Video Gambling Slush Fund Reported

“The government’s policy that failed to even foresee the next step caused the gambling arcades’ gift certificate market to become tarnished with slush funds amounting to trillions of won and widespread lobbying.” Statements such as this allege that gift certificate issuing companies, middle distribution companies, and adult gambling arcades created slush funds through the illegal transaction of gift certificates and used that to regularly lobby politicians and government officials.

On August 22, former gift certificate issuing company marketing director A, current planning director B who works for a company that failed to be assigned as an official gift certificate issuer, and gift certificate distribution company president C, met and stated so to Dong-A Ilbo reporters.

According to them, a large number of gift certificate issuers are creating slush funds by not recording in the account books exchange fees earned in the transaction process of gift certificates. Since not all gift certificate issuing companies are engaged in such illegal practices, it is impossible to estimate the exact total amount of slush funds. However, based on their assumptions, the three people calculated that 19 gift certificate issuers could accumulate 33 billion won, about 100 distribution companies approximately 12 billion won, and the 1,000 or so adult gambling arcades could hoard about 240 billion won every month. If converted into annual figures, the industry will heap about 3.4 trillion won in secret funds.

They also claimed, “About 20 percent of the total slush funds, or about 700 billion won, is used in widespread lobbying to politicians, central and regional government officials, review committees, prosecutors, police officers, and all those involved in granting permits and supervising.”

How Slush Funds Are Created—

Companies stash fees earned by illegal practices in the process of selling and recovering gift certificates as slush funds. Originally, the gift certificate issuers could only levy exchange fees to gift certificates used by the consumers in retailers, while exchanging through middle distribution companies was not permitted.

However, early last year, in order to promote the circulation of gift certificates, the government changed the regulations and allowed middlemen exchange, and hence issuers and distributors started to engage in transactions. The distributors started to pay about a 50 to 60 won exchange fee per 5,000 won gift certificate that they recovered from the arcades and returned to the gift certificate issuers.

Director A explained, “About 1.2 million gift certificates circulate every day, so we earned an additional 60 million won every day.”

Director B pointed out, “With middlemen exchange being allowed, companies engaged in cutthroat lobbying in order to be assigned as the official gift certificate provider. The government’s permission of middlemen exchange was a huge blessing to the gift certificate issuers. The government opened the doors for gift certificates, a form of stocks and bonds, to become subject of discounts or be distributed as products.”

They said that middlemen gift certificate distributors and adult gambling arcades started to charge to exchange fees from that point.

With middlemen exchange permitted, distribution companies earned about 20 won per each gift certificate recovered from arcades, while arcades also filled their pockets by charging 500 won per gift certificate cashed.

President C hinted, “With the explosive revenue originating from exchange fees, rather than the original income of gaming fees, adult gambling arcades such as Sea Story started to shoot up everywhere. These revenues are not recorded in the books, tax-free, and end up as slush funds.”

Size and Use of Slush Funds—

The number of gift certificates under circulation at any given moment by the 19 issuers is limited to 236.6 million. Since gift certificates are illegally and repeatedly cashed in arcades, about 600 to 1,600 won fees are attached to the certificates until they are returned to the issuers.

Director A commented, “An issuing company that can circulate about 10 million certificates at once will probably be able to hoard about 1.5 billion won every month for secret funds. It is common practice of the industry to manage all this in cash and not leave any traces whatsoever in the accounting books.”

They also mentioned that gift certificate issuers lobby politicians, government officials, review committees, and investigators so the various purposes of being assigned as the official provider, adult gambling arcades lobby them to avoid crackdowns, while the middle distributors lobby in order to prevent any harm to the issuers and arcades dealing with them.

Director A remarked, “Some companies share profits with politicians and government officials by having them as shareholders with other aliases.”

Companies that did not lobby well failed to be assigned as official providers.

Director B lamented, “At the review, a committee member pointed that the company building was not well cleaned, the surveillance camera was broken, and then I felt right away that we had not lobbied him well.”

jaykim@donga.com sunshade@donga.com