July 5, 2017 2:50 pm JST
David Suzuki

Japan's casino market offers perils as well as promise

Investors must guard against risks of infiltration, blackmail

© Reuters

Japanese supporters of casino gambling legalization originally hoped to have "integrated resorts" open in the country in time to take advantage of the surge in visitors expected for the 2020 Tokyo Olympics.

Given the many critical steps yet ahead, this ambitious timetable is now impossible. Yet the delay may not be such a bad thing for the government, the construction industry and other stakeholders. The monumental undertaking of building what are likely to be several casino resorts and the positive ripple effect this will have on the Japanese economy long after the 2020 Games are over would negate the post-Olympic economic hangover that has cursed so many other host cities.

Investment bank estimates of the addressable market for casino gambling in Japan range as high as $40 billion, potentially putting the country on par with Macau, Asia's dominant casino center. Such figures are drawing the interest of many large global gaming companies. Japanese gamblers already wager around $200 billion a year on pachinko and slot machines.

Supporters of Japanese casino legalization point to the example of Singapore where integrated resorts have not caused a much-feared spike in gambling addiction or related social ills. Japan, like Singapore, offers a clean, safe environment that can easily envelop high-end integrated casino resorts and nurture positive net effects for the economy.

Scratch the surface however and one is reminded of the insidious risks that are historically intertwined with gambling in Japan. Gambling has long been the bread and butter of the yakuza, Japan's organized crime groups. In post-war Japan, gambling was a popular pastime and the laws then made it almost impossible for the police to make arrests unless they caught bettors red-handed.

Japan's late 1980s bubble economy made it easier for the yakuza to make inroads into legitimate business. The groups steadily expanded from their base of drugs, prostitution, extortion, racketeering and gambling into stock market manipulation, real estate speculation and insider trading.

Yakuza leaders made an art form out of exploiting the close ties and loyalties of Japanese business life, as well as blackmail, a formidable weapon against legitimate businessmen. In 1991, the government said that more than 70% of brokerages and other finance-related companies and 50% of other companies in other sectors listed on the Tokyo Stock Exchange had admitted acquiescing in some way to demands from crime syndicates.

Over the past decade, Yakuza membership has slowly diminished, owing to a series of laws cracking down on the yakuza while not outlawing them. Many yakuza are now unable to collect protection money, rent a car or an apartment, open a bank account or get insurance. From 1992 to 2011, the numbers of yakuza hovered around 80,000 but are now estimated to be as low as 50,000.

Infiltration dangers

While the majority of the general public did not approve of the passage of the casino law last December, no one could be happier than the yakuza as casinos could open a whole new revenue stream for them.

What casino companies coming into Japan should really fear, according to Jake Adelstein, an investigative journalist who has covered organized crime in the country for more than 20 years, is not losing money to cheating yakuza customers, but the infiltration of their companies and staff by organized crime members. This is something that the modern yakuza do extremely well.

In 2007, it was revealed that a gang boss had managed to take over Yubitoma, then Japan's equivalent of Facebook. Over 3.5 million people were affected.

Matsumoto Hiroki, an investment adviser and former stockbroker who has studied yakuza strategies, noted in his book "Kyoseisha: The behind-the-scenes fixers in the Japanese stock market and yakuza money" that the groups can be exceptionally good at gaining control over a company via the use of information gathering, honey traps and blackmail.

In more complicated financial schemes, organized crime groups, which often run temporary staffing agencies, have ensured that their handpicked candidates are placed within companies. The Shimizu Ikka, a faction of the Yamaguchi-gumi, the nation's largest crime group, reportedly had younger yakuza with no tattoos or missing fingers enroll at temporary staffing agencies and report back from their placements with insider information that could be used to blackmail executives or for stock trades.

It might be possible to set up excellent surveillance at casinos to keep yakuza from walking in the front door. There are databases of yakuza photos that could be transformed into databases for facial recognition. However, the question is how to prevent the yakuza from sending their emissaries in through the back door.

Many yakuza groups will attempt to extort money from foreign operators coming to Japan by using right-wing front groups to protest against "foreign invaders" or the "perils of gambling" at loud volumes and in ways that disturb the business. Daikosha, a right-wing group affiliated with the Inagawa-kai, the third-largest Japanese crime group, already has a successful history of forcing foreign companies to buy their publications and make donations by digging up corporate scandals.

Anything improper that a casino does in Japan could be used as leverage by yakuza groups. An employee could "blow the whistle" on flaws in a casino's anti-money laundering practices. An insider at a rival casino could allow a known yakuza member to play there several times and then leak the story of his exploits to a weekly news magazine.

Top-level mobsters have strong connections in politics, finance, advertising, media and the entertainment industry. The use of such connections could cause casino operators to be denied licenses or have licenses revoked. Keeping out yakuza will require local advocates with a cosmopolitan mindset who can recognize the mobsters, educate staff, have good relations with the Japanese police and serve the interests of international stakeholders.

Bettering the odds

So what can be done to mitigate risks associated with casino operations in Japan? First and foremost, accurate and timely due diligence must be completed prior to hiring staff and engaging in any business relationship as the monetary incentive to penetrate or compromise legalized gambling establishments is just too great.

Second, the importance of maintaining a constant flow of risk intelligence cannot be overstated. The need for proactive, continuous countermeasures to detect and deny penetration by criminals and anti-social forces will be paramount.

Third, it will be indispensable to educate all vetted casino staff on recognizing yakuza and the signs of their entrapment schemes, as well as to cultivate an awareness among staff of how they could become targeted as a gateway into casino operations.

Maintaining the integrity of any legal gambling provider's infrastructure and daily activities will require a physical security presence comprising robust cyber security, state-of-the-art surveillance systems, covert and overt monitoring of both patrons and employees, and a professional guard force, which must include multilingual static and mobile security managers, supervisors and officers, according to Executive Protection, a Tokyo-based security risk management company. Cyber security may merit special attention, especially as vulnerabilities have been discovered at casinos elsewhere in Asia.

The legalized gambling market in Japan and attendant risks will be cosmopolitan and not just Japanese. Multitudes of foreigners are expected to join millions of Japanese gamblers. The lurking dangers of investing in the gambling industry in Japan are far greater than in almost any other sector. Foreign operators will need to step carefully.

David Suzuki is head of global Japanese business at Blackpeak Group, an investigative research and risk advisory firm.

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