Back in black: are stricter regulations really fuelling the black market?

At the tail end of last year, the Betting and Gaming Council (BGC) issued the findings from a report conducted on behalf of an unnamed operator by PwC which it claimed to show the threat posed to UK consumers by a resurgent black market. After surveying around 3,500 UK-based online gamblers and analysing Google search results and other web traffic statistics, the report concluded that over 200,000 UK gamblers had used an unlicensed operator at least once in the past 12 months.

Suggesting this amounted to circa £1.2bn in stakes, the BGC urged the UK government to take heed of these results lest the ongoing review into the 2005 Gambling Act leads to measures which might exacerbate the problem. “It is important that the changes it introduces do not have the unintended consequence of driving customers towards the illegal, online black market,” a spokesperson told EGR Intel.
Returning chickens
Until recently, the UK regulatory backdrop was secure enough that the legislators and the UK Gambling Commission (UKGC) could rest assured that black-market activity was something that happened far enough away that its impact needn’t concern them. What issues that did arise surrounded activity – rather euphemistically called ‘dark grey’ – that the UKGC long argued fell outside of its remit.

Other than instituting a licensing condition that a licensee should notify the UKGC of any jurisdiction where it took more than 5% of its revenue, the UK authorities avoided the trap of becoming the ‘policeman of the world’ over activity beyond its borders. It sufficed if there was a legal argument justifying deriving income from any given jurisdiction. Instead, it largely fell to shareholders of listed firms which ensured that most black or dark grey business was minimised, if not completely eliminated.

The status quo held even as questions were raised in parliament over the UK’s white-label provisions and the proliferation of largely Asia-facing entities on the front of English Premier League shirts. But the threat of harsher regulatory restrictions in the UK being brought in by the review to the 2005 Gambling Act changed that. Hence, the warnings from the BGC about unintended consequences and nefarious operators espying an opportunity. Of particular concern is the ongoing and concurrent consultation taking place on affordability being undertaken by the UKGC.

Analysts at Peel Hunt noted that this has the potential to “reduce revenue, possibly very materially”. “Some consumers would not want to share information about income and outgoings with a gambling company,” Peel Hunt’s Ivor Jones wrote. “Some consumers would not be able to do so; people who are spending household wealth that they did not earn, such as people with volatile earnings and people who earn money in the black economy.”

In the case of the latter – and potentially the other groups as well – it is certainly no great leap to suggest they might be attracted to an unlicensed operator offering them freedom from such restrictions.
Real-time experiments
The same arguments around how tighter regulatory measures can affect a market are being played out in Sweden. In response to fears over excessive online play at the beginning of the Covid-19 pandemic, the Swedish government moved to enact measures which it believed would constrain consumers and avoid exacerbating problem gambling issues.

Yet, according to a response from Copenhagen Economics issued in May last year, the weekly spending limit of SEK5,000 (£438) and the welcome bonus limit of SEK500 would not only be ineffective in preventing gambling, but would also severely impact the level of channelisation in the Swedish market.

In other words, it would only encourage the black market. Building on previous work from a report on channelisation in the Swedish market published before the pandemic developments, analysts at Copenhagen Economics estimated the new measures would see channelisation rates drop, depending on the product, from what the industry suggests is an already disastrous 75% to 52%-63%.
Such figures clearly spell bad news for the sector. But according to Gustaf Hoffstedt, secretary general of Branschföreningen för Onlinespel (BOS), the Swedish trade association for online gambling, the government doesn’t appear to be listening to the evidence.

“It has turned out that the government has had difficulties to acknowledge problems caused by unlicensed gambling,” he says. “The government obviously wants its licensing system to be viewed upon as a success, and stories about weak channelisation damage that story.”

The problem from the Swedish authorities’ point of view is that with the grey market experience so fresh in the memory, players have been quick to locate unlicensed sites. The evidence from search term trends would suggest this is particularly so for those that have signed up to the national self-exclusion scheme, Spelpaus, who are being targeted in case they are looking to recant.
“This needs to be stopped,” suggests Hans Uhrus, communications director at LeoVegas. “We can see that many players that have used the self-exclusion systems are being specifically targeted and encouraged to play on the black market.”

The minister who oversees gambling in Sweden, Ardalan Shekarabi, said such behaviour should be “smoked out” but it remains to be seen whether the government inquiry into how unlicensed activity will be combatted announced in late November will hit upon a solution.

“One of the biggest upsides of online gambling regulation is the ability to differentiate operators that are prepared to play by the book and the others that aren’t,” says Martin Lycka, senior vice-president of US regulatory affairs and responsible gambling at Entain.

Martin Lycka, Entain

“The Swedish example arguably demonstrates that less than efficient regulation is prone to give rise to material channelisation issues. The authorities have now launched an investigation into this matter in a bid to stop the haemorrhaging of customer demand into the still-existing unlicensed market.”

