Ontario’s Auditor General Addresses Criticism Of IGaming Report

Written By Robyn McNeil on December 30, 2021

A recent report issued by the Office of the Auditor General of Ontario has ruffled some industry feathers.

The report, Internet Gaming in Ontario, raises potential legal concerns for Ontario’s new competitive online casino and sports betting market. Specifically, the 15-page report identifies possible legal pain points concerning the structure and governance of the soon-to-launch market.

“We put out the report because we do have some concerns with the model,” Bonnie Lysyk, Auditor General, told PlayCanada.

“One, from the perspective of whether the model meets the requirements for conduct and manage under the Criminal Code. And secondly, with respect to the governance structure of how iGaming [Ontario] is being organized.”

However, the Ministry of the Attorney General seems ready to stay the course despite the warnings.

An email to the office of Ontario’s Attorney General sent last week received no response before the publication of this story. However, Natasha Krstajic, press secretary and parliamentary advisor for Ontario Attorney General Doug Downey, previously responded to Covers.com.

“Ontario is committed to creating a competitive new online gaming market to help protect consumers,” Krstajic reportedly wrote in the email.

“Ontario has carefully designed the online gaming model so as to achieve that objective in compliance with the requirements of the Criminal Code that apply to Ontario.”

However, understanding the allegations in OAG’s report requires background on the proposed enhancements to the existing Ontario online casino offerings.

All eyes on Ontario’s expanding igaming market

Anticipation for Ontario’s revamped online gaming market has been high since the Ford Government first signalled its intent in 2019.

In August, the excitement reached new peaks as the Federal government passed Bill C-218.

The legal change allows provincial operators to include single-event bets in their sports betting offerings. Before the bill’s passage, Canadians could legally only make parlay bets. The change means Ontario’s new market will be much bigger than first thought.

And with a population of nearly 15 million people, North America’s fifth-largest gambling jurisdiction is attracting many eyes.

On Aug. 18, the Alcohol and Gaming Commission of Ontario released a registration guide for operators interested in entering the new market. Almost a month later, on Sept. 13, the commission opened the application portal to operators, including those previously active on the unregulated side of things.

That unregulated market is part of what’s driving Ontario’s looming changes.

According to the AGCO, Ontarians spend close to $1 billion on online gambling each year. However, 70% of that is wagered on unregulated sites, which means Ontario is missing out on significant tax dollars.

Recapturing that revenue via an expanded regulated market also benefits players lacking legal protections when placing bets offshore.

However, prospective operators need to do more than just register with AGCO to enter the market. Once registered, they need to sign a commercial agreement with iGaming Ontario.

iGO is a subsidiary of AGCO responsible for the problematic “Conduct and Manage” requirements of Canada’s Criminal Code.

Undefined terms cause confusion

“The big issue, and this is why we’re hamstrung in Canada, is the way the federal legislation is constructed,” said Ron Segev, an expert on regulation matters.

Segev is a Vancouver-based lawyer and founding partner at Segev, LLP. He leads the firm’s securities team and has years of experience serving highly regulated industries, including gaming, cannabis, and blockchain.

Part seven of the criminal code contains all the gaming and betting provisions. But, Segev said, at a high level, those are not provisions. They’re prohibitions.

As Segev explained, sections 197 to 207 of the code spell out everything that’s a no-go. And they cast a vast net, he said. Then in section 207, we get: notwithstanding everything just said, you CAN do these things if conducted and managed by a province.

For Segev and the AG, the problem lies with the definition of “conduct and manage.” It’s never been clearly legally defined.

And how it’s interpreted has resulted in a patchwork of provincial offerings. Ontario is the first to attempt to open its market to competition and, by extension, a potential legal challenge.

Gambling with a risky business

But, the government’s plans could be open to legal risk.

Early signs indicate much of the decision-making power (and business risk) could fall to private operators.

According to the auditor general report, this passing of responsibility may not satisfy the section of the code that requires provincial governments to “conduct and manage” commercial gambling.

“Consideration for whether a province has illegally delegated the ‘conduct and manage’ function in a gaming scheme to a private entity has been the subject of past legal challenges in Canada,” the review read. “We conclude that iGaming Ontario’s business model could be subject to legal challenges.”

The report also notes iGO’s governance structure as a potential problem. Also noted was the difficulty associated with verifying the integrity and fairness of games.

“Typically, there’s a separation between a regulator and an operator,” Lysyk told PlayCanada. “In this particular situation, there’s a bit of an overlap in the involvement of the regulator and the operator in terms of iGaming. So, the model itself is what we cite as a problem.”

