At first it seemed so simple: any company selling predominantly digital product or which could separate the marketing and administration of its business from the process of physical delivery, could establish itself in an offshore jurisdiction and reap the tax-free benefits of being offshore while staying in close touch with its customers in high-tax regions via the Internet. From at least 1998, conferences galore have extolled the advantages of offshore e-commerce; jurisdiction after jurisdiction has announced that it would be the world leader in offshore e-commerce; and fibre-optic cables criss-cross the ocean floor delivering a plethora of bandwidth to obscure tropical islands no-one ever knew existed.

Although many offshore jurisdictions can already point to a substantial number of installed e-commerce applications, the reality of offshore e-commerce has somewhat lagged the hype. There could be a number of reasons for this, including possibly a sense of discomfort with the idea of 'offshore' in a year when it has come under attack by the great and good of the established economic order, or worries about the risks inherent in the use of new technology. The dotcom melt-down has not helped, and there remains considerable uncertainty about the tax treatment of new economy applications offshore.

The main reason, however, is probably just ignorance on the part of would-be users. These are all teething problems, and there can't be any doubt that an explosion in the offshore e-commerce is not far off. The best evidence of this is to be found in the betting and gaming sector.

At all events, large parts of the betting and gaming industry have moved offshore, and the sector's turnover has been expanding rapidly as previously unsatisfied demand has responded to new freedoms. This article will review the events of the past three years in offshore betting and gaming, examining some of the offshore and onshore countries which have figured prominently in the process, and will then end by attempting to draw out some conclusions for the development of offshore e-commerce more generally.

Antigua
The United States
Costa Rica
The Isle of Man
Gibraltar
The United Kingdom
Malta

Legislative Responses To The Betting Exodus

The Conclusions For Offshore E-Commerce

Antigua

When clever young US graduates began to understand the potential of the Internet for delivery of betting and gaming in the mid-1990's, it didn't take them long to work out that by going to the Caribbean they could enjoy a good climate, escape state and federal taxes, and avoid, as they thought, the problems of the US legal system, which imposes various controls on gambling operators.

Apart from Costa Rica (see below) Antigua has been the leader in the delivery of offshore gambling in the Caribbean, meaning really for the US market. Antigua has been welcoming to betting and gaming sites, charging $100,000 for a basic license, and offering a reasonable amount of bandwidth. At first everything went swimmingly, and early success caused a large number of gambling sites to be set up on the island. Not all of these were US-inspired: UK bookmakers William Hill and Victor Chandler both have Antigua betting licences, while Irish bookmaker easybets.com, which took $700,000 in 1997, its last year in Dublin as an earth-bound betting-shop operator, moved to Antigua, turning over $38m in 1998, £60m in 1999 and $150m in 2000. CEO Tim Lambe says he understands the distaste most governments have for Internet gambling, but: "It's time for all to get real. There is no moral reason. All these countries have gambling, or betting on their soil, so it's a revenue issue. When the traditional bookmakers suddenly face competition from Internet bookmakers, they get scared and put pressure on governments and congressmen to protect their business."

The commercial model used to take bets can vary quite widely. William Hill, for instance, takes betting instructions through a large call-centre in Ireland, but the bet is actually struck in Antigua. Cyprus betting firm Megabet has an Antiguan license but takes bets on servers located in the various countries in which it has customers.

The decision about structure depends on perceptions about the legality of betting operations, and the licensing regime in place in the destination markets, as poor Jay Cohen found out when he bravely returned to the US to face charges under the 'Wire Act' (see below).

As the ex-colonial power, the UK has attacked Antigua's regulatory regime more directly, with the imposition of a financial Advisory, demanding major improvements to Antigua's supervisory regime, to which the island at first responded in a mostly positive way. Later on, though, it seemd that the UK was pushing too hard:

Wrenford Ferrance, Antigua's Director of National Drugs and Money Laundering Control Policy said that Britain "has changed the goal posts from those which it established in April 1999 when the Advisory was imposed in the first place.

"On the basis of no evidence to support the claim, the U.K. now also says that there is a `possibility' of money laundering through client accounts with internet gambling operations. We feel that this new dimension is unfair, especially as it is unsubstantiated," Ferrance told a meeting of the Caribbean Financial Action Task Force on the International Financial Services Sector.

Another piece of "troubling" evidence of the shifting goal posts which Ferrance pointed to, was Britain's statement in its modified version of the April 1999 advisory that Antigua and Barbuda must first make the 30 amendments to its laws although "they are entirely the creation of our own regulatory body."

