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Tiny Chinese enclave remakes gambling world, Las Vegas

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Associated Press

In this June 5, 2013 photo, mainland Chinese visitors gather at the lobby of the Galaxy casino in Macau. Macau is in the midst of one of the greatest gambling booms the world has ever known. To rival it, Las Vegas would have to attract six times as many visitors essentially every man, woman and child in America. Wynn Las Vegas now makes nearly three-quarters of its profits in Macau. Sands, which owns the Venetian and Palazzo, earns two-thirds of its revenue there.

Updated Sunday, July 7, 2013 | 10:33 a.m.

Most people still think of the U.S. gambling industry as anchored in Las Vegas. They might think of vestiges of the mob, or the town's ill-advised flirtation with family-friendly branding in the 1990s.

But they would be wrong.

The center of the gambling world has shifted 16 time zones away to a tiny spit of land on the southern tip of East Asia.

An hour's ferry ride from Hong Kong and an afternoon flight from half the world's population, Macau is the only place in China where casino gambling is legal.

Each month, 2.5 million tourists flood the glitzy boomtown to try their luck in neon-drenched casinos that collect more winnings than the entire U.S. gambling industry. The exploding ranks of the Chinese nouveau riche sip tea and speak in hushed tones as they play at baccarat, a fast-moving game where gamblers are dealt two cards and predict whether they will beat the banker.

The textile factories that stood shoulder to shoulder with small-time gambling halls as recently as the early 2000s have given way to hulking American-run enterprises larger than anything found in the states. The gangs, prostitutes and money-launderers that once operated openly in this town half the size of Manhattan have at least receded from public eye.

"It was a swamp," said Sheldon Adelson, CEO of Las Vegas Sands, as he looked back on his early, risky venture in the forgotten colonial outpost.

"They wanted to change the face of Macau from the gambling dens to that of conventions and resorts," he added during recent testimony, flashing a jack-o-lantern grin and boasting that it would have taken a genius to imagine the profits that he could reap there.

Macau now powers three of the four largest American casino companies. Sands, Wynn Resorts Ltd and MGM Resorts International rode out the recession thanks to the gambling appetite of a region where notions of luck and fate are baked into the culture, and there is no religious taboo on games of chance.

But as U.S. corporations have remade Macau, Macau has remade them.

The town's criminal undercurrent has resurrected the specter of corruption the industry worked for so long to escape. MGM has lost its license to operate in Atlantic City, while Sands and Wynn are under federal investigation for violations of a touchstone anti-corporate bribery law.

The quest for Asian riches is changing Las Vegas as well. Casino bosses are tweaking their flagship casinos to look and operate more like Macau-style properties. As they succeed, hints of organized crime are returning to Sin City, this time in the form of Chinese gangs.

But the moguls are undeterred, increasing their investment at every opportunity.

"This industry is supply driven, like the movie Field of Dreams: 'Built it and they will come.' I believe that,'" said Adelson, racing ahead of his attorney on the witness stand in Las Vegas, where his company is being investigated for bribing Macau lawmakers and collaborating with the Chinese mafia. "Nobody wanted it. Everybody thought that I was crazy."

At 79 and greatly enriched now by his growing field of five Macau casinos, the diminutive GOP super donor adopted a professorial tone and explained that in 2003, Macau officials gave him a plot of land far from what passed at the time for a main drag. They encouraged him to fill in the surrounding bay.

"I thought, 'Do they want us to fail?'" Adelson asked, patting the ring of brown hair arranged across his round head.

When China reassumed sovereignty of Macau from Portugal in 1999 and abolished a longstanding gambling monopoly, U.S. companies rushed in to try their luck. Since then, annual revenue in the former backwater has grown tenfold, stacking up to $38 billion; four times that of Las Vegas and Atlantic City combined.

Wynn Las Vegas now makes nearly three quarters of its profits in Macau. CEO Steve Wynn, dubbed the "King of Las Vegas" for his role in shaping the contours of the Strip, stirred a minor scandal in 2010 when he said he might ditch Sin City and move his corporate headquarters to China.

Sands, which owns the Venetian and Palazzo on the Las Vegas Strip, earns two thirds of its revenue in Macau. Adelson's first casino opening there caused a stampede that ripped doors off their hinges. He now describes Sands as "an Asian company with a presence in Las Vegas and the U.S."

