How fighting yesterday’s battles could jeopardise the future of gambling in Germany

In the shadow of the coronavirus crisis, some German federal states are trying to undermine the carefully balanced compromise on a reform of gambling law in Germany. If they prevail, player protection will be at a disadvantage.

For many years, German gambling regulation has been a story of trial and error, arguably quite a bit of the latter. After lengthy and reportedly very tough political discussions, the 16 prime ministers of the German federal states agreed on a new State Treaty on 12 March 2020. Among other aspects, this treaty creates a regulatory framework for online casinos from July 2021 onwards. The political will is clear: as a reaction to continuously increasing customer demand, online casino gaming shall be moved from a taxed market into a regulated and licensed market.

The complex agreement is the result of months of negotiations and years of back-and-forth between the federal states, which rarely pull together in matters of gambling. While politicians are busy dealing with the coronavirus crisis, individual federal states are trying to undermine the carefully balanced compromise. In the front line, the state of Lower Saxony has been responsible for measures to prevent payment flows to illegal gambling throughout Germany since 2012.

The story so far?

For seven years – from 2012 to 2019 – Lower Saxony had not objected to the involvement of payment service providers in online gambling.

On 17 June 2019, the responsible Ministry of the Interior of Lower Saxony, according to its own statement, issued the first ever prohibition order against a payment service provider on the grounds of involvement in online casino transactions.

Irrespective of the political agreement that all 16 prime ministers had found in March 2020, the Lower Saxony Ministry of the Interior publicly communicated on 27 April 2020 that it had prohibited another payment provider from participating in payment transactions in connection with online casino gaming. In its press release, the Ministry states as follows: “Offering online gambling is prohibited in Germany under the current State Treaty. For online casino games, including online poker, organising online gambling and acting as an intermediary via the internet are prohibited due to the high risk of addiction, manipulation and money laundering associated with this and this is also punishable by law.” The Ministry even threatens that “further prohibition orders are in preparation and will likely follow”.

Lower Saxony is not acting alone

It seems that the federal state of Lower Saxony is trying to use the back door to unravel the political agreement reached on opening the online casino market. The state can count on the support of social democratic federal states such as Hamburg, Berlin and Bremen, which have traditionally opposed the liberalisation of gambling and adopted a restrictive position during the negotiations.

Among others, Lower Saxony had vainly argued against a liberalisation of the online casino market. In addition, the state had campaigned – ultimately unsuccessfully – for a bad actor’s clause. This is shown by internal files and proposed resolutions from the negotiations. The purpose of such clause was to force gambling operators willing to obtain a sports betting licence under the current licensing regime to switch off their online casino offers in order to avoid being excluded from obtaining licences for both sports betting and online slots under the new regulation in force as of 1 July 2021. Following political discussions, this clause was deliberately not included in the new draft State Treaty, which has been notified to the European Commission on 18 May 2020 for the Commission’s and other EU Member States’ review.

A market is not a light switch that you can turn on and off

During the negotiations, most of the states realised that the existing market could not simply be “switched off” and “switched back on” a year later. The demand for online casino offers would move away from the operators that are willing to subject themselves to licensing in Germany to non-European offers and it would hardly be possible to get German consumers back from there. Regulation would thus fail before it even enters into force: Players would turn to foreign, non-European gambling sites, which are only a mouse click away on the internet and offer hardly any consumer protection and responsible gaming tools. The legislative objective of the (current and new) State Treaty – protecting German consumers – would be bound to fail. Consumers would be channelled to the unlicensed offer rather than to the EU-licensed operators that are willing to be regulated by the German authorities. The problem: in contrast to the serious providers in the market who are willing to comply with German and EU regulation, these providers are not interested in player, youth and data protection. These considerations have led the political decision-makers to abandon the bad actor’s clause in the new 2021 State Treaty.

The aspect that the offers in the regulated market must be attractive becomes even more important. Players are required by law to disclose their personal data if they want to use the gambling offers. A database under public law is to be established specifically for supervising and limiting players’ spending on gambling offers in the regulated market. It is no coincidence that data protection experts in Germany have a critical view of this new aspect of gambling regulation. For example, Peter Schaar, the long-standing Federal Commissioner for Data Protection and Freedom of Information, has intervened in the German regulatory debate and pointed out the risk of total surveillance of players and the intended measures being excessive. Only last week, the 16 state data protection commissioners criticised the states for having overstepped the mark.

Legal doubts regarding Lower Saxony’s actions

The actions of the state of Lower Saxony are problematic from a legal point of view. The state forces payment providers to distinguish between legal and illegal gambling offers. In light of the political commitment to issue nationwide online casino licenses from July 2021, and the existing offer provided by EU- and Schleswig-Holstein-licensed operators, this is not a mere administrative decision. Lower Saxony’s competence under the State Treaty is subsidiary to enforcement against gambling operators. But enforcement against EU-licensed gambling operators is not going anywhere, because there are strong legal grounds that the online casino offers of EU-licensed operators that pay taxes for their online casino offer in Germany are legitimate on the basis of the EU market freedoms despite the ban in the current State Treaty. Lower Saxony is thus overstepping the red lines of its competence. And it seems there are voices in German politics that also disagree with Lower Saxony’s conduct. On the contrary, by agreeing on the 2021 State Treaty, German politics have decided that the current ban is no longer required to achieve the legislative objectives of the State Treaty – thus, it cannot serve as a justification anymore now either. It is, in any case, not the task of a payment provider to decide which gambling offer is legal or not, but a task of politics. And German politics have decided by means of the 16 prime ministers’ signatures.

Lower Saxony’s actions also lack a scientific basis that a prohibitive approach would achieve the channelling objective of the State Treaty. In other words, it is absolutely unclear why prohibiting online casino transactions by reputable payment services providers that work with reputable EU-licensed gambling operators would help protect German consumers. Quite to the contrary, it would channel the gambling demand of German consumers into illegal non-European offers that remain available to German consumers despite Lower Saxony’s attempts to cut off payment options. The latest market evaluation provided by the German federal states themselves proves that demand for online casino games in Germany is high, with a GGR above €1bn in 2018. This is the very reason the 16 federal states have decided to create a regulatory framework for online casinos.

Lower Saxony should end its aggressive policy towards payment providers

With its doubtful activities against payment providers, Lower Saxony is fighting the battles of yesterday. The opening of the online casino market in Germany is politically desired and decided. Lower Saxony’s threatening attitude towards payment service providers undermines the political compromise that has been painfully reached and thus risks the success of the GlüStV 2021 even before it comes into force.

However, Lower Saxony seems to have gone too far with its recent activities. They are lacking support from the other federal states, which would be necessary in order to continue the recent enforcement attempts. Along with matters concerning the current licensing procedure on which the federal states have so far not been able to reach common ground, this question has now been referred to for debate within a working group including the four state chancelleries from North Rhine-Westphalia, Berlin, Hamburg and Bavaria. It is their task to develop a compromise that is acceptable for all federal states.

Nicholas Aquilina is an attorney at Brandl & Talos, specialising in international gaming, betting and entertainment law, EU law, social gaming, esports, fantasy gaming, skill gaming, payments and cryptocurrencies, as well as ecommerce.