He noted that the 30 amendments were not required by Britain in April 1999 or demanded by the Financial Action Task Force (FATF), the grouping that did not list Antigua and Barbuda as a non-co-operative jurisdiction in the fight against money laundering in June 2000.

Ferrance said his country has remedied the deficiencies in its anti-money laundering laws, and in its regulatory and enforcement machinery.

Indeed, Antigua and Barbuda has worked closely with the US and the UK on cleaning up its offshore sector in the past year. "Operation Clean Slate" was implemented and has significantly reduced the number of offshore banks from 68 to 18. Through the introduction of amended rules and regulations, the number of IBCs has also undergone a major reduction from 10,000 to around 2,000.

Antigua has not only benefited directly from the shift offshore of betting and gaming companies, but it has also become the centre of a world-wide gaming conference industry.

The Fourth Annual International Symposium on Internet Gambling Law and Management held on November 26-28 at the Royal Antiguan Hotel in St. Johns, Antigua, attracted more than 400 participants from around the world.

'Meeting attendees will gather in Antigua, the current Internet Gaming capital of the world', hyperbolised the conference publicity, 'to discuss Offshore vs. Onshore Internet Gaming: the Battle Heats Up. Will Antigua remain the Las Vegas of Internet gaming or be replaced by other jurisdictions such as Dominica, Costa Rica, Belize, Malta, Gibraltar, Norfolk Island?'

'Which jurisdictions offer the best environments for Internet gaming? What are the pros and cons of various jurisdictions? What's the current situation and prognosis for Internet gaming in Australia (one of the first jurisdictions to legalize Internet gaming, only to narrowly beat back a recent effort to establish a moratorium on Internet gaming)? How will proposed regulatory and tax changes in Antigua affect entities operating there? '

United States

Jay Cohen belongs to a group of West-Coast finance industry executives who set up one of the first Antiguan gambling operations. These were not college kids working out of a silicon valley garage - they were adequately capitalised, took a highly professional approach to the business, and had taken advice from a large consultancy on the legality of their venture. But this didn't protect them when the Feds decided to crack down on the wild growth of offshore gambling and indicted Cohen and his colleagues under legislation known as the 'Wire Act', dating from the time of Prohibition, which makes it illegal to take bets over the telephone if the call crosses a state line.

The legal position of gambling in the US is highly complex: in some states it's totally banned, in some it's totally legal (think Las Vegas), and there's a whole range of situations in between. The Wire Act is federal legislation, however. And legal or not, profits from betting in the US will of course be subject to federal and state taxes - hence the rush offshore.

For some time, Jay Cohen and his colleagues remained out of reach of the Feds in the Caribbean, but Jay eventually decided he didn't want to spend the rest of his life on the run, and returned to the US, to be duly arrested and brought to trial in New York. After a widely-publicised trial he was fined and sentenced to 21 months imprisonment. Cohen has since failed at his first appeal; the second level of appeal is currently outstanding.

Gambling law expert Nelson Rose, a professor at Whittier Law School in Costa Mesa, Calif., says it is clear that Cohen was thoroughly convinced that what he was doing was completely legal, but believes the appeal is likely to fail. The Justice Department has astutely attacked only US citizens involved with companies that were clearly in violation of the Wire Act. "I don't think you need to have the word 'Internet' written into a statute to be able to prosecute people under traditional law," he says.

It is widely expected that Cohen's case will end up in the Supreme Court, meaning that legal certainty over offshore betting from the US will have to wait for perhaps as much as two years from now, unless the Congress legislates in the meantime. If it does, it is more likely to be in the direction of banning Internet gambling altogether - such a bill was introduced into the the last Congress, and made a fair amount of progress.

Meanwhile, other US operators are trying with some success to develop intra-State gambling business models within the existing law. Internet betting firms Virtgame and Youbet are hoping that Nevada regulators will approve sites which will be limited to sports, and which will accept bets only from Nevada residents. Expansion to casino games and to other states could follow.

Birmingham (Alabama) Race Course is one of a growing number of US tracks that has sub-contracted its off-track betting operations to an offshore gambling service that handles racing bets for clients around the country. Racing and Gaming Services Ltd (RGS) in St. Kitts contracts with the Birmingham Race Course to supply it with bets. The Birmingham Racing Commission allows the track to operate as a "hub," or processing center, for other betting operations, including RGS. The client places a bet - either by phone or via the Internet - with the betting operation, which transfers it to the track. Superficially it would seem that these operations are just as vulnerable under the Wire Act as Jay Cohen's Antiguan betting site.