The next country to test the limits of channelisation will be Germany. After many years of protracted to-and-fro on the part of the 16 state governments, we do at least have a “clear divide” between those operators that are staying within the limits proscribed by the new interim regime and those that have opted to stay on the outside, says Kevin Rieger, an expert on gambling regulation at consultancy Bernstein Group in Berlin.

But mirroring fears over what might happen in the UK under a tougher regime, he notes that measures now in place in Germany have already had an impact on consumer behaviour.
“Many consumers have already moved elsewhere, many to non-compliant operators,” he says. “So, on the one hand, if enforcement is scaled up, there is hope that the black market won’t grow too much. But the regulated market needs to be sufficiently attractive as well. There has already been leakage.”
A blur of activity
This ultimately leads to the question which haunts the debates in the UK, Sweden and Germany: just how big is the black market and how much is it growing? As can be seen from the figures from PwC with regard to the UK, estimates will always necessarily be vague and driven by proxy measurements that are necessarily imprecise. Ed Birkin, analyst with H2 Gambling Capital, says his company tends to stay away from market estimates because they are “by their very nature extremely difficult to ascertain”.

David McLeish, partner with Wiggin, adds that as per the PwC report, there is evidence of a small (but certainly not irrelevant) black market in the UK but its potential growth is far from easy to discern. “Predicting the impact of potential regulatory changes is therefore not straightforward,” he adds.

“But if some level of demand exists already (as the PwC report demonstrates) then black-market operators will look to take advantage of players who, for whatever reasons, increasingly wish to gamble outside the regulated environment. So it is absolutely something that the government and regulator cannot ignore in reaching their conclusions.”

There is, however, an asymmetrical aspect to black-market activity; generally it will have more of an impact on the licensed operators than on governments and their regulators. The lost revenue opportunity is far more immediate and sizeable than the lost tax revenue, while the ill-effects of reckless unlicensed behaviour is all but impossible to discern from wider problem gambling issues. “Gambling is a small share of everything a government is responsible for whereas it is everything for the operators,” says Hoffstedt.

For the wider online sector, of course, the lines between grey and black have always been blurred, particularly when it comes to suppliers and support services. Hoffstedt points out that BOS has a “zero tolerance” for any unlicensed activity but suggests his organisation’s arguments are hindered by examples of licensed operators which “also operate in the Swedish market without a licence”. “The same thing applies for suppliers although they are not – yet – bound by licences,” he adds.

Payments is an area which has been identified in Sweden as being problematic with media reports suggesting unlicensed operators rely on the same listed payment firms. One solution to such issue comes from the experience of the US regulated sector and affiliates. In that instance, any affiliate hoping to work in the regulated sector has to be licensed and is barred from working both sides of the fence. Indeed, it is the success of the rollout of regulated sports betting – and to a lesser extent online gaming – in the US which now provides some lessons on how a regulated market can effectively squeeze out the black market.

Jess Fell, senior director for government relations at the American Gaming Association (AGA), suggests that in part this is down to state legislators finally recognising one of the essential truths about any prohibition. That is, it doesn’t necessarily halt the activity but instead merely channels it away from the eyes of enforcement.

“In recent years, state legislators have become more attuned to the fact that consumers aren’t avoiding sports betting because it is illegal, they are simply using the black market,” she says.
Or as Simon French, analyst with Bixteth Partners says, the out-of-sight, out-of-mind attitude towards black markets “only works for so long” before reality intrudes. “People have always wanted to gamble and always will,” he adds. “If a jurisdiction wants to benefit from this via tax and employment whilst providing a safer experience for consumers, then great.”
To-do list
Fell suggests that most US states have now made a decent stab at creating “competitive, convenient” frameworks alongside a “robust federal law enforcement strategy”. In Europe, the actions and rhetoric witnessed across various regulated markets suggests governments are getting stingier with the size of the carrot. But what about the stick?

None of the weapons at the disposal of the authorities are new. Payments and website blocking are the most often-used tools and while neither have ever managed to shut down a market, they do likely have an effect.

McLeish says that in the UK, the Gambling Commission is still very much reliant on cooperation from payment processors or ISPs. “Cease-and-desist letters do have some success once unlicensed operators realise it is technically a criminal offence but enforcement action against purely offshore unlicensed operators is currently less than straightforward,” he says.

And that will doubtless remain the case. The old clichés about a borderless online world remains true despite the black market being hemmed in by regulatory advances globally. No one jurisdiction will be watertight and no system of policing will ever close all doors or manage to dissuade those that will be willing to forego regulatory costs in favour of profit. The legislators and regulators are always in the job of minimisation and it is a matter of debate as to what success looks like.

47%

Percentage of UK consumers found to be aware of at least one unlicensed operator, according to PwC survey on behalf of the BGC

229

Number of unlicensed sites identified by the same survey

52%-63%

The Swedish channelisation rate that a report from Copenhagen Economics suggested would be the result of the introduction of new harsher regulatory measures

$150bn

The oft-cited figure from the AGA on the size of the illegal sports betting market pre-PASPA