Ilya Machavariani: Offshore gambling and the state: main pain points

On April 19, 4H Agency, in collaboration with the Self-Regulated Organization of Sports Betting and Lottery Business of the Republic of Kazakhstan successfully held an international conference on the topic of "Gambling Regulation: International Experience and Kazakhstan" in Astana.

The conference panels covered various topics, including the approach to the gambling business regulation within the former USSR region, and which laws, regulations, norms, and practices have proven effective in the global practice.

One of my presentations was devoted to illegal online gambling operators that actively operate through the internet in many countries, including Kazakhstan. After the event, local media interviewed me and asked me to share my opinion on this important topic in more detail.

My interview focused on such issues as the harm that such offshore operators may cause and how they can be efficiently tackled. Now, I would also like to share its certain highlights with an international audience.

The risk of offshore websites and their distinction from legal operations

The primary concern associated with offshore websites is their illegal operations, as they do not adhere to any laws or regulations. From a governmental perspective, this represents an entirely unregulated sector of the economy, constituting one of the largest shadow industries. Such businesses operate opaquely, evading the scrutiny of authorities. The presence of these entities in the gambling industry gives rise to a host of negative phenomena that cause substantial public harm, and the most troubling aspect is that the government lacks the means to exert any influence over them.

It should be emphasized that legitimate businesses never engage in such behavior. They have no interest in catering to pathological gamblers or earning a tarnished reputation. Like any lawful enterprise, their objective is to enhance profitability, an outcome that is unattainable without a favorable market reputation.

On the other hand, offshore entities can act with impunity, as they are not physically located within the country and therefore not subject to its jurisdiction or laws (otherwise they would have obtained a local license). In instances where local authorities identify such operators, they typically lack the necessary tools to effectively combat them. While there is a mechanism for domain blockings in Kazakhstan, for example, when one website is blocked, another emerges within an hour - a so-called "mirror" site - and this cycle can continue indefinitely.

The unregulated digital advertising of offshore websites may attract minors, which is a significant social concern. Overall, the inability to control and counteract such entities gives rise to a wide range of problems, spanning from personal and familial tragedies to unhindered capital flight from the country without any tax contributions.

The primary challenges to developing the "White" market in the gambling industry in Kazakhstan

It is essential to acknowledge that there are indeed obstacles to the development of the "white" market in the gambling industry in Kazakhstan. However, these challenges present untapped opportunities. One of the main avenues to explore is regulation that stimulates the growth of legal businesses and renders offshore operations unviable. I am pleased with the initiative taken by Kazakhstan to reform existing regulations, as a series of pertinent draft laws are being prepared and will soon be adopted. It is imperative that all of these measures are implemented, ensuring that the legislation in this industry functions as a perfectly calibrated mechanism.

Unlike many other industries, the gambling business is inherently global, not only due to its internet presence but also due to the close ties between different sectors of the industry and government regulators. Countries that have effectively fostered interaction between the state and the business have created the best conditions for both the government and consumers. These conditions include protecting consumers from illegal fraudulent companies, preventing unhealthy gambling addiction, and ensuring openness and transparency in the business sector.

In other words, there needs to be a unified mindset between businesses and governments, given the complex and diverse nature of the gambling industry. This industry presents considerable challenges. Legal companies, for instance, face fierce competition from illegal offshore operators who actively seek out countries where regulations are less stringent and authorities have limited knowledge of the industry and are not aware of the recent trends in combatting offshore gambling.

Given that governments and businesses in many countries have encountered similar issues, optimal solutions and tools have been developed and proven effective worldwide. For any country, including Kazakhstan, a thorough analysis and localized implementation of these solutions within the local legal framework are crucial. This should be done in a manner that provides legal businesses with the best opportunities, enticing reputable "white" operators to enter the jurisdiction.

Approach to Implementation of Tools and Solutions for Combatting Offshore Gambling

First and foremost, it is crucial to establish investment protection tools, which encompass a well-designed counter-offensive system to safeguard against offshore operators. This includes various forms of blockings, the incorporation of "bad actor" concepts, the creation of black and white lists of operators, and active engagement of regulatory bodies, collaborating with regulators under whose jurisdiction offshore operators operate.

Secondly, it is essential to foster a rational economic and legal environment, characterized by a comprehensive set of regulations and norms that instill confidence and protection for both businesses and their clients. Businesses require an optimal balance between tax regulations and licensing requirements, along with the absence of illegal competitors who enjoy better conditions by evading taxes and flouting the law wherever they gain market access.

Conversely, the government seeks a civilized, clearly regulated, and transparent market that generates substantial budget revenues while ensuring citizen safety. Such a market must entirely exclude illegal offshore players.

Furthermore, it is of utmost importance to offer gambling industry clients the opportunity to enjoy their favorite pastimes with the assurance of fairness, protection against deception, and prevention of gambling addiction.

It is crucial to bear in mind that regulations and business conditions should be acceptable for legal operators. The state and the industry must work in harmony, striving to reach a compromise that enables the state to achieve its objectives while facilitating industry growth. Underestimating this factor is a significant mistake often made by regulatory authorities in recently legalized/reformed markets, such as Ukraine, Brazil, Germany, and numerous others.

Ideally, the government should regulate the industry not through prohibitive measures but through incentives, viewing officially licensed businesses as allies in the fight against offshore operators and in the oversight of the gambling industry itself.