Brazil: Legal considerations on the regulation of sports betting part III

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In the final instalment of our three-part overview from Udo Seckelmann regarding the legal considerations that must be taken into account for the regulation of the sports betting market in Brazil, the lawyer at Bichara e Motta Advogados highlights why it’s important to guarantee integrity and monitor the market. Furthermore, he highlights the role of sponsorships with local clubs and the potential revenue that the sector may perceive.

Sports integrity and market monitoring

Aiming at protecting the popular economy and the integrity of sport, Draft 2020 establishes that sports betting operators shall maintain an independent and suitable monitoring provider that fulfills the requirements established by the Ministry of Economy. The purpose of this requirement is to identify suspicious activities that may indicate manipulation of results, inside information or any illegal activity. 

Such a device is extremely important for the correct functioning of the sports system, especially because it establishes the information and data exchange between operators, monitoring companies, police authorities, the Public Prosecution, the Financial Activities Control Council (COAF) and others. 

Without prejudice to the provisions of the decree, other players in the sports market (such as state federations and national associations) must cooperate with each other to strengthen the fight against match-fixing, mainly through information exchange and hiring of companies that provide integrity and monitoring services, such as Betgenius and Sportradar.

Sports integrity is the cornerstone that keeps the entire betting system alive. Thus, integrity services, compliance programs, market monitoring and the creation of reporting channels cannot be seen as an expense, but as an investment by the sports entities themselves.

Advertising by operators and partnerships with football clubs

Draft 2020 provides for advertising sports betting. Any type of advertising of the activity must be guided by social responsibility and promotion of awareness of responsible gambling, always aiming at protecting the popular economy, collective security and fighting against illegal gambling. 

Thus, the decree must be clear regarding the restrictions and penalties in cases of advertising that do not follow the legal parameters, and it is at this point that we must pay attention to the recent movements of the national sports market. 

Since 2019, there has been a visible increase in the variety of partnerships between football clubs and sports betting companies, which are undeniably a great source of recurring revenue for sports entities. Betting companies invest millions in clubs in exchange for an efficient tool to reach their target audience.

Despite being a natural movement resulting from the legalization of the activity by Law No. 13.756/2018, Brazilian clubs must be cautious with the partnerships established. This is due to the wording given by Draft 2020 in its article 20, section 3º, in verbis

Art. 20 – section 3º Any form of publicity or advertising of the lottery modality of fixed-quota betting by any person, natural or legal, is prohibited, except when authorized by the operator.

According to article 2 of the Draft 2020, an operator is any “legal entity or consortium of companies to which the grant for exploitation (operation) of the lottery type fixed-rate betting has been attributed, which involves both direct exploitation and intermediation, in this case, exclusively through electronic means, of bets between third parties.” (Emphasis added) 

In other words, after the regulation not only commercial exploitation of sports betting by companies that do not have a license granted by the Ministry of Economy would be prohibited, but also any publicity or advertising of betting by such companies. 

In this sense, considering that there are currently hundreds of betting companies operating in the “Brazilian gray market” and that the Ministry of Economy is considering granting only 30  licenses, partnerships between clubs and betting companies that fail to obtain a license would be drastically affected, since such partnerships are essentially based on (i) the commercialization of bets by the company (including the conversion of fans into bettors) and/or (ii) the advertising of the company’s brand through sponsorships – both of which are prohibited by Draft 2020. 

Therefore, should the decree be sanctioned under the terms of the Draft 2020, any partnership proposal between the club and the betting operator must be thoroughly analyzed with regard to its legal certainty and viability, aiming to prevent harmful business to the contracting parties.

Potential revenues and the channeling rate

The potential of the Brazilian sports betting market is repeatedly disclosed in the press and, ultimately, the millions of dollars that operators might invest in clubs – both in private partnerships and in “image tax”.

In fact, Brazil has the potential to figure among the three largest betting markets in the world, but there are factors to be analyzed that often go unnoticed in press reports and in statistical analyses without further elaboration. 

First, it should be noted that the main focus of regulation in any country is the absorption of the illegal market into the legalized market. This is called a “channeling rate”, which is the percentage of bettors who bet on legalized (licensed) operators in the country as opposed to those who bet on illegal (unlicensed) operators.

No matter how advanced and solid a country’s regulation may be, no market in the world reaches the 100% channeling rate. According to a study by Copenhagen Economics, the United Kingdom, the largest betting market in the world, has 95% of channeling, while in countries with excellent regulation such as Denmark, Italy and Spain channeling rates vary between 70 and 88%. In view of this, even if Brazil regulates the sector effectively, it would not be able to absorb all the traded values to the legal market. 

As highlighted in the previous topic, hundreds of sites currently offer online bets to Brazilians, but only 30 will – initially – be able to obtain a license and provide the acclaimed benefits to Brazil (tax collection, job creation, income to clubs, etc.). Therefore, it is clear that the billions of Brazilian Reais moved by the hundreds of companies that currently operate in Brazil will not be fully absorbed by the legalized market, nor will they be reverted in favor of Brazilian clubs, given the limitation in the number of licenses available. 

That said, a dose of reality is necessary to dispel the illusion that the simple regulation of the activity will generate millions to public coffers and to Brazilian football. There is no magic formula, let alone easy money. The work on regulation must be very well done and involve all players, otherwise we will achieve the same results as Portugal and France, whose channeling rates do not exceed the 52% range.