Casino Enterprise Management

Casinos around the world issue billions of dollars in credit every year. Foxwoods Resort Casino, the largest casino resort in North America, is one of the larger issuers of casino credit. As much as casinos like to declare that this credit is with minimum risk, there is risk. There is the risk of the player not paying for any of numerous reasons, such as: his financial situation changed quickly, he is no longer liquid, he owes too many other casinos money and decides to pay them first because he plays there more regularly than at your casino, etc. We have all heard these excuses over the years.

Another risk is fraud, which is more prevalent in international casino credit transactions, where decisions are not as structured as we would like and oftentimes are based purely upon a player’s past record of “play and pay” at other casinos. Unfortunately, I have been on many collection trips where the player’s home address turned out to be a cemetery or an empty lot. On other trips, the player threatened me with bodily harm. Casino collections can be dangerous, especially in countries where casino debts are not legally recognized and therefore are also not legally enforceable for collection proceedings.

What can casinos do to better protect themselves from credit risks? Depending upon your gaming jurisdiction’s regulations, there may be some new creative options worth considering. Today we hear a lot about “reverse mortgages” as an option for individuals above a certain age to remain in their own homes during rough financial times. Basically, older homeowners borrow against the equity that they have built up in their homes, but they also pledge their home to the lender as collateral. The lender thereby allows the customer to live in their own home until their demise, knowing that they will eventually take ownership of the home. It is an innovative concept that led me to think outside of the box and take a closer look at casino credit in an attempt to determine what the benefits are to all parties. I tried to think like a consumer rather than a casino operator and then tried to develop a new, innovative concept that made sense to all parties—and provided benefit to all parties. I also studied private banking to get a better understanding of how they develop relationships with their best customers.

After meeting with well over a dozen of the top private banks during my last job in Singapore, I decided to work with a major international private bank that I will refer to as Bank X. Bank X is one of the market leaders in Asia, especially in private banking, and at the time also seemed to be fairly aggressive in its marketing. Our initial meetings focused on educating Bank X about casino credit. Its people were intrigued by the concept that casinos lend billions of dollars annually to customers in the form of casino credit for purposes of gaming. Bank X wanted in. We then began to focus on the benefits to the customer as opposed to the benefits to the casino or to Bank X. (Those benefits were reviewed independently of casino customer benefits.)

The first task was to educate Bank X as to why customers prefer to use casino credit, as opposed to bringing cash to gamble or to having their bank transfer funds in advance of their gaming trip. We all know that it is both dangerous and difficult to carry large amounts of cash around the world with today’s strict reporting requirements. Carrying large amounts of cash is not illegal if declared properly at each country’s customs check-point, but there is always the danger of theft. I remember a trip to Moscow several years ago where an Asian gentleman on my flight was seen declaring about $35,000 (USD) in cash at the airport, which was a fairly open and visible procedure. I later noticed that same gentleman checking into my hotel. About an hour later, I saw that the hotel lobby was full of police. I asked what happened and the hotel staff told me that an Asian guest had been robbed and killed in his room. It was the same man that I saw at the airport and in the hotel lobby. My guess is that someone “fingered” him at the airport as someone with a large amount of cash and that he was followed back to the hotel. Cash can be dangerous.

The second reason players prefer to use casino credit is that they do not have to liquidate assets to wire transfer money in advance of a gaming trip. The fact is that even though many high-rollers are rich, they do not keep large amounts of money in the bank. They invest their money and therefore must liquidate assets when they need cash. One other point is that if patrons are transferring funds from one country or currency to another, they will incur hefty bank transfer fees as well as foreign currency conversion fees, both on the outbound and return transfers. Many larger casinos often agree to pay these bank fees for the customer, especially if he is a big player, but that is not always the case. These fees can range from 1 percent to 3 percent, depending on where the funds are transferred from, and they can add up quickly. For example, $100,000 x 2% = $2,000. Two-way fees would then total $2,000 x 2 = $4,000, plus bank transfer fees of $40 to $100 each way. A $1 million transfer could mean more than $40,000 in bank transfer fees. Using casino credit, on the other hand, allows players to avoid these fees until such time that they lose and need to pay their markers. It is also aggravating and expensive for players to pay high bank transfer fees if they win in the casino and want to transfer their winnings back to their home.

