Italy's Controversial Gaming Market Undergoes Liberalization
By Quirino Mancini

Over the past six months the Italian gaming market has seen more legal and regulatory developments take place than in the previous decade altogether.

License Tender
Such a dramatic acceleration in a country whose politicians have always traditionally preferred to pontificate abstractly about possible reforms, rather than just pragmatically implement at least the most needed and long-awaited ones, was not the result of a sudden pro-market approach by the center-left ruling coalition steered by the former President of the European Union Commission, Romano Prodi.

Quite simply, the need to raise fresh tax revenues to make up the huge Italian treasury deficit spurred Prodi's cabinet to push an unprecedented liberalization process in various domestic sectors, including gaming.

On June 30, 2006, the Italian Council of Ministers enacted a Law Decree (LD) entailing an early mini-budget to slash its deficit by an ambitious €11,2bn. In presenting the LD to the media, Prodi vowed liberalizing economic measures in many sectors including legal and professional services, taxi licenses, select over-the-counter medicines, class actions available to consumer associations, other interest groups, and gaming would help reach their goals.

The measures affecting gaming and betting aimed at liberalizing and somehow deregulating the industry were laid down by article 39 of the LD, entitled Measures to Tackle Illegal Gaming. The same provision also delegated the Italian gaming regulator (AAMS) to implement the relevant regulations by no later than Dec. 31, 2006, concerning, among others, the following services:

• Interactive Peer-to-Peer Remote Betting on Fixed Odds-a brand new gaming product for the Italian gaming market.
• Real-Money Remote Skill Gaming-a brand new gaming product for the Italian gaming market.
• Betting Services other than Horse Racing-operated by companies other than those based in any EU and EFTA countries and even those in offshore jurisdictions, provided they comply with certain fit and proper requirements to be set by AAMS.
• License Tender Launch-with a total no less than 7,000 new land-based gaming shops and kiosks throughout the territory.
• Fresh Regulation of Remote Gaming Services-including real-money skill games subject to AAMS payment for a fee of €300,000.

SIDE BAR:
Tax-wise, the DL provides, with respect to skill games, the applicable rate is three percent of the stake, while for bets other than those on horse races (whose tax rate is slightly lower than 12 percent) effective Jan. 1, 2007, the following rates apply:

• If the fixed odds bets' net turnover recorded over the 12 preceding months is in excess of €1.850 million, three percent per bet up to seven possible outcomes and eight percent per bet with plus seven possible outcomes.
• If the fixed odds bets' net turnover recorded over the 12 preceding months is in excess of €2.150 million, three percent per bet up to seven possible outcomes and 6.8 percent per bet with plus seven possible outcomes.
• If the fixed odds bets' net turnover recorded over the 12 preceding months is in excess of €2.500 million, three percent per bet up to seven possible outcomes and six percent per bet with plus seven possible outcomes.
• If the fixed odds bets' net turnover recorded over the 12 preceding months is in excess of €3.000 million, 2.5 percent per bet up to seven possible outcomes and 5.5 percent per bet with plus seven possible outcomes.
• If the fixed odds bets' net turnover recorded over the 12 preceding months is in excess of €3.500 million, two percent per bet up to seven possible outcomes and five percent per bet with plus seven possible outcomes.

Note: The tax brackets in bold characters are those that will actually apply for the current year.

The DL was subsequently converted into law no. 248 by the Italian Parliament on Aug. 4, 2006 (Law248/07).

As a result of the above liberalization by the Italian government, AAMS called a tender for the award of the following licenses:

• 500 horse races betting outlets.
• 9,500 horse races betting corner points.
• remote horse races betting (unlimited in number).
• 1,900 sports betting outlets.
• 4,400 sports betting corner points.
• remote sports betting and skill gaming (unlimited in number).

The tender process was officially completed and relevant licenses adjudicated on Dec. 28, 2006. A full list of all terrestrial licenses and their respective geographical locations is available on the regulator's site (www.aams.it). A total of 33 remote gaming licenses were also granted, mainly to large foreign-based online gaming operators such as Betfair, Unibet, William Hill, Ladbrokes, Hit Casinos, and 888.

The Finance Act 2007
The liberalization process begun by the Italian authorities in 2006 is, however, far from being over. There are still a few important holes the regulatory level must fill to enhance the offer of gaming products in Italy:

The implementation of a specific set of rules concerning remote skill gaming, which at the moment, are legalized and indeed covered under the scope of the remote gaming licenses recently awarded; but they are not yet regulated in Italy and therefore cannot be launched.

The regulation of online bingo and video lottery terminals; two remote gaming products which currently lay in the same limbo as skill games.

Pending the expected issuance of the above rules by AAMS, the Finance Act 2007 (FA07) kicked in on Jan. 1, 2007. Three provisions contained therein are particularly relevant for purposes of this legislative and regulatory overview.

The first FA07 provision states that by no later than Dec. 31, 2007, AAMS may (but not must) award another 1,000 terrestrial licenses.

