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The explosion of legal gaming which is sweeping the planet has finally reached Asia and the Pacific. But it is developing in ways that are idiosyncratic. In Europe, virtually every nation has the same thing: casinos dominated by blackjack, roulette and slot machines; a state lottery, with sports betting; low-limit gaming devices in bars; parimutuel betting on horseracing; charity games, often bingo; and a growing market for Internet gambling. For European operators, the differences are significant, since they concern issues such as tax rates and who may be granted a license. But government policy in Asia ranges from complete prohibitions of all forms, to legalization of some gambling, to efforts to out-casino Las Vegas.

The differences are due, in part, to the divergence in local culture and the forms and philosophies of the governments involved. You would not expect North Korea to treat gambling the same as the Philippines. But, the differences are primarily the result of historic accidents.

Legal gambling goes through cycles. When all gambling is illegal, the legalization phase usually begins with a breakthrough of some form that is considered innocuous. Often this is social gambling and low-stakes games for charity, which are either expressly made legal or often simply tolerated. In the English- and Spanish- speaking countries and Europe, this is commonly bingo. In China and Hong Kong, it was mahjong.

Today, by local ordinance, mahjong played for money is legal in Hong Kong. In places like Zhuhai in southern China, there are signs on hotel saying that rooms for mahjong are available to rent by the hour.

A second breakthrough comes from the government operating its own lottery. These have come and gone for centuries. But even the most totalitarian regime will sometimes allow the traditional form, with paper tickets and once a week drawings. China, which purports to have no legal gambling, actually has authorized three lotteries for years, with tickets for sale from street booths – the China Welfare Lottery reported passing 70 billion yuan (US$10.2 billion) in sales for 2009, with three weeks left to go. In 2007, it was the world’s sixth largest lottery, and the China Sports Lottery was tenth. According to the World Lottery Association, China, aided by the introduction of video lottery terminals (VLTs), is now expected to be the second largest lottery market in the world, this year.

A third form of wagering which has been tolerated historically is betting on horseraces. This was not seen as a problem when it was mainly for the rich, who could afford to own a horse or just to take a day off to go to the racetrack to make a bet. The invention of the telegraph, telephone and parimutuel machine in the 19th century led to new laws against bookmaking.

So, the recent expansion of gambling often comes against a background of small-stakes social and charity games, a state lottery and racetracks. This has been as true in Asia as in the rest of the world. But local customs and history have created situations unlike anything seen in the rest of the world.

Japan today has racetracks and one of the largest lotteries in the world. It also has more slot machines than any other country, except they are not technically slot machines, but rather pachislo machines. Physically indistinguishable from video slot machines, these now out-gross the more traditional pachinko machines, which also have gone hi-tech. These gaming devices are technically legal because they do not pay out in cash. Winners are paid in tokens and merchandise. There is always a convenient window nearby; in one parlor I visited in Osaka, it was literally a hole in the back wall of the building. Here, winning players can redeem their prizes for cash. The payoff is by a company that is supposedly independent from the parlor operator. Experts agree that at least this part of the operation is controlled by organized crime.

Gambling spreads when governments finds it difficult to argue morality, when the state itself is selling lottery tickets, licensing horseracing and at least tacitly endorsing social and charity games. Technology also plays a role, allowing off-track betting on horseraces and lotteries to move from paper tickets to online wagers, including cell phones.

But the major impetus for expansion is usually the legalization of a more attractive form of gambling in a nearby jurisdiction. The sight of all that disposable income, some from a state’s own citizens, going across the border to another state, does more than anything else to weaken even anti-gambling lawmakers. No one would have predicted ten years ago that Singapore would be the next great casino market. And it would not be, if Macau, itself the result of a historic accident, had not shown how successful Las Vegas-style casinos can be.

It is doubtful whether the central planners of the People’s Republic of China would have intentionally created places like Macau and Hong Kong. Macau always had casinos under the Portuguese. Hong Kong developed the world’s largest racetrack, in terms of money wagered, under the British. On the mainland, on the other hand, gambling has been, and still is, one of the sins that can be punished by the death penalty.

