Although the gambling business has been banned in Ukraine since 2009, gambling halls are on practically every city street. Pretending to be lottery offices, these places allow gamblers to sidestep the country’s gambling ban.
The legal loopholes that allow the shadow businesses to operate started to open up in 2012, when the Ukrainian parliament, then controlled by the Party of Regions of Ukraine’s runaway former president, Viktor Yanukovych, relaxed the gambling ban.
The lax law featured no effective mechanisms to regulate holders of state-issued lottery licenses. That allowed operators to open gambling halls under lottery licenses.
It has produced a bonanza for fraudsters, who open online gambling saloons under the guise of lottery offices, and for those who cover for the illegal business while allegedly milking it for bribes.
As a result, the state budget gets only about $2 million a year in tax revenue from actual lotteries, and $4 million more in taxes paid by lottery winners.
Meanwhile, owners of illegal gambling halls masking as lotteries get about $1 billion in undeclared cash, according to the Anti-Monopoly Committee’s representative Agia Zagrebelska.
“That money could have gone to the state budget, to finance the construction of stadiums, schools,” Zagrebelska told the Kyiv Post. “But instead, it ends up in someone’s pockets.”
How it works
The sign on the shop in Kyiv’s Troyeshchyna residential district reads Golden Cup lottery. Its windows are covered with blue plastic, completely blocking the view into the premises.
The sign specifies that it’s a branch of the Ukrainian National Lottery. But there are no lottery tickets on sale here.
Instead, there are rows of computers. Their keyboards are customized to mimic slot machines.
Visitors buy a plastic gambling card with a minimum deposit of Hr 100 or about $3.50. The card goes into a slot on the keyboard, and the computer turns into a gambling machine.
Staff members recommend that newcomers start with the virtual fruit machine — a classic slot machine game. It’s easy and cheap — each pull of the virtual one-armed bandit’s lever costs just 50 kopiykas, or less than two cents.
Customer ID or age? No questions asked. Photography and video filming are forbidden, but alcohol consumption and smoking indoors are allowed. Only cash is accepted.
And Troyeshchyna’s Golden Cup is just one of tens of thousands of illegal gambling halls in Ukraine. They can be seen everywhere in Kyiv and other big cities: windows covered with plastic, doors always shut, and lottery logos everywhere.
For such an omnipresent industry, it remains remarkably unnoticed by the law.
Market in chaos
No one knows exactly how many illegal gambling halls are masking as lotteries. It’s not surprising giving how chaotic and unregulated the market is in Ukraine.
There are only three lottery operators who received state licenses: MSL, Patriot, and the Ukrainian National Lottery.
Their licenses expired in 2014 and were never renewed, but they continue operating. A controversial clause in the lottery law allows them to go on until the new license is issued.
And government agencies don’t hurry to issue new licenses. Finance Ministry approached the government in March with a plan for new gambling licenses, but was rejected. The Anti-Monopoly Committee thought the proposal favored the biggest operator, the Ukrainian National Lottery, and would lead to monopolization.
What we know is that there is a minimum of 15,000 lottery offices in Ukraine, as by law each of the three licensed operators must open a minimum of 5,000 offices.
But that’s not all. Even though their own licenses expired, the three operators sold franchise to some 180 different lottery retailing firms, as well as to betting agencies, who opened their own branches.
But only 19 percent of all lottery offices in Ukraine actually sell lottery tickets, according to an Anti-Monopoly Committee report on the lottery market published in February 2018. The rest of them function as either gambling halls or betting agencies — both of which are illegal.
Hidden schemes
The legalization of gambling in Ukraine could solve the problem, the Finance Ministry says.
But that’s easier said than done. Over the years, the issue has become highly politicized, with some political forces lobbying for the interests of the illegal business in parliament, Tetiana Ostrikova, a lawmaker from the 25-seat Samopomich Party faction in parliament and a member of the tax and customs policy committee in the Rada, told the Kyiv Post on Sept. 15.
“At a time when the law enforcement system is not only inactive, but corrupt law enforcers themselves frequently cover for illegal casinos and gambling saloons, the total ban on gambling only pushes this market further into the shadows,” Ostrikova said.
Seven bills that legalize gambling were submitted to the parliament — but Ostrikova said the tax committee cannot recommend any of them because each one aims to rig the market in someone’s favor.
“Moreover, not a single bill proposed a mechanism for effective controls over online gambling,” Ostrikova added.
Lack of oversight
The loopholes in the 2012 bill on lotteries mean there’s no oversight over what online software the operators use and how much money they earn, Georgiy Lozhenko, the president of lottery operator MSL, told the Kyiv Post.
Police have opened 245 criminal probes into illegal gambling in 2018 and passed 80 cases to court but it didn’t impact the sprawling net of gambling halls.
The reason police rarely hit the jackpot with their surprise raids lies in the nature of this business, Zoriana Toporetska, a lawyer who specializes in the gambling business, told the Kyiv Post.
“All the gambling halls went online, and can now turn off the gambling software and turn the lottery software on instead with one click, as soon as they see the police coming,” she said.
Market reshuffle
Since 2012, Ukraine’s lottery market has been divided between three private companies: MSL, Ukrainian National Lottery and Patriot, all registered abroad in offshore jurisdictions. Their licenses expired in 2014 but they are allowed to continue operating until new ones are issued.