The second provision reads as follows: "Card games of whichever type are considered skill-based games, provided (i) they are organized in the form of a tournament, and (ii) the stake is limited to the tournament entry fee only." It is widely believed that this latter provision was stuck in the FA07 to pave the way to the progressive legalization of poker in Italy, although initially only in the form of online poker tournaments that will therefore automatically fall under the skill games category.

The third FA07 provision deals with the controversial restrictions that were already successfully enforced in 2006 against foreign-based gaming sites accepting business from Italy residents without holding an AAMS-granted licence (.com versus .it). These restrictions had been introduced by the Finance Act 2006 (FA06) and eventually implemented with an AAMS decree of February 2006, accompanied by 500+ companies blacklisted as "illegal" gaming sites which the local ISPs were required to make inaccessible from Italy on pain of heavy sanctions. The relevant excerpts from the FA06 text are laid out below:

535. Regardless of any criminal action possibly taken by the prosecutor and by the law enforcement authorities if an offence is perpetrated, the Ministry of Finance-Autonomous Administration of the State Monopolies (AAMS)-notifies the Internet Service Providers about all cases where their web connection services are utilized to offer gaming and betting services without the prescribed AAMS licence, authorization or permit, or otherwise in violation of Italian gaming laws and regulations.

536. The addressees of such notification are required to restrict Internet access as long as it concerns the offer of the illegal gaming and betting services referred to at paragraph 352. To this end, the ISPs will have to take appropriate technical measures in compliance with AAMS directions.

537. In case of breach of paragraph 535 above, an administrative fine will be levied by AAMS ranging from €30,000 to 180,000 for each violation.

The Italian authorities had notable enforced the FA06 restrictions without being notified prior to the European Commission, as prescribed under EC Directive 98/34/CE in matters concerning the adoption by a single member state of technical rules relating to products and services of the information society, which triggered the European Commission to open infringement proceedings (still pending) against Italy.

To prevent another major breach of European law, the FA07 expressly repealed sections 535 to 538 of the FA06 thereby voiding also the subsequent AAMS implementing decree of February 2007. At the same time, the FA07 established that in order to tackle diffusion of irregular and illegal gaming, tax evasion, and elusion, AAMS was to enact fresh rules fully in compliance with community law, to restrict the offer via Internet and cable devices of money-awarding gaming, betting, and wagering services whenever they are not supported by a concession, authorization or license, or are otherwise carried out in breach of the laws and regulations provided by the local authorities.

FA07 fell into place on Jan. 1 and 2, AAMS promptly reiterated its site blocking measures by enacting a decree which mirrors the old one, repeatedly challenged before Italian courts, always to no avail, by various European operators during the course of 2006. The decree is accompanied by an updated 600+ name list of "illegal" gaming sites that cannot be accessed from Italy.

Although this time around AAMS did notify the European Commission in advance about the site blocking measures pursuant to Directive 98/34/CE, it still failed to comply with the standstill period required therein, that in fact will only lapse on March 20, 2007, while the decree has been effective since Jan.2. Hence, arguably, the new AAMS decree also instigated by the FA07 is in breach of European law.

The Imperfect Italian Liberalization
Definitely the most appropriate way to describe the liberalization process that the Italian gaming sector is now undergoing is "work in progress."

The imperative need of the Italian government to bring the budget relatively under control by introducing new products, and thereby new sources of taxable revenue, has proved the real driver of the liberalization, much more than a pro-European approach of the cabinet of Prodi.

After so many years of protectionist rule and a very closed market dominated by three big local operators (SNAI, SISAL and Lottomatica) traditionally backed by the political and judicial establishment, it is no easy nor quick job for the Italian authorities to now start a brand new era with fewer and clearer rules on the one hand and so many new players in the game on the other.

It is therefore expected that the liberalization process will still take quite some time prior to coming to fruition, even though one cannot rule out it might be dramatically accelerated by some external factors, such as the forthcoming ruling due any time soon by the European Court of Justice in re Placanica-Palazzese-Soricchio (C-338-04), and the outcome of the infringements proceedings launched against Italy by the European Commission.

With all the above in mind, the following priorities can therefore be envisaged respectively for the Italian legislator and regulator to coherently bring about an integrated and harmonized liberalization and thereby get definitely rid of the biggest obstacles still hindering such process:

• The Parliament ought to finally lift the archaic and hypocritical ban on terrestrial gambling that prevents the liberalization and modernization of the local brick-and-mortar casino industry which still shamefully remains a feudal privilege to the exclusive advantage of only just four fully-licensed municipal casinos (Venice, Sanremo, Campione d'Italia and Saint-Vincent).
• AAMS ought to enact without delay (i) skill gaming, online bingo, and VLT regulations, (ii) take the required follow up action on the peer-to-peer interactive remote gaming which was indeed legalized under Law 248/06, yet never regulated since; nor was it covered by the remote gaming licenses recently awarded and last but not least, (iii) deal with online poker and other popular ring games that as borderline products placed halfway between skill games and games of chance, lay currently in a grey unregulated area to the disadvantage of both the AAMS-licensed operators that cannot legally exploit them and the Italian consumers that cannot play them.