July 15, 2013
The main danger here was that the concession holders were free to enter into as many partnerships as they liked; regulators gave little scrutiny to those partners, or even to who was actually running the casinos or sharing in the casinos? profits.
A second area of concern arose due to the establishment of what is commonly called the junket system.? Credit reporting had always been poor in the People?s Republic of China, and gambling debts were not legally collectable.? Casinos were not allowed to issue markers.? And the PRC had severe limits on taking or sending money out of the Mainland, even to Macau.
So, junket operators arose under the monopoly operator to make all of the arrangements to get high-rollers, and their money, to Macau.? Although ?junket operator? is the generally accepted term used in the Western English language press, the title is misleading.? They are actually called ?VIP gaming promoters,? which is slightly more accurate.? They are nothing like the traditional junket operators associated with American casinos.? In Nevada, junket operators are more properly called ?independent agents,? because they act as agents of casinos, to bring in patrons.? True junket operators are more like travel agents, often being paid a flat fee per head to bring in players.? The Macau VIP gaming promoters, on the other hand, are more like casino operators themselves:? They can do virtually every part of the gambling transaction.? On the Mainland, they recruit players, arrange transportation and provide credit.? In Macau, they often operate the VIP gaming room itself.? Back on the Mainland, after the player?s visit, the VIP gaming promoter collects the gambling debt.
An elaborate system of dead-chips and separate high-stakes rooms was created to enable the VIP gaming promoters to share in the money lost by Mainland players.? Allegations arose that VIP gaming promoters had ties to triads, and used threats and violence to collect gambling debts.
These claims, that Stanley Ho?s company had unsuitable partners and ties with VIP gaming promoters who had connections with organized crime, have tainted current operators.? Especially at risk are companies directly doing business with SJM.? But so are anyone connected with Stanley Ho?s children.? Stanley Ho?s daughter, Pansy Ho, is in partnership with MGM Mirage.? His son, Lawrence Ho, is the CEO of Melco Crown Entertainment Ltd.? Its City of Dreams features major American companies, including Hard Rock and Grand Hyatt.? Melco Crown until recently had ties with Harrah?s.
The problems for American operators go beyond associations with Stanley Ho and his family.? The systems of concessions and VIP gaming promoters still exist.? The fact that there is no limit on the number of casinos, except for arbitrary declarations by Macau?s Chief Executive, creates economic uncertainties and the desire to make as much money as possible as fast as possible, since a concession holder does not have merely five other competitors, but faces literally a potentially unlimited number of other casinos.? The concessions and VIP gaming promoters supposedly also have brought organized crime directly into at least one casino owned by a U.S. casino company.
The idea of concessions was simply carried forward and expanded after Macau became a Special Administrative Region of the PRC, and the government in Beijing decided to end STDM?s casino monopoly.? Since Stanley Ho?s SJM won one of the concessions, and continued the partnership arrangements of STDM, it was only fair for the other two companies winning the new concessions to also be allowed to operate more than one casino.
?But it is easy to overstate the problems with the present system for the U.S.? In practice, there is the base system of casino control in Macau, which, although getting stricter, would still not meet American standards.
For example, some of SJM?s operations are called ?legacy casinos.?? These are the dozens of both small and large casinos that operate under the SJM concession, but with no actual oversight by SJM.? It is commonly known that SJM has, in effect, issued sub-licenses: for a share of the casino revenue, believed to be 15%, these legacy casinos operate as completely independent casinos.? Some of the actual owners and operators of these casinos would never receive a license from regulators as strict as Nevada?s.? They know this, so they do not ever ask to do business with Nevada?s licensees.
The casinos that are not licensed by Nevada and other American states are also willing to do business with VIP gaming promoters who have ties with organized crime.? The high-rolling VIP players from the Mainland are by far the most important contributor to Macau?s casinos? revenues.? But the PRC has put severe restrictions on the ability of Mainlanders to take cash into Macau.? Macau casinos can now directly lend money to their players, but those gambling debts are legally unenforceable in the PRC.? And Chinese Mainlanders like to do business with people they know personally.? So the VIP gaming promoters and their agents and subagents have been tremendously successful in getting Mainlanders, and their money, into Macau?s casinos.? And the threat of force has allowed disreputable VIP gaming promoters to collect almost all of those debts.
Some of the casino companies not licensed by American states go much further in their relationship with VIP gaming promoters.? There are high-roller suites in some casinos that are completely run by the VIP gaming promoters.? These usually consist of two or three baccarat tables, a cashier?s cage and a small kitchen area, all with employees of the VIP gaming promoter, not the concession-holder.? It is as if the casino operator issued a sub-license or sublease to an individual or organization that never applied for, let alone was approved for, its own concession from the government of Macau.? These VIP gaming room operators are, in all respects except the name on the concession, separate and independent mini-casinos.