While in Singapore, I helped developed a program with Bank X where our VIP customers, who were primarily from Asia, opened personal investment accounts with Bank X, which Bank X would invest in various stock funds. Bank X would then allow these select VIP customers to borrow up to 80 percent of their investment portfolio to issue a cashier’s check to the casino. The players were allowed reasonable credit time to either top-up their investment portfolio amount, or the bank would execute a pre-signed authorization form that allowed it to liquidate enough of their investment portfolio to pay off any outstanding credit and then send that amount to the casino. This was not an easy process to get approved, and it took months of review from both the compliance and legal departments at both Bank X and the casino that I worked for as well as from the casino industry regulators in Singapore. Both the casino and the bank maintained close control over this arrangement to insure that all Know Your Client (KYC) reviews and paperwork were properly completed. The concept was innovative at the time, but still limited in scope for a number of reasons. One was the volatility of stocks, which seemed to be a concern for several customers.

Consequently, I have now developed an improved program with Gold Bullion International (GBI) that will enable Foxwoods to grant credit to many international players that it otherwise would not feel comfortable granting credit to for a variety of different reasons. Those reasons could include the fact that casino credit may not be an enforceable debt in their home country; local currency control laws that do not allow for the free flow of funds out of their home country; a casino credit history of “derogs” (derogatory information on non-payment); current amounts of casino credit that are still outstanding versus their credit worthiness; or insufficient financial information on their banks, businesses or address.

GBI is a global business service company that provides the wealth management industry with customized products and solutions for physical precious metals investing. GBI has partnered with the best-in-class companies to provide a secure service where individuals investing in gold actually purchases and owns the metal rather than a certificate of ownership. The actual gold bullion, in the form of coins or bars, is inventoried and stored in secure vaults around the world, in locations such as New York, Utah, London and Zurich. All of the gold is insured by Lloyd’s of London both during transportation and while within the secured vaults. A Big 4 accounting firm has been contracted to verify the storage of the physical gold on a quarterly basis, and GBI reconciles its accounts on a daily basis with its vaulting partners as an additional measure of security.

One additional point of interest is that gold has always been a fairly stable investment medium with minimal market correlation. Also, customers in Asia are very familiar with investing in gold, as many Asian banks offer gold-denominated savings accounts. Over the past five years, gold has appreciated in value, and global investment demand for gold bullion is growing despite the current difficulties in buying and storing gold. With these factors in mind, Foxwoods and GBI have developed an innovative new casino credit concept that we believe will be very attractive and marketable, especially to international clients. The benefits to the client are:

- Pure ownership – The investor retains full title to the underlying gold assets
- No counterparty risk – Investors are not exposed to risks related to the financial solvency of banks, exchanges or investment trusts.
- Liquidity – GBI’s trading partners include broker/dealers, refiners and miners.
- Fully insured – All stored bullion is 100 percent insured for full replacement value through Lloyd’s of London.
-  Physical audits – A Big 4 accounting firm completes a physical verification of every bar stored to ensure physical presence within the vault and appropriate allocation.
- Cost effective – GBI’s fees are more cost effective than alternative investment options in precious metals (mutual funds, closed end funds, ETF’s).
- Physical delivery – Investors can elect physical delivery of bullion.
- Collateral – Precious metals are universally accepted as collateral for loans through banks and other financial institutions.

The last benefit—collateral—is what triggered my idea of using gold as collateral for casino credit. Thinking outside the box again, we came up with what we call the Foxwoods Collateral Process, whereby we allow a player who has opened an investment account with GBI to sign a document pledging up to 80 percent of his or her gold investment account value as collateral against any casino credit that Foxwoods will advance to that player. The investment account is easy for many international players to establish, and it is also appealing to them to invest in gold and be able to use that investment as collateral against any credit issued by Foxwoods. For Foxwoods it is a great benefit as well to be able to grant casino credit that is collateralized against a secure investment to international players that we might otherwise not be willing to risk granting credit to. The casino customer also achieves all of the benefits of casino credit mentioned earlier. In addition, we are also able to offer the player additional benefits by linking the GBI account to their player’s club membership number, which helps protect their identity for future transactions. It is a very clever process with no risk to anyone and substantial benefits to all. Also, the entire process is very transparent and simple to understand for the client. The entire process consists of three functions:

