Why Germany's Gambling Legislation Might Create A Black Market Worth Billions

Written by Fintan Costello on March 23, 2020

Just days ago, German lawmakers approved strong regulations to legalize online poker and casinos from 1 July 2021. They are enforcing rules that are extremely strict. To list a few restrictions, the slots are being subject to a €1 per spin stake limit, no autoplay and no jackpots are allowed. Slots must also be offered separately from table games, with the minimum spin duration being 5 seconds. There's a one-minute break to switch verticals, and one hour to switch money from casino into sports. Doing so, they risk sending huge numbers of players to unlicensed sites, essentially creating a black market. These sites offer no restrictions compared to the licensed sites

Sweden Must be Treated as a Warning Sign

They didn't reach this decision alone. On 1 January 2019, close neighbor Sweden accidentally created a vast black market of its own, one that might spiral out of control. Without urgent action, German gambling law seems to make the sitaution far worse off for them, as the German proposed restrictions are even stricter than in Sweden.

The Nordic markets were once a key driver of European online iGaming growth, until Sweden decided to regulate. Everything seemed rosy at first, with operators and suppliers primed with pre-approved licenses and ready-to-go compliance strategies. Reality set in when a series of factors collided to hamper the market from day one. The operators had to pay more costs due to tax and regulation.

The local Swedish monopoly was allowed to expand products, which gave them more market share. Then, brands were forced to only offer a single first-time welcome bonus, and were severely punished if they stepped out of line. They're not playing around with the fines, as Kindred Group was recently fined 100 million SEK (ca 9.5M USD) on 18 March 2020 for bonusing players in early 2019 at Unibet.

Failing Channelization

As Gustaf Hoffstedt, from Sweden's online gambling trade body BOS, argued in January this year in response to Ardalan Shekarabi, Sweden's Minister of Social Security and a key player in drafting the country's online gambling framework: There's strong evidence pointing towards thousands of players leaking through the government's 'channelization' strategy and into the hands of unlicensed, black-market operators. These operators mainly hold the Curaçao gambling license, which is known for their loose restrictions and "who cares" attitude.

curacao gambling casino

Curaçao is the home base for most of the black market operators. They mainly just hold the license there, but there is usually no actual activity in the small island state.

Even more worrying is that this appears to be getting worse with Shekarabi unwilling to clamp down on those flouting the rules outside the legal framework. Instead, he's pressing ahead with enforcing tougher sanctions and advertising and marketing restrictions. This will drive new responsible operators to skip the Swedish market as the risks are high, and profits are harder to make.

All of this leaves more room for the black-market operators who don't care about the restrictions. These operators have an edge in the competition as they can bonus the players as much as they want, and they don't care much about player protection, anti-money laundering rules, or responsible gambling. In the end, everyone else loses, while these operators reap huge financial gains.

Who Wins, Who Loses?

The biggest losers are the problem gamblers who end up playing on these black-market sites -although they've blocked their own gambling through the Swedish responsible-gambling website Spelpaus; this site enables players to block all their gambling activities on the licensed sites.

Figures vary, but according to official SGA numbers, 91% of gambling is carried out by licensed operators in a market worth more than €1.2 billion. In November 2019, H2 Gambling Capital estimated channelization to be at approximately 85%-87% for the licensed operators, but based on our data that trend has continued to decline, and we estimate the proportion of Swedish players using illegal black-market casinos to be closer to 70%.

Our numbers show this problem is deepening with potentially vulnerable players left unprotected and open to market abuse. Using publicly available data from Google Trends, we found huge growth in searches taking place in Sweden for a basket of black-market terms. We included "casino utan Spelpaus", "casino utan svensk licens" and "casino utan licens". These mean "casino without Spelpaus", "casino without Swedish license", and "casino without license". We compared these to "Online Casino". This data reinforces the theory that aggressive restrictions for licensed operators are driving players to search for, and convert to, playing on unlicensed brands. We can see that many affiliates are targeting and optimizing for these keywords. This is highly irresponsible.

german licensed gambling black market

The basket of black market search terms are getting more more volume day by day.

Instead of misguidedly declaring phase one of the Swedish legislation as a "success", regulators should be focusing on the 30% as well as the rising proportion of players that are searching for these terms. They could, for example, IP block the non-licensed sites like e.g. Estonia does.

Germany Needs to Learn from Sweden's Missteps

More concerning is that newly regulating markets, such as Germany, appear to be ignoring their mistakes. There's no regulated market on earth proposing such strict rules for the players. We would urge them to take heed of Sweden's rapid plunge toward encouraging unlicensed activity.

We talked to one of the main operators of the German market. The operator wants to stay anonymous, but here's what they think about the new situation:

"With the 16 Federal States in Germany approving the new gambling regulation (Glücksspieländerungsstaatsvertrag), everyone was anticipating a regulated and safe gambling environment for online and land-based players in Germany. The challenge for such agreements is to find the right balance between being attractive for operators and players, and establishing a framework that provides a safe gambling environment in order to prevent channelization and protect players. After more than a decade of uncertainty in coming to an agreement with a new regulatory frame, Germany has failed to do that.

The strict policies in the new Interstate Treaty on Gambling is not a threat for channelization. It's literally forcing players and operators into illegal channels as the market with the biggest potential in Europe has lost its opportunity. For many operators, the revenues will drop by 60-70%, and on top of that, taxes and fees will make this license unattractive.

A big number of players will look for a provider which offers a fun and entertaining user experience. Strict deposit limits, turnover limits per spin, and delays of seconds and minutes in the slot game or even an hour to switch between different vertical will drive players towards black-market operators.

Guidelines on responsible gaming are not only important for the player, but are also appreciated. This creates an opportunity for operators to establish long term relationships with their customers and the brand - which therefore improves retention – but only if the guidelines are practical, effective, and relevant to the user experience of the 21st century.
Ultimately, the decision on whether gambling in Germany will still be fun and through legal channels will be made by the player.

Despite all the warning signs, advice, and abysmal quarterly results from major licensees, Sweden - and now Germany - are ignoring the evidence and ultimately forcing players down a dangerous route.

Open and robust conversations about the reality of what players want and balancing the need to protect the most vulnerable, while also preserving a profitable industry, is vital. However, putting damaging restrictions in place will ultimately always fail with black-market options just a click away for consumers.

At Bonusfinder, we aim to give players more choice, presenting them with all the options before they commit to gambling on specific sites. Our aim is to help people "play with more" in a safe environment. Our core principles are built on a common-sense approach to regulation that involve honest and open conversations between regulators, operators, affiliates, and players. The more gambling regulates, the better. This we mean geographically, and by making the game fair for everyone, and not by enforcing unsustainable terms for players.