very encouraged by thehuge level of interest in the Summit.This was testament to substantialgrowth in the eGaming industrytogether with the Isle of Man having a leading position in the sector. TheIsland was committed to remaining atthe forefront of the industry, he said.

The Summit had been organised onthe back of KPMG’s 2010 globalpublication “Online Gaming – AGamble or a Sure Bet” whichexamined features and trends in theonline gaming industry. Two of itsauthors would speak later in the day.Mr Kelly explained that KPMG hadbeen involved with the industry on theIsland for a number of years, actinginitially for Betinternet who had been a license holder for 10 years. Sincethen they had become more and more involved.

Growth was inevitable. “People havealways gambled, and will continue todo so by whatever methods areavailable to them, especially throughthe internet,” said Mr Kelly. “Theindustry has moved very quickly andcontinues to do so. We had theUnlawful Internet GamblingEnforcement Act (UIGEA) in 2006 andnow we have an evolving regulatoryposition in Europe.”

Research from H2 Gambling Capitalforecasted a global market growing byalmost 50% over a four year period toUS$30bn by 2012 which showed thatthe industry was moving from a nicheto the mainstream.

Locally, online gaming was a“significant contributor” to the localeconomy, said Mr Kelly, with 22 liveonline gaming licenses in issue, inexcess of 700 direct jobs, plus manymore employed in ancillary services.Annual spend on the Island was over£150m and tax revenues generatedmore than £20m.

But Mr Kelly said it wasn’t justlicensed gaming operators that madeup the local market. Market leadingsoftware companies, payment andtelecoms providers, hostingbusinesses, corporate serviceproviders, lawyers and accountantswere all playing a major part in thegrowth of the eGaming industry.

“This wide variety of support sectorsensures the Isle of Man is able tocompete strongly with other leadingjurisdictions such as Alderney, Maltaand Gibraltar and often acts as a keyattraction to people looking to locatehere,” said Mr Kelly, before outliningthe Summit’s diverse range of expertspeakers; the morning session focusbeing more on local developmentswith the afternoon looking at the globalindustry and generic issues affectingthe sector.

Russell Kelly Director: Audit & Advisory

KPMG Isle of Man

SummitOpening

“People havealways gambled,

and will continue todo so by whatever

mediums areavailable to them,especially through

the internet”.

“This wide variety of supportsectors ensures the Isle ofMan is able to competestrongly with other leadingjurisdictions such asAlderney, Malta and Gibraltarand often acts as a keyattraction to people lookingto locate here.”

Russell Kelly

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The Summit began with an upbeat,jointly presented Sector Update bySteve Brennan, Director of the Isle ofMan’s Gambling SupervisionCommission (GSC) and GarthKimber, Head of eGamingDevelopment within the Isle of ManGovernment’s Department ofEconomic Development (DED). Theyexplained the different functions ofthe Regulator and the marketingteam charged with promoting eGaming on the Island.

Mr Brennan explained that the GSC,established in 1962, consisted of anindependent panel headed by aChairman and four members. MrBrennan’s main responsibility withinthe Commission was for thedevelopment and maintenance of theregulatory framework to license andsupervise all forms of gambling in theIsland including the online sector. Heconfirmed that there were currently 22 eGaming licensees operating with afurther nine applications now approvedand another seven applications inprocess which was an “unusually highnumber”.

Mr Kimber was primarily tasked withpromoting the Island’s unique packageof benefits for eGaming companieswhilst ensuring the Government’sreputational balance was retained and,by association, that of all companieson the Isle of Man, not just gamingoperators. To date, Mr Kimber hadsecured a number of the world’s toponline companies and assisted themwith setting up in the Isle of Man.

Above all, Mr Brennan said that whilstthe Government received directrevenues from VAT and licence fees,maintaining the Island’s economicreputation and retaining UK white liststatus was the prime consideration.“We don’t want operators that aregoing to tarnish the sector,” he said.

Mr Kimber emphasised the rigorousframework the Isle of Man hadadopted to build its reputation as a firstrate, high quality jurisdiction. TheGovernment was both open to andsupportive of the online gaming sectorand was positively encouragingoperators to make a permanent basein the Isle of Man.

Mr Kimber stressed that the growth ofthe online gaming sector meantbenefits extended beyond licensedoperators. The fulfilment sector had amajor role to play in attracting newcustomers. It employed many peopleand contributed greatly to IOM plc.There were opportunities in hosting, IT, software, the legal field and,especially, for CSPs to attract newbusiness. “I want CSPs to understandthat by helping their gaming clients todevelop and become moreindependent, they will get morebusiness. We are actively looking formore large CSPs to come into thesector.”

He said two banks on the Islandcurrently handled transactionalbusiness for the sector, but also urgedthe rest of the banking community tosupport the eGaming sector andstressed that DED was keen to talk tobanking decision-makers. “Hopefullywe can show it is well regulated hereand nothing to be scared by,” said Mr Kimber.

Continuing the banking theme, Mr Brennan emphasised that the GSCcould only protect players’ funds whenthey are deposited with an IOM basedoperator. “We can only cost effectivelydo that if those banks are available onthe Island,” he stressed.

Mr Kimber recognised the impact thateGaming operators were alreadyshowing to the Isle of Man, supportingmany local charities and gettinginvolved in sports sponsorship.

It was important that there was a clearseparation between the GSC and theDED to maintain impartiality. Mr Brennan explained that to reinforcethis position a very recent piece oflegislation, the Gambling SupervisionAct, was passed in the November2010 Tynwald. This moved the GSCfrom under the wing of the Treasuryand turned it into a statutory board,working closely with, but independentof, the Government; like the FSC. He said the GSC had nine members ofstaff responsible for regulation and alleGaming licenses on Island. Theirframework was to maintain an openand accessible approach. “This willensure efficiency is maintained in theapplication process,” said Mr Brennan.

Another key benefit of the GSC’snewly created independent status wasthat it was well positioned to work inmutual assistance with otherregulatory authorities. “A theme ofcooperation is starting to resonateacross Europe and we have the abilityto be included in those talks,” he said.

The three main areas in which theDED could help businesses to grow;

Firstly by introducing new suppliersand potential partners and assistingbusinesses on the Island to grow newbusiness models; secondly byencouraging new business to theIsland through promotion at overseasshows and exhibitions; and thirdlyworking with the GSC in testing newbusiness models and making sure newbusinesses fitted with existinglegislation and even changinglegislation if necessary.

“We want to show that theGovernment cares, is approachableand interested,” said Mr Kimber,stating that 80% of new businesseslooking at the Isle of Man actually

chose to locate here. “The Island doesusually put on a good show,” headded.

The GSC’s three core principles

Mr Brennan outlined the threeprinciples which form the foundationof all of the GSC’s work and said thatall decisions were primarily influencedby the need to ensure that gameswere fair, crime was excluded fromthe sector and that the young andvulnerable were properly protected. Mr Brennan said there was also a dutyunder law to support the localeconomy and changes to the law weremade if deemed appropriate.

He said the application process wasquite straightforward. New applicantsneeded to show a clear business plan,solid income and realistic projectionsbut advised: “It is not our experiencethat everyone becomes a millionaire inthree or four months.”

Player protection, banking facilities andsocial responsibility were paramount.The GSC carried out backgroundchecks to ensure any application was“good to go”. Due diligence wasundertaken far and wide on all keypersonnel regardless of their countryof origin. Corporate structures werescrutinised to ascertain names ofbeneficial owners, defined as anyonewith a 5% or greater shareholding inthe company. “If an operator is notprepared to reveal the identity of thebeneficial owner then that applicationcould fail,” Mr Brennan warned. Hesaid that GSC approved testing houseswere also used to assess thesuitability of new operators.

It was rare to find disagreementbetween the GSC and DED on thetype of companies receiving licences,said Mr Kimber, adding that the DED

would also advise new entrants onpotential pitfalls, especially start-upbusinesses.

Mr Brennan said operator advertisingwas carefully monitored to ensure itdidn’t target the young or vulnerableand regulation stated that all playersmust be over 18. As the GSC didn’thave departmental technical expertisein the field of IT, test houses were alsoused to provide verification of allgames’ software.

Mr Brennan said under the terms andconditions of the GSC, there needed tobe a very open relationship betweenthe operator and the player. For playerprotection, the law required thatmechanisms were put in place toensure anyone depositing money witha failed operator would get theirmoney back. Whilst the existingmechanisms were expensive, the GSChad now drafted regulations to allowoperators to establish client accountswhich held players’ money in trust andwhich would be much more costeffective than the existingmechanisms. He indicated it was dueto come into force at the DecemberTynwald. “But this mechanism willonly work if banking is on Island,” said Mr Brennan.

To do away with red tape, recently, aGambling Forum consisting of theTreasury, the DED and GSC hadclarified guidelines to ensure that awhole raft of business activities nolonger needed to be bound byregulation. This extended to marketingand advertising activity, the provisionof software and hardware, the hostingof client downloads and a number ofassociated activities which supportedthe gambling operators withoutrequiring licensing or approval.

Steve Brennan Director

Isle of Man GamblingSupervision Commission

Garth Kimber Head of eGamingDevelopment

Isle of Man Government,Department of EconomicDevelopment

eGaming Sector UpdateSteve Brennan

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All licence holders were subjected torigorous on-going compliance.Frequent checks were made ofoperator websites and any breachesfound would be quickly dealt with. Associal responsibility was such a keytheme of the regulatory framework,the GSC would also look at specificstrategic risks covering all operators,such as compliance with self-exclusionrequirements and on-page referencesto organisations who could advise andassist problem gamblers.

All operators received site visits byGSC staff every 12-18 months andregular intelligence sweeps werecarried out to detect any informationthat had become available in the publicdomain and which could constitute anearly-warning sign of a problem:specialist gambling blogs and feedswere a particularly rich source ofinformation. Companies were alsorequired to submit quarterly returnsconfirming their players’ fund-protection cover remained adequate,amongst other details.

The economic significance of theonline sector was also highlighted. Thelocal industry spend was put at £140mand operators contributed £3.5m tothe Treasury in licence fees andgambling duty, set against an overallcost for regulation and marketing ofjust under £1m.

Over 600 people were currentlyworking in the industry with over 30%of those in gaming coming from thefinance sector with cross transferableskills. “As business grows there are alot of people on Island who can fulfilthose roles,” said Mr Kimber.

So why was the Isle of Man a goodplace to play?

It was down to a combination offactors, said Mr Kimber. “What we’vegot is a package of things. The supportof the Gambling Commission, accessto Government, people you can reallytalk to, the ability as an industry togenerally take part in consultation toshape things.”

Mr Kimber said the Government wasnow well positioned to provideoperators with full assistance.Obtaining white list status with the UKwas also highly important, the Islandhad a competitive cost structure and,unlike most jurisdictions gave financialassistance for business moving here.

“In the last three years we have built areputation where you are regulatedfairly. We deliver what we say we willand we do it more quickly than anyother jurisdiction.” In exceptionalcircumstances a licence could beprocessed from start to finish in aslittle as six weeks, added Mr Kimber.

No gaming company would move tothe Isle of Man unless they felt theyhad a Government and a Regulatorthey can work with. “Partnershipmakes things happen – we see that allthe time when we talk to businesses,”said Mr Kimber.

He said the annual growth in spend inthe economy from eGaming wasrunning at 25%. “There are alwaysissues but as long as we remaincompetitive, fair and continue todeliver what we promise, we expectgrowth to continue,” Mr Kimberconcluded.

Q and A session

Russell Kelly then moderated aquestion and answer session, coveringthe challenges and opportunitiesrelating to the Isle of Man as well asupcoming regulation and legislation.

VAT

Mr Kelly began by asking if VAT was adisadvantage set against rivaljurisdictions in the Channel Islands andGibraltar. Mr Kimber agreed it was atough issue but there were certaincorporate structures available to helpmitigate VAT and lower bandwidthcosts as well. It was also pointed outthat the VAT advantages of otherjurisdictions were not always asbeneficial in reality as the “no VAT”headline suggested because ofestablishment rules and in any caseany VAT advantage a given jurisdictionenjoyed could easily be eroded by anunfavourable judgement and so mightnot always be there. Mr Brennan’smessage was clear. “Come here andwork with us. We are probably in asafer position in the longer term.”

Staffing levels

Mr Kimber also revealed that at a timeof Government cutbacks, a newexecutive level appointment wasimminent reflecting the DED’scontinuing determination to promotethe sector around the world.

Strategic issues

Mr Brennan said the biggest strategicissue over the next three to five yearswas the Isle of Man’s position withinthe UK white list. It had been good forthe Island and business had been

drawn here as a result. But the termsand conditions of white list statuswere still under review even thoughthe list was currently closed to newapplicants. Mr Brennan said the Islandhad given a very good responseconcerning betting legislation and theprotection of betting consumers.Conclusions had yet to be reached.Recently the GSC had met the UKGambling Minister John Penrose but itcould be some time before theprocess was concluded. For the timebeing “the threat remained. But thereshould be plenty of warning of anychanges,” said Mr Brennan.

