Depending on how you measure it or which prognosticator you listen to, China still has somewhere between five and 12 years before it overtakes the United States as the world’s largest economy. When it comes to the economy of the gambling world though, China surpassed America seven years ago.

That’s when Macau, the Chinese territory that has become Asia’s gaming mecca, first posted higher gambling revenue than Sin City itself, edging out Las Vegas $6.95 billion to $6.5 billion. Macau hasn’t looked back; last year, it had gambling revenue of $38 billion, over six times the Vegas total.

In fact, Macau is increasingly the focus of U.S.–based casino operators like Sheldon Adelson’s Las Vegas Sands Corp. and Steve Wynn’s Wynn Resorts Limited. These companies’ Macau properties now generate the lion’s share of their revenue, so much that Steve Wynn has said he now considers his company to be a "Chinese" one. The Americans now compete—or, in some cases, cooperate—with a number of more homegrown giants, including the empire of Hong Kong tycoon Stanley Ho, who had a monopoly on Macau gaming for four decades until 2001.

All that growth has, of course, spawned a huge amount of legal work. Finance lawyers have been kept busy as casino operators and other companies in the gambling area tap capital markets in the U.S. and Asia to fund expansion. Beyond the casinos themselves, the gambling boom has also fueled massive investment in retail and transport infrastructure in Macau.

That’s not the legal work that makes headlines, though. Macau has been receiving more press attention in the West lately for the U.S. government probe into whether Sands violated the Foreign Corrupt Practices Act in the course of expanding in the Chinese territory. That and coverage of the shady-sounding world of Macau’s junket operators has fed an unsavory image that has long dogged both Macau and the casino industry in general.

Perhaps that’s why many law firms heavily involved in the industry, as well as gaming industry in-house lawyers, declined to talk to us about their work in Macau. Those who did, however, mainly argued that perceptions of corruption in the Macau gaming world have been vastly overblown, noting that the industry is highly regulated, with many operators further subject to scrutiny by the U.S. federal and state authorities.

But this is China, or at least almost-China. And, while Macau itself may be highly regulated, its next-door neighbor and greatest source of revenue is all too well-known for its gray areas, which seemingly provide lessons to in-house counsel on a daily basis.

The lessons start with the status of gambling itself in China. It’s illegal on the mainland. No big surprise there. But so is collecting a gambling debt. That and other potential issues don’t sit easily with a gambling industry that has grown heavily dependent on gamblers from mainland China, says Jorge Godinho, a professor who teaches gaming law at the University of Macau.

"Let’s imagine you have a casino in Nevada and most of your customers come from California," he says. "But let’s also imagine there is a border and no free movement of people and no free movement of capital and you can’t legally collect debts in California. It’s a strange legal situation."

Macau, located on the edge of China’s Pearl River Delta and less than an hour’s ferry ride west of Hong Kong, was first settled by Portuguese traders in the 16th century. It became a full-fledged colony of Portugal in the wake of the 19th-century Opium War that saw the establishment of Hong Kong as a British colony. Macau was formally handed back to Chinese rule in 1999, two years after Hong Kong.

Both of the former European colonies are special administrative regions of China, which means that they retain a high degree of autonomy from Beijing. Both have their own governments; in Macau’s case, that ­comprises a chief executive advised by a 10-member executive council as well as a 29-member legislative assembly. Moreover, unlike China, Hong Kong and Macau each have freely convertible currencies. Mini-constitutions enshrine civil liberties such as freedom of speech and perpetuate legal systems handed down from colonial rule. In Hong Kong, that has meant an English common law system; in Macau, that has meant a Portuguese civil law regime.

Gambling has been legal in Macau since the 19th century, but things really got started in the 1960s, when Ho’s Sociedade de Turismo e Diversões de Macau was granted a monopoly license to launch gambling operations. The company introduced Western-style casino games, and the then colony thrived on tourism from a rapidly prospering Hong Kong, developing a slightly seedy image along the way. Still, at the dawn of the 21st century, few would have regarded Macau as a patch on Las Vegas.

