CWN Crown Resorts Limited

China's detention of casino employees is seen as broad warning to foreign companies

By Mike Cherney in Sydney, Wayne Ma in Beijing and Alexandra Berzon in Los Angeles 

China's surprise detention of 18 employees from Australian casino operator Crown Resorts Ltd. is reverberating from Macau to Las Vegas and beyond, with gambling concerns -- and some business consultants in general -- advising foreign executives to steer clear of mainland China for now.

The Crown employees were detained two weeks ago as part of an investigation into possible gambling-related crimes. Chinese authorities have declined to give details, and no charges have been made public. Jason O'Connor, the executive who oversees Crown's international VIP business, is among three Australians being held in Shanghai.

Gambling-industry insiders think the government is signaling its intention to strictly enforce rules that bar the marketing and promotion of gambling in China. But the episode also serves as a broader warning to other foreign companies doing business in China, legal experts say.

Dan Harris, a partner at law firm Harris & Moure in Seattle, said Chinese authorities are stepping up enforcement against businesses that don't comply with Chinese laws. He is cautioning some clients against setting up offices in China and to avoid executive travel there.

"Fifteen years ago, not many companies got caught. China didn't have the forces in place to catch these people, and they probably didn't have the desire," he said. Now, China has begun to "step up its game."

The gambling industry, which in many ways has pinned its growth to China's ability to mint tycoons, has taken notice.

"The lawyers are all over watching this," said Jan Jones Blackhurst, head of government relations for Las Vegas-based Caesars Entertainment Corp. "Everyone is backing way off until we totally understand what were the concerns of the government."

Chinese nationals contribute less than 10% of gambling revenues to casinos in Las Vegas and 15% in Australia, according to estimates from analysts at brokerage group CLSA.

Their impact is much greater in Asia, where casinos are being built especially to cater to their tastes. CLSA says Chinese account for 25% of gambling revenue in the Philippines, 30% in Singapore, 60% in South Korea and more than 80% in Saipan and Macau.

But VIP gambling tables have been hard hit by Chinese President Xi Jinping's campaign to crack down on corruption by party officials -- and to limit the amount of capital leaving the country.

VIPs account for about half of all gambling revenue in Asia casinos, down from about 69% in 2010, CLSA estimates show. Macau, a special administrative region overseen by China, has been especially hard hit, but casinos in nearly every other country are down as well.

Australia, less subject to the glare of the Chinese government than Macau, has been a rare exception. VIP gambling revenue there is up about 35% for the past two years, according to data from CLSA.

Crown declined to discuss what its employees were doing in China. But it is hardly the only casino operator who has sent employees to the country. U.S. casino interests are among those with marketing people who discreetly travel to mainland China to court high-end customers through small gatherings over dinner and drinks, people involved say.

The detention of Crown's employees will have a "very big impact" on the industry, said consultant Tony Tong, vice chairman of the Macau Gaming Information Association.

"A lot of foreign casinos have been active in marketing their services to China," he said. "This time, the government is sending a clean and clear message."

Other foreign business interests -- including those in mining, pharmaceuticals and financial-information services -- have previously drawn the ire of Chinese authorities.

In 2010, U.S. citizen Xue Feng was sentenced to eight years in prison for helping to purchase data on China's onshore oil wells on behalf of his then-employer, the information provider now known as IHS Markit Ltd. The government classified the data as a state secret two years after the sale.

Mr. Xue argued that he wasn't aware of the sensitivity of the data, which isn't considered a state secret in other parts of the world.

British national Peter Humphrey and his American wife, Yu Yingzeng , were convicted in 2014 of buying personal information on Chinese citizens, a practice that until then was mostly ignored by Chinese authorities. The couple had been investigating a case for GlaxoSmithKline PLC's local office in China, which was later found guilty of bribery.

China experts say the recent cases show that foreign companies need to be more cognizant of Chinese laws and the nuances of the country's political system.

"You've got to know what you're doing, because the costs of failure are now high," said Ryan Manuel, a research fellow at the Australian Centre on China in the World at Australian National University.

Write to Mike Cherney at mike.cherney@wsj.com, Wayne Ma at wayne.ma@wsj.com and Alexandra Berzon at alexandra.berzon@wsj.com

(END) Dow Jones Newswires

October 31, 2016 02:47 ET (06:47 GMT)

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