Mixed views on junket investment verdict

Dore group investors stage a protest

The Court of Second Instance (TSI) has recently ruled that a HKD2.5 million investment in a VIP gambling promoter should be considered a loan. The Times spoke with legal experts who have mixed views about the verdict, which public broadcaster TDM says “could have a huge impact in several high-profile cases, even those involving junkets that went bankrupt.”
Cases of junkets who offer locals investment schemes in return for huge interest rates are usual in Macau. Those unregulated investments are informally seen as deposits and some of them recently went bust. The most high profile case that went wrong was the Dore Entertainment theft, with many small local investors unable to withdraw the money they “deposited” in the junket group.
There are others, such as the one which led to the TSI verdict in September, that happened back in 2009.
The complainant knew a junket operator, Cheong Wai Leng, who proposed a deal to her. Shortly after, they signed several contracts in accordance with which the plaintiff “financed” the VIP club operating in a local casino in return for a three percent monthly interest rate. The total investment made was HKD2.5 million.
Two months after the last deposit was made, the plaintiff stopped receiving interest and the VIP club closed. Efforts were unsuccessfully made to have the total amount invested returned. The accuser went to court in order to get the investment made back, plus interest.
TSI cites the Civil Code to note that within the limits defined by law, there is a right to freely formulate a contract between parties. In this case, TSI stated that the contract is apparently a deposit. However, it is noted that “those contracts require that the deposit holder must be a bank, something that doesn’t occur in the case trialed.” The appeal court also ruled that the contract couldn’t be considered as a participation in the junket company, since the complainant didn’t have a share of profits (or eventually incur loses), receiving instead interest for the investment made.
Hence, TSI says that the investment made by the plaintiff should be considered a loan and be repaid with interest. But the three percent interest per month, which corresponds to 36 percent a year, is above the maximum allowed by law.
The court ruled that the interest rate could not be higher than three times the legal interest rate, which is equivalent to an annual interest rate of 29.25 percent.
Asked to comment on TSI’s ruling, José Espírito Santo Leitão, a partner at MdME law firm, told the Times that the verdict “opens good prospects for the rights of other persons injured by these arrangements as it is likely that local courts will also recognize their rights to repayment and will refuse to treat the amounts as losses arising from investment.”
“The decision is based on the position – with which we agree – that a contract providing for a temporary disbursement of money (one year term), with a fixed interest rate (three percent over the loaned amount), detached from any consideration of profit or loss of the investment and ability for the creditor to recover the money with two month’s notice, falls within the concept of a loan resulting from Macau law, and not of an investment,” José Espírito Santo Leitão complemented.
Macau-based lawyer Jorge Menezes told the Times that underlying the case are the consequences of a lack of regulations for gaming promoter activities, namely the way they finance themselves and operate.
“There are rules on credit granted for gaming activities. But these rules cover essentially credit granted to gamblers by casinos or gaming promoters. DICJ has recently issued measures aiming at tightening supervision and control over gaming promoters accounting and a new instruction on anti-money laundering measures, which increase their reporting obligations. However, as this recent judgment exemplifies, the financing of gaming promoters is essentially governed by the general law,” he told the Times.
That is the reason that leads TSI to quote the Civil Code and state that any agreement that is not forbidden by law, is lawful and should be fulfilled by the parties.
“The court found that this was a valid loan. Had it found otherwise we would be facing similar troubles. The problem is that the main goal of the general rules applied by the court lies in protecting and furthering the private parties’ interests and adjudicating fairly. Yet, the public interest should be addressed by the government. While casinos are governed by detailed sets of rules, the same cannot be said about gaming promoters,” Menezes argues.
According to the lawyer, financial institutions, investment funds, casinos and others are subject to stringent financial procedures and constraints, partly because they deal with huge amounts of money. Inversely, junkets are left “nearly untouched by the law.”
“The truth is that gaming promoters have been living in a sort of no one’s land, a rather convenient limbo that has been extremely profitable in the last few decades. This should be tackled. This is a matter of obvious political relevance.
Another concern is lack of transparency. Prevention depends on transparency. There is way too much protection of confidentiality as if there was something magical about what they do. There should be more reporting and more disclosure,” Menezes continued. “Journalists, politicians, non-
profit organizations, and the community in general should have access to more information. We do not even know which gaming promoters are registered with each concessionaires or sub-concessionaires. This is just an example among many. It is puzzling.”
Claiming that gaming promoters “are pivotal for money laundering and terrorism financing concerns,” Menezes thinks that “the integrity of Macau’s economy can be shaken by unregulated entities dealing with millions or billions as the recent past has shown.”
It is still not clear if TSI’s decision validates the popular practice in Macau of trusting junkets with savings money, as if they were banks or benefactors.