The Junkets in Macau Casinos: Evolution and Regulation

1.1. Gambling activity in the early days of Portuguese rule

Macau's gaming history can trace its origin to the sixteenth century when Macau opened its harbor to the world in 1557. ⁴ Since its foundation, Macau established itself as a regional center for international commerce. This Portuguese colony drew a great number of businessmen and visitors from all walks of life, as well as traffickers, gangsters, and coolies who were “gambling‐thirsty.” ⁵ Though gambling was prohibited at that time, illegal gambling houses were ubiquitous in Macau. However, Macau's role as a regional trading port gradually declined after Hong Kong was ceded to the British in 1842. ⁶ For the sake of diversifying the local economy, the Macau‐Portuguese government decided to regulate an ancient Chinese game, fantan (番攤), ⁷ and issued licenses to fantan houses in 1849. ⁸

In addition, Macau's early‐day marketing activity for fantan houses was generally associated with the nineteenth century coolie trade. ⁹ Gambling tours were frequently organized by traffickers and gangsters as a trap to attract people to Macau from mainland China, and numerous Chinese were forced to work as cheap laborers overseas if they failed to pay off their gambling debts. Since then, the gambling tours, together with the coolie trade, have acquired a negative connotation for Macau's gambling houses, which served to sustain the local economy. ¹⁰

1.2. Jin‐Ke activity in the 1930s

The present‐day junket system dates back to the gambler recruitment activity of Jin‐Ke (進客) in the 1930s. ¹¹ Jin‐Ke literally means “introducing (jin) customer (ke)” in Chinese. Jin‐Ke as a gambler recruiter was introduced in Macau's fantan houses during Japan's invasion of China in World War II (1937–1945). Many immigrants and refugees flooded into Macau, and this tiny isolated enclave experienced a brief period of prosperity. ¹² However, Macau's fantan business was also affected by the illegal gambling houses in Shenzhen (immediately north of Hong Kong), ¹³ and many Hong Kong gamblers were targeted by Shenzhen‐based recruiters in the 1930s. In 1937, the fantan license was awarded to a new operator, Tai Heng Company (泰興公司), ¹⁴ which started to make use of Jin‐Ke to recruit gamblers amid mounting regional competition. Until then, local gambling houses had an enlarged network of marketing agents, encompassing a mix of locals and refugees.

The Jin‐Ke activity had boosted Tai Heng's fantan business. Jin‐Ke had also become an effective marketing practice to target gamblers, who were organized by these recruiters to visit and gamble in Macau. Different from today's junkets, there were apparently no standard methods to compensate these gambler recruiters. It is believed that the first‐generation Jin‐Ke agents were not remunerated by the amount wagered by the gamblers nor by the number of gamblers introduced to the gambling houses. ¹⁵

1.3. Junket activity and VIP rooms from the 1970s to 2002

Macau's gaming sector underwent a revolutionary change in 1961. Specifically, Macau governor Jaime Silvério Marques (1959–1962) differentiated “games of fortune” from illegal gambling and opened the casino operations for public bidding in 1961. ¹⁶ This exclusive casino concession was eventually granted in 1962 to Sociedade de Turismo e Diversões de Macau (STDM), a company led by Stanley Ho Hung‐sun. The Jin‐Ke activity originating in the 1930s continued to exist in STDM's early‐day casino operations; ¹⁷ nevertheless, this marketing effort experienced little change over the decades until the 1970s.

STDM innovated and industrialized Macau's gaming sector during its four‐decade monopoly period. ¹⁸ Pursuant to its obligations under the casino concession, STDM introduced a variety of western‐style casino games, invested in the local infrastructure, and improved the transport between Macau and Hong Kong. Furthermore, Casino Lisboa opened in 1970 and became a tourist destination. This new casino hotel complex attracted many visitors from Hong Kong and caused the ferry tickets to be in short supply at the STDM‐owned ferry company. Yet, this also prompted some triad members to purchase in bulk and scalp ferry tickets to the passengers at both the Hong Kong and Macau ferry terminals. ¹⁹ The scalping activity had made the ferry tickets more expensive and unaffordable for visitors coming via Hong Kong.

