Member Articles

2008

The Explosive but Sporadic Growth of Gamling in Asia
by Professor I Nelson Rose

Gambling and the Law®

The explosion of legal gaming which is sweeping the planet has finally reached Asia and the Pacific.  But it is developing in ways that are idiosyncratic.  In Europe, virtually every nation has the same thing:  casinos dominated by blackjack, roulette and slot machines; a state lottery, with sports betting; low-limit gaming devices in bars; parimutuel betting on horseracing; and charity games, often bingo.  For European operators, the differences are significant, since they concern issues such as tax rates and who may be granted a license.  But government policy in Asia ranges from complete prohibitions of all forms, to legalization of some gambling, to efforts to out-casino Las Vegas.
The differences are due, in part, to the divergence in local culture and the forms and philosophies of the governments involved.  You would not expect North Korea to treat gambling the same as the Philippines.  But, the differences are primarily the result of historic accidents.

Legal gambling goes through cycles.  When all gambling is illegal, the legalization phase usually begins with a breakthrough of some form that is considered innocuous.  Often this is social gambling and low-stakes games for charity, which are either expressly made legal or often simply tolerated.  In the English- and Spanish- speaking countries and Europe, this is commonly bingo.  In China and Hong Kong, it was mahjong. 

Today, by local ordinance, mahjong played for money is legal in Hong Kong.  In places like Zhuhai in southern China, there are signs on hotel saying that rooms for mahjong are available to rent by the hour.

A second breakthrough comes from the state operating its own lottery.  These have come and gone for centuries.  But even the most totalitarian regime will sometimes allow the traditional form, with paper tickets and once a week drawings.  China, which purports to have no legal gambling, actually has authorized three lotteries for years, with tickets for sale from street booths – the China Welfare Lottery is the sixth largest in the world, with sales in 2007 of US$8.3 billion, and the China Sports Lottery is tenth, with sales of US$5.1 billion.

A third form of wagering which has been tolerated historically is betting on horseraces.  This was not seen as a problem when it was mainly for the rich, who could afford to own a horse or just to take a day off to go to the racetrack to make a bet.  The invention of the telegraph, telephone and parimutuel machine in the 19th century led to new laws against bookmaking.

So, the recent expansion of gambling often comes against a background of small-stakes social and charity games, a state lottery and racetracks.  This has been as true in Asia as in the rest of the world.  But local customs and history have created situations unlike anything seen in the rest of the world.

Japan today has racetracks and one of the largest lotteries in the world.  It also has more slot machines than any other country, except they are not technically slot machines, but rather pachislo machines.  Physically indistinguishable from video slot machines, these now out-gross the more traditional pachinko machines, which also have gone hi-tech.   These gaming devices are technically legal because they do not pay out in cash.  Winners are paid in tokens and merchandise.  There is always a convenient window nearby; in one parlor I visited in Osaka, it was literally a hole in the back wall of the building.  Here, winning players can redeem their prizes for cash. The payoff is by a company that is supposedly independent from the parlor operator.   Experts agree that at least this part of the operation is controlled by organized crime.

Gambling spreads when governments finds it difficult to argue morality, when the state itself is selling lottery tickets, licensing horseracing and at least tacitly endorsing social and charity games.  Technology also plays a role, allowing off-track betting on horseraces and lotteries to move from paper tickets to online wagers, including cell phones.

But the major impetus for expansion is usually the legalization of a more attractive form of gambling in a nearby jurisdiction.  The sight of all that disposable income, some from a state’s own citizens, going across the border to another state, does more than anything else to weaken even anti-gambling lawmakers.  No one would have predicted ten years ago that Singapore would be the next great casino market.  And it would not be, if Macau, itself the result of a historic accident, had not shown how successful Las Vegas-style casinos can be.

It is doubtful whether the central planners of the People's Republic of China would have intentionally created places like Macau and Hong Kong.  Macau always had casinos under the Portugese.  Hong Kong developed the world's largest racetrack, in terms of money wagered, under the British.  On the mainland, on the other hand, gambling has been, and still is, one of the sins that can be punished by the death penalty.

Hong Kong became a Special Administrative Region of China in 1997, Macau in 1999.  But the PRC pledged it would allow the capitalist systems there to continue.