Hong Kong became a Special Administrative Region of China in 1997, Macau in 1999. But the PRC pledged it would allow the capitalist systems there to continue.

When Portugal controlled Macau, a single company, Stanley Ho’s Sociedade de Turismo e Diversões de Macau, S.A.R.L. (“STDM”), had a monopoly concession on casinos. As with all monopolies, this restriction severely constrained the industry’s growth. But three years after the turnover, the new rulers of Macau decided to issue more casino concessions and put them out to bid. This opened the door to foreign operators, and, more importantly, foreign money.

Unlike American casinos, the majority of gaming revenue came from table games. Traditional Chinese beliefs give the number nine great importance, so the domino game of pai gow, which translates as “make nine,” and particularly the card game of baccarat, are of overwhelming importance, rather than slot machines.

The attraction was how much those tables made: STDM’s 340 tables won on average approximately US$10 million a year. Las Vegas’ gaming tables win only about $730,000. STDM’s 11 casinos had revenue of approximately US$3.5 billion a year; at least that was the amount reported officially. And this was before the PRC more fully opened its border.

When the numbers for 2005 were counted, Macau surpassed the Las Vegas Strip in casino revenue, making it the number one casino market in the world. This would not have been possible if the PRC had not dropped its travel restrictions, allowing its residents to travel there without being part of a tour group. The exit and entry point between Zhuhai and Macau has become one of the busiest border crossings in the world. There are hundreds of millions of China’s rising middle class who now have the money to spend on shopping and gambling, as well as visitors from Taiwan, Thailand and Hong Kong.

Stanley Ho’s current holding company, Sociedade de Jogos de Macau (“SJM”), did win one of the three new casino licenses, but so did Steve Wynn and a Hong Kong group that issued a sublicense to another American, Sheldon G. Adelson, owner of the Venetian in Las Vegas. In May, 2004, Adelson, aided by his on-site top executives, including VP and General Counsel Thomas Smock, opened the Sands, the first new casino in Macau in 40 years.

The Sands is a magnificent, western-style casino. Part of its enormous success has been the willingness of its management to test, and where necessary, to disregard accepted wisdom. For example, it was said that Asian gamblers would not play slot machines. They didn’t in STDM’s casinos. Of course, these were often isolated to grimy back corners. The Sands installed a few video poker machines. The devices have proven so popular that the casino ordered hundreds more.

The string of casinos being built in Macau, on the Cotai Strip, is intentionally designed to conjure up comparisons with the Las Vegas Strip. Laws have had to be changed. For example, the traditional Macau casino was nothing more than a room with table games. It made sense to keep out minors at the door. But hotel casinos have restaurants, shows and gamblers who bring their children. Legislation is necessary to let minors enter the buildings, even if they are kept off the gaming floors.

The biggest problems for operators like Adelson and Wynn are the strict Nevada laws, which forbid them to be associated in any way with illegal activities, especially organized crime. But the laws and traditions of Macau’s casinos were originally built around different laws, institutions and traditions. When STDM bought the casino monopoly in 1962, it was a small industry offering only Chinese games.

The legal structure of the monopoly was the concession, derived from the Portuguese legal system. The structure had been created in 1937, when the Macau government legalized casinos and first gave the gaming concession to a single company. But the company and its successors, including STDM and SJM, were allowed to open as many casinos as they wished, limited only by the availability of land and the demands of the market. This created a unique situation: Macau is probably the only jurisdiction in the world that licenses the operators and not casinos.

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 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 to make all of the arrangements to get high-rollers, and their money, to Macau. An elaborate system of dead-chips and separate high-stakes rooms was created to enable the junket operators to share in the money lost by mainland players.

This creates problems for present-day operators. The systems of concessions and junkets 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, since a concession holder does not have merely five other competitors, but faces literally an unlimited number of other casinos.

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.

One of the successful bidders was a partnership between Galaxy Entertainment and Las Vegas Sands. When that partnership fell apart, the Macau government allowed Galaxy to have the concession, and drafted a new law, creating a sub-concession for LVS, since they could have had two casinos anyway. But, the other concessions now also had to be given the right to have sub-concessions. The three concessions had now turned into six, with no fixed limit on the number of actual casinos.

