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Illegal slot machines threaten Puerto Rico casinos

SAN JUAN, Puerto Rico — He is just one man gambling alone, his face lit by the pink glow of a slot machine in a dark neighborhood bar, but 69-year-old Pedro Rodriguez represents a threat to one of Puerto Rico's most important money makers — legal gambling.

As Rodriguez robotically punches buttons on a video slot machine, barely drinking the warm beer in his left hand, he explains why he places wages at a bar in a seedy section of the capital, and not at one of the glitzy hotel casinos that line the island's coast, where he once regularly contributed to the hundreds of millions of dollars in tax revenue the government badly needs each year.

"The probabilities are always in favor of the house," he said. "They don't like to pay."

Growing numbers of people appear to prefer their odds with illegal slot machines set up everywhere from bars to bakeries in this U.S. territory. That's become not only a problem for the hotels running the bulk of legal casinos but for the government, which is already struggling with gaping budget shortfalls. As is, Puerto Rico will see two casinos close by the end of the year, with five other smaller casinos on the verge.

Particularly hurt has been the government agency that manages tourism, which received $61 million from gambling taxes this past fiscal year, representing 72 percent of the agency's revenues. Another $71 million of the $156 million in annual gambling revenue received by the government went to the University of Puerto Rico, the island's largest public university.

Puerto Rico's Tourism Company, which is responsible for promoting the island, feeds off the revenues as it takes on a more prominent economic role with the decline of the island's manufacturing sector. While tourism makes up 6 percent of the island's gross domestic product, the government is increasingly turning to resorts and other high-end projects to generate more revenue.

Overall, the government estimates it's losing about $200 million a year because of illegal machines, but it has done little to fight the problem, said Ismael Vega, president of Puerto Rico's Hotel and Tourism Association.

"To protect casinos is to protect the entire tourism industry of Puerto Rico," he said, expressing frustration with government officials and others who could fight the problem. "That's what they fail to understand."

The plummeting revenue couldn't come at a worse time for Puerto Rico, as it struggles with budget deficit that has recently totaled more than 10 percent of its annual budget. A lack of resources has particularly hit law enforcement struggling to control a record homicide rate.

Recovering legal gambling revenue would help put a big dent in those problems. Puerto Rico's 21 hotel casinos offer some 7,000 slot machines, but Vega said they're no competition for the estimated 25,000 illegal slot machines scattered across the island.

Some establishments openly advertise the machines with neon signs while others hide them in back rooms or require people to ring a bell for access. Most recently, people have set up illegal betting parlors dedicated just to the machines, renting commercial spaces in urban areas where they offer dozens of machines and sell food and drinks like a regular casino, said Tourism Secretary Luis Rivera Marin.

"Sometimes they send buses to retirement homes and take them to these casinos," he said. "This is a challenge for us."

He said the tourism company signed an agreement in May with other local agencies to crack down on illegal machines but actually putting the plan into action has been difficult. Marin said he wishes the island's prosecutors would take the problem more seriously though acknowledging that their priority at the moment is criminal cases and fighting the wave of homicides.

The parlors often can be found in easily accessible areas, which makes them popular, said Eric Rodriguez, who manages two large casinos in eastern Puerto Rico for Sheraton and Wyndham Garden. Legal casinos have also been issuing lower payouts to increase revenue, according to a government study, which may be pushing some gamblers away.

"We began to notice that the visits to the casinos diminished," said Rodriguez, who has been operating casinos for 35 years. "This is creating a huge problem."

In March, the Gran Melia Golf Resort closed a casino it opened in 2003 and laid off 57 employees. Officials have declined to say why.

In mid-July, El Conquistador resort announced that it, too, was closing its casino and laying off 56 employees. Marketing director Lydia Feliciano said it was a financial decision but declined to provide specifics. The casino has been operating since 1993.

"The industry is not as solid as they like to pretend it is," Vega said. "We've never seen the closure of two casinos in one year."

Meanwhile, Ervin Rodriguez, president of the popular Camarero Racetrack near San Juan, which operates 2,500 gambling machines, blamed illegal machines for a $58 million loss in the past four years.

Other Caribbean islands have struggled with illegal gambling machines, but to a lesser degree than in Puerto Rico, said Richard Khan, spokesman for the Caribbean Hotel & Tourism Association.

Only about 12 of 36 Caribbean nations have casinos, but they attract mostly tourists, he said. Illegal betting parlors tend to draw local residents.

In Puerto Rico, however, 90 percent of casino clients are locals, not tourists, according to Vega and Rodriguez.

Derek Peart, executive director of the Betting, Gaming and Lotteries Commission, said his department seizes about 500 illegal machines a year, but that a huge black market that produces the machines locally makes it hard to eradicate them.

In Puerto Rico, the majority of illegal machines are assembled on the island after the parts are smuggled in, and many worry they are being used to launder money, Vega said.

Legal casinos invest nearly $16,000 every time they buy a slot machine and obtain permits, Rodriguez said. Meanwhile, illegal machines cost about $2,500 each. Owners who operate those machines keep 60 percent of the profit while the establishments hold onto 40 percent, he said.

The difference in payouts was why Pedro Rodriguez said he enjoys playing the illegal machines at his no-name neighborhood bar, where he has won the maximum jackpot of $2,000 a couple times in recent years. He was trying his luck recently at the Alice in Wonderland-themed machine there, and feeding it more money for another go.

"As long as they keep giving me prizes, I'm happy," he said.