China's Secret Billion-Dollar Money Laundering Scheme

The tiny Chinese enclave of Macau is the largest gambling region in the world, accounting for more than six times the gaming revenue of the Las Vegas Strip. Over the past decade it's gone from a seedy mob-infested region to a glitzy entertainment capital. But beneath the shining lights, there's a secret world of money laundering.

The downside of wealth in China
China is notoriously controlling over its currency; for example, citizens are allowed to take only $50,000 outside the country every year. For people looking to buy real estate overseas or even emigrate from China, that's not a lot of money, so they need to find other ways to get money out. The result is money laundering, and it's big business in Macau. The 2013 International Narcotics Control Report highlights that the gaming industry is highly dependent on loosely regulated gaming promoters and collaborators, known as junket operators, which allow for anonymity and create vulnerabilities for money laundering. The Macau government has indicated that the gaming industry is one of the primary sources of laundered funds in the region.  

In Macau, the very setup of gambling has made money laundering extremely easy. Gamblers borrow renminbi, China's currency, from a junket in Mainland China, and the junket gets chips from Macau casinos for the player to gamble with. Once the chips are played, the winnings are paid out in Macanese patacas, not the renminbi the player borrowed. A quick trip to a jewelry store, a pawn shop, or Hong Kong, and the money can be transferred into Hong Kong dollars and leave Macau.

No one knows how often this happens or how big the market is, but it's estimated to be in the billions of dollars. Why would casinos need junkets at all if it weren't for money laundering? In the rest of the world, casinos will lend money directly to a player, giving discounts or other benefits, instead of paying a junket a percentage of gaming revenue to bring in players.

Picking off easy targets
Chinese and Hong Kong law-enforcement officials have had a hard time bringing cases against major players, but there have been some recent convictions. Reuters recently reported the story of the conviction of Luo Juncheng, a 19-year-old high school dropout who opened a bank account in Hong Kong and began laundering money. Eight months later, he had moved $1.7 billion through, with 5,000 deposits and 3,500 withdrawals.

Reuters also tells the story of Lam Mei-Ling, an illiterate 61-year-old who suddenly began moving money through Hong Kong banks in 2002. By 2005, she had moved $876 million through the region, and she also ended up in jail.  

These are two low-level players in a vast money-laundering scheme. Advocacy organization Global Financial Integrity estimates that $2.83 trillion flowed out of China illegally from 2005 to 2011, and most of it went through Hong Kong, in Macau's backyard.

Even the U.S. Department of State has taken notice, calling for "robust oversight of junket operators, mandating due diligence over non-regulated gaming collaborators, and implementing cross-border currency reporting."  

Casinos play dumb
Don't tell casino owners or Macau officials there's money laundering, because they don't want to hear it. Well-known CEOs, including Steve Wynn of Wynn Resortsand Sheldon Adelson of Las Vegas Sands (NYSE: LVS  ) , have denied for years that money laundering is a problem.  

But there's still evidence that it exists, even if authorities don't push hard for information. MGM Resorts (NYSE: MGM  ) was forced to divest its New Jersey properties because of the company's relationship with Pansy Ho, whose father had ties to triads in Macau. Las Vegas Sands is under investigation by the U.S. attorney's office for possibly violating money laundering laws in Macau last year.

As gaming expands in Asia, the illegal flow of money is a huge concern for officials elsewhere as well. Melco Crown (NASDAQ: MPEL  ) will soon open a resort in the Philippines, and the country recently increased anti-money-laundering laws just as gaming expands. Interestingly, it left casinos out of tougher regulations, hoping to capture gaming dollars going to Macau and Singapore right now.

Big money in turning a blind eye
The tie between Macau and Hong Kong makes it a prime location for laundering money out of China, whether it was earned legally or illegally. With China's economy growing like crazy and some wealthy citizens looking to get money out of the country, it's a perfect point of exit. The big question for investors is whether to turn a blind eye to money laundering and its importance to casino's profits in the region. With such a large amount of these casinos' valuation dependent on increasing revenues in Macau, is that a risk worth holding on to in your portfolio?

How big can Macau get?
The crackdown on junkets was one of the top three risk factors I pointed out in our premium report on Las Vegas Sands, in which you'll learn about all the  opportunities and risks facing the company. We're providing a full year of analyst updates to go with it, so make sure to claim your copy today by clicking here.


Read/Post Comments (6) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 13, 2013, at 4:06 PM, mbablitz wrote:

    You've broken no new ground and are only digging up old dirt, so I don't understand why you wrote this article. Is it a warning? Or, maybe you would you like WYNN, MGM and LVS to leave Macau simply because the junket system does not fit Western standards perfectly?

    China, Hong Kong and Macau all seem to be happy with the status quo. If they were not, they would change their policies. Are you advocating they change their standards to match ours?

    Personally, I am happy these US companies took on the risks necessary to navigate these very tricky waters and are playing by the rules on both sides of the globe allowing the junkets to fill US companies' treasuries with cash rather than China's.

  • Report this Comment On April 13, 2013, at 5:16 PM, gcialini wrote:

    I agree with mbablitz......nothing here those of us in positions with these companies don't know already.....the timing of this story is suspect....what's up with that, Travis?

    I live in Atlantic City, NJ.....and local government and our State sure helped kill this market....The Chinese have their way of doing things that are different than here.....and the numbers tell the difference.

    how did AERL do yesterday.....oh, right....up over %10

  • Report this Comment On April 13, 2013, at 7:57 PM, Gambaholic wrote:

    ....'it's gone from a seedy, mob-infested region to a glitzy, chandelier laden - mob-infested region. It doesn't matter if they wear fedoras or $5,000 suits; if they hang in D.C. , Vegas, Atlantic City, or Macao. When THAT kind of money is involved, the mob is at the front of the line with their hand out.

  • Report this Comment On April 14, 2013, at 1:57 AM, BenKeel wrote:

    Don't take this too hard readers, Travis Hoium and MOST of the Motley Fool are pretty new to investing and have very little real investment experience. Why? Because they're all 22 - 30 yrs old and they haven't been around very long. This article is almost as old as gambling itself.

    Just filling space folks. Just filling space.

  • Report this Comment On April 14, 2013, at 8:20 PM, spokanimal wrote:

    The risk to macau gaming is less with laundering than it is with the problem of govt. officials gambling funds that were garnered illicitly from their positions of power.

    The visa restrictions in recent years were damaging to gaming, but put in place more to disrupt the gambling habits of well-heeled officials than it was to combat laundering that was directly associated with the ex-patriation of funds.

    While it's true that recent press relates increasingly to the later than the former, it still does not rise to the level of the former's influence on the concerns of the politburo.

    Travis's concern that laundering poses a significant risk, especially relative to the risk posed by curtailments targeting govt. officials, is relatively unfounded. To the extent that launderers are targeted, it will be more direct... as it has been up until now... and not via sweeping measures that impact all gaming in shotgun style, like the visa curbs in recent years.

    Spokanimal

  • Report this Comment On April 15, 2013, at 10:06 PM, Pkylie wrote:

    The biggest criminal money launderer in the gambling business is Las Vegas Sands.

    Look no further than Zhenli Ye Gon, who laundered hundreds of millions of drug money at the Vegas Venetian, and not Macau.

    Adelson even signed off on a Rolls Royce for him to thank him for the hundreds of millions of drug money he lost at bacarrat while laundering drug money at the Vegas Venetian.

    The Asian hosts at Sands Macau are also in bed with triad run Neptune, including key Venetian Asian hosts based out of Las Vegas.

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