South African Gaming Developments
By Wayne Lurie, Lurie Inc.; and Garron Whitesman, Whitesmans Attorneys

South Africa is enjoying boom times and so is its gaming industry. For the financial year ending March 31, 2006, the National Gambling Board reported that the 35 licensed land-based casinos in South Africa achieved a total turnover of approximately R141 billion (approximately U.S. $20 billion). The casinos, together with bookmakers and totalisators, bingo operators and limited payout machines, enjoyed a turnover in excess of R220 billion (approximately U.S. $30 billion), [1] and the industry continues to grow.

South Africa is situated at the foot of Africa and consists of nine provinces. According to mid-2006 estimates, its population is approximately 47 million people. In addition to its citizen population, South Africa has a substantial refugee and illegal immigrant population. The four major provinces by population are Gauteng, Eastern Cape, Kwazulu-Natal and Western Cape. There are six land-based casinos in Gauteng, five in the Eastern Cape, five in Kwazulu-Natal and five in the Western Cape.

In June of last year, the Financial Times described South Africa as "a country enjoying high commodity prices, solid growth and low interest rates."[2] Financial Mail, reporting on the emerging black middle class, noted that the share of income going to the black majority has risen from 35 percent in 1990 to 50 percent today. According to World Bank's Doing Business 2007 report released in September 2006, South Africa ranks among the top 30 countries in the world for doing business and among the top 10 economies in the world for the protection of investors. The country also scored high in sectors measuring the ease of starting a business and obtaining credit. [3] Finally, according to international business risk consultancy Control Risks, the political risks of doing business in South Africa are regarded as low, albeit the security risk for business is regarded as medium overall. The political ranking places South Africa on par with Canada, France, Germany, India, Ireland, Italy, Japan, the Netherlands, Spain, Switzerland, the United Kingdom and the United States. The security risk rating, however, ranks South Africa with Bolivia and Russia. According to the report, this means there is a "reasonable possibility of security problems affecting companies, but there is no threat directed specifically against foreign companies." [4] Anyone seeking to do business in South Africa should be aware of the current situation there for the scope of business expansion.

No doubt the casino industry will be similarly affected by the growth and prosperity that the country is enjoying at present. The Football World Cup is to be held in South Africa in 2010; the area will probably continue to experience growth up until that event and possibly even well after.

South Africa has a stable and well-regulated land-based casino industry. Forty national land-based casino licenses have been authorized, and 35 have been issued to date. The licenses are issued by the various provincial licensing boards in each of the nine provinces under delegated authority from the National Gambling Board. The federal legislation that regulates gambling in South Africa is the National Gambling Act [7 of 2004] and the regulations thereunder. In addition, each province has its own gambling-related legislation that may not be inconsistent with the National Gambling Act.

Currently, the most interesting development in the South African gaming environment is the move to become a full-fledged licensing and regulatory jurisdiction for online casinos. While a policy decision was made to control the offerings and provisions of online gambling services to South African residents, it does not prevent an operator from abroad from basing its worldwide operations in South Africa.

Section 11 of the National Gambling Act prohibits engaging in, or making available, an online gambling game to residents of South Africa, and Section 15 prohibits the advertising and promotion of such activities in the country. In a recent matter before a provincial High Court, the prohibition was confirmed in respect to an online casino and poker room operator not based in South Africa. The matter is currently pending appeal before the Supreme Court of Appeal, the highest court in South Africa for non-constitutional issues.

Under the National Gambling Act, a committee of experts and interested parties convened to make recommendations on how to regulate online gambling in South Africa. The committee rendered its report in September 2005; a draft bill was published pursuant thereto and endorsed by the Cabinet in December 2006. The bill is following the parliamentary process into law. Most committee recommendations have been included in the bill, but some important details have not, and have instead been left for the Minister of Trade and Industry to draft.

What is known:

• Licenses will be issued at a centralized level by the National Gambling Board, not the provincial licensing boards;
• Software testing will be required on a results-based basis, with source code audits if problems should arise at a later date;
• A corporate entity will need to be established in South Africa;
• All operators, key-personnel and software providers will be required to be licensed, and pass strict and rigorous probity testing;
• The licenses will be renewable annually;
• The operator's gaming server relevant to the South African market must be situated in South Africa;
• There will be strict financial guarantees, payment mechanisms compliance, anti-money-laundering rules and compliance requirements;
• There will be regular audits and inspections, and approved control systems will have to be utilized;
• There will be stringent requirements and rules for age verification, know-your-player and data protection;
• Operators will need to prominently display game rules and provide easy access and contact details to members of the public;
• Prompt remittance of funds to players and refunds to inactive players will be expected;
• Respective gambling warnings and help center details must be as prominently displayed as they are in land-based casinos;
• Rules around content and advertising will likely be in line with requirements and limits currently imposed on land-based operators.

What is not yet known:

• What the gambling tax will actually be (the committee recommended 2 percent of net gaming revenue);
• What the annual licensing fee will be (the committee recommended R150,000 per annum);
• What the license application fee will be (the committee recommended R250,000 plus the costs of probity investigations and testing);
• Whether there will be a restriction on the jurisdictions from which players emanate;
• Whether the number of licenses issued will be restricted or not;
• The extent to which a Black Empowerment stake in the local business of the operator will be required in order to secure a license, albeit there is little doubt that such a stake will be required.

It is anticipated that it will be approximately one year before the first license is issued, but for the reasons set out in the opening paragraphs and the reasons to follow, an online license opportunity in South Africa may be an attractive option for both local and foreign operators.

South Africa is arguably the superpower of Africa. Little business of any real substance occurs in Africa without involvement from South Africa. South Africa is an attractive market, but may also act as a springboard to the rest of the continent.

The country has advanced professional, telecommunication, banking, insurance and financial industries. It has emerged as a top-tier democracy after an unprecedented transition from Apartheid in 1994, becoming a stable and healthy country that is reaping the benefits of certain policies and growth plans put in place by the ruling African National Congress party. South Africa has major transportation links and hubs to every continent in the world, with most major destinations being a simple overnight flight away.

Finally, with this sophistication comes many rules and regulations under which to abide, including a foreign exchange control regime that is slowly being phased out, but with appropriate structuring and advice, this should not dissuade foreign investors seeking to do business in South Africa. Indeed, it is anticipated that with the growth of the economy, the emerging middle class, high-speed broadband rollout and generally positive business sentiments in South Africa, the country may well be an attractive proposition for both online and land-based casino operators and suppliers for many years to come.

[1] National Gambling Board. "National Gambling Statistics 2005/2006 Financial Year." www.ngb.org.za.

[2] 12 June 2006. "Good times in SA: Financial Times." www.southafrica.info.

[3] 6 September 2006. "SA scores for ease of business." www.southafrica.info.

[4] 8 November 2006. "SA rated 'low' for political risk." www.southafrica.info.