The Grand Chamber of the European Court of Justice (ECJ), in a judgment handed down on 6 March 2007, decided that the criminal sanctions taken against a group of Italian traders who accepted bets on behalf of foreign bookmakers were contrary to EU law. One of Britain’s largest bookmakers, Stanley International Betting Limited, is celebrating the success of this ruling in a battle which has pitched betting companies against those Member States that are trying to protect their State monopolies. The ECJ decision comes at a time when Charles McCreevy, Commissioner for the Internal Market and Services, must decide what penalties to impose as a result of legal action commenced against several Member States operating a monopolistic regime, including France, Germany and Italy, an action that was extended to other Member States at the end of March 2007. Let us examine this ever-evolving area of European legislation.

The ECJ has clearly stated that the current Italian gaming regulations hinder the freedom of establishment and the freedom to provide services, pillars of the Rome Treaty. In Italy, the running and collection of bets is subject to the granting of prior police authorisation to operate a gaming franchise. The sanction for contravening these rules is up to three years in prison. The criminal proceedings referred to above concern three managers (including a Mr. Placanica) of Italian betting outfits linked to Stanley International that failed to obtain the relevant prior franchise authorisation. Therefore, until 2003, participation in the tendering process for such franchises was only open to companies whose shareholders were personally identifiable, which of course excluded all listed companies. Hence, Stanleybet, holder of a licence in England, was excluded from the tender process launched by the Italian public authorities.

However, did the decision in Gambelli (ECJ, 6 November 2003) not set out a clear test, confirming that any State monopoly was only valid if it was the most appropriate way in which to respond to a public demand for such a restriction? Gambelli predates an Italian Supreme Court judgment setting out that it was not within the European judges’ remit to decide upon the necessity and proportionality of national criminal sanctions, reasoning that it was outside of the scope of EU law, and that the English bookmaker’s licence only applied within its given national jurisdiction.

The ECJ, responding to references from the Criminal Courts of Larino and Teramo, held that:

“a law which prohibits (subject to criminal sanctions) the carrying out of gaming activities (the collection of bets, advertising, online-betting etc.) without the holding of a franchise authorisation from the police in the relevant jurisdiction effectively restricts the freedom of establishment and the freedom to offer services.”

Despite Gambelli, several governments, including France, have since strongly reaffirmed their belief that such restrictions (even a State monopoly) in the gambling and betting sectors may be justified by reference to the need for consumer protection owing to the harmful effects that gaming can cause, such as addiction or depression for compulsive gamblers, not to forget the risk of fraud or the laundering of money for criminal purposes. Yet, should these limits not comply nevertheless with the conditions of necessity and proportionality set out by the Gambelli test?

Pursuant to this test, criminal sanctions constitute a restriction on the freedom to offer services, but the ECJ highlights that such a restriction may in certain cases be justified by:

“particular arguments of a moral, religious or cultural nature, or where the consequences of such activity are likely to be morally or financially prejudicial to the individual or the society which is involved in the betting games.”

This was precisely the argument which was raised by the Italian government in defence of its regulatory framework, claiming that its policy of increasing the number of franchises is aimed at bringing those consumers who bet on the black market within the regulated sector. Such an argument will be noted with some interest by Française des Jeux (“FDJ”) and Pari Mutuel Urbain (“PMU”) (French bookmaker companies), both of whom operate under State monopolies, and who will hope that the new French government continues to follow Italy’s line of argument before Commissioner McCreevy.

The ECJ accepts that a franchise system could constitute an effective means of controlling the number of active operators within this sector. Nonetheless, it considers that the exclusion from franchise tenders of all stock companies goes further than is strictly necessary in order to ensure that no operator is involved in criminal or fraudulent activity. In effect, the court is saying that there must be other means of achieving control over the accounts and the activities of operators whilst at the same time impacting to a lesser degree on the freedom of establishment and the freedom to offer services. By way of example, it suggests a system of requesting information during the tender process about the principal shareholders and company representatives.