Claude Williams, executive secretary of the Birmingham Racing Commission, said that the Commission used to follow the track's relationship with RGS, but because money isn't being bet from Birmingham, and therefore is not subject to state and local taxes, it no longer does so.

It seems that similar arrangements are widespread throughout the US, although this is news - big news, apparently - to regulators. "I never heard of such a thing," said Racing Commissioner Gary White, "I'm going to ask some questions because I want to know about it."

It may be that the US, in one of its periodic fits of moralising enthusiasm, will succeed partially in controlling the access of its citizens to offshore Internet gambling, but the operators won't be too bothered - they'll just switch to other parts of the world.

Costa Rica

While well-capitalised US and foreign on-line gambling operations were setting up shop in Antigua, Costa Rica began to develop a reputation for 'cheap-and-easy' Internet gambling sites. It all began in 1996-97, when Caribbean centres such as Aruba, Antigua and Dominica established mandatory licenses of up to $250,000 and regulations that required the companies operating there to pay some taxes.

The numerous Internet gaming companies in Costa Rica process bets, but no money enters the country. Those placing bets open an account with the companies’ offshore banks and bet using their deposited funds by visiting the companies’ Web sites or by calling toll-free numbers that are answered by call center "clerks". Winnings are deposited into the offshore accounts.

At least 80 Internet gambling companies, most taking bets on sporting events around the world, have set up shop in Costa Rica, lured by lax regulations and a relatively inexpensive labor force whose workers often speak English in addition to Spanish. The growing industry has put up to 5,000 people to work with good wages and benefits.

The majority of Web bookies in Costa Rica cater to customers in the United States, although some also focus on the growing Asian market. The largest numbers of bets are on football, followed by professional basketball.

Costa Rica in fact does not have a formal gambling license structure, and the uncontrolled growth of its on-line gambling sector has led to calls for a regulatory and licensing regime. In late 2000 National Liberation Party deputies presented Congress with a bill to create mandatory industry licensing and yearly operations fees that could net the government some $4m to $5m in annual revenues. Whilst rigid rules could cause some Internet gaming companies to flee Costa Rica, there are a suprising number of industry executives who say that they would welcome government regulation of their business.

NASA Sports is a giant in Costa Rica, and calls itself the world's largest sportsbook. In local newspaper the Tico Times, NASA managing director David Carruthers is quoted as saying: 'I would welcome regulation, depending on its content. Regulation creates an environment of stability. It makes it easier to plan, and provides more confidence to invest.' In agreement is Sportingbet.com president, Mark Blandford, whose company also operates in Curacao and Alderney in the Channel Islands. He commented: 'Regulation places a minimum standard on the activity to ensure that companies comply with local laws and are good corporate citizens. It also ensures that the companies are adequately funded – and not using their incoming bets as working capital.'

The bill which has been put to Congress obliges sportsbook operators to buy a $150,000 operating license, as well as pay sales and luxury (consumer) taxes and a yearly fee based on the volume of bets they process. As a requirement for obtaining their operating license, the companies will have to finance an Interpol investigation proving that the bets they process are not funded with illegal drug money or through other illicit sources. The companies will also be required to present complete accounting reports to local tax authorities.

The fear amongst smaller online bookmakers is that the hefty licencing fee will be too much for some to pay. The Tico Times quotes one unnamed owner as saying: 'It would be completely unfair to establish a license of that amount. If I had to pay it, I would definitely move operations to another country, and other companies would too.' Besides the licencing fee, there are other financial commitments, including the rental of office space, monthly payments to the government's Internet monopoly Radiográfica Costarricense (RACSA) for fast connections, and employees' mandatory income-tax payments.

However, the situation is unlikely to change quickly as months of debate followed the presentation of the bill. In fact, it might be quite unwise for the Costa Rican government to put pressure on its on-line gambling sector, given the relative weakness of its telecommunications infrastructure, which is compensated for only by the tax and legislative freedom companies find there.

Costa Rica's current Internet infrastructure can be slow and erratic, although plans are in the pipeline to introduce a cheaper, faster and more reliable service called "Internet 2". The Costa Rica Electricity Institute (ICE), which has a monopoly over the provision of bandwidth, has been as slow as might be expected to upgrade facilities. ICE's Alvaro Retana said: 'Companies that were considering investment in Costa Rica did an about-face and headed elsewhere when they found out what fast Internet cost here. This new technology will combine with Costa Rica’s skilled workforce and (relatively) low wages to cause foreign companies to take a second look.'

