China arrests Crown Employees

China arrests Crown Employees

News of the arrest of 18 Crown (CWN) employees, including three Australians, this week highlights perfectly some of the risks associated with operating in China. It is currently unknown exactly what charges they will face however it appears that “promotion of gambling” is the main reason behind the arrests. The concept of country risk covers a wide range of risks of operating in a foreign country and this event would certainly be considered one of these risks. The CWN share price has dropped on news of the arrests as there is fear that this event may impact the number of Chinese ‘high rollers’ who gamble in Crown casinos. The management of CWN weren’t notified of the arrests by the Chinese authorities but rather learnt about it from the families of the arrested persons. This is apparently not unusual in China with information flow typically very limited in the first few days after an arrest.

Both CWN and the Australian government will want to tread very carefully with this issue so as to not antagonise China and make the situation worse. In 2010, a similar situation occurred with employees of Rio Tinto (RIO) who were arrested in China on charges of bribery and obtaining commercial secrets. The espionage charges were dropped before the trial after it was discovered the accuser (Jiang Ruqin – Protection of State Secrets Administration employee) used fabricated data from China Central Television for his accusation. Nevertheless, the bribery charges stood, and the employees actually admitted to receiving bribes. Australian Stern Hu received 10 years in prison and all four employees were fired by RIO. While the present case doesn’t appear to involve bribery, it highlights the risk of operating in a country where the penalties for many offences seem harsh by Australian standards.  

Back to the present case with Crown, even Crown itself cannot assess the validity of the charges because no charges have yet been announced. However, we can speculate that the charges will relate to promotion of gambling, which is illegal in China. The laws allow promotion of the services that surround gambling, such as the resorts where the casinos are located which allows them to skirt around the ban on gambling promotion to some degree. It seems that Crown may have pushed the boundaries a little too far although we won’t know this for sure until more facts are available. For now, CWN will be providing as much assistance as possible to the accused and their families. There is no doubt that the conditions in a Chinese prison must be grim.

Some have argued that CWN executive chairman James Packer should have seen the arrests coming. This is especially true since Packer is known for being acutely aware of political risk in a highly regulated industry such as gambling. Last year, China launched an operation called ‘Chain Break’ to target rich Chinese citizens who channel money out of China through Macau’s casinos. Although this appears to be unrelated to CWN arrests, the crackdown highlighted China’s growing frustration with the gambling industry. CWN, of course, is of the view that its employees haven’t done anything wrong and without charges being laid or any evidence, it would be premature to assume that CWN or its employees have, in fact, broken any laws. With the employees having been detained since last Thursday, the Chinese policy of allowing detention for an extended period without charge is at odds with what Australia considers just. Nevertheless, there is no reason to think the employees won’t ultimately receive a fair trial if they are charged. We expect more information to be released in the coming days.

This article was written by William O'Loughlin - Local Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via william.oloughlin@rivkin.com.au or by phoning +612 8302 3600.

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