The triad members' ticket resale was not in favor of STDM's casino and ferry business. STDM eventually stepped in and reached an agreement with the ticket dealers in 1972. These ticket dealers with connections to local triads were allowed to “make money” inside casinos if ticket scalping ceased to exist. ²⁰ In particular, triad members obtained the acquiescence to engaging in dead chip ²¹ dealings. During STDM's monopoly period, dead chip dealers, also known as Daa Maa Zai (疊碼仔, “chip roller”), acted as marketing agents to recruit gamblers and sold non‐negotiable chips to gamblers in return for a commission rate of 0.7 percent on the total dead chip sales (rolling chip). ²²

Furthermore, STDM was exposed to greater scrutiny from the government. Specifically, a gaming tax reform was initiated by Governor Garcia Leandro (1974–1979) in 1976. A new taxation system was introduced to audit and tax gaming activity in casinos and Macau authorities began to collect tax directly from the gross gaming revenue rather than the annual fixed concession fees of the past. This taxation reform brought significant change to STDM's revenue model and business strategy.

Daa Maa Zai's participation and the taxation reform provided the preconditions for the birth of VIP rooms. In 1976, STDM launched its first in‐house VIP room, ²³ an exclusive high‐limit gaming salon designed for substantial gamblers. Meanwhile, the anticipated increase in taxation prompted STDM to allow more Daa Maa Zai to recruit gamblers; yet, a myriad of these self‐employed individuals presented instability on STDM's casino management. ²⁴ In response to this dilemma, STDM began to invite trusted third parties, usually large‐scale junkets, to operate VIP rooms, and these VIP room operators also acted as leaders to Daa Maa Zai agents. In particular, Casino Lisboa housed the first gaming salon “Diamond VIP Room” operated by a junket in 1984. Since then, VIP rooms have been popular among privacy‐concerned VIP gamblers. The success of VIP rooms and the effective management of Daa Maa Zai made STDM strategically focus on VIP gaming, and STDM began to invite more third parties to operate VIP rooms in the late 1980s and 1990s.

VIP room operators and Daa Maa Zai also assumed the role of financiers or “loan sharks” for gamblers in the casinos. Specifically, the extension of gaming credit was illegal and subject to the crime of usury before 2004. STDM, as the casino concessionaire, could not allow their gaming patrons to gamble on credit; instead, VIP room contractors and Daa Maa Zai often made the credit arrangements with gamblers inside VIP rooms and engaged in the extralegal debt collection outside the casinos. Furthermore, the lucrative VIP room business had attracted the local triads' attention. Local triads, e.g., 14K and Shui Fong, began to operate VIP rooms in the 1990s and to participate in related grey‐area businesses such as loan sharking, dead chip dealings, and hangers‐on, etc. ²⁵ Macau police forces estimated that there were around 10,000 individuals working in these grey areas in the late 1990s, similar to the total number of STDM employees at that time. ²⁶

1.4. Licensed activity of gaming promoters since 2002

The triads' direct participation in VIP rooms led to rampant organized crime in the late 1990s. The “Broken Tooth” ²⁷ case especially epitomizes the lack of regulation of junkets and VIP rooms. Macau's gaming sector was subsequently reformed in 2002 after the city's return to Chinese sovereignty in 1999. Since the gaming liberalization, a wide‐ranging set of laws and regulations were enacted to oversee the gaming participants. In particular, the 2002 junket regulation and 2004 gaming credit law allow for greater regulatory oversight of junkets, and provide a series of money laundering controls. Macau casinos have also ushered in an era of massive growth thanks to the rise of visitors from mainland China, ²⁸ and the city has become the world's largest gaming jurisdiction by gross revenue since 2006.