So how will Romano Prodi’s government react? Will it be in a position to accept to relaunch fresh tenders? Indeed, the black letter law is unambiguous on this point:

“a Member State may not impose criminal sanctions in the event of a failure to fulfil an administrative formality, where it has refused, or rendered impossible, compliance with that formality, in contravention with EU law.”

Even though the ECJ decision appears to protect equality between all European bookmakers insofar as it confirms that a blanket ban on foreign bookmakers constitutes a restriction on the freedom to offer services, it nonetheless leaves a certain degree of room for manoeuvre for Member States that use monopolies in their attempts to justify the ways in which their protective regime contributes towards the protection of certain categories of individuals and the public interest. For this reason, the judgment was welcomed by FDJ and PMU, who felt that their monopolies were safe for some time yet.

At the beginning of March 2007, as had been announced for some time previously, the French government inserted sections relating to the gambling industry into its Act on crime prevention. These sections impose an obligation on Internet service providers or ISPs to make it clear to their subscribers which sites are prohibited by law and what are the risks that they would incur by logging onto them. We await the statutory instrument which will set out the precise IT mechanisms that are required to be deployed by ISPs, but we already know that those who fail to comply with these new regulations risk up to one year in prison and a fine of €75,000.

In Munich in April this year, the local Administrative Court fined AC Milan heavily (€100.000), after they decided to play their Champions League quarter final clash with Bayern sporting a “Buin” logo on their shirts. Indeed, sports betting (leaving horse racing aside) is subject to Länder monopolies, a position that was confirmed by the Constitutional Court in a judgment of 28 March 2006, and the advertising of Buin contravened Bavarian State law.

Even so, Placanica, as the recent ECJ case has become known, provides some comfort for the Commission in that it now knows that the ECJ will remain a strong ally. Brussels has recently enlarged the scope of its enquiry and it is now waiting to see against which Member States it will be necessary to bring Article 226 proceedings before the ECJ.

In the meantime, the United Kingdom has realised the huge revenue this industry sector could bring. The UK government, driven by Gordon Brown, the future Prime Minister, is preparing to introduce an Act allowing offshore-based online bookmakers and gambling companies to obtain a British licence for their activities, in return for a low rate of tax based on fixed profits (of perhaps some 2 to 3%). Such companies will still be exempt from VAT and other taxes normally payable by UK-based companies.

In the betting industry nothing has yet been achieved, although it appears that 2007 has brought with it a wind of change. Belgium has very recently decided to switch from a monopolistic regulatory framework to a system of non-transferable licences. Poland is also set to follow the same trend. In March 2007, the World Trade Organisation condemned the United States for its hindrance of free trade in the gaming sector, a stance which echos the ECJ’s ruling. We must not forget, either, that at the beginning of the same month, the Belgian-Swedish online betting company, Unibet, commenced legal proceedings against the organisers of the Paris-Nice cycle race, after the team they sponsor was prohibited from using the name (but which still competed under the colours of Canyon, the bicycle manufacturer). Mr. McCreevy himself has announced, in an open letter, the Commission’s support of Unibet’s claim. The race organisers are relying on the illegality of Unibet according to French law as it is currently worded.

However, if we are to believe the precedent of Placanica, the French courts will be obliged to assess the legality of the French regulatory system vis-à-vis EU law, and to decide whether, as set out in Gambelli, the prohibition that exists in France is a necessary and proportionate restriction. But the battleground may shift progressively to what is justifiable or not on grounds of crime prevention. There, the principle of “home state control” will play its fullest role and may prove to be a formidable defence for pro-monopoly governments whose fight against crime and money-laundering is today so-often associated with the global fight on terror in the post-September 11 world. Nonetheless, the momentum is for the time being clearly in favour of the liberalisation rather than the protectionism of this industry sector.

To be continued…