Macau’s Big Gamble

Even as foreign investors pour billions into ever-glitzier casinos, the tiny peninsula’s bid to become the Vegas of the Orient depends on China’s larger willingness to embrace transparency and the rule of law.
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The touts’ tactics varied. Sometimes, according to the professors, they would “befriend” prosperous-looking gamblers who had just gotten off the ferry from Hong Kong or had just crossed the Chinese border and lead them to casinos. It is hard to imagine visitors being this naive—“Hey, brother, looking for some action? I’ve got just the place!” But apparently it worked, and works, well enough to be an important part of the VIP-room business. Or junket organizers would act as travel agents, getting players to Macau and directing them to special rooms in a casino—where VIP-room contractors would extend credit to their customers and take a portion of the win. The players would have their own dealers, their own games, their own supply of food and drink, their own entertainment.

The win-sharing arrangements between touts, VIP-room contractors, and casinos could be quite complex. Sometimes the host casino would simply take a cut of each VIP room’s action; sometimes a tout or junket operator would be paid a commission or fee. Often these independent contractors would lend money to gamblers who were running into bad luck and make their profit through the “vig,” or interest. Often they would be paid off through a scheme too convoluted to explain here, which involved something called a “dead chip.”

Private gambling of this sort goes on everywhere—what would a Vegas movie be without a private poker game? But in Macau it was, and is, most of the gambling economy. Even now, some 65 percent of the money wagered in Macau is bet in VIP rooms. The rooms are not as profitable for the casinos as the grind market at its best. As Eadington and Wang explain, “VIP players may require the provision of lavish hotel rooms and high quality amenities for themselves and their entourages, expensive transportation, considerable pampering by staff, and a great deal of time and attention from senior management.” But the sums wagered are so great that no Macau casino can afford not to cater to this market.

The problem with the VIP system is that while it doesn’t guarantee corruption, it makes it very convenient. In theory, there’s nothing wrong with private gambling areas. In practice, there has been little or no effort to check the backgrounds of the contractors. The rooms are assumed to be convenient sites for money laundering, which works this way:

The Chinese government doesn’t allow rich people to easily take their money out of the country, and it allows them to convert only small amounts of renminbi each year. So a factory owner from the Pearl River Delta, or a corrupt public official who has grown wealthy, will head to Macau. One Western banker with extensive experience in Macau pointed out that the city functions as one big, quasi-official money-laundering site, via the numerous gold dealers’ shops on either side of its border with mainland China. Chinese visitors buy gold with RMB from shops on their side of the border, and then sell to dealers on the Macau side for Hong Kong dollars—a “hard” currency that can be converted into U.S. dollars or euros and sent anywhere in the world.

Something similar can go on when wealthy Chinese visit a VIP room. The room’s operator lends them money for gambling—often large sums, worth thousands or millions of U.S. dollars. The loan is in Hong Kong dollars, the main betting currency of Macau (its own currency is called the pataca). If the Chinese gambler wins, he now has hard currency. If he loses, he settles the debt back in China, in RMB. A related practice is “doubling down,” in which the bets are made in one currency, say Hong Kong dollars, but the players agree to settle them later in another, like U.S. dollars. Exactly how the debts are paid, and just where the touts get their substantial operating capital, is obscure. But the rooms and other Macau-based services are assumed to be a major channel for money flowing illegally out of China—and North Korea.

I was able to see the VIP suites in about half the casinos I visited. In many cases, I was the only non-Chinese person on the premises, so it was hard to make an unobtrusive visit to one of the private rooms. I got into the ones I saw by asking casino management for a press tour. The rooms ranged from one seemingly as clean-cut as, say, a first-class lounge in an overseas airport (the “Paiza Club,” at the Sands Macao) to one at a locally owned casino I won’t name, where the 20 people crowded around a baccarat table in a small room reacted to my entry as if I were a mother who had blundered into a room of teenage boys looking at skin magazines.

The VIP rooms are not the only cleanup challenge facing Macau. For instance, its banks are under pressure to tighten their rules against money laundering. This summer, the mainland government momentarily panicked Macau by making it harder for people in neighboring Guangdong Province to get visas to visit Macau. (The restrictions are still in place, but the panic has ebbed. Officials in Macau now see the move not as directed against them but as part of a general move to slow down parts of the economy that were growing unsustainably fast.) Still, the VIP-rooms issue has become central, because of this conundrum: Economically, they are too important for any company to forgo, but legally, they are risky for international companies to accept.

They pose no risk to Stanley Ho’s SJM, which is still the largest operator in Macau. A local reform movement would have to go to Cultural Revolution–style extremes to call his licenses into question. Galaxy, also based in Macau, is in a similar position. But Wynn, Sands, and MGM Mirage know that if they’re found consorting with shady touts in Macau or laundering money from Guangzhou or Pyongyang (where Stanley Ho has a casino), they could lose their U.S. licenses, which are vastly more valuable. Melco PBL faces a similar risk in Australia. And so it is that America’s big gambling companies have been made into tribunes for good governance, transparency, the international rule of law, and a cleanup of the VIP business—mainly under pressure from the Nevada Gaming Commission and its analogues in New Jersey and Mississippi.