Regarding access to Europe, therewas confidence that regulation wasmoving in the right direction. MrKimber believed in the future it wouldnot be so much where the operatorwas based but whether it was payingtaxes in that jurisdiction. It was allabout money, said Mr. Kimber. “Weare fairly confident that it would bepossible to do that from the Isle ofMan just as easily as Malta. MrBrennan cited the Danish examplewhere you could operate outsideDenmark as long as you were notblacklisted. With the liberalisation ofEuropean markets there was a movetowards local licensing on a country bycountry basis. Likewise, the UnitedStates appeared to be moving towardsstate by state regulation.

Mr Brennan said that the Isle of Manwanted to ensure that future licensingwasn’t closed off to EU memberstates and the Isle of Man was talkingto the EU to ensure that the grantingof licenses would extend to specialistjurisdictions like the Isle of Man,where there was the comfort of whitelist status. Encouragingly, Mr Brennansaid the Island was looking forconfirmation from the current BelgiumEU presidency that a broaderframework approach would beacceptable.

“Regulatory cooperation is going to bethe key as the EU landscape opens upand the Isle of Man has got a part toplay in that and we will have theopportunity,” Mr Brennan concluded.

Garth Kimber

“Regulatorycooperation is goingto be the key as theEU landscapeopens up and theIsle of Man has gota part to play in thatand we will havethe opportunity.”

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Malcolm Couch is the Assessor ofIncome Tax of the Isle of Man and isresponsible for all direct taxationand national insurance collectionmatters in the Island andinternationally, includingrepresenting the Isle of Man atOECD and EU forums andnegotiating tax co-operationagreements.

Mr Couch said his aim was to providethe Summit with “a thoroughly open,honest and up-to-date summary” ofthe issues relating to Isle of Manbusiness taxation, focussing on the on-going work of the EU Code of ConductGroup (the Code Group). He alsoreviewed the current status of theIsland’s international tax cooperationwork especially in relation to the zero-ten taxation issue.

He firstly moved to assure delegatesthat in answer to the burning question‘Can the Isle of Man keep its zero-tentaxation’ by declaring: “Yes, I’m prettysure we can.”

He began by providing background asto how we had arrived at the presentsystem. He said in 1999 the CodeGroup assessed 11 tax measures inthe Isle of Man and considered six ofthem harmful according to the criteriaof the 1997 Code of Conduct forBusiness Taxation.

As a result, in 2002 the Isle of Mangave a commitment to the Code Groupto roll back the contentious measuresand indicated it would replace themwith a zero-ten system of companytaxation which was designed not onlyto comply with the principles of theCode but also to protect and retainbusiness on the Island and add to itscompetitiveness.

“We told the EU exactly what wewere doing and I don’t think anything

was hidden about this” said Mr Couch.He said that the zero-ten concept hasbeen developed by the Isle of Man andthat Jersey and Guernsey had felt theyhad to slipstream us to some extent tomaintain a level playing field.

In 2003, the Code Group stated andthe Council of Finance Ministers,ECOFIN, agreed that a zero-tensystem would not in itself beconsidered a harmful measure. MrCouch described this as “a key finding.They can’t take back decisions theyhad already made,” he said.

The zero-ten system was finallyintroduced in 2006, providing agenerally applicable rate of corporateincome tax of 0%, with a specialhigher tax rate of 10% for income frombanks and property companies.

But the system was deemedproblematic by the EU, said Mr Couch,because it was accompanied by ananti-deferral measure, the distributableprofits charge. “We were informed inOctober 2007 that the Code Groupconsidered this to be a harmfulmeasure,” said Mr Couch. As a result,the Isle of Man abolished the measureand, with effect from 6 April 2008,introduced the Attribution Regime forIndividuals (ARI) whereby residentswith an interest in a relevant companywould be charged with income tax ontheir share of the attributed profitsfrom that company. Mr Couch said thishad been a highly effective policy withonly 300 or so ARI charges, eventhough there were tens of thousandsof companies registered on the Island.

“We have not yet been given anassurance by the Code Group that it iscontent that the ARI conforms to theprinciples of the Code,” warned MrCouch. He added that the Isle of Manlearnt in September 2009 that the

Code Group had some concerns inrelation to zero-ten systems and thatan assessment of the ARI would likelyinvolve a reconsideration of zero-ten.

As a result, Mr Couch said the Isle ofMan announced a review of itsbusiness taxation system using thefollowing criteria:

• It should meet the requirements ofthe Code of Conduct;

• It should meet the needs of asmany domestic businesses aspossible;

• It should contribute tocompetitiveness allowing existingbusinesses to continue to grow andattracting new businesses toestablish on the Island and

• It could potentially increase theattractiveness of the Isle of Man asa location for businesses ineconomic sectors not currentlywidely represented, if at all, on the Island.

To gather the necessary information,Mr Couch continued, the Isle of ManGovernment announced it would:

• Explore with the UK and EUinterested parties the rationale to beapplied when the Code groupconsiders business taxationsystems;

• Review business tax regimes in theEU member states (and regions ordependent territories);

• Conduct a public consultation toseek views on potential changes tothe business taxation system and

• Engage Deloitte as externalconsultants to support the wholeexercise.

With the exception of the CodeGroup’s opinion, the programme ofwork had been completed, Mr Couchconfirmed. On September 23rd 2010delegations from the Isle of Man andJersey attended a Code Groupmeeting in Brussels, the first time non-member countries had been invited toaddress the Group. “We were giventhe opportunity to make a presentationand we also answered any questionsput by the EU member States,” saidMr Couch.

“The thrust of the Isle of Man’spresentation was to review ourcompany taxation system against theCode of Conduct criteria.”

“In our view, the zero-ten system doesnot affect, in a significant way, thelocation of business activity within theEU. However, even if it could havesuch an effect, it is not harmful underthe Code criteria because no measurein the Isle of Man provides a lowereffective level of taxation than thegeneral rate of 0%,” said Mr Couch.Over 95% of corporations andcorporate income are taxed at zero.

The logic of the Code of Conductindicated that the additional “tests”set out in it didn’t therefore need to beconsidered. Furthermore, as ARI was apersonal tax measure, it was notstrictly within the scope of the Code ofConduct, Mr Couch added.

“It is evident, based on a decade longtrack record that the Isle of Man is fullycommitted to tax cooperation”, MrCouch continued. “Indeed, we havebeen prepared to move ahead of othersmall international financial servicecentres.”

He said this was evident by the earlyadoption of a policy of concluding taxinformation exchange agreements andthe announcements of moving toautomatic exchange of informationunder the EU Savings Directive in2011.

“We believe the Isle of Man businesstaxation system conforms to theprinciples of the Code of Conduct. Atthis point we have made no moves tochange it,” confirmed Mr Couch.

The Isle of Man’s view was that therewas no case to answer regarding zero-

ten. “For us the only thing on theagenda was the ARI and that’sbecause we considered that the zero-ten tax system had already gonethrough.” But he said that if the CodeGroup had any concerns in relation tozero-ten and the ARI, the Isle of Manhad asked it to set them out in detailso that they could be appropriatelyaddressed.

He said it was important that the Isleof Man was seen to be a good playerand that its tax system was EUcompliant “because if we are afinancial services centre in a globalmarket place then there are ruleswhich you have to conform to. If youdon’t, you will be excluded.”

Mr Couch added that if further changewas necessary then the Isle of Manwanted, as far as possible, to have asystem which would suit everyone. “Itwould be nice if our tax system wasnot commoditised but had aspects thatmade people excited about wanting togo there because of its features.”

Whilst jurisdictions such as the BVI,Bermuda and the Caymans had zerotax, Mr Couch said it was important tooffer other features. “It would be niceif there were more USPs providedthrough the tax system. We reallyhave to keep striving to stand out tomaintain the Isle of Man’scompetitiveness,” he said.

He said that the Code Group’s mostrecent meeting on November 19 hadproved inconclusive. He said theGroup’s response had been“convoluted” and it was as if theywere deliberately trying to findsomething harmful. He hinted that ifany concessions were necessary infuture then perhaps ARI was the areato consider.

The reality was that the Code Groupdidn’t really know what to do aboutzero-ten, said Mr Couch. One key pointwas whether the Group was actuallyeven empowered to look at personaltax in conjunction with business tax;and this had led to difficulties. He saida new ‘High Level Working Party’would be set up by ECOFIN in 2011 toconsider the scope of the Code ofConduct.

“Where we are the moment is that thezero-ten system has not changed,” heconfirmed. Mr Couch stressed that thefinal policy considerations could not becarried out until there was a definitiveand detailed assessment from theCode Group. He accepted that thisposition caused uncertainty, and thatuncertainty wasn’t good for business;although the Government was doingexactly what it had set out to do at thebeginning of 2010.

Being labelled as ‘harmful’ by a bodylike the Code of Conduct Group wasnot something that could be ignored,said Mr Couch. Economic sanctionshad been threatened against ‘non-cooperative jurisdictions’, but thathadn’t happened yet.

He felt there was a subtle shift fromthe UK since the election of theCoalition Government.

Mr Couch said that the EU was notable to rule on tax rates in its memberstates or other countries. The CodeGroup had no competence to imposerates of tax, he said.

“We will almost certainly be able tosustain zero-ten for a period,” said MrCouch but, comparing our system withthe Irish 12.5% corporate tax rate,which had suddenly come to the foreduring the recent bail-out negotiationsas being resented by some forces inthe EU, Mr Couch said that heexpected further pressure on zero-ten:which meant that it would benecessary to keep under constantreview “the optimal system” to havein the Isle of Man.

Welcoming the opportunity of gettingto know all parties within the eGamingsector, Mr Couch concluded: “As faras your sector is concerned we wantto maintain a symbiotic relationship ofsharing issues and sharing ideas, I’dlike to get to know all of you, so weunderstand where we are all comingfrom.”

Malcolm Couch Assessor of Income Tax

Isle of Man Government, Income Tax Division

Zero-Ten Tax

“Regulatory cooperation is going to be thekey as the EU landscape opens up and theIsle of Man has got a part to play in thatand we will have the opportunity.”

Malcolm Couch

Dan Starr is Executive Vice Presidentand Chief Marketing Officer at Isle ofMan based Neovia Financial, whichprovides an alternative paymentnetwork for large global businesses.Mr Starr leads the Group’s brand,positioning, marketing strategy andcommunications, promotional andproduct initiatives. His role alsoincludes P&L responsibility for theconsumer business including debitaccounts and cards. He spoke on thesubject of payments within theregulatory framework of theeGaming industry.

Mr Starr explained that Neovia hadbeen based in the Isle of Man since2004, was globally proven since 1996and specialised in the gaming sector,processing billions of dollars annually.The Company was a trusted andtransparent payment provider offeringinnovative payment solutions throughits core products such as Neteller andNetbanx with overwhelming marketrecognition amongst operators andplayers. The Company had a reputationfor being safe and secure and offeredremote identity and fraud services.“We are required to maintain 100% offunds on deposit, in transit funds andcleared funds in trust accounts, so youwould never get a run on a system likeours,” said Mr Starr.

Describing Neovia as offering “astrong value proposition” for the eGaming industry, Mr Starr said theemergence of alternative paymentcompanies in the last ten years hadfilled a void left by banks. “Theyhaven’t shown up for the eGamingindustry which is part of the problem,”he declared.

In appraising the 2010 eGamingmarket he said the ‘wild west’ dayswere now substantially over. Operatorconsolidation was now well underwayalong with more enlightened regulationwhich was encouraging freecompetition, innovation and growth.Furthermore, legitimate eGamingbusinesses wanted to come to wellrun jurisdictions like the Isle of Man.

He said that traditional paymentcompanies had been, at best,ambivalent to eGaming during itsperiod of rapid growth – hence the riseof legitimate large businesses withstrong domain expertise, like Neovia.But whilst traditional companies werenow more fully engaged and a morecoherent future was being created,companies like Visa and MasterCardwere still getting their act together.

“The question is will MasterCardactually tolerate gaming transactions ornot – we don’t know,” he commented.

The services of alternative paymentproviders was varied but havingcapability in areas of risk and fraud waswhat had really paved the way formoney to flow in the gaming worldand allowed the industry to grow.

High net worth VIP players wanted theability to transfer substantial amountsof money, especially in US$ and thetraditional banking system couldn’t berelied on to do this because they hadno domain expertise and couldroutinely block transactions.

Overall, despite enhanced regulation,the payment environment was stillsubject to card transaction declines,blocked wires, payout card issuingdifficulty, lack of customer knowledgeand ambivalent corporate banking.

Money was the business of eGaming,said Mr Starr, and it was critical thatoperators could offer multiple paymenttypes taking into account country bycountry variances like in Germanywhere giro banking was very popular.

Alternative payment partners,therefore, with global reach hadstepped up to provide frictionlessimmediate deposits with highconversions and high success rates onpayouts. Dependable and fast payoutswere also important to maintaincustomer loyalty and trust andmerchants themselves needed bothcheap and dependable paymentoptions.

“To ensure a high success on payouts,it is critically important to work withpartners that have global reach,” saidMr Starr.

He demonstrated that high carddecline rates crippled operators andthat global penetration of Visa andMasterCard was mixed. The challengefor operators was finding paymentcompanies that could work inemerging markets like India, Russiaand Brazil.

Mr Starr said operators also neededhelp with risk and compliancesolutions, especially in situationswhere payment companies operatedindemnified transfers. It was essentialto have good identity controls in place.

He also said that a good paymentprovider should also be able to offershared purse facilities which allowedmoney to flow across multiple gamessuch as spread betting, poker andsports.

