Secret Phone Bets in Macau VIP Rooms Spark Laundering Risks

  • Junket operators say they’re violating phone betting ban
  • Macau phone betting 2015 revenue reached $2.6 billion: Daiwa

Hidden inside the private room of a Macau casino’s exclusive gaming area, a single player sits at a baccarat table. As the cards are turned, the man, a hired hand, gives a play-by-play account via an earpiece wirelessly connected to his mobile phone. On the other end of the call, hundreds if not thousands of miles away, is the real gambler -- a player beyond the border in China.

That was the scenario described by five people who work at Macau’s junket operators, which front money to high rollers and bet on their behalf using wireless headsets -- in violation of the city’s May 9 ban on using phones at betting tables. At least three gaming promoters who conduct business at independently run VIP rooms at Macau casinos operated by SJM Holdings Ltd. and Melco Crown Entertainment Ltd. told Bloomberg News they’re using headsets to evade the ban, with the proxy players sometimes using their hair to hide the devices. They asked not to be identified because the activities are illicit.

A statement from Melco said its casino facilities, including VIP rooms, are complying with local regulations. SJM didn’t respond to requests for comment. SJM Executive Director  Angela Leong said in a May 17 interview that Macau casinos, including SJM, have increased monitoring to prevent phone betting.

Macau banned phone bets for a simple reason: money laundering. Mainland gamblers can get credit lines from Macau junket operators, who are repaid by the players inside mainland China. The gaming credit stays outside China, away from scrutiny by the Chinese government and its currency controls -- and where it can be cashed out in Macau as gambling proceeds. While a Macau law banned phone betting in 2001, there was no enforcement as long as operators reported the bets and the identities of the gamblers to the regulator, according to legislator Jose Maria Pereira Coutinho.

“There’s a situation of permeability for money laundering that the government must pay full attention to after the ban,” said Coutinho, who called the ban symbolic. “A regulation without effective implementation will create a new loophole as the industry may find a way to avoid it.”

No Punishment

It’s unclear how the new ban will work. Since there’s no longer a system for reporting bettors, phone bets are now clandestine, according to the people. On top of that, the rule doesn’t come with sanctions for violators, according to the Gaming Inspection and Coordination Bureau. Junket operators say phone betting revenue -- worth an estimated $2.6 billion last year -- is crucial for their operations as they struggle with a two-year slump. Gaming revenue plummeted 36 percent last year from its 2013 peak as high rollers stayed away from the tables due to China’s anti-corruption drive.

Not all phone bets facilitate money laundering, and some countries, including the Philippines, allow the practice.

Melco, which operates the City of Dreams and Studio City casinos, said in its statement that its facilities are fully compliant.

“Macau is a highly regulated market and the gaming authority has a strict regulatory regime aimed at closely monitoring the activities of licensed gaming promoters within casinos,” the company said in an e-mailed statement. “This being the case, we can assure you that all of our casino facilities are fully compliant with the local regulations.”

Regulator’s Response

Lionel Leong, Macau’s Secretary for Economy and Finance, pledged on Tuesday that the government will work to “ensure strict enforcement” of the ban.

“The government’s position on the ban on phone betting in casinos is unequivocal,” according to a statement by the Gaming Inspection and Coordination Bureau in response to Bloomberg News questions on violations in VIP rooms. “If irregularities that contravene the laws of Macau are found, the government will take severe measures against such activities.”

Casinos operators and gaming promoters are fully aware of the ban on the use of mobile telephones at gaming tables, according to the statement. The bureau is “also exploring possible legislative amendments to promote the industry’s healthy development by raising the thresholds for gambling promoters,” it said in the statement.

Coutinho, the lawmaker, said the lack of enforcement points to a less than ideal relationship between the regulator and the $30 billion gaming industry. Macau is the only place in China where casinos are legal.

“The government is too friendly with casino operators,” he said. “It doesn’t really punish them.”

He plans to propose revising the 2001 phone betting ban to include detailed punishment for violations.

"The government needs to revise the law if they have problems enforcing the regulation," said Coutinho. "They need to block the possibilities for violations."

More staff and security guards will be hired to conduct checks and monitor activities in the VIP rooms through surveillance cameras, Paulo Martins Chan, director of the gaming bureau, said in an interview May 18. 

“Casinos and junkets are supportive and are complying with the ban now,” Chan, the regulator, said last month. “Just a few gamblers who were still betting by phone were persuaded to stop. Casinos can ask clients to leave if they insist on phone betting.” 

