By Hannah DreierLAS VEGAS -- Most people still think the U.S. gambling industry is anchored in Las Vegas, with its booming Strip and 24/7 action, a place where years of alluring marketing campaigns have helped scrub away the taint of past corruption. In just a decade, however, the center of gambling has migrated to the other side of the world, settling in a tiny Chinese territory an hour's ferry ride from Hong Kong. The gambling mecca of Macau now handles more wagers than all U.S.-based commercial casinos put together, and many of those bets end up swelling the balance sheets of U.S. corporations. But as U.S. gambling companies have remade Macau, Macau has also remade them. Chasing riches, these companies have been hit with allegations of improper conduct, prompting investigations and serious questions about how closely U.S. authorities are watching the corporations' overseas dealings, and what, if any, real repercussions they could face. Could these corruption claims revive the specter of gambling's bad old days, when Sin City casinos kept mobsters flush? "There are some countries where you either have to pay to play and break the law, or you have to not do business there," casino consultant Steve Norton said. "I think the jury's still out on Macau." Macau is the only place in China where gambling is legal. Each month, 2.5 million tourists flood the glitzy boomtown, most nouveau-riche Chinese who sip tea and chain-smoke as they play at baccarat. The former Portuguese colony has long been known for its gambling but used to offer a seedier experience, with small-time gambling dens crowding up against textile factories and gangs, prostitutes and money-launderers operating openly. That was the scene in 1999 when China assumed sovereignty of Macau and opened it to outside gambling operators. "It was a swamp," said Sheldon Adelson, CEO of Las Vegas Sands ( LVS), as he looked back on his early venture in an obscure city where Chinese officials envisioned resorts. "Everybody thought that I was crazy." Nevertheless, he and the two American competitors that tried their luck there succeeded spectacularly. Now operating four booming casinos in Macau, Adelson described Sands as "an Asian company" with a presence in America. It makes far more in China than in Las Vegas.
"This industry is supply-driven, like the movie Field of Dreams: Build it and they will come." he said. "I believe that." If Adelson's words and jack-o'-lantern smile suggest all is right in the globalized casino world, consider where he made these statements -- on the witness stand in a Vegas courtroom this spring, defending his company against one of his former Macau consultants. A jury in May found against Adelson, awarding the consultant $70 million for helping Sands secure a lucrative gambling license in Macau. Sands immediately appealed. The company is also accused of making improper payments to a Macau lawmaker and collaborating with the Chinese mafia. The U.S. Department of Justice and the U.S. Securities and Exchange Commission are investigating. Sands says it has done nothing wrong. It's not just Sands facing legal and regulatory troubles connected with Macau. Two of the three other major U.S. gambling enterprises are, too: Wynn Resorts Ltd. ( WYNN) and MGM Resorts International ( MGM). Both Sands and Wynn are facing related lawsuits from shareholders who claim Macau mismanagement has damaged the companies. Wynn is being investigated by the Justice Department and the SEC over a $135 million donation to the University of Macau Development Foundation in 2011. Wynn co-founder Kazuo Okada characterized the donation as "suspicious" in a 2012 letter to the SEC. He noted that the Development Foundation's lead trustee is also a member of the Macau government, and said that the donation coincided with Wynn's request for land to develop a third casino. "I am at a complete loss as to the business justification for the donation, other than that it was an attempt to curry favor with those that have ultimate authority for issuing gaming licenses," said Okada, who is now under Department of Justice investigation himself for possible bribery in the Philippines, and has fallen out with his former Wynn colleagues. Okada denies wrongdoing. If his claim is true, the Wynn payment could violate the Foreign Corrupt Practices Act, or FCPA -- a law that bars U.S. companies from paying off officials to win business overseas. Wynn says it acted properly and had no need to buy off authorities. Nevada regulators, in a separate investigation, found no wrongdoing.
MGM got into trouble with New Jersey regulators when the company opened a Macau casino with Pansy Ho, the daughter of a gambling kingpin allegedly linked to Chinese gangs. The state found the partnership "unsuitable" in a 2010 report, and forced MGM to sell its stake in an Atlantic City casino. MGM denied that there was anything inappropriate about the relationship, began the process of selling its stake, and did not cut ties with Macau. Two years later, MGM CEO Jim Murren stands by that choice, saying: "The Macau market is now larger than the entire U.S. gaming market." Last winter, New Jersey agreed to consider MGM's application for a renewed license. The Sands inquiries stem from a pending wrongful termination case brought by former Sands executive Steve Jacobs in 2010. Jacobs claims that Sands' China subsidiary did business with known gangsters, tacitly condoned prostitution and made inappropriate payments to an attorney who was also a Macau lawmaker. Jacobs claims Sands paid the lawmaker to help settle various regulatory issues in Sands' favor. Sands has denied all claims, but recently said in an SEC filing that an internal audit had found possible breaches of a section of the FCPA that requires public companies to file proper financial statements and maintain a system of internal controls. Justice Department spokesman Michael Passman declined to comment on the inquiry. Sands says it is cooperating with federal prosecutors. Spokesman Ron Reese said the company is diligent wherever it operates. Sands opened for business in Macau in 2004, at the beginning of a massive boom in China's economy. The company now earns two-thirds of its revenue there. Wynn Resorts now makes nearly three-quarters of its revenue in Macau. But like early Las Vegas, Macau has a long history of ties to crime syndicates -- in this case secretive brotherhoods called triads. The history and regulations governing the enclave continue to make it tricky for modern casinos to avoid gangs, illegal money transfers and at least the appearance of bribery. Businesses operating there can expect allegations against them, true or not, said Bill Weidner, who was president of Sands until 2009.
