[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
UNLAWFUL INTERNET GAMBLING FUNDING PROHIBITION ACT AND THE INTERNET
GAMBLING LICENSING AND REGULATION COMMISSION ACT
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON CRIME, TERRORISM,
AND HOMELAND SECURITY
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
ON
H.R. 21 and H.R. 1223
__________
APRIL 29, 2003
__________
Serial No. 25
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://www.house.gov/judiciary
______
86-705 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
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COMMITTEE ON THE JUDICIARY
F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina HOWARD L. BERMAN, California
LAMAR SMITH, Texas RICK BOUCHER, Virginia
ELTON GALLEGLY, California JERROLD NADLER, New York
BOB GOODLATTE, Virginia ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio MELVIN L. WATT, North Carolina
WILLIAM L. JENKINS, Tennessee ZOE LOFGREN, California
CHRIS CANNON, Utah SHEILA JACKSON LEE, Texas
SPENCER BACHUS, Alabama MAXINE WATERS, California
JOHN N. HOSTETTLER, Indiana MARTIN T. MEEHAN, Massachusetts
MARK GREEN, Wisconsin WILLIAM D. DELAHUNT, Massachusetts
RIC KELLER, Florida ROBERT WEXLER, Florida
MELISSA A. HART, Pennsylvania TAMMY BALDWIN, Wisconsin
JEFF FLAKE, Arizona ANTHONY D. WEINER, New York
MIKE PENCE, Indiana ADAM B. SCHIFF, California
J. RANDY FORBES, Virginia LINDA T. SANCHEZ, California
STEVE KING, Iowa
JOHN R. CARTER, Texas
TOM FEENEY, Florida
MARSHA BLACKBURN, Tennessee
Philip G. Kiko, Chief of Staff-General Counsel
Perry H. Apelbaum, Minority Chief Counsel
------
Subcommittee on Crime, Terrorism, and Homeland Security
HOWARD COBLE, North Carolina, Chairman
TOM FEENEY, Florida ROBERT C. SCOTT, Virginia
BOB GOODLATTE, Virginia ADAM B. SCHIFF, California
STEVE CHABOT, Ohio SHEILA JACKSON LEE, Texas
MARK GREEN, Wisconsin MAXINE WATERS, California
RIC KELLER, Florida MARTIN T. MEEHAN, Massachusetts
MIKE PENCE, Indiana
J. RANDY FORBES, Virginia
Jay Apperson, Chief Counsel
Sean McLaughlin, Counsel
Elizabeth Sokul, Counsel
Katy Crooks, Counsel
Patricia DeMarco, Full Committee Counsel
Bobby Vassar, Minority Counsel
C O N T E N T S
----------
APRIL 29, 2003
OPENING STATEMENT
Page
The Honorable Howard Coble, a Representative in Congress From the
State of North Carolina, and Chairman, Subcommittee on Crime,
Terrorism, and Homeland Security............................... 1
The Honorable Robert C. Scott, a Representative in Congress From
the State of Virginia, and Ranking Member, Subcommittee on
Crime, Terrorism, and Homeland Security........................ 2
WITNESSES
Honorable James A. Leach, a Representative in Congress From the
State of Iowa
Oral Testimony................................................. 5
Prepared Statement............................................. 7
Mr. John G. Malcolm, Deputy Assistant Attorney General, Criminal
Division, U.S. Department of Justice
Oral Testimony................................................. 8
Prepared Statement............................................. 9
Mr. Jeffrey Modisett, Counsel, Bryan Cave, LLP, and former
Attorney General, State of Indiana
Oral Testimony................................................. 13
Prepared Statement............................................. 14
Mr. William J. Hornbuckle, President and Chief Operating Officer,
MGM Mirage Online
Oral Testimony................................................. 17
Prepared Statement............................................. 19
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
The Honorable Sheila Jackson Lee, a Representative in Congress
From the State of Texas........................................ 25
APPENDIX
Material Submitted for the Hearing Record
Prepared Statement of the Honorable Howard Coble, a
Representative in Congress From the State of North Carolina,
and Chairman, Subcommittee on Crime, Terrorism, and Homeland
Security....................................................... 35
Prepared Statement of the Honorable Bob Goodlatte, a
Representative in Congress From the State of Virginia.......... 36
Questions submitted by Rep. Bob Goodlatte to John G. Malcolm and
William J. Hornbuckle regarding H.R. 21, the ``Unlawful
Internet Gambling Funding Prohibition Act''.................... 38
Response, with attachments, from William J. Hornbuckle to
questions submitted by Rep. Bob Goodlatte...................... 39
Response from John G. Malcolm to questions submitted by Rep. Bob
Goodlatte...................................................... 69
Questions submitted by Rep. John Conyers, Jr., to John G. Malcolm
regarding H.R. 21, the ``Unlawful Internet Gambling Funding
Prohibition Act''.............................................. 71
UNLAWFUL INTERNET GAMBLING FUNDING PROHIBITION ACT AND THE INTERNET
GAMBLING LICENSING AND REGULATION COMMISSION ACT
----------
TUESDAY, APRIL 29, 2003
House of Representatives,
Subcommittee on Crime, Terrorism,
and Homeland Security
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:04 p.m., in
Room 2237, Rayburn House Office Building, Hon. Howard Coble
[Chairman of the Subcommittee] presiding.
