Shares of Macau casino operators Melco Resorts & Entertainment Ltd(ADR) (NASDAQ: MLCO), Wynn Resorts, Limited (NASDAQ: WYNN), Las Vegas Sands Corp. (NYSE: LVS) and MGM Resorts International (NYSE: MGM) all traded lower Friday on new reports that one of Macau’s major junket operators may be facing a liquidity crisis.

American casino investors may not be familiar with Macau’s junket system because Las Vegas and other American gambling destinations have no comparable operation. Here’s a closer look at what the junket operators do and why junkets play a critical role in Macau.

So, What's A Junket?

Macau’s junket operators work with the casinos to usher in critical VIP gamers. Junket operators reach out to wealthy gamblers directly and lure them to Macau by offering luxury travel and accommodation promotions and other personalized services. In essence, junkets are responsible for a large portion of the casinos’ VIP revenue.

Junkets also bankroll their VIP clients by serving as bank-like entities, lending money to players and collecting debts. They are not owned by the casinos, but rather are paid a commission for their services.

Junkets play a crucial role in the Macau gambling market. At one time, 80 percent of Macau’s gaming revenue came from just 5 percent of its VIP gamblers.

The junkets have been at the heart of China’s crackdown on money laundering that began back in early 2014.

Junkets have gotten a bad reputation among the gaming community over the years for their questionable methods.

“Some junkets also provide a means to outsource the collection of debts, relying on extra-legal mechanisms ranging from suasion to violence in the worst case,” Steve Vickers & Associates CEO Steve Vickers recently said.

Related Link: Casino Stocks Under Pressure Amid Macau Junket Liquidity Concerns

For Americans, these types of “extra-legal” tactics elicit memories of an era of Las Vegas when casinos were run by nefarious characters with ties to organized crime. However, that chapter of Las Vegas’ story ended decades ago.

New reports that the Chinese government is flagging and freezing suspicious bank accounts have junket investors pulling their backing. With junkets facing what could be a liquidity crisis, it’s understandable that casino investors are concerned about the potential VIP revenue fallout if the junket system collapses.

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