Dan Starr Executive Vice President

Neovia Financial

Making Sense of Payments

Dan Starr Executive Vice President

Neovia Financial

13 14

15

He went on to expose theshortcomings of card transactions,highlighting research carried out by H2Gambling Capital that was based on anaggregated cross section of eGamingrelated operator transactions in 2009.This showed that in Brazil there was a99.3% decline rate in cardtransactions. South Korea and Japanwere also above 90% and even in theUK the rejection figure was nearly57%.

What’s more, relying on cards alonewas not enough, said Mr Starr. Even ina well regulated gaming environmentlike the UK only 62% of UK adults hada card, a percentage that was decliningdue to the credit crunch.

“The hardest thing for the industry isthat the financial tool that theconsumer has in their pocket generallywon’t work,” said Mr Starr.

So it was important that operatorsshould offer a variety of payment typesto allow money to flow, said Mr Starr.Alternative payment options such asthose provided by other types of card,bank pull/push options such as directdebit, e-wallets like Paypal whichallowed funds to be topped up andthat could accept back winnings,payment accounts and cash vouchers.This ensured eGaming operatorsexperienced frictionless deposits,instant payments which drove higherconversions and facilitated high limitsfor VIPs.

“These are the tools by whichalternate payment companies can helpoperators decide which would be thebest payment method to useaccording to the country in which theyoperate,” said Mr Starr.

He said that research in Germanyshowed operators providing four ormore payment types increased thelikelihood of a successful purchase by22%.

Payout needed to be hassle free, too,he ventured. Smart operators wantedcheap and easy methods with a highsuccess rate and customersatisfaction. Operators deployedmultiple payout methods such asOCT/payback to cards, wires and e-wallets.

He said it was proven that hassle freepayouts reaped rewards for operatorsin repeat business. He said thatfollowing recent changes to the law inNorway 90% of transactions thatcome out of gaming sites throughNeteller went back to the operatorbecause of its simplicity.

“Psychologically people don’t feel theyhave won until they have cashed out.By putting it into an e-wallet they feelthey have cashed out. It’s all aboutunderstanding the psychology ofconsumers,” said Mr Starr.

He said Neovia needed to be expertsin risk and indemnified transfers andwere also required by FSA regulationto know who their customers were.

Whilst bricks and mortar financialinstitutions and bookies could looktheir customers in the eye, eGamingand payment companies couldn’t.

So payment companies had, bynecessity, to become experts in risk“because we are running things likeindemnified transfers.” Solid anti-fraudmeasures needed to put in place alongwith water tight chargebackmanagement. Neovia used a wholeslew of technology, such as devicesniffing, electronic identity, antiimpersonation checks to identifystatus, identity and age of customers.It was important to know yourcustomers, for instance, to spot if theywere registering in Germany butoperating an account from Taiwan.

Whilst banks and cards were not goodat dealing with remote consumers,there was lots of technology andinnovation that alternative paymentcompanies could bring to bearregarding secure transactions.

“Psychologicallypeople don’t feel

they have won untilthey have cashedout. By putting it

into an e-wallet theyfeel they have

cashed out. It’s allabout understanding

the psychology ofconsumers.”

Ten things to look for when selectinga gaming payment partner.

They should be:

• Gaming proven,

• Have global reach,

• Be resilient,

• Operate multiple payment types,

• Support core gaming requirements,

• Have solid fraud tools in place,

• Have compliance regulation,

• Offer simple integration,

• Have flexibility and white labelbranding and

• Possess the ability to take paymentsby multiple channels options.

“The right choice in partner enablespayments to become a businessfacilitator rather than just a necessarycost of sale,” said Mr Starr.“Alternative payment companies willcontinue to provide domain specificexpertise to support the industrythrough its next phase. I don’t thinkthe banks and the card companies aregoing to get there any time soon,” he concluded.

Summarising, Mr Starr said theindustry was becoming more matureand there was a lot of consolidationgoing on. He pointed towards recentmoves towards regulation in Norwayand France although he said theFrench approach was “prohibitiondressed up as regulation. Lots ofoperators aren’t going there becauseof the tax.”

He also urged operators to seekpartner relationships with theirpayment providers. “I wouldrecommend you to really leverageyour payment relationship becauseyour business is money and we canhelp you move it,” said Mr Starr.

16

1817

Rory Anderson joined 12BET.com atthe start of 2010 with a remit togrow its European business fromscratch. Before joining the companyhe spent eight years working insenior marketing roles for eGamingcompanies such as 888 Holdings,Empire Online and PartyGaming.

He spoke about the reasons12BET.com chose the Isle of Man tobe their preferred jurisdiction in whichto apply for a Gaming Licence,describing the company’s experiencethroughout the application process.

Mr Anderson explained that thecompany was established in 2007 asan Asian based remote gamblingcompany, offering live sports betting.“After initial success, the decision wasmade to enter the European marketproviding competitive odds andthousands of in-play events. Thecompany was striving to be the bestremote gambling business in theEuropean market by providing asuperior, unsurpassed core product.

12BET.com also expected thecompletion of their acquisition byformer rival firm Asianlogic by January2011 which would further underpin theGroup’s activities in the Far East, butthe aim was to make the Europeanoperation self sufficient, said MrAnderson.

The Company’s website now offeredthousands of in-play events everymonth from the Isle of Man. “Weprovide customers with a recognisedbranded portal to conveniently enjoydeposit gambling in a safe,transparent, socially responsibleenvironment, regulated by one of thepremier remote gambling licensingjurisdictions,” said Mr Anderson.

He said customer needs would alwayscome first and corporate activitieswere conducted to the highest ethicaland professional standards.

Mr Anderson provided examples ofhow 12BET.com had raised its profile.The company sponsored the recent12BET.com World Open Snookertournament followed by sponsorshipof the UK Snooker Championships inDecember. The Company were officialsponsors of Sevilla FC in the SpanishPrimera Liga as well as being theofficial betting partner for NewcastleUnited FC. “These deals give greatexposure in Europe but also in Asiawhere there are restrictions onadvertising for online betting,” said Mr Anderson.

The reasons for choosing the Isle of Man

He said there were four key reasonswhy 12BET.com chose to be based inthe Isle of Man, ahead of rivaljurisdictions such as Gibraltar andMalta:

• A Cooperative Governing Body,

• Solid Infrastructure,

• Reputation and

• The Isle of Man Government’sGeneral Enthusiasm for the Sector.

It was important to work with acooperative and communicativejurisdiction, he stressed. “Thewillingness of the GamblingSupervision Commission to workclosely with us throughout the processwas great. I spoke on a weekly basisto our liaison officer at the GSC so wewere able to address and iron out anyproblems very quickly. This wasrefreshing as many places pay lipservice. The GSC was completelygenuine,” said Mr Anderson.

Furthermore, the Island’s stableGovernment had created anindependent and well-regulatedenvironment, conducive to growing aneGaming business, said Mr Anderson.There were also several world classdata centres already established on the island.

Whilst advertising and sponsorshipwas important in building customertrust and loyalty “having the Isle ofMan Coat of Arms on our home pageis a rubber stamp that addstremendous value,” said Mr Anderson.

“The Isle of Man is a white listjurisdiction, meaning that 12BET.comcan freely advertise in the UK. TheIsland has earned a reputation as awell organised and regulated financialcentre. This is a positive associationfor 12BET.com,” said Mr Anderson.

Focussing on the GSC’s approach, he said there was absolutely nocompromise on rules and regulation.“What’s the point of a licensingauthority if it doesn’t properly vet itslicensees? This, for us, was veryreassuring,” he said.

12BET.com’s experience of thelicensing process had been favourable.The hearing took place in April 2010.He said that timing of the license waskey. “We were able to take our firstbet for the premier league season inAugust, so we delivered on target.

“There is no doubt that being based inthe Isle of Man has added to ourcredibility,” confirmed Mr Anderson.

He also pointed out some key issuesthat were emphasised to him, fromthe GSC’s perspective, namely the‘Know Your Customer’ standards, theimportance of anti money launderingpolicies and, at all times, to be aresponsible gaming company.

For prospective new licensees goingthrough the process Mr Anderson alsorecommended that a well preparedapplication pack submitted ahead oftime would enable the GSC tofamiliarise themselves with theapplicant’s business plan. “Any issuesthat do arise can then be discussedand resolved ahead of the hearingitself,” Mr Anderson said.

As for the future, Mr Anderson wasupbeat and said that 12BET.com wasdelighted with its decision to beheadquartered in the Isle of Man. “We are confident in our product andmarketing initiatives.”

The willingness of the Isle of ManGovernment to be proactive ratherthan reactive on European issues wasalso important, said Mr Anderson.

He warned that regarding access toEU markets, with pan-Europeanregulation not expected in the nearfuture and local licensing looking

probable in most key Europeancountries, there was still hugeuncertainty about entry to these newlyregulated markets.

However, from 12BET.com’sviewpoint, being based on the islandwas not seen as a barrier to operatingin the European eGaming sector. Andhe was bullish about the Isle of ManGovernment’s ability to handle theEurope question.

“We simply don’t have the resourcesto have licences in each country. Weneed a strong stance and a big effortfrom the Isle of Man Government toensure that we won’t bedisadvantaged in terms of access toEuropean markets. We have hadassurances from the DED thatensuring the Isle of Man is notdisadvantaged in terms of EU accessis a top priority issue. From what wehave heard today we are veryconfident that they will deliver,” he told the Summit.

Rory Anderson Chief Executive

12BET.com

Choosing the Isle of Man

“The Isle of Man is awhite list jurisdiction,meaning that12BET.com can freelyadvertise in the UK.The Island has earneda reputation as a wellorganised andregulated financialcentre. This is apositive associationfor 12BET.com.”

Rory Anderson Chief Executive / 12BET.com

2019

As Chief Development Officer ofContinent 8 Technologies, Nick Nallyhas almost 25 years’ experience inmany sectors of the IT andtelecommunications industry inIreland and the US, encompassingsenior management, consultancy,sales, carrier relations, engineeringand business development.

Joining Continent 8 in 2006, Mr Nallylooks after business development andstrategy as it relates to the rollout ofofferings to service the eGamingmarket. He was previously an advisorand consultant to the Department ofCommunications within the IrishGovernment where he worked on anumber of initiatives including the IrishConnectivity Project and related datacentre activity.

He explained why the Isle of Man was,and remains, the right location forContinent 8’s headquarters.

Background to Continent 8

Continent 8 Technologies is a datacentre provider that looks after thetechnical infrastructure for onlinegaming operators, providing a fullrange of co-location and managedservices. Continent 8 focuses on thedelivery of market-defining Internettechnologies across a global platform.

Mr Nally said the company’s originsdate back to Mohawk InternetTechnologies (MIT) which is based inKahnawake, a 50 square kilometreterritory south of Montreal and hometo approximately 9000 Mohawks. Theoriginal intention was to set up a datacentre to service the financial servicessector. A key differentiator for thislocation was the fact that all of thetelecoms infrastructure from New YorkState passed through the Kahnawaketerritory.

But in 1998, MIT started getting anincreasing number of calls aboutproviding data centre services for thedeveloping online gaming market andfollowing regulation by the KahnawakeGaming Commission in 1999, MITstarted offering such services. Overthe years, MIT has developed into ahighly influential centre with some ofthe world’s largest online operatorsand software providers having startedtheir operations in Kahnawake.

Mr Nally said that Continent 8’s aimwas to take the principles learned inKahnawake onto the global stage andto develop global offerings. “Wewanted to stay focussed on onlinegaming but address it on a multijurisdictional level,” he said. As aresult, Continent 8 was born – theeighth Continent referring to theinternet, beyond the seven terrestrialcontinents.

In selecting a headquarters for thecompany, whilst competitive tax wasan option offered by a number ofjurisdictions, there were other “softerfactors” that were as influential, saidMr Nally. “We wanted to be able towork with Government, withinfluencers and decision makers andwith communities rather thancountries.” He said that for asuccessful data centre business, thetwo most important factors were topclass power and telecommunications.

Validation

The decision to be headquartered inthe Isle of Man followed an intensivereview. The company had looked at anumber of countries includingGuernsey, Malta and even Ireland.Today, outside of MIT’s Kahnawakeoperation, by far the largestinvestment by Continent 8 in any of

Nick Nally Chief Development Officer

Continent 8 Technologies

Staying in the Isle of Man

Continent 8 - theeighth Continentreferring to the

internet, beyond theseven terrestrial

continents.

Nick Nally Chief Development Officer

Continent 8 Technologies

2221

its data centres is in the Isle of Man, from where all Continent 8’s majorcompany decisions are made. “The aim was to provide a multi-jurisdictional model and attractcompanies who wanted to takeadvantage of that,” said Mr Nally.

The company has opened otheroperations in Malta, Singapore, Franceand the UK and there are plans todevelop further centres in Europe andNorth America. But when it came tovalidating and setting up data centresin other jurisdictions, the Isle of Manmodel now provides the benchmark.“In every one of those locations, if itmatches our experiences on the Isle ofMan, that tells us if we are there orthereabouts in our decision makingprocess.” said Mr Nally.