Mr. Coble. Good afternoon, ladies and gentlemen. The
Subcommittee on Crime, Terrorism, and Homeland Security will
come to order.
Today we are--at the outset I want to apologize to you all
for my raspy voice. I have been plagued with a bad cold, so you
all bear with me as we go along here.
Today we address a serious and growing problem for our
country: the problem of Internet gambling. It is now estimated
that $4.2 billion is wagered over the Internet each year. This
is an increase from $445 million just 6 years ago. There are
currently more than 1,800 Internet gambling sites, and the
total dollar amount wagered worldwide is expected to reach $10
billion in the near future.
The most troubling aspect of Internet gambling is the
relative ease of accessibility for our Nation's children. The
anonymous nature of the Internet makes it almost impossible to
prevent underage gamblers from using their parents' credit
cards, or even their own in some cases, to log on to a gambling
website. Many Internet sites require nothing more than a name,
address, and a credit card number. Those sites that do require
a person to disclose his or her age make little or no effort to
verify this information.
Another group particularly susceptible to Internet gambling
are Americans' problem, or addictive gamblers. The National
Council on Problem Gambling estimates that there are currently
11 million Americans directly suffering from gambling problems.
High rates of financial debt, unemployment, bankruptcy,
divorce, homelessness and suicide are all associated with
problem gambling. Various casinos and their video game
structure have been labeled ``the crack cocaine of gambling''.
These facilities are open for the most part 24 hours a day,
7 days a week, all within a person's own home. By making
gambling more convenient, it can do nothing but make the
problem worse.
In addition to the social problems associated with Internet
gambling, these Internet sites also offer organized crime
groups a very simple and easy opportunity to launder the
proceeds of their criminal activity. Because of the lack of
oversight or regulations, and the high degree of anonymity,
money laundering through Internet gambling sites is already a
major concern to our Nation's law enforcement agencies.
Federal law is currently unclear as to whether or not all
types of Internet gambling is illegal. The statute that most
directly restricts the use of the Internet to place bets is the
Wire Act under section 1084 of title 18 of the U.S. Code.
However, because this statute was written prior to the age of
the Internet and the use of the wireless communication, there
is ambiguity as to what type of bettering is or is not covered.
Also, the types of gambling mentioned in the statute may not
cover all the different types of gambling available on the
Internet.
Today we will examine two bills that attempt to address the
problems of Internet gambling in two very different ways. H.R.
21, the ``Unlawful Internet Gambling Funding Prohibition Act,''
introduced by our friend from the Heartland, Congressman Jim
Leach of Iowa, seeks to ban Internet gambling by prohibiting
the use of financial instruments such as credit cards in any
transaction involving illegal Internet gambling.
H.R. 3215, the ``Combatting Illegal Gambling Reform and
Modernization Act,'' introduced by Congressman John Conyers of
Michigan, the Ranking Member of the full Judiciary Committee,
seeks to establish a commission to study the feasibility of
regulating Internet gambling rather than banning it.
I look forward to the testimony of the witnesses here
today, which will help this Subcommittee decide what is the
best approach to take with regard to this very important
subject.