He added: "Macau is their country, not ours, and it's their system not ours, and it operates differently than ours. It's not better or worse, just different." One contributing factor is China's capital controls, which restrict the amount of money that citizens take out of the country, including to Macau, which like Hong Kong, is a semi-autonomous region with its own financial system. Another is the lack of reliable credit risk information in China, which makes it hard for casinos to figure out whom they should lend to. So-called junket agents provide an easy fix. They use their networks on the mainland to identify wealthy would-be gamblers, whisk them to Macau's tables, lend them money, then settle up when they get home. Junket operators often assume management of a casino's private VIP room. Casinos provide the facilities, dealers and chips in return for a cut of the profits. Baccarat played in VIP rooms accounts for two-thirds of Macau's $38 billion in annual gambling revenue. While many junket operators in Macau are law-abiding, some have documented ties to organized crime. The enclave has seen a spate of killings and kidnappings associated with debt collection, including one grisly case last year in which two men were stabbed to death in their four-star hotel room, discovered by a friend who had come to lend them the money they needed. Today, U.S. companies are tweaking their flagship Las Vegas casinos in Macau's image -- importing Asian pop sensations, Chinese delicacies and baccarat, now Nevada's biggest moneymaker. They've set up Macau-style VIP rooms that employ junket operators. Asian visitors now account for 9 percent of tourists to Las Vegas, up from 2 percent in 2008. And the Strip is preparing to welcome its first Asian-owned casino: a multibillion-dollar Chinese-themed extravaganza called Resorts World. One reason casino bosses are dreaming up ways to lure Macau customers to Las Vegas is that Nevada imposes one-fifth of China's 39 percent tax on winnings. "They can make a lot more money from a big gambler here," said David Schwartz, director of the Center for Gaming Research at the University of Nevada Las Vegas.
But some of the problems associated with Chinese gambling halls may be migrating to the Strip as well. In March, a man the police described as an enforcer for the Taiwan-based triad United Bamboo began serving a life term for stabbing a man to death in a karaoke bar near the Strip. Prosecutors said he'd been sent to collect a $10,000 gambling debt. Last year, the U.S. Treasury's Financial Crimes Enforcement Network warned casinos to monitor junket operators and report suspicious activity. The warning followed media reports that Sands allowed a man named as a triad member in a congressional report to move a $100,000 gambling credit from Las Vegas to one of its Macau casinos. Unlike some other states, Nevada allows junket operators to work in casinos without the full suitability checks required for key employees. Some Hong Kong operators licensed in Nevada have been found unsuitable by other jurisdictions, including Singapore. "The reason why we don't do a full giant investigation on them is that they have no control over the casino operations; they are basically travel agents and hosts," said A.G. Burnett, chairman of the Nevada Gaming Control Board. If another jurisdiction finds fault with a junket operator licensed in Nevada, state regulators will simply ask the operator to submit to a suitability workup, which is tantamount to telling the operator to get out, Burnett said. Still, regulators are not blind to the link between junkets and triads. At a hearing in June, Burnett said it was "common knowledge that the operation of VIP rooms in Macau casinos had long been dominated by Asian organized crime." In the 1980s, state regulations, along with an FBI crackdown, helped push out the mob bosses who had taken refuge in the gambling world and usher in the industry's modern corporate era. Today, states can impose fines or revoke licenses if any U.S. companies are found to have acted improperly in Macau. But regulators have rarely taken such action, preferring to wait until federal investigations are complete. Conventional wisdom is that no U.S. companies will lose their licenses over the allegations, even if proven true. At worst, they could get fined, said Michael Paladino, of the credit rating agency Fitch. "They can handle that," he said, noting that the largest FCPA fine to date -- imposed on an engineering firm for bribery -- amounted to about $1 billion. That's less than one month's revenue for Sands.
Meanwhile, gambling companies have achieved their own version of outsourcing, according to I. Nelson Rose, a professor at Whittier Law School in California who writes a blog called Gambling and the Law. "Macau forced the casinos to see that they could become like other large U.S. corporations: Set up their plants and operations in other nations and make far more than they can being stuck just in Las Vegas," he said. Sands, Wynn and MGM have structured their China operations as subsidiaries that could eventually be spun off entirely. As Adelson, the Sands chief, appeared in court this spring, a former rival, Phil Satre, who headed Harrah's Entertainment, followed the coverage. Harrah's, the nation's largest casinos company when Satre stepped down in the early 2000s, was later renamed Caesars Entertainment Corporation ( CZR). While Wynn, MGM and Sands have taken off, Caesars has been left behind. Caesars did not apply for the finite number of gambling licenses in Macau in the early 2000s for fear of upsetting domestic regulators. At that time, Satre said, the U.S. gambling industry had at last gained a legitimacy and mundane familiarity that had been unthinkable a generation ago. He said he didn't think American regulators would tolerate any hint of ties to criminal activity in Asia. "There are some things that still have to play out, but when I look back and think about the opportunity to go back in Macau," Satre said, "I'd probably take a different posture." Kelvin Chan in Hong Kong contributed to this story.