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Increasing defaults within the informal credit system funding junket operators are now posing a considerable threat to the gaming industry throughout Asia
If it sounds too good to be true, it probably is. It would have paid investors to heed that old adage when Macau junket operator Huang Shan offered them a return of 2.5% a month to provide funds to finance his activities. Mr Huang had run junket operations in Macau for around four years when in April 2014 he suddenly disappeared with an estimated HK$10 billion (US$1.3 billion) of investors’ money.
“When Huang Shan disappeared, I believe my company was one of the first to be contacted for help by some of our investment partners in Macau,” says Pacific Financial Services Ltd Director Tony Tong, whose firm specializes in financial services, risk management, money lending and collection services for the financial and gaming industries. “We conducted searches in Macau and Hong Kong and discovered Mr Huang was not in town.”
Mr Tong had first met formally with Huang Shan around six months before his disappearance, in late 2013, at the Presidential Suite of L’Arc Macau. He recounts: “Mr Huang started the meeting by giving me an introduction to his company, business model junket agency network, credit players and VIP high-rollers, sidebet commission and credit system. He told me that his company had been offering 2.5% return per month to his junket investors, and his investors were very happy with the high return and he had no problem finding investors in China.
“Mr Huang also asked me about fund-raising and IPO possibilities for his group. I questioned his high return rate of 2.5% per month, as compared to most other junket companies offering about 1% to 2% per month to investors, and the sustainability of this high-return model, and all the audit, internal-control and compliance procedures required for IPO, including AML (Anti-Money Laundering), KYC (know your customer), risk management, revenue recognition, accounts receivable, provision for bad debt, credit assessment, and legal due diligence issues.”
Ultimately, of course, rather than the IPO route, Mr Huang chose to cash out by absconding with investors’ funds. In so doing, he put a spotlight on the potentially shaky foundations of Macau’s junket networks, even before the city’s VIP market succumbed to its protracted and ongoing slump. “There will obviously be domino effects as a result of major defaults like those of Huang Shan. On the basis of information gleaned from public court records and my private conversations with casinos, VIP clubs, money lending companies, micro-financing companies, and law firms, I believe there will be increasing credit default issues in the gaming industry, especially in the VIP sector,” notes Mr Tong.
Huang Shan’s disappearance has caused a lot of “triangular debt” issues, explains Mr Tong. “‘Triangle debt’ is a well-known phrase in China, referring to a default that occurs between one party and another in the country’s informal credit system because a third party can’t or won’t pay I foresee an increasing number of defaults in the junket agency network and among VIP players due to such triangle debts, triggered initially in part by Huang Shan.”
Mr Tong adds: “the law firms, credit investigation and collection agencies, and bankruptcy trustees we work in partnership with are dealing with a fast-growing number of credit-default, liquidation and collection issues coming from the gaming industry. We have been requested by our clients to help them resolve either their, or their clients’, non-performing loan and aging accounts receivable issues by trying to find new investors to invest in the non-performing assets and/or provide asset collateral pledges and asset-backed securities.
Most of the non-performing assets are tied to real estate, mining assets, luxury condos, villas, jets, cars, and the like. Often, the debtor does not have the cash to settle the marker/credit owed, but instead tries to settle with other such assets. In the cases where there is no money or assets to settle debts, Mr Tong says “the debtor normally would have to work for the junket agent by recruiting other players, and use the rolling commission to try to pay off their gaming debt. I have heard of debtors working for the junket agent for years before clearing their debt.”
“In addition to legal collection services, we have also been requested by many gaming clients to improve their VIP duediligence, credit/marker management, risk management services and advisory services,” notes Mr Tong. “Working in partnership with law firms, we provide a full range of cross-border investment advisory and legal services in Hong Kong, Macau, and China, including: collection and recovery services; accounts recovery; debt collection; payment negotiation/mediation; credit management consulting; cross border collection; due diligence; fraud detection; problem solving; debt management consulting services; and mediation and negotiation services.”
