The casinos in Macau are the busiest in the world; they dominate the income statements of three of America’s largest casino companies as well as the largest Australian casino company. The casino industry in Macau has grown so fast that it almost defies belief, or it would if Macau did not have 1.6 billion Chinese citizens as potential customers. Still, in my mind, the casino business in Macau is very vulnerable. Why would I think that? First, there is the uncertainty over the long-term plans of the Chinese government, and second is Macau’s reliance on a very small and potentially illegal source for the majority of its gambling revenues.

Macau is a special administrative region where capitalism and gambling may be practiced. When China assumed political control of Macau thirteen years ago, the Chinese government in its wisdom – and with its desire to generate more hard cash – decided to allow the capitalistic economic system to continue to function in special zones for at least 50 years. In the mix of businesses that operated in the former Portuguese colony were dozens and dozens of casinos. Most of the casinos in Macau were operated by one man, Stanley Ho. The new administration opened up casino licenses to other operators and a host of non-Chinese companies rushed to apply. Among the applicants were Steven Wynn, Sheldon Adelson, James Packer and MGM. In the thirteen years since the takeover, casino gaming revenues in Macau have grown to $38.5 billion per year in 2012, up from $4 billion in 2000. Casinos in Macau generate more revenue than casinos in any other place in the world, including the famous Las Vegas Strip, which generated $5 billion in fiscal year 2011.

Casinos in Macau are hybrids; they are a cross between conventional American and Australian casinos and the very Chinese casinos of Stanley Ho that existed before China took over control of Macau. However, the customers are still much the same gamblers who traditionally came to Stanley Ho’s casinos – high rolling Chinese. Macau is the land of high-rollers, credit-players and junket operators; 75 percent of the city’s $38.5 billion in gaming revenue came from that group of people, and it is a very small group. That fact begs the question: where do those high-rollers come from, and where did they get their money?

A year or more ago, I read an academic paper on those high-rollers, credit players and junket operators. The paper, written by a Chinese academic, describes a crime-controlled credit system in which syndicates loan money to unsuspecting Chinese gamblers a bit short on funds. Many of these gamblers are, in fact, brought to the casino by the syndicates. While the gamblers visit the casinos, syndicate members wait outside for the money-borrowing gambler to return. If the gambler can pay back the loan, with interest of course, then that is that – the gambler wends his/her merry way back home. If the gambler cannot pay the loan back, they do not go home. Instead they get the monopoly card: “Go directly to jail, do not pass go, do not collect $200.”

According to the paper, the gambler unable to pay back the loan is taken to an apartment and given a cell phone (their own cell phone is taken from them). He/she is told to call someone – anyone – to get the money. “Call your wife, call your parents, call your boss, tell them to sell the house, the children, anything, but get the money or bad things will happen to you.” The door is locked and the gambler is left to stress, fret and call until he or she gets the money. When I read the paper I was stunned and in disbelief. How could this be? Could that happen in casinos with gaming licenses in Nevada and other U. S. jurisdictions?

If American regulators knew about this, wouldn’t they do something? Of course they would, I thought. A person or company licensed in Nevada, for example has to comply with Nevada minimum standards – and imprisoning players until they pay back a loan does not comply with Nevada regulations. But on the other hand, how could the regulators not know this? I never resolved the issue in my own mind, and had pretty much forgotten it until recently, when I read a story in the Macau Daily Times.

The Times story is about one such gambler – a woman, detained in Macau because of a debt, just as the academic paper described. So, now the story is in the mainstream press and not lost in academia. The casinos are not accused of being complicit in any sense, not by the Times story nor in the paper I read. But, if the practice is at all common, how could the casinos avoid catching wind of it? And if they do know, then what? That is question at the heart of the issue; what can or should the casinos do? Whatever the answer is, it generates a second question; what should Nevada (or any other jurisdiction) do?

