16 September 2019
Thanks to its burgeoning gambling business, Macau is now the world's fourth-wealthiest territory per person according to the Financial Times. But casino stakeholders may be caught off-guard by efforts to crack down on money laundering. Photo: WordPre
Thanks to its burgeoning gambling business, Macau is now the world's fourth-wealthiest territory per person according to the Financial Times. But casino stakeholders may be caught off-guard by efforts to crack down on money laundering. Photo: WordPre

Losing game: Storm looms for Macau dirty money dodges

A visit from the taxman is enough to strike fear into most and those in Macau are no exceptions. Shivers went through the gambling capital when reports surfaced that US Internal Revenue Service agents dropped by the enclave on a reconnaissance mission. 

Adam Steiner, the IRS criminal enforcement unit’s senior agent, reportedly spoke about the trip at a closed-door conference in Las Vegas last month. Steiner’s visit has been seen as a reflection of serious official US interest in the staggering amounts of money flowing through the grand casinos in this tiny former Portuguese colony. Some believe that the US authorities are concerned that dirty money washed clean in Macau is ending up on US financial shores. That idea is in line with Macau’s special mention this year in the US State Department’s annual report on money laundering.

It’s all troubling news for various gambling stakeholders in Macau and comes after the controversial Foreign Account Tax Compliance Act took effect this month, granting the IRS the right to investigate the tax compliance of US citizens, wherever they live in the world. This is on top of a slew of agreements so far reached by the IRS with tax watchdogs in 85 countries on bilateral notification mechanism to exchange information on bank accounts of their respective citizens. China’s State Administration of Taxation reportedly agreed to a similar tax compliance deal with the IRS late last month.

This is anything but good news for some of the 29 million gamblers flocking to Macau each year, some of whom are mainlanders with US green cards and betting large sums in luxury private lounges.

On the surface, the IRS’s moves target tax evasion, but wherever there is tax dodging there is usually money laundering. It is especially the case in Macau where many companies have set up offshore branches to trim tax costs as firms in traditional tax havens like the Virgin Islands and the Cayman Islands have come under scrutiny. Macau’s free flow of capital, low operation costs and tax breaks to diversify development are added incentives for these firms, Central News Agency reports.

Yet, some of the firms can become money-laundering vehicles with the help of middlemen from the gambling business, an officer from Macau’s Gaming Inspection and Coordination Bureau told Southern Weekend. This coincides with reports that Beijing sent investigators to the special administrative region late last year to look into the activities of betting agents — many of which are said to have stakes in these offshore firms.

The Hong Kong Economic Journal, EJ Insight’s parent publication, reports that betting agents can channel a bribe or other dirty money to Macau through these firms, allowing mainland officials to “win” big in their private lounges and thus legitimately pocket their gains in Hong Kong dollars as casino wins. Since there is no restriction on the flow of Hong Kong dollars, the laundered money then goes into bank accounts in Hong Kong or other overseas destinations like the US.

CK Tam, professor at Macau University of Science and Technology, estimates that up to 10 trillion Macau patacas (US$1.25 trillion) has been laundered via Macau casinos since the 1999 handover.

Before the IRS move, Beijing had already begun to combat money laundering as part of its renewed anti-corruption drive. It banned mainland cadres from visiting Macau more than four times a year and cut individual stays in the enclave from seven days to five. China UnionPay also has stopped installing point-of-sale devices inside casinos this month amid reports that one-fifth of the HK$200 billion (US$25.81 billion) in annual transactions through UnionPay POS devices in Macau are “suspicious”. Credit card payment is a well-trodden workaround to circumvent rules restricting capital outflow from the mainland — firms and individuals can buy expensive items from luxury stores using UnionPay cards and then sell them for cash.

The growth of Macau’s revenue from gambling has been robust — from US$33.6 billion in 2011 to US$44.3 billion last year, according to its gaming inspection bureau. But Beijing’s crackdown on ostentation and graft has already dented momentum since the end of last year. Now, with the IRS’s involvement in anti-money-laundering undertakings in the territory, the headwinds are getting stronger.

Deutsche Bank has warned that the EBITDA of many casino plays could drop by 5-9 percent in the second quarter compared with the first three months. HSBC also notes that Macau’s gambling income from VIP lounges will drop by 16 percent in the second quarter on a quarterly basis.

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Luxurious private lounges that cater to mainland cadres and businessmen are cash cows for casino operators but can be vital channels for money laundering. Photo: HKEJ

EJ Insight writer