“We have found it an extremely openplace to do business and where wehave been able to work with thevarious stakeholders,” Mr Nallyconfirmed, citing the Manx ElectricityAuthority (MEA) as an example ofwhere Continent 8 had been one ofthe first commercial bodies on the Isleof Man to support the MEA’s newfibre network service. Likewise on theregulatory side, Continent 8 hadprovided strong input into theGovernment’s disaster recovery andexclusion regulations. Mr Nally saidthis had been “a very positiveexperience.”

He said that they had also beenpositively influenced by the number oftheir own customers who had alsobased themselves in the Isle of Man.

The Island’s technical infrastructure isalso first rate. There is an abundanceof power on the Island. “TheGovernment has put a lot of money inand it is paying off for companies like

us,” said Mr Nally. He told the Summitthat power levels in Continent 8’s datacentre on the Isle of Man wereengineered at 7.5 kVA per rack. Thiswas over 50% more than even someof the best Tier 1 markets. In placeslike France it wasn’t possible to getmore than 4.5 kVA per rack but, eventhough the Isle of Man levels wereextremely strong, he hoped they couldbe pushed even higher.

Telecoms were also praised. Eventhough the Island was small, it hadgreater telecoms capacity than manylarger islands. It was important to haveaccess to multiple systems and that’swhere other jurisdictions fell down,said Mr Nally. Malta, as an example,was for a long time reliant upon justtwo networks. “It amazes me thatbusinesses which are 100% online putthemselves at the mercy of networksthat aren’t capable of handling thebusiness,” he pointed out. The factthat the Isle of Man had first classoperators like Cable and Wireless andManx Telecom made it “a veryattractive place as far as networks areconcerned,” said Mr Nally.

And whilst other jurisdictions hadsome good data centres, the Isle ofMan was very fortunate in having atleast three world class data centres,said Mr Nally, highlighting ManxTelecom’s and Domicilium’s centresas examples.

As far as skill sets were concerned hedidn’t envisage this being a problem atthe moment but as Continent 8expanded its customer productportfolio this might impact on thecompany’s ability to recruit thenecessary skills here in the future.

Stable local working practices werealso a feature of the Isle of Man butwere not necessarily as reliable inother Tier 1 markets. He saidContinent 8 worked its suppliers hardand expected efficient, drop of a hatservice at all times. “We built in theIsle of Man because we believe theIsland will be here for a very long time.We are happy to facilitate ourcustomer base here but we remaincautious about other jurisdictions,”said Mr Nally.

The future

Looking forward, Mr Nally thought theIsle of Man would need to keepevaluating its position in the overallmarket place. The nature of theindustry was changing. It was nolonger the domain of entrepreneursand start-up operations. Over the last12 years Continent 8’s customer basehas changed. There were many CEOscoming into the business from othersectors and vertical markets, bringingin some established practices likebusiness compliance procedures.Similarly, highly qualified andexperienced IT professionals fromtelecoms companies andmultinationals are entering the onlinegaming sector. “So we have to bemore on our game every single day,”he said.

Many customers no longer want justone gaming licence, they wantmultiple licences for a variety ofmarket and company related reasons.Many customers want disasterrecovery but very few of thesecustomers have the financial ability toput in a disaster recovery system inisolation. Instead, they wanted a

combination of solutions; toincorporate disaster recovery, testing,pre-production and even Cloudscenarios. “They want to be able toleverage their assets that they areputting their money into,” said Mr Nally.

The problem with technology was thatit nearly always outpaced regulation,he ventured. Sometimes technologywas being adapted to suit regulation.“We think it should be the other wayround, that regulation should beadapting to technology in the marketplace,” said Mr Nally.

Complimenting the DED’s policy ofmarketing the Island to vertical marketcompanies like CSPs, he saidContinent 8 was working hard toencourage new business to come intothe Isle of Man. Often, decisionmakers are based outside the Isle ofMan, they are in places like Israel,South Africa, London and Stockholm.“We have to be continually working tomove out into those markets to bringthose operations and personnel intothe Isle of Man,” he said.

There were other challenges that theIsle of Man faced but stressed theisland’s need to be competitive.

“Although we have a fairly attractivebandwidth cost here in relation toother gaming jurisdictions, that’s notenough for us to rest on our laurels,”warned Mr Nally. “If we are to becompetitive – and I do believe thatthere is a jurisdiction out there thatone day will get everything right – thenthere has to be a better local coststructure and costs need to becontinually driven down. We have tobe aware of this. I don’t want to beantagonistic towards suppliers here,

but it is important in the future,especially if we are to win front-endconnectivity here in the Island.”

He said that Continent 8 didn’t want tolook at a base outside the Isle of Manso it was important for the Island tonurture the necessary skill sets for thefuture.

There is a lot of regulation anddevelopment going on in Europe at themoment and the outcome is not thatclear. Mr Nally said it may beretrograde if there was afragmentation of technology andinfrastructure throughout thecontinent. “It would be best ifeverything stays here and places likehere,” said Mr Nally.

Whilst it was important to strengthenrelationships with countries like Franceand Italy, he said it was also vital tofocus on bilateral agreements withother established jurisdictions, statingthat, in terms of technology, the Isle ofMan could lead the way in talking toother forward thinking jurisdictions.

“Everything points to a very successfulmarket place in the Isle of Man butwhen you look at the number oflicensees here, I don’t think anyonewould agree that we have as many aswe want,” Mr Nally ventured. Placeslike Malta, Gibraltar, Kahnawake andGuernsey were “massively installedplaces for licenses” and the Isle ofMan needed to work with thesejurisdictions. It was important toencourage more large operators intothe eGaming market place. “We needto see why we are winning businessand need to consistently push forwardand do some things that are maybe alittle closer to the edge than where weare at present.”

“We need to seewhy we are winningbusiness and needto consistently push

forward and dosome things that aremaybe a little closer

to the edge thanwhere we are at

present.”

2423

The afternoon session wasintroduced by Mark Summerfield,Head of Audit for KPMG Europe’sEuropean Gaming Group.

Leading the firm’s relationships withLadbrokes, the Rank Group andPartyGaming, his gambling team isbased in London, Gibraltar and the Isleof Man, working with Gala Coral, 888,bwin, PartyGaming, Betfair, WilliamHill, SportingBet and most other majorplayers in both the online and bricksand mortar sectors.

His personal experience includes theprovision of audit and transactionservices and various forensic and ITinvestigations. Recent industryprojects include work for Business inSport and Leisure (“BISL”) and theGambling Commission. MrSummerfield is a member of BISL’sGaming Working Group and a Trusteeof the hospitality charity, Springboard.

Mark’s opening address gave anoverview into the four key themes thatKPMG believe are facing the sectorbeyond the Island’s shores and howthe global eGaming industry wasdeveloping.

Mr Summerfield opened by saying hewas disappointed that the key themesand issues facing the industry hadchanged little over the past few years.In the UK, for instance, argumentswere still raging about selling the Tote,funding of horse racing and the myriadof UK taxation structures which werebest summed up as “a working modelto the rest of the world of how not todo it.” So he was delighted to hear theIsle of Man Tax Assessor MalcolmCouch’s Summit speech earlier in theday “giving a more enlightenedapproach to taxation.”

Nevertheless, potentially, many ofthose offline issues could affect the eGaming sector. “They do show thatthere is one global gaming industrywith thin walls between online andoffline,” said Mr Summerfield.

Industry consolidation

Despite previous false dawns, hebelieved the industry had now reacheda tipping point, with the merger ofbwin and Party forcing the industrydown the path of consolidation. “Itmight take a while to bed down butthe combined group will have a strongmarket position in every country andleading software, in all verticals, andfirst rate IT, marketing and customerrelations teams – the best of bothorganisations.”

He said that further acquisitions by thenewly combined group could simplybe about buying players, “Take over abusiness with NGR of $150m andcosts of $130m and then take, say,$60m out of the cost base. Suddenlyyou really start to see the power of thefirst mover who seriously sets out toconsolidate,” reasoned MrSummerfield.

Despite suggestions by some analyststhat certain impediments mademergers unlikely, such as US legacyrisk, shareholder interests, culturaldifferences, geographic revenue risk;companies that waited to see how theParty/bwin merger panned out “wouldbe taking a flawed approach”, he said.

Over the next three to five years MrSummerfield envisaged the possibilityof just three big online gamingcompanies emerging. This assumesthe US aren’t involved, with favourableUS legislation “We could see theAmerican super casino brands driving

consolidation at an undreamt ofspeed,” he said.

He said he could also see bricks andmortar companies acquiring becausethey would have to diversify earningsoutside of their own domesticmarkets. In the UK the demise of thetraditional bookmaker was longpredicted in favour of more convenienttransaction methods. In particular, theemergence of the smart phone wouldforce bookies into the mobile worldand beyond.

Merger or acquisition - How willconsolidation happen?

Despite the recent successful IPO ofBetfair listing, Mr Summerfieldbelieved it would remain difficult forlisted companies to access acquisitioncapital from shareholders. And withthe continuation of European marketregulation at a national level, the actualtiming and uncertainty of exit and re-entry strategies of different verticals,together with the cost of market entry,would all continue to cause volatility inearnings. This would continue to makeit difficult to raise money. “In thesecircumstances, the main way of pullingoff large scale consolidation is likely tobe through mergers,” said MrSummerfield, adding that it would becommercially imperative forcompanies to overcome theirdifferences in order to agree merger terms.

Regarding the US market, the bigunanswered question remained howLondon-listed companies could gainaccess to the US gaming market postregulation, especially with the US’stendency towards protectionism. Hesuggested that any regulation wouldlikely favour American companies, but

that didn’t mean the door was closedto European operators.

“When I look to who might succeed, I look to those businesses who alreadyhave a legal US presence, such asBetfair and Sportech, or thosesoftware providers, such as Playtechand 888 who have both a strong B2Boperation and existing USrelationships,” he predicted, addingthat “To understand the US you reallyhave to be in the US”

There was no consensus view onwhen US legislation would come but itwas inevitable. “You can’t ignore thelevel of demand that exists oreffectively criminalise that manydomestic voters,” said MrSummerfield.

The move from dot com to dotnational

Mr Summerfield believed the conceptwas here to stay with the UK, Italy,Germany, France, Sweden and Spainleading the way in European grossgaming yields. “But for the type ofgrowth in major European marketsforecast by the likes of H2 GamblingCapital, deregulation must continue,”he urged. France, Spain and Denmarkwould grow strongly in the next threeyears although France’s licensingframework review “may not bring allthe hoped for benefits”. US facingoperators, Pokerstars and Full Tilt,would continue to gain market share in European poker, he predicted.

He said all companies had to focusincreasingly on tax, especially thelocation of intellectual property, toinvest heavily in IT and achieve costefficiencies in each country. “Thefundamental message is that they willhave to recognise the need to run

international structures rather than justan Isle of Man or Gibraltar base.” Thatrequired having a greater appreciationof local employment laws andproviding sophisticated remunerationpackages, he added.

The impact of moving from dot com to dot national, he reasoned, wasapparent from bwin’s Q3 results whichhighlighted the change in earnings andrevenue profile from the loss of casinoand bingo, initial entry costs and costsassociated with adapting platforms tomany different national models.

“What’s interesting is that the lack ofimmediate returns may well preventnew players from other industries,notably media, moving heavily into thissector,” said Mr Summerfield.

Emerging jurisdictions

Referring to KPMG’s recent report‘Online Gaming: A Gamble or SureBet’ which looked at emergingjurisdictions such as the BRICcountries, Asia Pacific, Argentina andAustralia, Mr Summerfield said they allhad advantages of a developedbanking system and large populationswith a penchant for gambling.

A move to a dot national approach inEurope would help companies betterunderstand that people were nothomogenous and that regionalvariances existed, so each countrywould need to take these factors intoaccount when formulating an operatingmodel, he said.

“Despite all the challenges facing theonline gaming industry, I remain moreupbeat today than ever before,” heconcluded.

Mark Summerfield Head of Gaming

KPMG Europe

Introduction to the Afternoon Session

Mark Summerfield

“Despite all thechallenges facingthe online gamingindustry, I remain

more upbeat todaythan ever before.”

2625

As one of the industry’s foremost ITexperts, Archie Watt joined KPMGIsle of Man in July 2010 from KPMGLondon, where he was working asan IT Advisory Senior Manager forthe Information, Communicationand Entertainment practice, with aparticular focus on online gamingclients.

He has worked for KPMG since 2006and before that with BDO in London,where he worked on the public listingsof 888, Playtech and PartyGamingamongst others. He recently co-authored the KPMG report ‘OnlineGaming: A Gamble or a Sure Bet?’

Mr Watt spoke extensively aboutregulations in the sector, covering thegrowth in regulation, how we have gotto where we are and the influence ofthe EU.

Mr Watt said, at present, the sectoritself was not widely understood andthat education was required both onand off island to show where eGamingfitted in to the regulatory environmentas a whole.

As with the financial services sector,he continued, the eGaming industrywas also sitting on large deposits ofcustomer money at any one time andcustomers wanted that money back. In the Isle of Man’s case, the role ofthe GSC was to allow companies tomake best use of that money but toensure that it was returned tocustomers in due course.

“Gaming is a leisure activity andsuccessful operators are those thatcombine the enjoyment with themeans of making money forthemselves,” said Mr Watt. Atpresent, there was a patchwork ofregulation. In some places it wasbetter than others. The UK was anexample of having a good regulatoryframework although “what they forgotto do was put in place the necessarytax structures to go with it,” he added.