This story of this woman is not the only glimpse we have of the under belly of gambling in Macau. Coincidentally, a gangster, Wan Kuok-koi – “Broken Tooth” – was released from prison in the same week that story appeared. Broken Tooth is infamous; he has been in prison for 14 years for extortion, loan sharking and murder, crimes all linked to the casinos. Broken Tooth and the authorities both say he will not go back to a life of crime or be involved in the casinos in any way. Both maintain things have changed a lot since he went to prison. Whatever Broken Tooth does or does not do, he is a reminder of crime syndicates that existed before the Chinese took over. Whether or not they still exist is, of course, the question.

There was another related story that surfaced recently. Chinese authorities arrested some junket representatives in a Macau casino. The incident happened in October but was not reported in the press until the end of November. Those arrested were accused of being involved in a money laundering scheme; the source of the funds was the deposed communist leader, Bo Xilai. The combination of these three stories indicates there is something amiss in the high-roller junket business in Macau.

There are of course, legitimate junket operators in Macau. Asia Entertainment is publicly traded; it is, however, struggling at the moment. Its revenues were down 26 percent in December and 14 percent for 2012. The company blames the decline on two factors: “The decline in Rolling Chip Turnover was attributable to the Company’s self-directed tightening of credit to agents due to the slowing economy in China.” Asia Entertainment seems to have been caught in the dilemma before any of the casino operators. How long can the casinos escape facing the dilemma? It is not a simple issue.

Since high-rollers in Macau generate over 75% of the gaming revenues, it makes everyone a little nervous about meddling with the recruitment, credit and collection processes. For the American and Australian companies, the revenue that comes from Macau is a major share of the companies’ total revenues. Macau generated $3.5 billion in gaming revenues in December; the Las Vegas Strip’s revenues when tallied will be about $500 million. But the Strip gets more customers than Macau; Macau is expecting just over 30 million visitors this year, Las Vegas closer to 40 million tourists. Those high-rolling, money borrowing, money laundering Chinese gamblers are the difference. None of the casino companies in Macau can afford to lose those high-rollers, regardless of where they get the money to gamble or how they pay back what they got on credit. But relying on them is very dangerous. It sometimes looks like a house of cards to me: one strong gust of wind and it will all come tumbling down.

This is not the first time I have written about Macau; in a previous analysis, I speculated on the motivation of the Chinese government for allowing casinos in Macau. In that piece I suggested the Chinese might be using Macau and the foreign gaming companies as a laboratory to learn about the casino industry. I speculated that once China has learned what it wants to know, it would be possible to revoke the foreign licenses and turn over the casinos to mainland Chinese operators. Or, once the government believes it is ready, it could legalize casinos on the mainland.

Why would China permit seemingly criminal activity? Maybe it is a ruse; it would be difficult to suddenly revoke licenses and confiscate the casinos. The Chinese government is much too interested in encouraging foreign investment to do that. China could not afford to create an impression the government might at any minute confiscate foreign investments and businesses and give them to Chinese operators. But who could argue with revoking a license over criminal activity? Gambling in Macau serves the Chinese government well at the moment; it gives a nation apparently obsessed with gambling a place to gamble, and it gives the government a chance to catch its own officials when they embezzle, take bribes or just plain steal money to gamble. It sounds foolish, but every year several government officials fall into the trap. And gambling in Macau gives the Chinese government a chance to study the industry and develop its own model.

The casinos in Macau are on shaky ground. The casinos depend on the continuing good faith of the Chinese government, and they depend on too few people for the majority of their revenues. Many of those people have no legitimate access to the amount of money they are wagering. That income stream could be cut off by a change in the Chinese economy. It could be cut off by a change in policy by the Chinese government. It might even be interrupted for the American operators by American gaming regulators. There are too many high-risk factors in that high-roller market. It feels like a house of cards, and every once in a while I think I feel a breeze blowing, one that threatens to turn into a wind strong enough to blow the house of cards into the ocean.

But, that is just my opinion, isn’t it?

Ken Adams