Under Macau’s 2001 law, casino operators are responsible for making sure junket operators obey the regulation even though the gaming promoters operate the rooms independently of the casinos. The May ban doesn’t lay out the responsibilities of casinos to enforce the ban.

By comparison, Singapore’s prohibition against phone betting, which took effect last year, calls for a fine of up to S$5,000 ($3,600) and six months in jail for the gambler and as much as S$200,000 and up to five years in jail for those who facilitate remote gambling.

A week after the ban took effect, only 28 percent of 1,000 casino staff members surveyed by the Macau Gaming Industry Frontline Workers’ Union said they thought casinos were “strictly executing” the ban, according to the group.

The number of gaming promoters has also declined with the plummet of gaming revenue. There were 141 gaming promoters licensed by Macau’s gaming regulator as of earlier this year, a drop of 40 percent from the peak in 2013.

SJM shares have dropped 49 percent from a year ago, while Melco has declined 26 percent. Bloomberg Intelligence’s index of Macau gaming stocks rose 16 percent in the first quarter after about $46 billion of market value was wiped out last year from the city’s six gambling houses.

Read about Macau’s proposal to tighten capital requirements for junkets here.

Phone bets have been an avenue for wealthy Chinese to skirt China’s currency controls limiting outflows of the equivalent of $50,000 a year amid a crackdown on corruption by President Xi Jinping. With phone betting, the gambler-cum-money-transferrer never leaves the country, making it easier to conceal his or her identity. Other countries, including the U.S. and Singapore, have also banned phone betting due to money laundering risks.

Despite the 2001 law banning phone betting, junket and casino operators were allowed by the regulator in the wake of the severe acute respiratory syndrome, or SARS, epidemic in 2003 to use electronic devices at the tables, which facilitated phone betting, according to junket operators and Coutinho.

Casinos previously needed to fill and send forms to the regulator on behalf of gaming promoters that identified the gambler on the other end of the phone, the junket operators said. The phone gambler was required to put down a minimum of HK$1 million ($129,000) to HK$3 million in each gaming session, according to the junket operators. Casinos sent the forms to the gaming regulator, which approved the use of electronic devices by the junket agent serving as a proxy at the casino for the phone gambler, they said.

Corruption Crackdown

Numbers suggest that Xi’s corruption crackdown scared China’s high rollers away from the gaming tables -- and prompted them to pick up the phone instead. Last year’s $2.6 billion in phone betting receipts was a 15 percent gain from a year earlier even as VIP revenue at casinos dropped 40 percent, according to Daiwa Capital Markets Hong Kong Ltd. analyst Jamie Soo. For smaller junket operators, phone betting potentially accounted for as much as 50 percent of revenue, he said.

Over the past year, the industry has faced greater scrutiny, with gaming promoters required to adhere to stricter accounting standards generally. The regulator is working on a proposal to raise capital requirements 100-fold for new junket operators starting business.

In contrast to recreational gamblers often attracted to the excitement and adrenaline rush of the bustle and noise of a casino, phone betting is a serious, high-stakes game that points to the unique trust between the overseas gambler and gaming agent. The game of choice is baccarat, where the player bets whether the value of his hand or the dealer’s is closest to nine.

Since the ban, some of the junkets now assign two agents, with one playing at the table and announcing the results loudly while a partner sits near the table with an open phone line to the gambler, according to two junket operators.

For a story on Macau’s GDP contraction in the first quarter, click here.

To be sure, the regulator is monitoring VIP rooms more strictly and pressuring casinos to help enforce the ban, the people said. Some gaming promoters have closed their operations, while others have moved their VIP businesses to the Philippines and Vietnam, where policies are more favorable for phone betting and junket operators, they said. Some junket operators who are still engaging in phone betting report they are seeing an increase in plays at the table, most of it from gamblers in China, two of the people said.

The regulator will recruit 50 new gaming inspectors, adding to the 120 it now has, according to Sanford C. Bernstein & Co. analyst Vitaly Umansky, who wrote in a May 23 note that the number of enforcement staff is “still quite low” relative to the number of Macau’s casinos and VIP rooms.

While enhanced regulations on junket operations are generally good for the industry, the ban on phone betting and other tightening measures makes survival difficult for junkets, said Kwok Chi Chung, president of the Association of Gaming & Entertainment Promoters of Macau, which represents gaming operators.

“The junket business has already been struggling so much,” said Kwok. “The phone betting ban makes the weak market even worse.”

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