The news that Entain was in talks with the UK tax authorities over past operations in Turkey shines yet more light on online operators’ activities in black markets, a practice that is deeply ingrained and part of the evolution of the online gambling industry.
The UK group issued a statement last week saying it was cooperating with HM Revenue & Customs (HMRC) to provide information relating to its “former Turkish-facing online betting and gaming business, which it held from 2011 until it was sold in 2017” and to “a number of former third-party suppliers” that dealt with ”the processing of payments for online betting and gaming in Turkey”.
Notably it is being investigated for suspected offenses in relation to the UK Bribery Act, said it was likely to face a “substantial financial penalty” and was in negotiations with the UK Crown Prosecution Service over a deferred prosecution agreement.
Entain has pointed out that the activities being investigated happened long before current management was in place. That comment could be made about many gambling operators that have evolved over the years from unlicensed risk-takers to become highly regulated and risk-conscious commercial entities.
Still, as the analysts at Regulus Partners commented, regulators in the UK and North America are likely to view the developments at Entain “as material and be requiring updates”.
Those legacy activities carried out by former management teams also reveal that what may seem like a good option at the time often comes back to haunt those companies.
Nonetheless, many online gambling companies, listed or private, small or large, consumer-facing or business-to-business, have in one form or another operated in risky markets; whether one is alluding to markets such as Turkey, Iran, Saudi Arabia and China or European ones such as Norway or Finland.
When it comes to working in North America in 2023, the issue that is being raised is whether, as Regulus alluded to, U.S. or Canadian regulators will look at Entain’s Turkish travails and decide to follow up with pressure of their own.
For what it’s worth, while the optics are bad for Entain, even though the group contends that the activities happened under different management, it seems unlikely that state regulators will pressure the UK group about its BetMGM activities in the U.S. or Ontario, which are carried out with MGM as part of the joint venture between the companies.
Indeed, were that to happen, the number of operators and suppliers that could face similar pressures from U.S. gambling legislators would be sizable.
Long list and Western perceptions
That is because the list of companies working in unregulated/black markets is lengthy and the practice deeply ingrained and, as mentioned, many if not most of the current largest online operators started out as unregulated entities.
Past and present run throughs show that many of the most well-known listed operators had or have unregulated activities. From Betsson and Kindred currently active in Norway and Finland, which the authorities have disagreed with for many years, to the allegations against SBTech that the group generated many of its revenues from markets such as Iran and China, to Evolution, another supplier that is said to be making vast revenues from unregulated Asian markets, to 888’s recent scandal linked to VIP clients in the Middle East.
At this rate the list is near endless, but going back even further one could argue that the online poker market that came to be following the Unlawful Internet Gambling Enforcement Act of 2006 is what enabled PokerStars to become a giant of online gambling. And that’s without even mentioning Bet365, which still generates a significant chunk of its revenues from China.
In addition, our Western perceptions might not equate operating in countries such as Norway and Finland with markets like Turkey or Iran, but technically speaking there is little difference between operators that work in the Middle East and those active in those Scandinavian countries. We could also add France to this list; the country has not regulated iCasino and in the past decade has become one of the largest and most lucrative unregulated markets for the vertical.
On a corporate basis, operators will always assess the balance between financial rewards and legal jeopardy, and it is virtually always weighted in favor of the former because the potential gains are just too significant.
Speaking to contacts with knowledge and experience of companies that work in unregulated markets, it’s also interesting to hear of how they operate. While some can politely be described as deeply unreliable, many have been active for many years, are cautious and very well-managed.
When it comes to customer service, one industry source told CDC Gaming that many “regulated operators would be envious of those companies’ customer retention and loyalty levels and how they look after their VIPs”.
But the one area where unregulated operators are always experiencing setbacks is the most important one; of course we are referring to payments and extracting funds from unregulated markets.
As Regulus noted, “payments is nearly always the most exposed area of corporate risk in gambling, but it is an area too few boards and senior executives fully understand”. The fallout from this Entain case could heap even more “strain to the relationships between gambling and commercial banking”, Regulus added.
In fairness, banking obstacles have been a long-standing problem for the gambling industry while relationships between banks and operators have been strained for some time.
Those obstacles are not just confined to unregulated operators, companies that make a large percentage of their revenues in regulated markets face similar issues when it comes to finding banks willing to take their business. This at least partly explains why a smallish institution such as West Virginia-based MVB is the bank of choice for some of the biggest operators in the space.
As is often the case, discovering how companies operate – in other words, how they get their money out of gray or black markets – provides the most tantalizing details, and it certainly won’t stop others from following suit.