Illustration: Colin Daniel & Istockphoto

This article was first published in the 1st quarter 2017 edition of Personal Finance magazine.


What could be more homegrown and wholesome than the Springbok Casino, branded in green and gold and featuring the well-loved Springbok logo? The website www.springbokcasino.co.za is prominent in a Google search for “online gambling in South Africa” and tells us it was voted Best Online Casino 2016 by “South Africa’s largest and trusted” online casino guide, playcasino.co.za. It offers all the casino staples, such as slots, table games and poker, introduces new games frequently to keep the excitement going, and makes payment simple and easy via five online payment options, from Visa/Mastercard to SID Instant EFT.

But Springbokcasino.co.za is illegal, and the operator or a punter could incur a maximum penalty of R10 million and/or 10 years in jail and a criminal record. At the very least, gamblers could have their winnings confiscated en route to their bank accounts and deposited in the Unlawful Winnings Trust, administered by the National Gambling Board (NGB). The penalties have been repeated again and again, not least by the Casino Association of South Africa (Casa), whose members have most to lose through online gaming, and appear in a bold warning on the NGB’s website. Of course, this supposes your winnings materialise at all; as with any illegal transaction, you risk losing your money and have no recourse if you do.


So what’s going on?

Law-breaking could hardly look more brazen than this. The weird reality is that it is not entirely the fault of the online casino operators; to some extent, it has been brought about by the government’s indecisiveness.

The background (as briefly as possible) is that gambling in South Africa is regulated by the National Gambling Act of 2004 (NGA), which also established the NGB, and provincial laws aligned with the Act. The legislation sets out what forms of gambling are permitted: broadly, venue-based gambling, which means casinos and certain gaming machines set up in licensed premises, and sports betting. Lotteries are governed separately by the Lotteries Act of 1997. In 2004, the government was clearly receptive to the idea of legalising and regulating online (or interactive, or remote) gambling, which was a fast-growing reality, and the NGA went so far as to mandate the NGB to appoint a committee to look into it.

In 2008, the government produced the National Gambling Amendment Act, creating the framework for the industry to embrace “new forms of gambling” – not just interactive gaming, but other forms of gambling, such as greyhound racing. Bizarrely, the Act has never been promulgated: it was signed into law by the president in July 2008 without a commencement date, and none has been proclaimed.

At first, this unprecedented pause was put down to the responsible department, the Department of Trade and Industry (DTI), working on the supporting regulations, but later it became clear that the government was worried about the possible socio-economic impact of making gambling much more accessible. So the Act was sidelined, creating a hiatus that online casino operators both inside and outside our borders could exploit, claiming that new legislation was just a matter of time.

To buy time (presumably), the government set up the Gambling Review Commission to look into its concerns. The prospect of online gambling being regulated, rather than banned, was still very much alive then, according to the annual report of the NGB, which read: “The NGB is fully aware of the challenges that are inherent in legalising interactive gambling and maintains that the problems of regulating it can be mitigated by enabling legislation to an acceptable level, rather than controls to ensure complete prohibition of participation of international and local operators and gamblers.”

The commission reported in 2010, concluding that online gambling should indeed be legalised and regulated and could even revive a flagging industry. But that was obviously not what the government wanted to hear. Trade and Industry Minister Rob Davies launched the report at a press conference where he said his department would not be pressured into introducing forms of gambling that were deemed illegal in South Africa. He added that the Reserve Bank was monitoring illegal transactions and predicted darkly that gamblers would not receive their winnings.


The location of the offence

So the report languished, and into the vacuum came a landmark judgment in the Supreme Court of Appeal: Casino Enterprises (Pty) Ltd (Swaziland) v Gauteng Gambling Board 2011. Basically, the court upheld a decision of the North Gauteng High Court that interactive gambling was a prohibited activity in terms of the NGA, even if the server delivering the service was situated outside South Africa.

Casino Enterprises, which is licensed in Swaziland, had advertised its online casino in Gauteng, prompting the prosecution. It argued that gambling on the site could not be unlawful under either the NGA or the Gauteng Gambling and Betting Act, because the activity did not take place in South Africa; it took place where the server was located.

