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.
Today’s boom times in China are interesting in their own right, as economic booms always are. By chance and by design, I have lived in the middle of several of them: the Texas oil boom of the mid-1970s, Japan’s all-around boom of the late ’80s, and the Seattle and Bay Area Internet bubble of the late ’90s. Inside the boom zone, people don’t spend much time thinking about how the good times began, or asking how long the boom can last. Everyone, everywhere, takes their own prosperity as a sign of cleverness, wise planning, and hard work.
From outside, the questions concern the boom’s effects—on culture, on values, on old establishments and traditions. Such questions about China’s boom are unusually compelling, simply because of the country’s scale. What will its growth mean for the global environment? For jobs and prices outside of China? For the military balance of power and the ideological contest of ideas?
Right now the very most booming part of generally booming China raises questions like these in a peculiar and intriguing form. This part is the tiny peninsula of Macau—as it spells its name, versus Macao in American usage. Geographically, it is one-sixth the size of the District of Columbia, and it has a population of half a million. It officially became Chinese territory only in 1999, after centuries of colonial control by Portugal. Like its neighbor Hong Kong, which was transferred from British to Chinese control in 1997, Macau is a “special administrative region” of China, meaning it is supposed to run by its own laws and customs for at least 50 years after the handover.
Slideshow: "The Many Faces of Macau"
James Fallows narrates photos from China's glitzy, seedy, over-the-top gambling mecca.
While China’s overall economy has grown about 10 percent per year since the 1980s, Macau’s has recently been growing by 20. While Shanghai, Beijing, and other big cities are dotted with construction cranes, Macau appears to be made of them. Early this year, on a tour of Macau’s Cotai Strip, where a version of the Las Vegas Strip is being created, I counted more than 200 working cranes before I lost track. While the rest of China is struggling to contain the tensions between the very rich and the very poor, via what the central government calls its “harmonious society” policy, Macau is rushing to make itself more attractive to the very rich—and to anyone else who would like to visit the only part of Chinese territory where casino gambling is legal. (State-run lotteries are the only legal gambling outlet on the mainland.)
Last year Macau finally overtook Las Vegas in gambling revenues: Macau had about $7 billion, versus $6.5 billion for Las Vegas. As we will see, this statistical achievement is less significant than it sounds. But news outlets naturally presented it to Americans as more evidence of China’s incomprehensible scale and its unstoppable rise—plus, on the bright side, as another example of the riches open to Western companies (in this case, U.S. casino firms) that can figure out how to get part of the pot-o’-gold Chinese market.
Yes, what is happening in Macau should be of intense interest to casino operators everywhere, and to the financiers and suppliers who thrive off the world’s gambling industry, and to those compiling information on how Chinese people use their new wealth. But in repeated visits to Macau, I found it far more interesting than I would have guessed from most of the gambling-boom stories.
It is interesting in a lowbrow way, because of Macau’s ineradicable seediness. Look in one direction, and you see a new five-star hotel. Turn 90 degrees, and you see an alley down which Indiana Jones might run, pursued by gangsters, or where Sydney Greenstreet might totter out from a smoky den. But this same small locale is also deeply interesting in highbrow ways. The fate of modern Macau will be determined in part by the same political and ideological struggles that are determining so many other aspects of China’s rise. The more China influences businesses and societies elsewhere, the more it comes under pressure to adhere to broadly accepted international standards rather than to its accustomed ways. These standards include such vague-sounding principles as rule of law, transparency, and accountability, which in practice mean: Can you trust a contract? Can you win a lawsuit? Do you know who’s really making a decision? Will the decision be made in favor of whoever provides a “red envelope” containing the biggest bribe? How many sets of books should a company be keeping, anyway? How much money laundering is too much, if Macau wants to be internationally respectable?
Our story begins 450 years ago, when the Portuguese established effective control over Macau and began using it as their trading base for markets in China and Japan. By the mid-1800s, this business had been eclipsed by the rise of British banks and trading companies in Hong Kong. The Portuguese government of Macau responded by legalizing gambling and developing what two academic analysts recently called a “sordid” economic structure—a “mixture of gambling, opium, and coolies trade, together with prostitution, crime and contraband.” The businesses reinforced each other, since peasants who fell into debt at the gambling tables or in the opium dens could be turned into coolies or indentured seamen until they worked off what they owed.
