CONTINGENT LIABILITIES - GENERATED FROM OPERATIONS

GENERATED FROM OPERATIONS

13. CONTINGENT LIABILITIES

Jurisdiction-specific legal and regulatory issues

The regulations that relate to the Group’s land-based businesses are contained within well established legislation (albeit subject to maintenance of licences and permits) in the relevant jurisdictions. However, the same is not true in relation to the regulation of online gambling; a number of countries have not updated older laws to address internet supplies nor specifically in relation to online gambling where a number of cross border transactions may be involved. Moreover, the legality of online gambling is subject to uncertainties arising from differing approaches by regulators, enforcement agents and legislative entities in relation to determining where the game or the bet takes place.

(a) Key gambling Legal and Regulatory Issues in the principal territories

The following country-by-country sections summarise the directors understanding of the key legal and regulatory issues within the jurisdictions from where the Group currently accepts the majority of its online-derived revenue, being Singapore, Malaysia and Indonesia (the “Principal Jurisdictions”).

Singapore

The Common Gaming Houses Act 1961 (the “CGHA”) contains provisions which preclude the provision or facilitation of, or participation in, games in a “common gaming house”. The CGHA also makes gaming in public illegal and the promotion of any public lottery and sale of tickets relating to such lottery irrespective of whether that lottery is managed within or outside Singapore. There is a substantial overlap in the statutory definitions of gambling and lotteries.

The Group has obtained local legal advice supporting the argument that gaming which takes place over the internet and offshore would not be gambling in Singapore such that no “common gaming house” is established in the jurisdiction nor that a customer is gaming in public irrespective of the venue where he elects to access the gaming sites. Likewise, there are arguments which support the view that irrespective of the definitional overlap between lotteries and gaming, the products supplied by the Group comprise casino games as distinct from lotteries. However the police in Singapore have maintained that any participation in online betting and gaming sites or facilitation in relation to such participation is illegal.

There are local laws (The Monetary Authority of Singapore Anti Terrorism Measures Regulations 2002 (the “2002 Regulations”)) and the Guidelines issued by the Monetary Authority of Singapore To Financial Institutions On The Prevention Of Money Laundering and The Countering Of The Financing Of Terrorism 2006 (the “2006 Guidelines”) which preclude financial institutions (including ‘bureaux de change’) from facilitating funds transfers where there are reasonable grounds to suspect that the funds will be used to commit a terrorist act. Likewise, in Singapore the Corruption, Drug Trafficking and other Serious Crimes (Confiscation of Benefits) Act (Cap. 65A) Mutual Assistance in Criminal Matters Act (Cap. 190A) the Terrorism (Suppression of Financing) Act and the United Nations (Anti-Terrorism Measures) Regulations 2001 preclude any entity from facilitating or handling the proceeds of crime.

Whilst there are arguments that support the view that no underlying unlawful act is taking place in Singapore, the Singaporean police have brought prosecutions against proprietors of (and players in) internet cafés, where online gaming has taken place. There can be no guarantee that Singaporean police will not attempt to bring prosecutions against customers or affiliates of the Group or against the Group itself or its Directors on the basis of breaches of the CGHA or the wider offences in relation to the promoting of a public lottery. In addition, given that most of the money transfers are facilitated through a number of third parties utilised by the bureaux de change there is no guarantee that the funds flow might not be the subject of an investigation or freezing pursuant to the 2002 Regulations and the 2006 Guidelines. In addition, the Group has no control over the activities of such entities and while it is not aware of any such criminal activity, if those entities were to be involved in other criminal activities, the funds flow in relation to the gaming activity may be frozen under the above-named legislation as part of the authorities’ wider investigations. Were any of these to occur, such events could have a material adverse affect on the financial position of the Group.

There is a risk that local laws may operate to render gaming or wagering contracts null and void. If the Group sought to recover gaming or wagering debts in a local court, it is possible that such an action would fail.

Malaysia

The Common Gaming House Act 1953 contains similar wording to the legislation in Singapore. There are therefore arguments (which again have been supported by local legal advice obtained by the Group) which support that participation by customers in Malaysia in relation to the Group’s online games operating from a server located outside Malaysia, may arguably not constitute gaming in a common gaming house, gaming in public nor the promotion or facilitation of a public lottery. However, there is a risk that were this matter to be tested by a court, that such an argument could be rejected and that

would potentially lead to a material adverse effect on the Group either as a consequence of it being involved in the relevant action or as a consequence of its having to Lease trading with Malaysian players as a result of the negative effect such a judicial decision could have on the Group’s risk profile.

There are currency control regulations which preclude telegraphic transfers of cash in excess of RM50,000 without a prescribed form being provided to the Central Bank of Malaysia. The person requiring the export or import of money is required to complete the prescribed form and submit the same to the Central Bank of Malaysia via any licensed financial institutions. Further, the Group is dependent upon the licensed ‘financial institutions’ which facilitate cash transfers out of the jurisdiction to ensure that they fully comply with the other requirements under these regulations. There is a risk that if they are non-compliant they may have their licences revoked and also that money flows to the Group will be disrupted or frozen which could have a material adverse impact upon the Group’s financial position.