ICE’s assistant manager of Telecom, Alvaro Retana, and Science and Technology Minister Guy de Téramond, announced at the turn of the year the imminent arrival of new data transmission infrastructure that will make Internet 2 available in the San José region from March 2001 and the rest of the country by the end of the year.

Alejandro Filloy, president of Costa-Rica based Gammacom International Telecom Services, said: 'I applaud that ICE has finally figured out some of the services that Costa Rica needs and is making an effort to provide those services, but I’ll reserve other comments until we see the system up and working.'

The new Internet service will be made possible by the arrival last December of Costa Rica's "spur" of an undersea fiber-optic strand, known as Maya Cable. The cable allows the country to connect to the Internet at faster speeds than the current, satellite-based system, and it is independent of the telephone line.

Science and Technology Minister Mr Teramond is convinced that the arrival of Internet 2 will be of tremendous benefit to Costa Rican companies and individuals. Among other things, he said that electronic banking and financial services would expand, e-commerce would really take hold, and government services and information will become easily accessible.

The Maya Cable will be phased in gradually. The country's broadband Internet infrastructure currently has the capacity to receive 55 megabits per second (Mbps) of information and to send 22 Mbps. By June 2001, when Maya Cable is fully operational, Costa Rica's sending and receiving capacity will almost triple to 155 Mbps.

Many business-people, however, doubt that benefits will be felt at all rapidly, since ICE seems reluctant to offer the new capacity to the commercial sector, preferring to expand its (high-profit) residential operations first.

Isle of Man

Some of the many offshore jurisdictions laying claim to be the world's leading centre of offshore e-commerce eschew gambling (Bermuda is an example) but most do not. Without specially setting its cap at the gambling business, the Isle of Man nonetheless decided that it needed lots of reliable bandwidth in order to attract e-commerce, and as a result is one of the better-equipped jurisdictions from a connectivity point of view. This can't yet be said about any of the Caribbean or Central American jurisdictions, which are making progress but are not in the same league as the Isle of Man.

The Isle of Man has a link to the UK (and hence into the global network) with 1.2 Tera bits per second capacity, capable of carrying up to 10 times the current transatlantic Internet traffic. This capacity is nearly ten times as great as Costa Rica's new links will provide later in 2001.

This capacity is also redundant: completion of the MT fibre optic cable link to Northern Ireland was the final step in creating a "self-healing ring" topology for the island which will ensure that traffic continues to flow, even in the event of a break at any point in the network. The Isle of Man is one of the few island jurisdictions in the world that will offer this level of resilience and reliability.

The Isle of Man has also been active in creating a clear legislative environment for e-gambling, with two recent bills devoted to the on-line gambling sector. Prior to these bills, the Isle of Man had a conventional piece of legislation called the Gaming, Betting and Lotteries Act, aimed at licensing local betting offices. The Betting Offices Bill 1999 however introduced the idea of a 'Restricted Licence' available at a fee of £25,000 to an international betting or gaming operator wanting to base telephone or Internet betting facilities on the island, which would be available to non-Isle of Man residents.

The Online Gambling Bill 2001 goes much further, constructing a regulatory framework for resident on-line betting operations. The Bill, which has received its first and second readings in the House of Keys permits Internet gambling along with similar forms of online and interactive gaming. Its emphasis is largely on regulation, involving the Gambling Control Commission, the Financial Supervision Commission, Data Protection, Customs and Excise and the Isle of Man Constabulary. In a bid not to overburden the new regulatory system as it gets underway, only three operations will initially be granted a licence to manage online gambling businesses at a fee of around £80,000 each. However, this number is likely to increase as the system becomes more established.

Isle of Man government officials said: 'Companies will have to be registered in the Island, their designated officials will have to be resident here, and licence holders must maintain sufficient financial reserves. Regulations will protect players' privacy, prohibit sales to minors and residents of jurisdictions where Internet gambling is currently not permitted, and prevent money laundering.'

It is expected that the bill will extend the Island's economic base and attract a further source of income without adding to pressure in the employment market. The Isle of Man government claims that the Bill will make the Island a world class leader in the regulation of Internet gambling, providing 'an important opportunity for the Island to benefit from a growing e-commerce market. The Isle of Man is ahead of the competition and in the advantageous position from which it can benefit by attracting the best of the industry to the Island by providing a well regulated jurisdiction.'

Interestingly, the Bill provides that debts incurred under a licensed betting operation will be enforceable at law - most common law jurisdictions exclude gambling debts from the ordinary commercial laws, so that they are unenforceable.

