As it's explained in the episode, they just set him up: the police have a quota of illegal bookmakers they need to bust, and the actual illegal bookmakers have an interest in having the police fill their quota by people other than the actual bookmakers themselves. So in line with the police corruption shown in the series, the Digbeth Kid is set up as an illegal bookmaker, as his absence of criminal record will yield him a lenient sentence and help all involved (police and the bookmakers) go on without coming into conflict.