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Philippines’ Risky Bet on Gaming Industry
The Philippine gambling industry, and particularly online gaming, has recently emerged as a major driver of the country’s economy. Annual license fees are now the government’s third-largest income source after taxes and customs duties. The rise of this controversial industry has become a cause of concern for many Filipino citizens and has also drawn the ire of the Chinese government. However, the industry shows little sign of slowing down.
For the past two decades, Business Process Outsourcing (BPO) has been a major driver of the Philippine economy. Taking advantage of relatively affordable labor, high levels of English proficiency and a prevalence of soft skills, the industry accounts for 1.23 million direct jobs and an additional 4.08 million indirect ones, according to the IT & Business Process Association of the Philippines (IBPAP).
However, a new sector of the economy has emerged that appears poised to take over traditional BPOs: online gambling, also referred to as Philippine Offshore Gaming Operators (POGOs). Last week, Leechiu Property Consultants CEO David Leechiu announced that POGOs had taken over traditional BPOs as the top demand driver for office space in Metro Manila.
In many ways, POGOs can be thought of as BPO for the gaming industry, relying on similar business models and labor cost advantages. Indeed, many analysts, including Alvin Camba, a Sociology Ph.D. candidate at Johns Hopkins University who has conducted extensive research regarding the flows of Chinese investments, attribute their rise in part to the widespread availability of office space and related IT-infrastructure originally developed for traditional BPO operations.
A major fundamental difference of BPO 2.0, however, is the demand for Mandarin speakers – as the vast majority of these operations target Chinese-speaking gamers – a feature that is also shared by brick and mortar casinos.
“Online gambling started in the west, but Chinese firms took the model, improved it, and made it more efficient,” Camba said. “Unlike Western firms, the Chinese ones capitalize on the Chinese-speaking population across the world and millions of easily exploitable Chinese migrants.”
Demand for Chinese-speaking labor has far outstripped native capacity and the last few years have seen a dramatic influx of mainland Chinese workers. The total currently in the country is hard to accurately determine, with estimates ranging from 100,000 to 400,000. The Philippines has also seen a dramatic increase in the number of tourist arrivals from China, some of whom are staying to work, an outcome of the ties forged by the incumbent administration of President Rodrigo R. Duterte.
Data obtained by PSA shows that as of September 4, 2019, the Department of Labor and Employment (DOLE) counted 61,878 Chinese nationals among 70,113 foreign nationals employed by POGO service providers (SPs) compared to just 13,886 Filipinos. The variance is likely due to the commonplace practice, which has existed for decades among expats of all nationalities in the Philippines, of entering on tourist visas and working without proper status. The practice is largely considered a response to notoriously drawn-out processing times for foreign working visas and permits.
Legal Grey Area
The sector exists in overlapping legal grey areas. In August, the Embassy of the People’s Republic of China (PRC) in Manila issued the following statement:
“According to the Chinese laws and regulations, any form of gambling by Chinese citizens, including online-gambling, gambling overseas, opening casinos overseas to attract citizens of China as primary customers, is illegal. The casinos and offshore gaming operators (POGOs) and other forms of gambling entities in the Philippine target Chinese citizens as their primary customers. A large number of Chinese citizens have been illegally recruited and hired in the Philippine gambling industry. In many cases, the employers of Philippine casinos, POGOs and other forms of gambling entities do not apply necessary legal work permits for their Chinese employees. Some Chinese citizens are even lured into and cheated to work illegally with only tourist visas.”
In addition to the PRC’s official stance being decidedly anti-gambling, the Philippines’ own gaming regulator, PAGCOR, “prohibits online casinos from targeting markets where gambling is illegal, including China.”
Following the PRC Embassy’s August statement, PAGCOR suspended the issuance of new licenses. The development was “appreciate[ed]” by the PRC, although Beijing, through Chinese Foreign Ministry spokesperson Geng Shuang called on the Philippines to “go further and ban all online gambling.”
President Duterte flatly responded that the nation “needed [POGOs],” and that no such ban would be forthcoming.
By contrast, Cambodia, where gaming-related investments have increased dramatically over the last few years, made headlines when, on August 18, Prime Minister Hun Sen announced that he had signed a directive banning all forms of online and arcade gambling – telling businesses in that industry that they had until the end of 2019 to completely shutter.
The reasons behind President Duterte’s reluctance to abolish the industry are no mystery – despite his repeated claims that he is personally against gambling, the president is fully cognizant that POGOs and traditional casino operations have become big business.
PAGCOR has reported an income of PHP38 billion (US$730 million) through the first six months of 2019. Indeed, according to Lucio Pitlo III, “annual license fees [have become] the [Philippine] government’s third-largest income source, after taxes and customs revenue.”
