Government Investment News Analysis Reforms

A high-stakes game

Philippines gaming sector
Philippines gaming sector

If there’s any truth in the superstition, ‘bad things happen in threes,’ the Philippine casino sector must be wondering what’s coming next. In the space of the past 16 months it’s been rocked by two huge calamities – the theatrically sounding “Bangladesh Bank heist” in February last year and the tragic bungled robbery one week ago that turned Resorts World Manila into a blazing death trap. Both these events have shaken the foundations of the country’s gaming industry. Another blow on the scale of either could set it back years.

Briefly, in the first of these crimes, US$81 million of a US$101 million haul – extracted from Bangladesh’s central bank by hackers using Dridex malware – was routed through five fictitious accounts at the Rizal Commercial Banking Corporation (RCBC) in the Philippines, ending up in local casinos. In the second, 37 guests and staff at Resort World Manila died when a gambling addict attempted to rob the casino after setting fire to tables and chairs in the main gaming hall. The tools of his trade was an Armalite rifle and 2 litres of petrol.

So, two very different crimes – one sophisticated where casinos were participants, the other extremely crude in which a casino was the an unwitting accomplice. Both, however, made headlines around the world and left a dark impression about the state of the casino business in the Philippines.

Around US$15 million of the Bangladeshi haul was recovered from a Filipino-Chinese casino boss and junket promoter, further feeding long-held suspicions that the industry has links to organised crime. And the fact that a desperate armed robber could wander off the street into the gaming hall of Manila’s largest casino and cause such devastation and loss of life has raised the spectre of something approaching criminally bad security and the notion that the authorities have been playing Russian roulette with fire-safety regulations.

Certainly as far as the gambling community – local and overseas – is concerned, what happened at Resorts World will be the more damaging of these incidents to the Philippines’ casino business. Personal security for gamblers comes ahead of any other consideration; they’ll even put up with unfavourable house odds at the gaming tables if they have to, but they won’t have their safety compromised.

Combined, what these events have done is to make Manila’s gambling sector look like a clumsy throw back to the mob era of Las Vegas in the late 1940s and 1950s. And that’s just about the last thing it needs. Manila is the new kid on the block; the hope has been that it would grow this industry quickly to test the likes of Macau, from where a number of Philippine casino operators have come.

Right now, it’s a long way off making any real challenge to the world’s biggest casino colony: at present, the Philippines annually generates around US$3 billion from gambling; in Macau that’s just over a month’s takings. Last year, Las Vegas and environs drew in US$25 billion according to the Nevada Gaming Control Board; South Korea went over US$17 billion. Even tiny Singapore which operates just two casinos managed revenues of US$4 billion in 2016.

In other words, the Philippine gaming sector is already up against it as far as drawing in high-rollers – the demographic which is ultimately the key to success. Being additionally handicapped by security concerns and the less-than-savoury implication of being gangland sponsored – with all the images which that conjures up – will make it extremely difficult for the government to promote the industry to overseas investors.

The next challenge is likely to come from Japan. Last December, the Japanese parliament, the National Diet, passed legislation that opens the way for a gaming industry – hitherto forbidden – an industry that’s estimated could bring in US$30 billion a year if the plan goes nationwide.

And there’s already huge interest. Sheldon Anderson, founder of Las Vegas Sands, has earmarked US$10 billion to establish an integrated resort in Japan; Macau casino boss, Lawrence Ho who owns – among other things – the City of Dreams casino resort in Manila, has said he’ll spend “whatever it takes” to get a Japan gaming licence. Three other large Vegas operators – MGM Resorts International, Steve Wynn’s Wynn Resorts and Caesars Entertainment Corp – have also expressed early interest in what could turn out to be a Japan-style gold rush.

The Philippine Government knows the casino industry needs to clean up its act – and quickly; resort gaming and entertainment complexes are seen as a major pull to attract foreign visitors and provide a much needed shot in the arm for the country’s lacklustre tourism industry.