“The Isle of Man has not made thesame mistakes,” he continued.Instead, they had brought in a far morecomprehensive, understandable andenforceable regulatory regime than inother jurisdictions.

Kahnawake, in North America, wasone of the early exponents of onlinegaming, Mr Watt continued. Therewere a number of casinos on theirterritory and they naturally evolved intothe online sector, principally to providesports betting options for people livingin the US, although since 2006 thiswas prohibited to Americans. Butanyone in the world could go online toplay legally on a website which was ina properly licensed jurisdiction.

Range of regulations

Controversially, France and Italy havegone down their own routes onregulation, where to provide servicesto their citizens the operator had to belicensed in that jurisdiction. This wascompletely contrary to the approach ofjurisdictions such as the UK,

Kahnawake, Antigua and the Isle ofMan, said Mr Watt.

Consequently there was afragmentation on regulationrequirements in Europe and the rest ofthe world which meant that operatorshad to separate out their businessmodels, with all the resultantcomplexities, according to whetherthey were dealing in France, Italy,Denmark or Spain,” said Mr Watt.

There was a whole range of legislationthat operators in the sector had tocomply with to ensure that moneylaundering didn’t take place. Theseincluded the Third European UnionDirective (2005), Money LaunderingRegulations 2007, Proceeds of CrimeAct 2002 and the Terrorism Act 2000.“Contrary to what some Governmentsbelieve, in reputable jurisdictions noonline gaming sites are operated bymoney launderers,” said Mr Watt.“That is categorically not the case inthe Isle of Man. If it was, theywouldn’t even be shown the frontdoor. That is not what happens.”

Attempts at money laundering arespotted very quickly by responsibleorganisations, he continued. If anoperator suspected a crime then hehad a responsibility and requirement toreport it. “If they don’t then it couldmean going to jail. So it is in anoperator’s interest to have wellconstructed and well regulatedprocedures in place to protect themand prevent illegal money coming in totheir organisations,” said Mr Watt.

Archie Watt Senior Manager: Advisory

KPMG Isle of Man

Regulation in the Sector

Archie Watt Senior Manager: Advisory

KPMG Isle of Man

2827

Why have these regulations in place?

Above all, for operators, it helpedprovide peace of mind for their players,he said. “If you have got the Isle ofMan badge on your site, that’s goodenough for them. They assume thereare processes in place to protect them,that there is a regulator sitting on topof them making sure that it is a safeand secure place to play” he said.

Regulations are normally drawn up asa response to state monopolies thatran lotteries. “Those state monopolieshave been losing money hand over fistto online gaming operators,” Mr Wattsaid. Why? Because online operatorshave provided far better returns totheir players.

He said state lotteries claimed “tohave a divine right to prevent fraud.”The message they gave out was thatno fraud happened on a state lottery.Consequently, Mr Watt added, onlineoperators were having to fight againstthat perception very hard. He gave anexample of the European Court ofJustice hearing an appeal by thePortugese authorities against bwin forsponsoring local football.

The reason the state lottery gave wasthat it was to prevent fraud and thatthe subtext of this was that bwinwasn’t preventing fraud. “But it was inthe interest of bwin to prevent fraud.Fraud cost bwin money, so why wouldthey want to encourage someone todefraud them. This was not the case,”said Mr Watt.

It was also in the interests of onlineoperators to know who theircustomers were. “If you are a sportsbook, you’ve got to know that theplayer has the money to pay you ifthey lose,” said Mr Watt. They wouldalso want to know if the player waspart of a betting ring because if theywere then the sports books would losemoney. Equally it was important toknow if someone was involved interrorist activity, so knowing yourcustomers was a key part ofregulation.

It was also a requirement to know ifpeople were old enough to play and toblock them if they were not. “All thesesites have procedures in place toprevent and protect against under ageplay,” said Mr Watt.

How can the rules be applied?

With potentially hundreds ofthousands of bets taking place daily,how was it possible for operators toknow that customers were who theysay they were? asked Mr Watt.

For ease, most organisations used afour stage automated applicationprocess to verify players.

On registration

There were third party operators whocould look into customer validation,often using Government websites anddatabases. Whilst Mr Watt venturedthat this was all rather “big brotherish”it was done to make sure only the rightpeople were getting access to thesystem and to play fairly. “If we aren’twho we say we are or where we saywe are, then that is going to getcaught,” he said.

On deposit

If you had a bank card BIN numberfrom the UK but claimed to be fromsomewhere else then immediately awarning would be sent to theoperator’s site which could block theapplication before it was submitted, hesaid.

On win

If it was found that someone waswinning consistently it might bebecause they were lucky but theymight also be in collusion withsomeone on the operator’s site, saidMr Watt. He gave an example of apoker operator where a friend of theonline player worked for the operatorand was able to tell the player theidentity of the cards on the table. The individual’s identity was tracedand they were caught.

On withdrawal

To comply with money launderinglegislation, any payouts of over $2000had to be recorded and checks on anindividual’s identity would also becarried out, Mr Watt revealed.

He said that online operators arguablyhad more controls in place than mostof the banks. “They have to be moreand more sophisticated as the level ofknowledge of the operator grows.”

He concluded by stating that tocomfort those with little or no previousexperience of the eGaming sector itwas a well regulated and well runindustry.

“But those with experience, you canbe comforted that your views and yourhopes and beliefs are being fulfilled. I am very positive for the sector, I loveit and I have worked in it for over 10years,” said Mr Watt.

“Gaming is a leisure activity andsuccessful operators are those thatcombine the enjoyment with the meansof making money for them.”

3029

Fair Gaming Advocate Tex Reescurrently runs responsible gamblinginitiatives and dispute mediationservices for eCOGRA (eCommerceand Online Gaming Regulation andAssurance).

She joined eCOGRA in 2003 with morethan 15 years of management andcustomer relations experience in bothland-based and online gamingbusinesses. Ms Rees has mediatedthousands of player disputesoriginating from eCOGRA ApprovedSites. She established eCOGRA’sResponsible Gaming Requirementsand continues to ensure they arecorrectly implemented across over 140leading online gambling websites andmobile operations. She has alsocreated responsible gambling trainingprograms for a number of eCOGRAcertified operators.

Ms Rees explained that eCOGRA’srole as a UK based, non-profitorganisation is to help make the globalonline gambling industry safe and fairfor all players by providing assurancethat operators are honest, games arefair, monetary deposits are safe andthat winning bets are paid in a timelymanner. eCOGRA is about playerprotection, she said.

But this doesn’t mean simplyscrutinising operators. “In order tomake it safe and fair we also look atthe software provider. We make surewe conduct reviews at both theoperator and the software provider toprotect players thoroughly,” she said.

eCOGRA is a fully transparent,independent standards authorityestablished in 2003 and was originallya Microgaming and 888 initiative todemonstrate that they and their

operators offered best practice. Shortlyafter, they were joined by Ongame(bwin) as a Founding Member. In theensuing years, eCOGRA hascompleted almost 500 onsite reviews,each lasting between three and fivedays. They have reviewedapproximately 200 sites against eGAP,the EGBA Standards and forcompliance with regulations atdifferent jurisdictions. Of those 145operators now hold the eCOGRA Safe& Fair Seal.

To gain approval, each organisationreceives a visit from an eCOGRACompliance and Advisory Services(CAS) team member on site looking at all areas of the business. The CASteam member then prepares acompliance report for managementcomments and once he is confidentthat the operator has complied with all of the requirements as set out ineGAP, the report is presented toeCOGRA’s Seals ComplianceCommittee, made up of IndependentDirectors, who decide whether theoperator is awarded the Safe and Fair Seal.

Responsible gambling initiatives

Responsible Gambling is oftenmisconceived as only being aboutproblem gambling, said Ms Rees.“Although it plays a large role it’s notjust about the vulnerable. It’s aboutmaking sure that the operator works ina responsible environment.” The aimis to protect the underage andvulnerable, to ensure that operatorsact with integrity and that promotionsare delivered in a responsible manner.“If you are a responsible operator thenyou are going to make sure there is a

place for the player to go if they have aproblem,” she said.

She highlighted that eCOGRA runonsite training programs, the majorityon responsible gaming, where theywork face to face with playerinterfacing company staff, to makesure they are made aware of problemgaming issues and responsibleoperator conduct.

It’s important that players keep theirgambling activity within budget andthat operators have the tools in placeto encourage sensible gambling byproviding opportunities for depositlimits, cooling-off and self exclusion,said Ms Rees.

“The great thing about the onlinegambling industry is that we have agreater ability to successfully trackplayers and provide tools to help themkeep their gambling in the realms offun, than one would in a land basedenvironment,” said Ms Rees. “Youcan’t effectively stop players enteringa gambling establishment whereasthere are a number of ways of blockingonline players.”

Dispute mediation

Ms Rees revealed that disputemediation is offered to all eCOGRAsites, as well as to the EGBA. To dateshe has handled in excess of 4000disputes. She highlighted theimportance she placed on being givenaccess to an operator’s managementto ensure that any disputes weresettled in a timely fashion. Normallydisputes are resolved within 72 hours.

The mediation service was started in2004 and in the first year there were151 requests for assistance. Last year

that had risen to 826. Ms Rees saidthe increase was attributed to moresites becoming eCOGRA approved andalso because players were moreknowledgeable about where to go formediation.

She emphasized that eCOGRA offereda player mediation service and not anarbitration service. If an operator didn’tagree with what eCOGRA felt was areasonable resolution to a dispute,however, the matter would be taken tothe eCOGRA Board where thedecision could be made to suspendthe eCOGRA Safe & Fair seal. “Sothere are teeth behind the mediationservice,” she said.

Ms Rees said that on average therewas less than half a dispute per monthper operator. “In my opinion that is asuperb number when you considerhow many transactions there are andhow many disputes there could be.”The majority of disputes received areover withdrawals, bonuses, lockedaccounts and fairness of the software.

She itemised various examples ofcorrespondence received by eCOGRAfrom both players and operatorsfollowing successful mediation onissues such as slow payment,miscommunications between playersand call centre agents as well astechnical errors.

Data analysis

In 2007, eCOGRA brought the dataservices previously performed by PwCin-house and recruited a dedicatedteam that would maintain the TGTRapproach. They also engaged KPMG toperform an annual quality assurancereview. The review covers the internal

assessment teams, operator andsoftware supplier Work Programs anda review of the Payout Percentage andRNG methodology.

As a result of intensive data analysiscarried out, eCOGRA issues over 3000certificates annually on keyperformance indicators such as payoutpercentages and RNG (RandomNumber Generator) relating to casino,poker, bingo and live dealer studios.

Ms Rees explained that the methodused for testing data was output basedand known as the Total GamingTransaction review. The objective ofwhich is to show fairness bydemonstrating uniformity andindependence.

Compliance and Advisory Services(CAS)

The CAS team’s role is to assess andassist on site with the compliance ofonline gaming operators, softwaresuppliers and service providers againstindustry best practice and jurisdictionalregulations.

The department has moved from apure audit or assessment function toan advisory and assessment role. Theobjective now is to assess and assistthe client comply to with the relevantstandards.

Although it can take up to a year tobring an organization up to bestpractice levels, operators who meetthe required high standards receive theSafe and Fair Seal. There are alsoCertified Software and AffiliateProgram Trust Seals.

She stressed the importance ofundertaking a continuous compliance

program. “We are looking at anoperator from a holistic point of view,to ensure that they are continuallycompliant and always up to bestpractice,” she said.

As well as the onsite audits and datareviews it was often dispute mediationthat acted as an early warning signal ofa potential problem with an operator.“Players are the first ones to tell us ifthere is something wrong. We need tolisten to them, which is one reasonwhy dispute mediation is soimportant,” said Ms Rees.

She described the strict GovernanceStructure adopted by eCOGRA.Stressing that no seal would begranted unless the Seals ComplianceCommittee was absolutely sure thatan operator had achieved 100%compliance with the requirements.

In summary, Ms Rees explained thateCOGRA’s main objectives, containedwithin its eGAP (Generally AcceptedPractices) document weredemonstrated in three main areas;Player Protection, Fair Gaming andResponsible Conduct.

“An informed player is the best player.We will not have players coming backif their first experience is bad. Weneed to make sure that they have theability to become informed players,”she said.

Tex Rees eCOGRA Limited

Fair Gaming Advocate

Safe and Fair

Tex Rees

“In order to make it safe and fair we alsolook at the software provider. We makesure we conduct reviews at both theoperator and the software provider toprotect players thoroughly.”

3231

Phil Tompsett is Head of General Insurance for Aon (Isle of Man) Ltd.

He was formerly head of Aon’s operations for the North West of England andhas held many senior positions across the Aon Group. His client experienceencompasses complex risk and insurance programmes for domestic andinternational businesses across the public and private sector.

Gareth Tungatt is a specialist underwriter at Barbican focussing on e-Commerce risks.

He brings to the operation the benefit of 13 years experience of underwriting and placing technology and cyber risks in the London insurance market. He hasdeveloped substantial sector expertise, contributing to several industrypublications on insurance risk management for the e-Commerce sector andworking with a number of blue-chip organisations in a specialised riskconsultancy role.

Their joint presentation outlined keyrisk issues for the sector whichconventional insurance does not cover,supported by real life uninsured lossexamples and highlighted thespecialist cover now available for theeGaming and supporting sectors.

Mr Tompsett explained that the focusof the presentation was on some ofthe sector specific risks, in particularcyber risks, and said that he wasdelighted to have brought along GarethTungatt, the key sector underwriterfrom Lloyds of London to provide“cutting edge” information for theSummit.

Mr Tungatt said that cyber liability wasprevalent in many different aspects ofthe eGaming industry and began byexplaining exactly what cyber liabilitywas. Unlike property, motor or houseinsurance, cyber liability was anythingthat was non-tangible, he said. “I amnot talking about technology insuranceor physical assets like lap tops. It couldbe anything you say or do, anyinformation that is contained in a non-tangible format. It could be the wayyour mobile phone operates with thenetwork.”

He said there was an increasingamount of non-physical exposureemanating from the internet andcomputer networks and theseexposures were broadly split into twomain areas: first party, which was acompany’s own exposure and ownlosses as a result of having access totechnology and the way the companyoperated.

But the wider subject, he said, was onthird party or one’s liability to others.“In short, what is your organisation’sexposure to a third party as a result oftechnology?” Mr Tungatt questioned.

Cyber risk was a subject coveredalmost on a daily basis in the nationalpapers, he said. Stories werecommonplace of computer hacking, ofpeople stealing data, of disks beinglost in the post containing informationabout millions of people.

He said it was a commonmisconception that companies couldonly be exposed to cyber risk if theywere a technology company. “That iscompletely incorrect. I can’t think ofany industry in the world that isn’texposed in some way in terms ofcyber risk.” He said the eGaming

industry was particularly vulnerable totechnology and not necessarily at thefront end of the operation either. Theback end of the business wasespecially open to attack in areas suchas its method of invoicing, the way itprovided a white label service forclients, through its service levelagreements with third parties andinternet connectivity. “If your systemis down or certain aspects of it, suchas your payment partners operationare not operating properly, then yourbusiness grinds to a halt,” he warned.

Whilst every network’s functions wereunique and streamlined to meet acompany’s own requirements, aneGaming operation was reliant on awide range of supporting businessesand activities such as paymentprocessing, in-game betting, real timetransactions and interfacing withaffiliates. Consequently the speed andcomplexity of the IT function made eGaming companies especiallysusceptible to cyber risk, said MrTungatt.

He said people didn’t tend to think oftheir computer network as a businessin its own right which was a mistake.“It certainly is,” he countered. “In fact,many of my clients would describetheir computer network as the crownjewels of their organisation.”

He explained that first party exposurewould involve any risk to an operator’sown network. This might be loss ofdata, system failure, damage to boththe network and the Company’sreputation and any loss of businessrevenue or increased costs of workingas a result of disruption.

He said as far as third party exposurewas concerned, it was important toremember that eGaming companies,

by virtue of having a website, had thesame legal responsibility as apublisher. Indeed, he suggested thatthis amounted to even greaterresponsibility for the eGaming sectorbecause “if you operate on theinternet then you are not just subjectto the legal laws in your jurisdiction –you’re out there on the world wideweb.”

This even included defamation, libeland slander. “You are responsible foreverything about your website,including intellectual property,” said MrTungatt. Any branding or endorsementcarried on the site, for instance, had tobe cleared for use in the jurisdiction ofoperation. Particular attention neededto be paid to blogging activity. He saidhe had seen many examples, in NorthAmerica especially, where there weremore stringent privacy laws than in theUK, of uploading information whichhad not been cleared for use. And hewarned that stricter laws could followhere in future.

In North America, he continued, if youwere to obtain information such ascredit card numbers or people’s namesand addresses, there was a duty ofdisclosure. It was necessary to contactall those people by letter which wascostly and, depending on the State, itwas also often necessary to providecredit monitoring services such asExperian to make sure any informationbeing used wasn’t compromised.

Statistically, around two billion peopleworldwide now used the internet andthis created a huge amount ofpotential plaintiffs, said Mr TungattFurthermore, there was currently nosingle regulation relating to theinternet. The payment card industryhad gone some way to establishingreasonably consistent card processing

laws, but every jurisdiction wasdifferent and nothing specific had beenrolled out yet. “But at least the PCI istrying to make sure that everyone issinging from the same hymn sheet,”he said.

So in a relatively lawless environment,the internet was “a fantastic place” tolaunch criminal activity. You could walkinto a bank with a gun and expect toget life imprisonment but because theinternet was virtually unregulated andthere were generally no extraditionlaws, criminality abounded.

Data extortion and blackmail demands,fraud, phishing and pharming were allcommonplace examples of criminalactivity. “I’m sure everyone has had anemail from their uncle in Nigeria atsome time in their life who was goingto deposit half a million into youraccount. We understand these type ofscams have about a one per centpenetration rate,” he said.

Electronic security breaches involvinghacking, time or logic bombs, trojanhorses and computer viruses wereslightly different to criminal activity butcould also be a significant nuisance.Internet hackers had to be takenseriously, citing the example of ahacker that recently infiltrated thePentagon’s computer. “That’s meantto be one of the most secure places inthe world. If they are at risk then afinancial institution or a gamingcompany is certainly not beyond it,”said Mr Tungatt.

He also highlighted internal sabotage,such as where a malicious insider,perhaps a disgruntled employee froman IT department, would take a systemdown.

Philip Tompsett Broking Director

Aon (Isle of Man) Ltd

Gareth Tungatt e-Commerce Underwriter

Barbican Syndicate at Lloydsof London

Insurance: Not a GamblePhilip Tompsett

3433

And he warned against complacency.“When we have these forums it’squite interesting to speak to yourtechnical guys who are always verytight lipped. They say nothing can evergo wrong with their network. Well wesee this from an insurer’s point of viewand let me tell you that you certainlydo have some network security breachissues.”

Mr Tungatt then provided a snapshotof the types of cyber risk faced by anIT network ranging from human errorto system malfunction, from virus tofraud and malicious attack. “I knowthere are different ways of mitigatingdifferent exposures but as you can seeit’s not just physical perils which youhave to deal with. There is moreexposure to a computer network thanthere is to a tangible property.”

Case studies

He then highlighted a number of casesto show potential areas of concern forthe eGaming sector.

Firstly, of inside sabotage, where acomputer programmer for a majoronline trading entity had a grievance,wrote some malicious programmewhich caused the outage of allecommerce activities for 48 hours overthe busiest trading period of the year.

An example of infringement ofintellectual property was where agames development firm suffered aclaim for damages after including clipswhich were available as an onlinedownload. The content hadn’t beencleared for use by the freelancecontent provider who went bust,whereby the games development firmfound itself facing defence costs of£5m against one of the largest musiccompanies in the business.

Breach of Privacy also featured. Roguesoftware was found to be installed in acompany network with the aim ofcollecting credit/debit card numbers asthey were processed. It affected 1500individuals and three major banksissued legal proceedings against thecompany for £6m to recover theirlosses.

He also focussed on an example ofexternal hacking where a man wascharged with hacking into theprotected computer of a Las Vegashotel, resulting in a total cost ofintrusion and theft of data of nearly$6m. The defendant faced up to fiveyears in prison.

And, finally, data extortion. On the dayof a major multi-national sportingevent, a leading bookmaker was thevictim of a multiple distributed denialof service attack where a demand of£250,000 was made to bring thedisruption to an end. It causedsignificant business interruption fromloss of unplaced bets.

So what protection was available inthe market now?

Mr Tungatt said there were gaps intraditional coverage. Currently just fiveper cent of companies were insuredfor cyber risk. The reason being thatcyber liability was concerned withintangible assets and mostorganisations only purchasedtraditional coverage e.g for property.There was no trigger in those policiesfor hacker attack, sabotage or systemsmalfunction. Because there was nophysical damage, most policiesexcluded coverage.

Aon/Barbican eRisks solution,however, now provided a one stopcomprehensive cyber risk solutiondesigned specifically for e-commerceexposures including eGaming andsupporting industries.

The product was broken down intoseven modules which could be bought as a package or individually, Mr Tungatt.

The seven modules comprised:

• Technology and miscellaneouserrors and omissions in therendering of professional services

• Multimedia liability from internet,marketing and advertising activities

• Security and privacy liability frombreach of privacy or privacyregulations

• Data recovery and loss of businessincome

• Privacy and regulatory defence andpenalties

• Crisis management costs

• Data Extortion

“When we havethese forums it’s quiteinteresting to speak toyour technical guyswho are always verytight lipped. They saynothing can ever gowrong with theirnetwork. Well we seethis from an insurer’spoint of view and letme tell you that youcertainly do havesome networksecurity breachissues.”

3635

Bill Mummery has enjoyed aninternational career in both Africaand the Far East before completing a management buy-out fromGranada Group in 1991 whichbrought him to the Isle of Man.

Part of the eGaming industry since1998, Bill helped establish and floatone of the 'first to market' entrants onAIM in 2000. As eGaming Ambassadorfor the Isle of Man Government fromlate 2004-2007, he aided with thedevelopment of the Island as one ofthe premier global jurisdictions in theindustry.

Joining SBOBET in 2008, heestablished their European operation,Celton Manx Limited, on the Isle ofMan. He is a strong supporter of theeconomic development for the Isle ofMan and the contribution that the eGaming sector will continue to make.

He spoke on the reasons for easternoperators choosing the Isle of Man,the lessons learned, threats andopportunities and his view of thelandscape for the Isle of Man as ajurisdiction for the next three to fiveyears.

Initially, he explained why SBOBET hadmade the decision to relocate fromAsia to the Isle of Man. Around fiveyears ago there was a small cluster ofhighly successful, cash regenerativesports betting businesses in Asia. They faced a number of strategicissues, however. Apart from a specialeconomic zone in the Philippines,there were considerable limitations onquality licensing and regulation in the

region and it was clear that this wasnot of a sufficient standard to movethe business forward, said MrMummery.

Climatically, too, the region was proneto typhoons bringing the threat ofdisruption to external networks. Therewas also a level of political uncertaintyand risk which meant business couldgrind to a halt.

They also faced a lack of bankingfacilities. It was very difficult toestablish a business to consumermodel when credit card processingfacilities were not available.Furthermore, UIGEA legislation in theUSA had also had a direct impact onSBOBET’s core markets. Whereas alarge number of major brands hadbeen operating with a singular focuson product, currency and market,UIGEA meant that operators werelooking for substitute revenues.Suddenly there was an awareness thatthere were other geographicallocations in the world, including Asia,where there was the chance toprovide at least a partial substitute fortheir lost revenues. So for the firsttime, operators had a rival looking toplay in their back yard,” he said.

“Against that backdrop, I know anumber of operators allowedthemselves 12 months to do theirhomework and perhaps carry out alittle bit of a beauty parade in this partof the world and, as a result of that,this jurisdiction was able to attract twoof the largest operators,” said MrMummery.

Why the Isle of Man?

It was seen as being a premierlicensing jurisdiction, of high qualitywith the right levels of due diligence.Legislation and regulation was of ahigh order and a legal system based onthe English system. Its time zonesfitted with what SBOBET was trying toachieve.

Crucially, the Island also had a worldclass telecommunicationsinfrastructure, capable of handlingsignificant volume processes. “On apremier league Saturday, we processanything between 300 and 500transactions a second. That is amassive overhead on theinfrastructure,” said Mr Mummery.

He also revealed that during the recentfootball World Cup, on mobileplatforms alone, SBOBET processedseven million transactions. “I amcertainly not looking to denigrateLadbrokes as a brand, but during thesame period they celebrated theachievement of 100,000 transactionson mobile platforms.”

The sheer scale of this activity couldonly work effectively if it wassupported by high quality professionalsupport services and the Isle of Manhad these in abundance, he said.“When one is moving this amount in amassively cash generative businesspeople have to work very hard at thecoal face. The services available to uson the island are very important.”

Bill Mummery Executive Director

Celton Manx Limited

East Meets West

Bill Mummery Executive Director

Celton Manx Limited

3837

Access to the UK white list was alsoimportant, although not simplybecause of the access it provided tothe UK market but also further afield.He said there was a perception thatthe Asian gaming companies whosponsored Premier League footballwere primarily looking to build brandawareness in European markets. “Thereality is that that is a bonus,” said MrMummery. “There is no moreeffective vehicle than if a premierleague soccer team carries your logoevery single week.” He said that everygame was transmitted to 200countries many of which didn’t haveconventional marketing mechanisms.So that by using SBOBET’ssponsorship deal with West HamUnited as an example “what is verynoticeable is that when those picturesarrived in Asia, the brand that wasrecalled was certainly not West Ham,the brand that was recalled wasSBOBET. We have demonstrated thatPremier league sponsorship ismassively beneficial in our core marketand that is something that is notnecessarily understood,” said Mr Mummery.

Furthermore, the Isle of Man was wellknown and respected by the City ofLondon but it wasn’t simply as avehicle to penetrate the UK market.Five years ago, Europe had also beenseen as an realisable objective. But hesaid subsequently there was a realdanger of a situation emerging whereEurope would have 27 licensingjurisdictions. He questioned otheroperators who had chosen to go toother jurisdictions because it wouldgive them a passport across Europe.“In my view that is a perceived benefitmuch more than a deliverable one,” he said.

He said operators faced a dilemma.Did they chase licenses only tobecome late entrants and fringeplayers or was doing so a cue to futuregrowth. “It’s also a question ofwhether you’re seen to be diversifyingand reducing your dependency ontraditional markets, particularly whenyour business is being scrutinised bypotential investors and the investmentcommunity generally,” he said.

Mr Mummery said the Isle of Man wasalso an excellent base for developing a business-to-consumer platform. He said that this had not been possibleacross Asia despite the huge volumeof business that was done in thosemarkets because it was impossible toidentify and establish the right sort oforganisational connections there.However, a massive business toconsumer opportunity existed in thosecore markets that could be leveragedfrom the Isle of Man “because in theIsle of Man we have been able todevelop very effective and veryefficient platforms for processing.”

He said it was now possible to put realtime data on the LED boards aroundpremier football grounds. He said theaccess to this technology, coupledwith the availability of mobile platformswas lapped up by customers and nowaccounted for up to 65% of grossstakes placed on any football game.

But he cautioned that because theAsian handicap model was stillrelatively new to the European marketit still needed explaining at a genericlevel if progress was to be made inEurope. The customer benefits and thevalue proposition was persuasive. Hesaid that the Company pushed back99% of all stakes by value andredistributed them as winnings.

“We are operating on a 1% grossmargin which is pretty uniquecompared to the gross margins ofother betting models.”

An average fixed odds operator wouldoffer 200 football markets in a week,compared to the 1500 availablethrough SBOBET. “So you have twovery compelling arguments aboutvalue and depth of content but this stillhas to be communicated,” said MrMummery.

The generic benefits of taking the newAsian handicap business model tomarket was a significant responsibilityand required an education process“before you start to spend anysignificant amounts of money on yourown Brand marketing.” He said it wasimportant to look long and hard abouthow a vendor site was presented, howit functioned and presented its dataand it had to be sensitive to culturaldifferences. “I’d be the first to say we haven’t got that right yet,” Mr Mummery admitted.

SBOBET had been live in the Isle ofMan for two years and had proved tobe a sound move. “We believe wemade the right business decision, wemade the right choice and we areactually heading in the right direction.

Threats

Without question, regulation was amajor obstacle, said Mr Mummery. Ina number of jurisdictions it had beenused as a mechanism to protect statemonopolies. But he said a lot could belearned from the Isle of Man’s uniquecircumstances. “If those entities inEurope could all understand the qualityof licensing regulation in the Isle of

Man, most especially that they areguaranteed to get their tax take, thenover time I believe there may be aroute forward.”

He said it might result in one-on-oneagreements where it was understoodthat “we undertook to run ourbusinesses at least to the standard oftheirs. Why wouldn’t they allowaccess?”

He said the one caveat was that anumber of jurisdictions in Europe stilloperated a turnover tax. “In my viewthis is simply not defendable. It will notwork,” he said. “It drives very poorvalue out for the consumer.” But hesaid if jurisdictions considered a grossprofits tax model and the regulatorysystem was in place then “asoperators we would embrace that andI think it would be a win win situation.”

The UK white list had been key in theCompany’s decision to locate to theIsland. Without this, they couldn’t havesponsored UK football teams. Heexplained that everyone was nowawaiting results of the white listreview. If its purpose, Mr Mummerysaid, was to ensure the protection ofthe UK consumer this was “a nonevent” for the Isle of Man. “But myconcern would be, that despite all theassurances to the contrary, sooner orlater it may be part of a revenuegenerating measure. Hopefully not,”he said.

He said that the banks werehistorically extremely nervous of thegaming sector but as time had passedand operators had demonstrated thatthey were highly technology drivenand responsible, this had fosteredgood relationships with the banks. This had been rather derailed in recenttimes, he cautioned. In particular he

criticised the domestic policies of USand the influence they brought to bearon the wider market. “They end upinterfering with businesses like oursthat have no exposure to the US andno intention of exposure to the US, butit is massively disruptive. I’m afraidthat is probably something we aregoing to have to live with,” he said.

He hoped effective solutions could befound but warned, as things stood, itwas not ideal to be dependent uponone bank to handle all paymentprocessing. This was because if youwere reliant on a bank that had assetsscattered around the world, makingacquisitions around the world, youcould wake up one morning and thedynamics of their operation could havechanged completely. “The safest wayto have continuity of processing is tofind a bank in a creditable jurisdiction,with all the controls but where theyhave neither international aspirations,nor international assets scatteredaround the world. They would be lessrisk averse than some of the biggerbrands,” said Mr Mummery.

He also railed against the eGamingindustry’s “massive promiscuity” inthe way it enticed customers with evermore bonuses and free bets. This waspushing down operator profits andwasn’t good for operators orcustomers. “I think it is endangeringthe good health and stability of someof the brands,” he said.

Opportunities

He said there was very significantbusiness to consumer growth potentialfrom existing geographical locationsand markets. They were still “almostvirgin territory”, especially sincebroadband coverage was as low asseven per cent in some places whichwas both a constraint and a massiveopportunity.

With the regulatory restrictions inmainland Europe, Mr Mummery saidnew geographical locations such asSouth America, Australia and parts ofAfrica all had their challenges butoffered great potential.

He briefly touched on the recentBetfair flotation as being a businessmodel that “is absolutely not withoutits risk” and questioned whether theirparochial fixed odds betting modelwould fit into new markets. “If I wasan investor today I would be askingwhere does your future growth comefrom? The risk section of the Betfairprospectus was enormous,” he said.

As for the Isle of Man, it hadestablished itself as one of, if not THEpremier jurisdictions. The Island hadmet and exceeded the aspirations ofits licensees and was well understoodin the City of London as a jurisdiction.He said there might be a partialresolution in the constraints relating toEurope which would “benefit all ourexisting licensees” but by focussingon the quality end of the businessrather than volume was somethingthat would stand all Isle of Manlicensees in good stead.

“The future is very bright and it’s herein the Isle of Man,” he concluded.

“The future is very bright and it’s here inthe Isle of Man.”

4039

Warwick Bartlett founded GlobalBetting and Gaming Consultants(GBGC) in 1998. Originally from anoperational background, he now hasover 40 years continuous experiencein the gaming industry, continuingto chair and present at numerousUK and international gamblingconferences. He is regarded as oneof the industry’s top experts.

Mr Bartlett delivered a presentationbased on the Harvard Business School“Porter” model to analyse the forcesthat challenge the industry and howbest the eGaming sector on the Isle ofMan should face up to the future andsucceed in a competitive market place.

He began by explaining that he hadmigrated GBGC to the Isle of Man in2007 on the back of a slowing down inthe global economy and out of controlspending of the UK Government.

In late 2008 and early 2009, he said hemade three speeches to the industryin Gibraltar, Malta and the Isle of Manwarning that “times were going tobecome more difficult than they hadbeen in the past.”

But he stressed: “For me, the story tobe told was one of good news forthose companies that were preparedto take the necessary steps to preparefor recession.” Due to quantitativeeasing he reckoned that the currentrecession was not yet as severe asthose of 1972, 1982 and 1992.

He produced figures from a number of leading eGaming businesses whichshowed rising turnover from 2007 butnot matched by PBT. “The questionnow is that after our initial advice ofsome two years ago, where does theonline industry stand today?”

For the answers, he said that GBGChad looked at a number of companiesto assess their competitive edge in themarket place using the Porter modelfrom The Harvard Business School.This was based on five forces thatimpact on an organisation –Competition, New Entrants, Suppliers,Customers and Substitutes. “Becauseof the special nature of our businesswe have added a sixth – the Role ofGovernment,” said Mr Bartlett.

Competition

He said more than 2,100 websitesoffered gambling services, mosttargeting European customers withEnglish overwhelmingly the pre-dominant language although Italian andSpanish also featured.

A handful of operators dominated eachsector with a mass of smallercompanies. “All sectors operate onvery tight margins and have to workextremely hard to attract newcustomers. The business model workswell in low tax environments to enablehigh payouts to customers,” said MrBartlett.

Sports books aimed for margins of 8-10% but, using figures from theoperator Unibet as an example, thisrevealed a range from 6% to almost12%. Increased competition meantmargins would come under furtherpressure, said Mr Bartlett. Tocompensate, bwin were at theforefront of in-running betting but eventheir margins had fallen from 8% to5.5%, he added.

The eGaming industry was also one ofthe few that felt it had to buycustomers through generous sign-upbonuses and dormant accountincentives. Despite this, fewcustomers read the bonus rules whichled to disputes and complaints to theregulatory authority.

“This is the soft underbelly of thebusinesses. If the industry does notput its own house in order I believethe authorities will,” warned MrBartlett, predicting that lotteriesentering the European market wouldhave easy-to-understand bonussystems which would potentially payout faster than current operators.

He said that a recent EGR Live Yahoosurvey into online gambling revealed38% of people gave the main reasonfor opening an account was so theycould claim a free bet, 24% becauseof brand trust and 18% because of theodds offered. The research showedthere was little to choose betweenrival companies – they all had similarproducts and similar websites.

New Entrants

Despite competition, new entrantswere still keen to come to market,said Mr Bartlett. Wealthy individualssaw eGaming as an easy way to makemoney with its low barrier to entry,even though there was a high barrierto success.

Suppliers

Telecom providers, payment providers,banks, software suppliers, affiliatesand media suppliers were all influentialto an eGaming operator. “We see thetake up of broadband internet as a keydriver of the internet gambling

business,” said Mr Bartlett. He saidcurrent global broadband penetrationwas still under 7%, forecast to growto 8.3% by the end of 2011. But hewarned that it could take a decade tofulfil broadband’s potential andeGaming was at the mercy oftelecoms operators who needed toimprove technology and access aswell as lowering consumer costsoutside Western Europe.

Many offshore jurisdictions also hadlimited supply of data centres andtelecoms providers which meantswitching suppliers was often difficult.

Substitutes

Mr Bartlett said there was little longterm advantage of new productsbecause if something proved popular,other firms would simply add thatgame or product to their own sites.Betfair’s betting exchange model wasperhaps the best example ofinnovation. Yet that was a decade agoand it hadn’t led to the demise of thetraditional bookmaker “But it hascertainly shaken up the bookmakersand had an effect on betting marginson horseracing and football in the UK,”he added.

Social gaming sites offered analternative but they were differentbusiness models and didn’t givecustomers the chance to gamble andwin money.

The role of Government

With its influence over tax rates andlicensing requirements, Governmentwas arguably the greatest influence onthe European eGaming market, saidMr Bartlett. Where monopolies didn’texist, the combination of gambling and

Warwick Bartlett Founder and Partner

GBGC

Future Trends inOnline Gaming

Warwick Bartlett

“The question nowis that after ourinitial advice of

some two yearsago, where does

the online industrystand today?”

4241

the internet was a nightmare to mostgovernments. “The key issue for thenext decade is – will we end up with28 markets and 28 licences in the EU.Or maybe just one licence to serve thewhole of the EU with one tax rate?”he questioned.

He argued that regardless of taxrevenues collected, onshoreGovernments typically retreated topolicies of tax and spend because itwon votes. So as far as gambling wasconcerned it would be “those basedoffshore, the businesses that I call the‘Pirates of the Caribbean’, who will raidFrance and Italy, regardless of law andconsequences, and offer better valuethan those onshore.”

He said this was a possibility worthconsidering especially since the topfive unlisted private companies wereat least four times more profitable thanthe major five listed internet onlycompanies.

Would those companies drain themarket of liquidity? Would Italian andFrench customers ignore brand infavour of value and risk?

“We note that the gambler is 30%worse off betting under the new lawsof France,” said Mr Bartlett. “If those

gamblers decide to walk with theirmouse offshore, then it is they whowill cause Government to lower taxrates and not all the reasonablepleading of responsible gamblingoperators.” He said that was preciselywhat happened in 2000 when big UKbookmakers went offshore.

Despite some deflationary forces,because of the fall in currency andquantitative easing, Mr Bartlettwagered that inflation would risewhich would be positive for remotegambling. “Inflation is ideal for abusiness model that has high volumeand low fixed costs. The reverse istrue for the land based business whereconsumer income lags inflation butcosts rise immediately with inflation.

“So far as the Isle of Man isconcerned, Government has put inplace a structure that enables internetgambling to prosper – zero corporationtax, great IT and a great place to liveand work,” said Mr Bartlett.

But the Island still had significantchallenges to face if it was to retain itsstatus as a premier jurisdiction foreGaming. There were a finite numberof worthwhile operators to attract andthere was competition from threeother major jurisdictions which had

differing advantages over the Island.And he stressed that a VAT rate of20% from January 2011 wouldincrease costs for gambling companieson the Isle of Man which theywouldn’t have to face if they werebased in other jurisdictions.

Suggesting a radical solution, heventured: “Government, therefore,needs to take account of this and Ithink the time is right to abolish bettingtax for eGaming Companies,” MrBartlett urged.

He said there was an opportunity tocreate jobs and prosperity whichshould be grasped. “Rather thanfollow the rest of the market in catchup, the Isle of Man should now bepositive and lead the market,” heconcluded.

“So far as the Isle of Man is concerned,Government has put in place a structurethat enables internet gambling to prosper – zero corporation tax, great IT and a greatplace to live and work.”

