Gambling Business in Ukraine: To Play or Not To Play?

29 12 2007

Probably, there is not another business having so many aspects of its operations to be regulated by state at such extent as the gambling. The extent of such regulation is justified because the gambling operations have large amounts of cash that are uncounted and unrecorded as the gambling takes place, involving high risk of fraud and abuse for criminal activities such as money laundering, skimming etc.

Thus, the state control in the field usually focuses on three different levels: (i) controlling gaming operators activities, (ii) determining types and amount of legal gambling permitted and, finally, (iii) consumer protection. Moreover, one of the advantages of such state controlled gambling is that the funds received by the state from such activities can be used for the public purposes e.g. by means of the state lottery Sportlotto the USSR succeeded to collect funds for the 1980 Olympic Games organisation.

Consequently, involvement of governments through regulation and taxation, leads to a close connection between the government and gaming organizations, where legal gambling provides significant revenue for the state budget, such as in Monaco or Macau.

Despite, the market started forming in early 90s and the lottery and gambling market Ukraine is represented by many different operators, there is no special legal act to regulate the diverse sphere of licensing conditions of economic activities in issuing and holding lotteries as well as the organization of gambling business in Ukraine. Moreover, notwithstanding the fact that gambling business is currently one of the most profitable in Ukraine, a lot of controversies and discussions arise in the society mainly related to the moral aspects and its regulation. According to the recent publications almost every gambling outlet operating in Ukraine works under “black” or “grey” schemes allowing it to skim its profits and to scrub around the unclear requirements of the applicable regulations.

The present article aims to provide general overview of the effective regulations on lottery and gambling activities in Ukraine as well as the requirements applicable to lottery and gaming operators.

CURRENT REGULATION
At the present time there is no unified legislative act on gambling in Ukraine, In absence of the latter, the lottery and gaming activities in Ukraine are regulated by the number of legislative acts, such as: the On Licensing Certain Business Activities Act of Ukraine (Licensing Act), the On Patenting Certain Business Activities Act of Ukraine (Patenting Act) and a number of special by-laws issued by the Cabinet of Ministers of Ukraine and the relevant regulators etc.

Pursuant to the Licensing Act all activities related to organization and maintenance of the totalizators, gambling outlets, issuance and drawing of lotteries, organization and operation of the gambling activities are subject to licensing. Furthermore, activities on rendering services in the gambling sphere are subject to patenting as well. Moreover, Ukrainian legislation in force provides different procedures and establishes different criteria for obtaining a lottery operator licence and a gaming operator licence. Thus, the present article will consist of two parts dedicated to regulations on each of the said activities separately.

LOTTERY
The licensing authority for lottery business in Ukraine is the Ministry of Finance of Ukraine, which is also in charge for further maintenance of the licenses and effects control over compliance with the licensing conditions by a holder of the licenses.

Even though there are no provisions directly stipulating for a state monopoly, pursuant to the Licensing Rules for Business Activities on Issuance and Drawing of the Lottery (Lottery Licensing Rules), only so called state lotteries exist in Ukraine. The said act provides that the following state lotteries may be issued in Ukraine: (a) bingo; (b) toto; (c) state instant lotteries; (d) discharging lotteries; (e) numerical lotteries.

According to the rules stated above and the Corporate Profit Tax Act of Ukraine of 28 December 1994, the state cash lottery is defined as a drawing of lots with a prize pool of at least 50% of the amount of revenues received, along with deductions to the State Budget of Ukraine amounting to at least 25% tax rate, which applies to the income left after allocations to the prize pool. Moreover, an amount of revenues excess over expenses related to issuing and drawing the state lotteries as well as the state lottery gains are tax-exempt in Ukraine.

Requirements applicable to lottery operators
The Lottery Licensing Rules establish the exhaustive criteria an applicant must comply with to obtain the lottery operator licenses are divided into two groups.

(i) Organizational requirements
(a) An applicant shall be a legal entity, registered under the laws of Ukraine; its consitutent documents shall contain the specific reference to such business activity as «issuing and drawings the lotteries»;
(b) The minimum amount of the authorised capital of the applicant must be EUR 5 000 000,00 (five millions) and shall be contributed in monetary form only. Although it is not directly stipulated by the Lottery Licensing Rules, in practice Ministry of Finance requires that the said amount of authorized capital is fully paid up before applying for the licence.