In addition, in Malaysia money laundering offences under the Money Laundering and Anti-Terrorism Financing Act 2002 (“AMLATFA”) include any person who becomes directly or indirectly involved in any proceeds of unlawful activity. Although it is arguable that the facilitation of online gaming proceeds may not be premised on an illegal act, the Malaysian authorities have powers under AMLATFA to seize and freeze property outside Malaysia on the basis of proof or even suspicion that any property is the subject matter of any offence under the AMLATFA. To date, the Directors are not aware of any precedents of reliance upon these powers in relation to online gambling, but if the Malaysian authorities sought to pursue claims under AMLATFA it may cause severe financial risk to the Group and a freezing of money flows from Malaysia.

Indonesia

Under Article 303 of the Indonesian Criminal Code, any person who “....performs as his trade the intentional offering or providing of an opportunity for a game of chance or intentionally as an undertaking thereto....” is guilty of a criminal offence. This code however (and underlying regulations that address the sentences and fines appropriate to gaming related offences) all predate the internet. The Directors have taken local legal advice, and believe therefore that there is an argument that participation in online gaming offered remotely will not be contrary to the existing law. Moreover, although affiliates and ‘bureaux de change’ facilitate cash transfers relating to gaming, there is nothing specific in the legislation that makes it illegal to facilitate the acceptance of or transfer of wagers and winnings unless illegal gaming has taken place.

The Indonesian Financial Transaction Reports Analysis Centre (Pusat Pelaporan dan Analisu Transaks Kevangan or PPATK) is obliged to report suspicious transactions that exceed 500,000,000 rupiah (approximately £28,000) in any one-day period, but because the sums due to the Group are netted off before payment, the sums do not currently exceed that sum in any one-day period.

Nonetheless, Indonesia is an Islamic state that has periodically taken a very hard anti-gambling stance.

Legal action taken against customers, affiliate operators or the ‘bureaux de change’ may cause a material adverse effect on the Group’s business and, even if such claim was successfully defended, cause disruption to the payment of revenues from Indonesia during the court proceedings.

Conclusion on Malaysia, Singapore and Indonesia

The Directors believe they have undertaken a comprehensive assessment of the relevant laws and regulations in the Principal Jurisdictions from where it supplies and where it is therefore established.

The Directors have sought confirmations, by way of advice obtained from local lawyers and guidance from UK lawyers who are experts in this sector, that there are reasonable bases which support the arguments that the Group’s conduct of business in Singapore, Malaysia and Indonesia is not illegal. The Directors have considered this advice and consider it appropriate that no provision has been made in the financial information in respect of the possibility of any adverse financial impact, loss or liability that may arise from such activities. The Directors are unable to quantify any possible financial impact.

Japan

Article 186-2 of the Japanese Criminal Code provides that “…any person who opens a gambling place or gathers gamblers in order to gain profit will be subject to imprisonment for a period of three months to five years”. On the basis of enquiries made into the regulatory position in the jurisdiction, the Directors believe that, notwithstanding the restrictive regulatory framework applying in the jurisdiction, there is an argument, as yet untested, that these provisions would not preclude customers accessing the Group’s sites from home computers or from any premises provided no one was facilitating or soliciting the participation in such premises (in that the gambling would not be taking place in a “gambling place”

or under the control of a person who has “gathered gamblers”). The Group does not have affiliate operators in Japan and therefore the Directors believe most, if not all, participation is home based or in premises where the customer is not prompted to participate by any third party.

The Anti-Organised Crime Law 2000 defines money laundering extensively to include the use of such monies for the purpose of controlling a company or the concealment and collection of monies relating to certain criminal activities. In Japan the Group relies upon third party payment processors to facilitate bank transfers. However, again on the basis of enquiries made into the regulatory position in the jurisdiction, the Directors believe that there is an argument that the Group would not be in breach of local law if the underlying act of gambling by the customer was not illegal. Nonetheless, if the Japanese authorities were to prosecute a third party payment processor this could have a material adverse effect on the Group’s business, and even if such claim was successfully defended this would cause likely disruption to the payment of revenues from Japan during the court proceedings.

As a result of recently received local legal advice, the Directors have been made aware that offering Japanese-language online gaming websites, that may be accessed in Japan, could be sufficient to create a nexus in Japan, which were the untested arguments set out above to ultimately fail, would render the activities illegal under Japanese law. Therefore, there is a risk that offering such a language option may raise the profile of the Group’s applicable offerings in Japan, thereby raising the risk of an action being instigated against the Group.

The Directors are in the process of seeking further legal advice in order to clarify the Group’s regulatory position in relation to its existing Japan-facing operations. Depending upon the nature of this advice, the Directors will consider the options available to the Group, the most extreme of which is termination or disposal of the Group’s online gambling activities in the jurisdiction, Irrespective of the Directors’

decision, there is no guarantee that the relevant prosecuting bodies in Japan will not commence proceedings against the Group in relation to its previous activities in, and emanating from, the jurisdiction.

