Viktoriya Zakrevskaya: Ukrainian gambling amidst war: Survival strategies and regulatory evolution

During the onset of a comprehensive Russian military incursion into Ukraine, the Ukrainian gambling sector found itself in a nascent stage, having scarcely completed its inaugural year of operation following an eleven-year ban. Consequently, the industry confronted the adversities of wartime with a limited foundation and at the initial phases of its evolution.

A paramount challenge that needs swift resolution is the rationalization of fiscal legislation within the gambling domain. Currently, the rules are partially rooted in the norms outlined in transitional provisions of the "On State Regulation of Activities on Organization and Conduct of Gambling" law of Ukraine, and partly derived from provisions within the Tax Code. Notably, the most recent amendments to the Tax Code were instituted long prior to 2020, the year when gambling was reintroduced into the legal sphere.

Regrettably, the pertinent draft legislation labeled No. 2713-d, designed to harmonize norms across various laws and unify the taxation framework for gambling, while also integrating it with the State Online Monitoring System (SOMS), achieved only initial approval during the summer of 2021. The comprehensive consideration and full adoption of this legislation remain pending.

This delay is partly attributed to the war, which has diverted parliamentary focus towards defence-oriented legislation, relegating general economic and sector-specific bills to a lower priority.

Nonetheless, the expeditious attention to this bill is vital, as its enactment holds the potential to address significant national objectives, including:

• Amplifying budgetary inflow by optimizing accounting practices and reinforcing transparency in tax remittances.
• Augmenting the appeal of the Ukrainian gambling market for substantial investments from leading Western enterprises, which presently view the market with potential promise, contingent on the streamlining of fiscal protocols.
• Dispelling suspicions and allegations from tax and anti-corruption authorities concerning potential tax evasion and the employment of varied optimization strategies by legally operating market organizers.

Yet, rectifications solely within fiscal legislation are insufficient for ameliorating concerns regarding participants in the legitimate gambling sector. Simultaneous adoption of updated tax regulations and the State Online Monitoring System (SOMS) constitute necessary and essential prerequisites.

The State Online Monitoring System (SOMS) entails a specialized hardware and software amalgamation designed to oversee the economic activities of gambling organizers, ensuring compliance with licensing prerequisites and technical benchmarks. As stipulated in Article 8, Part 1, Paragraph 25 of the "On State Regulation of Organization and Conduct of Gambling" law, SOMS serves as the primary instrument for the national market regulator—the Commission for Regulation of Gambling and Lotteries (CRAIL)—to perform state supervision functions over activities within the domain of gambling. This encompasses fund circulation, facilitated by real-time acquisition of comprehensive and accurate insights into the operations of gambling organizers and every discrete facet of the gambling system.

Crucially, all transmitted data must be depersonalized through SOMS, barring circumstances outlined by legal stipulations. This provision safeguards players against potential breaches or misuse of personal information for illicit objectives. Moreover, SOMS is mandated to secure processed commercial data from gambling enterprise organizers against loss, theft, tampering, counterfeiting, unauthorized tampering, copying, and unauthorized online access. The system's utility extends to upholding responsible gaming principles.

A pilot demonstration of SOMS functionality transpired during the Gaming Regulators European Forum (GREF) 2023 held in Bergen, Norway, on June 5-7. This international conference united representatives from gambling regulatory bodies across 30 European nations, including Belgium, the UK, the Netherlands, Norway, France, Sweden, Switzerland, and Ukraine.

Another problem that risks becoming systemic manifested itself in the inadvertent inclusion of market leader Parimatch into the sanctions list of Ukraine's National Security Council, subsequently resulting in the cessation of activities for Ukraine's largest legal gambling organizer. Although the rationale behind imposing sanctions on Parimatch remains uncertain, media reports often reference tax-related matters. While official details are lacking, fiscal matters are recurrently spotlighted in discussions about the legitimate gambling industry.

The sanctions imposed on Parimatch have already triggered substantial contraction within the legal gambling market and heightened caution among potential Western investors. It is optimistic that clarity will eventually prevail, buoyed by the President's directive to the Cabinet of Ministers to diligently assess the situation and implement requisite responsive actions. This directive stemmed from a petition that garnered the necessary 25,000 citizen signatures for presidential consideration. The petition called for an inquiry into the circumstances leading to the inclusion of the leader of the domestic legal gambling market in the sanctions list of the National Security and Defense Council.

Amidst these challenges, it is heartening that domestic gambling operations persist, and the legal gambling sector progressively adapts to functioning during wartime. This resilience is substantially attributable to the Commission for Regulation of Gambling and Lotteries (CRGL), which boasts commendable performance metrics compared to other governmental entities. Notably, the ratio of funds allocated to the national regulator’s maintenance in relation to the annual license fees accruing to the state treasury from organizing companies is 1:8. This proportion may increase to 1:12-14 by year-end. In effect, state expenditures on CRGL are substantially eclipsed by returns from its operations.

Furthermore, gauging tax receipts solely within the industry for a mere seven months of the current year reveals a ratio exceeding 1:40. These statistics underscore that the regulator's annual expenses of approximately UAH 90 million are dwarfed by license fees and tax revenues amounting to around UAH 4 billion.

In light of these dynamics, it is reasonable to project that surmounting hindrances to gambling development and the facilitation of foreign investment in the domestic market will spur continued growth. This trajectory promises to augment state coffers while concurrently offering support to Ukraine's Armed Forces and Reconstruction Operations. Ultimately, this synergy serves to fortify Ukraine's defence capabilities.

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