Through the world wars of the 20th century and the rise of the Communists on the Chinese mainland, the Portuguese government oversaw Macau’s casinos and its vice- based economy. The prelude to Macau’s modern era began in 1962, when Stanley Ho, a 41-year-old entrepreneur from Hong Kong with a Chinese father and a Portuguese mother, paid Portugal about half a million U.S. dollars to take over monopoly rights to run all casinos in Macau. Soon he also dominated the helicopter and ferry businesses that brought customers from Hong Kong, the biggest department store, the racetrack, and so on. He held a one-third share in the airport and a one-seventh share in Air Macau. Perhaps it’s not surprising to hear that now, in his mid-80s, Ho is the richest man in Macau and one of the richest in all of China, with assets estimated at $7 billion. Or that he is debonair and sharply dressed, renowned for his skill at the tango and other ballroom dances, or that he has had, by most reports, four wives and 17 children. His flagship operation has been the Casino Lisboa—rendered in Chinese as Pujing, or “capital of Portugal”—which has a 1950s–Las Vegas look. (Earlier this year, he opened the glitzier, bigger Grand Lisboa Casino.) He is referred to in Macau as “Dr. Stanley Ho,” including on the avenue of that name running through the middle of the town and, for a while, on his apparently now-defunct online gambling site, DrHo.com.
Stanley Ho has not been charged with any crime but is typically described (outside his home territory) as being “associated with” or “suspected of ties to” criminal gangs from Macau and surrounding areas. The New Jersey Casino Control Commission is now considering whether one of its licensees, MGM Mirage, can enter a partnership with one of Ho’s daughters, Pansy Ho. The decision will turn on whether Pansy Ho, whose reputation is otherwise positive, can prove that she is wholly independent of her father’s influence. (The Nevada Gaming Commission and Mississippi Gaming Commission have already considered the same question and given Pansy Ho their OK.)
By all accounts, the Macau of Stanley Ho’s heyday was loose, easy, and lightly regulated. British Hong Kong attracted business through rule-of-law government and investments in infrastructure and education. Portuguese Macau enticed visitors. During the mid-1980s, my family visited Hong Kong. One day while I stayed there for meetings, my wife took our two school-aged sons to Macau by ferry for a day trip. She returned, ashen; they were wide-eyed after their brief visit to Gomorrah. In those days, according to a recent Time magazine report on the “sleepy, sleazy” city, “its architecturally charming but rundown streets were lined with hookers and occasionally reverberated with gunfire and car bombings from triad gang battles.”
It’s less violent now, but the old Macau is with us still. One hotel where my wife and I stayed this year doubled as a brothel featuring Russian women. On my latest visit, I stayed in Ho’s original Hotel Lisboa, where the young women patrolling the corridors and popping into elevators to greet unaccompanied men were Chinese. To be fair, the city also has beautiful gardens, an informative city-history museum, a good collection of local art, elegant colonial buildings, abundant Portuguese-Chinese estabelecimento comidas for informal outdoor dining, and many other elements of the tropical good life. A 1,000-foot tower offers visitors a sweeping panorama of the Pearl River Delta. Sleaziness and all, it’s an interesting place.
The next big change for Macau began in 1999, with the handover to China and the selection by the Chinese government of Edmund Ho (no relation to Stanley) as Macau’s chief executive. This Ho was raised in Macau, educated in Canada, and worked in the United States and elsewhere before returning home, in 1983, when he was in his late 20s. He participated in the negotiations for Macau’s handover to China. His selection, at age 44, was seen as a significant signal that the Chinese authorities were interested in good government.
Edmund Ho quickly went to work as a reformer. “The Mafia-style murders just ceased,” says William Overholt of the Rand Corporation, who lived in Hong Kong at the time. “Suddenly there was serious planning for economic development, serious investment in infrastructure, serious interest in sound business regulation.” Edmund Ho apparently believed in good government, and his sponsors in Beijing thought Macau would do best if it were seriously cleaned up. In 2002, he ushered in Macau’s modern age by ending Stanley Ho’s monopoly and opening the casino business to foreign competitors. He acted as if he understood that the best chance to clean up the casinos would be to bring in companies that answered to laws and regulations outside Macau. At first, the rules authorized three casino operators, counting Stanley Ho (through his SJM, for Sociedade de Jogos de Macau, or “Macau Gaming Society”). Now the rules allow six.