When regulatory troubles forced MGM Resorts to pick between Macau and New Jersey, the choice was obvious.

"The Macau market is now larger than the entire U.S. 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," MGM CEO Jim Murren said.

Macau is in the midst of one of the greatest gambling booms the world has ever known. To rival it, Las Vegas would have to attract six times as many visitors; essentially every man, woman and child in America.

But like early Las Vegas, Macau has a long history of ties to crime syndicates, in this case sinister brotherhoods that first came into being on the mainland more than a century ago called triads. The magnate who controlled gambling in Macau for four decades, Stanly Ho, did little to discourage gang warfare on the peninsula.

Sleepy town squares became incongruous backdrops for machine-gun shoot-outs, bombings and even assassinations of top-level government officials. In the late 1990s, a senior police official tried to reassure tourists by saying 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 are some countries where you either have to pay to play and break the law, or you have to not do business there. I think the jury's still out on Macau," said Steve Norton, an Atlantic City veteran who now runs a casino consulting firm in Indiana.

Adelson himself seemed to confirm this point on the stand this spring, when he casually mentioned that Sands had forgone a partnership with a successful Hong Kong-based casino operator because of a disagreement about organized crime.

"They had expressed their judgment that they were going to do business with either reputed, or-- triad people, and we couldn't do that," Adelson said, sipping from an oversized coffee cup.

Local policies are partly to blame. China bans its citizens from transferring more than $50,000 off the mainland each year; a pittance at many high roller tables, and nowhere near enough to account for the towers of chips that change hands in Macau. It also bans casinos from pursuing gambling debts.

Partly as a result, a thriving junket system has sprung up, with supercharged travel agents whisking VIPs to the gambling tables, lending them money, and then settling up on the mainland.

Junket operators sometimes work on commission, but more often assume management of a private VIP room. Casinos provide the gleaming marble facilities, dealers, and chips in return for a cut of the profits. Two-thirds of Macau gambling revenue is won from baccarat played in VIP rooms.

The informal banking and debt collection system provides a veil and an impetus for criminal activity, according to experts and diplomatic cables.

Junkets "allegedly work closely with organized crime groups in mainland China to identify customers and collect debts" and "work directly with Macau casinos to buy gaming chips at discounted rates, allowing players to avoid identification," according to a memo posted by Wikileaks.

The memo, which was apparently sent from the American Consulate in Hong Kong in 2009, continues, "Government efforts to regulate junket operators in Macau have been aimed at limiting competition, rather than combating illicit activities."

Operating off the books, junkets pay out winnings in Hong Kong dollars, which players can then funnel 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 moving funds abroad. At least 15 government officials have been executed for pillaging public funds and taking the money to Macau.

The enclave has also 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 give lend them the money they needed.

And while many of the approximately 200 junkets active in Macau are law-abiding, some have documented ties to organized crime.

The case of Cheung Chi-tai, a major investor in the publically traded junket operator Neptune Group, is a prime example.

In 2011, a Hong Kong appeals court judgment said Cheung was a "triad leader" who ordered the death of a casino dealer at Sands Macau. He had previously been identified as high-ranking gang figure in a 1992 U.S. Senate report on Asian organized crime.

A witness testified that Cheung was "the person in charge" of one of the VIP rooms at the Sands Macau, the oldest of the Adelson's Macau casinos.

He wasn't charged in the case, but a subordinate was sentenced for conspiracy to commit murder.

"There's no way you can do business over there without having allegations made against you, most of them are untrue," said Bill Weidner, who was president of Sands until 2008.

Casino bosses are now working to lure their Macau customers to Las Vegas, in part because Nevada imposes one fifth of China's 39 percent tax on winnings. The biggest casinos on the Strip have imported baccarat, now Nevada's biggest moneymaker, Asian pop sensations and Chinese delicacies. They've outfitting their hallways in red, and set up Macau-style VIP rooms that employ junkets and cater to high rollers.

"The Las Vegas casinos are adopting that new Macau look, trying to appeal to the high-end Asian gambler. They can make a lot more money from a big gambler here," said David Schwarz, director of the Center for Gaming Research at the University of Nevada Las Vegas.

Asian visitors now account for 9 percent of tourists to the desert metropolis, up from 2 percent in 2008. And the Strip is preparing to welcome its first Asian-owned casino; a $5 billion Chinese-themed extravaganza called Resorts World, complete with pandas and pagodas.