And all six concessions and sub-concessions are allowed to have revenue-sharing partnership deals with an unlimited number of unlicensed outside individuals and companies. The availability of partnerships has resulted in dozens of casinos being opened in a few years. Growth has been so explosive that when Macau’s Chief Executive announced a freeze on new casinos and casino expansions on April 22, 2008, after the initial shock, there was a general sigh of relief. No one complained that this was not the way to run a casino jurisdiction. The Macau government, without hearings, votes or any public input, simply said these are the new rules. And no one is sure exactly what these rules are.

The second problem also continues: Junkets are at the heart of gaming revenue for Macau’s richest casinos. They are so important, in fact, that junket operators were getting a larger share of money lost by high-rollers than the actual casinos. It is not clear, however, whether this money is all profits. 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.

Visitors from the mainland still have trouble getting their money to Macau; gambling debts are still not legally collectable; and there is still 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 mainly 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 without junkets, with their agents and subagents.

The PRC is committed to aiding the growth of the casinos in Macau and sports and race betting (and shopping) in Hong Kong. China hopes to have the best of both worlds. It can get all the jobs, tax revenue and economic growth from legal gambling, while keeping it somewhat isolated in its outer border regions of Hong Kong and Macau.

The Hong Kong SAR has not ignored the tremendous amounts of money legal gambling can bring in. The Hong Kong Jockey Club is Hong Kong’s largest taxpayer, but turnover has fallen more than 30% since 1997. So the Club was allowed to take bets on soccer in August 2003. For its first 11 months, it reported a handle of HK$16.1 billion (US$2.06 billion) and a gross profit of HK$3.3 billion (US$423 million). I don’t know of another sports book in the world that makes 20% on more than $2 billion in bets on all events, let alone on only one sport.

Gambling is legalized for different reasons. Usually, the argument is that people are going to gamble anyway, so better that the games be controlled and taxed rather than run by organized crime. Casinos are often seen as a way to help the local tourist industry, while lotteries are viewed as a painless, voluntary tax. Legal gambling does create some risks to a society, especially to vulnerable individuals such as children and compulsive gamblers. Unfortunately, these risks are often either ignored, or possibly worse, addressed by lawmakers who know nothing about gambling. Experiments in social engineering can go horribly wrong.

My favorite example is the requirement the state of Iowa imposed on the first riverboat casinos legalized in the United States in the 20th century. The ships were required to go on four-hour cruises. No one thought that locking a compulsive gambler on a ship with literally nothing else to do but gamble for four hours might not be the best idea. But it became even more absurd when the ships were docked during the winter, when the river froze over, but they were still required to lock their doors for four-hour “cruises.” Eventually, when a player got sick and had to be rushed to a hospital, someone had the common sense to open the door.

When a government legalizes a form of gambling it often engages in such attempts at social engineering. Since gambling brings social problems as well as money, legislators create restrictions that they think will work, with no scientific studies to back up the proposals.

So, in South Korea, almost all casinos are restricted to foreigners. This sounded like a good idea: import foreigners’ money and export the social problems. But visitors today have many choices, outside of South Korea, to gamble. And since the casinos are often difficult to reach, almost no foreigners make the effort. So these are economic disasters. The only casino that is making money, and it is spectacularly successfully, is the one the government allows local citizens to patronize.

Vietnam took this modal to the extreme. A casino was authorized for a remote northern village. A traveler fording many miles along a muddy road would find that he is the only foreign tourist who has actually been attracted. Since locals are not allowed to gambling, the casino stands empty. But Vietnam is also considering billion US dollar resort hotel casinos, to compete against Singapore and Macau.