In 2004, the first big foreign casino opened, the Sands Macao, owned by Sheldon Adelson’s Las Vegas Sands company. It was an instant success, creating profits so fast that it repaid all its capital costs in less than a year. In 2006, Steve Wynn opened the Wynn Macau, with rooms much bigger, fancier, and costlier than the norm for Macau. The other competitors are Galaxy, a company founded by Hong Kong construction tycoons and based in Macau, and two foreign-based firms affiliated with Stanley Ho’s children: MGM Mirage, in a 50-50 partnership with Pansy Ho, and Melco PBL, a partnership between the Packer publishing empire of Australia and Lawrence Ho, Stanley’s son. (Australian officials scrutinized his independence from his father’s influence, as American officials have done with Pansy Ho, before they approved the partnership.) Those are the players. Here is the play—that is, the many interlocking struggles in Macau that together create its larger political meaning.
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MEMBERS ONLY: A view of the bar area of the Paiza Club, an exclusive preserve within the Sands Macao casino |
If you were a financial analyst, as many, many of the people I’ve interviewed on this subject are, you would be interested mainly in comparing the six companies’ market strategies. For instance: Galaxy wants to be seen as the most authentically Chinese and is emphasizing the profitable if inelegant “grind” market.
(A note here on three terms: gaming, win, and grind. You can spot people who work in the gambling industry, because they always call their business “gaming.” They use gambling only in pejorative contexts, as in “problem gambling.” Win is the industry’s term for casino profit. Financial reports from the big casino companies list “win per table,” which means the house’s daily take from a baccarat or roulette table. Grind is a business term for low-stakes, high-volume customers—in American terms, busloads of quarter-slot players headed to Atlantic City. I am looking at a report from a major U.S. bank with a section headed: “The Grind Market: Brighter Prospects.”)
Galaxy’s new StarWorld is set slightly askew to the main boulevard that runs in front of it. This is one signal that it’s through-and-through Chinese. “Westerners look at it and say, ‘It’s crooked!’” Peter Caveny, head of investor relations for Galaxy, told me. “The instant Chinese look at it they think, ‘Feng shui.’” The casino has an apparently limitless supply of 6-foot-tall female Chinese models who stand just inside the front door. “People come in, they see the girls, they take a picture—and go upstairs and gamble,” Caveny said. “The noise, the excitement—it’s all just right.”
The Wynn properties take the opposite approach: classiness, modern Vegas variety. “Every one of the songs was chosen personally by Mr. Wynn,” a Wynn official named Reddy Leong told me as we watched “Performance Lake” outside the hotel, which sends off fireballs and jets of water in time with music ranging from “Luck Be a Lady” to “Thus Spoke Zarathustra.” The suites have high-thread-count linens, granite-appointed bathrooms bigger than my apartment in Shanghai, massage rooms with professional massage tables.
Stanley Ho’s SJM is opening the most new casinos and attractions—one that looks like a temple of Babylon, one like a Tang-era Chinese fortress, one like a volcano blended with a Tibetan palace, one like a Roman amphitheater. Its biggest casino, the Grand Lisboa, is so garish I do not know where a description would begin. (Perhaps with the casino dome itself, sort of like a billion-karat faceted diamond in pink and gold, surrounded by dozens of gold-colored St. Louis–style arches?) The company will also soon open a “Prague Harbour View” hotel, presumably inspired by Prague’s famous harbour.
The other competitors have varying strategies. Financial analysts are basically high on all six of the licensed casino companies.
If you were a gaming-industry insider, you would be interested in Macau mainly as the latest arena for the primeval struggle between Sheldon Adelson and Steve Wynn. In Las Vegas, the two are seen as opposite in all ways. Adelson, in his mid-70s, is still brash and impolite, a relative newcomer to the business (he first made money with trade shows) who transformed the Las Vegas economy through his “MICE” strategy (Adelson’s term for bringing customers to Las Vegas not just for gambling but for “Meetings, Incentive, Convention, and Exhibition”). Thanks largely to him, Las Vegas has changed from a weekend destination to one where hotels are busy all week long. “I can tell you that when Sheldon Adelson decided to build the [enormous] Las Vegas Venetian and cater to conventioneers, many people thought he was crazy,” Andrew Zarnett, a managing director at Deutsche Bank, said at G2E-Asia, the Global Gaming Expo, held this summer in Macau. “But he was daring, he had a view, and he was right.”
