Part 2: Online gambling and the case of the Philippines

The 2nd part of the briefer will tackle how the online gambling industry has created a ripple effect on the Philippine economy. This part will also discuss how the weak regulatory environment in both the Philippines and China has resulted in a boom of online gambling, as well as provided jobs for both Chinese and Filipino citizens. It will also discuss how the geopolitical tensions between the two countries resulted in the rise of prejudice against the Chinese in the Philippines.

China hates gambling

China hates anything and everything addictive. After all, the opium war and the gambling that came with it during the mid-19th century eroded its economy. Chinese citizens, however, never forgot the thrill that gambling brought them. Various reports estimated that the illegal gambling industry rakes in a whopping $144 billion yearly. Since they cannot gamble in the mainland, some opt to gamble abroad. Casinos in Singapore and Las Vegas in the US even go as far as sending sales staff to attract potential customers. The government’s solution? Arrest the staff. It also made it harder to get money out of China.

Public security minister Guo Shengkun said in a South China Morning Post article, “We must seriously investigate and severely punish those companies and individuals involved in enticing and organizing Chinese tourists to gamble in overseas casinos.”

Gambling has, however, moved online. Betting on sports games can be done through popular messaging app WeChat. Fly-by-night websites also allow gambling in the comfort of one’s home. These illegal websites are staying afloat, thanks to neighboring countries that allow gambling operations. These websites move their operations out from the mainland into countries like Thailand, Malaysia, and the Philippines, but cater exclusively to Chinese.

Lucio Pitlo, a lecturer at the Ateneo de Manila University and a subject matter expert on China, said the Chinese government “absolutely” wants to put an end to online gambling, but its options are very limited beyond its jurisdiction. “China respects our laws and does not want to dictate on the Philippines. Is that their wish, to tell the Philippines to stop housing online gambling companies? Yes, but they do not want to do that,” Pitlo said.

China, he added, is very “image-conscious,” and has already taken a lot of beating over the West Philippine Sea dispute. He said gambling operations further taint China’s image, which is why they are very careful about the subject.

Perhaps the first step China took to put an end to gambling was in 2018. During Chinese President Xi Jinping’s visit to Manila, both countries signed a cooperation agreement for crime prevention.

In their joint statement, they said: “Both sides agree to strengthen law enforcement cooperation, and will enhance cooperation and communication to combat transnational crimes, including job- related crimes, telecommunications fraud, illegal online gambling, cybercrimes, human trafficking and illegal wildlife trade. Both sides agree to speed up the discussions with a view to signing a bilateral agreement on Transfer of Sentenced Persons.” Pitlo said this agreement was crucial for Beijing’s planned crackdown, as it somewhat ensured the Philippines’ cooperation.

While the agreement’s intention is good, implementing it may prove to be quite a challenge, as local interests are at play in a highly unregulated environment.

How the Philippines became China’s opium

Duterte, the strongman who publicly criticizes illegal drugs and gambling, may have unwittingly caused the online gambling boom in the Philippines. Camba said it all started in 2016 when Duterte slammed tycoon Roberto Ongpin, the owner of publicly-listed gaming firm Philweb. Duterte said he would put an end to “all oligarchs” in the country.

Philweb had a 13-year contract with government-controlled Philippine Amusement and Gaming Corporation (Pagcor), where it created operations which facilitated Philippine Offshore Gaming Operations (POGOs). These gaming companies catered mostly to Filipinos.

Offshore gaming companies had to go through Philweb to operate in the Philippines. Moreover, the contract gave Philweb monopoly over operations, as it was the only company linking these offshore gaming companies to Pagcor. All that changed in July 2016, when Duterte did not renew Philweb’s contract and forced Ongpin out of embattled Philweb. Moreover, Duterte now banned all Filipinos from playing in online gambling websites.

With Philweb out of the picture, online gambling companies had to look for a company to provide gambling services, including customer support, marketing, and other gaming-related tasks. These firms then had to register with Pagcor. The new scheme is illustrated below by Camba:

To simplify further, Camba likened the POGOs to how business process outsourcing (BPO) works, as illustrated below:

Duterte’s move to kick out Philweb opened up the online gaming industry to other companies. The distribution of online gambling operations might have also boosted Pagcor’s revenues which rose 18.3% to P67.85 billion in 2018. There are over 50 POGOs registered under Pagcor and the agency said it is seeking to register even more in the coming years.

“Gambling is legal and it is here to stay,” Pagcor Chief Andrea Domingo declared.

Another unintended consequence of Duterte’s move to open up the online gaming market was the boom of the properties sector. New players in the online gambling space meant a higher demand for office space too.

How gambling saved Philippine real estate

At around 2004, real estate companies began constructing tall office buildings for the BPO industry in anticipation of the growth of BPOs. Industry experts, however, did not expect the BPO industry to mature at such a fast pace. When the buildings were finished sometime 2015 and 2016, there were already signs of a glut.

In 2016, when US President Donald Trump was elected, BPOs became wary about investing overseas due to the conservative leader’s protectionist policies. There were fears the real estate industry’s bubble was going to burst. Who came to its rescue? Online gambling.

Up to now, the real estate industry is bathing in cash, all thanks to gambling. Latest data from property consultancy firm Pronove Tai shows that in the 1st half of 2019, POGOs have overtaken information technology-business process management (IT-BPM) as the top demand driver for office space. Year-to-date, POGOs grew by 309%. From just 51,000 square meters (sqm) in 2018, POGO demand grew to 210,000 sqm of office space.