More detailed information on the Updated Online Gambling Regulation Bill can be found at: http://www.gov.im/infocentre/docs/DHA_gamblingbill4A.html. It is likely to come into force in mid-2001.

The Isle of Man is already home to a number of on-line betting and gaming operations licensed under the original Gaming, Betting and Lotteries Act - these operations are likely to be the first in line for licenses under the new Act, since they would otherwise be operating illegally.

Gibraltar

Unlike the Isle of Man, which applies a lowish rate of corporation tax to resident companies, Gibraltar's legislation allows for companies owned by non-residents to operate tax-free, or very nearly so, and as an English-speaking jurisdiction closely tied to the EU, has been a popular choice for bookies fleeing the UK, since they can escape both the UK's betting tax and company taxation as well.

Several very high-profile UK bookmakers set up shop on the Rock, including Victor Chandler and Ladbrokes. Together the emigre bookies have generated 500 jobs locally, and stimulated the economy in all kinds of respects, not always for the better. The real estate rental market, for instance, has been saturated, and property prices reached an all time high with a more than 50% increase almost overnight.

Gibraltar is considered to be one of the most desirable offshore centres for bookmakers, but there are only nine offshore bookmakers licences and the government is cautious about issuing new ones, perhaps not least because of the danger of overstressing the infrastructure in such a small place.

Recently, however, Gibraltar has had to face the possibility that the betting industry would desert the Rock almost as suddenly as it arrived, when the UK Chancellor, Gordon 'Stealth' Brown, announced changes to the UK's betting tax regime designed to tempt back the bookmaking companies which had jumped ship to escape the UK's 9% betting tax.

The Gibraltar government is currently holding discussions with those UK bookmakers established on the Rock following the British government's announcement. Bookmakers had left the UK precisely to avoid the tax that will be no longer there from the beginning of next year.
Trade and Industry Minister Keith Azopardi said that betting was not a mainstay of the economy, and discarded the idea that there was a crisis scenario.

Opposition leader Joe Bossano said the government had described the arrival of the bookmakers as one of the most important economic development in recent years. What they cannot do, he said, is seek the political credit when they came and then say it is not their fault if they go.

Some in the real estate industry immediately talked of a possible slump, but developers have indicated their optimism, with demand remaining high for accommodation in luxury projects already underway.

'This,' said one developer, "will allow for the market to continue offering affordable accommodation, and be able to give increased luxury accommodation in Gibraltar which after the sell out of the latest developments has seen an increase in the numbers waiting to buy luxury accommodation."

Property investors are paying up to £400,000 for up-market apartments, with many committing themselves to purchasing property before it has even been constructed, indicating the immense interest being shown in Gibraltar for high quality units.

As in other jurisdictions which have hosted foot-loose betting and gaming operations, one of the more interesting sectors to be in has been the software side. It was jeans manufacturer Levi Strauss and the shovel-makers that did well out of the Californian gold-rush, and the dotcom boom has been no exception to that rule: in Gibraltar, as in the US, local software houses weren't slow to rush out gaming platforms based on the work they did for initial customers.

It is said that there are more than 2,000 betting and gaming sites world-wide, that number having doubled in the last year, and the majority of them have used software from a small number of platform suppliers.

United Kingdom

It seems quite unexpected that the UK has been less puritanical than the US in its approach to the on-line betting industry. It's perhaps wrong to suppose that national policy owes very much to the personalities of individual Finance Ministers, and here is maybe a proof of that principle: Gordon Brown, the Scottish Presbyterian UK Chancellor, has taken a pragmatic view of revenue from betting and gaming, while Ivy League US Treasury Secretary Laurence Summers didn't step a foot out of line to accommodate the New Economy.

Anyway, the result is that the UK (a fully paid-up member of the OECD's anti-competitive fiscal moral majority) has abandoned its betting tax and its principles in a blatant attempt to compete with the offshore jurisdictions that are threatening to steal its betting tax revenue.

The new tax regime, which has been included in the cut-down Finance Bill to be passed before the upcoming election, abolishes the betting tax in favour of a gross profit-based tax at 15%, which will apply to all betting turnover, whether on- or off-line.

The UK decision was not a surprise as it had been the subject of informed speculation over several months. The UK chancellor of the exchequer Gordon Brown has made the move on the understanding that the bookmakers will relocate back to Britain.