Macau's gaming industry witnessed internal unrest among casinos, alongside the industry's stellar growth. The gaming market quickly expanded after the city's first Las Vegas‐style casino, Sands Macao, opened in 2004. The surge in casino properties ²⁹ in 2006–07 led to intense industry competition. Casinos and VIP rooms began to raise the commission rate in exchange for more VIP gamblers. Particularly, Melco's then‐only casino, Crown Macau, ³⁰ signed a gaming promotion contract with a corporate junket, AMA, in late 2007 and this contract allowed AMA to deal directly with Melco and “receive a commission of 1.35% on rolling chip volume from Crown Macau of which 1.21% [was] expected to be paid to its collaborators.” ³¹

Under the gaming promotion contract, AMA was expected to deliver a monthly minimum rolling chip turnover of HKD 30 billion (USD 3.8 billion) for Crown Macau. The higher‐than‐average commission rate had driven the AMA‐associated junkets and collaborators to bring in more VIP gamblers to Crown Macau, and Melco's gaming market share significantly increased from 4.9 percent in July 2007 to 18 percent in February 2008. ³² Moreover, the Melco‐AMA cooperation further intensified the competition among local casinos. It is reported that junket commissions were even raised to 1.5 percent in some casinos. ³³

Nevertheless, the commission war among casinos endangered the industry's profitability. ³⁴ As a result, the six casino sub/concessionaires lobbied and requested the government to keep the commission rate from escalating further. An administrative decision to limit junkets' commission rates at 1.25 percent was reached in July 2008 after a series of industry‐wide consultations. The original 2002 junket regulation was subsequently amended in 2009 to administer, among other things, the commission rate that casinos can pay to gaming promoters.

Macau casinos and junkets are also susceptible to China's economy and national policy. The economic growth in China has slowed down in the wake of the 2007–08 global financial crisis; furthermore, the nationwide crackdown on corruption has been underway since Chinese President Xi Jinping took office in 2013. These external factors, taken together, have discouraged Chinese VIP gamblers from visiting Macau casinos, and the city's gross gaming revenue peaked in 2013–14. Moreover, junkets witnessed a surge in bad debts among Chinese gamblers. There were around 100 VIP rooms in January 2016, after 30 to 40 VIP rooms closed in the second half of 2015 because of bad debts and weak VIP performance. ³⁵ Meanwhile, Macau has also been cautious about the licensing of gaming promoters with a view to enhancing junkets' internal controls and healthy development. A total of 126 gaming promoters are licensed in 2017, down from the peak of 235 junkets in 2013. With the tightening of junket control and the stabilization of the Chinese economy, Macau's gaming market began to recover in August 2016 after 26 consecutive months of revenue decline.

1.5. Summary of Macau's junket history

Junkets and their archaic equivalents generally operate outside traditional structures in casinos. The junket tours organized to gamble in Macau had been growing since the nineteenth century. While the roots of modern junkets date back to the Jin‐Ke activity in the 1930s, such gambler recruitment practices continued to exist in the early days of STDM's casino operations. After Casino Lisboa opened in 1970, Jin‐Ke gradually evolved into Daa Maa Zai, a gambler recruiter‐cum‐dead chip dealer; in addition, the VIP room system was established in the mid‐1980s against the backdrop of the tax increase and the myriad Daa Maa Zai in casinos. The late‐1990s organized crime associated with VIP room business led to the reform of Macau's gaming industry in 2002. Since then, Macau has recognized the legitimacy of junkets in casinos and junkets have been under the regulator's continuous oversight.