But gaming in the Philippines is dogged by problems. According to the National Bureau of Investigation, for example, the Philippines is home to some 6,000 illegal gambling operators. The problem of casinos being used as launderettes to wash dirty money is wide spread and is believed to have helped finance the full gamut of illegal activities including piracy and terrorism.

Later this month, Philippine President Rodrigo Duterte is expected to sign into law an amendment to the 2001 Anti-Money Laundering (AML) Act tol bring casinos into line with banks, forex dealers, money changers and pawn shops. This provision was left off amendments made to the Act in 2013 when Congress scrambled to comply with a deadline imposed by the 41 countries of the Asia Pacific Group on Money Laundering – a member organisation of the Paris based Financial Action Task Force (FATF) – to strengthen its laws.

The chances are, if the Philippines hadn’t included casinos this time around it would have ended up on the FATF ‘blacklist’. This wouldn’t simply result in detering investors to the sector, it would make it difficult for Filipinos remitting money home and hamper local banks from transacting foreign business. The FATF has been calling on the Philippines to deal with the “deficiencies” in its anti-money-laundering laws for some time. It seems it’s finally running out of patience.

Certainly this is a welcome reform; but the Act still doesn’t go far enough and leaves the Philippines looking like it’s being dragged kicking and screaming to comply with international standards that seek to crack down on organised crime and the funding of global terrorism – something that should be of particular interest to Manila following the upsurge of Islamist activity in the south of the country.

Here’s one major weakness of the amended Act. The new provisions require bets (including accumulative bets) of US$100,500 and above to be reported to an AML agency – in other words bets of US$100,499 can still pass through the casino laundry without being flagged. That’s the equivalent of PHP4.98 million and change. Do that seven nights a week in 10 casinos and you’ve just washed PHP84.66 million; over a month that’s a clean PHP1.49 billion.

Meanwhile, the gaming facilities at Resorts World Manila remain closed as police investigate possible security lapses and whether the company’s management should be held responsible. At the same time, the fire services are completing their report on the incident; checking whether the fire code was violated and whether the sprinkler system was working at the time of the attack.

Immediately following the fire, the Department of Justice made one conclusion: that a decision by the previous administration to allow establishments registered to the Philippine Economic Zone Authority – which Resorts World is – to forgo fire certificates from the Bureau of Fire Protection showed an appalling lack of judgement. The DOJ has now reversed that decision.

But paying lip-service to the global anti-money-laundering effort, and closing the stable door after the horse has bolted will do little to appease investor and high-roller concerns about the fitness of Philippine gaming. We’re not talking about locals gathering for a cock fight in a country barn somewhere; we’re talking about high-net-worth individuals who cross continents to place huge bets on the turn of a card – the very lifeblood of casinos.

And they’re not going to go to a place where there’s a chance – whatever the odds – that they’ll get shot, set on fire or be suspected of being a bagman for the mob. That doesn’t happen to them in Las Vegas or Macau and they’ll make sure to avoid anywhere that it’s even a possibility.

Few would disagree that a healthy gambling sector would be a blessing for the Philippine economy – it certainly has been for Macau. Gross domestic product per capita on a purchasing power parity basis there in 1997 – the year before the Portuguese enclave reverted back to China which promptly broke the casino monopoly system and opened it up to foreign players – was US$16,199. In 2015 it stood at US$102,600.

But that didn’t happen on the back of skimpy anti-money-laundering provisions. Last year, Macau further tightened its regulations to include keeping daily records of transactions and hiring compliance officers, as well as putting in place greater due diligence and more pre-emptive measures. These are on top of its 2006 code which already put Manila’s regulations to shame. Nor did it throw the dice with guests’ safety.

This then is the universe that the Philippine casino industry finds itself. And if it can’t come up to scratch, there’s a good chance that investors and high-stakes players will be scratching it from their list of potential investments or as a place to go and play cards.

Furthermore, anti-money-laundering regulations are likely to be stiffened further in the future – they’re not going to be relaxed. Thus the Philippines which is still playing catch up with them is in danger of falling even further behind. And if that happens and the FATF blacklists the Philippines, the House looses big time.

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