Tiny Chinese enclave remakes gambling world, Vegas

LAS VEGAS (AP) - Most people still think the United States (US) gambling industry is anchored in Las Vegas, with its booming Strip and 24/7 action, a place where years of alluring marketing campaigns have helped scrub away the taint of past corruption.

Yet in just a decade, the centre of gambling has migrated to the other side of the world, settling in a tiny Chinese territory an hour's ferry ride from Hong Kong. The gambling mecca of Macau now handles more wagers than all US-based commercial casinos put together, and many of those bets end up swelling the balance sheets of US corporations.

But as US gambling companies have remade Macau, Macau has also remade them.

Chasing riches, these companies have been hit with allegations of improper conduct, prompting investigations and serious questions about how closely US authorities are watching the corporations' overseas dealings, and what, if any, real repercussions they could face. Could these corruption claims revive the spectre of gambling's bad old days, when Sin City casinos kept mobsters flush?

"There are some countries where you either have to pay to play and break the law, or you have to not do business there," Indiana-based casino consultant Steve Norton said. "I think the jury's still out on Macau."

A few hours' flight from half the world's population, Macau is the only place in China where gambling is legal. Each month, 2.5 million tourists flood the glitzy boomtown half the size of Manhattan to try their luck in neon-drenched casinos. Most of them are nouveau-riche Chinese who sip tea and chain-smoke as they play at baccarat.

The former Portuguese colony has long been known for its gambling but used to offer a seedier experience, with small-time gambling dens crowding up against textile factories and gangs, prostitutes and money-launderers operating openly in the cobblestone streets. That was the scene in 1999 when China assumed sovereignty of Macau and opened it to outside gambling operators.

"It was a swamp," said Mr Sheldon Adelson, chief executive of Las Vegas Sands, as he looked back on his early venture in an obscure city where Chinese officials envisioned conventions and resorts. "Everybody thought that I was crazy."

Nevertheless, he and the two American competitors that tried their luck there succeeded spectacularly. Mr Adelson's first casino opening there caused a stampede that ripped doors off their hinges. Now operating four booming casinos in Macau, he described Sands as "an Asian company" with a presence in America. He makes far more in China, a culture in which notions of luck and fate play integral roles, than in Las Vegas.

"This industry is supply-driven, like the movie Field of Dreams: Build it and they will come." he said. "I believe that."

If Mr Adelson's words and jack-o'-lantern smile suggest all is right in the globalised casino world, consider where he made these statements - on the witness stand in a Vegas courtroom this spring, defending his company against one of his former Macau consultants.

A jury in May found against Mr Adelson, awarding the consultant US$70 million (S$89 million) for helping Sands secure a lucrative gambling license in Macau. Sands immediately appealed.

But the lawsuit may be the least of Mr Adelson's worries. His firm is also accused of making improper payments to a Macau lawmaker and collaborating with the Chinese mafia. The US Department of Justice and the US Securities and Exchange Commission (SEC) are investigating. The company says it's done nothing wrong.

It's not just Sands facing legal and regulatory troubles connected with Macau. Two of the other three major US gambling enterprises are, too: Wynn Resorts Ltd. and MGM Resorts International. Both Sands and Wynn are facing related lawsuits from shareholders who claim Macau mismanagement has damaged the companies.

Wynn is being investigated by the Justice Department and the SEC over a US$135 million donation to the University of Macau Development Foundation in 2011. Wynn co-founder Kazuo Okada characterised the donation as "suspicious" in a 2012 letter to the SEC. He noted that the Development Foundation's lead trustee is also a member of the Macau government, and said that the donation coincided with Wynn's request for land to develop a third casino.

"I am at a complete loss as to the business justification for the donation, other than that it was an attempt to curry favour with those that have ultimate authority for issuing gaming licences," said Mr Okada, who is now under Department of Justice investigation himself for possible bribery in the Philippines, and has fallen out with his former Wynn colleagues. Mr Okada denies wrongdoing.

If his claim is true, the Wynn payment could violate the Foreign Corrupt Practices Act, or FCPA - a law that bars US companies from paying off officials to win business overseas. Wynn says it acted properly and had no need to buy-off authorities.

Nevada regulators, in a separate investigation, found no wrongdoing.

MGM got into trouble with New Jersey regulators when the company opened a Macau casino with Ms Pansy Ho, the daughter of a gambling kingpin allegedly linked to Chinese gangs. The state found the partnership "unsuitable" in a 2010 report, and forced MGM to sell its stake in an Atlantic City casino. MGM denied that there was anything inappropriate about the relationship, began the process of selling its stake, and did not cut ties with Macau.

