Star facing $400 million federal AML fine as woes continue

The recent acquisition of Star Entertainment ignited optimism for a revitalized future, but allegations from AUSTRAC cast a shadow over these hopes.

The fate of Star Entertainment, a prominent player in the Australian gambling industry, is once again in jeopardy following its appearance in federal court amid a significant anti-money laundering investigation spearheaded by AUSTRAC, the national financial watchdog.

The civil penalty proceedings against Star and its affiliates, initiated in late 2022, stem from inquiries that began in June 2021. The allegations comprise a series of AML violations spanning several years, including inadequate reporting protocols and a glaring lack of managerial oversight.

A significant focus of the investigation is Star’s engagement with Chinese-linked junket operators, particularly the notorious Suncity Group. The former chairman of Suncity, Alvin Chau, is currently serving an 18-year prison term in Macau on illegal gambling charges. Chau’s case involved 289 criminal counts, with a striking accusation of facilitating undeclared bets totaling over HK$8.25 billion (approximately US$1 billion) in taxable income. Notably, he earned the moniker “Washing Rice Wa” in the Chinese media, echoing a character from a popular sitcom.

A Potential AU$400 Million Penalty

As reported by the Australian Financial Review, AUSTRAC claimed on Wednesday that from November 2016 to October 2020, Suncity’s junket operations led to a staggering turnover of more than AU$70 million (US$45.5 million) weekly at Star Sydney alone.

Moreover, in Queensland, Suncity operated without regulatory approval, yet facilitated 180 junkets associated with its affiliates during that timeframe. International travelers on junket tours reportedly spent over AU$125 billion with Star throughout this period.

AUSTRAC is advocating for a AU$400 million penalty, slightly less than the AU$450 million fine imposed on Crown Resorts in 2023 for comparable violations. Star, which has been teetering on the brink of collapse for nearly two years, has indicated that even a AU$100 million penalty could jeopardize its sustainability.

Immediately following the case’s initiation, proceedings transitioned to a closed court setting for the cross-examination of Star’s Chief Financial Officer, Frank Krile, who joined the company from Lendlease in December 2022.

Identifying High-Risk Customers

Among the most critical violations highlighted were Star’s inadequate due diligence checks. The investigation revealed that Star was aware that Suncity was funded by a high-risk customer, referred to as “customer one,” who was linked to organized crime—information that Star was allegedly aware of as early as November 2016.

Star only ceased operations with Suncity and Chau after his arrest in 2021, despite warnings about potential AML risks surfacing as early as 2019. Court filings indicated that between 2018 and 2021, at least AU$1 billion originated from junkets deemed to pose a “higher” risk of money laundering.

The investigation revealed a lack of appropriate risk-based controls that would have allowed Star Sydney and Star Queensland to adequately assess the origins of money flowing through these high-risk channels, exposing the company to significant money laundering risks.

Following these events, Suncity, listed in Hong Kong, rebranded as LET Group Holdings in 2022 after Andrew Lo acquired Chau’s former stake.

Compounding Challenges for Star

Star’s challenges extend beyond federal proceedings, as various state-led investigations have unearthed similar findings. Currently, both of Star’s casino licenses are suspended, and its properties are under the management of external supervisor Nicolas Weeks. The company has already incurred hundreds of millions in state fines and has undergone extensive restructuring within its board and executive team.

In New South Wales, Star’s flagship venue, Star Sydney, has recently been ruled unsuitable for license renewal, leading the NSW Independent Casino Commission to extend the license suspension through September 30. Such actions suggest a potential revocation of the license may still be on the table, creating further complications for the company’s recovery plans.

In Queensland, a suspension of Star’s gaming license is imminent, pending delays since 2022. Throughout this period, Weeks has also managed Star Gold Coast, with the suspension set to commence post-September 30.

In a strategic move to alleviate financial strain, Star divested its 50% stake in the multibillion-dollar Queen’s Wharf development back to partners Chow Tai Fook and Far East Consortium in March. This decision allowed Star to mitigate financial obligations tied to the project while consolidating ownership of Star Gold Coast as a more secure long-term investment.

Uncertainty Amid Takeover Talks

The looming AUSTRAC fine complicates matters further, as Star entered into a AU$300 million takeover agreement with US-based Bally’s Corporation and billionaire Bruce Mathieson in April.

Earlier this year, Star raised alarms about its financial losses and urgency in securing a lifeline, triggering a scramble for refinancing options before settling on the Bally’s-Mathieson agreement. Star has since received an initial AU$100 million from the investors, requiring no prior approval. A shareholder vote on the remaining AU$200 million will take place at its annual meeting on June 25.

Initially, skepticism surrounded Bally’s capacity to finance the investment, especially given its reported cash reserves of AU$209 million against total debts nearing AU$3.5 billion, even as they pursue casino projects in Chicago and Las Vegas.

As the situation develops, the potential impact of a substantial penalty on the proposed acquisition remains uncertain. Currently, Star’s stock trades at 11 cents, a decline of over 75% in the past year.