2.1. Regulation of gaming promoters in Macau

This section discusses the applicable laws and regulations governing gaming promoters in Macau casinos. Specifically, Administrative Regulation No. 6/2002 ³⁶ is the primary legal source for regulating the local junkets. Under this junket regulation, the term “gaming promoter” (Promotores de Jogo) is officially used to refer to any individuals or companies licensed by the Gaming Inspection and Coordination Bureau (DICJ) to carry out gaming promotion activity in casinos. Generally speaking, gaming promoters are responsible for recruiting gamblers to the casinos, extending gaming credit, and collecting gaming debts afterwards.

2.2. Junket license and suitability requirements

Macau operates a licensing system for junkets in casinos. The DICJ, as the principal regulator, has the authority to assess gaming promoters' suitability (idoneidade), ³⁷ to issue junket licenses to qualified applicants, and to oversee junket activity in casinos. There are verification procedures to confirm each applicant's suitability for a gaming promoter license. The definition of suitability is not expressly defined under Administrative Regulation No. 6/2002, whereas the concept of suitability shall be read in conjunction with Law No. 16/2001, which serves as the legal framework for Macau's gaming industry. Article 14 of this legislation states the regulator will look into the applicant's experience, character, and reputation when it assesses the concerned application. Each applicant, along with their key management, directors, and shareholders possessing more than five percent of the corporate capital, will be thoroughly investigated.

The suitability requirements are a permanent prerequisite for any individuals or companies interested in applying for and holding a junket license in Macau. Junket applicants must cooperate and provide the regulator with any documents or information upon request, ³⁸ along with the disclosure and declaration forms submitted by the applicants and their concerned parties. ³⁹ In addition, full background checks on junket applicants are to be conducted by the DICJ. ⁴⁰ Upon completion of the background checks, the junket applicants will be informed by the regulator whether or not they are suitable for a gaming promoter license. The applicant's risk assessment report prepared by an independent auditor may also be requested by the government at any time. ⁴¹

A gaming promoter license will be awarded to an applicant that has met the suitability requirements. Under Article 14 of Administrative Regulation No. 6/2002, the junket license term is only one calendar year from January 1 to December 31. In a case where the junket license is issued after January 1, the license is valid from the date of issuance to December 31 of the same year. The junket license could be renewed for the subsequent year, subject to the DICJ's decision. Furthermore, junket licensees are under the regulator's continuous monitoring and inspection. All junket licensees are obliged to undergo additional verification processes to demonstrate their suitability during the license term, and the suitability of each individual and corporate junket licensee will be reassessed every three years and every six years, respectively.

2.3. Registration, non‐exclusivity, and confidentiality

Administrative Regulation No. 6/2002 stipulates that registration is needed before any gaming promotion activity can be carried out. In addition to applying for a junket license with the regulator, gaming promoters are required to register with at least one of the six casino sub/concessionaires, and such registration with a specific casino must be approved by the DICJ. ⁴² There is also a non‐exclusivity relationship between gaming promoters and casino sub/concessionaires; ⁴³ in other words, the registration requirement does not limit a junket licensee to one casino only, and a gaming promoter can concurrently be in partnership with different casino sub/concessionaires. Moreover, junket licensees are not allowed to contract any intermediaries to carry out the gaming promotion activity, and the contractual position assigned or transferred to any third parties in any form is null and void. ⁴⁴

There are also provisions for confidentiality in the junket regulation. ⁴⁵ Gaming promoters are under a duty to maintain the confidentiality of all information that they acquire in the course of carrying out the business, and the information shall not be disclosed except upon the request of the competent authorities, e.g., DICJ, Finance Services Bureau, police, or court. This duty of confidentiality also applies to the concerned parties of the junket licensees, including shareholders, administrators, key employees, and collaborators associated with the gaming promoter. Besides, the obligation to keep confidential must be observed by all the concerned parties even after the termination of their functions with the junket licensees.

2.4. VIP rooms and commissions

A gaming promotion contract must be concluded between gaming promoter and casino sub/concessionaire. In particular, Article 24(5)(2) of Administrative Regulation No. 6/2002 states “the terms in which the gaming promoter can operate in casinos, particularly if there is allocated space for the gaming promoter,” and such arrangements must be expressed in the gaming promotion contract. This provision thus constitutes the legal basis for the establishment of VIP rooms in Macau casinos, and junkets can bring their patrons to gamble in their allocated gaming salons.