It makes a pointed mention of AGCO’s in-house testing facility, which validates all gaming equipment currently used in the province. This equipment includes slot machines, electronic table games, card shufflers, random number generators and cashless wagering systems.

In contrast, for gaming, private operators must engage independent testing laboratories to certify their gaming systems and platforms.

A bitter pill to swallow, for some

On Dec. 1, as the auditor general released their report, many from the gaming industry were gathering in New Jersey for a North American trade conference.

As news of the report began to spread through the conference rooms, some with eyes on Ontario seemed to take exception to the findings. The issue, some said, is that the auditor general is not part of the industry and therefore lacks the necessary understanding.

While not going quite so far, Paul Burns, president and CEO of the Canadian Gaming Association, recently commented to The Parleh:

“The auditor general is allowed to pass comments on issues,” Burns said. “Lots of people have opinions on what ‘conduct and manage’ means. The (provincial) government in its response (to the AG) was quite direct that it has dealt with those concerns, and I think they have, too.”

When asked about industry pushback, Lysyk challenged the idea that the OAG was offering an opinion at all.

“I wouldn’t say it’s an opinion that we’re sharing; I think what we’re sharing is the facts of the situation.”

And the facts in the report, Lysyk said, have been vetted for accuracy.

“We don’t have a vested interest in the outcome of this, so we are independent and objective of the benefit of Internet gaming in Ontario. So I would say that our perspective is factual and independent of vested interests.”

AG report offers vindication

For Segev, the AG’s report is a vindication of sorts.

On the same day AGCO released their Internet Gaming Operator Application Guide, Segev published a piece on iGaming Business, a trade publication. That piece, Ontario: is the province’s hands-off approach illegal?, noted the same conduct and manage issue later raised in OAG’s review.

At the time of publication, the industry responded much as it has to the official report.

“Columbus didn’t discover anything. It was always there,” Segev said in a recent interview with PlayCanada. “I think I think that elephant was always in the room. It’s just no one wanted to point to it. I don’t think any of this comes as a surprise to anybody, to be perfectly frank.”

Segev’s take on the report is kinder than some industry folks: He said it’s comprehensive and engaging. And he applauds the office for picking up on the potential conflict of interest issue between AGCO and iGO. A problem he said he missed.

Raising the issue a call of duty

Segev believes any legal practitioner in the field is duty-bound to raise potential hurdles like this. Especially those that take their practice seriously.

However, he said he had one client who asked: “Why did you publish this? Don’t you want to see this go through?”

Segev asked them to consider a scenario months in the future. One where the AG report comes out and delays market. At that point, he said, the question becomes, “Why didn’t you see this coming?”

While Segev understands that some in the industry are displeased with the report, he feels the criticism is misplaced.

“I absolutely sympathize. People are investing a lot of time and money in getting ready for this market,” he said. “The resources invested are incredible, in terms of getting your technical platform in place, getting your compliance regime in place, your (anti-money laundering) regime, spending money on legal fees, getting geared up just to provide a product for the Canadian market.”

But that’s no reason to rush and make avoidable mistakes, he said.

Frustrations understandable but misplaced

“People are going in, and they’re going in big,” Segev said. “So, I understand their frustrations when they see an article like mine [or the AG report] come out. But I honestly think I was doing a service to the market, flagging potential risk. And the AG was just doing her job.”

Segev urged caution from the industry.

“I don’t think we can go in blindly with our head in the sand,” he said. “I think everybody needs to be transparent, not opaque about it. I think we need to explore potential risk, as well as potential reward.”

“The net benefit is difficult to argue against,” he added. “I think it would be great to have a new liberalized regime. What the AG Report did wasn’t saying, ‘We don’t think this is this has economic legs, or we don’t think you should do this.’ They just said, ‘We’re not entirely sure, we’re not confident as to how you’re going about this.'”

Big money is always a big topic, Lysyk said.

“Our point is just to identify that, at this point, there are some things that need to be looked at first. And at the end of the day, you know, this gaming revenue does provide an additional source of revenue for the government for social services, health, etc. So we’re not saying that’s a bad thing.

“We’re just saying, you know, does this model ensure integrity of the game for people playing in Ontario?”

Photo by Shutterstock / Ian Dyball
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Robyn McNeil

Robyn McNeil is a Nova Scotia-based writer and editor. She lives in Halifax with an awesome teen, a mischievous cat, and a penchant for good stories, strong tea, cheeseburgers, yoga, graveyards, hammocks, gardening, games, herb, and hoppy beer.

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