special report The connection Las Vegas Sands faces a crimal investigation into alleged unsavory business practices

REUTERS/Bobby Yip By Matt Isaacs low, below $2 a share, around the time gambling boomtown bigger than Las Vegas BERKELEY, Calif, March 10 Jacobs, a 47-year-old Harvard graduate and 16 time zones ahead of the Strip. with a boyish face and close-cropped silver “There is no question as to Steve’s hen Steve Jacobs joined Las hair, took a job heading Sands , which performance,” Sands COO Michael Leven Vegas Sands in 2009, the company runs the company’s Macau operations. told the company’s board of directors in early Wwas sinking. But over the course of the next year, Sands 2010, according to court records. “The Titanic The Sands, which owns the Venetian mounted a remarkable recovery, thanks in hit the iceberg. (Jacobs) arrived and not only resort, saw its stock price hit an alarming large part to Jacobs’ leadership in Macau, a saved the passengers, he saved the ship.”

march 2011 macau march 2011 “Casino operators regret the growing power of ‘junket’ operators in that account for most of the Macau casinos’ earnings.” with the Investigative Reporting Program espionage. at U.C. Berkeley has learned that casino But the brazen town on the tip of a Chinese executives, U.S. diplomats and the Chinese peninsula has evolved into much more than a government share the concerns raised by backwater den of iniquity. Jacobs about Macau’s booming junkets Today Macau is a super-charged conduit industry, which they describe as rife with for cash on the lip of the world’s fast-growing organized crime. major economy. The once worn casinos An extensive review of court records, huddled near the ferry docks have gone interviews with high-level federal officials, upscale. And in the last ten years, it has and State Department cables obtained by become a major source of cash for America’s WikiLeaks and released to Reuters through largest casino operators. a third party, reveal widespread corruption in Since 2001, when China opened its doors a region that resembles a Chinese version of to U.S. casinos, annual revenues have the early years of Las Vegas. increased more than tenfold to reach $23.5 Among the Reuters-IRP investigation’s billion today -- more than two and half times findings: the revenues of the Las Vegas Strip and * The FBI has joined the federal Atlantic City combined. The enclave provides investigation of Sands, prompted by the two-thirds of Sands’ revenue worldwide, Jacobs allegations. according to securities filings. * Sands has an internal background report Behind the gaudy numbers, however, FIRED: Sands China’s then Chief Executive Steve on an alleged criminal figure who had public records suggest the region is becoming Jacobs attends a media briefing in May 11, financial links to the company. a growing geopolitical concern. 2010. REUTERS/Bobby Yip * Mainland China restricted visas to Macau The U.S. Department of State, in its 2011 based on its distress about the growing International Narcotics Control Strategy The feel-good story, however, was not to power of criminal groups, known as triads, in Report, said Macau is “vulnerable to last. the region. becoming a hub for the laundering of criminal Within months, Jacobs was clashing with * U.S casino executives have discussed with proceeds.” the company’s CEO Sheldon Adelson over U.S. diplomats the pervasive influence of the Beyond the casinos, the report says, the several issues, according to a legal complaint, triads in the junkets for years -- yet nothing “close proximity border with PRC (China) including whether to hire more so-called has changed. and Macau’s open economy, including lack of junket operators who bring in high rollers. Sands says that it has denied all allegations controls on cross border physical movement Jacobs says he objected, citing their corrupt in the Jacobs lawsuit from the outset and of cash, are factors that create a risk of money reputation -- and last July, the company on January 21 a subsidiary filed documents laundering and terrorist financing activities.” unexpectedly fired him effective immediately. seeking to initiate a criminal complaint And the triads, according to diplomatic Two security guards escorted him out of against Jacobs. It declined to provide a copy cables, are expanding. A trusted academic the casino without allowing him to gather of the complaint. told diplomats that China had clamped down his belongings, and then unceremoniously The SEC and Department of Justice on Macau visas, “at least in part to stem the escorted him out of town, Jacobs alleges. inquiries appeared to be a result of Jacobs’ rise of organized crime in the mainland.” Today, Jacobs is firing on the ship he once allegations in his wrongful termination The source of this criminal expansion is saved. The former chief of Macau operations lawsuit, Sands said by email to Reuters. Macau’s unique junket system, which whisks is suing Sands, and his description of “Neither the SEC nor the Department of VIPs into casinos, stakes them, and offers unsavory business dealings in the lawsuit has Justice has accused the company of any legally suspect services to avoid China’s strict touched off a criminal investigation. wrongdoing. The subpoena is described as currency and debt collection laws. The junket Earlier this month, the company a fact-finding inquiry and does not mean the companies -- widely linked to the triads, acknowledged it had received a subpoena for SEC has concluded anyone has broken the according to diplomatic cables -- generated documents pertaining to possible violations law,” it said. an incredible 72 percent of the region’s of the U.S. Foreign Corrupt Practices Act, gaming revenues last year. which bars U.S. corporations from bribing BIGGER THAN LAS VEGAS “Casino operators regret the growing foreign officials. Not only are the Securities Macau, a former Portuguese colony power of ‘junket’ operators in mainland and Exchange Commission and Justice located less than 40 miles (64 km) west of China that account for most of the Macau Department looking at Sands’ actions, but Hong Kong, for centuries served as a center casinos’ earnings,” one U.S. consulate the FBI has joined in. for trading and piracy in the South China official reported in a cable. “They believe the A Reuters investigation in collaboration Sea, a base for vice, gold smuggling and operators are directly or indirectly involved