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

Last year, the Treasury's Financial Crimes Enforcement Network warned casinos to monitor junkets operators and report "all available information" on any suspicious activity.

Sands reportedly allowed a junket operator named as a triad member in the 1992 Congressional report to move a $100,000 gambling credit from Las Vegas to one of its Macau casinos.

Las Vegas is also beginning to see occasional outbursts of triad violence.

In March, 26 year-old Xiao Ye Bai began serving a life term for stabbing a man to death in a crowded karaoke bar near the Strip. Prosecutors said Bai was a martial-arts trained enforcer for the Taiwan-based triad United Bamboo, sent to collect a $10,000 gambling debt.

Unlike some other states, Las Vegas allows junket operators to work in casinos without the full background checks required for virtually every other employee, from blackjack dealers to CEOs.

Some of Hong Kong operators licensed in Nevada have been found unsuitable by other jurisdictions, including Singapore.

Steve Vickers, who spent 18 years in the Royal Hong Kong Police Force and commanded the its criminal intelligence bureau, believes that nearly all junkets that cater to Chinese tourists must tangle with organized 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," he said.

Authorities in Nevada, New Jersey and Washington DC are investigating all three of the U.S. companies with properties in Macau.

— New Jersey regulators objected when MGM teamed up with Stanley Ho's daughter, Pansy, because of the senior Ho's triad links. The state found the partnership "unsuitable" in a blistering 2010 report, and forced MGM to sell its stake in the Borgata casino in Atlantic City. MGM and the family of Pansy Ho deny the allegations.

Nevada, where casino revenue provides about half of the state's general fund, examined the MGM partnership and found it acceptable. Mississippi and Michigan also approved. This year, New Jersey allowed MGM to re-apply for a license.

— Wynn is under investigation for donating $135 million to the University of Macau in 2011. A former board member says the payment was a bribe and a violation of the Foreign Corrupt Practice Act. In a footnote in a March legal filing, U.S. prosecutors revealed they were looking into the donation, but did not elaborate.

Established in 1977 as part of a series of reforms intended to restore the nation's standing after the Watergate scandal, the Foreign Corrupt Practice Act bars U.S. companies from paying off officials to win business, though it makes an exception for small administrative payments that do not confer unfair advantage.

The Department of Justice has recently stepped up its enforcement of the act. As the business world becomes more globalized and other countries adopt similar laws, U.S. companies can no longer argue that enforcing the ban gives an edge to rivals.

In recent years, the act has been used to take on the pharmaceutical company Pfizer (for payments to foreign doctors), Rupert Murdoch's News Corp. (for paying British police officers for information) and Wal-Mart (for an ongoing Mexican bribery scandal).

The law was most famously deployed in the "bananagate" scandal, in which a U.S. fruit company was charged with bribing the Honduran president for favorable tax rates. The uproar ultimately precipitated a government overthrow.

But Macau regulators draw fewer bright lines around corporate gift-giving than their American counterparts, according to I. Nelson Rose, a professor at Whittier Law School in California who writes a blog called Gambling and the Law. What might look like a bribe on American soil is a routine part of the culture in Macau, he said.

Wynn says it acted properly. Nevada regulators looked into the donation before the federal investigation was made public and found no wrongdoing.

—A long list of agencies, including the Department of Justice, the Securities and Exchange Commission and the FBI, are investigating Sands. Those inquiries stem from a 2010 lawsuit brought by former Sands executive Steve Jacobs. In an ongoing wrongful termination suit, Jacobs says Sands' China subsidiary allowed triad boss to run one of the company's VIP rooms, tacitly condoned prostitution, and made inappropriate payments to a Macau lawmaker, among other "outrageous" misdeeds.

Sands has denied all claims, but recently said in a Securities and Exchange Commission filing that an internal audit had found possible breaches of the Foreign Corrupt Practice Act.

The law contains two parts: it prohibits bribing a foreign official to win patronage and it requires that public companies file proper financial statements and maintain a system of internal controls. Sands admitted to likely violations of the second, more bureaucratic, provision.

"There were likely violations of the books and records and internal controls provisions of the FCPA," the company said in an annual report filed in March.

In April, the auditor for Sands' China subsidiary resigned.

Both Sands and Wynn are facing related lawsuits from individual shareholders who claim mismanagement has damaged the company.

It sounds bad. But is it?

Probably not, according to Fitch ratings analyst Michael Paladino. At worst, the companies could get fined.

