Ontario’s looking out for #1: AGCO aims to end Ontario’s (but not Canada’s) ‎unregulated iGaming market

Online betting and gambling (“iGaming”) is big business in Ontario. Despite Ontario’s relatively new market, it is presumed to be worth around $1 billion. In the first publicly available market performance report covering April 4 through June 30 2022, 18 fully regulated iGaming operators were providing 31 iGaming websites that generated CAD$162 million in revenue from $4.076 billion in wagers made by 492,000 active player accounts. Since then, the number of iGaming websites has risen to 55, with 22 of those involving online sports betting. Some of the biggest players involved include: BetVictor, DraftKings, Bet365, PokerStars, theScore Bet, and Unibet.  From a purely financial perspective, iGaming in Ontario has been a huge success.  However, from the outset there has been an inherent tension between regulated iGaming, the more common grey market iGaming, and even Ontario’s own governmental offering through Ontario Lottery & Gaming.

Against that backdrop, on October 4, 2022, the Alcohol and Gaming Commission of Ontario (“AGCO”) announced the end to Ontario’s transition period for unregulated (i.e., grey market) iGaming operators and gaming-related suppliers (together, “iGaming Participants”). The change comes by way of an update to the Registrar’s Standards for Internet Gaming (the “Standards”) and came into force on October 31^st, 2022. New Standard 1.22 makes clear that iGaming Participants who are active in Ontario’s grey market (or those with agreements and arrangements with participants active in the grey market in Ontario) must cease their unregulated activities or, according to the AGCO, their eligibility to remain or become a registrant may be jeopardized.

Ontario’s regulated iGaming market - Overview of regulatory regime

To understand the significance of this move, an overview of Ontario’s iGaming regulatory framework is helpful. The AGCO is the body ultimately responsible for regulating iGaming in Ontario, in addition to being responsible for regulating alcohol, cannabis stores, and horse racing. In relation to iGaming specifically, the AGCO develops the Standards, and determines the eligibility of iGaming operators to enter as a registrant in the regulated market. As part of assessing eligibility, this provincial agency works with interested participants to certify, for example, the appropriateness of their systems and technology. After a participant joins the regulated market, the AGCO takes on additional responsibilities, including addressing complaints related to registrants, and imposing progressive sanctions when non-compliance with the regulatory framework becomes an issue.

Under the Gaming Control Act (the “GCA”), the AGCO can impose progressive sanctions from suspensions, administrative monetary penalties (“AMPs”) through to revoking an entity’s status as a registrant. AMPs imposed in relation to a contradiction of the Standards (including 1.22) can be severe, with iGaming Participants facing fines of up to $200,000 per breach.  Revocation for non-compliance may be an even harsher penalty in some instances, particularly because  the initial registration process takes 2+ months and comes with substantial application fees. The re-registration process for a former registrant whose registration has been revoked for non-compliance may take even longer, as the registration requirements are already rigorous and the eligibility requirements for non-compliant former-registrants, understandably, may be more demanding.

In July 2021, iGaming Ontario (“iGO”) was established as a subsidiary of the AGCO under the premise of being responsible for conducting and managing iGaming when provided through private iGaming Participants. iGO enters into operating agreements with these iGaming Participants after AGCO registration. Following the opening of the regulated iGaming market on April 4, 2022, to be a fully regulated iGaming operator in Ontario, an entity must (1) be an AGCO registrant and (2) have an executed operating agreement with iGO.

Shortly after the passage of Canada’s new single-sports betting rules [discussed in our previous post], the AGCO began helping non-regulated participants “transition” to the regulated iGaming market. In September 2021, the AGCO began accepting applications for registration, but iGaming Participants were warned that if registration applications were not submitted prior to the April 4, 2022 market opening, and the participant continued acting in the unregulated market, they risked having their application rejected. Despite that warning, there has been no evidence of rigid enforcement, and the AGCO has instead been lenient with grey market participants by opting for a transition period that allowed participants to continue to provide offerings to Ontarians even if they failed to meet all regulatory requirements.

This lenient approach appears to be coming to an end.

Returning to the new standard

Standard 1.22 is an effort to put an end to iGaming Participants’ unregulated activities in the grey market in Ontario. It reads as follows:

Operators and gaming-related suppliers must cease all unregulated activities if, to carry out those same activities in iGaming Ontario’s regulated online lottery scheme, it would require registration under the [Gaming Control Act].

Operators and gaming-related suppliers shall not enter into any agreements or arrangements with any unregistered person who is providing the operator or gaming-related supplier with any goods or services if, to provide those goods and services in iGaming Ontario’s regulated online lottery scheme, it would require registration under the [Gaming Control Act].