Unlike Adelson, who shaped Las Vegas through mass marketing, Steve Wynn, now in his mid-60s, shaped it through high-end innovations. At industry meetings, I listened to financiers and casino veterans contrast Wynn’s suaveness and perfectionism with Adelson’s bluntness and commoditization. I came away thinking that Wynn’s demeanor could have been the model for Wayne Newton’s performance in National Lampoon’s Vegas Vacation. “Steve Wynn was equally daring in going upscale, offering luxury and high-end restaurants, in the faith that the customer will pay,” said Zarnett.
The broadening of Las Vegas’s economic base is why Macau has in no sense overtaken it. Casino earnings make up nearly all of Macau’s tourist-related revenue, while they’re barely 40 percent of the Las Vegas Strip. The rest comes from conventions, shows, high-end dining, and fancy malls. Because of all these attractions, the average visitor to Las Vegas stays for nearly four days. The norm in Macau is still the casino-centric day trip. That’s one reason Las Vegas has 130,000 hotel rooms, versus 13,000 for Macau. In size, glitziness, and overall excitement, Macau feels much more like Atlantic City—really, like an especially large concentration of Indian casinos in California—than Las Vegas. The current growth surge in Macau is meant to correct these weaknesses.
Adelson’s Sands Macao is the town’s biggest casino, and his 3,000-room Venetian Macao, scheduled to open by this month, will be the city’s biggest hotel (plus casino and convention center). On my first visit to the Sands, in January, I looked from an inner balcony onto a gambling floor that, I was told, contained 20,000 customers, virtually all of whom appeared to be Chinese. The Wynn Macau looks different from anything around it: The city is aglare in blinking neon, but the only ornamentation on his hotel is a large cursive signature of his last name. The casino itself is understated, along the lines of a gentlemen’s club. Hotel rooms at the Wynn are more expensive than at any major competitor, but the hotel has an 85 percent occupancy rate, versus 70 percent for Macau as a whole. In the battle for Macau, both men have won.
If you were an economist, you might be interested in Macau’s test of the hypothesis that everyone who gets into the casino business wins, not just the industry’s Men of Vision, like Adelson and Wynn. This is “win” in the casino sense, of course—that is, they end up with the money the customers lose.
The gambling business is unusual because of what analysts call its “supply driven” nature: The more places and ways there are to bet money, the more money people will bet. In many businesses, success for a new competitor means a defeat for those already there. In minor ways, this appears to be true even in Macau. Stanley Ho does not enjoy the monopoly he did a decade ago; as casinos add new tables, the win per table overall goes down. Some financiers worry that in the short term Macau may be adding too many gambling sites too fast.
But in the largest sense, the pie of gambling revenue grows and grows, so there’s more for all. Macau’s gambling win is bigger than that of Las Vegas—and Las Vegas is now adding capacity faster than it ever has before. (Macau also imposes a tax of up to 40 percent on casino earnings, far higher than in most U.S. states.) Fifty years ago, no U.S. state had a lottery; now, 42 states do. “People would always ask, ‘Will Atlantic City hurt Vegas?” Zarnett, of Deutsche Bank, said to me. “What about Indian gaming? Or the riverboats? They all came, and Las Vegas continued to grow. Macau won’t hurt. Nothing hurts. New supply is always absorbed.”
Some animals, given all the food they want, will eat practically until they burst; others eat only until they reach a certain size. I asked I. Nelson Rose, a professor at Whittier Law School who has written many books about the industry, whether any society offered evidence that at some point people would have spent “enough” on gambling. He said that specific areas, including Macau, could become over-casinoed, but that a sustained worldwide surge in demand for gambling seems to be under way. And even if there is a theoretical limit, for now the potential for Asia is limitless. The 300 million people of the United States spend about $50 billion a year on gambling. Frank Fahrenkopf, head of the American Gaming Association, points out that within a five-hour flight of Macau live more than 3 billion people, who together now spend only about $12 billion. Supply will bring demand.