Now, prior to recognizing the distinguished gentleman from
Virginia, the Ranking Member, I am advised that a Member of our
Subcommittee will be celebrating a date of birth tomorrow, and
with your permission, sir, I will extend a ``happy birthday''
greeting to you.
I now recognize the Ranking Member.
Mr. Scott. Thank you, Mr. Chairman.
You know, when I was growing up, we would always declare a
``birthweek.'' I didn't know that was going to extend to my
congressional tenure. Thank you, Mr. Chairman.
I am pleased to join you in convening this hearing
regarding the Federal regulation of gambling over the Internet.
I would also like to thank you and your staff for working with
the minority on a bipartisan matter to develop the hearing and
select witnesses for it.
Mr. Chairman, gambling has traditionally been primarily a
State regulatory responsibility. It should continue to be so,
in my judgment, although it is appropriate for the Federal
Government to have a role to assist States in the total
regulatory scheme. The Federal Government undertook such a role
in passing the 1961 Wire Communications Act as a way to assist
the fight against gambling by organized crime syndicates. The
Department of Justice contends that it can prosecute Internet
gambling businesses under that law, but clearly, that law was
not designed with Internet gambling in mind. So I appreciate
the desire of my colleague, the gentleman from Iowa, to update
the ability of the Department to address illegal gambling in
today's context.
However, I am concerned that his bill, H.R. 21, similar to
the bills in the last several Congresses which attempted to
regulate gambling, is not likely to be effective in doing so.
When we address the real question on Internet gambling, we must
acknowledge that the horses are literally already out of the
gates. So let's be clear that the bill is not about prohibiting
Internet gambling; it is only about regulating Internet
gambling, and then only with respect to the United States'
Internet gambling market.
Regulating anything on the Internet is problematic, even
when desirable. Most law enforcement is jurisdictionally
dependent. The Internet has no jurisdiction and, as a result, I
suspect that, even if we are successful in closing down
business sites in the United States, or in countries that we
can get to cooperate because of the Internet and electronic
funds transfer, the approach of H.R. 21 will be ultimately
ineffective. The gambling website can simply code an Internet
gambling transaction as another type of transaction and thereby
evade the total enforcement mechanism in the bill, or an e-cash
or electronic payment system can relocate in another country
and thereby evade the enforcement mechanisms in the bill.
Furthermore, we should not overestimate the cooperation we
might get from other countries. Presently, over 50 nations
allow some form of gambling on line, and that number is likely
to grow. And even if we're successful in getting cooperation
from most countries, it would simply be increasing the profit
opportunities for uncooperative countries, especially those
with which the United States does not have diplomatic
relations.
To be effective in prosecuting illegal gambling over the
Internet, I think we have to prosecute individuals. This bill
does not. If we took the approach in this bill in enforcing
drug laws, we would be prosecuting the sellers but not the
buyers. Prosecuting individuals in Internet gambling would be
more effective than what we're seeing in illegal drug
prosecutions, because the technology of the Internet would be
in the Government's favor, since the activities of illegal
gambling would leave a trail leading directly back to the
individual gambler. So, so long as individuals can gamble over
the Internet with impunity, a market will be provided for them
which the regulatory scheme in this bill will not be able to
stop.
Since we are not talking about prohibiting Internet
gambling but simply regulating it, I believe there is a more
effective regulatory approach than offered by H.R. 21. However,
the approaches must be developed taking into account the
technology, State policies with respect to gambling, and
Internet gambling practices and preferences.
This is the approach offered by H.R. 1223, the bill before
us authored by Ranking Member of the full Committee, Mr.
Conyers. That bill establishes a commission that would study
the issue and make recommendations for a regulatory environment
for Internet gambling which would be controlled by individual
States. States do tend to prohibit individuals from gambling,
so Internet gambling can be both effective and individualized
in each State. Under the regulatory environment the bill
provides for, if Nevada opts to allow Internet gambling within
its borders, it can. If Utah does not opt to allow Internet
gambling within its borders, it can prohibit it, and that would
be enforceable by the Federal Government by the States that
allow gambling, as well as by the State of Utah.
