POGOs: What’s at stake?

(I am pleased to share with readers a post that Christine Tang and I wrote for subscribers of Globalsource Partners [globalsourcepartners.com], a New York based network of independent analysts.)

We momentarily turn our eyes away from the turmoil in financial markets and take a look at the uproar in the online gambling industry. Called POGOs, short for Philippine offshore gaming operators, the industry is akin to business process outsourcing (BPO) in that firms set up bases in the Philippines that provide services to foreign markets, in this case, internet gambling. However, POGOs have attracted a lot of unwanted attention because of the following:

1. Unlike BPOs, POGOs employ mostly foreign nationals as it needs workers who could speak the native languages of target markets, most prominently China where gambling is illegal.

2. Regulatory oversight is weak resulting in monitoring and taxation issues. The Philippine Amusement and Gaming Corporation (PAGCOR), which is in charge of licensing POGOs, has conflicting mandates as regulator and casino operator that has yet to be addressed. Clearer tax regulations were put in place only in September 2021 through Republic Act 11590, spelling out applicable tax rates on gaming revenues and incomes of foreign workers. Additionally, there have been enforcement issues related to immigration and security forces.

3. Another major concern is monitoring of money laundering risks. In its risk assessments of POGOs, the country’s Anti-Money Laundering Council (AMLC) found “a low level of AML/CTF awareness and regulation; an increasing level of threat to money laundering and other fraudulent activities; a high number of unregulated or unsupervised service providers (SPs); and a low level of beneficial ownership identification.”

4. Rising crime associated with the industry, particularly kidnap-for-ransom resulting from disputes over debts and alleged human trafficking that has placed the industry in a most unfavorable light.

5. Analysts have always been sensitive to the risk of a sudden stop in POGO activities should China (which has expressed disapproval of POGOs’ negative influence not just on nationals’ gambling habits but also the reported crimes against Chinese workers) tighten immigration regulation and/or shut down internet gambling sites and prevent wire transfers through Chinese payment systems.

TO BAN OR NOT TO BAN
Philippine legislators are calling for banning POGOs, arguing that the social costs outweigh the financial benefits. Supporters argue that strengthening law enforcement would be superior to a total ban. They claim that a total ban would cost the economy anywhere from 0.6% to 1% of GDP.

OUR VIEW
We think the risk of a system-wide property sector collapse and/or banking sector stress is manageable since most firms and banks deliberately limit exposures to the sector and the decline in real estate prices would help the country be more competitive in attracting a bigger slice of the expanding global BPO market.

While a complete ban would come with some amount of economic pain especially for certain property firms that have outsized exposures to the industry as well as the knock-on effects on housing, food, retail and other services catering to the foreign workers, we are more concerned with the incalculable costs of allowing POGOs to operate in the country. These include:

1. “Reputational risk” cited by Finance Secretary Benjamin Diokno. We take this to refer to the negative perception associated with the country’s inclusion since June 2021 in the Paris-based Financial Action Task Force’s (FATF) list of jurisdictions under increased monitoring or the so-called “grey list.” Money laundering through casinos, actual or virtual, has been a major worry for authorities especially after the Bangladesh Bank cyber heist scandal in 2016.

2. Security experts we consulted tell us that kidnappings are “systemic” and “recurring” in the industry.

3. A prominent sociologist worries about POGO operators’ agility in exploiting “the corruptibility of our public institutions,” as well as the longer-term harm to the economy of government’s dependence on POGOs at the expense of finding “more enduring and less (socially) costly sources of revenue.”

All told, while it is true that POGOs could help cushion the economy against current strong external headwinds, we would rather argue that allowing these to continue and climb back up to its pre-pandemic size would only increase the economy’s vulnerability to a sudden and massive pullout.

The latter may be triggered on the Chinese side by authorities’ social policy vs. gambling, a crackdown on money laundering and the state of Philippine-China relations, and/or on the Philippine side, if online gambling becomes a reason for the country’s blacklisting by the FATF which could damage remittances and investment flows immensely. The current upheaval in global financial markets, with China and other emerging market central banks looking for alternative ways to manage money outflows to help ease exchange rate pressures, could even make the case for banning POGOs stronger.

Romeo L. Bernardo was finance undersecretary from 1990-96. He is a trustee/director of the Foundation for Economic Freedom, the Management Association of the Philippines, and the FINEX Foundation. He also serves as a board director in leading companies in banking and financial services, telecommunication, energy, food and beverage, education, real estate, and others.

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romeo.lopez.bernard@gmail.com