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Asia Insight

Manila Vice: Xi and Duterte grapple with online casino crime

China wants to kill thriving industry; the Philippines aims to tame it

CLIFF VENZON, Nikkei staff writer | Philippines

MANILA -- With its marble walls, gilded lobby and sign with Chinese characters that can mean "paradise on earth," the Skytop International Club never tried to be subtle.

Opened last year on the fringes of the Makati business district, Manila's Wall Street, the club became known as a place where men would spend big money on booze and women. The decadence ended on Sept. 30, when officers from the National Bureau of Investigation, or NBI, barged in and rescued 95 women -- 91 of them Chinese -- believed to be victims of sex trafficking. Seven Chinese men and seven local cohorts were arrested.

Raids like this are expected to intensify in 2020, as Manila's and Beijing's law enforcement agencies team up to stop a vicious cycle of vice blamed on the dramatic rise of online casinos.

Businesses known as Philippine offshore gaming operators, or Pogos, rake in billions of dollars a year. Most are Chinese-run and cater to Chinese gamblers. President Rodrigo Duterte's government sees them as a valuable source of revenue and has resisted calls from China to ban the industry.

Gradually, however, the Philippine authorities are recognizing the real-world costs of this murky cyberworld and are becoming more receptive to cooperation with Beijing, which considers online gambling the "most dangerous tumor in modern society."

Just last week, Philippine police arrested 335 Chinese employees of one local gaming operator for alleged investment scams and other financial crimes. Officials say prostitution rings like Skytop's suspected operation are fueled by Pogo insiders eager to spend their spoils.

Now, the involvement of Chinese law enforcement will only turn up the heat.

Ninety-five suspected victims of sex trafficking were rescued from the Skytop International Club in September. Authorities say the booming online casino business is fueling a rise in prostitution. (Photo by Kimberly dela Cruz)

On Dec. 12, a "high level" Chinese delegation met with officials from the NBI to discuss sharing information on Chinese criminal elements in the Southeast Asian country. "They are very much interested in operations by Philippine law enforcers to go after the syndicates or members of the Chinese mafia who are involved in prostitution, illegal Pogo operations and kidnapping," NBI Deputy Director Ferdinand Lavin told reporters on Dec. 17.

A day after the visit from the Chinese delegation, NBI agents raided a brothel in Las Pinas City, south of Manila. Five Chinese women believed to have been forced into prostitution were rescued, while their suspected Chinese pimps were arrested and are facing deportation.

"This is a warning," Lavin said at the briefing. "This is one of the crimes related to Pogo operations."

Separately, Lavin told the Nikkei Asian Review that information sharing on such crimes will officially begin next year. "Operationalization and tactical enforcement will immediately take place," he said.

On the surface, the Duterte government has been wildly successful at taking advantage internet betting -- a booming business expected to be worth $60 billion worldwide by next year, according to the Philippine National Tax Research Center.

In late 2016, Duterte's new administration opened the country's doors to online casino operators, allowing dozens of companies to move in. The welcome mat was unfurled just as Chinese high-rollers were looking for an alternative to brick-and-mortar casinos in Macao, where they faced intensifying scrutiny under President Xi Jinping's anti-corruption drive. Gambling, of course, is illegal on the mainland.

In the ensuing three years, Pogos hired over 400,000 people, many of them Chinese who took marketing and customer service positions. These workers -- as well as suspected members of Chinese crime syndicates -- joined surging numbers of Chinese tourists, drawn by a relaxed visa policy stemming from Duterte's Beijing-friendly foreign policy.

But while the operators flourished and the gamblers got their fix, they did not escape China's watchful eye.

An NBI official said Beijing worries the industry's growing reputation for criminality is giving China a bad name in the Philippines, where the public already distrusts the emerging superpower amid a territorial dispute in the South China Sea.

In August, the Chinese government accused the Pogos of causing gambling addiction and other "social problems" in China. It also raised concerns that the sector is a conduit for cross-border money laundering.

China's pressure campaign against online casinos is part of a broader push "to expand its policy reach across borders where substantial expatriate Chinese-national populations are living and working," said Sam Ramos-Jones, business development director at PSA Consultancy, which tracks the gaming sector.

The Chinese Embassy early this year blew the whistle on an online investment scam in the Ortigas business district of Metro Manila, leading to the arrest of over 200 Chinese nationals. The Philippines, meanwhile, has scrambled to deal with the rising prostitution as well as an alarming series of kidnappings.

