What a Gamble
Paul Gauselmann had more than 100 white tents erected for the milestone birthday, along with a Ferris wheel and a large stage. The party went on for three days in the town of Lübbecke, not far from Hannover in northwestern Germany. His company had just turned 60, having grown from its origins as an enterprise specializing in sales of jukeboxes and gaming devices into Germany’s largest gambling company. Gauselmann and the smiling sun logos of his Merkur gambling halls have changed the face of the country’s city centers while Gauselmann himself has become a billionaire. Today, the 83-year-old still oversees the empire he built. Addressing Gauselmann in a fawning speech as the festivities kicked off, Garrelt Duin, a former economics minister of the state in which Lübbecke is located, said: “You are part of German business history.”
For a time, the gambling industry had been a well-organized monopoly market, cleanly split between government-run lotteries, sports betting and casinos and the private gambling machine business. But the digital revolution replaced that system with an opaque web of internet casinos that compete for players' money from tax havens like the Isle of Man, from where they operate in legal gray areas. This has left Germany's state governments hopelessly overwhelmed. For years, they have been unable to enforce strict bans on online gaming. The internet gambling market has developed into a lawless industry, a playground for criminals and money launderers with active support from the financial sector.
It was a development Gauselmann couldn't ignore. He was the king of betting machines, the godfather of German gambling – a status he meant to keep. Internal documents from the law firm Appleby now make it possible to reconstruct for the first time what Gauselmann did to ensure he didn't miss out on the online business boom. His actions show how simple it can be, with the help of resourceful lawyers, to circumvent German gambling laws.
Gauselmann’s foray into the online world began in 2008, when he purchased the Hamburg-based games developer Edict Egaming. Less than two years later, he founded an offshoot of the company on the Isle of Man called Edict IoM. Appleby lawyers drafted terms and conditions and license agreements for the subsidiary. They also received approval for the company from the Gambling Supervision Commission in the island's capital city of Douglas. When contacted for a response, the Gauselmann Group confirmed these actions and wrote that it had “only created a sales organization on the Isle of Man that had been properly licensed according to applicable regulations there.” From that point on, Gauselmann’s entry into the online business has been closely linked with both the Isle of Man and with Appleby.
Online gambling is also an important line of business for the law firm. Appleby even touts itself for having helped shape gaming regulations on the Isle of Man. In a book titled "You Can"“You Can”"You Can" published by Appleby, readers can learn in detail how to set up, license and successfully run an online gaming company there.
In brochures and on its website, Appleby promotes complete packages for companies that want to offer sports betting, lotteries or casino games. The company states it has everything clients need to “grow their business offshore.” Those wanting to operate an online casino from the Isle of Man don’t even need programming skills – there's software for that.
The island’s government, in turn, is proud to have created a paradise for online gaming. The British crown dependency was one of the first places in the world to regulate the casinos of the digital future. In 2001, the Isle of Man passed extremely liberal laws, making it possible to simply and legally obtain official gambling licenses. It has since become the island’s second-most important industry after the financial sector.
Gauselmann is now able to sell its games worldwide from the island. “For the Gauselmann Group, it is imperative to be active in the online gambling area,” the company wrote in a statement. The group already offers online gaming services in Spain, Italy, Britain and Denmark. Gauselmann is also able to earn money off German players, at least indirectly, without violating restrictive laws in Germany. It simply sells online licenses for well-known Merkur slot games like “Fruit Slider” or “Double Triple Chance” to other casino operators. When asked if these companies could in turn use the software to offer online gambling that is largely prohibited in Germany, the company responded, “The Gauselmann Group does not work with companies that obviously break German laws.”
But can a company like the Gauselmann Group really know exactly how its software is used? The online gambling market has become so complex that even government inspectors appear to be throwing in the towel. Perhaps Gauselmann doesn’t really want to know. The business, after all, is quite lucrative.
