Wynn’s Junketeer Gets Hacked

As was to be expected, gaming revenues fell again in Macau in September; this time a decline of thirty-three percent. But, there is yet more bad news for Macau, as if it needed any. Dore Holdings, a junket operator with three VIP rooms in Wynn Macau lost millions of dollars through employee theft. Wynn’s stock also lost millions of dollars as a consequence.

Wynn Macau Ltd. led declines in Macau gaming stocks after an analyst’s report alleged that a junket group operating out of the company’s casino in the city may have lost as much as $258 million to thievery, adding to concerns over the battered industry. Christopher Palmeri/Stephanie Wong, 9-11-15

Macau’s casino industry is reeling from months of declines in gaming revenue. Sixteen months ago, the Chinese government started a crackdown on graft and corruption. That hit the junket market square between the eyes. Macau’s gaming industry was built on junkets of VIP gamblers. In some manner almost incomprehensible to outsiders, the new capitalistic Communist China was producing lots of very rich people. Month after month, the junketeers brought those rich people to Macau to gamble. For the city and the casinos, it was easy money until the Chinese government stepped on the air hose. In retrospect it is clear that much of those riches came from illegal activity, as the gaming revenue declines directly coincided with the crackdown.

The theft from Dore Holdings is making an already challenging situation worse. The incident sent shockwaves through the casino industry and casino industry stock prices. It is being investigated by officials and in the meantime, Dore is withholding all investor funds; and the stock of all of the Macau casino companies took a dive. No one is happy and the situation is bringing the whole junket system under scrutiny.

Macau police are investigating alleged fraud involving one of the gambling hub’s biggest junket operators after the company said an ex-employee had stolen money from investors, the latest incident to hit an industry reeling from a slump in revenues. Reuters, 9-21-15

The government in Macau is going to increase its oversight and develop new regulations and controls. It is going to require all junketeers to be investigated and certified. Now for those of us in this country, particularly in Nevada, that is just common sense. But, it begs a question; just what kind of control and oversight existed before? Two things seem obvious at this point; the cash coming into Macau for the last few years has been tainted; and the government of Macau and China knew it all along. The Chinese government ignored the issue until last year when it began the crackdown. And, the government in Macau waited until now before exercising any real oversight of the system.

Secretary for Economy and Finance Lionel Leong Vai Tac said the government will soon implement internal guidelines regarding the more stringent monitoring of the city’s VIP gaming promoters and enhanced transparency in disclosing shareholders’ background. The government will observe the effect before introducing any changes to local gaming laws. Macau Business Daily, 9-23-15

The government is closely monitoring the gaming industry to ensure it operates legitimately and develops in accordance with the city’s vision of becoming a world centre of tourism and leisure, the secretary for economy and finance said. Leong Vai Tac said the government would step up efforts to fortify a healthy development for the gaming industry. Asia Gaming Brief, 10-2-15

The hotels have recently started taking out kidnapping insurance. What? Yes, they need insurance to protect them against the junketeers using their rooms to hold people while they extort money from their families in China. The junketeers have been routinely loaning money to gamblers and then holding them hostage until it was paid back.

The junket system lets companies or individuals loan credit to gamblers, mainly VIPs, on behalf of Macau’s casinos. Reuters, 9-21-15

In December 2011, I wrote a piece on this subject. In that piece, I used an academic study that found loan sharking, extortion and organized crime characterized the underside of the apparent prosperity in Macau. To help make my point, I used the following quote from the Motley Fool:

The Fool wonders what will happen with new currency regulation in China that may lead the gamblers to take their money some place outside of the Chinese government’s sphere of influence. The Fool sees two reasons for concern about Macau’s future; the government wants the winnings to come back to China and is tightening the noose; second it is thought that most of really big players are playing with stolen money – much of it stolen from government sources – the rest from major corporations. Both of which would like to stop the thefts and put the thieves in jail. Motley Fool, 2011

As far as I can see, that analysis is as relevant today as it was then. The VIP system is left over from the organized crime, Stanley Ho-monopoly, pre-Mainland-takeover times and it appears to be running out of steam. The head of Las Vegas Sands for Macau, says the VIP market is gone, done, over. He thinks that the model is broken; I could not agree more.

Rob Goldstein, president and chief operating officer of Las Vegas Sands Corp, parent of Macau casino operator Sands China Ltd, was responding to questions during the Bank of America Merrill Lynch 2015 Gaming and Lodging Conference for investors, held in New York. “I don’t have a lot of confidence in the VIP [segment in Macau] because I think the junket model – for now – is broken,” said Mr Goldstein. Gross Gaming Revenue Asia, 9-10-15

It was always a very fragile model. It depended on third party junket operators bringing in high-rollers and inducing them to play – a lot. Those high rollers were for the most part men obtaining large amounts of money in very suspect ways, like taking bribes, embezzling or extortion. It has taken Wynn, Adelson, Packer and MGM ten years to realize it was a flawed model. No one wanted to look behind the curtain as long as the money was rolling in. Now, the government and the casino operators are trying to concentrate on mass market gamblers, average Chinese citizens out for a lark. It will take a long time and millions upon millions of those average Chinese tourists to make up for the VIPs now sitting in jail or hiding under a bed. The junket system is a failed system; it took Wynn’s buddy getting hacked to fully expose its flaws.

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