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HIGH STAKES: A croupier prepares to greet visitors inside the VIP room of Sands Macao in Macau May 18, 2004. REUTERS/Bobby Yip with organized crime in Macau and the Jacobs in his suit also notes that he was mainland.” repeatedly threatened with termination if The U.S. casinos operating in Macau are he “objected to and/or refused to carry out bound by Nevada laws that prohibit them Adelson’s illegal demands.” from bringing “disrepute” upon the state. Find more Reuters special reports at In particular, Adelson insisted Jacobs hire But they have immersed themselves in the our blog The Deep End here: a local lawmaker named Leonel Alves, he junkets -- while privately, according to cables, http://link.reuters.com/heq72q says in his lawsuit. For more than a year, confiding their concerns about the criminality Alves, a public official in a position to help of the industry to diplomats. planners wanted a diverse assortment of the corporation, was also listed as its counsel Another cable quoted a senior U.S. executive properties, and Sands has delivered, building -- a potential conflict of interest central to the saying the growth of the triads was leading the Venetian Arena, the Grand Canal Shoppes U.S. federal bribery investigation. to expanding corruption in China. Provincial and the Four Seasons apartments. A Sands senior executive acknowledged officials were providing “sweetheart” land But where Las Vegas rivals went in softly, a potential conflict in an interview with the sales, business licenses, and government working with local businesses and regulators, Macau Daily Times last fall. “When we deal contracts to junket operators, in exchange Jacobs’ suit and diplomatic cables suggest with an individual that is a government for bank deposits or cash sums paid to the Sands wasn’t there to make friends. official, we have to follow the rules of the officials upon arrival in Macau. One diplomat in a cable referred to the United States,” said Chief Operating Officer casino’s “combative” style. Others describe Leven. “So we are working our way through SANDS’ COMBATIVE STYLE how Sands executives have gone over the that.” No U.S. casino has more aggressively heads of Macau politicians to lobby ranking Jacobs, meanwhile, says Adelson was pursued the Macau dream than Las Vegas members of China’s politburo, much to the pushing to “aggressively grow the junket Sands. chagrin of the locals. business.” In his lawsuit, he says that he Sands was the first U.S. casino to plant Jacobs says in court filings that one of his himself objected to expanding the VIP roots in Macau in 2004, and has since primary tasks involved repairing “strained segment, citing low profit margins and grown into the largest American company relationships with local and national “given recent investigations by Reuters and in the region, dwarfing the operations of government officials in Macau who would no others alleging (Sands’) involvement with competitors like Wynn Resorts and MGM longer meet with Adelson due to his rude and Chinese organized crime groups” connected Resorts International. obstreperous behavior.” to the industry. Sands raised the stakes for the entire Adelson, Jacobs charged, instructed him to Now, the FBI has joined the probe into territory. From a swath of reclaimed land, secretly investigate senior Macau government Sands and is exploring the full range of it created a new gambling resort called the officials. A“ ny negative information could be Jacobs’ allegations, “getting into all of it,” a “Cotai Strip,” an Eastern rendition of Las used to exert ‘leverage’ in order to thwart source familiar with the probe said. Vegas with plans for shopping, restaurants government regulations/initiatives,” the Leven, the COO, told the Macau Daily Times and fancy hotels. The Chinese government lawsuit claims. last week that there were some “mentions”