The Chancellor expects that the UK's major betting firms which have moved their operations offshore to centres such as Gibraltar will now return to the UK but it may not be as simple as that. Ladbrokes has indicated that it may not relinquish its base in Gibraltar just yet. The firm, which employs over 200 in Gibraltar alone, responded to the news by saying it was considering the options 'for maintaining the maximum possible presence in Gibraltar', even though a delighted Chris Bell, the worldwide chief executive of Ladbrokes, did say that the move 'has to rank alongside Red Rum's three Grand National wins and Frankie Dettori's magnificent seven as one of the best ever days for punters.'

The first bookmaker to relocate offshore to Gibraltar two years ago has said it will not be enticed back to the UK on such a 'hollow victory.' Victor Chandler argued: 'The betting duty cut ... will not stop UK punters betting offshore. The proposed 15 per cent tax on gross profits is simply another stealth tax. Regrettably, this looks like a hollow victory for punters, as they will continue to pay, only this time they won't realise it. I believe the only way to turn the UK into the world centre for gambling is to have no tax, aside from corporation tax.'

Another Gibraltar-based bookmaker who doesn't think the UK government has done enough to lure it back to the UK is Simon Bold. The company has confirmed that its operations on the Rock will remain unchanged and is urging the Gibraltar government to consider granting more licences to other companies in the gaming industry.

Perhaps the biggest response to the Budget is from Ireland, where bookmakers have warned the government that they may have to move their operations to the UK unless Ireland follows suit. In an attempt to compete with operations established in tax-free or low-tax centres such as Gibraltar, Irish online bookies have been absorbing the tax themselves.

Stuart Kenny from Paddy Power said Chancellor Brown's decision 'will have a positive effect on turnover and activity and now makes the UK a very attractive base for betting operations.' And his company will be among those bookies waiting to move their online operations to the UK. He explained that the new UK tax translated to a tax of just 1.8 per cent compared with Ireland's current 5 per cent betting tax, saying 'unless something is done, we will have no choice but to transfer all our business to the UK.'

Victor Chandler, who prompted the flight abroad by big bookmakers when he started offering British punters tax free bets from Gibraltar two years ago, openly dismissed the Government's plans to entice them back again by converting the UK's 9% duty on winnings into a 15% tax on gross profits. He won't accept the Chancellor's proposed bargain in exchange for closing down his offshore operations, and he doesn't believe that his competitors will either, whatever they now say.

"The stable door has been opened and the horse has bolted," said the famous bookmaker, chairman of Victor Chandler International. He claimed that the 15% tax "equates to a 3% betting duty - and that will be passed on to the punter. The punter will always suffer. Meanwhile, VCI offers as good a service but with better odds. People are still going to find us, even if government restricts our advertising."

Estimates of the European on-line betting market (not including gaming) range as high as £5bn within five years. This figure sounds low: UK betting turnover is currently worth £7 billion a year, and will presumably migrate largely to the Internet within five years whether onshore or offshore. So there is much to play for.

Malta

In a quiet way, Malta has in fact amassed more on-line betting and gaming companies than any other Western European offshore jurisdiction. The latest count is 19. Like its competitors, Malta is eyeing a global market for on-line betting and gaming that is expected to total over £120bn a year within 5 years. According to Merill Lynch research, total revenue generated by electronic gambling is expected to be £124bn by 2004.

The island’s excellent location, technical expertise and competitive tax incentives for on-line bookmakers who relocate to Malta, is slowly putting Malta on the bookmakers’ map. It is also encouraging for the government and the Minister of Finance that nearly 12 per cent of each company’s gross profits will flow into the country’s coffers.

According to Vincent Caldwell, chairman and chief executive officer of betinternet.com, an on-line bookmaker specialising in totalisator betting, and horse and greyhound racing, Malta is very attractive to the on-line bookmakers. “Even though the UK chancellor Gordon Brown has removed taxes on punters and introduced a tax on gross profits, Malta is still far more attractive to us. The 0.5 per cent tax on each transaction in reality works out to be around 12 per cent of gross profits, well below the 19 per cent that will be charged to bookmakers in the UK,” said Mr Caldwell.

“We have grown rapidly over the past nine months. We are taking bets from 95 countries and expect to have a turnover of around Lm45m this year. In Christmas 1999 we had eight staff. The figure now stands at 50,” Mr Caldwell said. His company is examining numerous channels of revenue and new betting sources. They are looking very closely at mobile commerce, an on-line casino and external gaming operations all year round.

“We have long-term plans but what is important is that all our operations follow stringent regulation. We do not want to be seen as another offshore betting company looking for tax free betting,” Mr Caldwell said, and continues by explaining the growth of on-line betting:

'On-line betting is on the increase and this is attributable to a number of factors. People have more leisure time, there is more live coverage of sports and other events on which bets can be placed, impulse betters are on the increase, and there are more female participants. Another two factors that are also relevant to such a change in mentality is the cultural acceptance of betting and the lifting of limits on prohibition of gambling in numerous countries,” he added.