Nevada- and other U.S. state-licensed operators naturally do not have similar arrangements in their Macau casinos.? They do use VIP gaming promoters to get players, to make loans to patrons, and even for some cage and reporting transactions.? Since 2004, casinos have had the legal right to loan money directly to their patrons.? But casinos were not allowed to take bad debts off their taxes, greatly reducing a Macau?s casino?s incentive to lend money to a patron.? More importantly, although Macau casinos would greatly prefer not to have to share the patrons? gambling losses with VIP gaming promoters, Chinese Mainlanders want to do business with individuals they know, so casinos do have to continue to rely on VIP gaming promoters to get high-rollers to the casinos.? But the games are always dealt by the U.S. state-licensed operators? dealers.? And being licensed by a U.S. state, these casino companies cannot be doing business with individuals who are unsuitable.? They are required to do due diligence investigations of the background, funding and operation of the VIP gaming promoters they do work with in Macau.
The question remains whether there is a need for additional federal oversight, by administrative agencies like the SEC or FinCEN, or restrictions from Congress.? I admit that I was surprised when Nevada approved its licensees to open casinos in Macau.? A casino insider told me in 2004, before the Sands, the first American casino, opened that they had asked the Macau Chief of Police about hiring off-duty officers as security guards.? The Chief?s response was, ?If want guards who aren?t corrupt, don?t hire any of my men.?? This is not the type of system that inspires confidence.
Casino gaming is primarily a state issue.? Despite the occasional horrible headline, I think Nevada has overall done a pretty good job of keeping its licensees clean.? And this is in light of the practical impossibility of knowing what is actually going on in the Mainland.
I think major factors have been the operators themselves.? The licensees are frankly too smart to knowingly get into bed with organized crime.? Macau might not pull their licenses for having dealings with tainted VIP gaming promoters, but Nevada would.? And if Nevada won?t, then New Jersey and other states will.? As a dramatic example, Macau gave Stanley Ho a concession; New Jersey pulled MGM?s license for being in partnership with his daughter.? And losing a license could mean the company might not be able to do business anywhere else in the world.
The existing federal laws are probably adequate for handling the worst problems that might reasonably arise with an American casino in Macau.? The Foreign Corrupt Practices Act [1] has real teeth, and it covers any company with stock traded on an American exchange.? In addition, as we have seen in recent years, there is always the possibility of civil suits if an American employee or shareholder feels casino executives have been involved in wrongdoing.[2]
I don?t think there is much the U.S. can do about the other regulatory system in Macau, the legacy casinos and VIP gaming promoters who work in conjunction with casino operators who are not licensed by Nevada.? The U.S. simply does not have the right, or power, to interfere with the sovereignty of Macau and the PRC.? It can assert political pressure, and Macau does react to such pressure, usually by slowly added more controls.? But the political leaders of Macau, like those anywhere, are sometimes offended by what they see as outside interference, which can slow down reform.
It is even unclear whether gaming in Macau creates much of a risk to the United States.? It does appear that VIP gaming promoters are violating the PRC?s restrictions on currency transfers, and probably other PRC laws.? But the American state-licensed operators do not knowingly do business with the most disreputable promoters.? And the money-laundering may be only technical violations.? The VIP gaming promoters are mostly interested in getting patrons from the Mainland to Macau, for a share of the gambling losses, and in lending their customers money at usurious rates.? This is shown by how negatively they are affected when the PRC tightens credit.The VIP gaming promoters do not seem to be involved in more conventional money-laundering, such as washing cash from illegal drug sales.? And even with the billions of dollars they might be washing, there is no indication they are somehow trying to hide funds from North Korea or other sponsors of terrorism.
The federal government, with help from the rest of the world, does have the power to influence China and Macau on specific issues like money laundering.? Macau is a signatory to international agreements, and is, in fact, definitely getting tougher on money laundering.? The minimum threshold for currency reporting is too high, at $62,000, where the U.S. threshold is $10,000, but thousands of currency transactions reports are filed by Macau casinos.? Casinos are also required to file suspicious activity reports.? And some of these have resulted in criminal convictions of patrons attempting to misuse casinos for illegal purposes.
[1]? 15 U.S.C. ? 78dd-1, et seq. [2]? Both LVS and Wynn have been involved with some very high profile civil suits involving their casinos in Macau.
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