Under such a regulatory environment, it is much more likely
that those who choose to gamble over the Internet will do so
through a licensed regulated entity than one operating
illegally. First, the consumer in a State where Internet
gambling is legal will have confidence that, if they win, they
will be paid. And in a licensed regulatory entity, such as MGM
Mirage.com, we would not have to worry about the licensing
authorities in Las Vegas failing to adopt stringent controls on
access to its website. A consumer would have no similar
confidence in a fly-by-night offshore casino.com, so a likely
result from licensing and regulating Internet gaming activities
would be to drive less reputable businesses out of business,
particularly those that are offshore.
Another significant result is, if States choose to
authorize Internet gambling, it can tax it. At a time when
unauthorized Internet gambling is flourishing, and when most
States are cash-strapped, those States that already have chosen
to authorize regulated gambling could receive much more needed
revenues while contributing to the control of the industry and
protecting the gambling public.
I believe that we should regulate Internet gambling, but we
should do it effectively. We should not allow any single
business sector with the sole responsibility for doing the bulk
of the work of enforcement, whether it is the banking industry
as in this bill, or the Internet service industry as we tried
in prior bills. There are ways to regulate Internet gambling
effectively, and the commission approach to develop those ways
is the best way to come up with them.
Again, Mr. Chairman, I thank you for working with us on
these two bills. I look forward to hearing the testimony of the
witnesses, and I thank you for your birthday congratulations.
Mr. Coble. You're indeed welcome. And you still don't know
how I came into that knowledge. I rarely have him guessing, but
I have him guessing now.
Folks, I believe members of the audience need to know
something about our panelists, so I'm going to give brief
introductory remarks prior to starting with Mr. Leach.
Our first witness is the sponsor of H.R. 21, Representative
James Leach. Congressman Leach has been a Member of Congress
for 26 years and represents the 2nd District in Iowa. During
his tenure, Congressman Leach has invested a tremendous amount
of time and effort on the issue of Internet gambling. The
Subcommittee looks forward to his testimony on this complex
issue.
Our next witness is Mr. John G. Malcolm. Mr. Malcolm is
currently a Deputy Assistant Attorney General in the Criminal
Division of the Department of Justice, where his duties include
overseeing the Computer Crime and Intellectual Property
Section, the Child Exploitation and Obscenity Section, the
Domestic Security Section, and the Office of Special
Investigations.
He is an honors graduate of Columbia College and the
Harvard School of Law. Mr. Malcolm served as a law clerk to
Judges on both the United States District Court for the
Northern District of Georgia, and the 11th Circuit Court of
Appeals.
Our third witness is Mr. Jeffrey Modisett. Mr. Modisett is
currently counsel for the law firm of Bryan Cave, LLP, in Los
Angeles, CA, and has recently published articles concerning the
States' approach to on-line gambling, cyber-law, and e-
commerce.
An honors graduate of UCLA, Oxford University, and the Yale
University School of Law, Mr. Modisett is also the former
Indiana Attorney General. Mr. Modisett is the past president of
the Family Advocacy Center, which he founded, and a former
director of the National District Attorneys Association.
Our final witness this afternoon is Mr. William Hornbuckle.
Mr. Hornbuckle is president and chief operating officer of MGM
Mirage Online, and executive vice president of marketing for
MGM Mirage. He is a 23 year veteran of the gaming industry and
was promoted to his current position in July, 2001.
Mr. Hornbuckle has been serving as president and chief
operating officer of the MGM Grand Hotel and Casino in Las
Vegas since October, 1998. Prior to that role, he was executive
vice president of operations for the resort.
It's good to have all of you with us. We have written
statements from each of the witnesses on the panel. I ask
unanimous consent to submit them into the record in their
entirety.
Gentlemen, as you all have previously been told, we try to
adhere to the 5-minute rule here, both as to you all and to
ourselves. So when that red light illuminates into your face,
you will know that you're skating on thin ice. So if you could
wrap it up then.
Mr. Leach, before you start, it's good to have you with us.
I am a country bluegrass music aficionado, and Merle Haggard,
who was known for years as the ``country balladeer'', once
recorded a song entitled, ``The Kentucky Gambler.'' Has anyone
in the audience ever heard of the song? Well, the concluding
words in his song were these: ``...but a gambler loses much
more than he wins.'' A sad story about a guy who abandoned his
family because he was an addictive gambler.