That all began to change in 2001, when the Macau government ended Ho’s monopoly and issued gaming licenses to other operators like Wynn and Sands. The introduction of giant Vegas-style casinos paired with the fast-growing wealth of mainland Chinese has proven a hugely winning combination for Macau over the past decade.

But Macau has developed in quite a different way from, say, Las Vegas. Though perhaps still best known for its casinos, the Nevada city has diversified into a broader tourist destination, where many visitors spend little or no time in casinos. Meanwhile, Macau remains heavily dependent not just on gamblers, but high-rollers in particular. Some 70 percent of its gaming revenue currently derives from these high-stakes players, who mainly play baccarat and, these days, come mostly from mainland China.

To reach these gamblers, the big casino companies rely primarily on so-called junket operators. These companies operate special VIP gaming rooms inside the casinos and they also identify and recruit gamblers to play there. On top of that, they provide credit to the gamblers and assume responsibility for collecting debts. In exchange, they receive about 40 percent of the casino’s take from their gamblers.

How do they collect debts in China? Godinho says any thoughts of leg-breakers are off the mark; the junket companies only use "friendly" persuasion. "There is a certain amount of peer pressure," he says. "People want to be invited back."

Mabel Lui, a Hong Kong partner with DLA Piper who often advises companies in the gaming area, says gaming companies have risk management systems in place. New customers are only extended so much credit to start, with their limit increased as they gain a track record of honoring debts.

The 235 junket operators are licensed by the Macau government and some, like Asia Entertainment and Resources Ltd. and Neptune Group, have become publicly listed in Hong Kong or the United States. Lui is currently advising one junket company on a planned offering. "The trend for the junkets is trying to access capital markets both to raise funds and to build credibility," she says.

That credibility is still somewhat lacking, as the means by which junket companies operate still garner suspicions and whispers of ties to organized crime. In a 2009 diplomatic cable posted to Wikileaks, an official in the U.S. Consulate in Hong Kong noted the junket system allowed ­Chinese gamblers to gamble billions in Macau despite capital restrictions that limit Chinese nationals from moving more than $50,000 overseas annually. The Macau casino sector’s "phenomenal success is based on a formula that facilitates if not encourages money laundering," the cable states.

A rumored crackdown on junket companies by the Chinese government caused gaming stocks to plummet in February. Though signs of such action have yet to appear, concern that Beijing may pursue policies that harm Macau is ever-present in the minds of those with a stake in the latter’s gambling industry.

Lui says a more direct concern is that the Chinese government could again restrict the number of visas it issues for mainland Chinese to travel to Macau. Beijing did so in 2008 and 2009, and the impact, coinciding with the onset of the global financial crisis, was devastating in Macau.

The Chinese government often does not explain or even announce its actions. It is known, however, to have concerns about the temptations Macau poses to government officials; some have been caught stealing public funds to gamble. Beijing may also be worried about the amount of money that leaves China through Macau.

There is little THAT gambling industry lawyers can do to address what are essentially political concerns. But such issues need to be cataloged as risk factors for potential investors considering capital markets issues by companies operating in the Macau gambling sector.

"It is a dangerous industry," says Bryant Edwards, a Hong Kong–based partner with Latham & Watkins. "There’s a lot of opportunity for these companies to get into trouble."

But Edwards, who recently advised Melco Crown Entertainment Ltd, operators of Macau’s City of Dreams casino and hotel complex, on a $600 million bond issue, says investors are willing to accept the risks because the growth over time has remained so spectacular. He points out that the present Las Vegas Strip was financed almost entirely through high-yield debt, or junk bonds.

"You always have ups and downs in this industry, but, ultimately, Macau keeps charging ahead," says Edwards.

Those investors are increasingly from Asia itself, he adds: "The U.S. investment is becoming a smaller and smaller share."

Lui agrees, noting that Hong Kong seems to be emerging as the preferred market for the Macau gaming industry. Apart from finding willing investors, those companies may also want to avoid some of the regulatory scrutiny that those listed in the United States now face. Those U.S. companies that also operate in Las Vegas need to pass muster with the Nevada Gaming Commission along with Macau’s Gaming Inspection and Coordination Bureau. U.S.–listed companies are regulated by the Securities and Exchange Commission and also face the possibility of shareholder litigation. Then there is the FCPA.