One danger for the industry is that governments always get greedy. There is a general feeling that people should not really be spending their money on gambling anyway – sin taxes are always the easiest to raise – and that there is an endless supply of cash resulting in outrageous profits, which operators should be forced to disgorge. This last is really a misconception based on the fact that we are coming out of a period of prohibition. The first large, Nevada-style casino in Macau showed a fantastic return on investment. But the built-up demand cannot last, especially as more Asian jurisdictions legalize. It may never happen, and even then it may be many years away, but Macau has to remember the lesson of Atlantic City, where the first casino also made fantastic amounts of money but the 13th casino went bankrupt in less than two years, along with half of the other casinos.

Singapore is obviously not Macau. It comes from the British Commonwealth legal tradition, not centuries of Portuguese and Chinese law. More importantly, the social and business cultures of Macau have always been basically laissez-faire, while Singapore thrives on structure and order. It is surprising for a government like Singapore’s to even consider legalizing gambling. But, once it decided to go that route, it is natural that it is consciously trying to maximize profits while engaging in intense social engineering. The two integrated resorts are, so far, even more fantastically successful than the Macau Sands, winning more per day than any other casinos in history.

But the question is whether the demands made by the Singapore government will stifle long-term growth. Singapore asked for and got more than any other jurisdiction has ever demanded in terms of billions of US dollars in commitments from the winning applicants. And the state imposed restrictions ranging from safeguards such as charging SGD$100 (US$60) per day on locals just to enter the casino, exclusion programs and limits on advertising, to the government reserving the right to close the casinos down if it decides that it is having a negative impact on society.

How gambling will spread depends almost entirely upon the unique laws, politics, history and culture of the jurisdiction. Even China, having undergone radical change since the Tiananmen Square uprising in 1989, might open up the mainland: Rumors were rampant that the PRC would repeal the 1949 ban on betting on horseraces for the 2008 Olympics. That did not happen, but new lotteries are a distinct possibility. And even China is subject to competition. The PRC does not like it, but neighboring Mongolia, which already has betting on horse races, will probably permit border-town casinos for the China trade within the next five years.

But there is not a limitless supply of players. Competition will lead to governments finding that they have to keep promoting and expanding gambling if they want the money to continue to flow in.

Chinese players call slot machines “tigers.” It will be interesting to see how Asian governments will react when they realize that it is they and not the players who have caught a tiger by the tail.

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I. NELSON ROSE

Professor I. Nelson Rose is a Distinguished Senior Professor at Whittier Law School and a Visiting Professor at the University of Macau. He is an internationally known scholar, author and public speaker, and is recognized as one of the world’s leading experts on gaming law.

Prof. Rose is best known for his internationally syndicated column and 1986 landmark book, “GAMBLING AND THE LAW®.” He is the co-author of INTERNET GAMING LAW (2nd edition published last year), BLACKJACK AND THE LAW, and the first casebook on the subject, GAMING LAW: CASES AND MATERIALS (LexisNexis). Prof. Rose is co-editor-in-chief of the Gaming Law Review and Economics.

Harvard Law School educated, Prof. Rose is a consultant to governments and industry. He has testified as an expert witness in administrative, civil and criminal cases throughout the United States, in Australia and New Zealand, including the first NAFTA tribunal on gaming issues. Prof. Rose has acted as a consultant to major law firms, international corporations, licensed casinos, Indian tribes, and local, state and national governments, including the province of Ontario and Québec, the states of Arizona, California, Delaware, Florida, Illinois, Michigan, New Jersey, Texas, and the federal governments of Canada, Mexico and the United States.

With the rising interest in gambling throughout the world, Prof. Rose has addressed such diverse groups as the National Conference of State Legislatures, Congress of State Lotteries of Europe and the National Academy of Sciences. He has taught classes on gaming law to the F.B.I., at the University of Ljubljana in Slovenia, Sun Yat-sen University in China, the Universidad de Cantabria in Spain, Université de Toulouse in France, and as a Visiting Scholar for the University of Nevada-Reno’s Institute for the Study of Gambling and Commercial Gaming. Prof. Rose has presented scholarly papers on gambling in Nevada, New Jersey, Puerto Rico, Canada, England, Australia, Antigua, Portugal, Italy, Argentina, the Czech Republic, Japan and Macau.

Prof. Rose can be reached through his website: www.GAMBLINGANDTHELAW.com.