Macau's gambling sector has seen a raft of regulatory changes since the appointment of a new top industry regulator last December. These have exacerbated the pressures that a dwindling supply of Chinese high rollers has put on casinos and junket operators already reeling from the impact of Beijing's anti-corruption crackdown.
In 2013, Macau's casinos won around $45 billion from hapless bettors, with more than two-thirds of that coming from VIP players, the vast majority of whom originated from China. This year, the casino win is tracking towards $27 billion, with a bit more than half -- around $14.5 billion -- of that amount attributable to VIP players. This represents a revenue reduction of more than half in only three years.
The provenance of this unpalatable banquet of consequences lies largely with those now complaining most vociferously about regulation.
Prior to the corruption crackdown, and indeed to the issue of new gaming concessions in Macau in 2002, exchange controls on money flowing into Macau's VIP betting rooms from China were honored mostly in the breach and various informal systems developed over many years for moving funds in violation of the mainland's currency restrictions.
When the gaming market was opened to competition in March 2002, Macau did not have an effective casino credit law, a licensing regime for junket operators, any limitations on the form or amount of commissions paid to those operators by casino operators or laws directed against money laundering and the financing of terrorism. Gaming concessionaires faced no table count restrictions, the entry age for casino patrons was 18, dealers were earning less than $1,000 a month and the words "responsible gaming" never appeared together in a sentence said or written by anyone of note in Macau.
In short, Macau was not well equipped to adopt a contemporary regulatory regime when it opened its doors to new casino operators. There was a good reason for this.
The monopoly operator which had enjoyed incumbency for 40 years, Stanley Ho's Sociedade de Turismo e Diversoes de Macau, was the city's largest private-sector employer. It also provided critical infrastructure and was a significant source of government revenue in both the colonial and post-colonial periods. The company had pioneered the concept of outsourcing credit risk and cage operations in its VIP rooms to junket operators who with their networks of agents, provided a steady stream of high-value players to the casinos.
Macau faced a precarious future in 1997 when the Asian financial crisis seriously impacted investment and construction in the territory. Competition from other producers had devastated traditional manufacturing industries, especially textiles.
This economic instability was overlaid with open warfare between organized criminal gangs seeking to position themselves for the post-colonial era as Portugal prepared to return the city to Chinese rule in December 1999. The last thing Macau needed at this point was further social disruption from wholesale change to the legal and regulatory fabric governing its casinos, its remaining economic driver.
Enforcement tools and appetite have noticeably lagged well behind changes to the law. While Macau legislated a licensing system for junket operators in 2002, it did not commence operation until 2004. A new gaming credit law was also introduced in 2004 but did not promote responsible lending practices; it simply confirmed who could legitimately lend for gaming purposes and lawfully recover monies owed.
Macau became a member of the Asia/Pacific Group on Money Laundering in May 2001, but did not implement laws addressing money laundering or terrorist financing until 2006, just ahead of an evaluation by the Asia/Pacific Group. A government directive in 2009 capped the amount of commission payable to junket operators at 1.25% of amounts wagered, but did not limit revenue sharing, a situation which still pertains.
In truth, junket operators have been the biggest beneficiaries of the casino industry's growth. Even under STDM's old monopoly, the junkets would typically take 40% of the revenue generated by their players with another 40% going to the government as gaming tax and STDM keeping 20%.
Prior to the introduction of the commission cap in 2009, junket operators could command commissions of up to 1.5% of amounts high rollers wagered, equivalent to more than half the revenue generated from baccarat, the VIP game of choice, assuming normal statistical outcomes.
A rich reward indeed for little more than player sourcing and credit risk intermediation. Notably, junkets were not the ones investing billions of dollars in new developments nor directly contributing to government tax revenues since they are effectively exempt from tax on monies paid to them out of gaming revenue.
The gravy train which junket operators have been aboard since at least 2002 was not enough for some. Side-betting, where bets are settled in multiples of actual table game results, found favor because it was difficult to detect and stop and there was no leakage of potential junket revenue to either the government or the casino operator. Telephone proxy betting provided a means for players to avoid the know-your-customer requirements associated with Macau's anti-money laundering laws.
Certainly larger junkets have to maintain and incentivize a network of trusted agents and need to be tightly managed if they are to avoid liquidity problems, especially during market downturns. Some poorly capitalized junkets have failed, generally taking with them monies advanced by investors seduced by the same confection of attractive yields as one might find in a Ponzi scheme.
Of the measures announced by the Macau Gaming Inspection and Coordination Bureau this year, the non-renewal of around 35 junket licenses hardly qualified as news. Most of them had either effectively ceased business or merged with other operators to secure the benefits of scale.
The anti-money laundering directive issued by the bureau in May would have been expected by any student of history. Risk-based rules have been advocated for the gaming industry since the Financial Action Task Force, the intergovernmental body combating money laundering and terrorist financing, issued revised recommendations for members in 2012. Macau is due for another Asia/Pacific Group evaluation imminently, likely explaining the recent directive against proxy betting.
The fare being served up now by the regulator to Macau's casino industry, and to junket operators in particular, may be difficult to digest, but should come as no surprise. It is just late.
David Green is the founder of Newpage Consulting, a gambling regulation advisory company. He has advised governments in Macau, Singapore, Taiwan and New Zealand and served as chair of the South Australia Independent Gambling Authority.