Chinese police questioned Crown staff 15 months before arrests

A senior Crown Resorts executive told one of James Packer’s key lieutenants that Chinese police had questioned a Crown staff member over suspicions of illegally promoting gambling in the country more than a year before 19 employees were arrested and charged.

But Crown’s Australian resorts chief executive Barry Felstead told a NSW Independent Liquor and Gaming Authority's inquiry on Tuesday that he never raised the issue with Crown's chief executive, board or risk management committee.

Crown's Australian resorts CEO Barry Felstead, pictured at the Crown AGM in 2016. Credit: Philip Gostelow

The inquiry is examining whether Crown's board and executives knew their staff were breaking the law in China as it considers whether it is a suitable holder of the licence for its new casino in Sydney's Barangaroo, due to open early next year.

The arrest of 19 Crown staff in October 2016 sent shockwaves through the ASX-listed casino giant and a shareholder class action is currently seeking to claw back hundreds of millions of dollars they lost in a subsequent share price collapse.

The inquiry heard on Tuesday that Mr Felstead and other Crown executives were aware of a Chinese government crackdown on overseas casinos announced in 2015 and the arrest of staff from two South Korean casinos when police detained and questioned a Crown employee in Wuhan in July that year.

Mr Felstead said that in hindsight he should have raised the development with Crown's chief executive Rowen Craigie, its risk management committee and board but at the time he did not think it was an "obvious escalation of risk".

"I thought that the risks were being dealt with individually and they were separate circumstances not connected," he said.

Crown's top executive responsible for the international VIPs told a representative of James Packer (pictured in 2015) about Chinese police questioning a staff member, but not the Crown board. Credit: Bloomberg

However, Mr Felstead did send information about the questioning of Crown's employee to Crown director Michael Johnston, who represents the interests of major shareholder James Packer, with a note saying: "This is what we’ll be up against in China at the moment". Mr Felstead said he was not aware if Mr Johnston ever raised it with his fellow directors.

The detention was raised during a meeting of the "CPH VIP Working Group", made up of Crown VIP business executives and representatives of Mr Packer’s private company, Consolidated Press Holdings, which advised on and approved elements of Crown's high-roller strategy.

Counsel assisting Adam Bell suggested that showed that Mr Felstead provided more information about the Chinese high-roller business to the CPH VIP group than to his own CEO.

“Yes, on certain occasions that may be correct,” Mr Felstead said.

But pushed further, Mr Felstead insisted his obligation was always to the ASX-listed company's board, rather than to Mr Packer, who owned just over half of the company's shares at the time.

“There were instances where I should have told him [Mr Craigie] things, I accept that, but I was under no illusion that Mr Craigie was my boss at all times,” Mr Felstead said.

Mr Felstead told the inquiry he took all the responsibility for Crown's risk register not being updated to include the possibility of Crown staff being arrested in China, rejecting the suggestion from Mr Bell that it reflected a broader failure of Crown's corporate governance.

“I was of the belief that we had the right process from a risk management perspective then and this one should have been on the risk register and it should have been escalated," he said. He added that Crown's risk management processes had been improved significantly since the 2016 arrests.

'Good advice for spies'

The inquiry also heard on Tuesday that Crown received advice from law firm WilmerHale in February 2015 that its China staff should only promote Crown’s hotels and not be seen facilitating gambling in China.

But Mr Felstead said Crown had other legal advice that it was acceptable for its staff to seek out wealthy gamblers in China and encourage them to travel to Crown’s casinos abroad.

Nonetheless, documents showed that Mr Felstead and Crown’s VIP team subsequently decided it was too risky for Crown executives to travel to China.

"If it was too risky for you to travel to China for a while, you must have realised that the staff that were based in China were facing an increased risk?," Mr Bell asked. "And in those circumstances, you should have raised those risks with the board of Crown Resort?"

Mr Felstead accepted that it was "something I should have done".

Crown also implemented advice from a consultancy called the Mintz Group in March 2015, authored by the CIA’s former Beijing bureau chief, on how to take a "low key" approach to doing business in China in light of the government crackdown. That included not using text messages to communicate and to limit the distribution of business cards.

Mr Bell asked whether recommendations from a former CIA agent "might be good for spies" but might not be appropriate for a leading Australian public company that has an obligation to act legally, ethically and with "strict observance of the highest standards of integrity".

"I think what we were doing was appropriate based on this advice," Mr Felstead responded.

Sixteen Crown staff spent between nine and 10 months in jail in China after pleading guilty to gambling-related crimes. The inquiry will continue public hearings on Wednesday.