Odds are that the federal government is going to legalize single-event sports wagering. The Safe and Regulated Sports Betting Act (Bill C-218) was unanimously passed by the House of Commons, and is currently before the Senate.
Similar private member’s bills have previously made it this far, but this time it’s different. The bill has all-party support, and has the backing of the sports industry and police, both of which opposed legislation in the Senate in 2015. A 2018 U.S. Supreme Court decision that struck down a federal law prohibiting single-event sports betting outside of Nevada, giving each state the power to decide whether to allow it within their borders, has changed the North American gaming landscape, adding pressure on Ottawa to follow suit as 30 states and counting have either launched legal sports betting or passed legislation. “The U.S. Supreme Court decision was probably a trigger point because once it becomes regulated in the U.S. then you ask what is fundamentally different about that form of entertainment in Canada from the U.S,” notes Don Bourgeois, former General Counsel for the Alcohol and Gaming Commission of Ontario (AGCO) and now counsel with Fogler, Rubinoff LLP.
And then there’s the COVID-19 pandemic. Federal and provincial governments will be hard-pressed to turn away a new source of tax revenue as the pandemic drains fiscal coffers. Single-event sports betting in Canada is big business. Canadians spend $10 billion annually on single-event betting through illegal bookies, $4 billion through offshore online sports wagering sites, and a rather paltry $500 million in legal provincial sports lottery products, according to the Canadian Gaming Association. Legalizing single-event sports betting could deflect $2.4 billion in gross gaming revenue from the grey market within two years, estimates consulting firm PricewaterhouseCoopers.
This is not terra incognita for Ottawa. The federal government has already taken advantage of the vice economy when it legalized the recreational use of cannabis in 2018. Changing social attitudes, in conjunction with a rise in financial liabilities for governments, have paved the way for governments to embrace and shift policies to favour “sin taxes” and government regulation over outright prohibition, points out Michael Lipton of Dickinson Wright, one of the most experienced gaming lawyers in Canada. Protecting public interest of “these activities can be accomplished by regulating smartly and to do it in a manner that will add revenue to the government coffers which in turn will benefit the public,” says Lipton, QC.
The proposed legislation would decriminalize single-event sport betting, currently prohibited under section 207(4)(b) of the Criminal Code unless it involves placing a bet on the outcome of more than one match. But just as decisively it would also allow provinces and territories to regulate and license single-event sport betting in Canada. They could adopt a competitive gaming regime that would shunt aside the monopoly regimen, and implement a private operator model for single-event sport betting. Private businesses operating under license would then be able to bring competitive sports betting products to market, either online or in physical facilities like casinos. “The time of the government sector monopoly in gambling probably had a value but no longer in the 2020s,” says Bourgeois. “There has been a dramatic change in the regulatory environment. Operators are now very sophisticated, mature, highly-regulated companies that provide a consumer product” all the while “emphasizing social responsibility, responsible gambling, anti-money laundering and privacy.”
All eyes are now on Ontario as it has detailed plans to launch a regulated online marketplace for online gaming. Under its scheme, now the subject of consultations, the Ontario government is proposing to create a subsidiary of the AGCO which would be granted authority to manage and regulate online gaming operated by private parties. “The interesting development isn’t allowing single-game sports betting – that’s more of a symbolic acknowledgement that attitudes towards sports betting in North America have changed considerably,” say gaming attorney Jack Tadman. “It’s what’s beyond that, and in particular what’s happening in Ontario as it moves towards the licensing model.”
Complicated legal framework
Canada’s unique legal framework for gaming can make things complicated. Under section 207(1)(a) of the Criminal Code lottery schemes are to be “conducted and managed” by provincial governments. The conduct and manage obligation has been interpreted in case law as being the “operating mind” of the lottery scheme, says Ron Segev, a gaming lawyer and a founding partner of Segev LLP. “You have to run the business, and what we’re seeing in this proposed iGaming Ontario model is they’re proposing operators to come in and basically run the business while the province is basically just providing a registration framework and some regulatory oversight,” explains Segev. “So it’s possible, at least theoretically, that they’re off-side.” Others disagree. Bourgeois, who wrote “The Law of Charitable and Casino Gaming,” believes that the Ontario model is fully compliant with the Criminal Code. Still, even the Ontario’s discussion paper on internet gaming acknowledges that the conduct and manage obligation will require a more rigorous and complex framework for gambling than what operators may be used to in other jurisdictions.
Even then, many more issues need to be resolved before private operators can be swayed to enter the Ontario marketplace. Questions around the licensing framework, taxation regime, revenue sharing and responsible gaming initiatives need to be settled as do anti-money laundering, anti-fraud and data and protection measures. Also, the kinds of games that consumers will be allowed to bet on is up in the air. Ontario, at least, is examining the possibility of expanding offerings to beyond single-event sport betting (if Bill C-218 is passed) to novelty event wagering such as the Oscars or elections and peer-to-peer games and offerings.