Betinternet.com has joined forces with a major betting group in the United States in a bid to revive greyhound racing and to expand its business opportunities. Totalisator betting allow betters to see highlights of all the greyhound or horse races in the UK and Ireland and place bets as the races are underway. The odds are announced simultaneously. Euro-off track, as the venture is called, gives Betinternet.com an extensive client base and technical expertise. “At present betinternet.com has clients from 95 countries and receives around 550,000 hits per day. Our sites are also multi-lingual, including Chinese, and the Thai site is expected to be up and running in four weeks’ time. We have around 1,000 new accounts every month,” Mr Caldwell said.

Mr Caldwell is very keen on tapping mobile betting, which is expected to be a very lucrative business in the coming years. As technologies get better, the easier it will be to relay and receive data on one’s mobile phone. Betinternet.com has also joined forces with MGS, a technology company, that takes all data in XML format and delivers the content to all mobile phones in one single format. The data can also be received via a Palm Pilot.

“The mobile phone will cease to be solely a means of voice traffic. Mobile phones will be used as data devices in the coming years,” Mr Caldwell said.

“This will come about when there is increased mobility. When devices are more independent, growth is registered in free or subsidised hand-held devices and the audience using these devices will increase. On the technological level, 3G will transform the market,” he added.

The Malta-based operation will serve as a hub for all transactions received by betinternet.com from its various operations. They will be directed to the local hub, verified, processed and re-sent to the outlet or server.

“We are using Malta as a ledgering system and not for betting. There will be substantial amounts of money passing through the system. This will obviously be of benefit to the local economy, as the government will take 0.5 per cent on each transaction,” Mr Caldwell added.

Maltese Finance Minister John Dalli has said that he is still convinced that Malta was competitive in its incentives to betting companies in England despite the changes announced in Gordon Brown's budget.

“The English government had forced English betting companies to move abroad because of taxes it imposed and now in this budget it is addressing this problem. This obviously changes the situation in which Malta operates.” Mr Dalli however said that it was difficult for the companies that have left Britain to return even though they might now have an incentive to do so.
“It is not up to me to decide whether the English companies will stay in Malta or not since they have their own marketing strategies but I believe that Malta is still competitive in this sector especially following their experience here,” he said.

Mr Dalli’s comments were backed by George Debrincat, general manager of Unibet.com.
He said that although new laws may looking attractive, based on calculations received from the UK, Malta is still a very attractive location.

“I doubt that there will be an exodus from Malta. The local scenario is still attractive and companies here benefit from lower costs and cheaper services,” said Mr Debrincat. "In reality the 15 per cent tax on gross profits has been calculated to be around 19 per cent. In Malta, each transaction is charged 0.5 per cent. Calculating the total revenue to the government, this works out at around 12 per cent on gross profits. So Malta is still a better deal,” he added.

Legislative Responses To The Betting Exodus

The enormous sums passing through the world's betting industry seem destined only to grow as a result of the move offshore of the world's bookies and casinos, and there seems little that the high-tax 'grown-ups' can do about it, other than reduce taxes - and they probably can't reduce them enough to make much of a difference.

What they can do, and it doesn't really have much to do with the issue of tax competition, is to attack offshore betting as a magnet for money launderers. Quite why offshore betting should be more magnetic than onshore betting is not clear (other than the tax advantages, of course!) but that doesn't stop the fiscal high priests from attacking it. The technique is simple: you place large sums of 'dirty' money in your account with a casino, play a little, then change your mind and ask for your money back, and hey presto, it is a clean Ladbrokes (or whatever) cheque looking like your winnings!

The US authorities have been active in fighting money-laundering, particularly during Larry Summers' tenure as Treasury Secretary, although one key bill to strengthen the administration's powers was defeated in the last Congress, and the new Republican administration is considerably less likely to take or use powers which make further inroads into personal privacy. The main weapon the US, or other countries, can use is the financial advisory, as in the case of Antigua, which bans US domestic banks from making transactions with banks in the targeted country. It is quite effective against banks, but less so against casinos which can and do bank anywhere.

There have been some problems for on-line betting and gaming operators as a result of US pressure which has caused many banks to refuse to handle credit card transactions with a US origin; but this is perhaps just a temporary situation. How many banks can afford to refuse their share of a business variously valued at between $10bn and $50bn, and which is certain to increase at a very rapid pace for years to come? Will even the US want to damage its own financial institutions by excluding them from this lucrative business?