The commissions or other remunerations payable to junkets must also be included in the gaming promotion contract. Such junket commissions are also subject to the government's oversight. Administrative Regulation No. 6/2002, amended in 2009, empowers the city's secretary for economy and finance to impose a ceiling on the commission structure that casinos can pay to gaming promoters, and the maximum commission rate is currently set at “1.25 percent of the total amount bet (net rolling), regardless of the exact basis of calculation.” ⁴⁶

2.5. Casino sub/concessionaires

Casino sub/concessionaires' obligations for junkets are expressly stated in Administrative Regulation No. 6/2002. ⁴⁷ Specifically, casinos assume the day‐to‐day management of the gaming promoters registered with them. Casinos must provide to the DICJ a monthly report of their junkets' commission reports, collect withholding tax ⁴⁸ on the commission payments, and update the gaming promoter list every three months. Furthermore, casinos are under special obligation to supervise the junket activity in strict compliance with the local laws and regulations, and junkets having association with criminal activity (e.g., money laundering) must be reported to the competent authorities.

2.6. Collaborators

Macau junkets generally have a large network of self‐employed collaborators. These collaborators are subordinate agents responsible for targeting gamblers and engaging in dead chip dealings. Administrative Regulation No. 6/2002 also seeks to oversee the collaborators in association with the junket licensees. ⁴⁹ Junket licensees can choose their own collaborators, but the maximum number of collaborators for each junket is determined by the DICJ. Besides, junket licensees must annually submit, through their casino sub/concessionaires with which they are registered, a list of collaborators chosen for the upcoming year, together with the collaborators' identification documents and criminal history records. Such collaborator list is subject to the DICJ's approval, and any individuals on the list can be rejected or withdrawn at any time. Furthermore, all the approved collaborators must observe and abide by all the DICJ's notices and instructions. Each junket licensee, as well as their employees and collaborators, is also jointly and severally liable for any violations committed by their employees and collaborators. ⁵⁰

2.7. Gaming credit and enforceability

Law No. 5/2004 is the main legislation to administer the extension of credit for gaming and betting in Macau casinos. Casino sub/concessionaires and gaming promoters are authorized to extend gaming credit to their patrons at their sole discretion, and all the authorized credit grantors are exempted from the crime of usury for gambling. ⁵¹ Under Article 2 of the gaming credit law, gaming credit is defined as casino chips passed on to a gaming patron without immediate payment. Since there is no restriction on the types of casino chips, both cash chips and dead chips (non‐negotiable chips) can be construed as casino chips.

The extension of gaming credit is limited to three types of credit relations. ⁵² The gaming credit law specifies that both casino sub/concessionaires and gaming promoters can extend gaming credit to their patrons. In addition to being a credit grantor, gaming promoters can act as a credit grantee and seek credit assistance from their associated casino sub/concessionaires. Thus, casinos may provide junkets with credit (i.e., dead chips) for the VIP room operations, e.g., dead chip dealings. In addition, junket licensees must observe all the laws and regulations applicable to the credit granting activity, and any violations will be taken into account in determining the junket's suitability. ⁵³

The gaming credit law ensures the role of gaming promoter as the credit provider and debt collector in VIP rooms, where large amount transactions take place. However, the law also prohibits such credit granting activity conducted through any third‐party entities (e.g., collaborators). ⁵⁴ As for its legal effect, gaming credit generates civil obligations, ⁵⁵ and the resultant gaming debts are fully enforceable in Macau court. While Hong Kong court recognizes the enforceability of gaming debts, ⁵⁶ gaming debts incurred in Macau casinos are not valid in mainland China. Though there is an arrangement on reciprocal enforcement of civil and commercial judgments between mainland China and Macau, ⁵⁷ a Macau court's judgments on gaming debts cannot possibly be enforced by the legal process in mainland China as it is deemed to violate China's public policy under this arrangement.

