It’s difficult to know what to make of the grilling New South Wales regulators unleashed on Crown Resorts last week during hearings to determine the company’s suitability for a license to operate Crown Sydney, the multibillion-dollar high-roller casino slated to open later this year at Sydney’s Darling Harbour.
Was it Crown Resorts in the hot seat, the Melbourne-based, ASX-listed gaming giant whose long record of misconduct in the international VIP trade would appear to throw that suitability into question?
Was it James Packer, the company’s erratic former chairman and controlling shareholder, who spent three days last week fielding questions via satellite link from the comfort of his $200 million super-yacht reported to be floating somewhere near Tahiti?
Or was it really the Independent Liquor and Gaming Authority?
Because a slew of damning media exposés into Crown’s VIP dealings, and the company’s equivocations about them notwithstanding, the agency will little choice but to declare Crown and Packer suitable to do business in the state. Because the reality is that the powers that be in New South Wales have been all in on Crown Sydney from the start. Now, six years after its initial approval, the A$2.2 billion (US$1.6 billion) casino, hotel and residential complex is nearly finished and plans to open in December, the centerpiece of a A$6 billion phased redevelopment of Darling Harbour’s Barangaroo waterfront district which is being paid for in part by Crown and its Crown Sydney partners.
All this was clear enough on October 1, when the ILGA’s examiners were settling in to their task from the authority’s headquarters in a Sydney suburb at the same time that Crown Chairwoman Helen Coonan was at Barangaroo, standing in front of the company’s towering 71-story baby for a splashy ribbon-cutting to celebrate the opening of a new pedestrian promenade.
It doesn’t, however, address the question of whether Crown Sydney is viable, designed as it is as a playground dedicated to the amusement of China’s seemingly endless supply of very wealthy and extremely avid gamblers.
The answer to that lies not with Crown and not with authorities in New South Wales but with Beijing.
The government of the People’s Republic has been wrestling with a chronic capital flight problem since Xi Jinping assumed power in 2012. Observers in and around Macau and law enforcement agencies farther afield have been wondering ever since when China’s financial authorities would get around to what’s been happening in the tiny, autonomously governed city, where its citizens have been gambling away tens of billions of dollars in VIP rooms annually and in the larger world beyond China, as more jurisdictions in East and Southeast Asia, not to mention expensive casinos like Crown Melbourne, angle for a piece of the enormous action taking place there.
The first part of their answer came in 2014-15 when a crackdown on corruption and lavish spending within the Communist Party and the country’s state-owned enterprises sent the VIP sector, which accounted at the time for nearly three-quarters of Macau’s world-leading casino revenues, plummeting. Dozens of junkets, as the promoters who fund the trade are known, folded, and the first cracks appeared in the intricate shadow banking system they’d designed to evade both the government’s strict currency controls and its ban on gambling marketing.
The crackdown was widely reported, and Crown was well aware of the turmoil, as the ILGA hearings have revealed. Management’s response, however, was to get more aggressive. The result was the arrest in 2016 of 19 of the company’s operatives in China for violating the marketing ban, among them the company’s vice president of international operations, who served 10 months in prison before being released and deported.
Neither Packer nor former Chairman John Alexander, a Packer confidante, could explain the debacle to the ILGA examiners or why the China staff had been instructed to lie if questioned by Chinese authorities about their activities, as the hearings also revealed.
“It was a failure in compliance. A significant failure,” Packer acknowledged, for which he and Alexander blamed then-Chairman Robert Rankin and former CEO Rowen Craigie. They “let the side down,” as Packer put it.
Patricia Bergin, the former Supreme Court judge leading the hearings, was less than satisfied. “If the company doesn’t know what’s happening internally, how on earth is a regulator supposed to know?” she wondered.
It’s a question that would come up again as the inquiry turned to the company’s deep involvement with the Hong Kong- and China-based junkets that are the lifeline to the high rollers on which its flagship Crown Melbourne depends. News reports in Australia dating back to 2014 have accused Crown of turning a blind eye to the junkets’ links to organized crime and the risks that dealing with them pose when it comes to money laundering and other illegalities. The company found itself in an unwelcome spotlight again last year when three of the country’s major media outlets took up the controversy anew with tales of organized crime entanglements and unreported cash. They included an allegation that Crown used its influence to fast-track visas for certain wealthy customers, which prompted an inquiry at the federal level by the Australian Commission for Law Enforcement Integrity.
At last week’s hearings, Packer disputed the contention he had “long been on clear notice of the links between junket operators and organised crime.” He said that while executive chairman of Crown he was aware of the due diligence the company did on junket operators “only at the highest level”.
“I was assured that they were junkets of good repute,” he said.
But he agreed that it was the responsibility of the board of directors to set guidelines for the risk the company was willing to take in dealing with them. Only it wasn’t something he said he thought much about.
“I saw that as Mr. Craigie’s job,” he said.
Packer resigned as chairman in December 2015, rejoined the board in 2017 and resigned again in 2018. He holds no official position with Crown and seems to prefer to manage his controlling 37 percent of its equity from a distance, having largely steered clear of his native land in the aftermath of a messy, high-profile 2013 divorce, a brief and disastrous engagement to pop singer Mariah Carey and reported battles with substance abuse and mental health issues.
Which is not to say he’s unaware of how the value of his shares could be impacted by events in the VIP trade’s main theater of operations, as the ILGA inquiry revealed, citing e-mails between Packer and a Crown executive dating back to 2015 in which the executive tersely reported: “transferring money out of China difficult.”
In 2019, VIP revenue in Macau declined more than 18 percent from the previous year, the sector’s share of the total revenue mix falling to less than 50 percent for the first time since records have been kept.
Crown reported a 25 percent year-on-year decline in VIP revenue at Crown Melbourne in pre-Covid fiscal 2019. It was down 30 percent at Crown Perth.
Beijing earlier this year declared the cross-border flow of gambling funds a major national security risk and announced it was compiling a blacklist of foreign gaming destinations from which Chinese citizens would be banned.
Indirectly, the government also zeroed in on Suncity, Macau’s largest junket, through a media report that blasted the company for its alleged role in facilitating illegal online and proxy gambling.
What has followed, according to news reports, is a panic run by mainland gamblers on cash deposits held with Macau’s junkets, Suncity among them, and the city’s casinos as well that was likened recently to a “stampede.”
“The crackdown on the cross-border transactions has finally rammed home the inconvenient fact that Macau has always been dependent on outflow of funds from the mainland,” said Ben Lee, founder of Macau gaming consultancy IGamiX.
Analysts and observers are now talking about a liquidity crisis within the junket industry that threatens the survival of the system as it’s operated up till now.
“Unlike in 2010-14, when the central government had targeted corruption, this time around Beijing is targeting gambling activities,” a trio of Credit Suisse analysts said in a recent client note. “This hurts big players demand, affects junket debt collection and blocks funding channels for big players.”
The upshot for Macau’s casinos is not only that the pace of recovery from the pandemic will be a lot slower than they hoped, but that the halcyon days of VIP may well be over.
Crown can’t expect to escape unscathed either. The palatial Crown Sydney will get its license. A tenable business model may be more difficult to come by.