So, having said that, Mr. Leach, it's good to have you and
the other people with us. Fire away.
STATEMENT OF HONORABLE JAMES A. LEACH, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF IOWA
Mr. Leach. Thank you very much, Mr. Chairman, Mr. Scott,
distinguished Committee counsel. Thank you for holding his
hearing. Your leadership on this issue is deeply appreciated.
As I have testified previously in this Committee, gambling
on the Internet is fast becoming one of the critical issues
confronting thousands of American families. The financial and
economic implications of Internet gambling may not be intuitive
to those unfamiliar with the workings of the industry, but the
consequences cannot be exaggerated. It is simply not good for
the economy at large, as well as each individual gambler, but
the economy at large, to have Americans send billions to
overseas Internet casinos which have shady or unknown owners.
Casino gambling, while it competes for jobs with other
sectors of the economy, such as restaurants and the retail
trade, also partly balances job losses elsewhere with some job
creation. Internet gambling, on the other hand, may be the only
sector of the economy where the case of greater efficiency is
not altogether compelling. It reduces jobs in competing parts
of the American economy, but creates few in itself and all, to
date, are abroad. In other words, this is a ``jobs'' as well as
a moral and regulatory issue.
The very characteristics that make the Internet such a
valuable resource are also the reasons why it has such a huge
potential to impinge on the stability of American financial
institutions, as well as the American family. The easy access,
anonymity, and speed of transactions which make such positive
contributions to the level of efficiency and cost of financial
services. also make routine safeguards impractical and leave
the financial services industry open to abuse. Internet
gambling increases consumer debt, makes bankruptcy more likely,
money laundering an easy endeavor, and identity theft a likely
burden.
Gambling, in general, and Internet gambling in particular,
provide one of the most accessible platforms for money
laundering. Money launderers tend to seek out areas where there
is a low risk of detection by law enforcement. Internet
gambling is a particularly attractive method to launder money
because of the heightened level of anonymity and a virtual lack
of governmental regulation. Nearly 80 percent of the $10
billion in revenue generated by Internet gambling sites is
impossible to account for, since most operators are located in
the Caribbean and other jurisdictions with loose regulatory
structures and limited financial reporting requirements.
Reports from the OECD's Financial Action Task Force
specifically point to Internet gambling as a major loophole in
anti-money laundering regimes. The U.S. Treasury's Financial
Crimes Enforcement Network has a special anti-money laundering
program designed for the traditional domestic gaming industry.
No such strategy exists for illegal gambling sites located in
unregulated offshore jurisdictions. Given the hard work of this
Committee, and also that of the Financial Services Committee,
to quash the money laundering efforts of terrorists and narco
traffickers, it would be irresponsible to leave such an
enormous institutional loophole unplugged.
Suggestions to legalize and regulate Internet gambling
address none of these concerns. No regulatory system can
prevent the social and economic ramifications of online
gambling. This was the conclusion of the National Gambling
Impact Study Commission report issued in 1999. This
congressionally mandated report concluded that Internet
gambling should be illegal at the Federal level and suggested
prohibiting the use of financial instruments for these
transactions, thus serving as a model for this legislation.
I stress this point, that we have had a national commission
on gambling, that was congressionally mandated----
Mr. Scott. Jim, did you say it should be legal on the
national basis, or illegal?
Mr. Leach. No, no. Illegal.
Mr. Scott. Illegal?
Mr. Leach. Illegal. I'm sorry. I'm reading a little too
quickly. I apologize.
Mr. Scott. No, I'm just listening too slowly.
Mr. Leach. While it's true that one can have more
formalized prohibitions--and I would certainly favor them--it
is not necessarily the case that it is easy to get Congress to
adopt bigger steps, so this bill is designed to accept the law,
whatever this Committee determines to be, and then, using the
Banking Committee's jurisdiction, come up with an approach
which is basically functional regulation or a functional
deterrent to whatever laws this Committee determines are
appropriate.
I would simply stress that this is a functional ban. It is
partly working today because, voluntarily, several of the major
credit card companies have taken this direction as their own
practice. We have already seen the Bear Stearns report that
about half the Internet gambling profits have been reduced, and
a number of companies are seeing some difficulties based on
certain voluntary steps in this direction. So an assertion that
there is no effectiveness defies the current partial steps that
are being taken in the private sector.