If you were a gambling-equipment supplier, you would be interested in knowing whether Macau’s casinos were going to make the “tables to slots” shift anytime soon. For anyone familiar with an American casino, the first glance inside the Grand Lisboa or even the Sands Macao is startling. To begin with, it’s (relatively) quiet. China in general is as noisy as American casinos, but Chinese casinos are surprisingly hushed. Perhaps that’s because there’s practically no alcohol; attendants walk around with trays of free drinks, but the drinks are water, tea, milk, fruit juice. (The Chinese theory is that placing bets requires full concentration, and gamblers don’t want to dull their senses or skills.) But mainly it’s quiet because there are practically no slot machines to whoop-whoop and clunk out coins when someone wins. In Las Vegas, slots account for roughly 60 percent of the total casino win; in Macau, roughly 5 percent. Catherine Burns, vice president of marketing for the Bally slot-machine company, pointed out at the G2E conference that the total number of slots in Macau is about the same as at the Mohegan Sun, in Connecticut. What Macau’s casinos have instead are “table games”: not blackjack, craps, or poker—all of limited interest so far to Chinese gamblers—but roulette, a dice game called da xiao (“big-little”), and most of all, baccarat. Felt-covered tables for baccarat occupy most of Macau’s gambling space.
Customers will be wedged six-deep around one table, while dealers stand idle at the neighboring two. This pattern arises, I was told, from the widespread belief among Chinese gamblers that there are “hot” and “cold” tables, and much of the skill in gambling involves telling them apart. (The clustering of other gamblers around a table is one clue.) This leads to the question that might interest you if you were an anthropologist—or a potential investor in Macau: Is there a distinctively Chinese attitude toward games of chance?
Nearly all customers in Macau are ethnically Chinese. They come in roughly equal shares from the mainland, Hong Kong, and Chinese communities in Southeast Asia. “Do Chinese like gambling more than other people?” asked Ivan Yiu at the conference in Macau. Yiu, himself Chinese, is the coordinator of addiction services for a group of hospitals in Hong Kong. His answer was yes. I have seen many sociological studies that support that view. Here is one of Yiu’s pieces of evidence: In the United States, the overall rate of “pathological gambling” is 1.8 percent; for Chinese Americans and Chinese immigrants, it is about 3 percent. The variation, Yiu said, involves cultural characteristics and assumptions. Some of these may sound familiar to people who have seen or known problem gamblers of any background: a “lack of probabilistic thinking,” a belief that a player’s skill can surmount the odds (even in baccarat and roulette, which involve no skill beyond laying down a bet), the “delusion that one can foresee results by intuition and control results by ritual.” The main difference, Yiu said, is that in Chinese cultures, a larger proportion of people think this way. One other, more distinctive factor is a traditional belief that money won in gambling is as respectable as money earned any other way. According to Yiu, a gambler who has a good run at the roulette table will be just as esteemed as, say, Warren Buffet, with allowances for difference of scale.
With the concept of respectability, we arrive at political values, regulation, and international law. If you were curious about the broad noneconomic effects of China’s economic rise, you would be watching the struggle over Macau’s “VIP rooms” as a proxy for larger questions about China’s adherence to “universal values.”
Stanley Ho’s four-decade monopoly on all casino business might seem the strangest part of Macau’s economic structure. It was not: That distinction has belonged to the related system of VIP rooms, which has also been the foundation of Macau’s gambling economy—and which poses the greatest challenge to Macau’s ability to come into sync with international norms.
The most recent and authoritative academic study of the topic is “The VIP-Room Contractual System and Macao’s Traditional Casino Industry,” forthcoming from William Eadington, a prominent economist and director of the Institute for the Study of Gambling at the University of Nevada, Reno, and Wuyi Wang, of the Macau Polytechnic Institute. They write that the system arose from a quirk in Macau’s location and logistics. In the 1970s, most of the customers came from Hong Kong by ferry, but there were never enough seats to satisfy demand. Scalpers moved in, buying up ferry tickets at face value and selling them for a profit. Stanley Ho believed this was bad for Macau’s casinos and for the ferry, which he also owned, so he proposed a grand compromise: If the scalpers would move out of the ferry terminals, and presumably keep replacements from moving in, he would let them participate in gambling operations in special areas inside his casinos, which could be much more lucrative. Over time, the arrangement evolved into a way to increase the profits of Ho’s casinos while subcontracting much of the work of dealing with customers to a group of shady touts.
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.