There’s another conundrum that all provincial and territories will have to confront. They will need to decide whether to stick with the monopoly model or follow Ontario’s lead and adopt a licensing regime. “Ontario is moving away from the monopoly model but unless other jurisdictions do the same thing, you’re still going to have a problem with offshore operators competing with monopolies in Canada for Canadians to place bets,” says Lipton. What’s clear is that the tack taken by the Quebec government will not fly. It passed a law in 2018 that required internet service providers to “block access” to a list of “unauthorized” gambling sites drawn up by Loto-Québec, the government agency that operates and develops lotteries in the province. Provisions of that law were recently nixed by the Quebec Court of Appeal as it infringed areas of exclusive federal jurisdiction.
It remains that enforcement will be another issue that needs to be addressed by provinces and territories. At present, offshore online sports wagering sites advertise and accept bets from Canadians with impunity. Only a handful of prosecutions in relation to internet gaming have taken place, and that’s only because the servers were located in Canada. Efforts should be focused on bringing offshore operators onside, and it appears that many – particularly multinational outfits, many of whom are public companies — are drawn to the Canadian marketplace, according to gaming lawyers. “A number of these companies now are trading issuers on European or North American exchanges, and that dynamic means there’s lawyers and accountants and compliance committees who don’t want to put at risk the brand,” says Bourgeois. “They are willing to get into a regulated market and to compete in that regulated market.”
But if that fails, enforcement, while daunting, can be at least partially achieved. Some, like Segev, suggests following the American lead and “cut them at the knees” and go after the payment processors and financial institutions. Others, like Tadman, believes that regulators should be working together and withhold licenses from private operators who refuse to abide by the rules. “As jurisdictions move towards regulation as opposed to prohibition, one way to enforce would be to make it clear that a company’s actions in one jurisdiction could affect their ability to get a license in another,” says Tadman.
First Nations internet gaming
First Nations internet gaming is yet another thorny issue that provinces and territories will have to grapple with. Ontario’s iGaming model’s proposal plainly states that it will be holding discussions with the Ontario First Nations Limited Partnership, which represents the gaming interests of 132 First Nations in Ontario as a signatory of the Gaming Revenue Sharing and Financial Agreement ,over how revenues from the iGaming market could be shared. It also intends to exchange views with them over the design of the iGaming market. But in other jurisdictions First Nations iGaming can be a thorny issue. The Mohawk Nation of Kahnawake, south of Montreal, is a pioneer of online gaming. The Indigenous community has established a world-class location facility and internationally-known online gaming authority that licences well over 50 online gaming operators from around the world, representing over 100 online gaming websites.
Morden Lazarus, a well-known gaming lawyer, says that Ottawa’s efforts to implement single-event sports betting will not have an impact on them because they possess the aboriginal right to carry out gaming, and the facilitation and regulation of gaming by virtue of section 35(1) of the Canada Constitution Act, 1982. Lazarus has proposed an agreement with the Quebec or federal government “to provide legal sanction” to its its internet gaming operations. Such an agreement would also provide “genuine reassurance” to potential gaming entities involved in public offerings of their securities. But his efforts led nowhere. “There was just no preparedness on the part of Loto-Québec or the government of Quebec to even consider such a discussion or arrangement,” says Lazarus.
That can be a problem, says Lipton. While the Kahnawake Gaming Commission “does a good job in respect to regulation,” it remains that they have a decided competitive advantage in the absence of an agreement with either the provincial or federal government. “Those operators in Kahnawake are not subject to, or at least they don’t adhere to, Canadian taxation requirements,” says Lipton. “It’s perhaps more advantageous for an operator to be based in Kahnawake and to take Canadian bets than it is for an operator to be licenced in Ontario under the new system and take extra Ontarians.”
Regardless of all of the gray areas, the move towards decriminalizing single-event sports betting is having an impact on merger and acquisition deal activity in Canada, say gaming lawyers. Score Media and Gaming Inc. (theScore) closed a bought-deal offering in December 2020 for gross proceeds of $40 million while electronic payment processing company Nuvei Corp. made history in September 2020 by raising $700 million in the biggest initial public offering of a technology company in the history of the TSX. If Bill C-218 is enacted and if Ontario’s licensing model becomes a reality then there is going to be a lot more financing activity, says Segev, whose firm is now working on three IPOs for gaming companies. “With respect to the Canadian market specifically, we’re going to see consolidation on the sports media and entertainment side, and we’re going to start to see some non-endemic partnerships too but that’ll only happen if there’s absolute clarity and certainty around the legality,” says Segev.
The optimism should be however tempered. Even if single-event sports wagering is legalized and provinces and territories follow Ontario’s lead and implement a competitive gaming regime with licensed private operators, it’s not as if gray market is going to disappear. The decriminalization of recreational marijuana is a case in point. A 2019 survey by Statistics Canada found that 42 per cent of Canadians still purchase cannabis from dealers. “It’s going to be harder for the provinces to convince people who have these longstanding relationships with their poker dealers to switch,” says Segev. “What’s the value proposition, especially if there’s limitations on what an operator can do in terms of VIP management, marketing and the rest of it?” And offshore operators tend to offer better pricing, better odds, and a wider variety of events that a bettor can place a wager. It will be an uphill battle. As former British Columbia Minister of Public Safety said of illegal pot shops: “They’re not just going to roll over and go away.”
This story was originally published in the National, a Canadian Bar Association publication.