13 May, 2024

Nothing is free: Analysing Brazil's sports betting laws

Brazilian lawyer Neil Montgomery unpicks all the technicalities of the latest sports betting laws in conversation with Gambling Insider

At the end of 2023, Brazil finally enacted Law 14.790, to help in its bid to secure a ‘zero-tax deficit’ this year. Of course, to generate maximum revenue from gambling, it made sense to continue the regulation of sports betting and iGaming – not least because iGaming represents the largest portion of revenues for operators in Brazil.

By the new law, iGaming is broadly defined as all games of chance, offered in a virtual environment where the player knows exactly what the odds are, and what the multiplying factor is on the return of their bet. Land-based casinos are now the only prohibited form of betting in Brazil. Although we are waiting on ordinances to further detail what games will be allowed in Brazil, the ordinances will not, legally, be able to change any definitions.

So far, three ordinances have been released. The first one was Ordinance 300 dealing with the accreditation of testing labs. The second came out at the end of April– 615 – which deals with payment methods. We’re just waiting for nine or 10 other ordinances to be released. The third came out in the beginning of May – 722 – dealing with the technical requirements for gaming websites. Lawyer Neil Montgomery, of Montgomery & Associados, speaks exclusively to Gambling Insider to tell us more...

Neil Montgomery

Do you feel that, especially with the announcement of strict regulations around payments and advertising, local operators have the upper hand early on in the Brazilian market?

Well, as you know, the regulations have been quite strict in many respects and there’s a series of obligations there that payment processors and operators need to abide by. One of the factors is the need for a central bank licence for payment processors. However, there are many types of payment arrangements that sometimes do not require a central bank licence. Therefore, there’s a doubt around whether for those companies, a licence will indeed be needed or not, because it’s not the MI Ministry of Finance that regulates whether PSPs need a licence or not – it’s a central bank. So of course, the Minister of Finance can require a licence if the central bank does not itself require a licence from certain types of PSP. Also, Conar, the Brazilian advertising watchdog, also released its own guidelines for advertising in the betting industry at the beginning of the year. Those, too, are quite strict.

So there aren’t many local operators yet, because since the federal licences are not available, we only have those that have obtained the licence from certain regulated states like Paraná and Rio de Janeiro. Operators are still mostly operating from overseas, continuing not to pay tax and are not yet subject to the laws being enacted in Brazil. I just hope that the number of obligations isn’t going to be so burdensome that it leads operators to think a licence isn’t worth applying for and stay operating offshore. Then, of course, we’ll have channelisation issues.

We are creating a potentially dangerous scenario in Brazil, where the state licences may be earning a greater importance than was initially expected because of the delays at federal level

People have raised concerns that the ban on promotional bets could push people towards the black market – do you think this is a real threat, or a convenient argument for operators perhaps in the interest of their own advertising techniques?

No, I think it could be a real threat – consider bonuses, for example, you can argue that they’re a very important advertising and promotional tool for getting new clients on board. Those are being prohibited for the time being. In the meantime, what exactly will be considered a bonus is still yet to be defined. I don’t know whether the payments ordinance is going to eliminate loyalty programmes, for example. Still, there could be other creative forms of providing some sort of benefit or advantage to clients.

Why exactly do you think it is that the Brazilian authorities have decided to impose strict regulations around promotion and advertising? 

Everything is limited to certain payment methods like debit cards, potentially e-wallets, and I think the drive of the Government is to try and combat gambling addiction. I think what they want to avoid at all costs are the pathological problems that gambling can create if you don’t have the right discipline. Brazil wants to look at gambling as a form of entertainment. That’s it.

Long term, do you think Brazil kickstarting its market with tighter regulations, although perhaps not as financially lucrative, could lead to a more stable regulated landscape further down the line?

It all depends on how many operators effectively apply for a licence and how enforcement plays out long term, because there’s also now the issue of certain states in which obtaining a licence may be perceived as being more attractive than the federal licence. The main example is the state of Rio de Janeiro, which grants licences that are much cheaper than the federal licence. So instead of R$30m (US$6m) it’s only R$5m and, instead of a 12% GGR tax at federal level, there’s a 5% GGR tax. There’s no monthly inspection fee, as well, and the difference with Rio de Janeiro is that although it’s a state licence in principle, it’s the only state benefiting under a specific article from the 2023 law. Article 35 details that states who launched their tenders for accreditation of operators prior to the release of the provisional measure last year have an almost-acquired right based on what is in the tender.

Rio de Janeiro has been quite creative to amend the tender that was issued before the provisional measure. This tender now allows licensed operators in the state of Rio de Janeiro to accept bets from outside of state borders, provided the operator and the player sign – electronically – a declaration saying that they consider the bet to be placed within the territory of Rio. Rio de Janeiro has now received 13 applications for a licence. Four licences have been granted, nine licences are in the process of being granted and many of the obligations that exist at federal level do not exist at state level.