1) GBI Order and Management Process

2) Foxwoods Collateral Process

3) Foxwoods Gold Bullion Settlement

 Order and Management Process

Order:

- Upon client opening GBI account through Foxwoods, client places gold order in dollars or specific bar sizes, including vault location.
- Client or Foxwoods wires cash to GBI account at Wells Fargo for processing.

 Execution:

- GBI confirms receipt of the order with the client.
- GBI secures the required precious metals from an approved dealer.
- GBI confirms the order execution with the client.
- GBI wires cash to bullion dealer to pay for secured gold.
- Via Mat and other internationally recognized vaulting partners pick up the precious metals from the bullion dealer’s vault and transport it safely to an insured vault of the client’s choice.

 Management:

-  A Big 4 accounting firm provides quarterly verification of precious metals holdings.
- GBI provides monthly statements to clients.
- Bullion is audited daily by Via Mat and other internationally recognized vaulting partners.

Foxwoods Collateral Process:

- Foxwoods provides client with GBI account opening documentation along with all required compliance documents.
- GBI conducts Office of Foreign Asset Control (OFAC) and Know Your Client (KYC) reviews.
- GBI account opening for Foxwoods client is authorized and linked to the customer’s Dream Rewards account number.
- Foxwoods client completes collateral transfer agreement.
- GBI will accept instructions for agreed format and methods.
- GBI will transfer title to Foxwoods Resort Casino (i.e., Foxwoods Resort Casino Pledged Collateral Account FBO Client).
-  Foxwoods determines the loan to value (LTV) amount.

               • Gold valuations can be provided in real-time.
               • Historical average daily price change since 1970 is 0.85 percent.
               • Largest positive one-day price change is +21 percent.
               • Largest negative one-day price change is -13 percent.
               • GBI has the capability to structure limit orders to protect Foxwoods from a downside price
                  movement of the collateralized asset.

- GBI will only accept instruction from authorized Foxwoods agent(s) by the agreed upon format when gold is held in Foxwoods’ Collateral Account.

Gold Bullion Settlement

Win Options:

- Client can elect to collect casino winnings in the form of cash, check, bank transfer or gold bullion.
- If bullion, Foxwoods wires cash dollar proceed to client’s GBI account for real-time gold bullion purchase.

Loss Options:

- Clients can choose to settle debt directly with Foxwoods or to pass funds through their GBI account as payment to be forwarded (Some clients may not want their bankers to know that they are sending money to a casino).
- If a debt is not paid within the allotted time period, Foxwoods can instruct GBI to liquidate the debt amount from the collateral account as payment.
- Foxwoods can elect to receive proceeds as physical gold in an omnibus account.

Looking at the benefits, this is a win-win situation for all parties involved. GBI earns fees from buy/sell transactions, plus storage fees that are charged monthly to cover the cost of secure storage, insurance and bullion verification. Foxwoods gains the ability to grant secured credit to customers that would not normally qualify for casino credit. And the player benefits from the availability of casino credit, even though it is secured, by pledging gold as collateral against the loan. Once players establish an account, the benefits are identical to those of normal casino credit—they will not have to liquidate assets to wire transfer funds in advance of a visit to Foxwoods. Foxwoods has also developed its own Loan/Collateral Agreement form with GBI to ensure that there is no risk to the casino. In addition, due to the strategic alliance between GBI and Foxwoods, both companies will participate together in certain international marketing campaigns to gain even greater exposure for both companies. This is definitely a win-win situation for Foxwoods and GBI.

Steve Karoul is Vice President of Casino Marketing at Foxwoods Resort Casino. Karoul has lived in numerous countries and has conducted casino marketing activities in more than 100 different countries. He is a recognized gaming industry innovator who openly shares his ideas with fellow casino executives. He can be reached at (860) 312-3588 or skaroul[at]comcast.net.