The market has been upended in 2015. Before that, Patriot was the largest chain of lotteries across Ukraine, MSL was the second largest and the Ukrainian National Lottery was the smallest.
But in September 2015, the two market leaders, MSL and Patriot, were put under sanctions imposed by the National Security and Defense Council on suspicion of financing terrorism. Authorities said both companies had Russian businessmen among owners.
Investigation found no evidence, and sanctions were lifted in May.
But during these 2.5 years, the third operator, Ukrainian National Lottery, became the leader.
“Before the sanctions, the Ukrainian National Lottery had some 15 percent of the lottery market, after the sanctions — 85 percent,” Toporetska said.
In 2017, it declared a turnover of Hr 934 million — three times more than MSL with its Hr 308 million, the Finance Ministry told Bihus.info investigative website in May. The former leader, Patriot, had practically disappeared from the market, and declared only Hr 300,000.
The Ukrainian National Lottery didn’t respond to repeated requests for comment on this story. Patriot’s corporate phone numbers didn’t respond.
MSL’s president Lozhenko says its competitor benefitted from sanctions but calls it “normal.”
“It’s a normal way of competition with the use of authorities,” he told Kyiv Post. “I don’t know if our competitors did it on purpose or simply benefitted from the situation.”
Who creams it?
Ownership structures of lottery operators can be as confusing as the market itself.
MSL lottery operator belongs to a Cyprus-registered Evolot Ltd. The company claims a Cyprus businessman Marcos Siapanis is its beneficiary.
With Ukrainian National Lottery it’s more complicated. As of 2014–2015, it was owned by Olympic Gold Holdings, a company registered in the British Virgin Islands, one of the more secretive offshores.
A Swiss citizen Peter Shetti said in 2015 he co-owned Olympic Gold Holdings with Ukrainian businessman Valeriy Kovalenko and other undisclosed shareholders. Shetti couldn’t be reached for comment.
At some point after that, the lottery operator changed ownership to Hong Kong Rui Bo Investment Limited. According to the Justice Ministry registry, it belongs to British citizen Michael John Foggo. He didn’t reply to requests for comment.
Foggo is found in leaked offshore databases as a director of a Malaysian company Totech Global Ltd. A company with such name sells dehumidifying cabinets.
Ukrainian media have been explaining the success of the Ukrainian National Lottery with its alleged link to Oleksandr Tretiakov, a lawmaker with the Bloc of Petro Poroshenko, the largest faction in the Ukrainian parliament with 135 seats.
Tretiakov has denied its ownership of the company, but in 2015, Tretiakov showed up during an SBU search of the offices of the Ukrainian National Lottery, entering the building flanked by law enforcers.
Oleksandr Tretiakov, a lawmaker with the Bloc of Petro Poroshenko, the largest faction with 135 seats in the Ukrainian parliament, attends a session of the Verkhovna Rada on Oct. 16, 2018. (UNIAN) (UNAIN)
In 2016, he told Ukrainian TV channel 2+2 channel that he had an option to buy Ukrainian National Lottery shares, and was going to do it when his term in parliament ends.
Tretiakov didn’t reply to repeated requests for comment. He never explained how or when he acquired the option to buy the lottery’s stock.
But three unconnected sources in the Ukrainian parliament and the lottery business told the Kyiv Post that Tretiakov is the main lobbyist for the Ukrainian National Lottery in parliament.
The Ukrainian National Lottery denied Tretiakov has any links to it in a statement on its website issued in April.
“The Ukrainian National Lottery works in a transparent way and according to Ukrainian law,” the statement reads.
Betting agencies
Indeed, Ukrainian National Lottery hasn’t violated the law even when it sold the lottery franchises to the international betting agencies, also banned in Ukraine since 2009.
The international betting agencies Parimatch and Favorit Sport have bypassed the betting ban by registering as toto lotteries.
The Verkhovna Rada website defines a toto lottery as a lottery, where the players are guessing the results of sports event.
“There’s actually no difference with the betting agency. That’s a doublespeak. If you name your business a betting agency – you’re illegal. But if you name it ‘a toto lottery,’ then everything is legal,” Iryna Sergiyenko, the director of Fomin, Sergiyenko and partners law firm and the leading lawyer that specializes on gambling business and sports law told the Kyiv Post on Oct. 26.
Even on their websites, the Favorit Sport and Parimatch do not hide that they have international betting licenses.
“Betting is indeed forbidden in Ukraine, but Parimatch has been fighting for its legalization,” Parimatch’s press service told the Kyiv Post on Sept. 4, although it refused to provide any details.
Ukraine’s State Fiscal Service sees no problem with the international betting agencies operating in Ukraine, as both are registered as lotteries in the Finance Ministry’s online registry of lotteries – an Excel file in which the Finance Ministry has entered the names and financial data of the companies that the state lottery operators have declared to be franchise holders.
“The unregulated lotteries market, where the state doesn’t control cash flows or set strict rules for the business, or even the types of gaming, as well as having no mechanisms of punishment, has allowed even the betting agencies to pretend to be lotteries,” Lozhenko said.
“They just bought the franchises and registered as lotteries – because they can.”