When Portugal controlled Macau, a company owned by one of the richest men in the world, Stanley Ho, had a monopoly on casinos.  As with all monopolies, the restriction on casinos to one company severely constrained the industry's growth.  But three years after the turnover, the new rulers of Macau decided to issue more casino licenses and put them out to bid.  This opened the door to foreign operators, and, more importantly, foreign money.
Unlike American casinos, the majority of gaming revenue came from table games.  Traditional Chinese beliefs give the number nine great importance, so the domino game of pai gow, which translates as “make nine,” and particularly the card game of baccarat, are of overwhelming importance, rather than slot machines. 

The attraction was how much those tables made:  Ho's 340 tables won on average approximately US$10 million a year.  Las Vegas' gaming table win only about $730,000.  Stanley Ho’s 11 casinos had revenue of approximately US$3.5 a year; at least that was the amount reported officially.  And this was before the PRC more fully opened its border.

When the numbers for 2005 were counted, Macau surpassed the Las Vegas Strip in casino revenue, making it the number one casino market in the world.  And many more casinos are being built.  This would not have been possible if the PRC had not dropped its travel restrictions, allowing its residents to travel there without being part of a tour group.  The exit and entry point between Zhuhai and Macau has become one of the busiest border crossings in the world.  There are hundreds of millions of China's rising middle class who now have the money to spend on shopping and gambling, as well as visitors from Taiwan, Thailand and Hong Kong.

Stanley Ho did win one of the three new casino licenses, but so did Steve Wynn and a Hong Kong group that issued a sublicense to another American, Sheldon G. Adelson, owner of the Venetian in Las Vegas.  In May, 2004, Adelson, aided by his on-site top executives, including VP and General Counsel Thomas Smock, opened the Sands, the first new casino in Macau in 40 years.

The Sands is a magnificent, western-style casino.  Part of its enormous success has been the willingness of its management to test, and where necessary, to disregard accepted wisdom.  For example, it was said that Asian gamblers would not play slot machines.  They didn't in Stanley Ho's casinos.  Of course, these were often isolated to grimy back corners.  The Sands installed a few video poker machines.  The devices have proven so popular that the casino has ordered hundreds more.
A string of casinos is being built in Macau, on the Cotai Strip, intentionally designed to conjure up comparisons with the Las Vegas strip.  Laws have had to be changed.  For example, the traditional Macau casino was nothing more than a room with table games.  It made sense to keep out minors at the door.  But hotel casinos have restaurants, shows and gamblers who bring their children.  Legislation is necessary to let minors enter the buildings.

The biggest problems for operators like Adelson and Wynn are the strict Nevada laws, which forbid them to be associated in any way with illegal activities, especially organized crime.  But the laws and traditions of Macau's casinos were originally built around institutionalized corruption and hidden control by triads.  When Ho's Sociedade de Turismo e Divorsoes de Macau ("STDM") bought the casino monopoly in 1962, it was a small industry offering only Chinese games.  It took off when a complicated system of junkets, private rooms and credit developed, involving individuals who, to put it politely, would never meet Nevada's standards for licensing.  The STDM leased gaming rooms to outside operators, who were required to buy from STDM large quantities of "dead chips," special non-negotiable gambling chips good only in these private rooms.  Dead chips function as a form of black-market currency, allowing players easy access to credit.  It was estimated that 70 percent of STDM's table revenue involved these dead chips.

Wynn and Adelson would have immediately lost their Nevada licenses if they had had anything to do with organized crime.  On the other hand, an operator who cannot extend credit is at a distinct disadvantage to one who can.  Plus, the private rooms catered to Chinese high-rollers, who love the special privileges and sometimes extravagant amenities.  Wynn forced Macau to change its law, when he refused to begin construction of his massive hotel-casino project until the Macau government allowed casinos to also issue credit to players.

The PRC is committed to aiding the growth of the casinos in Macau and sports and race betting (and shopping) in Hong Kong.  China hopes to have the best of both worlds.  It can get all the jobs, tax revenue and economic growth from legal gambling, while keeping it somewhat isolated in its remoter regions of Hong Kong and Macau.

The government has even allowed an Institute for the Study of Commercial Gaming to be set up at the University of Macau.  Jason Zhicheng Gao, a noted professor and expert poker player from Canada, was recruited as the organizations's first director.  The University has organized academic conferences on gaming with such institutions as the Osaka University of Commerce, headed by Ichiro Tanioa, a world champion go player and internationally recognized expert on gambling.  The cross-fertilization has helped make discussions of legal gambling respectable, easing acceptance by lawmakers.  If Japan ever legalizes casinos, it will be because of the work of Tanioa.