Defense Establishment Concerned
Many Filipinos remain dissatisfied with the situation. Aside from the complaints of “Chinese abroad behaving badly,” key members of the government, including the most senior members of the defense establishment have voiced concerns. In July, when asked about the dramatic influx of Chinese nationals, the National Security Adviser Hermogenes Esperon Jr. stated that he “[had] a tendency to look at it as a threat.” In August, the Secretary of National Defense, Delfin Lorenzana, stated that with so many Chinese nationals in the country, it would be “very easy” for them to “shift their activities to spying.” The Defense Secretary later clarified that he was talking about a theoretical possibility, not something that had already been documented.
The Philippines has an as-yet unresolved territorial dispute with the PRC regarding mutually claimed maritime features in the South China (West Philippine) Sea – many of which are within the Philippines’ Exclusive Economic Zone. Despite winning a landmark international arbitration case in the Hague in 2016, the incumbent administration has shown little resolve to push the issue with Beijing. Two weeks ago, President Duterte stated that he was inclined to “ignore” the Arbitral ruling’s findings in favor of closer economic ties with the PRC, including joint oil and gas exploration and development in the contested waters.
Geopolitical concerns aside, other analysts, including PSA’s, have voiced concern over apparent increases in criminal activity linked to both POGOs as well as on-site gambling operations. According to PSA’s 2018 Annual Kidnapping Report, loan shark syndicates accounted for a greater number of kidnappings of foreign victims than did the notorious terrorist organization, Abu Sayyaf Group.
PSA has recorded 21 incidents of Chinese nationals being kidnapped in 2019 in relation to gambling debts. In a typical case, syndicate members offer to “finance” gamblers, detaining and often torturing them if they are unable to repay. These groups then typically demand a ransom in exchange for their release, often from the victims’ family back in China. These cases typically occur in and around brick-and-mortar casinos.
Other criminal activities also have been observed, with the emergence of investment scams defrauding victims in China as well as instances of abuse of Chinese POGO workers in the Philippines. In August, a Chinese national fell six floors to his death attempting to escape an office in Las Pinas where he had evidently been handcuffed to his post by his employer as a result of outstanding “debts.”
The potential for these operations to facilitate money laundering is another major concern. According to Stephen Cutler, Ph.D., a veteran FBI Agent and anti-money laundering expert, the Philippines’ Anti-Money Laundering Council is simply under-resourced in terms of both manpower and IT, to adequately deal with the problem. As early as 2016, the US State Department flagged the Philippines’ gaming sector as the “weak link” in the country’s anti-money laundering effort, adding that organized crime groups “have infiltrated casino operations and have facilitated prostitution, narcotics trafficking, loan-sharking, and suspect junket and VIP gaming tours.”
Relatively high levels of corruption, weak institutions, and uneven enforcement and rule of law have left the country particularly vulnerable to sophisticated transnational criminal groups. Paul Le Roux, the infamous South African drug and firearms trafficker who used the Philippines as his operational base once bragged that he chose the country because:
“As far as Asia goes, it’s the best shithole we can find… I didn’t care who knew what, whether people (in the Philippines) knew the crimes were happening or not because I had the police in my payroll…I was protected.” Indeed, in a recent article in the South China Morning Post, Raissa Robles, detailed how Chinese criminal groups have established a cottage industry of contracting rogue police and military officers to facilitate kidnappings.
Not Going Anywhere
For all its apparent ills, this controversial industry shows little sign of going away anytime soon. “This is exactly what happens when [an] industry gets ahead of regulation,” an international gaming consultant told PSA, “and the answer is now for regulators to try and play catch up.”
The Philippine government has in some ways become partially dependent, or at least accustomed, to the revenues brought in by the industry. Members of the real estate sector too have voiced their concern that a crack-down on the gaming industry would cause a near-term collapse of property and rent prices.
Somewhat ironically, the industry appears to be where the administration has taken a strong line on sovereignty issues with respect to the PRC. In response to Beijing’s call to close POGOs, Philippine Ambassador to the PRC, Chito Sta Romana, quipped: “they can't dictate on us. Those are sovereign decisions.”
Perhaps more poignantly, elites in both countries have entrenched interests in sustaining the industry that will not be easily circumvented, despite Beijing’s official position, with Camba expounding:
“Can the CCP stop the bets? There are ways around it, but one issue is that a number of bets from inside China are vastly more numerous than in other places and the values tend to be extremely small. This makes regulation much, much harder. Add to that, there are 50-60 million competing and uncoordinated Chinese bureaucrats and 500,000 party-elites with their own agendas.”
This article was originally written for PSA Philippines Consultancy, Inc. (PSA)’s Weekly Report. Please contact email@example.com for more information. It was largely taken from a recent panel discussion, ‘Taking a Gamble: The Gaming Industry and the Question of Chinese Influence,’ presented by PSA in partnership with and at Manila House, on September 16, 2019, featuring Alvin Camba, Stephen Cutler, Ph.D., and Sam Ramos-Jones.