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The Philippine online gambling industry’s rapid transition from a disgraced foreign-facing segment to flourishing domestic sector is approaching a crunch moment as payments channels come under unprecedented scrutiny.
With foreign-facing B2C operations now illegal and B2B operations heavily curtailed, political and media narratives on the notorious POGO (foreign-facing) sector have transferred to the perceived benefits offered and threats posed by a domestic market that Vixio GamblingCompliance now ranks in the top ten globally.
Within a matter of months, debate on the socioeconomic merits of the industry has escalated into threats of heavy restrictions or a full ban from individual lawmakers in both houses of Congress. Supporters of the industry and pragmatist policymakers in the executive branch are consequently mobilising against this hostility.
PAGCOR, the Philippines’ primary gambling regulator and casino operator, has long been a gambling revenue beneficiary, and its advocacy for a sustainable domestic industry is steadfast, notwithstanding its initial indifference to domestic operator difficulties and dabbling in policy tightening.
But PAGCOR is not a de facto independent body. Its politicised board appointees and top executives answer to the President of the Philippines and openly juggle regulatory concerns with the interests of the government of the day and industry rather than serve as dispassionate enforcers.
Consequently, threats to the gambling industry and impetus for major reform largely come from elsewhere.
Today, three such threats – or signals of reform – are posed by the legislature (calls for heavy restrictions or a ban on all online gambling), the finance ministry (a proposed online gambling tax) and the central bank, which is now targeting domestic payments channels.
This regulatory influencer focuses on the last of these, because reform of the payments sector’s online gambling nexus has the potential to accelerate and professionalise monitoring of player, gambling company and payments channel metrics, to rebalance market share of legal and illegal operators, and to stabilise the volatile politics surrounding the industry.
The Bigger Picture
PAGCOR’s customarily reactive methodology is never more conspicuous than when political heat rises.
Having shut down its regulatory machinery for almost all of the POGO sector, but with political sentiment turning against domestic online operators, the regulator is now warning against illegal gambling websites for local customers; illegal or unauthorised advertising for these sites on billboards, prime time television and online; and the paid promotional efforts of social influencers and celebrities.
PAGCOR on Wednesday (July 16) also implemented an agreement with the national Ad Standards Council that requires all gambling advertising be submitted to the council for approval prior to publication or distribution.
However, media concentration on PAGCOR intrigue has, until recent weeks, given insufficient coverage to the importance of payments systems to the regulated and illegal markets alike.
The limited enforcement capabilities of PAGCOR on the edges of the gambling ecosystem have also left significant space for other government organisations to substantially impact the industry using gambling-specific controls.
In the case of domestic online gambling, that space is set to be filled by the central bank, which has released a draft circular on wide-ranging clamps it is preparing for the nation’s free-wheeling payments industry.
The draft circular is a blunt reminder that a lot of the debate on online gambling ignores the bifurcation of the domestic market into regulated and unregulated operators, with the latter already commanding at least half of the market and able to exploit with impunity the highly penetrative e-payments networks and solutions of the Philippines, including the ubiquitous e-wallet.
The regulated market has long complained about this imbalance, and the intervention of the central bank may help to retract the outsized influence of illegal operators, alleviate the threat of criminal infiltration and reduce political risk for the domestic industry.
Given the European Commission’s removal in June of the Philippines from its blacklist of nations with high money laundering and terrorism financing risk, a decision mirroring the Financial Action Task Force (FATF) in February and approved by the European Parliament last week, the central bank now has every incentive to implement effective and reputable AML/CTF measures covering the payments-gambling nexus, thereby upholding hard-won improvements to the Philippines’ reputation.
According to the draft circular of the Bangko Sentral ng Pilipinas that amends the Manual of Regulations for Payment Systems (MORPS), companies that provide online gambling payments services must:
In terms of commercial partnerships and day-to-day operations, payments companies must:
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Payments companies also must develop a Responsible Online Gambling Policy to promote responsible gambling and combat addiction. This policy will require that companies regularly display responsible gambling alerts, particularly during periods of heavy play. It also requires customers to set a daily total transaction limit and a daily playing window limit of no more than six hours, while allowing customers to disable online gambling transactions for a nominated number of weeks.
Finally, payments companies must prohibit employees from gambling online, submit online gambling user data to the central bank and submit a “list of partner [online operators], its volume and value of transactions, and number of registered and active accounts”.
The central bank’s Monetary Board will wield penalties for payments company non-compliance with the MORPS amendments, starting with fines of up to 100,000 pesos per day for “violations of a continuing nature”, or a maximum 1m pesos for “each transactional violation”.
