The Canada question

Canada has been a bountiful gray market for international operators for years but Quebec recently declared war on them in the form of Bill 74. Brad Allen analyses the impact of the law and what happens next

April 20, 2016 – a date known as 420 in stoner parlance – was a day of optimism for the Canadian egaming industry, albeit not for obvious reasons. It was the day Canada’s Liberal government announced plans to legalize marijuana, and it signalled a willingness by lawmakers to take a modern, objective look at ‘vices’.

However that optimism has all but evaporated in the intervening months, with the government publically opposing a bill that would have let provinces offer single-game sports wagering. Needless to say, it has made no effort to push for a more widespread tax-and-regulate system that would invite foreign operators legally into the market.

The stance seems nonsensical in a country that is sports-mad and highly digitized, with offshore sports betting alone estimated to be worth US$4bn a year. As Paul Burns, the vice-president of the Canadian Gaming Association, puts it: “There’s too many dollars leaving the country without being taxed for this not to be looked at.”

The status quo would indeed appear untenable, for the government which is missing out on this revenue, and the provinces, whose legal online platforms are struggling to compete with offshore operators.

On poker, firms like PokerStars can offer a market-leading product with a global liquidity pool compared to the regulated Canadian Poker Network – a joint venture between Quebec and British Columbia –  which “nobody would consider a success”, according to Burns.

On sports betting, provinces are limited to doubles or parlays, with multiple efforts to introduce single-game wagering failing to get through parliament. “It’s bonkers,” says a gaming consultant with experience of the Canadian market who requested anonymity. “It’s a massive competitive disadvantage.”

On casino games, provinces are equally hamstrung, in part due to budgets. Ontario, for example, only offers IGT games with other provinces also sticking to just two or three providers. Compare this to a company like bet365 with 5,000 slot games and 70 different providers and it’s easy to see why the provinces struggle.

Tough stance

They are also hamstrung by suffocating regulations on anti-money laundering, bonusing restrictions and player safety rules. In Ontario for example, the maximum a player can deposit in a given week is C$10,000.

“The regulators are ludicrously tough and very expensive to comply with,” says the consultant. “It costs you a fortune to get licensed as a supplier. Then each game has to go through a ridiculous amount of testing. IGT has had real problems. Its blackjack game in Ontario had a tiny glitch and they were forced to take it down. For more than a month, Play OLG simply didn’t have any blackjack. And of course none of them have a live dealer option because it’s too expensive for providers to get licensed.”

What’s more, the provinces refuse to work together, despite the obvious benefits of collaboration. British Columbia and Quebec are both on an OpenBet platform, but have worked out individual deals.

“Its batshit crazy if you ask me,” says the gaming consultant. “It’s just a colossal waste of money – British Columbia Lottery Corporation (BCLC) contributes something like a third of OpenBet’s overall profit. The provinces just aren’t good at working together.”

His point is reinforced by their treatment of William Hill. After the UK bookmaker bought a 20% stake in NYX – which provides the platform to BCLC through OpenBet – British Columbia asked the bookmaker to stop operating in its province. Hills duly obliged but continued to operate in the gray market in the rest of the country with no backlash from the other provinces. “There’s just not any reciprocal protection going on,” adds the consultant. As a result, a recent ipso study suggested that the provincial operators were each getting single digit market share.

“Are the provinces a real credible threat?” asked one Canadian gaming lawyer who requested anonymity due to his work with offshore operators. “They haven’t been thus far.”

Offshore operators are further boosted by the relative stability of the gray market. Multiple sources suggested that egaming was simply not a top priority for Canadian law enforcement bodies.

“Law authorities are probably more concerned with violent crime and things that are a danger to the public,” said the gaming lawyer. “I don’t think police authorities view private citizens playing a game in their house as a threat to the public’s safety.

“Secondly I don’t believe they think there is a good chance of a prosecution. I have to believe that if you’re a crown attorney, do you really want to invest a lot of time and effort into this when the law is as vague as it is?”

Furthermore, firms can advertise their .net sites with free to play games and then funnel players onto the dotcom sites later. Interac is the widely-used payment processor and it is “quite happy to see gray market money coming and going”, according to the consultant.

As a result, there have never been any issues with foreign operators not paying customers in Canada and that, as much as anything, has kept authorities from intervening. “There are bigger fish to fry,” agrees the consultant.

So the obvious question for offshore operators who are thriving in a $16bn market without paying taxes, is do they even want to see a tax-and-regulate model?

Burns from the CGA is adamant they do, in part because of the risk associated with operating in gray markets from other regulators around the world. When a flurry of leading bookmakers, including Ladbrokes, Betfair and Betfred, withdrew from Canada in 2014 and 2015, it was speculated that they were protecting their UK licence under the new Point of Consumption (PoC) tax regime.

“That’s principally the reason” confirms a representative from a major operator. “PoC will have been significant and in Canada some firms were only tentatively dipping their toes in the water rather than making Canada a key strategic growth area. It simply didn’t add up to hang around and commit the time and resource into such an uncertain territory at the time.”

“A lot of companies have told me they would love to be regulated in Canada,” Burns confirms. A key factor according to him, is indeed stability. The legislation recently introduced by Quebec for example could potentially kill a market of more than eight million people.

