Gaming needs due diligence in Russia

The Russian government has wagered $18 billion in infrastructure projects for the southern port city of Vladivostok on a gamble that American casino giants will turn the area into the next Macau.

Vladivostok may also become known for something more than just its proximity to northeastern Asia, a minuscule gaming tax and a market hungry for casinos.

Russian mobsters.

We’re not talking the drug lords that Arnold Schwarzenegger and Jim Belushi chased down in the 1988 film “Red Heat.” Nor do they resemble the arms dealer portrayed by Nicolas Cage in the 2005 movie “Lord of War.”

Today’s organized crime in Russia is disguised as legitimate business operations.

“They are not the guys with the tattoos and the bull necks. It’s a new generation of Russian gangster,” said Mark Galeotti, the academic chairman of New York University’s Center for Global Affairs. He is an expert on modern Russian organized crime and security affairs, having followed the topics since the downfall of the Soviet Union.

Galeotti will be in Las Vegas on Wednesday night to take part in the Mob Museum’s fall lecture series. With Russia on gaming’s radar screen, gangsters see new opportunity.

The challenge, Galeotti said, is for gaming companies looking at Vladivostok to do their due diligence.

“It’s not like you’re going to know you’re dealing with a Russian gangster,” Galeotti said. “They are probably university educated and have legitimate businesses. A lot of criminal businessmen are very good at what they do.”

Vladivostok is one of the four regions allocated by the Russian government to have gaming. The mountainous region bordering China and Korea is roughly a two-hour flight from Seoul or Tokyo.

Plans call for 12 casinos with the first phase of a three-part rollout to be completed by 2016 and a planned total investment of about $2 billion.

Galeotti said that of the four regions, Valdivostok makes the most sense because it is further along than other locations. The city is in the Russian Federation’s Primorsky Territory, which is best known for fish processing and heavy industry.

Galeotti, who founded Europe’s only Organized Russian & Eurasian Crime Research Unit, said the region is also infamous as a criminal haven. The ports allow smugglers to move goods in and out of China while black market automobiles can move easily to and from Japan.

In July, Nash Dom Primorye, the wholly owned government developer in Vladivostok, released a Request for Concepts inviting major gaming companies to submit ideas for the first phase of the development.

Nash Dom Primorye said it was willing to trade zero gaming taxes for creating jobs and developing the area’s tourism industry.

Galeotti said gaming will attract Russian gangsters who view the casinos as conduits for money laundering and other rackets.

“There will be a lot of dirty money coming into the casinos,” Galeotti said.

The challenge of an untested market such as Russia is not new to the casino industry.

When the Portuguese colony of Macau was returned to China in 2000 as a special administrative region, gaming was expanded beyond the casino monopoly controlled by Hong Kong billionaire Stanley Ho. International law enforcement authorities alleged Ho’s casinos were influenced by Chinese organized crime triads.

Opening the market to casino operators such as Las Vegas Sands Corp., Wynn Resorts Ltd. and MGM Resorts International helped legitimize Macau, which is now the world’s most lucrative gaming destination, producing $33.5 billion in revenues in 2011.

The move came at a cost. Nevada casino companies work with Asian junket operators who bring high-end customers to the Macau casinos. The junkets extend credit and collect debts, while receiving commissions on the gaming revenues their gamblers produce.

The concern has been that junket operators have nefarious ties, potentially to triads.

Earlier this year, former Nevada Gaming Control Board Chairman Mark Lipparelli told The Wall Street Journal that the junket operators are “becoming an area of increased attention for us.”

MGM Resorts spokesman Alan Feldman said the company conducts on extensive investigation of its Macau business partners.

“We do due diligence,” he said.

Galeotti said the same due diligence – and then some – will be necessary in Russia.

He told the story of a Western businessman who knows a company he works with in Chechnya is controlled by organized crime. However, the relationship means the trucks carrying his goods arrive safe and on time.

“No one messes with his trucks. It might cost a little more, but for him, it makes perfect business sense,” Galeotti said.

“I’m certainly not recommending this to a business as complex as gaming,” he added.

Howard Stutz’s Inside Gaming column appears Sundays. He can be reached at hstutz@reviewjournal.com or
702-477-3871. He blogs at lvrj.com/blogs/stutz.
Follow @howardstutz on Twitter.