Macau casinos face regulatory balancing act amid international money laundering concerns

By Christine Duhaime | October 25th, 2013

This article was originally published in Asia Gambling Brief. 

Increased pressure on Macau’s casinos

Macau is facing a delicate balancing act – how to satisfy mounting international demands to crack down on money laundering and other criminal activities in its $38 billion gambling industry, without killing the goose that lays the golden egg.

Finding a way of regulating the junket operators, which bring in about 75% of Macau’s annual gambling revenue, is central to the problem.

Many warn that efforts to clamp down on the junkets, which have acted as middlemen between Macau and China’s high rollers, would have a major impact on casino operators and may scare away the Mainland big spenders.

Still, with the rhetoric ramping up, most say that eventually some action will need to be taken.

Concern about gambling crimes

At home, Macau’s Prosecutor General Ho Chio Meng last week called on the government to amend criminal laws to address what he called serious issues arising from the gambling sector and the increase in criminal activity from extortion cases.

While overseas, a U.S. Congressional Committee on China urged Macau to tackle money laundering at its casinos, saying Macau’s gambling industry is reportedly tied to widespread corruption and laundering of proceeds of crime out of Mainland China that is “fueled by junkets.”

The U.S. Department of the Treasury, in testifying before that Commission, noted that Macau does not have AML laws to deal with cross border currency declarations, casino know your client requirements (KYC), or proper threshold reporting of casino transactions.

But it also testified that changes are afoot. Both the Chinese government and Macau officials are stepping up efforts to regulate the gambling industry and are working “very closely” with China’s Deputy Governor Li of the People’s Bank of China to stop illicit money flows to Macau from Mainland China.

U.S. regulators also appear to be turning up the heat on U.S.-based casinos with operations in the Chinese territory, pointing out that violations overseas could have repercussions at home.

The Nevada Gambling Commission, which has oversight over Nevada-based casinos that operate in Macau, recently confirmed that removing money from China to Macau by junket operators in violation of China’s currency restrictions raised suitability issues.

Suitability issues place casinos at risk of losing the right to operate casinos in the U.S. Steve Wynn, the CEO of Wynn Macau, brought that point home last week before the Massachusetts Gaming Commission. He questioned whether he risks being sanctioned in the U.S. over his Macau operations, which comply with the less stringent gaming rules in force in the Chinese territory.

Economic impacts

The prospect of tougher regulations may drive gamblers away from Macau and materially affect its revenues, although no one knows for sure what the economic impact may be. The biggest junket operators – Neptune, Golden, Jimei and Dore – would be the hardest hit.

They account for more than half the monthly junket turnover with VIP Room gamblers spending between US$10,000 and US$20 million each per trip.

In terms of the casinos themselves, SJM Holdings said VIP revenue was up 10.5 percent in the first half to HKD$29.2 billion ($3.7 billion), accounting for more than 69% of revenue, according to its interim report.

Casinos are so dependent on junket operators that any news that Macau, or China, intend to restrict or monitor currency imports or impose greater regulation sends the share prices of publicly listed casinos with operations in Macau into a downward spiral.

When Macau officials said in July that they planned to implement cross border currency declaration requirements for visitors as part of overall efforts to improve AML rules, SJM Holdings shares dropped 3% on the day, while Galaxy Entertainment Group shed 3.8%.

However, there are no timelines set for such a change and analysts dismissed the proposal. J.P Morgan put out a note saying the impact of such controls is likely to be limited and difficult to implement given the amount of cross border traffic.

Currency declarations are not the only AML concerns – there are other deficiencies including no counter-terrorist financing requirements, few KYC requirements and an unrealistically high reporting threshold for transactions of US$62,000 (compared with $3,000 in other countries).

Pressure from abroad on AML

Ultimately, the pressure to effect changes will come from abroad. The Financial Action Task Force (FATF), is a Paris-based organization that evaluates countries on compliance with its AML standards every few years. Countries that are in serious non-compliance risk being placed on an international blacklist, which negatively affects their international banking relationships and credit ratings. The potential blacklisting of Macau would be politically embarrassing for China, particularly given that it now co-chairs Asia’s version of the FATF, the Asia Pacific Group.

In June of this year, U.S. Congressional Committee members suggested that the FATF evaluation of Macau be prioritized to address what it called the “huge problem” with VIP Rooms operated by junkets outside of the AML regulatory framework. It wants to see an end to lax AML controls over VIP Room operations and for Macau casinos to be fully compliant with international AML standards that apply to other casinos worldwide.

However, taking control of the VIP rooms away from the junket operators and making casinos responsible as in the U.S. would likely kill the business and drive away the high-rolling Chinese gamblers, who are attracted by the anonymity under which they are currently allowed to operate.

A more palatable solution would be to make the junket operators themselves AML compliant, as it would also likely involve a transition period.

Mindful of the accusations and the potential fallout, junket operators have been working towards improving their image.

Slowly, they are coming around to the realization that they need to have a better understanding of international AML requirements with a view to demonstrating that they are prepared to embrace AML compliance to preserve the gambling industry.

As we reported in last week’s article, they are also seeking to diversify into other business activities to reduce their dependence on VIP Rooms.

Part 1 of this article is available here.

 

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