In conclusion, let me stress that at a personal level I am
a skeptic about all forms of gambling. But each of us are
obligated to the maximum extent possible to be respectful of
legitimate choices made by others. Casino gambling, as it
exists in America, is at least regulated by the State to
protect the participants. Generally, casinos also add
entertainment and involve elements of socialization.
Gambling alone, on the other hand, whether using a laptop
at home or a computer in the workplace, involves no
entertainment or socialization element, and lacks the
fundamental protections of law and regulation. Casino gambling,
as it has been sanctioned in all Western democracies, has only
been allowed to exist with comprehensive regulation. Internet
gambling lacks such safeguards. It is a danger to the family
and society at large. It should be ended.
From a family perspective, the home may be considered a
castle, but it should never be a casino.
Thank you all very much.
[The prepared statement of Mr. Leach follows:]
Prepared Statement of the Honorable James A. Leach, a Representative in
Congress From the State of Iowa
Mr. Chairman, thank you for holding this hearing on legislation
addressing the epidemic problem of Internet gambling. Your leadership
on this issue is deeply appreciated.
As I testified previously, gambling on the Internet is fast
becoming one of the most critical issues confronting thousands of
American families and the social and economic implications of Internet
gambling can no longer be ignored. The ramifications of Internet
gambling are now showing themselves on college campuses and even
professional athletes have admitted addiction. Approximately 15 million
Americans are at-risk or problem gamblers, who are more likely to have
drug addictions, alcohol dependency, serious family dysfunction, and,
at the extreme, especially when gambling losses accumulate, a higher
rate of suicide.
The financial and economic implications of Internet gambling may
not be intuitive to those unfamiliar with the workings of the industry,
but the consequences cannot be exaggerated.
It simply is not good for the economy at large to have Americans
send billions to overseas Internet casinos which often have shady or
unknown owners.
Casino gambling, while it competes for jobs with other sectors of
the economy, such as restaurants and the retail trade, also partly
balances job losses elsewhere with some job creation. Internet
gambling, on the other hand, may be the only sector of the economy
where the case of greater efficiency is not altogether compelling. It
reduces jobs in competing parts of the American economy, but creates
few in itself and all, to date, are abroad. In other words, this is a
``jobs'' as well as a moral and regulatory issue.
The very characteristics that make the Internet such a valuable
resource are also the reasons why it has such a huge potential to
impinge on the stability of American financial institutions, as well as
the American family. The easy access, anonymity, and speed of
transactions which make such positive contributions to the level of
efficiency and cost of financial services also make routine safeguards
impractical and leave the financial services industry open to abuse.
Internet gambling increases consumer debt, makes bankruptcy more
likely, money laundering an easy endeavor, and identity theft a likely
burden.
Gambling in general and Internet gambling in particular provide one
of the most accessible platforms for money laundering. Money launderers
tend to seek out areas where there is a low risk of detection by law
enforcement. Internet gambling is a particularly attractive method to
launder money because of the heightened level of anonymity and a
virtual lack of governmental regulation. Nearly 80 percent of the $10
billion in revenue generated by Internet gambling sites is impossible
to account for, since most operators are located in the Caribbean and
other jurisdiction with loose regulatory structures and limited
financial reporting requirements.
Reports from the OECD's Financial Action Task Force specifically
point to Internet gambling as a major loophole in anti-money laundering
regimes. The U.S. Treasury's Financial Crimes Enforcement Network has a
special anti-money laundering program designed for the traditional
domestic gaming industry. No such strategy exists for illegal gambling
sites located in unregulated offshore jurisdictions. Given the hard
work of this Committee, and also that of the Financial Services
Committee, to quash the money laundering efforts of terrorists and
narco-traffickers, it would be irresponsible to leave such an enormous
institutional loop-hole unplugged.
Suggestions to legalize and regulate Internet gambling address none
of these concerns. No Internet gambling site will subject themselves to
taxation and the cost of regulation when they can remain offshore. And
no regulatory system can prevent the social and economic ramifications
of online gambling. This was the conclusion of the National Gambling
Impact Study Commission Report issued in 1999. This congressionally
mandated report concluded that Internet gambling should be illegal at
the federal level and suggested prohibiting the use of financial
instruments for these transactions, thus serving as a model for this
legislation.