Note: For greater certainty, and without limiting the generality of any other Standard, this Standard applies to and governs applicants.

This Standard requires potential and existing iGaming Participants who are operating in the unregulated market in Ontario, and even those with agreements in place with participants in the unregulated market, to end their activities in the unregulated market — or else their eligibility as an AGCO registrant may be jeopardized.

For registrants, Standard 1.22 signals an end to AGCO’s transition period. With the new Standard now in force, ‎registrants will be required to cease all unregulated operations within Ontario.‎  Additionally, the AGCO will be able to impose any of its available sanctions against any iGaming Participant that fails to comply with the new Standard which is in force as of October 31, 2022 — including AMPs up to $200,000 or revocation of the registrant’s approval.

For applicants, the first real risk is the risk of rejection. Non-compliant applicants risk having their registration application refused if, for example, they continue providing integration services to an unregistered person operating an unregulated iGaming website in Ontario. This is the case even if the applicant is otherwise compliant. Where an applicant is outright rejected for non-compliance by operating or supporting the operation of unregulated iGaming, they may also remain at risk for criminal prosecution.

The AGCO has also indicated a “reasonable notice period to support further transitioning to the regulated market, including making…customers…aware of potential blackout periods due to pending registration”. What this actually means or how it may be enforced is unclear, but the reference to forced blackout periods suggests the AGCO is adopting a stricter approach to enforcing its mandate.

Regulated vs. unregulated - Why be a registrant at all?

The Criminal Code of Canada (the “Code”) contains outright prohibitions against offering gaming and betting schemes as well as any activities or services that facilitate gaming or betting, for example marketing, logistical support, or providing equipment to be used for gaming or betting.   As such, operating unregistered iGaming websites in Ontario is illegal, and the same goes for the rest of Canada.

To get around this, there is a very large grey market that advertises legal offerings in Canada (for example, free-to-play casino websites that do not involve or link to unregistered iGaming websites), where it is generally understood that the legal offering shares name, branding, or online presence with off-shore operations. While this comes with less regulations (though, presumably, regulations relevant to the off-shore jurisdiction would still apply), this is a very indirect way of advertising your offerings.  And, there is a large market to be captured in direct, legal iGaming offerings in Canada; just look at the first part of this article!

But, you might ask, why are there casinos and such in Canada, as certainly these are direct offerings? The answer lies in Section 207(1)(a) of the Code, which provides exemptions for provinces to license certain gaming and betting schemes to third parties while only permitting the provinces to “conduct and manage” others. This exemption is the reason that provincially licensed private operators can manage land-based gaming or betting operations like casinos or video lottery terminals, albeit in a highly regulated market.  But the Code makes it clear that these exemptions which permit the provinces to license third parties to operate gaming and betting schemes do not extend to any game or scheme operated through a “computer” or “video device”. Instead, the Code requires that the provinces themselves “conduct and manage” such online gaming and betting schemes, thus why there are online gaming offerings from the various provincial agencies like Ontario’s Lottery and Gaming Corporation and the BC Lottery Corporation.

On the surface, that may seem exactly like what Ontario is doing by allowing iGaming Participants to operate and supply iGaming in Ontario. But, the province is basing the legitimacy of its iGaming framework on a novel interpretation of Section 207(1)(a) of the Code which has yet to be tested in the courts‎¹‎. This interpretation asserts that, through iGO, it will be the Province of Ontario that will be “conducting and managing” the online lottery schemes in Ontario, with the assistance of iGaming Participants. Because the exemptions to the Code’s prohibitions on iGaming only apply if it is the province, not a third-party, “conducting and managing” the online lottery scheme, Ontario’s interpretation attempts to respect that while still inviting third party iGaming Participants into the iGaming scheme.

To determine which entity is conducting and managing, the courts inquire as to which entity is acting as the “operating mind” of the online gaming scheme. In making such a determination, the courts consider a variety of elements, including:

• Which entity is responsible for strategic decision-making;
• Which entity owns operational control;
• Which entity retains a significant portion of profits;
• Which entity controls funds generated;
• Which entity retains control over game selection and rules of play; and
• Which entity controls physical infrastructure and intellectual property.

The Province of Ontario’s role may be indicative of it acting as the operating mind of iGaming Market Participants. For example, as a term of the Operating Agreement, Operators will be required to deposit all Ontario-based revenue in iGO accounts, and iGO will then pay the Operator a share of the revenue generated from Ontario operations. This is the core regulatory structure of the Ontario iGaming landscape, and how iGO “conducts and manages” iGaming Market Participants — through private Operating Agreements that govern each private operator’s iGaming activities sufficiently for Ontario to claim that it (and not the operator) is “conducting and managing” iGaming services in the province.