Clearly, this is a fundamental issue for the industry. After analysing the process, the High Court found that online gambling takes place at “the place of consumption” – the computer terminal of the gambler – rather than at the “location of the supplier”. As the judgment put it: “It matters not ... whether the critical elements are to be found or generated within the borders of South Africa or not. Section 11 prohibits … both engaging in the game, which happens each time a gambler presses the spin button, and making available the game, which takes place when the plaintiff’s servers in Swaziland make it possible for the gambler in Gauteng to connect interactively with them through the internet.”

The Supreme Court of Appeal agreed and held both parties to the illegal act equally liable. The judgment reads: “The conclusions at which I have thus arrived have the effect that persons in South Africa who gamble with the appellants, as well as the appellant in its interactive participation, contravene the provisions of sections eight and 11 of the NGA and sections 76(2) of the Gauteng Gambling Act.” So there can be no doubt that anyone who gambles online, or makes online gambling available, in South Africa will be contravening the law, until such time as the law is amended.


Cat-and-mouse game

The government has since relied on that clarification of the existing law, but failed to enforce it. The result is a cat-and-mouse game, in which the authorities keep their claws sheathed, while the gambling websites hide in plain sight, trying not to be noticed, or hoping to become such a familiar part of online commerce that they are accepted by default.

Cleverly, the casinos present a united front, so that gamblers are reassured by the obvious presence of an entire industry surrounding and supporting individual sites. Websites such as playcasino.co.za, onlinecasinosafari.co.za and southafricaonlinecasino.com call themselves casino “guides” and host multiple sites that they claim to have vetted and are happy to endorse. They offer one-click access to offerings for all technologies and tastes, backed up by reviews, payment information and guides for first-time users.

All the sites claim to offer “the best South African online casinos”, but the wording is misleading: these are gambling sites that accept South African currency; they are not South African websites, although many of them have co.za domain names. Some of them claim to be “exclusive” to South Africa and to accept “only” rands, but bear in mind that even Springbok Casino is registered in, of all places, Luxembourg. A random sample of the most popular sites put to the test on the website monitoring service Check-Host (check-host.net), turned out to be registered as follows: White Lotus Casino, Casino Midas and Apollo Slots in Quebec, Canada; Thunderbolt Casino in Costa Rica; Yebo Casino in Dallas, Texas; and Club SA Casino in the state of Virginia.

The websites even address the legality issue head-on by publishing statements that purport to provide clarity for the confused would-be gambler. In reality, they tend to make the legal situation murkier – for example, under the headline “Legality of online casinos in South Africa”, playcasino.co.sa writes: “Gaming laws in South Africa have undergone a number of changes since South Africa’s Gambling Act of 1965 was enacted. Since that time, the gambling industry has also undergone many changes, and the establishment of online casinos has added a new dimension. While the National Gambling Act of 2004 banned online gambling in South Africa ... there are still plenty of South Africans who enjoy the services and games of quality online casinos.

“The reason is that the South African online gambling laws are geared towards the online casinos themselves, and do not target the individual players. We have compiled a list of online casinos that many South Africans still enjoy playing at. These online casinos are highly reputable and offer safe and legal online gambling to customers in South African rands, and we suggest you give them a try.” (Emphasis added.)


Clarity at last?

Presumably, such statements are being amended, because the government has given the industry notice that 2017 will usher in a new, tougher stance on online gambling. In April 2016, the DTI published the National Gambling Policy, stating that “no new forms of gambling will be allowed at this point” and “improved provisions will be included in legislation to deal effectively with illegal gambling”.

The policy goes on to say: “The capacity to regulate online gambling currently is not adequate, but can be streamlined to prevent illegal operations. Provisions must be included to prohibit illegal winnings, with amendments to prohibit internet service providers (who must not knowingly host an illegal gambling site), banks and other payment facilitators from facilitating illegal gambling by transferring, paying or facilitating payment of illegal winnings to persons in South Africa.”

On September 30, the DTI followed through with new draft legislation, the Draft National Gambling Amendment Bill, with a 45-day window for public comment (until November 15, 2016). The legislation repositions the NGB as the National Gambling Regulator and enhances the powers of the National Gambling Inspectorate to investigate illegal activity.

There will be a clampdown on the advertising and promotion of online gambling, but the focus of the fightback by government will continue to be unlawful winnings. Davies told the media that the Financial Intelligence Centre will work with financial institutions to verify and intercept online winnings. Those who fail to do so may be held criminally liable, and winnings will be deposited in the Unlawful Winnings Trust. He added: “If you go online, we may not be able to stop you when you play the game, but when you win, we get you.”