In more severe cases, the Monetary Board can first suspend a company’s authority to offer online gambling payment services, then suspend its authority to settle through the Philippine Payment and Settlements System. No custodial penalties or prosecutions thereto are indicated.
A grace period of six months will apply for transfer to the new regime, including receipt of all regulatory approvals.
Why Should You Care?
Because the central bank is targeting the innermost workings of online gambling’s payments milieu and is independent of pro-industry PAGCOR officials, the MORPS amendments represent one of the biggest threats yet to illegal cash transactions involving regulated and illegal gambling operators.
By definition this promises to even a de facto playing field in which illegal online gambling operators have at times overwhelmed regulated companies in the fight for a share of an aggressively growing market with colossus potential.
Regulated companies, whether offering sports betting, online casino or other products, have had to bear the costs of keen regulatory compliance and a tax regime far more thorough and complicated than that imposed on their former POGO cousins.
So, it is critical for their prospects that the new, enforceable payments regulations are able to strip much of the illegal market of its prize conduit – leading e-wallets such as GCash, Maya and GrabPay and other payments solutions – and force payments companies to police attempts by the unregulated sector to access customers by more devious means.
Because the central bank is on the front line of negotiations with global monitoring bodies such as the FATF and the Asia/Pacific Group on Money Laundering, and as online gambling is one part – and a highly sensitive part – of a wider economic and fiscal environment under its jurisdiction, bank officials are heavily and arguably uniquely invested in a successful outcome.
For a country beginning to escape global watchlists, this is a crucial element in delivering practical outcomes given the allegations of serious corruption that continues to hobble various levels of the Philippine government.
Further, the amendments could have different effects on the gambling industry itself because of distinct product types and player demographics in the regulated and illegal markets, potentially impacting the online industry’s burgeoning networks of suppliers and supply chains differentially.
From a political perspective, the changes in the draft MORPS circular offer, almost counterintuitively, a promise of solace and stabilisation for regulated operators intimidated by congressional calls for a total ban on online gambling, foreign-facing or domestic.
This sense of intimidation can only increase this week with reports that Philippine President Ferdinand Marcos Jr. is contemplating a full ban on domestic online gambling, though hedging comments from press secretary Claire Castro imply that Marcos’ review of the domestic industry is more about optics than results. Marcos, after all, as president is a direct recipient of significant online gambling revenue through PAGCOR, and in the Philippines, murky administrative cash conduits are the lifeblood of politics.
In any case, the successful execution of the central bank’s scheme would increase the credibility of the domestic online gambling sector and likely disarm much of the hostility emanating from Congress, while also releasing pressure on PAGCOR.
Such an offsetting or neutralising of anti-gambling forces would gift the government an opportunity to better calibrate its handling of the regulated sector, without exercising the nuclear option of prohibition that would greatly empower illegal operators.
This last point is of concern to the wider industry in Asia and beyond. The onset of online gambling prohibitions in the Philippines and Cambodia have previously engendered significant shifts in criminal network operations in Southeast Asia and these networks’ interests in other continents, including Europe.
What the central bank initiative promises is a moderated crackdown, potentially sending a proportion of illegal Philippine operators offshore all over again and fuelling a degree of lawlessness in nations wracked by war, ethnic Chinese-controlled crime empires and despotic, corrupt governments.
But the tougher option of a full Philippine ban strips illegal operators of the possibility of coming in from the cold, and could super-charge illegal online gambling operations across the region, as well as further muddy the reach and risk posed by offshore hubs such as the Comoros island of Anjouan, which has welcomed often anonymous refugee licensees from around the globe.
What Comes Next
A full ban on domestic online gambling in the Philippines seems unlikely. Much more likely are the implementation of the MORPS changes and accompanying revisions of tax law, as well as lawmaker clamps on industry excesses short of a full ban, all with the hearty approval of a PAGCOR relieved at the survival of the domestic online segment.
The online industry is likely to continue its world-beating growth, with observers offering variable predictions on when the market will reach maturity, though implementation of central bank restrictions could hasten this outcome.
In the meantime, the Philippines continues to strengthen its credentials as a hub for gambling companies in all sectors, slowly but surely leeching Macau of not only higher-tier services, products and management personnel but also confidence in a sustainable, entrepreneurial future.
This shift in perception toward the Philippines can only encourage a degree of permissiveness and liberalism and, quite crucially, a greater faith in regulation that is central to shepherding an industry with mass appeal and strong political risk.
