Insight

Countdown to compliance

Malta’s iGaming industry is evolving from fledging upstart to mature market, but companies may have a thing or two to learn from the island’s successful finance sector, says Vladimiro Commodini of RSM.

RSM has been operating in the iGaming industry since its inception in Malta. Can you give us an overview of your services and explain how you have seen the industry evolve and develop throughout the years?

The iGaming industry isn’t the same as it was some 10 years ago. RSM was set up in 2005 – at a time when iGaming really started to take off in Malta. In the industry’s early days, many people thought they could make a quick buck by owning a gaming company and didn’t really see the bigger picture and the implications of such a business. I was a manager at that time, and together with one of the firm’s partners, started to build up our iGaming service line. We are one of the few firms providing a 360-degree-service to gaming companies. We assist clients with corporate structuring and licensing, while  also providing IT advisory and compliance support. Audit, accounting and payroll also come into play once the company is operational. Throughout the years, the industry has matured significantly. Most companies that reach out to us today know very well what it means to operate in this industry, although some need help tweaking their paperwork or documenting their business processes.

How would you describe the state of the industry today and what are the pain points iGaming operators often ask you to address?

This is a highly competitive industry and increasingly stringent regulations are emerging. While more countries are regulating this industry, there are also a number of EU directives that businesses need to comply with. Operators today often seek advice on compliance issues when entering new markets, and compliance costs have increased significantly. Although I cannot comment on exact figures, I can tell you that the profits are not what they used to be. It is a well-known fact that player loyalty is minimal and the cost of acquisition is high. Intermediaries and other middlemen are also putting pressure on profit margins.

What are the key challenges when accounting for iGaming companies these days?

One of the most challenging aspects with respect to accounting for gaming companies relates to how a company accounts for bonuses. Bonuses offered by gaming companies can typically be divided into two types: those that are immediately payable or available as credit to the player, otherwise known as cashable bonuses; and those that will only become so once the player has satisfied a number of pre-set criteria, such as, for example, the number of bets placed. These are referred to as non-cashable bonuses. Cashable bonuses are accounted for by debiting the profit and loss account and creating a liability.  On the other hand, the company would typically consider the likelihood of the realisation of the non-cashable bonus in order to determine to what extent a provision should be accounted for, with the excess being possibly disclosed as a contingent liability. This places a significant burden on a company’s management to ensure that appropriate historical data is monitored and updated in a consistent manner that would enable the management to make such distinction in a timely and accurate manner.

The iGaming industry has seen substantial changes in recent years as a result of regulatory and fiscal reform on a European level.  For instance, 2015 saw the introduction of new VAT rules. How has the sector reacted to this new reality?

The new place of supply services rules engaged most gaming operators, but not to the level expected. The majority of operators just expected the regulations to be postponed to a later date – something that did not happen. It was written on the wall that this was going to happen, but many companies left it to the last minute. In 2016, we then saw a catch-up process by those operators who adopted a wait-and-see approach and a re-alignment by the operators in the industry.

What needs to be on the radar of iGaming companies in 2017?

Primarily, 2017 will be the year of the Fourth Anti-Money Laundering (AML) Directive. The AML Directive is supposed to be transposed into national law by June 2017, and it stipulates that online casino operations are now classified as subject persons, and therefore a more rigid Know Your Client (KYC) process is to be followed by the operator. Malta’s Remote Gaming Regulations currently require due diligence documentation upon cumulative withdrawals of € 2,330. The AML Directive requires a more risk-based approach to be adopted based on level of transactions. The transactions may be carried out in a single operation or several operations, however once the € 2,000 mark is reached, enhanced due diligence needs to be carried out.  As a result, operators need to get on board and step up their game in this respect to prepare for the changes. Furthermore the revised FATF recommendations demonstrate that operators should maintain the necessary information obtained through customer due diligence measures for a period of at least five years.  This is, in fact, potentially in conflict with the Data Protection regulations that allow for the ‘right to be forgotten’. In July, we will see how different authorities and supervisory authorities will deal with it and what level of enforcement we can expect. There will be consequences for non-compliance; Malta, if it wants to uphold its reputation, has to be seen as taking action against anyone who is in default. However, I would expect enforcement to be taken across the board because there needs to be a level playing field.

What other regulatory changes does the industry need to watch out for?

The General Data Protection Regulation becomes law in May 2018. It will introduce a number of changes which will result in increased responsibilities for businesses which process personal data, as well as the introduction of fines as high as €20 million for non-compliance and for personal data breaches. iGaming operators servicing jurisdictions outside of Europe also need to inform their national data protection authority that they are sending data outside of the EU. In addition, companies will be required to appoint a competent data protection officer and carry out an impact assessment. 

What advice would you give to iGaming operators ahead of the regulatory reforms?

Start preparing; do not play the waiting game. In today’s regulatory reality, the industry needs to be more proactive when it comes to meeting new regulatory obligations. They need to step up the pace of change. There are analogies with the financial services industry, which has experienced a similar wave of regulation. iGaming companies can certainly learn from the very proactive approach of financial services companies when it comes to implementing new compliance standards.

Malta has developed a new regulatory framework that is to hit parliament later this year. What’s your opinion about it and what other areas should Malta look into?

I think the market has matured and is ready for a transition to a business-to-consumer and a business-to-business licensing system as envisioned by the new regulatory framework. This will ease the process of applying for a licence, and it will reduce the number of licences required by an operator.

It is a pity that cryptocurrencies are not included in the new legislation. The MGA does not accept bitcoin at this point. This is an area that Malta definitely needs to address as many operators who are keen to use cryptocurrencies are approaching us. They are seeing this as a way to boost their revenue streams because they will be able to target other markets and offer more flexible payment solutions. I understand that there are security concerns regarding the transparency of the source of funds and the stability of cryptocurrencies, but I think these risks are manageable.

What are your expectations for the iGaming industry in the coming years?

Mergers and acquisitions will continue. I am also in favour of regulating affiliates, after all they are the people who bring players to the operators. There needs to be some level of control, in particular if we want to put more emphasis on KYC processes. The industry requires full visibility of the entire cycle. I think a regulatory function at affiliate stage would help in achieving this. 

Vladimiro Commodini is a Certified Public Accountant and partner of RSM Malta who’s responsible for business advisory and back office services. He also heads the unit that provides services to iGaming clients. Vladimiro has extensive experience in remote gaming and is heavily involved in the licencing, pre-certification and compliance processes. Prior to joining RSM Malta in 2005 as a business advisory manager, Vladimiro worked with one of the big four firms on long-term secondments overseas. 

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