Questionable betting exchanges are profiting off Hong Kong racing's clean record

It's three minutes before a race at Sha Tin and bets are flying thick and fast through cyberspace. Tens of millions of dollars appear to change hands as punters furiously trade money on individual horses - like commodities on a futures exchange.

This isn't the Hong Kong Jockey Club's massive totalisator pools though - the bets are being traded on leviathan betting site CITIbet, thought to be the biggest player in a murky collective of offshore operators betting on Hong Kong's racing.

In the past decade, Asia's underground bookmakers have made a seamless transition from dingy parlours and backstreet casinos to the internet. On CITIbet, horses can be bet to lose, accounts and lines of credit are easily obtained and cash payments are suspected to be made through the notorious VIP rooms of Macau casinos.

One minute before the race, the action on CITIbet stabilises and the Jockey Club's betting pools now begin to swell - sometimes doubling in the last 60 seconds before the horses jump.

The numbers for turnover tick over rapidly, climbing to the point where more than HK$100 million is bet on a single race.

Green and brown lights - indicating dramatic price fluctuations - appear on Sha Tin's massive in-field tote board, mirroring the movements seen moments earlier on CITIbet, lighting it up like a Christmas tree and drawing "oohs" and "ahhs" from the massive crowd, and further spurring the action to fever pitch as punters "follow the money".

Most of the money bet passes not through the tote windows in cash, but through online betting accounts.

The second renaissance of booming turnover in Hong Kong is one where two worlds, legal and illegal, work side by side.

Business is brisk for both and neither seems to be struggling - judging by the astronomical numbers.

Believed by some to be even bigger in volume than the Jockey Club's massive betting pools, but unregulated and unanswerable to racing authorities, CITIbet is the big daddy of the still mysterious group of "Asian betting exchanges".

Now the unnerving influence of platforms like CITIbet, the similarly run but more "niche" site AA-Star, and myriad agent-driven sites that feed into and off the two largest platforms, have gone mainstream.

The spectre of the black-money marketplace, once the domain of major illegal bookmakers and their hand-picked, high-roller clients, is beginning to creep into the pockets and, more to the point, on to the smartphones, laptops and tablets of the man on the street. Today, it is as simple to open a CITIbet account as it is to send a message on Facebook to an agent.

Racing officials admit the network of illegal betting platforms is a concern. The officials also say the sites, and offshore bookmaking in general, are a haven for organised crime, money laundering, junket operators and loan sharks - and, importantly, they are where punters can bet on a horse to lose.

Hong Kong Jockey Club officials say they are trying to mitigate the effects of illegal betting, formulating a strategy that involves increasing public awareness, assisting law enforcement agencies to make more arrests and pushing for more products to stay competitive in this brave new world of gambling.

But as one official put it, the sites are "run by faceless operators" and answer to no one.

Experts say the multilayered operations are licensed in the Philippines - licensed being a loose term, and may not be licensed at all. The Jockey Club security department monitors the sites and say they have server locations for websites that are frequently moved.

The Philippines authorities give the companies a home in the country, as long as the sites don't bet on sport there or allow their nationals to bet. But why would they? Hong Kong racing holds by far the most of any jurisdiction, but CITIbet offers action on any racing with a home tote and live TV coverage, stolen and fed through the website.

CITIbet also offers coverage on greyhound and harness racing, in-play betting where users can match bets during a race and spread betting on financial markets. The pyramid structure of CITIbet is made up of illegal bookmakers at the top, dealing with professional gamblers and filtering down to opportunist loan sharks charging exorbitant interest rates on credit. At the bottom, the man on the street pays the highest rates.

The actual CITIbet operation is well out of the reach of Hong Kong law, but the threat to racing is real.

The sites could enable unscrupulous individuals to potentially profit from prior knowledge of a horse affected by foul play, controlled by a corrupt jockey or other untoward tactics. And there is huge liquidity available.

The Jockey Club's official line is to point to its world-class stipendiary stewards, the sport's unprecedented transparency here and state-of-the-art drug testing as deterrents against race fixing. Away from the track, the Jockey Club boasts extensive security measures and strict monitoring of accounts for signs of suspicious activity. Officials maintain that high prize money is "a major mitigation against threats to racing integrity".

One professional gambler who uses CITIbet almost exclusively professed: "Hong Kong racing is the cleanest, most transparent in the world".

Hong Kong's racing stewards have been aware of the platforms "for a number of seasons" and in that time have begun monitoring them on raceday.

"It's about having the knowledge of what is going on with the sites, which can have a bearing on how you view the race, the tactics jockeys are using and how the horses are being ridden. Betting is often a good window to the race," explained Jockey Club chief steward Kim Kelly.

Although somewhat similar in nature to controversial English-owned betting exchange Betfair - in that players can match bets about a single horse with other account holders - Asian exchanges do not co-operate with authorities with regards to account information.

"And co-operation with them would seem extremely unlikely," Kelly said. "That's not something we have pursued anyway. We've got a very capable security department to help us gain intelligence on matched bets on those sites. There are ways we have to investigate things that we see that might be irregular.

"Knowledge of what happens on those sites may have a bearing on what happens in an inquiry. We deal with each race on a case-by-case basis, but if there was something irregular that happened at a racetrack it would be naïve not to explore those platforms, given that they are becoming increasingly popular worldwide," he added.

HKJC director of security and integrity Martin Purbrick said betting accounts were closely monitored, not just for threats to integrity, but for indications of money laundering.

"We look at betting patterns and if these suggest that the funds are from illegal bookmakers we would review it and, because illegal bookmaking is in breach of the law, we would report this to the police."

