Introduction
In September 2014, FIFA - the worldwide governing body of football - declared its intent to ban the contentious practice of third-party ownership (TPO). Before we start delving into the intricacies of the TPO in this article, we will briefly explain the structure of the international professional football industry and football transfers, then we will explore TPO and its impacts on the football sphere as a whole. In order to fully examine the impact of FIFA’s TPO structure currently in place, we will scrutinize the curious case of Deportivo Maldonado, which recently took over news headlines when all-star clubs such as Real Madrid and Juventus unexpectedly and furtively gained players from this Uruguayan second-tier club.
Background
Founded in 1904 and headquartered in Zurich, FIFA, or the Fédération Internationale de Football Association, hosts around 211 member associations each of which represents a specific country or region. Its primary role is to promote and regulate football at the international level. It is also responsible for organizing international competitions such as the FIFA World Cup, establishing rules and regulations for the game and overseeing the transfer of players between clubs. As well, UEFA (the Union of European Football Associations) is the administrative body for association football and futsal in Europe and it is one of six continental confederations of FIFA- all in all consisting of 55 member associations.
Transfers
The transfer of a football player between clubs consists primarily of a selling club and a purchasing club agreeing on a fee to compensate the selling club for the value of the player's existing contract. If the player and the purchasing club agree on an employment contract, the player's existing contract with the selling club is terminated, the selling club receives the transfer fee, the player signs the employment contract with the purchasing club, and the player registers with the association that manages the league in which the purchasing club competes.
As aforementioned, transferring a player between football clubs is a complex process that involves numerous parties and considerations. In order for a transfer to take effect, several rules and regulations must be followed, including those set forth by the European Union (EU) and the Regulations on the Status and Transfer of Players (RSTP). By following these rules, clubs ensure that transfers are conducted fairly and transparently, protecting both the rights of players and investors alike.
As such, the 2001 regulations between FIFA, UEFA and the European Commission were introduced to further oversee the transfer of players between football clubs. According to these regulations, a player can only be transferred during the transfer window, which is typically during the off-season and completed before the deadline set by the respective governing sporting body.
The transfer window in football leagues allow players to move from one team to another biannually, similar to how stocks are traded on the open stock market. This lack of uniformity and a streamlined set of rules in different leagues operating within the EU has led to different forms of ownership throughout the world.
Yet, landmark cases such as Bosman and Meca-Medina allowed for the fabrication of a successful EU judicial framework allowing the CJEU and EU institutions to act as watchdogs and to assert the supremacy of EU law over sporting bodies that interfere with European economic activities.
All in all, it is important to note that measures governing sport activities fall under the scope of the Union treaties in so far as they constitute 'economic activity' as per article 63 TFEU that effectively prohibits restrictions on the movement of capital.
TPO: What is it and how does it work?
A TPO agreement occurs when a third party (an investment fund, corporation, sports agent, or private investor) purchases an economic stake in a football player’s economic rights from a football club and consequently also in future profits from his/her sale. The third party could believe that the player has the potential to improve and be sold to another club for a high enough fee to make a profit on the initial investment, also known as the Third Party Investment.
Furthermore, we must underline that this purchase surrounds the right to the player's sporting services rather than a material asset as such; Economic rights are distinct from federative rights. The "federative right" is the right of any sports entity to register a player in a specific official competition organized by a federation or an association and it remains exclusive to the football club, whereas economic rights can be divided and transferred between multiple parties.
Both sets of these rights are initialized upon signing the employment contract with a club, allowing the division of rights that makes TPO possible: Economic rights are merely the consequence of this contractual relationship between player and club, whereby third parties then purchase the economic right due to the player's potential future revaluation, as previously stated. It is therefore an investment with a risk, in virtue of the fact that the player may not even prove its value and the capital expenditure does not produce the expected outcome.
A practical example to elucidate the above mentioned is as follows: Club A and a third party agree to co-purchase Player X's economic rights from Club B, with Club A buying 25% of the rights for 2.5 million and the third party buying the remaining 75% for $7.5 million. This is a joint venture between the two, splitting the initial investment, sharing the risk, and sharing the reward. For example, Team C offers 20 million to buy Player X, with Club A getting 25% and the third party getting 75%. This TPO is called the investment model, and it is widely used when a club wants to buy a player but does not have the necessary funds.
The other type of TPO, coined as a financing model, occurs when a club, in need of general financing to balance its books (i.e., to cover player wages, and facility fees), enters into a contractual agreement with a third party by which it receives financing in exchange for a portion of the economic rights of one or more of the club's players.
Why does this occur?
There is a massive financial and competitive disparity in this industry - a selected few top clubs earn exponentially more than the remaining 99% of clubs from lucrative sponsorship and broadcasting deals, and they also benefit financially from competing in international and continental competitions. However, TPO agreements offer a loophole: widely utilized in South America, the Financial TPO is a crucial resource for cash-strapped football clubs around the world. Third-party investors engage in TPO agreements to bridge the gap between the high demand for South American football players and the inability of clubs to financially compete with their European counterparts. TPO is also used by other clubs as part of a long-term financial strategy to level the playing field and challenge the monopoly afforded Top Clubs.
