Among the mess of revelations published by Der Spiegel last week reminding us that the people in charge of running the world's favourite sport still aren't very good at it, it was no surprise to see the issue of sponsorship deals rear its ugly head once more. This has been a hot topic in football finance ever since the Financial Fair Play (FFP) regime first came into force, with frequent speculation that certain teams — chiefly Manchester City and PSG, who remain the prime culprits today — have dabbled in balance sheet doping in order to satisfy FFP's break-even requirements. 

The Football Leaks disclosures shine a new light on how this issue has been approached within the C-suites of big clubs, and the extent to which supposed stewards of the game may have been complicit. In order to grasp the significance of these latest revelations it helps to understand the nature of the problem and how it fits within the broader framework of FFP. 

Getting even

At the heart of the FFP scheme is the notion that clubs wishing to obtain a licence to play in the UEFA European competitions must demonstrate they are in good financial shape. One way this is done is through something called the break-even requirements, a fairly self-explanatory concept which requires clubs to bring in enough revenue to more or less offset their spending. This is challenging: football has long had a reputation for unprofitability (it's often joked that the quickest way to become a millionaire is to be a billionaire then buy a football club), and it's only relatively recently that this has begun to change, thanks in large part to mammoth TV rights deals driven by demand for the sport in new geographies and a competitive broadcasting landscape.

As such, an owner who wishes to inject significant capital into a club needs to find ways of balancing the books. A tempting way to do this might be to funnel money into the club under the guise of some kind of sponsorship or marketing agreement: Company X, influenced by Owner Y, pays Club Z a deliberately oversized sum of money in exchange for Club Z's purported help in promoting Company X's brand. Club Z might do this by emblazoning their shirts with the Company X logo. They might advertise Company X's products around the stadium. Or, as is allegedly the case under PSG's agreement with the Qatar Tourism Authority (QTA), they might basically do nothing, perhaps taking the money in exchange for some kind of  woolly commitment to assist with promotional activities. 

Fair value

Clearly this is problematic. As such, the FFP rules attempt to guard against it by regulating transactions between clubs and so-called "related parties". Annex X of the FFP regulations provides a pretty unwieldy definition of who constitutes a related party. It includes (but is not limited to): any entity that is part of the same group of companies as the club, any entity that is controlled by the same entity that controls the club, and any entity that is controlled by a relative of the person exercising control over the club. The rules also wisely caveat the definition by stating that, in assessing the status of a party and whether or not they are "related", they will look to substance over form. To take the PSG example, the club is owned by Qatar Sports Investments (QSI), which is an investment vehicle of the Qatari sovereign wealth fund, the Qatar Investment Authority. Naturally, the QTA is also owned by the state. And although their respective corporate structures are likely to be complex for reasons of tax efficiency and confidentiality, the end destination will be the same — ultimate, substantial control in the hands of the Al-Thani family, thereby rendering the QTA a related party. This is the same conclusion that Deloitte arrived at when they undertook a three-day deep dive into PSG's books, though I imagine it didn't take three days to figure out. 

Where transactions take place between a club and a related party, the rules require that the "fair value" of the transaction should be recorded for the purpose of calculating revenue for the break-even requirements. In explaining what constitutes fair value, UEFA borrows (as it does throughout the FFP rules) from the International Accounting Standards: 

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable willing parties in an arm's length transaction. An arrangement or a transaction is deemed to be ‘not transacted on an arm’s length basis’ if it has been entered into on terms more favourable to either party to the arrangement than would have been obtained if there had been no related party relationship. 

In other words, the value that gets written down is the price you would've got if you'd made an identical deal with a non-related party on the open market. It is up to each club to perform fair value assessments of their related party transactions.  Then, when clubs complete their applications for a UEFA licence, they must provide evidence of these assessments, essentially arguing why the value they've ascribed to the transaction is reasonable. There are a variety of ways a club might go about doing this. Perhaps the most obvious technique (and the one anticipated by UEFA in their literature) is to consider similar current and historic transactions by comparable football clubs, together with other contextual factors, such as the number of rival bidders. 

Der Spiegel alleges that UEFA didn't like the sound of PSG's "Agreement for the Promotion of the Image of Qatar", under which the QTA were to pay them €215 million annually, and called in leading international sports marketing agency Octagon to evaluate the fair value of the deal. Octagon deemed it to have a fair value of (at most) €3 million per year. Accordingly, PSG ought to have made a downward adjustment of roughly €212 million when reporting their revenues for FFP purposes. They did not, and last week's reports state that the investigatory arm of the Club Financial Control Body (the supposedly independent branch of UEFA responsible for enforcing FFP) was set to refer PSG to the higher chamber for sanctioning.  

Blind spots and upshots

It is worth pausing to note that a blind spot in the regulatory scheme may be discernible here. As pointed out by Salvatore Cincimino, the nature of marketing means that each sponsorship agreement is a "singular event" which may not be capable of being readily explained or benchmarked against other superficially similar deals. While the example of PSG and the QTA is particularly brazen, it's easy to imagine how other clubs may be able to make an argument that less obviously inflated (but inflated nonetheless) agreements do indeed represent fair value. UEFA is unlikely to have the resources or the desire to conduct deep-dive investigations into every related party transaction on every applicant club's registration form. It makes one wonder how many sponsorship agreements have been artificially inflated, not enough to arouse suspicion but enough to make a meaningful difference to a club's compliance status, and have slipped through the net over the years. 

In any case, more broadly, one of the key takeaways from the latest Football Leaks revelations is that the question of whether or not the actual FFP scheme as written out in the rulebook is sensible or workable appears to be secondary. PSG were never referred to the higher chamber for sanctioning because high-ranking UEFA officials reportedly intervened. And while it serves no purpose to regurgitate the particulars of Der Spiegel's accusations, if even one-tenth of it is true then it is impossible to see how, in doing so, the independence of the Club Financial Control Body was not compromised contrary to UEFA regulations.

The upshot of this is potentially huge. It will add fuel to the flames of the increasingly commonplace view among the majority of football fans that "it's one rule for the big clubs and one rule for us". It widens the legitimacy gap between those at the top and the stakeholders below. But it also speaks to the idea (which will be explored further in future posts) that the sport in its current form is not capable of effective self-regulation. For many years football has enjoyed a light-touch relationship with government bodies and in particular the European Union, who have trusted the sport to keep its own house in order. But as legal expert Ken Foster argues: "self-regulation should only be permitted subject to a proper rule of law system of governance". On current evidence, whereby the rules do not seem to apply equally and fairly to everyone, this is lacking. Soon the day may come for a fundamental, radical rethink — and with every leak, that day edges closer.