Macau Junkets Trouble Nevada

#165 © Copyright 2010, all rights reserved worldwide. Gambling and the Law® is a registered trademark of Professor I Nelson Rose, www.GamblingAndTheLaw.com

The headlines were startling. From Reuters, the source of the original story: “SPECIAL REPORT-High-rollers, triads and a Las Vegas giant.” Others picked it up: “Las Vegas Sands (LVS) Accused Of Mob Ties;” “LV Sands ‘linked to Macau gang;’” and the worst, “Macau Murder for Hire Tie-ing Las Vegas Sands.”

Reuters then ran the inevitable, “Nevada regulators analyzing Macau casino activity.” Even the hometown newspaper, the Las Vegas Sun, jumped onboard: “Macau giving fits to Nevada regulators: Organized crime said to run rampant where state giants do business.”

The murder-for-hire was real. Four men were convicted in Hong Kong of a plan to have a dealer at the Sands Macau killed, for supposedly helping a high-roller cheat a VIP room out of millions of dollars.

But the other ties to LVS were weak. Reuters reported that a witness, not a gang-member but only a “regular casino patron,” testified that a man who was alleged to have been running the high-roller room was also, allegedly, a member of organized crime, and, allegedly, the mastermind of the plot. This alleged mastermind also was a major investor in a publicly traded junket operator.

It is important to note that the testimony was not strong enough to get the Hong Kong police, or anyone else, to arrest the alleged mastermind.

It is doubtful there is enough here for the Macau government to do much in response to this news story, other than tighten its procedures and increase background checks on junket operators.

But there certainly was enough to cause major headaches for LVS, and for the other companies associated with Macau’s casinos: MGM Mirage, Wynn Resorts, Galaxy Entertainment, Melco Crown Entertainment, SJM Holdings; and even Hard Rock, Hyatt Regency, Four Seasons and Mandarin Oriental. It also put pressure on Nevada and other U.S. state regulators to take another look to see whether licenses will be pulled, or at least more stringent restrictions should be placed on Macau junket operators.

Murder-for-hire and casinos obviously made this a major story, and sexy enough to be published far and wide. The timing was particularly bad, coming on top of the ruling in New Jersey that MGM’s Macau partner, Pansy Ho, was unacceptable due to the alleged organized crime ties of her father, Stanley Ho, who controls SJM and most casinos in Macau.

This was viewed, by some in Asia, as an insult to China.

It also put MGM in the awkward situation of having to choose. With the U.S. still stuck in the economic doldrums, while Macau is rebounding spectacularly from the Recession, MGM chose China.

But, problems in one jurisdiction automatically lead to problems in others. State governments in the U.S. cannot ignore news like this. American casino companies in Macau have licenses in Nevada, Michigan, Mississippi and other states, that are now at risk, if any tie at all with organized crime is discovered.

Even Nevada had to open an investigation, due to fear that otherwise the U.S. federal government might get involved. Nevada won’t pull LVS’s license, but it may be forced to require its licensees to do more thorough investigations on who is really running junkets. Plus, the states have to be getting worried about junket operators who are operating virtually independent mini-casinos in the high-roller rooms of Macau casinos.

Nevada has laws on the books that already require regulators to look at the operations of its licensees wherever they may be. The state’s “foreign gaming” law has gone through a number of changes over the years.

Nevada’s original policy was to forbid its operators to open casinos anywhere else. This was obviously designed to keep Nevada the only game in town. And it worked, until the voters of New Jersey approved amending their State Constitution in 1976 to allow casinos in Atlantic City.

The Nevada Legislature reacted by passing a law in 1977 allowing Nevada licensees to open casinos outside the state, but only if the gaming regulators gave their prior approval. This included evaluating the foreign government’s controls.

I still have a copy of the “Report on Gaming Control in New Jersey,” dated April 19, 1979. The Report concludes, “the Nevada State Gaming Control Board finds that a comprehensive, effective government regulatory system exists in New Jersey.”

I’m sure New Jersey was happy to hear its casino regulations met Nevada’s standards.

Others were not so amused. The U.S. Ambassador to the Bahamas told me the leaders of that independent country did not like being judged by a mere state. There were also legal questions of whether Nevada was creating trade barriers in violation of U.S. treaties.

The proliferation of legal gaming made it too costly for Nevada to investigate every foreign regulatory system in advance. And Nevada operators complained that their competitors could get a new jurisdiction’s casino licenses first. So, the law was changed, in 1987, 1993 and 1997, to ease the standards and eliminate the requirement of prior Nevada approval.

Now Nevada licensees only have to notify state regulators within 30 days of signing a deal for a foreign casino and apply for a “finding of suitability.” And those regulators are supposed to continuously monitor activities around the world, through contacts, reports filed by licensees, and occasional visits.

The problem is that may not be enough.

Junkets are at the heart of gaming revenue for Macau’s richest casinos. They are so important, in fact, that junket operators get a much larger share of money lost by high-rollers than the actual casinos. Junket operators complained when the Macau government, at the urging of its casinos, put a cap on commissions, claiming that they have to give large kickbacks to losing high-rollers.

Junkets exist so gamblers from the mainland can get their money to Macau. Gambling debts are not legally collectable in China. There is very little fiscal infrastructure, since most Chinese do not have bank accounts, let alone credit cards and credit histories. So the junket operators bear the risk when they lend money for gaming.

The PRC also puts strict limits on how much cash mainlanders can take out. Without the junkets to act as lenders, gamblers have to be more creative.

One Macau executive told me about a farmer who walked into his casino in dirty, torn clothes and took HK$50,000 in cash out of his sock. After he lost it, he took another HK$50,000 out of the other sock.

Plus, business in China is conducted informally among people who know each other, or the personal contacts of personal contacts. So it is extremely difficult for a U.S. company to break into this market.

On the other hand, there are many confirmed stories of bookkeepers embezzling. Which means the junket operator, or its agents, or its agents’ subagents, knew exactly that the player was good for the money, because he was in a position to steal it.

Times may be changing. Macanese law was changed a few years ago to allow casinos to loan money directly to players. A Hong Kong court recently issued a ruling that should allow Macau casinos to collect there. And there may be a way to get the PRC to enforce judgments from courts in Hong Kong or Macau.

Until then, junkets will continue.

The great unknowns are whether other companies will become reluctant to partner with casinos in Macau, whether investors will get scared off if there are more rounds of bad news, and, the major threat, whether the Beijing government will once again impose visa restrictions on mainlanders’ visits to Macau.

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© Copyright 2010. Professor I. Nelson Rose is recognized as one of the world’s leading experts on gambling law, and is a consultant and expert witness for governments and industry. His latest books, Internet Gaming Law (1st and 2nd editions), Blackjack and the Law and Gaming Law: Cases and Materials, are available through his website, www.GamblingAndTheLaw.com.