(ii) Qualification Criteria for Managerial Staff:
(a) Operator’s chief executive officer/chief manger shall (a) possess higher education degree, (b) have work experience in managing lotteries issuing and drawing or in the financial institutions not less then 3 years and (c) have unblemished business reputation ;
(b) Chief accountant of the operator shall (a) possess higher education degree in economy, (b) have work experience as an accountant not less then 5 years and (c) have unblemished business reputation.

Conditions Imposed on a Lottery Operator
The Ukrainian legislation in force provides for extensive list of the conditions to be followed by a operator while conducting activities under a lottery operator licence including: (a) net assets requirement; (b) conditions for lottery issuing, distribution, drawing; (c) requirements applicable to prize funds; (d) requirements applicable paying cash prizes; (e) conflict of interests requirements; etc.

Lottery Operator’s Branches
It shall be noted, that a lottery operator licence covers all registered branches and regional offices of an operator, if they were notified to the Ministry while applying for licence. Furthermore, an operator may extend the licence for new branches and/or offices conducting business under the same licence. For that purpose an applicant shall submit an application to the Ministry requesting issuance of the copy of licence, as well as required documents specified above. In such case, the operator shall pay a state duty for a copy of the licence in the amount of one tax-exempt minimum income.

Lottery via Internet and Mobile Networks
There are no specific regulations applicable to lottery in/via the Internet and mobile networks in Ukraine; but, at the same time, the Ukrainian legislation contains no prohibition with regard to conducting the latter. The Lottery Licensing Rules provide that operator can use an electronic system for lottery payments receipt and data processing. The only limitation that may be applicable is the requirements provided for by the said Rules with regard to lotteries drawings i.e. the latter provides that the lotteries drawings shall be performed with presence of the special drawing commission and live-broadcasted or delayed (pre-recorded) broadcasted with further broadcasting of drawings results. In such a case the control for the said lotteries is performed by the State Treasury of Ukraine (the “State Treasury”) in the real time regime. While doing the latter an operator shall provide the State Treasury with the controlling tools allowing the State Treasury to perform: (a) enter control before termination of tickets sale/payments; (b) exit control after the tickets sale/payments; and (c) exit control after the drawing the lottery.

GAMING
As a result of the absence of the single legislative act on lottery and/or gaming (gambling) operator activities and of the lack of transparency, regulations and specifications on the issue, there are a lot of the gaps and loopholes in Ukrainian legislation, one of which is existence of two different regulators for issuance of the gaming license for gambling activities, namely: (a) organization and maintenance of the gambling outlets and totalizators; and (b) organization of the gambling activities.

At the same time, the Ukrainian legislation does not also contain description of the difference between the above-mentioned activities. Pursuant to the Decree on Licensing Authorities there are two licensing authorities in Ukraine, namely: (a) the Ministry of Finance issuing licences for organization of performance of gambling activities; and (b) local state authorities (e.g. the Kyiv City State Administration, state administrations in each region of Ukraine, etc) issuing licences for organization and maintenance of the gambling outlets and totalizators.

Furthermore, the licence criteria for gambling activities, which have been adopted recently, have no exhaustive interpretation or specification as to the newly established provisions of Ukrainian legislation. Moreover, these provisions are rather overlapping and do not provide clear answer to the question which one of those licences or both of them shall be obtained by the operator.

Licensing
An operator license for organization of performance of gambling activities may cover the following types of activities: (a) organization and conducting gambling on the slot-machines; (b) bookmaker activities; (c) organization and conducting gambling in the electronic (virtual) casino; and (d) organization and conducting gambling in the casinos and other gaming. The business entity applying for the licence shall specify for which type(s) of the above-mentioned activities it is applying for.

Even though there is a uniform the Gambling Operator Licensing Rules for Organization of the Gambling Activities (the “Gambling Licensing Rules”) effective for the whole territory of Ukraine, there are no uniform licensing rules for organization and maintenance of the gambling outlets and totalizators. The latter shall be adopted by the relevant local state authority for each region, and thus, the said rules vary from region to region.