What exactly is legal?

The NGA defines “gambling activities” as:

• Placing or accepting bets or wagers, including staking or accepting money, or anything of value, on fixed-odds bets, open bets, and with bookmakers on any contingency;

• Placing or accepting totalisator bets;

• Playing bingo (including electronic versions) or making bingo available;

• Playing any gambling game (a game for money) with a chance of receiving a payout whether by skill or chance, and/or making such a game available; and

• Playing any amusement game with a restricted prize, or making one available.

Legal gambling is restricted to:

Casinos. The land-based casinos (38 of them) are, by any measure, the heart of the South African gambling industry. According to NGB figures, they accounted for 70.5 percent of the total gross gambling revenue (GGR) of R26 billion in the 2016 financial year. They also support 64 000 jobs, according to Casa.

Limited-payout machines. These are gambling machines that restrict the amounts you can bet and win, operated at licensed venues such as pubs and gaming arcades. They experience good revenue growth from year to year (13.7 percent in 2015/16) and accounted for nine percent of total GGR in 2016.

Bingo. Most active licences to operate electronic bingo terminals (EBTs) are in Gauteng. They are a bone of contention for the casino industry, represented by Casa, which argues that EBTs are no different from casino slot machines, and yet may be operated without the infrastructure or social obligations of a casino. Bingo revenue dropped by more than 16 percent in 2016, compared with 2015, and accounted for 3.6 percent of total GGR.

Horse racing. It’s been a popular sport in South Africa since the late 1700s, but is in decline. According to the 2015 gambling report produced by PricewaterhouseCoopers, betting on horse racing still outstrips all other sports betting (in 2014, R1.9 billion went on the horses, versus R1.6 billion on other sports), but it’s the other sports that are growing, while horse-racing revenue falls steadily.

Sports betting through a licensed bookmaker. This is your only legal option if you want to use an online platform to place bets. The legitimacy of this type of gambling rests on the fact that the internet is merely the medium of communication; the outcome of betting is decided elsewhere, in the real (rather than the virtual) world. The combined (sports and horse racing) betting industry grew in revenue terms by almost 28.5 percent in 2015/16, thanks to bookmakers offering more and more sports betting, and accounted for almost 17 percent of overall GGR.

The National Lottery. Licensed local operators may conduct their business online or in a retail space, so there are several websites offering lottery games, including the official www.nationallottery.co.za. Lottery ticket sales in the 2016 financial year amounted to R4 426 million, down from R4 559 million in 2015.

Buying overseas lottery tickets is illegal, but you can take online bets on the results of certain overseas lotteries, such as the EuroMillions, through the relatively new website Lottostar (www.lottostar.co.za). As the holder of a bookmaker’s (sports betting) licence, Lottostar accepts fixed-odds bets on the winning numbers of lotteries and lottery games. It has been operating for two years and has paid out R180 million in winnings, according to spokesperson Maria Pavli.

The so-called “new forms of gambling” that are to remain illegal in terms of the National Gambling Policy are an odd group: alongside online gambling, there’s the far-from-new game of fahfee (a kind of lottery game, said to have originated in the Chinese community, in which you try to pick a single winning number between one and 36), and dog racing (actually greyhound racing), which has been practised since the 1930s, but is banned in terms of long-standing provincial ordinances.


Impact of online gambling

If South Africa has been ambivalent about online gambling, so have many other countries, judging by the variety of solutions around the world. South Africa is not alone in outlawing it – Russia, China, the Netherlands and Switzerland, among many others, do – but other countries restrict it in all sorts of ways. Australia allows (and taxes) operators of casino websites, but prohibits their use by its own citizens, while the United States has a federal ban on all gambling (including sports betting), but allows the individual states to permit it within their borders (as four of the 51 states do). The United Kingdom has a permissive approach, but was forced to introduce licensing for websites both inside and outside its borders, so that it could claim its share of tax on their profits. Europe is a mixed bag: for example, Portugal allows only government-sanctioned online gambling sites, and Greece deals with its ambivalence by allowing licensed online gambling, in theory, but not issuing any licences.

Lawrence Monnye, a senior lecturer in private law at Unisa, summed up the dilemma of governments in his doctoral thesis (“Towards the regulation of interactive gambling: an analysis of the gambling regulatory framework in South Africa”), published last year:

“The borderless nature of this activity brings it into direct competition with traditional land-based gambling establishments, which have been a source of revenue for many governments through licensing and taxation. More importantly, if not properly regulated, the borderless nature of this activity may result in providers offering their interactive gambling services without ever physically placing their equipment or operations in their targeted countries.