The most important international defence against money-laundering is 'Know Your Customer' regulation, which imposes a duty on banks to inspect their customers and their customers' transactions. Whatever the origins of the FATF and OECD offshore blacklistings, there is no doubt that standards have risen over the last year or two; indeed by now they are probably higher offshore than they are onshore. The problem with fighting money-laundering through controls on banks or bookmakers is that, when you close one door, another one will open around the block. There is an unlimited supply of tropical islands and the boom in on-line casinos is probably only just beginning. The regulators have a Sisyphean task and will never get to the top of the hill.

The Conclusions For Offshore E-Commerce

It's hard to avoid the conclusion that, as regards betting and gaming, the genie has got out of the bottle and it's difficult to see how anyone is going to put it back in again. The response of the UK's Treasury to the mass exodus of its bookmakers, in which it gave in to the idea of tax competition without so much as a second thought, shows how high-taxing governments will typically respond to individual threats from offshore. But they can't easily extend this principle to other sectors: the betting and gaming industry has its own tax structure in most countries, so it's fairly easy for a government to give bookies fiscal favours just by removing its special tax - in most of business and industry, tax favours directed at a particular sector would be seen as discriminatory, if not illegal under State Aid rules. And the fiscal favours may not work even in the betting and gaming industry: UK bookmakers still have to pay a 15% tax on their gross profits (estimated to be an effective 19% under the published rules), plus 30% corporation tax on their eventual profits.

It may be that firms with a UK listing (which are pretty much condemned to paying UK taxes) such as Ladbrokes and William Hill will continue to base themselves in the UK; but their call centres will be in Ireland, and their back offices in Bangalore. Privately-owned firms are less likely to stay: what the Chancellor gives them today another one can take away tomorrow - who will trust a government's promises?

After betting and gaming, then, which sectors will go offshore, and when? There is a wide range of possible candidates, including:

Retail businesses dealing in intangibles or intellectual property, such as software or music
Electronic publishing enterprises
Online reservations
Telecommunications services
Language translation services
Education and Internet-based training
Online gift certificates

Online brokerages and other financial services, including insurance
Legal services
Software and other technical support
Research and online information services
Internet Service Providers (ISPs)
Metamediaries and access portals
Corporate services

Data warehouse centres for processing and storing data
Database management services
Certification and verification services for business and consumer documents
Hubs for secure transactions and communications
Supply chain management centres
Communications and billing hubs for fibre optic and satellite systems
Network monitoring facilities and services

It's a difficult task at this point to guess which sector will be first, although there are isolated cases of offshore activity for almost every line on the above list.

What can be said is that there are several main requirements needing to be satisfied before a significant part of any business sector would come to see offshore e-commerce as a real and safe option:

• There must be a clear legislative environment both in and around the chosen jurisdiction. This requirement is satisfied in that many individual offshore jurisdictions have passed electronic transactions laws (including Bermuda, Ireland, Gibraltar, the Isle of Man and Hong Kong) but the uncertainty created by the OECD's blacklisting process and the lack of consensus over the tax treatment of e-commerce both stand in the way of total clarity. These aspects are being worked on intensively in a number of forums.

• There must be redundant bandwidth and 100% reliable technical support for e-commerce in the chosen jurisdiction. These conditions are satisfied by now in Bermuda, Ireland, the Isle of Man and Hong Kong, and perhaps in some other jurisdictions; the perception of onshore companies is probably lagging behind the reality, but that is just a matter of education.

• There must be a growing market for a company's e-commerce product among its customers. The dotcom meltdown had obviously been unhelpful in this respect; yet volumes of e-commerce continue to grow at high percentage rates in many of the above sectors. While the bricks v clicks argument rages on and while the jury stays out on consumers' willingness to trust the Internet, wholesale conversion of new business sectors to offshore may remain limited.

• There must be a reliable and scalable systems 'platform' to deliver a company's electronic product, which is seen as such both by providers and consumers in a sector. This condition was fulfilled for betting and gaming operations by 1999, and the result has been an explosion in the number of offshore sites. Most major Internet systems providers (such as Microsoft and Sun Microsystems) have announced or released e-commerce business platforms, and the process of customising these to specific sectors is well advanced in many of the business sectors listed above.

So offshore e-commerce will happen, and it is likely to happen in a big way, soon. Who will be first? It's little more than a guess, but it may be that from the list above, electronic publishing, on-line reservation services and on-line financial services will be some of the early winners for offshore e-commerce.