The arrest in China of Australians working for billionaire James Packer’s Crown Resorts could be a further signal about the level of alarm among Chinese authorities about the flow of cash to foreign casinos.
China has a problem with money fleeing the country. In recent years, there have been huge outflows of capital – the dividends of two decades of stunning economic growth – seeking safe havens such as property investments in Australia and Canada.
For years, China’s currency was allowed to strengthen against international currencies. But in the second half of last year, China started allowing the yuan to weaken against a basket of global currencies. This adds an extra incentive for wealthy Chinese to find ways of getting their money out of the country.
Between early 2014 and mid 2015, $US450 billion of private money left China, according to the Reserve Bank of Australia.
In Macau, the Chinese territory where casinos are allowed and where Crown’s resort is located, authorities have been active trying to stop money being washed through the casinos.
Macau has the largest exposure in the world to money laundering, according to Global Risk and Investigations at FTI Consulting. China’s Ministry of Public Security has an operation called Chain Break aimed at disrupting the flow of money from China to foreign casinos. Among the targets are scouts who identify potential high rollers in China.
Crown’s presence in Macau no doubt helps it to attract whales, VIP high rollers with deep pockets, to Australia. These customers are traditionally offered incentives, including free travel and luxury accommodation. (Note: there is no suggestion of any money laundering activity at Crown operations anywhere.)
The arrests could disrupt that lucrative market for Crown, cutting earnings and profits, according to analysis by CLSA, the broker and investment house based in Hong Kong.
The 18 Crown Resorts staff detained, including three Australians, were understood to be on the sales and marketing side of the business. They were picked up in various cities across China.
Among those arrested is Jason O’Connor, the head of VIP International at Crown. The company has been contacted for comment.
Crown, in a statement earlier today to the ASX, said it hadn’t been able to speak with its employees and was working closely with Australia’s Department of Foreign Affairs and Trade.
Its shares were down 10% today to $11.63 on news of the arrests. Other stock exchange listed players also suffered. On the Hong Kong exchange, Wynn Macau Ltd was down 3.7%, MGM China 2.7%, Sands China 3%, Galaxy Entertainment 3.7% and SJM 2.8%.
Advertising casinos is unlawful in China and the Crown staff would have been promoting the resort side of the business rather than the gambling opportunities. Still, the Chinese may argue about the distinction between the two.
Luring Chinese to gamble
According to the South China Morning Post, Chinese police last year arrested 13 South Korean casino managers and several Chinese agents suspected of luring people from China to gamble in South Korea.
Sacha Krien, a senior media and gaming analyst at CLSA, says it’s not yet clear why the Crown staff have been detained.
“It might be a crackdown on marketing (same as Korea) but Crown has always differentiated its marketing activities from the Korean operators that got into trouble,” says Krien.
“So it could signal a broader crackdown on foreign casinos marketing in China.”
Krien says the risk of this latest action is that it may impact the willingness of VIP players to visit Australia.
“And potentially Melco Crown (the Macau arm of Crown) given the clear association with Crown (in Australia),” Krien says.
“In which case the earnings impact for Crown in particular, and all operators, could be greater.”
Impact on profit
CLSA estimates that if 100% of direct business from China disappeared, and was not replaced, Crown’s EBITDA (earnings before interest, taxes, depreciation, and amortisation) would fall 6% and net profit after tax about 10%.
Star Entertainment, the other ASX-listed Australian casino company, would also be drawn into a crackdown. CLSA estimates Star EBITDA would fall 3% and net profit after tax about 5%.
Gambling has been illegal in China since the Communist revolution. Dr David Chaikin, an associate professor in business law at the University of Sydney, says the move by China could well be the Chinese government sending a warning to casinos.
“We have a history of Australia trying to compete for Chinese high rollers,” he told Business Insider.
“Gambling is not just [prohibited in China], it’s a crime. They used to send people away to re-education camps.
“It’s likely they (China) are sending a message. It’s not unexpected. We are trying to pitch ourselves, selling gambling services to Chinese.
“What do we expect when that is illegal and a serious crime?”
The general crackdown has already crushed Crown’s earnings out of Macau but this is the first big step by China to stop casino marketing on the mainland.
Not normal arrests
Crown is being split to isolate the struggling Macau casino holdings and break free the cash machine of the Australian casinos and associated property holdings.
Chaikin argues that these arrests aren’t normal.
“They are doing this for strategic reasons. It’s not just another arrest. I presume they could have arrested lots of other people if they wanted to,” he says.
A spokesperson for the Department of Foreign Affairs and Trade said Chinese authorities had three days in which to notify of the detention of Australians according to the terms of a bilateral consular treaty.
“Consular officials will seek to offer appropriate consular assistance to the detained Australians in accordance with the Consular Services Charter,” the spokesman says.