Innocents Abroad: Wynn vs. the FCPA

By Chase Kimball - July 8, 2012 | Tickers: LVS, WYNN | 0 Comments

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I do not envy Steve Wynn.  Well that's not true: I do, in every aspect, except having to do business with the Chinese government.  He and any other Laowai ("foreigner" in Mandarin) has to deal with an incredibly complex web of back-scratching, face-saving, and outright bribery in order to get a deal done.  

I remember a wine importer friend of mine from Shanghai (by way of New York) telling me a story of how he was able to secure a license in China.  The best and most secure way for an American to set up a business in China is to set up a subsidiary company in Hong Kong and then a WFOE (Wholly Foreign Owned Entity) in mainland China.  This setup works due to Hong Kong's friendly business climate toward foreigners and also their special relationship with mainland China.  But, mainland China is still involved and the whole WFOE approval process can be a bit…slow.  So, in order to grease the skids, this friend of mine engaged in the ancient practice of "light bribery."  He knew the son of a particularly well-connected Chinese judge was very much into American basketball, specifically the Lakers.  So he sent a jersey with a signed card (elegantly forged to make it look like the father's handwriting) to the son.  The son was ecstatic at his father's gift, the father looked great, and my friend got his license.

Is this bribery?  Well, according to the Foreign Corrupt Practices Act, it is.  Anything of value is included in the definition of a bribe, and emphasis is placed on the intent rather than the amount.  So, if a payment is found to have a "corrupt intent," that is to influence the beneficial behavior of a government official, the payer might have a problem.  It could be argued doing business this way is common pretty much worldwide, although it might be more blatant in more emerging economies. But bribery of some sort is prevalent everywhere.

The real problem lies in one country applying its laws and standards to that of another.  This is where Wynn (NASDAQ: WYNN) and Las Vegas Sands (NYSE: LVS) currently stand.  Wynn's Macau operations (which account for about 75% of the entire Wynn organization) has been under investigation by the US for a gift of $135 million over 12 years to the University of Macau which, curiously, ends the same year Wynn's gaming license ends.  The results of this are ongoing but, as the Wall Street Journal reports, another payment could attract the attention of the US.  It seems what happened is Steve Wynn met with Edmund Ho (the first Chief Executive of Macau) to secure some land in the Cotai area of Macau.  Edmund told Steve he could look into a site he had reserved for another person by the name of Ho Ho (yep) and the two could explore a joint venture.  Steve did just that and, as part of the arrangement with Ho Ho, agreed to pay a $35 million "finder's fee" once development of the site was approved by the government.  A few years later, in 2009, Wynn bought out Ho Ho to the tune of $15 million.  

So, boiling this down to its simplest form, we are left with Wynn paying a colleague of the most powerful government official in Macau $50 million to develop land.  As suggested in Kate O'Keeffe's WSJ article, the existence of the "colleague" is even in question as no evidence of Ho Ho ever owning the land has been found.  Further, Wynn disavowed any knowledge of Ho Ho's business partner in the land deal, Cliff Cheong, which is another questionable turn since Mr. Cheong was involved in a highly public lawsuit against Las Vegas Sands alleging he was owed money for securing a casino license.  One would think for someone involved so heavily in Macau gaming at such a high level, Steve Wynn might have at least heard of a plaintiff in a lawsuit against his closest competitor.  But then again, Wynn can be a bit absent-minded; he did, after all, accidentally put his elbow through a $40 million Picasso.

Say the US finds a violation of the FCPA; does this mean anything?  Technically, fines are capped at $2 million at the corporate level.  But, with the magic of the Alternative Fines Act, fines are nearly unlimited.  The largest fine to date was against Siemens in 2008 at $3 billion.  The bribes were paid to Argentine government officials and allowed Siemens to win a $1 billion contract.  More recently, Wal-Mart's FCPA violations in Mexico are expected to be hit with huge fines as well.  The rule of thumb is based on how much of a benefit the bribe netted.  So if Wynn is hit with a violation charge, let's hope it's sooner rather than later when officials can really see how much money will be made by Wynn Cotai.     

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