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in the federal subpoena about “triads and historic: this was one of the first documented Heung has repeatedly denied any things like that,” adding vaguely, “but we examples of an alleged criminal figure participation in organized crime. think that’s cover.” financially linked to a U.S.-based, publicly The Sands background reports on Cheung traded casino. and Heung are the subject of a series of RETURN OR DESTROY DOCUMENTS The article led to an ongoing Nevada letters in the Jacobs case. Documents show According to the Jacobs suit, Sands has investigation. The company then the former executive still holds copies of already done its own poking around within commissioned its own private background at least one of the reports based on the Macau’s criminal underworld. The casino report on Cheung, said a person involved in investigations commissioned by the casino. commissioned background checks on local the Sands effort who requested anonymity. Sands’ displeasure is reflected in its legal officials as well as two alleged criminals. The company also ordered a report, team’s demand for the “immediate” return of Sands has given at least one report to according to documents in the Jacobs case, the internal inquiries. Nevada, a casino regulatory source said, but on another figure who was identified as a “All copies,” the attorneys insisted, should it has gone out of its way to stop the reports member of a triad in a 1992 U.S. Senate “be returned to us or destroyed.” from reaching the public eye. Subcommittee probe. Charles Heung was Last year, Reuters published a report on described in a Subcommittee chart of COMMON KNOWLEDGE a man named Cheung Chi-tai, described in organized crime as an officer of the Sun Yee Nevada spent decades cleansing itself of court testimony as the mastermind behind On triad. criminal elements. By the 1980s, as casinos a plot to murder a dealer suspected of In a 2007 public hearing, the former chair largely assumed corporate control, gambling cheating. of the Nevada Gaming Control Board, Randy was widely considered one of the most At trial a witness identified Cheung as a Sayre, also said he had seen three public heavily regulated industries in the United leader of the Wo Hop To -- one of the largest documents identifying Heung as “a high- States. Nevada’s oversight became the gold triads in Hong Kong. ranking member of the triads,” according to standard. Cheung was also, according to witness a transcript. And from the moment Sands landed in testimony, “the person in charge” of a VIP Macau, the industry and state regulators room at the Sands Macao, and Hong Kong “all of the junket insisted the same rules that apply at home stock exchange filings showed him to be apply there. Casinos can lose their licenses if a “substantial shareholder” in a junket operators are they consort with the wrong characters. company with ties to the cloistered room. directly or Nevada has no office in Macau and largely The allegations emerged in a routine trial, depends on local oversight, which casinos barely noted beyond the crime pages of Hong indirectly involved executives quoted in cables describe as lax. Kong newspapers. Yet the revelations were with the triads.” Diplomats relay widespread concern about Macau’s police and gambling regulator. The Macau police force is “afraid of triad GAMBLING REVENUES groups,” a diplomat quoted the academic who was a trusted source as saying. Macau versus Las Vegas Strip 1 dollar = 8.0237 mop Organized crime leaders in Macau “know % change from previous year billion $ the identity of each police force member and 100 8 where they live,” the diplomat continued. Macau Las Vegas Strip Macau’s Gaming Inspection and Coordination Bureau, which goes by DICJ for its Portuguese acronym, barely enforces 75 6 its own rules, according to accounts in the cables. Sands executives approached diplomats 50 4 with particular frustration about the agency’s oversight. “They alleged that junket operators are routinely licensed after cursory DICJ investigations,” a diplomat wrote in a 25 2 cable, “while the DICJ does not enforce its own reporting requirements.” A senior executive at MGM told the 0 0 consulate that “there are some good people at DICJ, but if they’re not directed to take enforcement action by Macau’s political leadership, they won’t.” -25 One Macau casino executive, quoted in a Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2008 2009 2010 U.S. State Department cable, reported that “all of the junket operators are directly or Source: Macau's Statistics and Census Service, Nevada Gaming Commission indirectly involved with the triads.”

