Local gaming regulat ion ‘invites rumours’

Law expert Nelson Rose

The regulatory framework of the local casino industry will remain incomplete until everyone involved is licensed, including the concessionaires partners, Nelson Rose says.
In an interview with Macau Daily Times, the gaming law expert warned that criminals might be linked to these partnerships. “Having a system where it’s possible that there are secret owners invites rumours and charges,” he says.
The US scholar claims VIP gaming promoters, known as junkets, are also resorting to organised crime in order to get money back from gamblers. However, he adds, “casinos would be very happy if all junkets would just disappear”.
Both the local authorities and the Central Government are becoming more active in controlling the boom of the gaming industry, the visiting professor at the University of Macau says. Rose goes as far as to say pressure from authorities played a role in the public listing of operator MGM China.
Still, the Macau Government should not have remained silent during the Ho family dispute, he says. “There seems to be a trading in ownership and control of casinos without really caring what the government says,” the Whittier Law School professor stresses.

‘I think the strangest thing that Macau has is the junkets. The other strange thing is that you license the operators but not the casinos, so they can open up an unlimited number of casinos’

Macau Daily Times – Ever since gaming was liberalised, Macau has repeatedly been compared to Las Vegas, Nevada. What are the main differences between the two jurisdictions?

Nelson Rose (N.R.) – One of the interesting things is that they’re both similar that they both have very old and very new regulatory systems, at the same time. Macau has its regulatory system, which dates back at least to the beginning of the 20th century with the monopoly concession. It changed completely after 1999. I think the strangest thing that Macau has is the junkets. The other strange thing is that you license the operators but not the casinos, so they can open up an unlimited number of casinos. Therefore, when you have given out three concessions and all of a sudden they turn into six. You also could have these partnerships where people who don’t have concessions can run the casino and share in the profits.

MDTimes – What’s so strange about licensing operators but not casinos?

N.R. – It’s the economics of it. You have supposedly six licensed gaming operators but in reality you’re competing against a literally unlimited number of operators who can have an unlimited number of casinos. From an economics point of view, that makes it very difficult. If the market weren’t so enormously successful, it would be difficult to justify putting money in it. The two great risks are: you don’t know how many competitors you are going to have and, of course, if mainland China closes the door, Macau disappears as a casino city.

MDTimes – So why does Macau have these gaming partnerships?

‘If you allow casinos to operate without any government oversight you will only end up with big social problems. If you are going to set up a licensing system you have to license everybody who has any control or share in it’

N.R. – I think it’s a historical accident. They could have gotten rid of that in 1999 but it would have been very difficult. What would they have done with the more than 30 existing casinos and partnerships? Instead they grandfathered the existing operators and agreements. It’s a way of protecting the investment and expectations of the operators. However, to be fair, once you allow one operator to do that, all the other concessionaires have the same rights to an unlimited number of casinos and an unlimited number of partners.

MDTimes – Has the delay in the approval of land grants in Cotai been the government’s way to control the number of casinos?

N.R. – Both the government of Macau and the Central Government are unhappy with explosive growth. That appears to be the main reason that the Chief Executive [Fernando Chui Sai On] announced a cap on new casinos. Another reason could be that the mainland authorities are worried about being embarrassed by government officials and executives gambling. What’s also funny is that they don’t want to grant land to individuals and companies and then end up with these empty plots. I think it’s a separate problem. You have the casino problem and then you have the land use problem.

‘Untraceable cash’

MDTimes – What are the consequences of having casino partnerships?

N.R. – I don’t see any advantages. Everywhere in the world where anyone who has control or a significant share of the profits in a casino has to be licensed. And here you have three concessions and three sub-concessions, which were licensed, they passed all the checks and even their main executives have to be looked at. But their partners are in effect sub-licensees. They often run the casinos or high-roller suites in the casinos and they certainly have a share in the profits. They are looked at but they don’t have a concession or a sub-concession.

MDTimes – So what are the disadvantages?

N.R. – Who are these people? The problem with legal gambling is that it deals with enormous amounts of untraceable cash. If you allow casinos to operate without any government oversight you will only end up with big social problems. If you are going to set up a licensing system you have to license everybody who has any control or share in it. The regulators might say that it’s the concessionaires who are responsible for their partners. But are there secret ownerships? That’s definitely the greatest danger, if organised crime was a partner in one or more casinos.

MDTimes – Last year, according to reports, a man called Cheung Chi Tai was identified in a Hong Kong court as alleged leader of the Wo Hop To crime triad and also the person in charge of one of the VIP rooms in one local casino. Do you think there might be more similar cases?

‘The two great risks are: you don’t know how many competitors you are going to have and, of course, if mainland China closes the door, Macau disappears as a casino city’

N.R. – We don’t even know if that one is true. There have never been any criminal convictions or even charges filed in Macau. It certainly doesn’t like anybody being investigated in terms of losing their licence over that. But even if it’s completely false, it could still bring the whole gambling industry into disrespect. Having a system where it’s possible that there are secret owner’s invites rumours and charges.

MDTimes – How is the reputation of Las Vegas Sands after the allegations of wrongdoing raised by the former head of Sands China, Steve Jacobs?

N.R. – To put it into context, this suit is very typical of high-ranking ex-employees that are fired and file a lawsuit claiming the company did all sorts of horrible things. The difference is that this is a regulated industry: an American firm regulated by Nevada, regulated by Macau and traded on the Hong Kong Stock Exchange. My guess is that there will not be criminal charges. On the other hand, there is going to be a lot of what looks like borderline stuff, also due to cultural differences. Business in China is so personal. What about handing out gifts? Under Chinese custom, you would be crazy not to. But when exactly does it become a bribe?

