Casino tax study exposes pachinko to greater scrutiny

September 8th, 2014 by Philip Brasor & Masako Tsubuku

Where's the money? Pachinko patrons at an off-site exchange booth

Where’s the money? Pachinko patrons at an off-site exchange booth

In line with plans to make casino gambling legal in Japan, the government needs to come up with some sort of scheme to tax gambling receipts, but even before they do that they have to address another problematic potential revenue source: pachinko. As it stands, pachinko winnings are not taxed and pro-casino forces are thinking of implementing a 1 percent levy on those winnings, so they went to the National Police Agency and asked for figures to see what kind of tax revenues they could expect. An NPA representative told them, seemingly with a straight face, that they don’t keep such statistics since there are no winnings.

Classic pachinko is like pinball in that the player earns points by being able to send balls into certain holes, which gives him more balls to play with. In gambling terms, a player wins when he ends up with more balls than what he started with. However, pachinko parlors cannot reimburse the player for the balls he wins. Instead they give him tokushu keihin (special premiums) — ball point pens, lighter flints, etc. — in exchange for balls. Then, he can take those premiums to an off-site, unaffiliated shop that buys them with cash. The shop then sells the premiums back to a wholesaler, which, in turn, redistributes tham back to pachinko parlors.

This “three-shop exchange system” (santen kokan hoshiki) bypasses anti-gambling laws because the venue where the customer plays the game does not offer cash rewards. Everyone understands this system and how it works, but the police representative told the group of lawmakers that they don’t have figures because “we don’t know anything about places” where pachinko players exchange prizes for money.

According to the Asahi Shimbun, the lawmakers were “disgusted” with this ingenuous display of “tatemae” (official principle). The group, established last February, believes a 1 percent tax on pachinko winnings would generate ¥200 billion a year in revenues for the government, which is important since the present administration has decided to reduce the amount of corporate tax it collects and has to make up the shortfall somehow. Consequently, according to the Asahi, these lawmakers have to “destroy” the illusion that people don’t exchange pachinko balls for cash, which means they have to publicize the three-shop system and explain it for what it is, which is gambling by indirection.

The system was devised in Osaka in the 1960s. At the time, players exchanged the premiums they won for cash directly from organized crime members. Later, the police forced underworld elements out of the business and entrusted the exchange system to local chapters of the Japan War-Bereaved Families Association, which consists of people who lost heads-of-household and other loved ones on the front lines in World War II.

It was a form of public welfare, and at this point the NPA acknowledged, albeit tacitly, that pachinko exchanges weren’t strictly illegal any more. Eventually, they set up their own bureaucratic organization, the Pachinko Gyokai Dantai (Pachinko Industry Group), and staffed it with retired NPA officials to administer the exchange system. Some media have said that profits from the system go into the police pension fund and other NPA-related schemes. In any case, the police have never allowed anyone outside this organization to have anything to do with the system.

So if the government passes a law to tax pachinko winnings it would be an automatic admission that pachinko is gambling, so there is a fundamental disconnect between the government and the police with regards to the game. This could spell trouble for the proposed Casino Promotion Law, since foreign companies want to invest in casinos but will certainly ask why their businesses are taxed and pachinko parlors aren’t. That’s why the government wants to clarify the situation. On July 24, lawmakers essentially told the police that if they cooperate they won’t be held responsible for the last 30 years of looking the other way with regards to a semi-legal gambling system, but the NPA seems loath to admit as much.

In a separate interview with the Asahi, pachinko writer Pokka Yoshida explained the situation in more detail, saying that the the police-controlled Pachinko Gyokai Dantai isn’t, as some may think, corrupted by the pachinko industry itself. In actuality, they control the industry, which is in thrall to the three-shop exchange system. If the police take that system away, the industry is nothing, so they do anything the police ask.

In Yoshida’s words, the pachinko industry is in a constant state of crackdown. The relationship started in 1985 when the Law to Regulate Businesses that Affect Public Morals (fuzoku eigyo-ho) was revised. Police said they were going to be more aggressive about controlling pachinko, and later introduced a prepaid card system for buying pachinko balls in parlors.

The person who promoted this system was Katsuei Hirasawa, a Diet politician who was once an NPA bureaucrat. The idea was to understand exactly how much money pachinko parlors were making, since the industry was famous for fudging accounts and evading taxes and sending money to North Korea, where many people in the industry had families. In order to spread the use of prepaid cards, the police controlled the manufacture of certain new types of pachinko machines that allowed proprietors to adjust the odds of winning so that they could “incentivize” their parlors: Players are always looking for machines with better odds of winning. Police made sure that when these machines were manufactured, they couldn’t accept cash, only prepaid cards.

When pachinko became a “social problem” in the late ’90s, according to Yoshida, the police, through the PGD, had some 700,000 “socially problematic” machines removed from parlors. As it happens, these were cash machines, thus establishing the prepaid card system as the standard. But now, Yoshida says, the actual pachinko industry is trying to get away from police control, and so they are working with “the political world” behind the scenes to break free of the PGD. The police, understandably, are resisting.

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