China has an offshore online gambling problem

China-Facing Online Gambling Sites Running Amok In The Philippines

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President Rodrigo Duterte of the Philippines and his government may be starting to regret the decision to allow offshore gambling sites to operate out of their country. Philippine offshore gambling operators (POGOs) don’t seem to be playing by the rules, and it may be too late to rein them in.

Some Asian countries, most notably China, have a long-standing cultural history of gambling under socially conservative governments. That creates a dynamic where there is considerable unmet demand for gambling — both online and land-based — and few legal options.

That, in turn, has led to the proliferation of illegal offshore operations. And the Philippines has a particularly high concentration of those.

The Philippines: a haven for offshore gambling

POGOs are predominantly run by Chinese citizens for the Chinese market, though some also serve neighboring countries like Vietnam and Thailand.

China is the more lucrative target, of course, due to its population and the extreme wealth of its upper class. All gambling is illegal on the Chinese mainland, save for the government lottery.

When Duterte first took power, he vowed to put an end to offshore gambling. Once it became apparent how important it was to the nation’s economy, however, he reversed his position and has held firm to that new stance ever since.

China calls for an end to POGOs

Back in August, Chinese president Xi Jinping surprised the gambling world by raising the issue directly with Duterte during a meeting. It’s rare for illegal gambling – domestic or offshore – to be seen as sufficiently serious an issue that it’s addressed at the level of national leadership.

Duterte placated Jinping in the moment by assuring him that he’d look into the financial impact of dismantling the POGOs. Mere days later, however, he was telling reporters that the POGOs were too important to do any such thing.

A deal that’s too good to be true

The appeal of the offshore gambling industry is obvious, both for the Philippines and for the Chinese citizens who come to work for the POGOs.

Starting wages can be as high as 10,000 yuan per month, or about $1,500 plus food and accommodation. The average wage of an urban private sector worker in China is barely a third of that by contrast, and the situation is far worse in rural areas.

For the Philippines, POGOs are big money.

The local gambling regulator PAGCOR has collected $150 million in license fees this year alone. That’s despite a moratorium on new licenses enacted in August to help soothe the Chinese government. PAGCOR will resume issuing licenses in 2020 and expects to collect a further $200 million from those.

If the POGOs were all paying taxes, they’d be worth many hundreds of millions of dollars more. But therein lies the problem.

Illegal gambling a slippery slope to organized crime

The thing about criminals and criminal organizations is that they tend to commit crimes.

The Philippines might not consider POGOs illegal. However, the people running them are criminals by the laws of their home country. And they could face prosecution if they return to China.

That’s a bridge they’ve already crossed, and the Philippine government was foolish — as it is now discovering — to believe that POGOs would comply with Philippine law while breaking Chinese law.

There are currently 60 licensed POGOs in the Philippines, officially employing some 56,180 people. Only 10 of those pay taxes, however. There are also estimated to be at least 100 POGOs operating without a license.

Both the licensed and unlicensed POGOs also employ illegal workers who come to the Philippines from China on tourist visas. They pay no income tax, of course, and probably number in the hundreds of thousands.

Tax evasion isn’t the full extent of the problem, either. Some POGOs have reportedly begun to branch out into other forms of organized crime including prostitution, loan-sharking, and even kidnapping.

There have been over 50 reported cases of casino-related abduction to date. One recent instance involved a young Chinese man deep in gambling debt who was abducted and tortured to extract a ransom from his parents.

Little chance to turn back time

If the Duterte or a future president were to reconsider the decision to allow POGOs, there’s a good chance they’d find that it’s too late. For one thing, these operators are propping up what had been a struggling real estate market.

Each POGO reportedly takes up between 20,000 and 160,000 square feet of space for its operations. Between both the legal and illegal ones, that likely means something like 10 million square feet of commercial real estate are being rented by the industry.

On top of that are the residential spaces POGOs rent to house their employees. It’s obvious what a boon they’ve been to real estate developers, who have been among the fiercest opponents of any attempt to shut them down.

Worse, the organized crime aspects of the POGOs have begun to include bribery. It seems some corrupt police and immigration officials are now in their pockets. This is likely part of the reason the government doesn’t have a firm handle on just how many POGOs there are, how much they owe in unpaid taxes, or how many people they employ.

Depending on how deep that corruption already runs, shutting them down might not be merely costly and unpopular. It may, in fact, be impossible in practice. And it’s only likely to get worse.

Trying to make the best of a bad situation

Since the genie is out of the bottle and probably can’t be put back, the Philippine government is attempting to roll with it and increase its slice of the pie. It will impose a 5% franchise tax on POGOs and a 25% income tax on their workers.

Socioeconomic Planning Secretary Enresto Pernia claims those taxes should bring in the equivalent of about $880 million. That’s assuming they can be collected, however. As it stands, Finance Secretary Carlos Dominguez estimates a minimum of $400 million in unpaid taxes.

Duterte has warned POGOs to pay their fees and taxes or face the consequences, but they may only get bolder with time if he’s powerless to shut them down.

Lessons to be learned

The Philippines’ experience with POGOs should serve as a cautionary tale for other countries considering dealing with such organizations. Yet, China’s role in the problem is also significant.

People who want to gamble will find a way to do so. When gambling is legal, governments can collect taxes. They can then spend some of that money on reducing the societal harm of gambling. When it’s made illegal, however, criminal organizations often profit.

Cracking down on them can be difficult, as the internet means they can easily move their operations to another jurisdiction.

Yet when governments tolerate them, they can start to branch out into other forms of criminality. That can include gambling-related crime like cheating or absconding with player funds, but also more serious forms of organized crime.

Seen from that perspective, liberalization and regulation is the obvious answer. Fortunately, it’s the route more and more western countries are taking. The rest of the world would do well to compare the situation in Europe these days to that in Asia, asking itself which paths reduce harm and which increase it.

- Alex is a journalist from Dartmouth, Nova Scotia, Canada. Now site runner for Online Poker Report, he has been writing about poker and the online gambling industry in various capacities since 2014.
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