MDTimes – Last September gaming consultant David Green said Pansy Ho’s partnership with MGM had been rejected by New Jersey because there is a prejudice against Macau...

N.R. – Yes, definitely there is an American mindset that says everything else is inferior. But why did Nevada say it’s OK for MGM to do business with Pansy Ho and New Jersey said no? Nevada had the exact same information. It’s partially a historic accident. Nevada legalised casinos in 1931 and had to ignore people’s criminal background because the only ones with experience were criminals who were operating illegal gambling. But when New Jersey legalised gambling in the mid-1970s, they said: ‘No, that’s wrong. We won’t allow anyone with a criminal background or even a suspicion of associating with criminals to get a licence in New Jersey.’ So they’re going to somehow disqualify the daughter simply because she got money from the father and they don’t like the associations of the father. I don’t think it was so much arrogance as the history and culture of the regulator. The problem is that for China this looks like an insult, that New Jersey has insulted China and Macau. Number two: they forced MGM to make a financial decision: do they give up New Jersey or do they give up China? It seems like a fairly easy choice for them to make.

MDTimes – The Ho family dispute seems to be over but it did raise the question of how far is one family still in control of the Macau gaming industry...

N.R. – Well, the lawsuits were fun for outsiders to look at but I don’t think it was embarrassing for the industry. What is potentially embarrassing and would not be allowed in other jurisdictions is that there seems to be a trading in ownership and control of casinos without really caring what the government says. Secondly, Macau doesn’t want to have a monopoly, a concentration of economic power. But you have one family that has a too larger percentage of ownership. Perhaps that’s why Pansy Ho reduced its share in MGM.

MDTimes – With MGM’s initial public offering in the Hong Kong market, all six operators are controlled by publicly-listed companies. How good is that for the transparency of the industry?

N.R. – I think it’s great. I personally am a fan of having as many eyes looking at a gambling operation as possible. So now we have another set of government eyes, the securities regulators. It also means there are more controls built into the law. But also there are a lot of good financial and social reasons to do that. One of them is obviously to raise money. I think there was also a push by both Macau and Beijing that they didn’t like the idea that casinos were owned 100 percent by foreigners. Casinos are often seen as sucking money out of society and if they put something back into the community, it’s not so bad.

‘You don’t know the deals’

MDTimes – Back to the junkets, how strange is it from a Western perspective?

Following Asia

Nelson Rose is a distinguished senior professor at Whittier Law School in Costa Mesa, California, where he taught one of the first law school classes on gaming law. He is also a visiting professor at the University of Macau.
“I was first in Macau in 1986 because I was working back then in bringing ‘pai gow’ to California. Of course it was so much different from now,” he recalls.
In 2004, just three weeks after Sands casino opened, Rose was in Zhuhai teaching International Gaming Law at a summer abroad program. He managed to get his students invited to a tour of the first American-style casino in Macau.
“A week later I was invited by the Institute for the Study of Commercial Gambling at the University of Macau to come and give a lecture to the whole university on gaming law. And then they invited me to come and teach a class as a visiting professor,” Rose says.
He now comes to Macau usually twice a year to co-teach a master’s class on gaming law. “I now really follow Asia and it’s actually easier than in other parts of the world because you don’t have that many gaming jurisdictions,” Rose adds.

N.R. – Well, I don’t know of any other jurisdiction in world where anything like this exists. What we call junkets in the United States, for example, simply organise a tour and gets maybe USD 100 per head, it’s not a share of the profits. Certainly it’s not lending money and it’s not ever running part of the casino itself or a high-roller suite. Here you don’t know what deals are being made. More importantly, how do they collect gambling debts? How do they lower their risk? And I have talked to investigators who said that triads do get involved, with force, threat and even death.

MDTimes – Recently the United States Department of State claimed illegal side-betting in Macau could outnumber reported revenues by ten times. Is this estimate realistic?

N.R. – First of all, it’s not like for every bet there is a ten-fold side-betting going on. Maybe some of it happens in the mass market but I certainly think a major part of it takes place in the high-roller suites. It’s a way to avoid sharing money with the casino, to avoid paying taxes to the government. And that’s probably incentive enough for some people.

MDTimes – The industry says junkets are necessary because gambling debts are not collectable in mainland China and it’s not possible to bring huge amounts of money into Macau. Is there an alternative to junkets?

N.R. – Many countries place restrictions on getting money out of the country. And they changed the law in Macau. Casinos can now lend the money directly to gamblers. Number two: In almost all countries around the world, gambling debts are not collectable. The ideal solution would be for court decisions from Hong Kong and Macau to be enforceable in mainland China. This has always been a problem for the industry but most people pay because if not they will never be invited back or into any other casino. Collection rate is usually better than in many other industries. So you don’t need junkets for that reason, you probably need junkets for other reasons.

MDTimes – What reasons?

N.R. – They allow anonymity. Casinos can claim they are not lending money to someone who later turns out to be a government official or from organised crime. We don’t know who these people are, even when they’re playing. And then there’s the fact that China usually works through social networks. Even if gambling debts are not collectable, you still want to know what the risk is and junkets can do that. You can check a person’s financial and credit history but paper records in mainland China are not that good.

MDTimes – Are casinos comfortable with having somebody else take that risk?

N.R. – No, they would like to do it themselves instead of sharing the profits. That part of the argument has been way overblown. Casinos would be very happy if all junkets would just disappear.