The Star exposed to potential $900m liability over Chinese credit card use, inquiry told

A $900 million financial risk could be hanging over The Star Entertainment Group (ASX: SGR) after the casino operator accepted international credit card payments from Chinese high rollers to gamble at its properties, an inquiry has been told.

The revelation emerged during the review by the Independent Liquor and Gaming Authority (ILGA) of NSW which is examining The Star’s suitability to hold a casino licence.

Counsel assisting the review, Naomi Sharp SC, raised the spectre of the potential business risk to The Star after she began probing chief financial officer Harry Theodore about the company’s practice of accepting payments from high rollers via China Union Pay (CUP) credit cards – a facility that explicitly disallowed the use of its cards to fund gambling activities.

However, the inquiry, which has been under way since March 17, has previously heard that CUP payments were used by high rollers in exclusive gaming rooms at The Star and that about $900 million had been transferred through the cards from mainland China over seven years until early 2020. This is despite repeated attempts over several years by National Australia Bank (ASX: NAB), acting on behalf of CUP, for clarification on the true nature of the transactions.

The CUP payments have been a prime area of interest for the inquiry as a source of potential money laundering activities at The Star’s casino. The review previously heard that NAB, and subsequently CUP, had been misled by senior Star employees as to the nature of the credit card transactions.

The Star issued ‘sham’ invoices for ‘dummy’ hotel service, with some bills totalling $20 million, to cover up the use of CUP credit cards at The Star to buy gambling chips.

Theodore told the review that he understood The Star was permitted to accept the funds through CUP for gambling as the company had no contractual obligation to the Chinese credit card provider because the relationship was handled by NAB.

Evidence produced by Shaw revealed that The Star had indemnified NAB against any potential claims against it in relation to the use of the CUP credit cards for gambling. The ban on gambling was in place due to the Chinese Government’s capital flight restrictions imposed on its nationals.

Sharp put it to Theodore, the most senior executive yet to give evidence at the ILGA review, that the warranty to NAB exposed The Star to ‘a very significant financial liability’ should CUP discover that it was not adhering to the terms and conditions of its arrangement.

Kate Richardson SC, acting for The Star, closed down Sharp’s line of questioning by arguing that the suggested liability was ‘hypothetical’ and that ‘the premise of it has not been established’.

In another bombshell revelation, Theodore had confirmed his plans to tender his resignation as CFO of The Star, after Sharp noted an article published by The Australian that speculated on his future with the company. While a decision is yet to be made, Theodore told Sharp he was prepared to resign his position pending the outcome of his appearance on the stand.

“I will consider my position after giving evidence,” said Theodore.

The ILGA review has already claimed the scalp of The Star’s most senior executive, Matt Bekier, who resigned as CEO following damaging revelations at the review in March. Theodore told Sharp that he had discussed his intention to resign with executive chairman John O’Neill, who assumed the company’s leadership position after Bekier’s resignation.

Theodore has been with The Star since 2011 and was appointed CFO in 2019. Bekier is expected to give evidence to the ILGA review next week, and questioning is likely to be shaped by Theodore’s latest evidence.

Theodore stunned Shaw and Adam Bell SC, who is leading the review, when he said that he believed both NAB and CUP were aware that the funds were being used for gambling at the company’s casinos. He said he ‘understood it to be a prevalent practice' in the industry.

Bell interrupted questioning to clarify Theodore’s evidence that CUP knew its credit card payments were being used to buy gambling chips despite the many inquiries the credit provider made to determine the true purpose of the transactions over many years.

“I believe they likely knew,” said Theodore.

He clarified that he understood there was a ‘tacit acceptance’ that the CUP cards were used to fund gambling and that it was a ‘prevalent practice’ in the industry. The Star circumvented the CUP rules by undertaking the customer’s transactions in two stages – the initial payment to one of The Star's hotels, and then the release of the funds to the customer to buy gambling chips.

The inquiry had previously been told that these sums, the origins of which could not be verified, were a red flag for potential money-laundering activity. Evidence has also been tendered in relation to bags of money being exchanged at a dedicated high roller room established by The Star Sydney and that some of the gamblers were not Chinese nationals.

The review continues.