Reforms for the sake of corruption – risks and threats from draft law №10101 for the gambling market and the state

The period of the ban on gambling in Ukraine, which lasted from 2009 to 2020, can be described as a classic example of a situation when officials, under the cover of imaginary concern for citizens, use their power to enrich themselves. Because despite the formal illegality of this type of activity, the gambling business flourished – under the protection of police and politicians.

Sometimes there was a show with a raid by policemen on some hall of slot machines (which existed under the sign “computer club”), which did not at all prevent the existence of dozens of similar halls in every sleeping area of every city. During this time even separate networks in this business, with their own identity, managed to form.

The law “On state regulation of activities related to the organization and carrying out gamblings”, adopted in the summer of 2020, was supposed to put an end to it. The law regulated the procedure and methods of organizing gambling, requirements for participants and licensing conditions, and created a specialized regulatory body. It was also planned to introduce a system of online monitoring of the process, which was supposed to monitor bets and the progress of the game in real time, but it somehow “did not work out”. The formal reason was the lack of funds for its launch, although the decision itself was allegedly developed.

As it usually happens with high-margin areas of business in which the percentage of shadow activity can easily outweigh the share of reported activity, representatives of the authorities immediately had a desire to “reform” the newly legalized market. Industry, and the regulator – the Gambling and Lottery Regulatory Commission – began to be criticized for the fact that gambling brings too little tax to the state.

During 2021-2022, revenues from the sale of licenses amounted to slightly more than 2.5 billion hryvnias.

The state budget planned to receive 7.4 billion hryvnias in 2021 and another 1.1 billion in 2022. However, the People’s Deputies, who criticized the legal gambling business, kept silent about one detail – according to the relevant law, payments for licenses are extended over 5 years, therefore, formally, licenses were indeed issued for the planned 7.4 billion hryvnias, but you will have to wait 5 years for this amount. However, complaints in this regard should be addressed to deputies rather than businesses. 

In addition to license fees, tax revenues from gambling organizers were also criticized. At the beginning of the full-scale invasion of Russia, People’s Deputies allowed gambling operators to pay a 2% tax of income. According to Danylo Hetmantsev, Head of the Tax Committee of the Verkhovna Rada, those companies that switched to the 2% rate, before the transition paid 200,000 hryvnias per day, and after the change in the tax rate, they paid 23,000 hryvnias per day. What were People’s Deputies thinking about when they allowed to pay less, and then it turned out that the business took advantage of this permission? It took 9 months, during which the state did not receive taxes, and People’s Deputies complained.

In another attempt to fight against everything “bad” in the industry, a group of People’s Deputies registered draft law № 10101 dated October 2, 2023 “On Amendments to certain laws of Ukraine regarding improvement of legislation in the sphere of organization and carrying out gamblings and state lotteries”. The explanatory note to it states that the purpose of the draft law is “to improve licensing in the field of organization and conduct of gambling and state lotteries in order to prevent abuse of the provisions of the current legislation”. Why People’s Deputies react to potential abuses of provisions of the current legislation, and not the tax department, the police, the prosecutor’s office and the relevant regulator – may seem like a mystery.

First of all, it is worth mentioning the legal technique of the authors of the draft law – how complete and clear the text of the draft is written. It is most clearly demonstrated in paragraph 37 of Article 1 of draft law 10101, which defines organizers of gambling games as… organizers of gambling games (with clarification – casinos, slot machines, poker, etc.).

For comparison, the current norm, which the authors of 10101 propose to “improve”, looks like this: organizer of gambling games – a legal entity (1) – a resident of Ukraine (2) who, on the basis of a received license (3), has the right to carry out the type of activity specified in such a license (4) regarding the organization and carrying out gambling games in accordance with the requirements of this Law (5). Key aspects of the current definition of gambling are listed in parentheses. Each aspect contains important information about who can be the organizer of gambling games according to the legislation of Ukraine – legal entities registered in Ukraine that have received a license and have the right to organize gambling games of the type for which they received a license in accordance with the law. The authors of 10101 suggest replacing all this information with a definition that is not a definition at all.

Draft law № 10101 creates much bigger problems for the legal gambling market and, most importantly, for the state and Ukrainians. Briefly about the key problems:

1) In Part 1 of Article 2, the draft law supplements the list of activities in the field of organizing and carrying out gamblings with item 6 – “providing services in the field of gambling”. At the same time, the draft law does not specify exactly what services are meant – development of software for the game, provision of premises for rent, public catering services in the casino premises, transactions of funds within the framework of the game (bets and winnings), risk insurance, etc. 

This refers a number of non-core types of copanies to activities related to the organization of gambling, contrary to the definition of the latter in the relevant law and creates a situation for abuses by regulatory authorities in favor of certain market participants.

Part 2 of Article 14-1 of draft law № 10101 states that banks and other financial institutions cannot be providers of gambling services. But excluding banks and financial institutions from the list of providers of such services is nonsense, because banks and financial institutions ensure the flow of funds from the participant to the game organizer and vice versa; and for online gambling, there is no other way to ensure the flow of funds between participants and the organizer than through banks and financial institutions.

