Letter from Macau - China's Visa Restrictions

12.05.2009, The dark side behind China’s visa restrictions and junket-business impacts.

Editor's note: As we do several times per year, we turn to Norman MacKillop, Macau Country Manager for Spectrum Gaming Group, which publishes this newsletter, to provide insight on the critical issues facing the $14 billion gaming industry there.

It is no surprise that China does not publish reasons for the policy on visa restrictions on Mainland citizens visiting Macau. The truth may embarrass both the Macau and Chinese governments. Many blame the restrictions for the slowdown in Macau's gaming revenue. Some say that it is a prudent tool to cool Macau’s overheated economy. Others claim that it is an effort by Beijing to curb the outflow of embezzled money from state- owned enterprises and proceeds of corruption by government officials.

Professor Zhonglu Zeng of Macao Polytechnic Institute conducted an interesting study into the problem of high rollers from the Mainland, which tends to support the embezzlement and corruption theory.



For obvious reasons, Mainland Chinese gamblers are not approachable for interview on the subject of how much they gamble in Macau and where the money comes from. So the professor conducted a simple review of Internet reports over a six-week period between February and April 2008 (you can easily do this yourself if your Chinese is up to scratch and you know which search engines to use).

After refining about 500 articles on gambling in Macau down to 99, the professor’s main findings were shocking in that:

22 of the 99 reports concerned gamblers from provinces near to Macau; 33 concerned government officials; 26 were owners of private businesses; 19 were senior managers of state-owned enterprises; 7 were cashiers of state-owned enterprises; 14 were from miscellaneous backgrounds. Their highest single loss was RMB12 million (US$1.8 million) and the average loss per individual was RMB0.08 million (US$11,700). Of the 99 cases, 15 were sentenced to death and two received suspended death sentences. Twenty were imprisoned for between 10 and 20 years. Seven committed suicide or were murdered and more than 10 private enterprises went bankrupt as a result of the losses in Macau.

Taking into account that relatively few of these types of crimes are detected, and how the Internet is censored in China, and that this type of activity tends to be covered up, we suspect that this study provides only a glimpse of the true magnitude of the problem.

No wonder that the "not so communist" Communist Party is concerned and trying to do something about the problem. As a one-party state, the government’s hold on power depends on the stability of the country and maintaining hopes and aspirations for the continued economic growth that has been developed since Deng Xiao Ping freed the country from Maoist style communism in 1984.

The current restrictions on individual Chinese citizens, and in particular government officials, travelling to Macau at least give the authorities more time to scrutinize individual applications and deter embezzlers of pension funds and corrupt officials from losing their ill-gotten gains at the casino tables.

Recent reports hint that China has no intention of lifting restrictions, and many analysts now realize that this has more of an impact on gaming revenue than the current global financial crisis.

How much does this hurt the junket-operator business? Our sources indicate that side betting is on the increase (deals made between junkets and players behind closed doors to multiply the money on the table).

Likewise, telephone betting, which although requiring a minimum of HK$20,000 (US$2,580) stake by the agent at the table in Macau, gives no sure means for the regulator or the casino operator to know who or how many people are gambling on the game on the other end of the line in China, or elsewhere in the world.

Both of these forms of gambling are illegal, with the latter tolerated by the regulators and the former difficult to detect except by the most experienced of surveillance operators. Both forms of gambling mean millions of dollars in lost revenue for the operators and the government but provide a means for the junkets to ride the economic downturn and visa restrictions as well as avoiding government tax.

However, as the junket clients provide up to 70 percent of the gaming revenue of Macau, who is going to kick them out and into the VIP rooms of a rival casino? Better to have some of the revenue from the junket than none.

THE MONEY-FLOW PROBLEM

Another problem with direct links to the junket business that may be just around the corner for the Macau government and casino operators is the most recent report of the Asia/Pacific Group on Money Laundering, of which Macau is a member.

The member jurisdictions and observers of the APG are committed to the effective implementation and enforcement of internationally accepted standards against money laundering and the financing of terrorism. APG members are associate members of the Financial Action Task Force, an intergovernmental body with similar aims, of which China is a full member.

Both organizations are extremely influential and their reports and recommendations carry a lot of weight. The APG report “Vulnerabilities of Casinos and the Gaming Sector,” published in March 2009, singles out the junket business as being extremely vulnerable to money laundering.

Although the report mentions Macau in terms of the laws and regulations, which enforce junket activity, there is no attempt (at this stage) to single out Macau or any other for failure to enforce these regulations effectively.

It is worthwhile to quote the following paragraphs directly from the report. Anybody with even a little knowledge of the junket business in Macau will have no doubt about which jurisdiction is in the crosshairs of this language:

Over-reliance on junket operators, especially in markets with resident populations that are too small to normally support casinos, can pose a heightened money laundering risk. In these instances, casinos can become overly dependent on junket operators for business, a potential misuse of these services. In some jurisdictions, a casino may enter into a contractual agreement with a junket operator to rent a private room within a casino and in some situations, it is the junket operator, not the casino, which monitors player activity and issues and collects credit. Junket operators that provide premium players may exert commercial pressures on casinos, which may result in reducing scrutiny of individual spending patterns, or unduly influence or exercise control over licensed casino operations. Junket operators may engage in lending or the facilitation of lending to players outside casinos’ knowledge. In some jurisdictions, junket operators are allowed to pool--and therefore obscure the spending of individual customers, thus preventing casinos from making any assessment of customers--spending patterns. In certain jurisdictions, licensed junket operators act as fronts for junket operators in another country. The front operators supply players to a casino through a casino’s licensed junket companies, which may not qualify for licensure in the country where the players will be gambling. Such unlicensed sub-junket operators can act as unlicensed collectors of credit and may have ties to organized crime networks. All the above issues pose serious risks, and can lead a casino to engage in informal arrangements with junket operators that are inconsistent with risk-based AML/CFT [anti- money-laundering/counter-terrorist financing] policies, procedures and internal controls.

There is much more in the report citing concerns about junkets. However, this is an interim report, which unlike a full report does not provide recommendations for members to implement. It merely summarizes policy considerations.

However, from the tone of this report, we believe that the authors have been caught by surprise at what they have found and that they will soon be revisiting the junket business with reinforced vigor.

In the knowledge that both regulators and casino operators in Macau are reluctant to force junkets and their high rollers to abide by casino credit regulations and customer due diligence, the tone of this report leaves us with a sense of foreboding about the sustainability of the Mainland Chinese junket business, on which Macau is so dependent.

The next report by the APG and or Financial Action Task Force on junkets is likely to be much more detailed and carry recommendations, which are, in effect, orders to comply.

gamingindustrymedia.com/

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