Las Vegas has been a bright spot lately in an otherwise grim gaming industry in which Las Vegas Sands (NYSE:LVS), Wynn Resorts (NASDAQ:WYNN), and MGM Resorts International (NYSE:MGM) have suffered major revenue declines due to struggles in Macau.
Yet Vegas' renaissance could face a major risk: money laundering and its related regulatory expense -- or worse, fines for slipping up and allowing such financial seediness into its casinos. Here's the risk and what to watch for.
Anti-money laundering, or AML, describes the practices that companies that deal with money -- which is to say every company, but particularly financial institutions and intermediaries, such as casinos -- must comply with per the federal 1970 Bank Secrecy Act, or BSA. This includes reporting suspicious activity and meeting requests from government authorities for details of transactions involving the company's clients (requiring the institution to keep in-depth records of their transactions with clients for years afterward).
Some government regulators believe the casino industry has done a poor job in recent years of upholding its BSA requirements, and those authorities have been scrutinizing gaming companies further.
The risk is not just the cost of complying with the law (which can be quite high) but rather the potential fines for failing to comply with AML regulations. For example, Las Vegas Sands in 2013 paid $47 million over anti-money laundering shortcomings.
Is this a real risk? Just ask Macau.
In March, total gaming revenue in Macau declined nearly 50% from the year-ago period. The Chinese special administrative region is struggling as a result of Chinese President Xi Jinping's bold stand against corruption and illicit financial activity.
When it was discovered that some high net worth players from mainland China (including government officials and third-party "junket operators" that provided a means to move cash back and forth between the mainland and Macau) were using both government and illicit funds to gamble, Xi made Macau his target for continuing to fight money laundering and corruption.
Heavy regulation is now keeping VIP players (and not just those involved in shady dealings) away from Macau. For companies such as Wynn that offered the bulk of their services to this VIP class -- as much as 75% of Wynn Macau's revenue came from VIP operations in Q1 2014 -- this has been a massive blow to their income.
Is there similar risk in Las Vegas?
There are multiple ways in which this could be a major risk for Las Vegas and its investors. First there is the obvious risk of money laundering and related activities occurring at a Vegas casino. If that were to happen, or if regulators find a lapse in AML compliance, a hefty fine could cause a substantial earnings setback.
Another risk is that China's President Xi could try to block Chinese citizens from gambling in Las Vegas, just as he is doing in Macau. Since Chinese travelers make up about 10% of Las Vegas guests, this alone could push Sin City revenue down. But it could hurt Las Vegas' future growth even more.
Chinese citizens not only represent a relatively large population of visitors, but also a growing segment of major investors. Using the EB-5 visa program -- which allows special investments by foreigners in economically depressed areas, which Las Vegas has been deemed since the recession in 2008 -- wealthy Chinese citizens have been large sources of funding for new growth in Las Vegas.
According to Global Market Advisors partner Andrew Klebanow, 85% of EB-5 visas granted go to Chinese citizens. This means Chinese government restrictions on this area of foreign investment (or worse, if it were found that some of this was illicit money), could suddenly shut off a large flow of new capital into the city.
Betting with this risk in mind
While money laundering hasn't been a major issue for the casino industry yet, it has come up. Caesars announced in February that it was under investigation by the Treasury Department for potential AML lapses, and as a result had hired industry AML leader (and former Wal-Mart AML expert) Benjamin Floyd as a top executive.
Similarly, Wynn Resorts was under investigation at the end of 2014, according to The Wall Street Journal. Neither of these probes has produced findings yet, but the risk is that they could lead to substantial fines.
Companies are continuing to decrease money laundering risks. For example, MGM and Wynn have stopped the use of cash at their poker tables, effective April 2015, making players first convert cash to chips to help monitor cash transactions. Still, the risk is more sophisticated and complicated than just cash transactions on the casino floor, and the stakes are high.
Any major fine here would come at a time when Vegas earnings remain fragile. Consider that MGM lost $150 million in 2014 (with no AML-related fines). While 2015 could finally be a profitable year, a fine of $50 million would surely hurt that chance, and thus hurt investors who are betting on a turnaround.
Bradley Seth McNew owns shares of Las Vegas Sands.. The Motley Fool is short Caesars Entertainment. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.