According to Pronove Tai, even before office space was available to companies, 74% was already reserved or pre-leased to POGOs. The consultancy firm also said that cities have been generally more open to giving permits to POGOs, further boosting the industry’s presence in Metro Manila. POGOs are not as price-sensitive as traditional office spaces, giving them an advantage in acquiring coveted office space in the tight central business districts. Available office space in Makati would now cost companies some P1,590 per sqm, 4% higher compared to 2018. Taguig City grew the largest at 9% and now at P1,340 per sqm.

Meanwhile, properties consultancy firm Colliers International noted that POGOs took up a total of 796,000 sqm of office space since Duterte started his presidency in 2016.

It’s not just office spaces enjoying the perks of online gambling. Condominiums also gained more cash. As of 2018, average condominium prices in Makati already soared to as high as P261,800 per sqm. This consistent rise of condominium prices also pushed up rental rates, much to the dismay of local residents. As previously reported by Rappler, locals are finding it harder to live in areas where online gambling workers are also housed.

Regulating POGOs

While the Philippines is reaping the economic benefits of online casinos, the industry still has several holes which the government needs to cover.

First, the Philippine government is struggling to monitor the number of Chinese workers in the country. The government estimates there are at least 130,000 POGO workers – based on the alien employment certificates issued to Chinese citizens. Industry insiders, however, say the number is likely more than double, as some come in as tourists and simply work without the necessary permits. Tourism data indicates that Chinese tourists accounted for the highest leap in numbers.

Chinese who come to work in the Philippines have no way of processing their work permits from their point of origin – they need to come in as tourists and process their documents here. The workers’ passports are also reportedly confiscated by employers, which could hinder the movement and overall freedom of Chinese workers.

Second, the government has already flagged the industry for tax evasion. The Department of Finance, along with other government agencies, has estimated that around P22 billion was not remitted by POGOs. The agency, along with the Department of Justice and Bureau of Immigration, is already working on guidelines that require foreigners to secure tax identification numbers before they can work. It appears that while the government wants to tax the industry

properly, it faces structural problems and may not have the capacity to go after all POGO workers. For instance, an Inquirer article quoted Internal Revenue Commissioner Ceasar Dulay as saying that the agency had trouble registering Chinese workers because of the sudden spike in the volume of these workers.

Third, the Philippine government, along with China, has problems ensuring the welfare of Chinese citizens working in POGOs. With clashing laws of the two countries, workers are left in a bind and could be exploited by gambling companies. Some workers get paid only $600 a month – less than half of what they were promised. The salary cuts are supposedly due to all the paperwork fees, as well as travel and living expenses. POGO workers also reportedly work for 12 hours for 6 days and are restricted from going outside their cities of work.

Finally, the Philippine government needs to police the gambling industry more, as companies are still able to find ways to skirt the law. Some of these gambling companies are said to have categorized themselves as BPOs. While these companies can still be considered call centers, POGO firms exclude mention of gambling operations and effectively stretch the law to evade paying more taxes and avoid closer scrutiny. Without sufficient policing, the industry could even be prone to money laundering. With the Philippines having very relaxed laws on gambling and a tight bank secrecy law, authorities must be more vigilant now more than ever to monitor the cash flows – regardless of the economic benefits.

Diplomatic strain

After operating for years in the country, will online gambling operations cease just because the Chinese government, through the Chinese embassy here, had already asked the Philippines to stop all forms of online gambling? The Chinese embassy has even gone as far as linking the industry to crimes such as money laundering, kidnapping, and murder.

The Philippines has nothing to gain if it heeds the call of China to end POGOs. The real estate and food sectors are just some of the potential losers, with China offering nothing in return. As of writing, the government insisted that gambling is perfectly legal in the Philippines and that any crimes linked to it should be proven by China.

This has brought about an odd situation with the Philippines holding its ground against China on this issue. In other aspects of bilateral relations, such as the West Philippine Sea, no less than President Duterte has taken a soft position vis-a-vis China.

Conclusion

Filipino-Chinese relations run long and deep. The recent Chinese “invasion” during the first half of President Duterte’s term is but the latest iteration in a long history of Chinese immigration waves, trading ties, and investment booms going as far back as several centuries.

But make no mistake: China’s growing presence of late is fueled by a whole new set of motivations: China’s rise as a global economic and political superpower; shaky economic growth and socioeconomic disparities in the mainland; and attempts by Chinese businesses to seek greener pastures and circumvent highly restrictive investment laws and regulations. President Duterte’s overt friendliness toward Beijing and certain Chinese business interests has also undoubtedly facilitated this new Chinese influx.

We are only beginning to get a grasp of the extent of the economic presence of Chinese in the Philippines, much less its impact on the economy and on Filipinos. Exactly how much do Chinese investments – like the Beijing-funded BBB projects and POGOs – contribute to Philippine GDP? How many jobs do these projects create and destroy, both for Filipinos and Chinese? Is Philippine real estate turning into a bubble? Can our laws sufficiently protect Chinese nationals prone to abuse while working in the Philippines? What are the welfare impacts of the rapid rise of Chinese offshore gambling?

Just as important, the Philippine government will have to discern the best policies to address the Chinese influx. What market failures, if any, will these Chinese immigrants and investments create that will justify interventions by the Philippine government? How will the government balance the economic benefits and costs borne by all this Chinese activity? And how will the government balance the economic contributions of the Chinese vis-à-vis broader political considerations like the Belt and Road Initiative, China’s occupation of territories and exploitation of resources in the West Philippine Sea, and Beijing’s opposition to POGOs?

One thing is certain: the causes and consequences of the Chinese influx will be worth watching and will continue to be of paramount interest to Filipinos in the years to come. – Rappler.com

Here are the rest of the links to the other parts of this paper: