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IN-DEPTH 23 August 2018
Is Canada finally thawing out for gambling operators?
Gambling Insider takes a look beneath the Canadian ice to see what the current state of play is in America’s neighbour to the north
By Gambling Insider

Canada remains something of an enigma in terms of gambling, where its nearest neighbour, the US, has fully embraced the potential of gambling for generating revenue and supporting strong economic growth. The Canadian market has remained like its legislatory outlook in as much as it is a patchwork of provincial markets, each with their own legislation and challenges in operation.

Gambling is not expressly defined in Canadian law but the prohibition of gambling is set out in the federal Criminal Code of Canada, which was first instituted way back in 1892.

Specific definitions are applied to terminology and for the Criminal Code to legally apply the terms of the definition must first be met. According to the code, gambling or gaming "must involve a chance of gain and a risk of loss". Although the word gamble or indeed gambling itself is not expressly defined in the Code, it is often legally interpreted as ‘playing games of chance for money or taking a chance for a return much beyond the original investment’.

The code deems it unlawful to participate in a gambling activity except under certain circumstances. These prohibitions apply to both the land-based and online sector; however there is a significant exemption which comes into play.

PROVINCIAL CONCERNS

Under the Criminal Code, provincial governments are permitted to both conduct and manage gambling activities that would otherwise be illegal, be it on their own or in partnership with another provincial government in Canada.

Using this exemption, each provincial government has formulated its own legislation and has developed its own regulatory framework with the express aim of offering gambling services to its residents.

The first amendment to this Code was made in 1969, allowing charities to conduct small-scale gambling activities, but the more notable development included with this amendment was the proviso to allow conduct and manage ‘lottery schemes’. Lottery schemes are defined broadly to include games or any proposals, schemes, plans, means, devices, contrivance or gaming related operations as described in the Criminal Code. Lottery schemes include games of chance or games of mixed chance and skill.

Since a further amendment in 1985, provincial governments throughout have also had the exclusive jurisdiction to conduct and manage gambling activity. Therefore, the provincial governments are therefore both operators and regulators of gambling activity (other than in respect of pari-mutuel betting on horse racing which exists as a type of shared jurisdiction with federal authorities).

The Federal Minister of Agriculture and Agri-Food supervises and regulates pari-mutual betting on horse racing through the Canadian Pari-Mutuel Agency (CPMA), its a Special Operating Agency of Agriculture and Agri-Food Canada. The CPMA's mandate is to ensure the integrity of pari-mutuel betting systems in Canada and to protect the betting public by ensuring that an effective regulatory framework is in place.

Under the Criminal Code, the definition of lottery scheme has the effect of rendering it illegal to bet on the outcome of a single sporting event or athletic contest. Therefore, gaming related to sporting events or athletic contests offered in Canada is limited to multiple-event (or parlay) betting.

Federal regulations also empower provincial Commissions to undertake certain licensing, rule-making, enforcement and other regulatory activities. In Ontario, this provincial regulator is the Alcohol and Gaming Commission of Ontario (AGCO), but there are 31 separate regulatory entities covering the various provinces which make up Canada.

While the specifics of each province's legal approach differ, commonalities include protecting the public and the integrity of gaming services and preventing unsavoury individuals from entering the gaming industry through a combination of investigation and surveillance procedures which are industry standard.

In addition, these regulations cover the location and size of gaming facilities, financial controls which need to be implemented, the types and numbers of games which can be offered and ownership guidelines.

THE ROLE OF TRIBES

As with its nearest neighbour, the US, Canada’s gambling industry incorporates a number of indigenous tribal nations, the most prominent of which are the two tribes that make up the bulk of the First Nations: Inuit and the Métis. In total there are 634 recognised First Nations Governments across Canada, with almost half of these in the provinces of Ontario and British Columbia alone.

Under legislation, the tribes are all entitled to operate gambling in the same way that the provinces do and with social depravation high amongst tribal populations many have turned to gambling as a way of increasing revenue.

As with the provinces, there are a lot of differing approaches to legalisation with some offering the full gamete of gambling services while some, like the Kahnawake Gaming Commission have offered operators the ability to act as their agents.

This offer gives the individual gambling firm the opportunity to work within the market, while also benefitting the tribal community in the form of ongoing licence fees and payments. It also adds to the experience of the licensing commission, allowing them to draw on a network of potential partners in the form of their licensees.

SPORTS BETTING

Betting is defined under the code as ‘a bet that is placed on any contingency or event that is to take place in or out of Canada, and includes a bet that is placed on any contingency relating to a horse race, fight, match or sporting event that is to take place in or out of Canada’.

This lack of definition extends to placing a bet, stake or wager which is deemed by the code to be an essential element of the gaming activity. If the individual has placed a bet/stake/wager that could potentially result in a gain or a loss, then a gaming offence may have taken place under the code.

A person participating in lottery schemes in Canada is generally not subject to income tax on the winnings. The Canada Revenue Agency's position (as governed by the federal Income Tax Act) is that gambling profits are generally not taxable. However, if the main source of an individual's income comes from gambling, it can be taxable as business income.

HEADING ONLINE

The advent of new technologies entering the gambling lexicon has led to a lot of change in the way gambling is regulated worldwide, but rather than draft a separate set of rules to cover its online gambling industry, language in several sections of the criminal code has been used to fit the growth of online gambling.

Indeed as with gambling itself, online gambling is not expressly defined in gambling legislation and there is no distinction between the land-based and online sectors. Under the code, provincial governments can conduct or manage gambling offered “on or through a computer” with recent amendments to the code extending that proviso to allow both religious and charitable organisations to offer gambling, albeit through the medium of lotteries and raffles.

So where are the international online operators in all of this? Hesitantly waiting at the border for the authorities to check their suitcases...

Quite simply, in the Canadian system, the Criminal Code is presumed to only apply to local operators. The question of whether international online gambling operators, who are domiciled in countries where online gambling is legal and fully regulated, can offer gambling services to Canadian gamblers has not been fully addressed by the Canadian legal system.

Any such consideration by the Canadian courts would undoubtedly look into links between the international operator and Canada itself, so the most opportune method for an international operator to insulate itself against any future investigation would be to partner with one of the provincial governments, be it via its lottery company.

This is where the greatest opportunity lies for international operators, in partnerships with provincial governments.

There has been considerable debate about the future of online gambling, most notably in the Canadian province of Québec. In 2014, the Québec Government's working group on internet gaming issued a report which made recommendations to amend the Criminal Code and enable Canadian provinces to issue online gambling licences to private operators.

In 2016, the Québec Government passed consumer protection legislation to ban access to unauthorised websites. This legislation was an attempt to force internet service providers to block Québec residents' access to online gambling sites that are not approved by the government.

This type of legislation has never before been tried in Canada and could possibly face legal challenges as to its constitutionality, primarily due to criticism that it may be contrary to Canadians' freedom of expression and because telecommunications falls within the exclusive jurisdiction of the federal Government of Canada.

So the fundamental question and indeed the focus of this, well focus is on whether the Canadian market offers opportunities to international operators has been answered: Yes, it does offer good opportunities for operators, with a population of 36 million, 82.7% internet penetration, average salaries around $42,157 and a healthy sporting and lottery industry, the opportunities are self-evident.

However, at the same time the aforementioned patchwork of provincial and tribal regulations, together with the stringent federal regulations make this a market that an operator or supplier should not enter into lightly. Indeed those that have made the journey have primarily done so in partnership or as agents of those very same provinces and governments.

With their neighbours in the US moving to a more European style industry environment, most recently in the Supreme Court’s decision to legalise sports betting, the changing US market may prompt advocates for change in the Canadian gambling industry to renew their efforts and they may be able to finally sway public opinion in favour of reviewing the existing structure of the industry.
DISCUSS THIS ARTICLE
IN-DEPTH 16 August 2019
Roundtable: David vs Goliath – Can startups really disrupt the industry?

(AL) Alexander Levchenko – CEO, Evoplay Entertainment

Alexander Levchenko is CEO of innovative game development studio Evoplay Entertainment. He has overseen the rapid expansion of the company since it was founded in early 2017 with the vision of revolutionising the player experience.

(RL) Ruben Loeches – CMO, R Franco

Rubén Loeches is CMO at R. Franco Group, Spain’s most established multinational gaming supplier and solutions provider. With over 10 years working in the gambling, betting and online gaming industries, he is skilled in operations management and marketing strategy.

(JB) Julian Buhagiar – Co-Founder, RB Capital:

Julian Buhagiar is an investor, CEO & board director to multiple ventures in gaming, fintech & media markets. He has lead investments, M & As and exits to date in excess of $370m.

(DM) Dominic Mansour – CEO, Bragg Gaming Group:

Dominic Mansour has an extensive background of nearly 20 years in the gaming and lottery industry. He has a deep understanding of the lottery secto,r having been CEO at the UK-based Health Lottery, as well as building bingos.com from scratch, which he sold to NetPlay TV plc.

What does it take for a startup to make waves in gaming?

DM: On the one hand, it’s a bit like brand marketing; you build an identity, a reputation and a strategy. When you know what you stand for, you then do your best to get heard. That doesn’t necessarily require a TV commercial but ensuring whatever you do stands out from the crowd. Then you have to get out there and talk to people about it. 

AL: Being better than the competition is no longer enough; if you’re small, new and want to make a difference – you have to turn the industry on its head. Those looking to make waves need to come up with a new concept or a ground-breaking solution. Take Elon Musk, he didn’t found Tesla to improve the existing electric cars on the market, he founded it to create the industry’s first mass-market electric sports car. It’s the same for online gaming; if you want to make waves as a startup, you have to bring something revolutionary to the table.

JB: Unique IP is key, particularly in emerging (non-EU) markets. As does the ability to release products on time, with minimal downtime and/or turnaround time when issues inevitably occur. A good salesforce capable of rapidly striking partnerships with the right players is vital, as is not getting bogged down too early on in legal, operational and admin red tape.

How easy it for startups to bring their ideas to life? How do they attract capital?

AL: It depends on the people and ideas behind the startup. Of course – the wave of ‘unicorns’ is not what it used to be. Some time ago the hype was a lot greater in terms of investing in startups, but that’s changed now. Investors now want more detail – and even more importantly, to evaluate whether the startup has the capacity (as well as the vision) to solve the problem it set out to address. That’s not to say investors are no longer interested in startups – they certainly are – but now more than ever, it’s important for startups to understand their audience as well as dreaming big.

JB: To get to market quickly, you need a great but small, team. If slots or sportsbook, the mathematical engine and UX/UI are crucial. Having a lean, agile dev team that can rapidly turn wire framing and mathematical logic into product is essential. Paying more for the right team is sometimes necessary, especially when good resources are scarce (here’s looking at you, Malta and Gibraltar).

Building capital is a different beast altogether. You won’t be able to secure any funding until you have a working proof of concept and, even then, capital is likely to be drip fed. Be prepared to get a family and friends round early on to deliver a ‘kick-ass’ demo, then start looking at early-stage VCs that specialise in growth-stage assets.

How do you react when you see startups coming in with their plan for disruption?

RL: We welcome the innovation and fresh thinking startups bring. This is particularly the case in Latin America, with a market still in its infancy. One area we’d especially like to see startups making waves is in the slot development sector. Latin America is a young market that needs local innovation suited to its unique conditions – especially in regard to mobile gaming.

Operators eyeing the market have Europe‐focused core products, which creates a struggle to work to the requirements of players and regulators. To succeed there, it has become more important than ever to work with those with a knowhow of the local area to adapt products and games to besuitable from the off; we welcome the chance for local talent to develop and grow.

Do you think it’s easier for established companies to innovate and establish new ideas? 

AL: From a financial perspective, yes. It is without a doubt easier for incumbent companies to establish a pipeline of innovation via their R & D departments, as well as having the tools to hand for data gathering and analysis.

But it stops there. Startups hold court in every other way. Not only are they flexible, they can easily switch from one idea to another, change strategy instantly as the market demands and easily move team members around. Established companies know this – and this is why we’re seeing an emerging trend for established companies to acquire small, innovative online gaming start-ups. They have the right resources and unique ideas, as well as the ability to bring a fresh approach to businesses’ thinking.

RL: For me, it’s always going to be established companies. Only with the resources, industry experience and know‐how can a company apply technology and services that truly make a difference. Of course there are exceptions. But when it comes to providing a platform that can be approved by regulators across multiple markets – as well as suiting an operators’ multiple jurisdictions – it is simply impossible for a couple of young bright minds with a few million behind them to get this done.

DM: I actually think it’s harder for established companies. It’s key to differentiate between having a good idea and executing one. That’s where the big corporates struggle most. They’re full of amazing people with all sorts of great ideas but getting them through systems and processes is nearly impossible.

Is it essential to patent-protect innovative products?

AL: It’s a very interesting subject. If we take IT for example – patents can actually become a block to the evolutionary process within the industry. Of course, getting a patent future proofs yourself from the competition copying your concept but, having said that, if you’re looking to protect yourself from someone more creative, smarter and agile, you’ve probably lost the battle already!

In our industry everything is moving faster and research takes less time than the development itself. No matter how good you are at copy pasting, you can’t copy Google or Netflix. The most important thing is not the tech itself but rather its ‘use-case’ – or in other words, does it solve what it’s meant to solve? Competition is healthy and the key to innovation. If you spend your whole time looking behind you, you’ll never be able move forwards.

JB: Tricky question, and one that depends on what and where you launch this IP. It can be difficult to patent mathematical engines and logic, mostly because they’re re-treading prior art. Branding, artwork and UX is more important and can easily be copied, but the territories you launch will determine how protectable your IP will be once patented. US/EU/Japan is easy but expensive to protect in. But China/South East Asia is a nightmare to cover adequately. Specialised patent lawyers with experience in software, and ideally gaming, can help you better.

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