As well, the buying and selling of players' economic rights can also be beneficial for third parties. Traffic Sports, a prominent investment fund, made a 62% return on its initial investment of 50 million in 21 players between 2008 and 2012.
FIFA ban
Prior to December 2014, FIFA had left the task of regulating the phenomenon of the TPO to the individual national sports federations, conclusively creating a regulatory disorder between countries that allowed TPO and those that prohibited these agreements.
The FIFA Executive Committee issued Circular No. 1464, banning TPO’s commercial operations as of May 1, 2015. Pursuant to art. 18bis FIFA Regulations, clubs are prohibited from entering into contracts that allow any third party to influence employment or transfer-related matters, policies, or the performance of their teams. Furthermore, art. 18ter states that "No club or player shall enter into an agreement with a third party by which a third person is entitled to participate, either in full or in part, in compensation payable in relation to the future transfer of a player from one club to another, or is assigned any rights in connection with a future transfer or transfer compensation". In essence, any agreement reached between a club or a player and a third party that provides for the assignment of rights or participation in the remuneration to be paid for a player's future transfer is prohibited.
Initially, the TPO was banned due to its financial harm and conflicts of interest between club owners and investors, as well as between agents and players. For example, opponents also argue that the approach provides third-party investors with undue control over club policies, which leads to match-fixing. As well, contracts inserted into the agreements can force clubs to sell the player if a bid comes in at a high enough price. If the player is not transferred by a certain date, the club will reimburse the third party's investment, plus interest, and the investor's share in the player shifts to another player.
The Deportivo Maldonado Case
Deportivo Maldonado is an interesting case connected to TPO in international football: as an Uruguayan second division club that, despite FIFA bans, still embarks in these kinds of negotiations. This smaller club, which seldom plays home matches in front of more than 300 people, surprisingly signs world-class players. In 2009, English entrepreneur Malcolm Caine bought the club and provided the necessary financial support to keep the team afloat. In exchange, the Deportivo Maldonado allows Mr. Caine to conduct financial operations in the football world while also benefiting from the tax breaks afforded to such joint-stock companies under Uruguayan law: a player transferred from a Uruguayan club to a club outside the country would be taxed only at 12.5% (this rate was at just 4% three years earlier, while for example in Argentina the rate is 35%).
In practice, players are purchased with the capital made available by the investment fund linked to Caine, after which, without ever playing a single minute for Deportivo Maldonado, they are transferred definitively or with the formula of loans to another club making a profit, from which the Uruguayan club does not receive any benefit. It is clear that Mr. Caine's technique successfully circumvents the FIFA blockade established on the TPO. The capital from the investment fund transforms Deportivo Maldonado into a bridge company, which allows for triangulations whose sole purpose is to speculate on the purchase of football players.
Concluding Statements
In conclusion, the drawbacks FIFA hoped to avoid by banning TPO arrangements-conflicts of interest and the moral dilemmas associated with owning a player can all be avoided by embracing a discriminatory TPO approach. FIFA executives decided to ban the practice after committee members from different nations failed to reach an agreement on what to do about it. “The only way to fight against third party-ownership is to ban it,” said FIFA General Secretary.
TPO was banned due to its financial harm and conflicts of interest between club owners and investors, as well as between agents and players, and for example to avoid match-fixing. But is FIFA's ban as insurmountable as it appears, or is it being circumvented by clubs, as we saw with the practice of Deportivo Maldonado?
Citations
“Soccer Club with 200 Fans Earns $14 Million from Transfers.” Bloomberg.com. Bloomberg, March 19, 2014. https://www.bloomberg.com/news/articles/2014-03-18/soccer-club-with-200-fans-earns-14-million-from-transfers#xj4y7vzkg.
Patrick John Warren, "FIFA's Ban on Third-Party Ownership Calls Foul on Major League Soccer," Connecticut Journal of International Law 32, no. 2 (Spring 2017): 247-266
Brendan A. Bailey, "O Colapso do Joga Bonito: How FIFA's Banishment of Third-Party Ownership Runs Counter to European Union Law and Has Tarnished the Once Beautiful Game," Vanderbilt Journal of Transnational Law 52, no. 1 (January 2019): 179-228
W. Tyler Hall, "After the Ban: The Financial Landscape of International Soccer after Third-Party Ownership," Oregon Law Review 94, no. 1 (2015): 179-222
Guardian News and Media. (2016, October 10). Welcome to Deportivo Maldonado, where the big names never actually play. The Guardian. Retrieved March 31, 2023, from https://www.theguardian.com/football/2016/oct/10/deportivo-maldonado-stars-never-play-calleri-riulli-agents
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