This is a guest contribution by Michael Dewan of GBO International Financial Services. If you would like to submit a contribution please contact Bill Beatty for submission details. Thank you.
In recent years it has become increasingly difficult for gaming companies to manage their financial and banking operations due to many new restrictions made by banks, payment companies and financial regulators around the world.
One of the outcomes of this is that gaming companies and even gaming affiliates are changing their legal structure and operations, while taking into consideration the new restrictions and options.
In this article we will see what is happening in the industry, what are the pros and cons for an offshore legal structure vs onshore and try to offer several solutions.
In the past there were no problems or difficulties for a gaming company operating online casino/betting/skill game/sports betting, etc. to open offshore corporate bank accounts in top countries in Europe. Countries such as Cyprus, Malta, Gibraltar, etc. welcomed gaming companies whether they were an operator, affiliate or marketing. Few questions were asked and there was no problem to accept and send direct wires to players.
Today the situation is totally different and there are many difficulties (we will point them out) for gaming companies from banks, payments companies and clients.
So what’s the damage and risk for the gaming company today?
The actual damage is to be stuck without the ability to receive player’s money, whether it is wire transfers (the player sends money directly to the gaming company bank account through Banks) or the ability to accept and process debit cards and credit cards. Most banks prohibit the players from depositing directly to the company bank account, meaning that players can’t send money to the gaming company bank account. The gaming company also can’t send out payments via its bank account.
The company/website could lose its credibility with the players. Moreover, the inability of the company to send out money and pay suppliers, affiliates and most importantly – winners, can permanently hurt the site.
For example, any one of the following scenarios could cause the gaming company to lose its reputation in the eyes of players and affiliates:
1. One player who won
2. One player that wants to withdraw the money from his account and is blocked
3. One affiliate that doesn’t get his commissions
We saw cases of a single player posting negative reviews on a certain online casino in Facebook, and after a very short time it was like a fire in a forest, the casino could not conduct pay-outs because it was blocked and that was the end if its operation.
Moreover, even Affiliate or marketing companies that work B2B, find it hard to open corporate accounts in Europe (both offshore and onshore).
Problems facing the gaming industry when operating via offshore companies
The main problems when operating via pure offshore structures (e.g. BVI, Seychelles, Belize, Panama) are with the development of the banking and financial infrastructure.
Those legal structures created complex situations, for example, a company is established in an offshore jurisdiction A, shareholders reside in jurisdiction B, directors reside in a jurisdiction C, the shareholder nominees are from jurisdictions D, the nominee directors are from jurisdiction E, the company has customers from jurisdiction F and affiliates & suppliers in other jurisdictions. Now, try to explain this complicated structure to banks or processing companies and expect that the bank will agree to open accounts for the company.
The dual combination that banks and financial institutions dislike:
1) Offshore companies – companies that were incorporated at offshore jurisdictions, for example the BVI, Belize, Seychelles, the Marshall Islands, etc. are not required to prepare financial statements for the registrar of companies or other local authorities. When there is no obligation and supervising of the company, the banks are concerned and rightly so, that many financial problems may occur. In addition, in many cases the owners of the company, meaning the BO (beneficial owners) of the company, use nominees – for shareholder and director and in that case, they, the real BOs of the company are staying in the shadows and are not disclosed publicly, nor do they have any exposure. Banks do not like this as they want to be a real and true “father and mother” to the company, so that if a problem occurs, the owner takes responsibility and care of it. In addition, banks now seek all information relating to the Company – financial statements, invoices, clients, agreements etc.
When there is no supervision, taking risks by corporate managers is quite common, this is human nature, and banks, as we mentioned above, dislike it and don’t want to deal with it.
2) High risk business (Without regulation) – The gaming industry went through tremendous changes in the last decade. From industry without regulation and supervision, where companies operated in a “jungle” atmosphere, it became a highly regulated and supervised industry with giant companies operating. However, many banks in the EU are still not ready to open accounts for gaming companies, especially when it comes to offshore accounts.
High risk is defined by several factors such as: high refund rate, global clients, AML (anti money laundering), etc.
The gaming company owner’s point of view
If you operate a gaming company, then your consideration in setting up the correct legal structure and management of your financial systems becomes a difficult and very complicated task, especially if you are not so familiar with international banks, payment companies, wires etc., it’s like a game of cat and mouse, it’s really the essence of what is happening in the online high-risk industry in terms of finding solutions for payments and banking.
Controller – as a business owner or executive, you should create a special role in the company – a controller. The job description is someone that is in charge of all the payments, banking and wire solutions in the company, a full time job. It’s not the CFO, COO or the CEO, it’s a dedicated person that has knowledge and expertise in the payments world and this is all that he/she does – working with payment providers, looking for banks to open accounts, finding clearing companies, handling all the documentation involved – so the company will be able to receive money from players. It’s quite a difficult and complex role, full of paperwork, procedures and signatures.
3 main problems for the owners:
Offshore Legal structure – basically the offshore legal structure is dying.
Many gaming companies established their legal structure, which was very common and popular in recent years, in offshore jurisdictions.
The structure was like this:
1) Offshore company that holds the website, marketing, retention, etc. and has bank accounts.
2) EU Company that acts as the payment provider to the offshore company/site.
The flow of the money – Money that was received though the site goes to the EU Company and the EU company transfers the revenues to the offshore company.
The advantages were that the offshore company did not receive direct payments from players but accepted money only from the payment providers and it was considered a legitimate B2B.
This legal structure which use to be quite popular is much less acceptable today.
Processing credit cards and debit cards – Declined Credit / Debit / Prepaid Card – it’s quite difficult to find today a payment processor that is willing to work with unregulated companies and with offshore structures. The processor drastically limits its risk by adding many restrictions to offshore structures and therefore the gaming company loses many potential clients. Same story with merchant accounts, banks would not agree to open an account for the company immediately, and would place many restrictions such as keeping high reserve, high fees, strict compliance and AML procedures and more.
Pay out \ Withdrawals – from time to time gaming companies need to pay out to players, whether it is for winnings, withdrawals etc. If the company is blocked from paying out since the banks prohibits that, the company could encounter serious problems – legal & reputation (like we mentioned before), The goal is to make payouts to the players as fast as possible. The company must have several payout systems, this is really essential today.
So what can be done?
Go onshore – gaming companies are moving to onshore structures – Jurisdictions like Bulgaria, Malta, Cyprus, Hong Kong are offering low corporate, light accounting supervision, positive attitude from authorities, wider banking and payment options and more transparent structures.
1. Wider payment and banking options – the gaming company will widen its options to open merchant accounts and corporate accounts in tier 1 banks.
2. You will be able to offer your players more processing possibilities and therefore you will be able to accept more card types and countries since your payment gateway will be open to more processors.
3. Think long run – set up a legal structure for long run without the hassle and headache of changing it every few months.
4. Positive vibe – the offshore industry has a bad reputation, especially in the last year (e.g. Panama papers)
Work with several payment and wire companies – choose from many companies that offer wire solutions to C2B and B2B and always be covered with back-up options.
The online gaming industry, a high-risk industry, has been going through a transformation in the past few years because of the dying offshore activity which causes many difficulties, mainly with the financial sector.
There will come a time when offshore structures will limit the financial and legal issues to such a point that it will be impossible to work.
GBO International Financial Services LTD is fast becoming a world leader in providing financial services for online gaming and casino companies. These services include incorporation of companies, opening business bank accounts, licensing, payment solutions, nominee services and more.
GBO offers the most innovative A to Z financial solutions for Gaming and more.