Whether sites like CITIbet or AA-Star affect the Jockey Club's escalating year-on-year turnover is a moot point, with some arguing the operations may even boost the club's bottom line.

In 2006, with turnover flagging, new Hong Kong Jockey Club chief executive Winfried Engelbrecht-Bresges lobbied for more autonomy and implemented a 10 per cent rebate on certain losing bets [minimum amount HK$10,000] as a way to curb the illegal market - and it worked.

Turnover steadily increased at first, and after a brief blip because of the 2008 global financial crisis, is now booming. Annual racing turnover has moved from HK$60 billion before the rebates were implemented, steadily climbing to last season's whopping figure of more than HK$100 billion.

The growth of CITIbet has added a new dimension to the illegal market though - with the site offering up to 24 per cent rebates on all bets - not just losing tickets.

Many believe the activity on the sites is at least partly responsible for late price fluctuations.

"Price stomping", as it is known, is where massive bets are placed in the final minutes, changing the starting odds dramatically and causing headaches for the club.

Although many of these late moves are "market corrections" from so-called "computer teams", it would seem logical some of the bets are from illegal bookmakers "laying off" - that is, reducing liability on bets they have taken from customers by putting money on horses on the legal tote pool.

Ironically, they are taking advantage of the club's 10 per cent rebate on losing bets, which was introduced to reduce the leakage of illegal money.

So how big are the sites and how do they affect turnover? Both are questions clouded by these sites' lack of transparency.

On one hand Jockey Club officials estimate HK$2.4 billion is lost by Hong Kong punters with illegal operators on racing each year, a seemingly low figure given that a single race meeting with legal turnover of HK$1 billion is seen as an aberration, but on the other hand say the operations are "worryingly big in volume" and "larger than people think".

Club officials openly admit that "the turnover of illegal bookmakers in Hong Kong is larger than the Jockey Club's turnover".

One professional punter and former bookmaker downplayed the liquidity available on CITIbet. He claims some offers available on screen could not be matched when put to the test, also suspecting that CITIbet "seeded" pools to make them look more attractive, and at times copied the activity of successful punters, "stealing clients and bets".

"In the end it's impossible to truly quantify how much is bet on CITIbet," said another punter. "But I think it is substantial in size." He maintained he can outlay HK$400,000 per bet without being knocked back and was another to claim that CITIbet was good for Jockey Club business.

"The net effect of betting exchanges is to increase the Hong Kong Jockey Club turnover. The exchange punter is a different type of customer to your average Jockey Club customer. So the money isn't really leaking, and some comes back to the tote pool."

Whether the sites are a blow to turnover or not, and the numbers suggest they aren't making much of a dent, the professional operators the SMP spoke to say they are not only using the offshore sites to bet on, but monitor the markets carefully for an accurate gauge of upcoming price movements on the Jockey Club tote.

"When a horse is heavily backed on CITIbet, the Jockey Club's odds crunch every time," said one. "And why wouldn't we use it? As long as you can find a good agent and a jurisdiction where you can set up and get paid. You are crazy not to because the average rebate is 13 per cent. The key is to finding an agent with a low take-out."

The exchanges' overall effects on turnover are a matter of conjecture because their handles (the total amount of bets taken) cannot be accurately gauged - but what is clear is the rebates being offered in the lead-up to a race are an accurate guide to price fluctuations on the HKJC tote board in the final, frenzied minutes of betting.

"This isn't necessarily evidence of 'betting back' or the illegal money flowing into the pools," said one source. "In my opinion what it suggests is CITIbet has become a guide for punters. CITIbet has been driving turnover at the Jockey Club for the last three years, because [it] is telling punters what to back.

"It's simple. If a horse is being offered at a full discount it will blow out in betting. Asian punters love backing favourites and they love a tip - and when they see confidence on CITIbet they want to follow the money. That's what they are doing for the club."

Another smaller player claimed CITIbet agents spread throughout mainland China and southeast Asia are acting as Jockey Club agents by default - reaching punters who otherwise might not bet on Hong Kong racing.

"They are essentially attracting and seeking out new customers," he said. "Then there is the fact the agents can offer credit, and the Jockey Club refuses to. Can you imagine the stock exchange operating without credit? Credit betting keeps things ticking over."

The club's official response to claims CITIbet drives turnover is to again point to a lack of definitive figures from the operators.

"It is difficult to make a conclusive statement whether offshore and unregulated betting exchanges actually increase turnover of the regulated operator or otherwise," said executive director, customer and marketing Richard Cheung.

"However, it is obvious that betting with these offshore and unauthorised operators drain public funding that could otherwise be kept in Hong Kong. The prime objective of the HKJC is to combat the illegal betting market by attracting customers to bet with the Club rather than illegal bookmakers or illegal betting exchanges."

While there is a legal market, there will always be its dark shadow, but there is a clear message from officials to anyone willing to lurk in the shady areas and use the exchanges.

"It is illegal to bet with illegal or offshore bookmakers in Hong Kong," Cheung said, adding that employees of the club were not allowed to bet in cash. "But we are confident our staff and licensed persons are law-abiding citizens. We also have very stringent internal controls and policy on staff betting, including training and registration with us before bets can be placed via account betting. If an employee were to be caught betting with an illegal bookmaker he or she would be dismissed."

Kelly extended that warning to licensed persons, perhaps the most vulnerable group to the activities of exchanges. "We would just remind any licensed person that to bet with a non-Hong Kong Jockey Club operator while in Hong Kong is illegal, and there would be serious ramifications if someone were caught."