Operators may be inclined not to apply for a federal licence because of the cheaper and less stringent obligations that exist at state level. This means that all these compliance restrictions on payments and advertising will potentially only kick in for those who obtain a national and federal licence. If the federal Government isn’t very strict on enforcing the legislation against unlicensed operators or challenging states that, like Rio, are offering more attractive licences, it could be losing out on money. Therefore, the whole compliance structure that was envisaged by the federal Government may not be applicable, because operators have preferred to go to state level.

I think the main discussion, which affects foreign operators that hasn’t reached a resolution yet, is this requirement for 20% Brazilian ownership that is in the 2023 Law

What do you think are the key takeaways Brazil can learn from other LatAm countries that have recently entered the regulated gambling space?

I think Brazil, at the moment, is far behind other Latin American countries. Countries like Colombia have had a regulated market for many years now. Argentina, as well, which is our neighbour, has had a regulated market longer than Brazil. Other countries, like Peru and Chile, are starting to regulate as well. We should have got the regulations for the 2018 law during the Bolsonaro administration; that didn’t happen. Then it took one year for the Lula administration to push the law that was enacted practically, as we were switching off the lights for 2023.

Now, the regulations at ministerial level are also taking longer than expected. This has created an opportunity for the state lotteries to push forward. So we are creating a potentially dangerous scenario in Brazil, where the state licences may be earning a greater importance than was initially expected because of the delays at federal level. I think the takeaway is that the federal Government is simply taking too long to issue these ordinances. Even if the initial ordinances are not perfect, I think they should be issued. They can always be improved because it’s easy for them to be amended by the ministry itself – but they’re taking too long to decide.

In turn, this is creating very important business opportunities for their competitors, which are not only the states, but also municipalities in Brazil, who are issuing their own municipal licences. It is becoming a very competitive market.

As we move forward, do you think it is more likely that the government will alter the law, or stick to what they have written up initially?

Well, hopefully I think they will evolve as the industry moves along, because I think the main goal of the Lula administration with regard to legalising gambling was to collect the vital revenues for them to achieve zero fiscal deficit. The more they delay, the longer they’re missing out on collecting those taxes. So, we’re nearly halfway into 2024 and those very essential industry revenues to achieve zero tax deficit have not started to be paid by operators, because the legislation is not out there. I believe they should issue the ordinances as they are now, and then gradually refine them over time. It’s a genesis for the market. As Rio Janeiro is now in the fourth round of accreditation, they themselves have adjusted their initial tender notice to adapt to the change in circumstances. If the federal Government has the same dynamics as Rio has, for example, I think they have a lot to gain.

With licensing fees so high, do you think it’s possible many operators will simply continue working as part of the black market?

I think that’s very possible. Especially if there’s an incentive for them to stay in the black market because of excessive regulation, excessive bureaucracy, excessive financial burdens and restrictions on advertising and payments. There’s a fair likelihood that channelisation will be affected, and many operators then will subsequently decide to stay in the black market.

With such a large general and betting population, legislation will need to remain airtight. From a legal perspective, do you see any red flags in the regulatory framework early on?

At this point, I think the main discussion that affects foreign operators. which hasn’t reached a resolution yet, is this requirement for 20% Brazilian ownership that is in the 2023 Law. I don’t know why, but this appeared at the very last minute. It was included by the Senate before the law was approved at the end of 2023. I don’t really see a reason for the inclusion of this requirement, especially because most areas in Brazil are open to foreign capital and do not impose any restrictions on foreign capital. So I don’t see to the extent that foreign shareholders of Brazilian companies need to have a local proxy to represent them  to facilitate service of process. I don’t see how adding the 20% Brazilian ownership would contribute to providing greater certainty of security to the Government or to players.

One thing I do believe is this 20% Brazilian ownership can be circumvented by having a two-tier corporate structure in Brazil. So a foreign operator that wants to obtain a federal licence would set up first, a Brazilian holding company. Then, that Brazilian holding company would itself incorporate another Brazilian corporate co-company, which would be 100% owned by a Brazilian company holding a Brazilian shareholder. That operator would apply for the federal licence because the law doesn’t say that the 20% Brazilian shareholding must be held by an individual or by a corporate. So since you cannot distinguish between individuals and corporates, national and foreign, in my view, having this two-tier corporate structure would satisfy the requirement of 20% ownership. However, there are rumours that the Government will require a Brazilian individual to hold the 20% and I think that is illegal, and can be challenged in court.

Generally, it would add a market barrier for foreign operators, and an unnecessary layer of bureaucracy of trying to find a Brazilian individual who satisfies all the compliance requirements to hold that position.