Sydney

AUSTRALIA'S casino industry is facing an existential crisis, with allegations of brazen misconduct in courting Chinese gamblers threatening to upend one of the world's most lucrative gambling markets - just as Blackstone buys the biggest player in town.

Four public inquiries into Crown Resorts and Star Entertainment Group in just over a year have uncovered a litany of wrongdoing - from facilitating money laundering to cheating on taxes and preying on problem gamblers.

In the latest revelations, Star allegedly disguised almost A$1 billion (S$1.02 million) as hotel expenses that was instead withdrawn by patrons on Chinese bank cards to be gambled at its Sydney casino. At one stage in 2019, so much money sloshed through this channel that even China's central bank struggled to understand the scale of the spending, according to evidence at the inquiry.

The cascade of investigations, witness-box revelations, damning findings and executive resignations is a watershed moment for what was once one of Australia's most prized industries.

Crown and Star have both been exposed as they sidestepped regulations to chase the vast profits offered by China's wealthiest gamblers. One New South Wales senior government lawmaker has even questioned whether the industry should be shut down for good.

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"The Australian casino business is a dreadful example for anyone running a casino anywhere else in the world," said Charles Livingstone, an associate professor at Australia's Monash University who specialises in gambling policy reform.

It's a cautionary tale for the thousands of companies across the world - from clothes and luxury-goods makers to food and wine producers - that have tied their fortunes to the biggest consumer market on the planet.

Leading the charge was Australia, which turned itself into the world's most China-dependent economy by sending everything from iron ore and coal to wine and beef to the nation's shores. The relationship hit a high-water mark with a free trade deal in 2015. But since then, political ties have all but broken, and China has imposed a raft of prohibitive tariffs on Australian products.

The sorry saga of how Australia's casinos bent the rules to enrich themselves on China is yet more repudiation of one nation's reliance on another for so much.

Plunging into the wreckage is Blackstone, which has agreed to buy Melbourne-based Crown for A$8.9 billion. The US private-equity giant is plowing money into an Australian industry just as it enters a period of unprecedented scrutiny, elevated compliance costs and an inevitable squeeze on profit margins.

At its height, Crown and billionaire shareholder James Packer had casino and entertainment assets stretching into Macau and North America. The international network unravelled in 2017, when a Chinese court convicted current and former Crown employees of illegally promoting gambling.

That case was a turning point, ultimately spawning a regulatory crackdown in Australia that's yet to run its full course. Over the past 13 months, Crown has been found unfit to run casinos in Sydney, Melbourne and Perth by separate watchdogs, though each stopped short of revoking its licences.

As for Star, the weight of evidence during four weeks of public hearings has stoked concern it will fare worse than Crown. The cancellation of Star's Sydney casino licence is a "very real possibility", according to Jefferies Financial Group.

The probe has presented "extremely powerful evidence of organised facilitation of prohibited activities", said Geoffrey Watson, director at The Centre for Public Integrity and a former counsel assisting the Independent Commission Against Corruption in Sydney.

Adam Bell, the lawyer overseeing the inquiry into Star's suitability to run its Sydney casino, must report to the New South Wales gaming regulator by the end of August. Star has said it's cooperating fully with Bell's inquiry.

Some of the most serious allegations against Star relate to the way it sought to profit from high-rollers with links to China, and the transparency of its dealings with Suncity, the Macau-based junket operator. Suncity's chief executive officer, Alvin Chau, was arrested in Macau in November.

According to evidence, Star knowingly misled the regulator in Sydney and allowed Suncity to operate a prohibited money-for-chips desk. The inquiry was shown security-camera footage from 2018 of backpacks stuffed with cash being brought into Suncity's private gaming room. Angus Buchanan, Star's group manager of due diligence and intelligence, testified on March 23 that "it would certainly appear" that money was being laundered.

Chief executive officer Matt Bekier quit days later, after the inquiry heard that he'd berated KPMG for an audit that concluded Star was inadequately assessing money-laundering risks.

Gambling has been a part of Australian culture for centuries. The country spent a record A$25 billion gambling in 2019, among the highest per-capita sums in the world, government data show. It equates to more than A$1,000 for every man, woman and child in the country.

But the latest Star revelations, so soon after the Crown investigations, are stirring outrage and doubts about the merits of allowing casinos to operate at all. Rob Stokes, the New South Wales minister for infrastructure and cities, told state parliament on March 29 that casinos should face "an existential question".

"Are the illusory and ephemeral benefits of Sydney's casinos worth the proven harm - the deceit, the crime and the destroyed lives?" Stokes said.

Crown's glittering new casino in Sydney was built specifically to target wealthy overseas gamblers. The regulator is yet to let it start operations, more than a year after its scheduled opening. Star, now under more scrutiny than Crown, said this month it needed to accelerate changes among its directors.

Both face an uncertain future. "Their revenue sources are, unfortunately, not sustainable," said Livingstone, the Monash University gambling policy researcher. "The real problem is casinos became a law unto themselves." BLOOMBERG