Two years later, MGM chief executive Jim Murren stands by that choice. "The Macau market is now larger than the entire US gaming market. Unfortunately for Atlantic City, it's gone the other way. It's smaller now than when we entered it. The fortunes of the two couldn't be more different," he said.

Last winter, New Jersey agreed to consider MGM's application for a renewed licence.

The Sands inquiries stem from a pending wrongful termination case brought by former Sands executive Steve Jacobs in 2010. Mr Jacobs claims that Sands' China subsidiary did business with known gangsters, tacitly condoned prostitution and made inappropriate payments to an attorney who was also a Macau lawmaker. Mr Jacobs claims Sands paid the lawmaker to help settle various regulatory issues in Sands' favour.

Sands has denied all claims, but recently said in an SEC filing that an internal audit had found possible breaches of a section of the FCPA that requires public companies to file proper financial statements and maintain a system of internal controls.

In April, Sands' auditor declined to stand for re-election.

Justice Department spokesman Michael Passman declined to comment on the probe. Sands says it is cooperating with federal prosecutors. Spokesman Ron Reese said the company's dealings in Macau attract more scrutiny because it's the world's largest gambling market, but Sands is diligent wherever it operates.

Sands opened for business in Macau in 2004, at the beginning of a massive boom in China's economy that has lifted incomes for hundreds of millions of people, allowing them to afford upscale pleasures like gambling in casinos. Today, the former backwater is in the midst of one of the greatest gambling booms the world has ever known. To rival the money it takes in, Las Vegas would have to attract six times more gamblers each year than it does now- essentially every adult in America. Wynn Resorts now makes nearly three-quarters of its revenue in Macau. Sands, which owns the Venetian and Palazzo, earns two-thirds of its revenue there.

But like early Las Vegas, Macau has a long history of ties to crime syndicates - in this case secretive brotherhoods called triads that first formed on the mainland more than a century ago. Machine-gun shoot-outs, bombings and even assassinations of government officials were commonplace during magnate Stanley Ho's four-decade monopoly of gambling. (He is Ms Pansy Ho's father.) In the late 1990s, a police official tried to reassure visitors by remarking that Macau had "professional killers who don't miss their targets". The history and regulations governing the enclave continue to make it tricky for modern casinos to avoid gangs, illegal money transfers and at least the appearance of bribery.

"There's no way you can do business over there without having allegations made against you. Most of them are untrue," said Mr Bill Weidner, who was president of Sands until 2009.

One contributing factor is China's capital controls, which restrict the amount of money that citizens take out of the country, including to Macau, which like Hong Kong, is a semi-autonomous region with its own financial system. Another is the lack of reliable credit risk information in China, which makes it hard for casinos to figure out whom they should lend to.

So-called junket agents provide an easy fix. They use their networks on the mainland to identify wealthy would-be VIP gamblers, whisk them to Macau's tables, lend them money, then settle up when they get home.

Junket operators often assume management of a casino's private VIP room. Casinos provide the facilities, dealers and chips in return for a cut of the profits. Baccarat played in VIP rooms accounts for two-thirds of Macau's US$38 billion in annual gambling revenue.

While many of the more than 200 junket operators active in Macau are law-abiding, some have documented ties to organised crime. Operating off the books, junkets pay out winnings in Hong Kong dollars, widely accepted in Macau, which players can then move to another location. As a result, Macau is seen as a conduit for money flowing out of China, with wealthy individuals and corrupt officials suspected of transferring funds abroad.

The enclave has seen a spate of killings and kidnappings associated with debt collection, including one grisly case last year in which two men were stabbed to death in their four-star hotel room, discovered by a friend who had come to lend them the money they needed.

Today, US companies are tweaking their flagship Las Vegas casinos to look and operate more like Macau-style properties. The biggest casinos have imported Asian pop sensations, Chinese delicacies and baccarat, now Nevada's biggest moneymaker. They've outfitted their hallways in red, a lucky color in Asian culture, and set up Macau-style VIP rooms that employ junket operators catering to high-rollers.

Asian visitors now account for 9 per cent of tourists to Las Vegas, up from 2 per cent in 2008. And the Strip is preparing to welcome its first Asian-owned casino: a multi-billion dollar Chinese-themed extravaganza called Resorts World, complete with pandas and pagodas.

One reason casino bosses are dreaming up ways to lure Macau customers to Las Vegas is that Nevada imposes one-fifth of China's 39 per cent tax on winnings. "They can make a lot more money from a big gambler here," said Mr David Schwartz, director of the centre for Gaming Research at the University of Nevada Las Vegas.