Patenting
In addition to licensing activities on rendering services in gambling sphere by business entities are subject to patenting. Pursuant to the Patenting Act the trade patent shall be purchased for each branch and/or outlet and/or for each structural item (i.e. gaming place, table, slot-machine etc.). The Patenting Act does not provide any clear answers as to whether an Internet web-site or mobile game shall be regarded as a structural item and shall be subject to patenting. Please note that the local state authorities in each region of Ukraine are authorized to issue of the patent for gambling operators in Ukraine according to the Patenting Act.

Gaming Operator Licensing Criteria
The Gambling Licensing Rules provides the exhaustive criteria for the gaming operator to comply with, namely:
(i) An applicant shall be a business entity;
(ii) Operator’s chief executive officer/chief manger shall (a) possess basic or higher education degree, (b) have work experience relating to the gambling not less than 1 year;
(iii) Chief accountant shall (a) possess accounting education or basic or higher education degree in economy, (b) have work experience as an accountant not less than 3 years;
(iv) All employees of the operator shall be not younger than 18 years old and have professional background, which is necessary for organisation of gambling activities.

Applicable Restrictions
Ukrainian legislation in force does not contain any specific restrictions applicable to gaming operators. However, the Gambling Licensing Rules provide for extensive list of the conditions to be followed by a operator while conducting activities under a licence including: conditions for organization and conducting of gambling business; requirements regarding operator’s branches and/or offices; requirements on documentation and reporting; requirements on working regime of casinos; requirements with regard to gambling rules; amount of the maximum and minimum stakes; reporting obligations; etc. Moreover, pursuant to the On Advertisement Act of Ukraine , the advertisement of all services subject to licensing shall contain name of a services provider and a licence information i.e. number, issuance date, authority etc. The local authorities may provide some additional advertising and marketing limitations to be imposed on gaming operators in certain regions conducting their activities under licences issued by the said authorities.

Internet & Mobile Networks
As of today, Ukrainian legislation in force contains no prohibition with regard to gambling in/via the Internet and mobile networks. At the same time the Ukrainian legislation does not distinguish the requirements for the Internet and/or mobile networks containing only the notion of electronic (virtual) casino.

Gambling organisation and operation in electronic (virtual) casino shall be regarded as activities of a licensee, operating the gambling using the software placed on an electronic server making it possible for an indefinite group of persons to take part in such gaming via telecommunication networks (for instance, the Internet). In addition, the Gambling Licensing Rules prohibit the following activities of gambling licensee operating the gambling activities via electronic (virtual) casino:
(i) Placing electronic server of electronic (virtual) casino outside customs territory of Ukraine;
(ii) Placing electronic server of electronic (virtual) casino at the address other then indicated in the licence;
(iii) Displaying on the gamblers’ monitors inadequate information.

Moreover, while operating via telecommunication modes gambling operators shall place on the terminals of electronic (virtual) casinos the following information: (a) licence’s details; (b) name, location, identification code and phone numbers of a licensee (a legal entity); (c) a server location, mail and e-mail addresses, and phone numbers (under which g information on the server work may be obtained); (d) rules of gambling/gaming, including the order of stakes and prize payments; (e) an announcement that persons under 18 are not allowed to play.

OTHER APPLICABLE REGULATIONS
Money laundering legislation
Due to its specifics and peculiarities, the gambling business is scrutinized by the state bodies responsible for the control of money laundering. According to the requirements of the On Prevention and Counteraction of Legalization (Laundering) of the Proceeds of Crime Act of Ukraine , business entities organizing and operating casinos and other gambling outlets are obliged to carry out internal financial monitoring – as a set of measures to identify financial operations related to the legalization (laundering) of income illegally received. The monitoring consists of mandatory and financial monitoring of a prize (winning) payment to a person in a casino or other gambling outlets in an amount equal to or exceeding UAH 80 000 or equivalent of the said amount in a foreign currency. The mechanism for such measures is provided by the Order of Internal financial Monitoring by Business Entities Dealing with Organization and Operation of Casinos, Other Gambling Outlets, and Pawnshops , according to which gambling operators are obliged to identify persons who carry out financial operations, that are subject to financial monitoring.