“Jurisdictions such as Antigua, Costa Rica and Canada, among others, provide so-called safe havens for interactive gambling providers licensed to offer their gambling services to users worldwide. These safe havens are driven more by the financial reward of serving as hosts to interactive gambling providers than by being a flourishing market for this type of gambling. This creates challenges for countries whose citizens are lured onto the websites of interactive gambling providers situated or licensed in such safe havens. Realising the burden of carrying the costs of problem gambling while safe havens earn licensing and taxation fees, countries with discernible markets for interactive gambling have had to pronounce their legal position regarding this recreational economic activity. Such legal positions vary from prohibition to restriction or liberalising interactive gambling.”

In South Africa, at least five percent of spending on gambling is being diverted to illegal websites, according to a guesstimate by Casa. Themba Ngobese, the chief executive of Casa, fronted a public awareness campaign in 2015/16 in which he said that the gambling industry as a whole paid R2.2 billion in taxes and levies in 2014 (in 2016, it rose to R2.8 billion). If five percent of that had been lost to the fiscus through illegal activities, the government would have had R110 million less to spend – enough to “pay the salaries of an additional 594 teachers, or equip around 11 000 school children with a computer tablet and broadband access for the year”.

“The government has two options,” Ngobese told a radio station. “One is to keep the current status quo, where it is illegal, but then you must enforce the law; you must make sure it doesn’t happen. Alternatively, you must legalise it and have proper regulation. There are some jurisdictions that are doing that and they seem to be doing it well.”

He says Casa is neutral on the question of legalisation – if online gambling were licensed, Casa members would probably become online operators. “At the moment, unfortunately, we can’t, even if we wanted to,” he says. “[Legalisation] is a decision the government must make. There are always pros and cons of gambling online, and some of the controls that we have in a land-based environment are not there in a virtual environment.”

Surprisingly, he says gambling on personal computers is but a small part of the problem; most online gambling in South Africa is happening in premises that call themselves internet cafés and “entertainment lounges”, distinguished by darkened windows and security checks at the doors. They are unlicensed, use software smuggled in from other countries and operate strictly in cash for as long as they can get away with it.


Problem gambling

Despite the economic benefits of a legal and taxed gambling industry and the pressure the government has been under to bring illegal but popular forms of gambling into the regulatory fold, the government has been unable to shake off its concerns about the social implications of online gambling.

Problem gambling is not easy to define, but the Gambling Review Commission describes it as an “uncontrollable urge to gamble such that the persons involved cause significant harm to themselves and others”. The report found that levels of problem gambling in South Africa remained relatively constant over the preceding decade, despite massive growth in the gambling industry over the same period, but were consistently higher than levels in Europe, similar to those in the US and slightly lower than levels in Asian countries.

Although the ills of problem gambling, such as criminal behaviour, substance/drug abuse and financial problems, are relatively well known, writes Monnye, there is very little information as to whether online gambling would make the situation worse or better.

“Interactive gambling offers more regulatory challenges – for example, the barring of underage gamblers, detection of gamblers with a gambling problem and provision of interactive counselling and treatment, all of which are not easy to regulate online,” he says. “Interactive gambling will further be subjected to the same pitfalls of all internet business transactions, such as money laundering, tax avoidance and hacking of personal gambling accounts.”

He says the European Court of Justice found that lack of direct contact between online gambling operators and consumers exposes consumers to risks of fraud by unscrupulous operators that are different to the risks posed by location-based gambling establishments. In a separate case, the court highlighted the relative accessibility of online gambling, the isolation of the gambler and the absence of social control as some of the factors contributing to the development of gambling addiction, the squandering of money, and many other negative consequences.

But overall, Monnye argues – like the Gambling Review Commission – that online gambling is no different from any other form of gambling, except in its mode of delivery. On that basis, it should be “incorporated in the existing gambling regulatory framework, subject to [certain] amendments”. Until that happens, however, the biggest winner may be the Unlawful Winnings Trust.