But some of the problems associated with Chinese gambling halls may be migrating to the Strip as well.

In March, a man police described as an enforcer for the Taiwan-based triad United Bamboo began serving a life term for stabbing a man to death in a karaoke bar near the Strip. Prosecutors said he'd been sent to collect a US$10,000 gambling debt.

Last year, the US Treasury's Financial Crimes Enforcement Network warned casinos to monitor junket operators and report suspicious activity. The warning followed media reports that Sands allowed a man named as a triad member in a congressional report to move a US$100,000 gambling credit from Las Vegas to one of its Macau casinos.

Unlike some other states, Nevada allows junket operators to work in casinos without the full suitability checks required for key employees. Some Hong Kong operators licensed in Nevada have been found unsuitable by other jurisdictions, including Singapore.

"The reason why we don't do a full giant investigation on them is that they have no control over the casino operations; they are basically travel agents and hosts," Nevada Gaming Control Board chairman AG Burnett said. If another jurisdiction finds fault with a junket operator licensed in Nevada, state regulators will simply ask the operator to submit to a suitability work-up, which is tantamount to telling them to get out, Mr Burnett said.

Still, regulators are not blind to the link between junkets and triads.

At a hearing before a congressional advisory panel in June, Mr Burnett said it is "common knowledge that the operation of VIP rooms in Macau casinos had long been dominated by Asian organised crime."

Mr Steve Vickers, who spent 18 years in the Royal Hong Kong Police Force and commanded its criminal intelligence bureau, believes that nearly all junkets that cater to Chinese tourists collaborate with organised crime.

"You won't find the triad names listed as the junket operators, but they are behind it, because who is it that can reach into China and enforce the debts, move the money? Only one kind of person can do that," said Mr Vickers, who now runs a consulting company.

In the 1980s, state regulations, along with an Federal Bureau of Investigation crackdown, helped push out the mob bosses who had taken refuge in the gambling world and usher in the industry's modern corporate era.

Today, states can impose fines or revoke licences if any US companies are found to have acted improperly in Macau. But except for rare instances like New Jersey's action against MGM, regulators have so far refrained from public action, preferring to wait until federal probes are complete.

Nevada's Mr Burnett said that does not mean regulators are sitting idle.

"A lot of what goes on is dialogue between the board and the companies that the public doesn't necessarily see," he said.

Conventional wisdom is that no US companies will lose their licenses over the allegations, even if proven true. At worst, they could get fined, said Mr Michael Paladino, an analyst at the credit rating agency Fitch. "They can handle that," he said, noting that the largest FCPA fine to date - imposed on German engineering giant Siemans AG for bribery - amounted to about US$1 billion. That's less than one month's revenue for Sands.

The balance of power between casinos and regulators has shifted as gambling companies have achieved their own version of outsourcing, according to Mr I. Nelson Rose, a professor at Whittier Law School in California who writes a blog called Gambling and the Law.

"Macau forced the casinos to see that they could become like other large US corporations: Set up their plants and operations in other nations and make far more than they can being stuck just in Las Vegas," he said, speaking from his hotel room near Macau University, where he teaches a summer course.

Sands, Wynn and MGM have structured their China operations as subsidiaries that could eventually be spun off entirely.

In any case, public officials aren't exactly clamouring for investigations. Among the ranks of the unconcerned is former Las Vegas mayor Oscar Goodman, a one-time lawyer for mob figures. Sitting on an overstuffed green leather couch his living room, Mr Goodman, whose wife is now mayor, said he doesn't worry about Macau because Americans are not paying attention to the murky allegations there.

"You ask people who Sheldon Adelson is, if 10 out of 50 recognise the name, I'd be surprised. If they associated him with the Venetian and the Palazzo, I'd be even more surprised. People are busy," he said.

Of course, within the industry, Adelson is an object of fascination. As the Sands chief appeared in court this spring, a former rival, Mr Phil Satre, who headed Harrah's Entertainment, followed the coverage from his home in Reno. Harrah's, the nation's largest casinos company when Satre stepped down in the early 2000s, was later renamed Caesars Entertainment Corporation.

While Wynn, MGM and Sands have taken off, Caesars, the industry's fourth major player, has been left behind. Caesars did not apply for the finite number of gambling licences in Macau in the early 2000s for fear of upsetting domestic regulators.

At that time, Satre said, the US gambling industry had at last gained a legitimacy and mundane familiarity that had been unthinkable a generation ago. He said he didn't think American regulators would tolerate any hint of ties to criminal activity in Asia.

"There are some things that still have to play out, but when I look back and think about the opportunity to go back in Macau," Mr Satre said, "I'd probably take a different posture."