Identification for tax purposes
The identification of persons by gambling operators shall be carried out according to the requirements of the On Individual Income Tax Act of Ukraine for the tax control purposes. The said Law provides that a person shall produce his/her passport while entering a gambling outlet. Residents of Ukraine shall be identified by (a) first name, patronymic, surname; (b) date of birth; (c) passport or other document identifying the person; (d) place of residence; (e) identification number according to the state register of individuals/tax payers. Non-residents shall be identified by: (a) first name, patronymic, surname; (b) date of birth; (c) passport or other document identifying the person; (d) citizenship; (e) place of residence or temporary stay. Please note, that the said Law does neither provide whether the said requirement shall be applicable to virtual casino nor specify how the said identification shall be conducted in virtual casinos.

CURRENT TENDENCIES
Thus as far the lottery operator market is closed to new-comers because in 2005 the moratorium on business activities relating to issuing and drawing the state lotteries was imposed by the Parliament of Ukraine. Currently a number of companies wishing to enter the market as well as market players are lobbying adoption of the special law on lotteries in order to set aside the above said moratorium and establish transparent and comprehensive regulation.

The regulation may be improved by adoption of the On Lotteries and Other Gambling Games in Ukraine Draft Act (Draft Act) submitted by the Ministry of Finance to the Ukrainian Parliament and registered with the latter in April 2007. Pursuant to the Ministry the said Draft Act provides for establishment and application of more clear mechanism of state regulation of the lotteries and gambling activities, aiming at the protection of the gamblers’ rights and interests and preventing misuses and frauds in the sphere.

The Draft Act provides licensing for the following types of business activities: (i) activities on organization and performance of gambling games on slot-machines; (ii) bookmaker activities; (iii) activities on organization and performance of gambling games in casinos. Moreover, it establishes the unified rules for conducting the gambling activities in Ukraine and single regulator in the sphere of gambling business, namely the Ministry of Finance, which appears to ease the procedure for issuing the licence and exercise the state control over the gambling operators. It is worth also mentioning that the special attention is paid to the issue on the location requirements for the gambling operators.

Furthermore, the new regulation provides for strengthening of the financial interests of Ukraine in the sphere of organization and performance of the lotteries and gambling activities by means of the revenues received as the result of (a) the increase of mandatory deductions to the State Budget of Ukraine amounting payments of the lottery operators to the state budget from 25 % till 35 % tax rate applied to the income left after allocations to the prize pool, and (b) the establishment of the current payments for licences for each casino, slot-machines’ hall, bookmaker’s office.

The said Draft Law is also intended to eliminate a number of the existing gaps and loopholes of Ukrainian legislation mentioned above, namely:
(i) Existence of two licenses for gambling activities i.e.: (a) for organization and maintenance of gambling outlets and totalizators; and (b) for organization of performance of gambling activities, both of them having different rules and regulators; and
(ii) Patenting of the gambling activities.

At the same time, the said Draft Act contains a number of controversial provisions as well as does not provide clear answers to a number of questions that arise while performing lottery and gaming business in Ukraine e.g. the said Draft Act prohibits to perform the gambling activities in any way via information telecommunications, incl. the Internet, as well as via other modes of communications on Ukrainian territory.

Notwithstanding the above, we hope that the adoption of the Draft Act will increase the effectiveness of the state regulation in the field of lottery and gambling businesses, eliminate the existing loopholes and gaps in the current legislation, as well as will lay sound foundations of clear regulatory environment for the said businesses.
  1.  Dated 1 June 2000
  2. Dated 23 March 1996
  3. Approved by the Resolution of the State Committee of Ukraine on Regulatory Policies and Entrepreneurship No. 128/1037 of 12 December 2002
  4. Please note that according to the Ukrainian legislation the unblemished business reputation is regarded as clean record for the crimes committed in the sphere of tax, antimonopoly, competition, banking and currency legislation as well as legislation on securities and stock market and financial services.
  5. Decree of Cabinet of Ministers of Ukraine On Approval of the List of the Licensing Authorities No. 1698 of 14 November 2000
  6. Approved by the Order of the State Committee of Ukraine on Regulatory Policies and Entrepreneurship No. 40/374 of 18 April 2006.
  7. Dated 3 July 1996
  8. Dated 28 November 2002
  9. Approved by Decree of Cabinet of Ministers of Ukraine No. 1800 of 20 November 2003
  10. Dated 22 May 2003
Ukrainian Journal of Business Law, December 2007