China

Only a small proportion of revenue is currently derived from China. This comprises deposit-based online gaming, which is not actively marketed within China.

Article 303 of the Criminal Code establishes the primary criminal law in China in relation to gambling.

There is some debate as to whether Article 303 applies to entities other than bricks and mortar operators, professional gamblers or entities that run online gambling services from within China. One implication which could be drawn, however from the Group’s relationship with OnePay (discussed below) is that a certain proportion of its players may be gambling in China contrary to the provisions, as currently interpreted, of Article 303.

The Directors are aware of the regulatory framework applicable in the jurisdiction and keep the Group’s activities under constant review. At present, the Directors are in the process of seeking legal advice in order to clarify the Group’s regulatory position in relation to its existing China-facing operations. Depending upon the nature of this advice, the Directors will consider the options available to the Group, the most extreme of which is termination or disposal of the Group’s unlicensed online gambling activities in the jurisdiction, This would not, however, preclude the Group from pursuing opportunities with locally-licensed businesses.

There is also an Administrative Law (Article 70), which imposes criminal sanctions in relation to Chinese customers’ participation, but these are not regarded as serious offences. Moreover, the Directors believe, having taken local legal advice, that there is an argument that Article 70 only applies where gambling stakes are large and on average the stake from Chinese customers is small (on average US$11.93 over the course of a year).

Whilst there are currency controls in place in China which would preclude cash transfers, all of the Group’s payment receipts are effected via the Chinese banking system by use of the China debit card system in conjunction with OnePay, the NETeller owned Macau payment processor. There is therefore also an argument that Article 70 would not apply in settlement of gambling debt when these are effected outside China (in this case Macau).

Nonetheless, if the Chinese authorities sought to preclude Chinese customer participation and took proceedings against the customer, OnePay or the Chinese banks and, at that juncture, China was a key market of the Group in revenue terms, it may have a material adverse effect on the Group’s business.

Even if such claims were ultimately successfully defended they would cause disruption to the payment of revenue from China during the court proceedings.

Under Chinese Criminal Law, China has technical jurisdiction to assert authority over not only any Chinese national who commits a crime wherever it takes place but also over foreign nationals if their crime or the result of the crime occurs in China. Local lawyers have advised the Group that China would not normally attempt to enforce Chinese laws against entities located outside China. In any event, there are significant impediments to China successfully claiming jurisdiction over the Group and/or its Directors, stemming from the difficulty any sovereign state would have enforcing laws that purport to have extra-territorial effect. However, there is a risk that such impediments may not be adequate to prevent jurisdiction being successfully exerted by China which could lead to proceedings being instigated against the Group and/or the Directors.

Conclusion on Japan and China

In respect of Japan and China, the Directors continue to monitor the situation and will act accordingly when they receive any additional clarification from local lawyers and UK lawyers who are experts in this sector. At present the Directors have considered the current advice provided by local and UK lawyers and are of the opinion that there is a possible financial risk, loss or liability as a result of these activities if they were deemed to be illegal. Nevertheless, in spite of this possible liability, the Directors do not consider a provision to be required in the financial information. The directors are unable to qualify any possible financial impact.

(b) Risks in relation to discontinued activities

Gambling in Italy used to be in the hands of state monopolies but the Italian authority, the Autonomous State Monopoly Administration (Amministrazione Autonomana dei Monopoli di Stato or “AAMS”), has allowed a tender process for entities to apply for betting licences including online betting licences.

There is no such process in place for online gaming. On the basis of local legal advice, the Directors have decided to terminate the Group’s online gambling activities in the jurisdiction. However, there is no guarantee that the relevant prosecuting bodies in Italy will not commence proceedings against the Group in relation to its previous activities in, and emanating from, the jurisdiction.

The Directors have also sought local legal advice on the possible legacy issues as a result of the past activities and have been advised that there is a low risk of enforcement. As a consequence of this opinion, the Directors consider that while there is still a possible financial loss or liability as a result of these past activities no provision should be made in the financial information. In any event, as a result of these uncertainties, it would not be possible for the Directors to quantify this potential financial liability.

The Group has not taken legal advice or made investigations of the regulatory position in countries from where it derives insignificant revenues. Similarly, where it provides live video-streaming facilities to operators, it has not taken legal advice or made investigations of the regulatory position in the countries where such licensees take wagers. It is possible that, subject to the courts in the relevant countries being able to establish jurisdiction over the activities of the Group, or its licensees, such activities could

have an impact on the financial position of the Group. However, as the Directors consider any such possible impact would not have a material adverse effect on the Group, the Directors do not consider a provision to be required.

Regulations governing the flow of monies to the Group Money laundering legislation in Cyprus

There is an argument that the handling of criminal proceeds in Cyprus could extend to offences based on activities which, although lawful elsewhere, are not lawful in Cyprus. Online gambling is not legal in Cyprus although support for online gambling is largely tolerated and local lawyers have advised that there are no legal precedents that could confirm the Cypriot Police Money Laundering Unit’s (the “Unit”)

In document Placing and Admission to AIM by Collins Stewart (Page 117-127)