The Philippine National Bureau of Investigation holds a news conference on Dec. 17, briefing reporters on rising Pogo-related crime and plans to cooperate with Chinese authorities. (Photo by Cliff Venzon)

The Philippine National Police say the number of Chinese citizens suspected of crimes surged to 460 in the January to August period of this year, from 86 in 2016. Kidnap-for-ransom cases -- almost unheard of in recent years -- totaled 28, spooking locals and threatening Duterte's image as a crime-busting president.

Offenses committed in Manila have ripple effects in China. Most of the abductions involve Chinese tourists who failed to pay gambling debts, or Pogo employees who tried to escape after being cheated out of agreed-upon wages, according to Lt. Col. Jowel Saliba, spokesperson for the police's Anti-Kidnapping Group. "They are only released once their relatives in China pay the ransom," Saliba told Nikkei.

To better cope with these cases, the Philippine police plan to send personnel to China to learn Mandarin. And China intends to set up a "Chinese desk" staffed with its own nationals, who will coordinate police operations with the embassy.

"That's good," Saliba said, "because hiring Chinese translators is already straining our resources."

Senator Joel Villanueva, a critic of the industry, on Sunday said the prostitution and kidnapping cases "support our theory that the negative effects of the industry outweigh any benefit that the country may get from the proliferation of Pogos." He plans to launch a congressional probe on the issue next month.

But while critics like Villanueva and China would prefer to kill this golden goose, the Duterte government hopes to tame it and extract more money from it.

China twisted Cambodian Prime Minister Hun Sen's arm into banning online casinos in August, but Duterte said in September that his country "needs" the industry. Just days after meeting with Xi, the Philippine leader declared that he and he alone would be the one to "decide" the sector's fate.

Unlike Cambodia, which relies heavily on Chinese aid, the Philippines' more diverse economy gives the government freedom to choose its own path, said Alvin Camba, a doctoral candidate at Johns Hopkins University who has researched Chinese investment in Southeast Asia and the online gaming industry.

Camba even suggested the industry gives Duterte leverage over Beijing when it comes to the South China Sea. The Philippine leader has largely looked the other way when it comes to China's maritime maneuvering. But "if China gets real about online gambling in our country," Camba said, "the Duterte government can hurt them" by bringing up the dispute.

One thing the Duterte government has shown little tolerance for is tax avoidance by the Pogos. Many of the gambling businesses are domiciled in offshore tax heavens such as British Virgin Islands. But the president's congressional allies recently approved a bill that strengthens tax collection powers and imposes a 5% levy on gross receipts, on top of existing fees in the tax code.

The tax bureau also began padlocking Pogo offices until they pay. It seems to be working: Tax collections hit 1.63 billion pesos ($32 million) for January to August, three times higher than the 579 million pesos for all of 2018. That is on top of the roughly 8 billion pesos in fees the Philippine Amusement and Gaming Corporation, the industry regulator, expects to collect this year.

In late November, Duterte himself threatened online casino operators that fail to pay up. "I'm giving you three days to pay your debts," he said. "Otherwise, I will shoot you."

PSA's Ramos-Jones said the increased tax burden could slow the industry's growth "but not enough to result in a complete shutdown."

A sign advertises office space for offshore gaming operators in Manila. (Photo by Kimberly dela Cruz)

David Leechiu, whose Leechiu Property Consultants is a major broker of offices for Pogo businesses, argued the industry really is good for the economy and should not be solely condemned for the rise in crime. The real issue, he said, is about vetting who comes into the Philippines.

"Are they drug lords, slave lords, or prostitutes? Well, that is a different problem," Leechiu said.

But even putting aside the crime issues, not everyone is benefiting. The influx of foreign workers has pushed up real estate values and rents in areas where Pogo-related companies are concentrated, in some cases pricing out locals.

Makati, which already hosts over 300 online gambling-related companies, recently announced it would temporarily stop accepting applications for such businesses. Michael Camina, the city's chief legal officer, told Nikkei that the municipality has observed upward pressure on both commercial and residential prices.

"It's driving out local residents, they can't afford it, so that's also a concern," Camina said.

As police descend on places like the Skytop club, he fears the recent spate of sin puts something else at risk: Makati's reputation as the nation's premier business district.

Additional reporting by Ella Hermonio.

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