"They can handle that," he said.

He noted that the largest fine paid in modern corporate history— imposed on German engineering giant Siemans A.G. for bribery— amounted to about $1 billion. That's equivalent to one month's profits for Sands.

Justice Department spokesman Michael Passman declined to comment.

Wall Street seems to share Paladino's confidence. Not one analyst or investor raised the issue of corruption charges during recent conference calls held by the three companies to discuss earnings.

"For the average person going to a casino, they're not going to stop going because the company that owns the facility is implicated in some kind of corruption scandal," said Peggy Holloway, vice president and senior credit officer at Moody's.

States also have the power to impose fines, and can revoke licenses.

Nevada regulations prohibit casino companies from doing anything anywhere in the world that could "reflect discredit upon the State of Nevada or the gaming industry."

Similar statutes exist in New Jersey, Pennsylvania, Mississippi, Michigan, Illinois and Connecticut, where the companies with properties in Macau operate.

In the 1980s, these rules helped push out the mob bosses that had taken refuge in the casino industry and usher in its modern corporate era, though the FBI and other federal agencies did the heavy lifting.

A Congressional report issued in 1999 found that American gambling was finally free from the taint of organized crime.

That was the same year China opened Macau to U.S. investment.

State regulators have so far refrained from public action, preferring to stay out of federal investigations until a conclusion is reached, Nevada Gaming Board Chairman AG Burnett said. But that does not mean they are sitting idle.

"I think there's an impression out there that the control board doesn't hammer companies, but the truth is that a lot of what goes on is dialogue between the board and the companies that the public doesn't necessarily see," he said.

While the regulators occasionally file complaints for egregious violations— for instance, the Palms hotel-casino paid a $1 million fine this winter for abetting prostitution and drug dealing — they prefer to handle things quietly, partly of concern for the industry they police.

"When you're dealing with a publicly traded company, the sheer fact of an investigation being made public may be damaging. And if at the end of the day if we find that there's no violation, then unfortunately, we may have harmed the company," Burnett said. "It increases our ability to work with the companies more fluidly and have more of a dialogue. While we work against the industry sometimes, it's helpful if we can work with them."

Conventional wisdom is that no casinos will lose their licenses over the Macau allegations, even if they prove true.

And in any case, Sands, Wynn and MGM have already put their China operations into subsidiaries which could eventually be spun off entirely.

"If I were one of these operators, I might start tallying up how much my U.S. operations are worth and how much my Macau operations are worth and thinking about moving," said Vickers, the former intelligence officer, who now consults about risk management in Hong Kong.

The balance of power between casinos and regulators has shifted as gambling companies have achieved their own version of outsourcing, according to Rose, the professor.

"Macau forced the casinos to see that they could become like other large U.S. 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.

It helps that public officials aren't exactly clamoring for justice.

Among the ranks of the unconcerned is former Las Vegas mayor Oscar Goodman, who famously demanded an apology from Barack Obama after the president cautioned against blowing "a bunch of cash in Vegas when you're trying to save for college."

Sitting in the living room of his five-bedroom home among dozens of bobble head dolls cast in his image, Goodman, whose wife is now mayor, said he doesn't worry about Macau because Americans are not paying attention to the murky allegations there.

"If it brought discredit to us, of course I would become concerned, defensive, and try to rectify the station. But the average person could care less about this," he said, straightening his pinstripe suit, an affectation left over from his days as a nationally-famous mob lawyer.

"You ask people who Sheldon Adelson is, if 10 out of 50 recognize 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."

Of course, within the industry, Adelson is an object of fascination. As the casino titan sat in a courtroom among a phalanx of employees, security and family members this spring, a former rival was following along from his home 500 miles to the north in Reno, Nevada's second, shabbier gambling town.

While Wynn, MGM and Sands have taken off, the industry's' fourth major player, Caesars Entertainment International, has been left behind.

China issued a finite number gambling licenses in the early 2000s, and Caesars did not apply for fear of upsetting domestic regulators. The company's former head now calls that an overcautious mistake.

Phil Satre, who was CEO in 2003, when Caesars was called Harrah's Entertainment, said that at the time, the gambling industry had at last gained a legitimacy and mundane familiarity that was unthinkable in the 1980s. Many executives thought American regulators wouldn't countenance any dalliances with criminal elements 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, I'd probably take a different posture," he said.