Junkets Hit Hard as House of Cards Fall Down in Macau


Junkets first became popular in Macau thanks to a now obsolete law prohibiting casinos from lending money.

Macau’s gambling industry continues its steady stream of decline with Macau’s fourth quarter VIP revenue down 29% and mass market revenue down 16%. And who or what is responsible for this slide? Speculations are that on the one hand, it could be the Chinese government clampdown on illegal activities in Macau. On the other hand, it could be the Macanese police force itself.

News on the implementation of Macau mainland banking scheme, a casino exec mixed up in a big prostitution ring bust and mainland China meeting with Macanese regulators, all made headlines this week, in the never-ending Macau casinos saga.

$50 million in profits from prostitution ring that has been dissolved

Just last week, police in Macau swooped down on Alan Ho, a senior executive at SJM Holdings’ former flagship Hotel Lisboa and arrested him. The nephew of the gaming mogul, Stanley Ho, now quite ill, was linked to an extensive prostitution ring.

The ring generated around $50 million in benefits including a US$18,750 in membership fee. With an ongoing investigation involving the Macau-Guangdong province investigation that dates back to 2 years ago it was able to put an end to solicitations. Indeed prostitution is not illegal but associated activities, such solicitation, are.

Although Ho’s arrest may cause shame in the casino industry in Macau and a reluctance of high rollers to play, for fear of police closing in on them too, the Chinese government anti-corruption campaign and having a top executive with a famous name busted at a landmark hotel is an embarrassment for all involved, is taking a toll on Macau’s leading gambling industry.

Junkets’ demise on the rise as money flow corked

David Group, a leading junket operating group in Macau, with an estimated market share of 3.5% is losing big money because its high rolling clients are on decline. The group, which was formed in 2004 was hit by decline in overall VIP junket revenue, amounting to over $3.25 billion in 2014, thus felling one of the top ten best junket promoters in Macau.

According to Kenneth Fong and Isis Wong, analysts, the David group closed its VIP rooms in Venetian Macao and City of Dreams, during Q3, 2014 grinding business almost to a halt. To date though, it continues to operate its fifty eight tables with VIP wagers amounting to $25 billion.

• Macau the casinos top conduit for capital flight from mainland
• Chinese officials meet with Macanese regulators this week
• Money from mainland China to Macau’s VIP tables was $1 trillion in 2014

For high rollers from mainland China, the importance of junkets in Macau cannot be overemphasized. Junkets help them to beat the system by allowing them to place more than the regulated $3,200 to be transferred abroad. Furthermore, casinos still prefer to outsource player lending to junkets and let them worry about collections.

Junkets collect money from players in renminbi and provide Hong Kong dollar valued chips to be used in Macanese Poker rooms, and lends money to its casino’s clients. This is because casinos cannot directly collect gambling debts directly from mainland players but players can borrow credits through junkets.

Since junket operations are prohibited in countries like Singapore, casino operators there are unable to recuperate $1.8 billion worth of debts from gamblers. Today Macau’s VIP revenue stands at only $26.6 billion even though it had hit at an all-time low of $4.75 billion before, in February 2014.

Credit Suisse says junket consolidation will play an important role in the survival of Macanese land-based and mobile casinos in 2015. So unless middle junkets such as David ups VIP revenue it will be a stand-off with no credits to players, therefore fewer players, which will result in less revenue for Macau’ s casinos.

Why isn’t money going in to infrastructure improvement in Macau? critics ask

However, although it is true that that President Xi Jinping is clamping down on scrupulousness in Macau, it would not be in the best interest of the Chinese government to allow Macau and its casino industry to fall like a house of cards.

Mainland government seems displeased with Fernando Chiu’s part of the ‘one country, two systems’ government in Macau. As the Chief Executive of Macau, serving his second five year term tenure, Chiu has done little to develop the island except bringing in more casinos. His government, under Macanese gambling law, recently gave six new licenses to have casino resorts built.

However, critics are outraged that no economic diversification is happening nor is Macau’s infrastructure improving, nor are more health care services or public houses being constructed. And that’s considered a shame for the world’s leading gambling island, in spite of the huge fiscal reserves.

Macau and China docs show fake sale cash-backs are widespread

But it’s little wonder that VIP and other gamblers are getting cold feet though. Currently, with the mainland banking surveillance being implemented, this will mean that money being transferred to Macau mainland’s UnionPay system is under close watch. This, in a bid to curb illegal money transfers.

However some have already outwitted the system through the merchandise-for-cash program. Just buying let’s say an expensive piece of jewelry or other items through UnionPay, then selling the item for cash for more than the allowed mainland currency limit, is one way.

This seemingly harmless piece of transaction could mean tens of billions of dollars flowing into Macau but it is still not enough to add up to the to the hundreds of billions that junkets are used to handling daily.

As the goal is to crack down on illegal money transfers through UnionPay, which encompasses ATM, debit and credit card functions, junkets are at risk. There is no denying that Macau’s multibillion-dollar casino industry relies on them as does Macau, that is, until Chiu diversifies.

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