“In order to have any effective game, there has to be effective regulatory control,” Frank Fahrenkopf said on the opening day of the gaming expo in Macau. “We have to be assured there is no money laundering. The secret to having a successful gaming industry is tough regulatory control.” This is not a normal statement from the head of a trade association, but it reflects the American industry’s rise toward legitimacy from the days when Bugsy Siegel helped create Las Vegas and Jimmy Hoffa’s Teamsters financed its development. The state gaming commissions—which control the all-important licenses for Las Vegas, Atlantic City, and the Gulf Coast casinos of Biloxi—try to ensure these standards are met by requiring thorough checks of the backgrounds and sources of income of everyone who gets near a casino’s staff. What they want to see are similar strictures in Macau for anyone operating a VIP room, as well as leakproof systems to prevent money laundering.

Fahrenkopf pointed out that over the past decade, scandals have affected the American accounting industry, banking, mutual-fund brokers, telecom companies, and many others—but not the gambling business. “This industry is licensed more carefully than any other that exists—well, I don’t know about nuclear reactors,” I. Nelson Rose of the Whittier Law School told me. “The Nevada application starts by asking you every address where you have ever lived. Every cent you have earned. Every gift you have received.” This is a standard that no VIP-room tout could hope to pass, he says.

What the gaming commissions don’t impose on the industry, its financiers do. The big international combines financing Macau’s current expansion, from Goldman Sachs and Merrill Lynch to Deutsche Bank and Citibank, spend much of their due-diligence time vetting the casinos’ provisions against money laundering, so as to avoid what one banker called the “franchise risk” of winding up as the financiers of Chinese criminals, North Korean potentates, or other evildoers with hot cash.

So which side will prevail in the battle of Macau? The shady system that has been the backbone of its economy, and that local companies still rely on? Or the international standards that the Nevada Gaming Commission and the shareholders of the world are forcing on the likes of Wynn, Adelson, and MGM Mirage?

Fahrenkopf says that technology will again come to America’s rescue: “We’ve got capital, but really we’ve got expertise in running a modern gaming business, which they need.” Therefore, he told me, Macanese and Chinese officials would cooperate in cleaning up the VIP system. Adam Rosenberg, a managing director and co-head of Goldman Sachs’s gaming practice, says that China’s interests push in the same direction, toward doing whatever will allow Macau to prosper by international standards. “China is very much a partner in the success of Macau,” he says. It is also assumed to be a partner in the success of Edmund Ho, whose second term as Macau’s chief executive ends in two years. Everything he does right, and every step forward Macau takes under its special-administrative-region status, reflects well on China’s ability to manage its “one country, two systems” commitment.

But I. Nelson Rose says that these good intentions won’t matter. “I still don’t understand why Nevada approved its licensees to be associated with some of these [VIP] operators,” he told me. “I think there is the potential for real disaster. Some guy will get arrested, and they’ll go through his books, and it will all unravel from there.”

You take your clashes of ideas where you can find them, and if you get tired of hearing about other tensions between “Chinese values” and the outside world, you can just follow the casino news out of Macau.

James Fallows is an Atlantic national correspondent.
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James Fallows is a national correspondent for The Atlantic and has written for the magazine since the late 1970s. He has reported extensively from outside the United States and once worked as President Carter's chief speechwriter. His latest book is China Airborne. More

James Fallows is based in Washington as a national correspondent for The Atlantic. He has worked for the magazine for nearly 30 years and in that time has also lived in Seattle, Berkeley, Austin, Tokyo, Kuala Lumpur, Shanghai, and Beijing. He was raised in Redlands, California, received his undergraduate degree in American history and literature from Harvard, and received a graduate degree in economics from Oxford as a Rhodes scholar. In addition to working for The Atlantic, he has spent two years as chief White House speechwriter for Jimmy Carter, two years as the editor of US News & World Report, and six months as a program designer at Microsoft. He is an instrument-rated private pilot. He is also now the chair in U.S. media at the U.S. Studies Centre at the University of Sydney, in Australia.

Fallows has been a finalist for the National Magazine Award five times and has won once; he has also won the American Book Award for nonfiction and a N.Y. Emmy award for the documentary series Doing Business in China. He was the founding chairman of the New America Foundation. His recent books Blind Into Baghdad (2006) and Postcards From Tomorrow Square (2009) are based on his writings for The Atlantic. His latest book is China Airborne. He is married to Deborah Fallows, author of the recent book Dreaming in Chinese. They have two married sons.

Fallows welcomes and frequently quotes from reader mail sent via the "Email" button below. Unless you specify otherwise, we consider any incoming mail available for possible quotation -- but not with the sender's real name unless you explicitly state that it may be used. If you are wondering why Fallows does not use a "Comments" field below his posts, please see previous explanations here and here.
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