2.8. Money laundering controls in casinos

Macau strengthened its money laundering controls in 2016–17. Law No. 2/2006 ⁵⁸ is legislated to prevent and suppress the criminal offense of money laundering, and Administrative Regulation No. 7/2006 ⁵⁹ establishes the preventive measures against such criminal activity. In line with these regulations, DICJ has released certain regulatory guidelines to further tighten the money laundering controls in Macau casinos. Under the latest DICJ Instruction No. 1/2016, casino sub/concessionaires and gaming promoters are required to identify, report, and prevent money laundering in casinos. Specifically, casinos and junkets are obliged to identify and verify the gaming patrons. ⁶⁰ They must also file a “report of large amount transaction” (ROVE) to the DICJ for any transactions over MOP 500,000 (USD 62,500) within two working days, ⁶¹ and information to be recorded in a ROVE report includes the gaming patron's full name, sex, date and place of birth, nationality, identification documents, address, occupation, date and amount of transaction, source of funds, beneficial owner, etc.

The DICJ instruction specifies that ROVE reports prepared by junkets must be verified by a compliance officer of their associated casino. ⁶² In addition, any suspicious transactions identified must be registered with the Financial Intelligence Office (GIF) ⁶³ within two working days. ⁶⁴ Casinos and junkets are also under the obligation to refuse any transactions requested by their gaming patrons if the patrons fail to meet the requirements for customer due diligence measures for large amount transactions, and suspicious transaction reports must also be filed with the GIF. ⁶⁵ In addition, casinos and junkets must also cooperate with the police, judiciary, and other competent authorities upon request. ⁶⁶ The failure to abide by the preventive measures of this DICJ Instruction is punishable by the administrative infractions and pecuniary penalties for non‐compliance. ⁶⁷

2.9. Currency declaration system and ATM restrictions

Macau's Legislative Assembly has approved Law No. 6/2017 to control cross‐border movement of currency and other bearer negotiable instruments (e.g., traveler's checks) in June 2017. In effect from November 1, 2017, any individuals in possession of over MOP 120,000 (USD 15,000) or its equivalent in any other currency are required to declare to the Customs Service when entering or leaving Macau, and the declaration forms collected will be kept for five years. Since July 2017, the Monetary Authority of Macau (AMCM) has also tightened the use of ATM cards by Chinese visitors to suppress money laundering and capital flight from mainland China. To withdraw cash from Macau's ATMs, China‐issued bankcard holders must verify their identity cards and undergo facial recognition scans. In addition, AMCM has set an upper limit of MOP 5,000 (USD 625) per ATM withdrawal transaction for Chinese bankcards, along with China's overseas daily withdrawal limit of CNY 10,000 (USD 1,500). ⁶⁸

2.10. Financial and accounting requirements

Cash deposit is required to obtain and maintain a junket license. ⁶⁹ Currently, gaming promoters have to make a cash deposit of MOP 100,000 (USD 12,500) for their junket licenses. ⁷⁰ However, the DICJ is planning to raise the deposit, capital, and accounting requirements for gaming promoter licensees. ⁷¹ The local junket association has reportedly proposed to the regulator to raise the minimum deposit requirements to MOP 50 million (USD 6.25 million) for any new junket entrants. ⁷² In addition, a guideline on financial accounting systems, issued by the DICJ in October 2015, attempts to refine the junkets' internal controls and reporting procedures. A site‐visit examination on all gaming promoters was subsequently launched in February 2016 to inspect whether the junket licensees have strictly adhered to all the accounting requirements in the guidelines. Furthermore, the DICJ started to audit the junkets' credit granting records in April 2017, and the audit review is expected to complete by year‐end.