The Sands FCPA case has grabbed headlines in the U.S. in part because of the high public profile of boss Adelson, but also because of the way it fits in with preconceived notions of how both the gaming industry and Macau operate. The allegations first surfaced in the wrongful termination suit filed in 2010 against the company in Nevada by Steven Jacobs, the former president of Sands’s Macau operations.

In his complaint, Jacobs claims that he was fired in part because he resisted the continued retention by the company of Macau lawyer Leonel Alves, which he felt "posed serious risks under the criminal provisions of the [FCPA]." Emails obtained and published in July 2012 by nonprofit news agency ProPublica show that Sands paid Alves a legal bill of $700,000, despite concerns by both in-house and outside counsel that this was three times the going rate and would likely trigger FCPA scrutiny.

"What we have before us is Leonel reaching out to [Adelson] seeking to become full-time counsel," Jacobs wrote to then–Sands general counsel J. Alberto Gonzalez-Pita in a March 2010 email. "He has intimated he will drop his fees and that he is uniquely situated both as counsel and as a legeslator [sic] to ‘help’ us in Macau."

It is not entirely clear what help Sands was seeking from Alves, but the company has needed various government approvals for projects in the so-called Cotai Strip. Sands has led the way in developing the area, south of the main Macau peninsula, into an area of mega-resorts similar to the Las Vegas Strip. Alves is a member of both Macau’s executive council and its legislative assembly, in addition to being a private lawyer with his own firm. He is also chairman of the audit committee for Macau’s monetary authority as well as a member of the National Commission of the Chinese People’s Political Consultative Conference, an advisory body to the Chinese government.

The investigation is ongoing, though several media outlets reported in March that Sands "admitted" in its annual report that it may have violated the FCPA. The company has since pointed out that it only said it may have violated bookkeeping and documentation provisions of the FCPA.

A senior in-house lawyer with one of the Macau casino operators says he thinks the allegations against Sands had been blown out of proportion, noting that regulators had little reason to block projects when Cotai was mainly undeveloped. "Back when Adelson was looking there, no one else was," he says.

The in-house lawyer does not dispute that there has been corruption in Macau, but he points out that the most notable example received a very tough sentence. "That was Ao Man Long, and he went to jail for a long time," he says.

In 2008 former executive council member Ao, who served as Macau’s secretary for transportation and public works, was convicted of accepting over $100 million in bribes and kickbacks on construction projects. He was sentenced to 27 years in prison.

Lui says the case has had a lasting impact." When we do our due diligence on Macau projects, it’s a standard question: Did Mr. Ao approve this project?"

On the whole, though, she thinks the scrutiny that the industry receives, both in Macau and outside, means that such incidents are less likely now than in the past. But Lui expects that the current environment will lead to some regulatory tightening. A likely catalyst could be an upcoming evaluation of Macau’s anti–money laundering regime by the intergovernmental Asia/Pacific Group on Money Laundering.

"Everyone is anticipating a new debate about regulation," she says. "People are expecting something to happen."

Whatever new debate takes place will coincide with the larger ongoing debate about Macau’s future.

"There are very real doubts about whether Macau can continue to grow at this pace," says Godinho, "or whether it can grow too much."

Faced with the continuing uncertainty about policy out of Beijing, the Macau government would like to encourage a diversification of the economy into a broader tourist and leisure destination, not unlike Las Vegas. Such a model would rely less on the high-roller junkets and more on the mass-market, casual gamblers who play slot machines rather than baccarat.

Such an approach may also make sense because Macau’s model is starting to attract competitors all across the region. Singapore, which opened two casinos in 2010, is already nearing Las Vegas in gambling revenue. A series of large casinos complexes is also now opening in Manila, and more are on the way in Vietnam too. Most of those places are also targeting mainland Chinese gamblers via junket operators.

But Godinho figures that Macau’s proximity to China will continue to serve it well, even with new competition on the horizon.

"The fact is, there are 1.2 billion people across the border who like to gamble," he says. "That’s not going to change."