Cleaning up Asia's casinos

How big is the casino business?

The gross gambling yield (GGY) of casinos around the world income from gambling minus its payouts on successful bets was more than $150bn last year, roughly double the level at the start of the century. That growth is largely due to the boom in casinos in Asia, which now accounts for all ten of the world's largest casinos.

The Chinese Special Administrative Region of Macao is the largest single market, yielding $33bn in gross revenue in 2017 and accounting for all of the top eight casinos (numbers nine and ten are in Singapore). The US as a whole remains the biggest national market, at over $60bn, and the state of Nevada that is, Las Vegas was the second-largest region with $26.2bn in turnover. It seems people are queuing up to throw money at an activity that they are almost guaranteed to lose.

Why would they do that?

At least one group of users has no illusions about whether they are likely to win and are not there for fun. Criminals with ill-gotten gains be they from corruption, drug dealing or outright theft have long found visits to the baccarat table to be an attractive way of laundering large sums of dirty money so that they can be used without attracting suspicion. Casino chips offer an untraceable way of mixing up the proceeds of crime with legitimate revenue and gambling winnings.

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Altogether, the UN estimates that $800bn to $2trn is laundered globally every year, equivalent to as much as 5% of the world economy. Casinos are by no means the only way that money laundering happens, but wherever gambling regulation and enforcement are lax there are plenty of high rollers with millions of dollars to rinse.

Has that helped Macao take top spot?

Macao is right next to mainland China, a vast market where betting is banned. That would have made it a popular gambling destination anyway, but until recently it was also one of the easiest ways for Chinese citizens with money to launder or wanting to hide funds, or move them offshore, to do so. China operates strict controls on how much money can be taken abroad, but a system of "junkets" developed to serve the gambling market. These typically involve a lavish all-expenses paid trip to take high-net-worth individuals on holiday to the Macao casino tables, where they are then extended lines of credit to gamble.

While some junkets are trying to clean up and adopt a corporate image, the currency controls incentivise a range of criminal activities to smuggle money and enforce collection on the mainland, a jurisdiction which doesn't recognise gambling debts. Nearly two-thirds of Macanese casino revenues used to come from junkets, but the former Portuguese colony has been hit hard by Beijing's clampdown on capital flight in recent years. Last year's $33bn in gross gaming revenue was a long way short of 2013's $45bn in takings.

Has China's clampdown worked?

The trouble with money laundering clampdowns is that, as Union Gaming analyst Grant Govertsen told Bloomberg in 2016, "it's like pressing a balloon downit's going to pop up somewhere else". One of those places is the Philippines, which hit the headlines that year after $81m that had been stolen electronically from Bangladesh's central bank was laundered through its casinos, rendering the funds unrecoverable.

The Philippines is keen to develop its gambling sector, with revenue rising by 24% per year between 2009 and 2016. That keenness has led to light-touch regulation, including allowing anonymous gambling and conflicts of interest at the gambling regulator, which also runs casinos.

Is the Philippines alone in this?

The sole casino on the tiny US Pacific territory of Saipan has also been raising eyebrows since it opened in 2015. Billions of dollars started flowing over its tables even while it was still in a downmarket temporary facility in a shopping mall, with the average high-roller betting $39m per visit, many times higher than in Macao, according to Bloomberg. US federal agents raided an office belonging to the Hong Kong-listed firm that owns the casino in March this year, Bloomberg reported at the time. The company, which is controlled by former junket operators from China, said in a statement that no raid had taken place. It has denied any wrongdoing.

Will this always be a problem?

More mature gambling markets have safeguards designed to catch money laundering although the rules are not always followed. Authorities in British Columbia vowed to take action earlier this year after revelations that Chinese gangs are laundering drug money through Vancouver casinos before investing it in the city's superheated real-estate market.

Regulation aside, the best way to ensure that casinos are not used for nefarious purposes is for the industry to appeal more to the average punter, who doesn't typically have millions of dollars of drug money to launder. High-rollers stake a lot of cash and generate revenue, but they are less profitable than mass-market consumers, who don't expect subsidised penthouse suites and often play games where the odds favour the house more.

What's the future for casinos?

Many destinations are keen to emulate Las Vegas, whose economy has branched out from gambling to become a broad-based entertainment destination. These days 65% of revenue on the Las Vegas Strip comes from non-gambling activities such as conferences and high-profile sporting events. In Macao the equivalent figure is just 12%. In Asia, Singapore has pioneered integrated resort where casinos are just one part of a larger leisure offering. This model also looks set to be emulated by Japan, which is legalising casinos but will prohibit junkets as it aims to become a major Asian gambling destination.