It’s a business that caused Lucas Jager (whose name has been changed to protect his privacy) to lose half a million euros, his family and many of his friends. Gambling machines, arcades, casinos – the goosebumps he got when his bank account grew, when he won a hand of poker, when the slot machine clattered as it spat out coins. Jager turned it into a career – the career of an addict. When gambling moved to the internet, he followed. He first played poker, then the same games he had played on the slot machines. Fruits and shapes would spin on his smartphone and on his PC for at least seven to 10 hours each day. In the end, he said, he hardly ever left home. That is, at least until he checked himself into the hospital for inpatient addiction treatment. “From the viewpoint of a player, I would say: Shut them all down and smother them with lawsuits,” said Jager.
Jager’s case may be a particularly serious one, but online casinos are considered the most dangerous form of gaming for those prone to addiction. They are never closed, you don't have to worry what others might think of your behavior and users can play on several sites at once. The payout percentages are higher than for stationary slot machines or casino games because costs are lower. The stakes are often unlimited and there are no maximum limits on losses per hour. Player protection is virtually nonexistent.
That’s why online gambling is largely prohibited in Germany. But business is booming nevertheless. Gambling site operators rake in close to 1.3 billion euros a year from German players, according to research conducted by the state government of Hesse. It’s the fastest-growing part of the gambling sector, with double-digit annual growth. Hesse also found that nearly 500 German-language gambling sites can be accessed on foreign servers. The European Commission, the EU’s executive, has threatened several times to impose infringement procedures on Germany for, among other things, not enforcing the online ban. All attempts by the state to block money transfers to gambling companies with the aid of banks and credit card companies have failed. But that’s as far as the law goes.
Bookies are monitoring the situation very closely. Generally, well-known companies like Tipico and Bwin also offer casino games that are largely prohibited in Germany. In some cases, the firms are listed on the stock market and also operate a large number of betting shops in Germany. The situation is complicated. On the one hand, you have regional authorities that enact bans but are unable to enforce them. On the other, you have companies that knowingly violate those laws. Then you have lawyers who provide those companies with support in their disputes with governments and assume the cases will be drawn out. Finally, you have a European Commission that repeatedly poses difficult questions.
Confronted with reporting by the Süddeutsche Zeitung and the German public broadcasters NDR and WDR, Gauselmann responded with a 14-page statement. In it, the company stressed it was not involved in illegal businesses in Germany. Its subsidiary on the Isle of Man sold “online casino products to third parties that also have the necessary gambling licenses and market their independently operated online casinos worldwide,” the company wrote. It added that individual operators were themselves responsible for the operation of online sites and the marketing of their products – Merkur was “not legally liable” if such products were accessible from Germany.
But then why does Gauselmann need dummy companies as trustees, if not to conceal something?
The Appleby documents raise these sorts of questions. They make it seem as if the establishment of Edict IoM on the Isle of Man isn't quite as innocent as Gauselmann claims. In July 2012, the Interstate Treaty on Gambling went into effect, cementing Germany’s online gambling ban. Shortly thereafter, one of Gauselmann's legal advisers met with staff at the law firm Appleby. A newspaper later cited Gauselmann as saying he had sold Edict IoM, which had meanwhile been renamed Alliance Gaming Solutions. Apparently Gauselmann wanted to distance himself from the Isle of Man subsidiary following the inception of the Interstate Treaty on Gambling.
And ownership really did change. From January 2013 on, a company called Bruncaster Limited – a firm that cropped up in the Panama Papers as pseudo-owner of numerous offshore companies – became the sole stakeholder in Edict IoM/Alliance. Bruncaster, in turn, holds the shares in trust for the Gauselmann subsidiary Merkur Interactive. In other words, Gauselmann sold a subsidiary and had it turned into a trust to which he is still connected today. In its written reply, the company countered that such trust structures are “standard practice” as a means to sell and that the firm’s trust relationship had been disclosed to the gambling supervisory authorities and also the German tax authorities. The company claimed it had no further business relations with the firm. “The suggestion of concealment is wholly without factual foundation.”
So why did it resort to using this structure? Gauselmann wouldn't say. Meanwhile, business with the Merkur licenses continues.