However, there are weaknesses in that position.  Based on the court’s indicators,  it is not as clear-cut as it could be.  iGaming Participants, not Ontario, are responsible for major decisions, retain the reigns in terms of operational control, keep most of the profits generated, maintain control over most decisions related to revenues generated, continue to control game selection, rules of play, and remain the ultimate owners of the required gaming infrastructure and intellectual property. Certainly, iGO and the AGCO exert some control over these entities, but there is some vulnerability in saying that the Province of Ontario is the “operating mind” of these businesses. The Province has done an excellent job of constructing a regulatory framework given the constraints of federalism and the law-making powers ‎it holds. However, the legal legitimacy of the regime remains marred by uncertainty.

As such, operators who want to access Canada’s lucrative iGaming market are left with two slightly unsatisfactory routes that are not risk-free: one, an unregulated grey market (albeit one in which there is minimal, if any, enforcement) that sacrifices customer clarity and legal certainty for off-shore regulation; or, the other, a highly regulated market that offers as much legal certainty as is possible under Canada’s current Code, but still an imperfect solution… and an expensive one at that.

But, clearly, becoming a registrant in Ontario’s regulated iGaming market can benefit iGaming Participants by providing legitimacy (or at least the appearance of it), legitimized market access, direct marketing to customers, and at least theoretical protection against criminal charges under the Code. However, if the Province of Ontario’s interpretation of the Code is not correct, that ‎fact ‎alone may not be a full defense to the iGaming Participants’ own resulting breaches of the ‎Code, it is ‎also clear that participation in a highly regulated, expensive regime implemented by Ontario would at ‎least give a court pause about determining criminal intent, a necessary element of all criminal ‎convictions in Canada.‎

Novel approach, novel issues

Ontario’s re-vamped efforts to clamp down on unregulated iGaming brings to light an additional issue inherent in the province’s regime. The AGCO does not seem concerned if an operator or supplier is offering or supporting unregulated gaming law outside of the Province of Ontario as long as the iGaming Participant is fully regulated inside Ontario. If the private party’s activities are acceptable within the iGaming regulatory framework, then those activities can continue in Ontario.  

This is dictated by practical reality, and not by any legal principle: if Ontario took the position that grey market iGaming in Canada was not permitted, it would force iGaming Participants to choose between only operating in Ontario’s regulated iGaming market, or continuing to operate in a grey market across Canada.  By limiting their concern to Ontario, the Province is allowing an iGaming Participant (or more likely, an affiliate or related party) to conduct regulated gaming in Ontario and grey market gaming outside of Ontario.

First, we note that this is not an ordinary approach that an iGaming regulator would take — for example, many United States iGaming regulators require licensed operators to cease grey market operations even outside of their borders as part of maintaining the local license.

Second, this creates a legal conundrum. The Code applies across each province in Canada. The provinces and the federal government share responsibility for enforcing the Code - this is why the RCMP and municipal police departments can both make arrests and lay criminal charges.  By creating the new iGaming regulatory framework, but not enforcing restrictions on grey market gaming across Canada, Ontario is giving tacit acceptance to the legality of an activity on which, until now, no province had taken a formal position.‎²‎  One must assume that iGO does not want criminals to participate in its iGaming regime; but, by turning a blind eye to grey market operations outside of Ontario, they seem to be accepting that these activities are not illegal, but simply unwanted as a registration requirement.

To date, Ontario has held out more of a carrot than a stick: if an operator or supplier would like to register to participate in the regulated iGaming scheme, it must cease unregistered activities. But Ontario has not taken the obvious position that would encourage a high volume of registration in Ontario: that grey market gaming is illegal and that iGaming must be done through iGaming Participants in order to be legal. It remains to be seen if they will later take that position.

Conclusion

Ontario’s efforts to take advantage of the immense iGaming market through the development of the ‎iGaming regulatory framework is commendable. Without question, significant efforts and progress have ‎been made by an experienced team to introduce rules, accountability, anti-money laundering measures, ‎and protections for players in Ontario. At the same time, absent an amendment to the Code that allows ‎provinces to license private third-parties to offer iGaming websites, the regime does not offer complete legal certainty. ‎

Only time will tell whether key remaining questions will be answered. Will a court be called upon to consider whether Ontario’s interpretation is correct? Is iGO “conducting and managing” regulated iGaming in Ontario, or are iGaming Participants the “operating mind” of these iGaming offerings? Will any other provinces follow Ontario’s lead, or at least convince Ontario to start using their regulatory might to tackle unregulated gaming in their jurisdictions? Will Ontario change its soft approach to unregulated gaming, switching from carrot (“please stop if you would like to register”) to stick (“you must register or your activities are illegal”)?  We’re not taking bets. Yet.