Friday, Jul 28, 2017, 8:47 PM CST – China

Society

Online Lottery

Swept Stakes

China’s growing lottery craze could sputter as authorities clamp down on online ticket sales in order to curb ‘rampant irregularities’

Yueyaduo members visit a restaurant kitchen to check its compliance with national food standards Photo by cfp

China’s Ministry of Finance (MoF) issued a joint directive with seven other agencies in early April to ban unauthorized online lottery ticket sales – a move, according to industry insiders, aimed at eradicating widespread malpractice among online operators and their agents and promoting a legal and licensed lottery industry.

MOF statistics for 2014 indicate 382 billion yuan (US$57bn) total revenue in China’s lottery industry, a 73 billion yuan (US$11b) increase since 2013. It is estimated that some 40 billion yuan (US$6bn) worth of lottery tickets were bought online in China last year.

Despite such healthy sales figures, of 400 Internet enterprises reportedly involved in the online lottery business, only two were licensed under a pilot government program – 500.com and sporttery.cn. Even in the case of these two companies, the government had only licensed them to engage in business relating to the sports lottery so far, not one online business has been approved for involvement in the national welfare lottery – the Chinese mainland’s only other legal gambling outlet.

Overhaul

According to the new government directive, which requires all provincial authorities involved in finance, civil affairs and sports to conduct investigations into unauthorized gambling activities, some Internet companies have been selling “fraudulent lottery tickets.”

This latest campaign began on January 15, 2015, when the MoF and other agencies issued a notice asking Internet companies selling lottery tickets to carry out “self-correction” and deliver a formal report before March. Major Internet enterprises including Alibaba, Tencent and Netease all suspended online sales of lottery tickets starting in February. Since April 4, the first day after the suspension announcement was made, 500.com also halted its online service. Two days later, the company’s shares stopped trading on the New York Stock Exchange.

According to Su Guojing, founder of China Lottery Industry Salon, a quasi-industrial association, China’s lottery business was regulated by three government agencies: the MoF, the Ministry of Civil Affairs and the General Administration of Sport.

“The latest announcement shows the government’s determination to reform the lottery sector, especially through the involvement of law enforcement agencies including the public security as well as industry and commercial departments,” Su told NewsChina.

“Previous regulations issued by these three agencies lacked a clear and detailed outline, resulting in many gray areas that could be manipulated by Internet lottery companies,” he added.

Complaints and scandals surrounding online sweepstakes have been rife as reports emerged that some online lottery companies held on to their customers’ money rather than using the funds to enter sweepstakes. According to media reports, a customer in Guangdong who found they had won a 5 million yuan (US$800,000) grand prize failed to receive their payout because the online subscription order was not filed by an Internet company in time to claim the winnings.

Su Guojing told NewsChina that some Internet agents even refrained from issuing lottery tickets to their customers, instead providing fake ticket numbers after receiving their money. He added that small prizes are often paid to their winners in full, while payouts on big jackpots are completely withheld, with the company, typically a small Internet enterprise, claiming that “because of technical errors, the tickets failed to be issued.”

Wang Xuehong, director of Peking University’s lottery research institute, said online sales of lottery tickets have a number of problems because it is difficult for buyers to distinguish legal websites from illegal ones.

“Once money has changed hands, it’s impossible to know whether a website will actually buy [your] lottery tickets,” Wang told the official Xinhua News Agency.

Li Jian, founder of lottery consulting agency Caitong Consulting, told our reporter that there is speculation that the government may set up a separate government agency such as the “National Lottery Development Bureau” to take charge sector under the supervision of China Banking Regulatory Commission.

Li added that the new regulation was set up partly due to the auditing of lottery funds in 18 provinces. Under the current rules, 50 percent of the funds raised by lottery ticket sales become prizes, 35 percent contribute to the central government welfare fund, and 15 percent pay the expenses of appointed lottery organizations. Reports emerging from the National Audit Office in recent years showed that the misuse of these latter funds has abounded.

Prospects

In 1987, the China Welfare Lottery was set up in the wake of the establishment of the China Welfare Lottery Management Center (CWLMC), its regulatory body. Ticket sales revenue in the first year of operations hit 17.4 million yuan (US$2.4m). In 1994, the China Sports Lottery appeared on the market, with the China Sports Lottery Management Center (CSLMC) charged with the issuance, printing and management of sports lottery tickets.

Over the years, online ticket sales have been gaining popularity, particularly in recent years as a growing number of people have seen winning one of the two national lotteries as a chance at a better life. MoF data shows that in the first two months of 2015, 64 billion yuan’s (US$10bn) worth of lottery tickets were sold in China, year-on-year growth of 35.8 percent. According to the 2014 Online Lottery Sales Report published by Caitong Consulting, total revenue from online ticket sales in 2014 hit 85 billion yuan (US$13.7bn), double the figure in 2013, including 38.5 billion yuan (US$6.2bn) or 45.3 percent of tickets that were purchased via mobile devices. With annual growth in its mobile sector hitting 80 percent, the industry could not ignore the contribution made by online ticket sales.

Under the existing sales structure, CWLMC and CSLMC, under the Ministry of Civil Affairs and the General Administration of Sport, were directly responsible for the supervision and issuing of lottery tickets, with provincial and city authorities responsible for distribution. However, the appearance of online channels circumvented this top-down arrangement.

“Next to the lure of profits, regulations without legal backing were nothing but waste paper,” a senior manager at an online lottery ticket sales company, speaking on condition of anonymity, told NewsChina.

This is not the first time the central government has tried to wrest influence away from the unregulated online lottery market. Since 2007, online sales of lottery tickets have been suspended four times. The responsible companies, however, tended to suspend business and simply resume sales after the dust had settled.

In 2012, to restore the credibility of online lottery ticket sales, 500.com voluntarily halted sales for a full year, only resuming operations after being approved under an MOF pilot program. The cost to the company was huge – net profits dropped from 13.5 million yuan (US$2.2m) in 2011 to 4 million yuan (US$645,200) in 2012, according to the company. Since resuming business, 500.com has also withdrawn from sales of welfare lottery tickets.

Since business was suspended in April, industry insiders agree that there is no specific time frame for the resumption of sales. On April 7, representatives of 500.com told Chinese media that the company has been cooperating with the CSLMC to develop its online sales system and, when the new system is unveiled, the company will apply to MOF to reopen its sales channels.

According to Li Jian, before online sales can resume, several industry-wide changes need to be made, including the establishment of a supervisory management system, the alignment of the currently distinct welfare and sports lottery sales systems and final adjustments to the entry requirements to the industry for online companies.

Li added that this year’s “strictest suspension” would prove to be a turning point for China’s lottery sector, and was in the best interests of most companies working in this industry.

“Online lottery tickets sales is nothing but another sales channel in China today,” Li told NewsChina, adding that lottery tickets, whether sold on- or offline, are “exactly the same” and thus coordinating the two channels is an “urgent task” for the supervisory authorities.

“The development of an exclusive online lottery would be a priority,” he added.

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