Quebec clampdown

Back in May, the notoriously autonomous province passed Bill 74, with three main objectives; to block ‘illegal’ online gaming sites based on a backlist established by Loto-Québec; to enhance Loto-Québec’s online game offerings through commercial agreements with private operators; and to launch a multimedia campaign to inform the public about new provisions applicable to online gaming.

The first of these objectives – asking ISP providers to block gambling sites – has already come under a legal challenge from a public interest lobby which claims the policy is “practically unworkable”, and will impair free speech.

Objectors also point out that telecoms regulation is a federal responsibility rather than provincial and Quebec technically has no authority over ISPs. The province claims it has that authority because gambling is a public health issue.

While no-one is certain how the legal wranglings will play out, University of Ottawa law professor Michael Geist, has said that Quebec’s stated aims “won’t be enough to stop the law from being struck down once it’s challenged in the courts.” Another Ottawa lawyer, David Elder, said there was “a good argument” to be made that “broad accessibility is essential to a communications network.”

Perhaps the more impactful goal of Bill 74 then, is the integration of private operators into Loto-Quebec’s Espace-Jeux site, which some insiders view as the first step toward a more open, regulated egaming market.

Loto Quebec said the call for tenders will be launched this fall and there will be slots available for poker, sports betting and online casino. “We don’t know yet how many private companies will be integrated into our Espace-Jeux site, but it is possible that one company would be chosen for more than one type of game,” the regulator confirmed.

Companies that aren’t already active in the gray market in Canada are said to be interested in bidding, with names like Paddy Power, Betfair and Ladbrokes thought to be in the mix. However, according to the gaming consultant there are a lot more questions than answers at this stage. Loto Quebec is still working out the tax rate and how different brands could market themselves for example.

“Assuming they could work that out, a lot of people would be interested, but the details are very important,” says the consultant. “Will it be attractive for customers with all the restrictions on bonusing, and depositing? And does the platform even work?

“I get the feeling from the operators they’ve spoken to that it’s going to be a tough integration and it’s not absolutely clear how you can build your brand on the back of it.

“If you’re not currently a gray market operator it could be attractive as it will give you a toehold in the market but if you’re Party or William Hill and you have to give up your other revenue it’s not really worth it.”

One of the obvious candidates for integration would have been Amaya, but David Baazov’s subsequent arrest for insider charges threw something of a spanner in the works. Indeed, the desire to regulate Amaya in the market properly was the catalyst for the entire ‘storefront’ system, according to the consultant.

He adds: “The vibe I get is that Amaya is not very popular at the moment and the regulators are less inclined to be favourable to them until the outcome of Baazov’s case is known.

“They [Quebec] were trying to accommodate them and then that blew up in their face. Although whether they are still getting pressure from the higher-ups in the Ministry of Finance is a different matter.

The criticism of the integration idea was echoed by the gaming lawyer who said Loto-Quebec’s plan to have something in the market by the end of 2017 was “overly ambitious”.

“They are putting out this tender, trying to build the technology infrastructure for an online storefront, and trying to implement all the responsible gaming checks, geolocation requirements, and verification processes,” he says. “That’s a very ambitious agenda”.

But despite the criticism, there is a sense that the integrated online storefront is forward progress in Canada. It is the first opportunity for private operators to enter the regulated market and a sign that the provinces are aware they are fighting a losing battle.

Indeed the gaming lawyer suggests that if the small number of integrated operators are successful, Loto Quebec could expand the portal and bring more and more private products into the fold.

“There is optimism among offshore operators,” says the lawyer. “Hopefully the changes in Quebec will lead to further investment in the market and then getting some licensees into a compliance model.”

A conservative approach

Another lawyer, who requested anonymity because of his involvement with the tendering process, claims there is an appetite from the Canadian government for the Quebec project to act as the first step towards regulated gaming. “If you can’t beat them, join them”, he says.

Of course, much like their cousins to the South, Canadians are a libertarian bunch and nobody expects major changes anytime soon. Bill 74 is being implemented over the next 18 months, and Quebec has yet to even launch the call for tenders. And the battle for wider regulation could trundle into the next decade.

As the consultant puts it: “Regulated gaming will happen, but I think it will be much slower than people expect. There’s very few votes in gambling in Canada and there’s a lot of noise around it because it’s such a conservative country.

“Pretty much everyone in government that I’ve spoken to understands the importance of going to a tax-and-regulate model, but none of them want to introduce it themselves. No one wants to take the political flak.”

The anonymous gaming lawyer agrees, adding: “While the Quebec efforts may point the way towards a more regulated market, it is a fairly unanimous feeling that a full-scale tax-and-regulate system is still a long way off.

“I would say that any regulation will take a minimum of five years just to get though the system, because Canada is so conservative.”

Paul Burns from the CGA is the most optimistic of the bunch, arguing that online gambling is on the national agenda like never before, although even he admits its “a few years out”.

“I’d say there’s more discussion being had in Canada now because of Quebec and that’s the best part about it,” he adds. “We’ve always said as an association that we want a regulated market because it makes so much sense.

“Canadians love their technology. We do more electronic transactions than in cash and the government needs to move with the times and give people what they want.”

For operators looking to make a quick buck, the best option might simply be to plunge into the gray market since police authorities appear to have little appetite for prosecution and even Quebec’s attempts at IP blocking look more likely to fail than succeed.

More cautious operators appear to be looking at a five year stint of thumb-twiddling, but the prospect of a wealthy, populous, mobile-first market could be well prove to be worth the wait.