Where’s the Money?
Speculation about the scale of side-betting in Macau defies common senseSunday, 01 May 2011
Could Macau have generated US$50 billion in actual VIP baccarat revenue in the first quarter of 2011? If it did, where did all the money go?
Macau’s official VIP baccarat revenue surged 48.0% year on year in the quarter to 42.6 billlion patacas (US$5.3 billion). The growth in VIP baccarat revenue outpaced growth of overall casino revenue, which jumped 42.9% year on year to 58.5 billion patacas. VIP baccarat accounted for 72.7% of total revenue in Q1 2011.
It is widely acknowledged not all VIP baccarat action is captured by the official figures, however, and at least some degree of illegal side-betting takes place in Macau. Where consensus diverges is on the scale and prevalence of side-betting.
According to the US Department of State’s International Narcotics Control Strategy Report 2011, illegal side-betting in Macau’s VIP rooms could be ten times greater than the reported revenues.
There are many good, practical reasons for side-betting to exist and to thrive in the sometimes dark world of Macau’s VIP sector. Side-betting is in essence a private arrangement between junket agents and their customers, governing the size of the bets placed. Most commonly, it occurs in two basic forms, with essentially the same outcome.
The first is when the agent agrees with players that whatever the value of chips placed on the table, the real ante is multiplied by an agreed number. For example, if the customer placed a HK$1,000 bet and the agreed multiplier is 10, then the ‘real’ bet is HK$10,000.
The second common form of side-betting is when it’s agreed that the ‘real’ bet is denominated in a different currency to that of the actual chips placed. For example, the customer places a HK$1,000 chip on the table, but agrees with the junket operator that the bet is in reality denominated in US dollars, so the ‘real’ bet is US$1,000, which represents a multiplier of 7.8 times.
Such arrangements appear particularly convenient because the majority of junket customers in Macau hail from mainland China and do not—and in any case cannot—bring money with them to play, and instead rely on credit extended by junket agents. When a customer requests HK$1 million credit, the junket agent can merely request the casino provide HK$100,000 worth of chips, with the implicit understanding between the junket agent and customer that a ten times multiplier is in effect. Where side-betting involves a ten times multiplier, the result is that the government and casino licensee’s share of revenue is reduced to a tenth of what it should be. That means the government is getting only around 4% of the ‘real’ gross, rather than 40%, as tax.
Gauging the disavowed
It’s pretty much impossible to get an accurate picture of just how much side-betting takes place in Macau. Those directly taking part—junkets and VIP players—obviously deny their involvement. Casino operators may be able to hazard a reasonable guess, but won’t acknowledge illegal activity takes place on their premises. The local gaming regulator, meanwhile, in response to the most recent claim of side-betting in Macau, reaffirmed its strict supervision of all gaming activities in the city.
Thus, when the US Department of State says “observers note that the amount of unreported illegal side-betting could be as much as ten times” the reported figure, it’s hard not to question how well informed those ‘observers’ could be. On 22nd March, Stephen Young, the US consul general for Hong Kong and Macau, conceded to Macau media the claim was “just speculation or a guess.” Mr Young added, though: “I’m prepared to believe that there is a lot of stuff going on.”
Inside Asian Gaming does not claim to be better placed than the US Department of State’s observers, but in an attempt to better gauge the scale of side-betting, we talked to several casino and junket contacts, and ‘impartial’ analysts and industry sources, promising all of them strict anonymity. None denied the existence of side-betting, but the top end of estimates provided by what we believe to be the most reliable sources was that side-betting accounted for at most 10% of reported VIP revenue.
Of course, our estimate of the scale of side-betting is as unsubstantiated as the 100-times-greater estimate offered in the International Narcotics Control Strategy Report. Our sources did offer some common sense observations and supporting anecdotes to support their assertions, however.
There is a relatively large number of VIP players around Macau who regularly bet the maximum of around US$125,000-250,000 per hand of baccarat. Common sense would dictate even Asia’s biggest whales do not have the appetite to bet several times such amounts per hand for six hours or more a day for several days.
Then there’s the question of volatility. If side-betting were equivalent to several times the reported revenue figure, one unlucky month at the hand of a few big players betting at a ten times multiple would likely break the bank of all but the biggest junket operators (who would be effectively running parallel casinos several times the size of the publicly-listed ones they operate inside). Side-betting would also likely multiply junkets’ bad debt issues. Whereas players commonly lose US$5-10 million on trips to Macau, there are only a handful of players in the world who could handle gambling debts of US$50-100 million.
Side-betting also multiplies the potential gains from cheating the junkets, as well as the potential shares offered to accomplices among the casinos’ or junkets’ staff. In the Autumn of 2009, four men were convicted by a Hong Kong jury of a conspiracy to commit bodily harm and a fifth of soliciting murder. According to court records, the men had, at first, been ordered to break the arms and legs of a dealer at a Macau casino suspected of helping a player cheat millions of dollars from a junket. Later, a call went out to murder the dealer, but then one of the men baulked and reported the plans to authorities. IAG’s sources suggest the cheating in question was carried out by a player who was side-betting.
Assuming for a moment that Macau’s junkets are indeed operating massive parallel casinos, and can stomach the inherent volatility and collect their debts, they would be earning enormous tax-free revenues (even while giving some back as higher commissions to players). In that case, they must be a lot more powerful than they appear. It could lend credence to the idea that they are capable of moving and concealing huge sums of money.
That sounds like the makings of a great conspiracy theory.