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Graphic MACAU-REVENUES/ Date 10 / 03 / 11 Story - Reporter - Size 10 x 9 cm Research - Artist Kinyen Pong/RNGS Code ECO © Copyright Reuters 2011. All rights reserved. http://thomsonreuters.com/products_services/media/media_products/graphics/ macau march 2011

Other cables show U.S. diplomats and casino operators routinely discuss corruption Las Vegas Sands in the Chinese enclave. Another diplomat divulged that “private U.S. casino operator Las Vegas Sands has seen share price and profit swing wildly in the last few sector leaders have noted many loopholes years as it made an aggressive, costly expansion into the Chinese gambling haven of Macau. that enable junket operators -- and the casino Net profit/loss – $ millions Share price – $ 800 concessionaires themselves -- to enter legal 200 gray zones with little fear of investigation.” 600 Then there is Manuel Joaquim das Neves, 150 the long-standing head of DICJ, who was remarkably candid when discussing the 400 100 junkets industry with diplomats. During a conversation with a U.S. official about the 200 50 worldwide economic downturn, he implicitly linked the triads to Macau’s gaming sector, 0 0 saying that “triads’ revenues will probably decline in 2009 along with Macau’s gaming -200 10/03/1

earnings.” 1 -400 Neves acknowledged some wiggle room 2006 2007 2008 2009 2010 in his agency’s licensing, which judges candidates primarily on their criminal history. Source: Company reports, Thomson Reuters “If you make hard rules in the beginning, no Reuters graphic/Stephen Culp one applies,” a cable quotes him telling U.S. diplomats. “So we forgive small crimes in an applicant’s background.” Neves told Reuters “there’s no logic” to any assertion that his agency is falling short of its duties. “The majority accept that we are doing a good job in Macau,” he said. “I cannot say that in Macau we don’t have triads, but things are under control,” he added.

CHINA’S CONCERNS The scale of the corruption in Macau has drawn fire from the most powerful and important critic of all -- the mainland China government. And China’s ire already has been felt once as the government choked off the supply of gamblers to Macau. Criminality within the VIP segment made China “very concerned,” one U.S. diplomat revealed in a cable. In late 2008, according to a missive, it changed the rules of the game, cutting the number of visas from mainland China to Macau in a move that was disastrous for U.S. operators, including Sands. “The fact that mainland gamblers account for the majority of funds flowing into Macau appears increasingly undesirable to Beijing,” says one post. “The perception is widespread that, with the implicit assistance of the big ‘junket’ operators, some of these mainlanders are betting with embezzled state money or proceeds from official corruption, and substantial portions of these funds are flowing on to organized crimes groups in SANDS CHIEF: Las Vegas Sands Chief Executive Officer SheldonA delson speaks during a media briefing in mainland China, if not Macau itself.” Singapore December 21, 2009. REUTERS/Vivek Prakash

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Jacobs, quoted in a cable, spoke to this sits before us.” SO MUCH POWER point when he told a diplomat that “the junket A murmur circulated through the crowd. Early last June, at G2E Asia, a conference operators maintain significant economic and The gentleman had identified the for casino industry insiders, the Venetian political influence in Macau.” 800-pound gorilla -- who was not in the Macao hosted a session to discuss “The “The government and all the room. Future of VIP.” concessionaires rely heavily on the junket Jacobs had grown wary of the dangers On stage, beneath a massive, glittering operators for the bulk of their revenue of this gorilla, he said in his complaint. His chandelier, sat three men: a former executive streams,” says another cable. “They won’t private objection to expanding the junket from Sands Macao, an academic, and Sean make any big moves against the junkets.” business was one of the final battles he fought Monaghan, a junket analyst, who proclaimed: Another missive points out that as Macau with his boss. Soon enough, their differences “These guys are huge, they’re growing, and derives over half of its revenues from the VIP would reach the point of no return. they hold so much power.” market, it has “proven itself either incapable Now Jacobs is shouting his concerns for all Monaghan was articulating what had or unwilling” to rein in the companies. the world to hear, and federal authorities in already begun to be well understood by the Toward the end of the session, an emissary Washington DC appear to be paying heed. U.S. diplomatic corps. By plunging millions from the U.S. consulate rose to make a of dollars into the development of the VIP comment. “I find it remarkable,” he said, (Additional reporting by Peter Henderson; sector, casinos had, in essence created a “that we’re talking here about junkets, yet Editing by Peter Henderson, Lowell Bergman, monster. not a single representative from the industry Jim Impoco and Claudia Parsons)

TABLE GAMES: Croupiers prepare to greet visitors at Sands Macau casino in Macau, May 18, 2004. REUTERS/Bobby Yip

COVER PHOTO: The Venetian Macao casino resort of Las Vegas Sands is seen lit up in the evening in Macau June 2, 2009. REUTERS/Bobby Yip

For more information contact:

Jim Impoco, Claudia Parsons, peter henderson, Enterprise Editor, Americas Deputy Enterprise Editor San francisco bureau chief +1 646 223 8923 +1 646 223 6282 +1 415 677 2541 [email protected] [email protected] [email protected]

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