Side-bet scams dwarf bad old days when mafia ran Vegas
'Let me tell you a little bit about skims. There is no casino, in this country at least, that is capable of defending itself against a skim. There are no safeties. You can't prevent a skim if a guy knows what he's doing.' So warned Frank 'Lefty' Rosenthal, the former boss of the Stardust casino in Las Vegas, where officials in the 1970s and '80s exposed one of the city's largest mafia skims.
The revelation that Macau may have lost more than HK$100 billion in casino winnings and HK$40 billion in tax revenue over the past five years due to side betting is reminiscent of Las Vegas before it became an American conventioneer's paradise dominated by billion-dollar resorts. The Nevada gambling hub was for decades the target of large-scale, systematic casino skimming operations ultimately directed by the country's top mafia bosses.
From the 1946 opening of notorious gangster Benjamin 'Bugsy' Siegel's Flamingo casino to the '80s, when Mr Rosenthal's reign at the Stardust ended with Nevada authorities adding him to a blacklist, the mafia skimmed millions of unreported, untraced and untaxed dollars out of casinos in Las Vegas.
In the Stardust operation, documented in the book Casino by journalist Nicholas Pileggi and turned into the 1995 film of the same name with Robert De Niro playing Mr Rosenthal, the key was infiltrating the casino's supposedly secure money-counting room. Complicit staff underweighed coin winnings from slot machines and set aside bricks of paper money for mafia couriers, who simply walked it out the door.
'Even when you know what can happen, it's almost impossible to keep a casino from leaking cash,' former Stardust casino manager Murray Ehrenberg, who previously worked at Steve Wynn's Golden Nugget casino, told Pileggi.
'The systems for skimming casinos are as varied as the genius of the men doing the skimming,' Pileggi wrote.
While it is a different type of skimming, the Macau scam probably dwarfs anything that ever took place in Las Vegas.
Five senior executives at licensed Macau casino operators polled by the South China Morning Post estimated side-betting volumes in Macau at between 20 and 200 per cent of the officially reported market for VIP gaming.
Macau reported VIP gaming revenue of 46.88 billion patacas in the 12 months to September. Based on the lowest estimate from the Post survey, side-betting volumes in Macau were around 9 billion patacas or US$1.1 billion in the last year. At the time of the Stardust skim, which involved three other Las Vegas casinos owned by the same company, Nevada officials estimated the operation never netted more than US$20 million.
The key figures behind side betting in Macau are the players themselves and the junket operators - middlemen who bring high-rollers to casino VIP rooms, issue them credit to gamble with and collect their debts in exchange for a commission on the sales of gaming chips.
It works like this: before visiting a casino a player and junket operator might secretly agree that each HK$1,000 wagered at the VIP tables in fact represents HK$10,000, and they will settle the remaining HK$9,000 of each HK$10,000 between them later. The junket assumes the risks usually shouldered by the casino, while both parties share the risk that the other will honour the debt after the player has left the casino. Because the casino books no winnings from the side wager and no gaming taxes are paid to the government, the third-party junket agent collects 100 per cent of the revenue and is able to offer the player a higher rebate on betting volumes than otherwise available in the Macau market.
'I think the practice is likely to be more prevalent where third parties are involved, particularly if they operate under revenue-sharing arrangements with casinos,' said David Green, a partner at PricewaterhouseCoopers in Macau. 'Both the casino and the government are being defrauded.'
But defrauded of how much? It is unlikely that most of the money being bet under the table would otherwise be wagered legitimately.
'The side money being bet is likely wagered due to the additional rebate being offered,' said one senior casino executive in Macau. 'Certainly some of this money would not have been wagered under normal 'house' incentive policies.'
Macau casinos compete for business from high-rollers against other low-tax or no-tax gaming operations in Malaysia, the Philippines, aboard offshore casino cruise ships and even online. But due to Macau's high tax rate - 40 per cent of casino winnings - all of these rival jurisdictions are able to offer higher commission payments to junket operators, who in turn can offer higher cash rebates to their players.
By accepting side bets, a junket operator can entice players with a cash rebate that is equal to or better than what is offered in other markets, and may even exceed the rate of commission the junket is legitimately receiving from the casino. According to one VIP sector source, some Macau junkets offer player rebates as high as 1.8 per cent of chip sales - extremely generous considering the highest commission rate on offer from a casino to a junket is now 1.35 per cent.
The dangers for a junket taking side bets are sizeable. In addition to the possibility of jail time there is a risk that players will win more than expected, or that they will not honour the side bet. Just like in a casino, the number and dollar volume of wagers must reach significant thresholds before a junket accepting side bets can be confident of breaking even.
Dore Holdings chairman Richard Lum, whose firm invests in junkets attached to the Wynn, Sands and Venetian casinos, told investors at a September conference in Macau that his company does not do business with junkets that engage in side betting. He cited the case of one unnamed junket operator that lost about HK$600 million on a side bet in June this year.
'If a junket promoter wants to act like a casino, he must have many players to be profitable,' Macau Gaming Inspection and Co-ordination Bureau director Manuel Joaquim das Neves said.
'If the number of players is not high your risk is higher, and from the information I have many gamblers won't accept side betting,' he said. 'They know it is illegal.'
There are more than 200 companies and individuals currently registered as junkets with Mr Neves' department. The registered junkets rely on a network of sub-agents or collaborators that Macau Secretary for Economy and Finance Francis Tam Pak-yuen last month said numbers in excess of 4,000. Those agents in turn represent an unknown number of high-stakes players across Asia and beyond.
'The real culpable people here are the VIP room operators and the players, and that's really an issue for the Macau authorities,' said one senior official at a US gaming regulatory agency.
'I don't think the casinos licensees [in Macau] are incentivised to be part of this,' he said. 'They are the ones with licences at risk so if they were involved, theoretically, their licence could be revoked and that would have a catastrophic effect on those companies. The Las Vegas skims didn't involve the players; rather, casino winnings walked out of the building without the payment of gaming taxes.'