Therefore, the draft law needs significant revision in the definition of terms, as it now violates the fundamental principle of legal certainty, in other words – its content is not obvious and incomprehensible to those, whose rights and obligations it will affect.

2) Although paragraph 2 of Part 1 of Article 2 of draft law 10101 contains the rule that the activity of providing services in the field of gambling (paragraph 6 mentioned above) is not subject to licensing –in the next part of Article 2 of draft law 10101, its authors contradict themselves, proposing to replace the term “licenses for the provision of services in the field of organization and carrying out gamblings” with the term “licenses for the provision of services in the field of gambling”, which actually introduces an additional type of license and will have a negative impact on the functioning of the field of accompanying services – r ental, provision of services in the field of food, accommodation of people, etc.

3) A similar destructive proposal is contained in the proposed version of Part 1 of Article 5, which provides for the creation of a Register of legal entities that have the right to provide services in the field of gambling. In addition to the fact that the name of this register contradicts the content of Paragraph 2 of part 1 of Article 2 of draft law and provides that “gambling services” will still require a certain type of permit or license, which will grant such a right. All this will only result in the deterioration of the business environment in the entire industry, narrowing of competitiveness and further reduction of revenues to the state budget, as well as to additional expenditures of budget funds, contrary to the statements of the authors of the draft law in the explanatory note to it.

4) The authors of draft law № 10101 propose to expand the powers of the supervisory body (Article 10 of the draft law) to supervise (control) the activities of the gambling market and grant it the right to conduct control purchases, in particular, by using a test situation.

At the same time, the draft law does not define the procedure for conducting the test situation, the sources of its funding, as well as the consequences of its conduction. 

This approach, along with granting the regulatory body the powers established by procedural legislation for the police, carries significant corruption risks. At the same time, not creating an effective mechanism to fight against gambling organizers who operate without a license provided by law or with violations of license conditions.

The same applies to the obligation of the gambling organizer to submit to the Authorized body “reports, other documents and information, the submission of which is required in accordance with the legislation on gambling and/or at the request of the Authorized body”. The wording “and/or” in this case creates unjustified risks of abuse of authority by the regulator, which increases the general corruption-genic nature of the draft law.

The same argument concerns granting the right to the regulator to approve the list of entities that perform certification and inspection of gaming equipment for compliance with the technical requirements established by the Authorized body. If the draft law is adopted in this version, the regulator will have the authority to approve technical requirements and determine the list of entities that will check the equipment for compliance with these requirements. In addition to the obvious corruption risks, this is an attack to the tasks of the National Accreditation Agency of Ukraine. 

5) Article 14 of draft law № 10101 proposes that a legal entity, the ultimate beneficiaries of which were the owners of a substantial share or the ultimate beneficiaries of a legal entity whose gambling license was revoked within a 5-year period, cannot become the organizer of gambling games.

In addition to the fact that the draft law does not justify the duration of the specified period of validity of the ban, such a restriction is ineffective, because it does not solve the problem of non-payment of tax debt or license fee debt. 

Such an approach can increase costs for unscrupulous market participants for the “rotation” of fictitious persons, but it will not help the state budget in any way to get the necessary funds. Legislators should focus primarily on solving the problem of the state budget not receiving funds, and not on creating obstacles for market participants, because the proposed method is also corruptible from the point of view of abuse of powers by regulatory and tax authorities in order to put pressure on business.

6) It is proposed to add a similar norm to Article 51 of the current version of the law “On state regulation of activities related to the organization and carrying out gamblings”, giving the regulator the right to cancel a gambling license if there is a tax debt.

Such a decision will not only not solve the problem of non-payment of taxes to the state budget, but will also increase corruption risks and risks of abuse of authority by tax and regulatory authorities. Instead of introducing an effective mechanism for accounting and collecting taxes, the legislator creates conditions in which unscrupulous market participants not only do not receive an incentive to act in the legal field, but on the contrary – will have reasons to direct funds to the implementation of corruption schemes.

To sum up, we should note that the goal and interest of the state is not to deprive certain market participants of licenses and not to create favorable conditions for certain market participants – but receiving predetermined tax and license revenues from all persons willing and able to become participants in the gambling market. 

This principle should be the basis of any legislative initiatives aimed at regulating the market. Now draft law  №10101 is much more aimed at restricting access to the market for existing and potential participants than at realizing the above-mentioned goal. In addition, in a number of norms, the draft law even contradicts the purpose and goals specified by its authors in the explanatory note to the draft law.

As a result, draft law № 10101 of October 2, 2023 “On Amendments to certain laws of Ukraine regarding improvement of legislation in the sphere of organization and carrying out gamblings and state lotteries”. cannot be adopted in its current version, because it is against the interests of the state, creates additional corruption risks and may lead to the redistribution of the gambling market in favor of certain participants, which is an unacceptable intervention by the state in the market economy and harm the state budget – contrary to the goal stated by the authors of the draft law.