PLAYING ON EMOTIONS

“Human beings often rely on their feelings to make decisions when there is uncertainty. If I tell you ‘there is a one in 15 million chance that you will get cancer this week’, you would think ‘it is very unlikely to be me’ and you may quickly forget about my words. However, if I said ‘there is a one in 15 million chance that you will win the British lottery this week’, you are likely to think ‘yes, it is going to be someone, why can’t it be me?’. Gambling companies are excellent at using your emotions to rip you off.” – Pieter du Toit, fellow of the Actuarial Society of South Africa and a member of a group of qualified and student actuaries writing articles on topics that serve the public interest


HOW ARE YOUR WINNINGS TAXED?

Gambling and lottery winnings are not taxed in South Africa, unless they arise from an activity that is “organised and conducted in such a manner that they become a business carried on for the purpose of earning income”, according to Stephan Spamer, a director in the tax department of law firm ENSafrica.  

Spamer explains that the South African Revenue Service (SARS) “does not tax ordinary punters on the proceeds of gambling when they engage in betting transactions for entertainment and distraction”. This applies whether you win the Lotto, pick the winner in the Durban July or hit the jackpot at a casino slot machine. 

Even if gambling is a regular recreational activity, or you make a hobby of trying to beat the odds, you are not regarded as a professional gambler, unless there is clear evidence that you are in the business of gambling for profit, or, in the case of a bookmaker, for example, you make your living from betting and you bet yourself. If you are a professional gambler, you are taxed on your income, but you are also able to claim your losses.

Like the bookmaker’s bets, winnings in competitions and awards of money directly related to employment are subject to income tax. So an award for winning a competition among employees for best performance, for example, would be taxed, whereas a prize of money in the office raffle, which is for fun and has nothing to do with your job, would be regarded as capital in nature and would not be taxed.  

Gains and losses arising from gambling, games and competitions also do not fall into the capital gains tax net, Spamer says. The SARS Guide to Capital Gains Tax lists as exempt: “Betting, lotteries, competitions or the disposition of a chance to win a prize, or a right to receive a prize … where a gain is made in a fortuitous manner in any of the above-mentioned instances – that is, where you are not a professional gambler.”


THE PREDICAMENT OF THE BANKS

How do the banks deal with the fact that the transfer of funds has become the front line of the government’s battle against online gambling? Willie van Zyl, the head of card issuing, commercial and consumer cards at Barclays Africa, gives Absa’s perspective on the challenge of identifying and responding to illegal activity.

 

Can the banks distinguish between payments for legal betting and gambling and payments for illegal online gambling? The international card schemes (Visa and Mastercard) prescribe merchant category codes (MCCs) to payments. The MCC is the same for “lottery” and “gambling”. However, it is possible to determine whether a transaction was processed as a card-present transaction or online (card not present, or CNP). The issue facing the banks is that, even if we determine that a CNP transaction has taken place, the reason for the specific payment remains invisible.   

 

Does Absa monitor the activities of clients who might be offering or paying for illegal forms of gambling? Absa Payment Acceptance conducts proper due diligence when clients are taken on, but it would be unrealistic to expect banks to “police” client activities on an ongoing basis. It is possible for clients to change their business activities from legal online commerce to illegal gambling without the bank’s knowledge. Our terms and conditions include clauses dealing with the legality of transactions and the obligation on merchants to inform the bank if they change the nature of their business activities, and spelling out the bank’s termination rights. Our card-issuing business also continually makes clients aware that cards may not be used for illegal or unlicensed gambling activities and card agreements already include clauses in this regard. Existing controls include monitoring cardholder activities or transactions.


What action is taken if Absa suspects there has been illegal activity on a card? If a transaction is identified as linked to any illegal or unlicensed gambling activities, the bank will send a letter to the client to remind him or her of the prohibition and will request an explanation. Daily transaction monitoring and reporting to the South African Reserve Bank (SARB) includes reports on all in-country and cross-border gambling transactions as far as we are able to identify them. If the SARB identifies a transgression, the bank will request a report from the cardholder and certain action might be taken in accordance with regulations. 

 

Does the bank close the accounts of clients who are involved in illegal transactions? The relationship between a bank and a client is contractual. Both parties have a right to exit the relationship when necessary. The bank may exit the relationship for a number of reasons. The most important is if it decides that continued association constitutes a financial risk it cannot cover, or if it cannot assure regulators that the manner in which a client conducts his or her banking activities is not in breach of regulations or legislation (including illegal online gambling). A client’s account might be temporarily locked, or specific funds might be temporarily frozen pending receipt of a full and satisfactory explanation from the customer.