The Hong Kong SAR has not ignored the tremendous amounts of money legal gambling can bring in.  The Hong Kong Jockey Club is Hong Kong's largest taxpayer, but turnover has fallen more than 30% since 1997.  So the Club was allowed to take bets on soccer in August 2003.  For its first 11 months, it reported a handle of HK$16.1 billion (US$2.06 billion) and a gross profit of HK$3.3 billion (US$423 million).  I don’t know of another sports book in the world that makes 20% on more than $2 billion in bets on all events, let alone on only one sport.

Gambling is legalized for different reasons.  Usually, the argument is that people are going to gamble anyway, so better that the games be controlled and taxed rather than run by organized crime.  Casinos are often seen as a way to help the local tourist industry, while lotteries are viewed as a painless, voluntary tax.  The dangers created by legal gambling, especially to vulnerable individuals such as children and compulsive gamblers, but even to the average member of a society, is often addressed, unfortunately by lawmakers who know nothing about gambling.

When a government legalizes a form of gambling it often engages in attempts at social engineering.  Since gambling brings social problems as well as money, legislators create restrictions that they think will work, with no scientific studies to back up the proposals.

So, in South Korea, almost all casinos are restricted to foreigners.  This sounded like a good idea:  import foreigners' money and export the social problems.  But visitors today have many choices, outside of South Korea, to gamble.  And since the casinos are often difficult to reach, almost no foreigners make the effort.  So these are economic disasters.  Only when the government allows local citizens to play, do the casinos actually make money.

Vietnam took this modal to the extreme.  A casino was authorized for a remote northern village.  A traveler fording many miles along a muddy road would find that he is the only foreign tourist who has actually been attracted.  Since locals are not allowed to gambling, the casino stands empty.  But Vietnam is also considering billion US dollar resort hotel casinos, to compete against Macau.

One danger for the industry is that governments always get greedy.  There is a general feeling that people should not really be spending their money on gambling anyway – sin taxes are always the easiest to raise – and that there is an endless supply of cash resulting in outrageous profits, which operators should be forced to disgorge.  This last is really a misconception based on the fact that we are coming out of a period of prohibition.  The first large, Nevada-style casino in Macau showed a fantastic return on investment.  But the built-up demand cannot last, especially as more Asian jurisdictions legalize.  It may never happen, and even then it may be many years away, but Macau has to remember the lesson of Atlantic City, where the first casino also made fantastic amounts of money but the 13th casino went bankrupt in less than two years, along with half of the other casinos.

Singapore is trying to maximize its profits while engaging in intense local social engineering.  The plan, which is succeeding, is to have two massive integrated casino resorts open by 2009, which everyone predicts will be fantastically successful.  But the government  asked and got more than any other jurisdiction in the world has ever demanded in terms of billions of US dollars in commitments from the winning applicants.  And Singapore is imposing restrictions from safeguards such as charging SGD$100 (US$60) per day just to enter the casino, exclusion programs and limits on advertising, to the government reserving the right to close the casinos down if it decides that it is having a negative impact on society.

How gambling will spread depends almost entirely upon the unique laws, politics, history and culture of the jurisdiction.  Even China, having undergone radical change since the Tiananmen Square uprising in 1989, might open up the mainland:  Rumors were rampant that the PRC would repeal the 1949 ban on betting on horseraces for the 2008 Olympics.  That did not happen, but new lotteries are a distinct possibility.  And even China is subject to competition.  The PRC does not like it, but neighboring Mongolia, which already has betting on horse races, will probably permit border-town casinos for the China trade within the next five years.

But there is not a limitless supply of players.  Competition will lead to governments finding that they have to keep promoting and expanding gambling if they want the money to continue to flow in.

Chinese players call slot machines "tigers."  It will be interesting to see how Asian governments will react when they realize that it is they and not the players who have caught a tiger by the tail.

© Copyright 2008 all rights reserved worldwide. GAMBLING AND THE LAW® is a registered trademark of Professor I Nelson Rose, Whittier Law School, Costa Mesa, CA. Professor I Nelson Rose is recognized as one of the world’s leading experts on gambling law. His latest books, INTERNET GAMING LAW and GAMING LAW: CASES AND MATERIALS, are available through his website, www.GAMBLINGANDTHELAW.com.

I. Nelson Rose
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