43 44

“Without doubt, further product innovation would enhanceour customers’ (the operators) performance,”

“At present, players are spoilt with an absolute bevy offeature rich technology” exemplified by convergence.Consumers are used to new technology and, indeed, theyexpect it. “So it’s no longer a product push when it comesto marketing, it’s a pull,” said Mr Raatgever. New productsand technology are needed to take this into account.

Raatgever considers connectivity as a huge issue.Broadband penetration needs to be developed. Raatgeversaid Microgaming are developing richer products andneeded to do so at an accelerated rate to achieve growth.Continuing, Raatgever referenced that the internet is now20 years old and it wouldn’t be long before a device wasavailable that would be able to do everything. “So we havegot to start tailoring our product development to make sureit can cope with all that richness.”

John Spellman – Moderator Director

MeGA

What about product innovation in the future. Where do youthink the industry is going to go from a product point of view?

Question to Roger Raatgever

Warwick Bartlett said it was difficult to answer because theUK hadn’t been very clear on it. The Gambling MinisterJohn Penrose had said there was unfinished business as faras the internet was concerned, but that he didn’t want toalter the 2005 Gambling Act, Mr Bartlett observed. Hethought the UK Government was under a lot of pressurefrom the horseracing lobby. They were opposed to firmsgoing offshore because they were not paying the horserace betting levy. “Although as a percentage of thegambling revenue it’s a very small figure, it shows howpowerful the lobby is,” he said, commenting that hethought the UK would probably introduce a system wherepeople who were offshore would take bets in the UK butthere would be another form of licence in the UK.

Bill Mummery agreed that this would be a probableoutcome, he said this would be acceptable as long as it wasa license that recognised your primary licence or your placeof residency and was largely there as a bolt-on to givepermission to advertise. “But I hope it is not a smokescreenfor additional revenue generation.”

Where do you think UK white listing will actually go and overwhat time period?

Roger RaatgeverCEO

Microgaming

Claire Milne Chair, GSC

Partner, Appleby

Bill Mummery Executive Director

Celton Manx Limited

Mark Summerfield Head of Gaming

KPMG Europe

Tex Rees Fair Gaming Advocate

eCOGRA Limited

Warwick Bartlett Founder and Partner

GBGC

Panel Session

4645

Mark Summerfield said that the EU would keep a closeeye on revenues of France and Italy and try to replicate thatmodel across Europe.

Warwick Bartlett commented that there was a long historyof gambling in the UK and the British customer had a clearunderstanding of odds and value. They wouldn’t acceptbeing overcharged and, if they were, would resort to bettingillegally.

Roger Raatgever commented that over time there wouldbe one set of regulations, a common standard similar to themobile industry.

Warwick Bartlett said there was a common standard fordrugs but they were all illegal! “The thing about illegalgambling is that there’s no victim,” he said. “It is avictimless crime with a willing buyer and a willing seller.Everyone’s happy. It could take place anywhere. I couldmake a book here.”

Bill Mummery cited the example of administrators in HongKong who had spent 40 fruitless years attempting to take awhole raft of illegal activities, including gambling, away fromthe Triads. They then came up with the idea of criminalisingHong Kong citizens for going online and betting offshorewhilst at the same time offering them a monopoly Toteproduct. “The net effect is that they have just handed backgambling in Hong Kong to the Triads.”

Claire Milne said that it was unclear exactly what the driverwas behind future regulation. “We are being told from aregulatory perspective that it’s about player protection. Ifthat is the case then we absolutely welcome that,” shesaid. She doubted whether that was actually the case,however, and it was simply a matter of waiting and seeing.

Is EU access the be all and end all to the Isle of Man’sfuture in gambling?

Claire Milne said it was important to note that the GSC andthe cross governmental Steering Committee had workedhard over the last 18 months discussing bilateralcooperation with various different jurisdictions. But whilst itwas important that the Island continued to talk to Europeanjurisdictions there were other jurisdictions to focus on aswell, outside the EU.

Bill Mummery thought the pressure on operators in theIsle of Man would not be based so much on the loss ofrevenue if they didn’t have access to those mainlandterritories, but because they would be heavily criticised fornot being seen to have diversified sufficiently away fromtheir core markets. That’s where the pressure would come.

Tex Rees said there was definitely a big role for self-regulation because it was important for the industry to lead.She said that with so many innovations and new productscoming out it was vital “that we quickly get some kind ofbest practice requirements in place, to demonstrate topolicy makers that the industry is willing to be regulated.“Sometimes legislation does lag – so the industry needs tolead through self-regulation.” She said if the industry setsthe bar, the rest will follow.

She also highlighted the issue of regulation across Europewhere it was fragmenting. She gave the example of bwin,an EBGA member, which had separate licences in France,Italy, Gibraltar and potentially acquiring licences in Denmark,Greece and other jurisdictions as they open. “It means theyare subjecting themselves to a very large number of onsiteaudits in a single year. They’ve got auditors in their officealmost every day,” she said. This is simply not practical.eCOGRA is looking for ways to streamline the testingprocess by working with jurisdictions as an approved testhouse. The ideal situation would be to combine the reviewsinto one onsite visit that would cover all the regulations.“So I believe that self-regulation still has a very big part to play.”

Tex Rees explained that bodies such as the EGBA and theRGA were lobbying the European Parliament and otherjurisdictions around the world to aim “for some consistencyat the very least.” She said some progress was being madein the form of a CEN workshop agreement which is the firststep towards consistent player protection measures acrossEurope.

Warwick Bartlett observed that the best protection for thecustomer was competition. “But Governments don’t see itthat way. They want lots and lots of regulation.”

Claire Milne said it was true that regulation had not kept inline with technology. “But it’s not just eGaming, it’s mosttechnology businesses,” she said, explaining that she hadbeen involved with technology companies for 15 years andeveryone said the same thing – that the law did not keep upwith what they were doing. She said that in 2006 legislationwas enacted that allowed the Government more flexibilitywith the Online Gaming Regulation Act by using secondarylegislation under the Act. This was a major move forward.The GSC was aiming to have new primary legislation bothfor the online and land based industries on Island.

That would result in one consolidated piece of legislationwhich would provide a framework for the industry with theuse of secondary legislation to flesh out the details – thiswould allow more flexibility. “The hope is that newlegislation would be out for consultation at some point in2011 and at that stage I think it is for the industry toparticipate as much as possible and to tell us their views inorder for the GSC to work towards an appropriateframework.”

Roger Raatgever said from a technology companyperspective, initially technology drove the industry and thenmarketing drove the industry. Now the industry was seeing“regulatory pressures being a major force driving theindustry. Raatgever said that it could mean prices comingdown and a requirement to be more innovative, somethingwhich Microgaming thrives on.

“As a software company, we’ve already come out with peerto peer gaming. We are coming up with three or four newproducts in the next three to six months that will blowexisting regulations right now,” he said. Technology isheading in directions that hadn’t previously been thought of,for instance, where do you play if you are on a ship orplane? Raatgever said Microgaming would soon belaunching technology in planes and boats. Although the Isleof Man had lost licensees on peer to peer gaming in thepast, he applauded the Government for moving towardssecondary legislation and welcomed the opportunity fordialogue.

Do you think that Europe will adopt the principle of white listing,e.g extending the EEA or that the UK will merge far more to theEuropean model?

Where do you see the importance of self-regulation fitting inwith technological development in the future?

The issue of regulation not keeping pace with technology

4847

Mark Summerfield said Warwick Bartlett had shown aslide earlier indicating the combined revenues of six leadinggaming companies which were all growing nicely. But theirprofits were “roughly zero.” That would tell you it was amarket that was ripe for consolidation, he said. He saidhowever you looked at it, whether in terms of industry

characteristics, economic theory, or competitor behaviour,everything pointed towards consolidation. Whether it wasthree or five companies it didn’t matter.

Mark Summerfield was asked to explain his thoughts onconsolidation, that buyers appeared to be few and far betweenand the likelihood of three super consolidated players emergingin the future.

Roger Raatgever pointed out that Betfair had sold at muchhigher than that. Seven might be the average but thatwould change, Raatgever said. As markets began toregulate you would see margins and revenues comingdown, but values would increase because “theirsustainability and quality are going to be strong”. Raatgever said it was inevitable that the industry would seethe P/E moving up to 13 or 14.

Warwick Bartlett surmised where an investor should puthis money in the current market. He suggested it would bethe software companies like Microgaming (if it was listed),Playtech and Netentertainment because these werebusinesses that “don’t have the same legacy or regulatoryissues and they can talk to anybody and deal with anybodybecause they are not actually accepting the bets.”

Bill Mummery said there was definitely “a middle groundwhere we are currently under represented.” But he said itwas important to ensure protection of all of start ups. He said that there were businesses that had started upelsewhere “where the climate in that jurisdiction is notfulfilling its role.” As a result, he thought we may well see asituation where people would transit from their first choiceto the Isle of Man. “I think we are better placed to winsome of those operators,” he said, citing Malta as ajurisdiction that “in my view is not able to deliver a qualityproduct for its license holders.”

Warwick Bartlett thought it was important to encouragestart ups because although the risk of failure with most ofthem was high, using Betfair as an example, there was abusiness that had started with one million pounds and tenyears later was floated for £1.4bn. “You’ve got to backpeople and we don’t want to make it too difficult for them,”he said. “I know the application process is easy but I think,for a start up, you’ve got to lower the entrance fee andmake it as easy as possible. But he stressed that the Isle ofMan should be viewed as a whole package. “It’s not justabout VAT and some betting tax. You need to get peopleover here and sell them the Island; that the schools arebetter than in the UK; that the hospital service works well.Because once they see what the island is like, I think they’lltake to it.”

Claire Milne said it was a difficult balance from the GSCperspective. For companies to be licensed, they had todemonstrate they had robust business plans and forecaststhat were realistic. But there weren’t any set requirementsbecause “that’s something we’ve decided isn’tappropriate.” She said that the Island would love to attractmore of the large operators from other jurisdictions “butrealistically moving them once they are established in aparticular jurisdiction is very difficult.”

Roger Raatgever said there was “a significant amount ofinertia to move a large operator.” He thought the realopportunities for expansion lay with the peripherals, such asCSPs, and marketing companies. “There are so manyprofessional services that these gaming companies aregoing to need. That’s the gap, that’s the opportunity for the

Island.” He said one of the reasons Microgaming came tothe Isle of Man was because of the professional services,but now “we are starved of professional services.” If moreof these companies came to the Island “then large gamingcompanies would start to look at the Isle of Man. Whencompanies need good lawyers and good CSPs they mayend up coming to the Isle of Man because they are regularlydoing business with them. Raatgever said it was unrealisticto move the big players because of the huge costs involvedand there are already major operators here like Pokerstars.“The opportunities are for the peripherals.”

Claire Milne said it was not just about the licenseoperators. There was a large cluster around the operatorsalready and more of that type of business should beattracted here. That was why exclusion regulations wereput into place so that it didn’t deter that type of company.

Roger Raatgever said that there are more patent lawyers inMicrogaming than developers!

John Spellman said this was a perfect place to finish, withthe emphasis being placed on service providers and CSPs.And he told delegates: “It is now up to you to develop thebusiness on the Isle of Man.”

Russell Kelly then closed the Summit saying it had beenthought provoking and very informative. He was very proudthat KPMG had staged the event and thanked all thesponsors, speakers and delegates for making the day sucha success.

Does the industry represent value at a P/E of 7 given the industryrisk? Was that a realistic P/E ratio?

The Isle of Man had had success in attracting some very largeoperators in the gaming sector but had also seen a large numberof start ups. How could the Island attract more value fromdifferent sized operators?

Tex Rees said she would like to see the banks gettingtogether and “helping us protect players.” The same issueapplies to the tobacco, alcohol and pharmaceuticalindustries. “Kids are going online with cards we can’tidentify. I believe the banks could do a lot more in codingtheir cards to help us protect the underage.”

Claire Milne said from the regulator’s perspective it wasimportant to have banking on the Isle of Man “because thatis part of our regulatory jigsaw.” She said if the regulatoryauthority had an issue , they would “go to the banks andsay ‘can we talk it through with you’ and that had worked inthe past. That gives us a lot of comfort.” She referred tonew legislation mentioned earlier in the Summit by GSCDirector Steve Brennan the intention of which was thatplayer funds held in IOM banks would be in effect ringfenced, so if the operator went into liquidation, the fundscould be repatriated. “But that only works if we have thebanking on island.

Roger Raatgever said he didn’t want banks “to love us, butto understand us.” Raatgever implored the banks to get tounderstand the eGaming business because as the industryheads towards regulated markets, banking is “absolutely

fundamental for this sector.”There are significant risks butalso significant opportunities, pointing to the recentMasterCard acquisition of DataCash. “The banks need tounderstand this sector. If they don’t understand it, they aregoing to get left behind. They need to start makingdecisions now.”

Warwick Bartlett said the only real risk was the US.

Roger Raatgever said the banks should make the decisionand stand by it. It was possible for the banks to identifythose customers that were a risk and those that weren’t.

Bill Mummery said it was frustrating for the industrybecause a lot had been achieved with the banks inovercoming their sector concerns. “But to then walk away,in my view, is not reasonable.” He stressed that it was USdomestic regulation that was the root cause of the issueswith the banks. There needed to be more balance than thebanks were currently showing.

What was the panel’s view on bringing the banks to the table andcould more be done with understanding the banking position?

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