Can Germany’s new government take on the illegal gambling fight?

Imogen Goodman examines how the newly formed coalition government in Germany can enhance the nation’s efforts to combat illegal gambling and fortify the regulated sector.

The coalition pact announced on April 9 by Germany’s incoming government articulates a critical aim: to confront the pervasive issue of illegal gambling. In their concise statement, the coalition emphasizes, “Together with the federal states, we will improve the fight against illegal gambling.” This commitment resonates strongly within the gambling industry, signaling a potential pivotal shift in regulation.

Set to assume office on May 6, Germany’s government faces a formidable challenge. The nation’s economy has been grappling with longstanding structural issues, including an aging population and bureaucratic hurdles, which have impeded market growth.

The coalition, comprising the centre-right Christian Democratic Union (CDU), Christian Social Union (CSU), and centre-left Social Democrats (SPD), has embarked on ambitious plans to revitalize the economy. Proposed initiatives include a €500 billion infrastructure fund, deregulation strategies to reduce bureaucracy, incentives to promote overtime work, and scheduled cuts in corporate tax rates by 2028.

The Scope of Germany’s Black Market

Yield Sec, an intelligence platform dedicated to tracking illegal gambling activities globally, has meticulously monitored the German market over recent years. The data reveals a burgeoning illegal market, showing continuous growth. In 2023 alone, there were 1,620 unlicensed operators targeting the German populace, engaging with approximately 13.5 million individuals throughout the year.

Forecasts for 2024 predict that this figure will escalate to 1,926 illegal operators, potentially reaching 15.8 million users—approximately 20% of Germany’s population. This growth coincides with an uptick in sports events, which has allowed illegal operators to attract new consumers while cross-selling various products.

Last year, Yield Sec reported that roughly 54% of Gross Gaming Revenue (GGR) originated from the black market, amounting to approximately €4 billion. However, Yield Sec’s CEO, Ismail Vali, believes that as the landscape evolves, this figure may surge to 88%, exacerbating the challenges faced by legitimate operators.

The Challenges of Gambling Licensing in Germany

Legal operators in Germany assert that they are engaged in a Sisyphean struggle against illegal competitors, a situation compounded by the nation’s federal structure which delegates online gambling regulation to 16 federal states. Since the implementation of the Interstate Treaty on Gambling in 2021, which sought to standardize the betting and online gaming landscape, licensed operators have been hindered by stringent regulations, protracted approval timelines, and high taxation.

These rigorous measures, which even prohibit online slots providers from using the term “casino,” are the result of compromises among various regional factions. Regions governed by the CDU and CSU favor market liberalization but encounter staunch opposition from gambling-skeptical states.

Yield Sec’s findings illustrate a stark imbalance, indicating that illegal operators can offer 9.2 times more products than those legally available. Vali notes, “Criminal groups market themselves as offering choice and convenience to consumers, devoid of Know Your Customer (KYC) protocols and self-exclusion schemes.”

Navigating Reform within Government

In this complex backdrop, Wulf Hambach, co-founder of Munich-based law firm Hambach & Hambach, posits that federal government intervention could yield positive changes. The coalition’s pledge to address illegal gambling indicates a more active approach to regulatory oversight, which could pave the way for broader reforms.

Hambach emphasizes, “If the black market continues to expand, it would signify a policy failure for the federal government right from the outset.” Historically, efforts to liberalize the restrictive Interstate Treaty have been thwarted by SPD-led regions. For instance, Bremen’s Interior Minister Ulrich Mäurer consistently advocates for stricter limitations, including outright bans on sponsorship and advertising.

Such measures could inadvertently exacerbate the problem by pushing consumers further into unregulated, illegal markets, a point Hambach poignantly highlights. Conversely, figures from the CDU are more inclined towards practical solutions that would recalibrate regulations to accommodate market changes. “I am optimistic that the coalition will reassess regulatory strategies during the upcoming reform of the Interstate Treaty,” Hambach asserts.

While regional governments ultimately wield more power, the federal administration’s external pressure could catalyze much-needed reforms. Hambach notes the necessity for national assistance in combatting illegal operators, especially in enforcing criminal and tax regulations.

A Step Forward for the Industry

The German Online Casino Association (DOCV) heralds the coalition’s acknowledgment of illegal gambling as a monumental advancement for the sector. President Dirk Quermann stated, “The coalition’s commitment to combating illegal gambling is a welcome and overdue development.”

However, the DOCV is urging that this acknowledgment translates into actionable policies that reinforce licensed operators. Key recommendations include replacing the current stake tax on virtual slots with a gross gaming revenue tax and abolishing the €1 maximum stake limit, as well as enforcing IP blocking measures against illegal operators.

“Channeling players from the unregulated market back into the legal sector is crucial, as it is the only environment where player protection is assured,” Quermann emphasized. In alignment with the DOCV, the German Sports Betting Association (DSWV) also welcomed the coalition’s intentions but described them as somewhat ambiguous.

According to the DSWV, five critical actions should be prioritized by the federal and state governments to eradicate the illegal gambling sector, including establishing a national prosecutor’s office and regulating advertising partnerships with illegal platforms. Still, the consensus among associations remains: a robust legal market is the most effective deterrent against illegal gambling.

Imperative Measures to Tackle Illegal Gambling

The journey toward establishing a legal gambling market in Germany has been protracted and fraught with challenges, primarily due to the federal system’s complexities. With 16 states influencing gambling regulations, any attempts at reform tend to progress at a glacial pace. Nevertheless, the economic pressures facing Germany, including significant fiscal deficits, present a unique opportunity for change.

Many coalition proposals remain “subject to financing,” underscoring the urgency for innovative revenue streams—illegal gambling stands out as a potent yet untapped resource. Christian Heins, director of iGaming at Tipico, noted on LinkedIn, “Given Germany’s status as a high-tax country, illegal gambling represents a vital avenue for revenue generation.”

Heins suggests that effectively addressing the illegal gambling issue could potentially add approximately €1 billion annually to state revenues, excluding recouped funds from prior years. Moreover, visibility of illegal operators at major sporting events such as Formula One and international football underscores the pressing need for governmental action.

“Despite an inauspicious beginning, I hope the new government prioritizes this critical issue, fostering a robust legal market that ensures consumer protection and mitigates the risks posed by illegal operators,” Heins concluded.