In conclusion, let me stress that at a personal level I am a
skeptic about all forms of gambling, but each of us are obligated to
the maximum extent possible to be respectful of legitimate choices made
by others. Casino gambling as it exists in America is, at least,
regulated by the State to protect the participants. Generally, casinos
also add entertainment and involve elements of socialization. Gambling
alone, on the other hand, whether using a laptop at home or a computer
in the workplace, involves no entertainment or socialization element
and lacks the fundamental protections of law and regulation. Casino
gambling as it has been sanctioned in all Western democracies has only
been allowed to exist with comprehensive regulation. Internet gambling
lacks such safeguards. It is a danger to the family and society at
large. It should be ended.
From a family perspective, the home may be considered a castle; but
it should never be a casino.
Thank you.
Mr. Coble. Thank you, Mr. Leach.
We have been joined by the gentleman from Florida, Mr.
Feeney, and Mr. Chabot, the gentleman from Ohio.
Mr. Malcolm.
STATEMENT OF JOHN G. MALCOLM, DEPUTY ASSISTANT ATTORNEY
GENERAL, CRIMINAL DIVISION, U.S. DEPARTMENT OF JUSTICE
Mr. Malcolm. Mr. Chairman, Members of the Subcommittee,
thank you for inviting me to testify today. The issue before
the Subcommittee is one of singular importance and I commend
the Subcommittee for holding this hearing.
I would also like to commend Congressman Leach, as well as
Congressman Goodlatte and Senator Kyl, for their tireless
efforts and longstanding commitment to provide law enforcement
with additional tools to combat Internet gambling. Today, I am
pleased to offer the views of the Department of Justice about
Internet gambling.
As you all know, the number of Internet gambling sites has
increased substantially in recent years. While there were
approximately 700 Internet gambling sites in 1999, it is
estimated that, by the end of 2003, there will be approximately
1,800 such sites, generating between $4.2 and $4.3 billion. In
addition to online casino-style gambling sites, there are
numerous offshore sports book operations that take bets both
over the Internet and via the telephone. These developments are
of great concern to the United States Department of Justice
because of the potential for fraud, the opportunities they
create for money launderers and organized criminal
organizations, and the problems of gambling by minors and by
compulsive gamblers, which are exacerbated by Internet
gambling. I discuss each of these issues in greater detail in
my written testimony.
Additionally, most of these gambling businesses operate
offshore in foreign jurisdictions. Many of them accept bets
from United States citizens, which is a violation of several
Federal laws, including sections 1084, 1952 and 1955 of title
18, United States Code.
The Department of Justice generally supports the efforts of
the drafters of H.R. 21, to enable law enforcement to cut off
the transfer of funds to and from illegal Internet gambling
businesses.
With respect to H.R. 1223, the Department has concerns
about the feasibility and desirability of regulating Internet
gambling. I have more extensive comments on H.R. 21 and H.R.
1223 in my written testimony. Of course, I am happy to answer
any questions you may have about those bills.
Before concluding, I would just like to thank you again for
inviting me to testify today. The Justice Department also
thanks you for your support over the years, and we reaffirm our
commitment to work with Congress to address the significant
issue of Internet gambling.
Thank you.
[The prepared statement of Mr. Malcolm follows:]
Prepared Statement of John G. Malcolm
Mr. Chairman and Members of the Subcommittee:
Thank you for inviting me to testify today. The issue before this
Subcommittee is one of singular importance, and I commend the
Subcommittee for holding this hearing. I would also like to commend
Congressman Leach, as well as Congressman Goodlatte and Senator Kyl,
for their tireless efforts and longstanding commitment to provide law
enforcement with additional tools to combat Internet gambling. Today I
am pleased to offer the views of the Department of Justice about
Internet gambling, including the potential for gambling by minors and
compulsive gamblers, the potential for fraud and money laundering, the
potential for infiltration by organized crime, and recent state
actions. The Department of Justice generally supports the efforts of
the drafters of H.R. 21 and S. 627 to enable law enforcement to cut off
the transfer of funds to and from illegal Internet gambling businesses.
With respect to H.R. 1223, the Department has concerns, which I shall
address below, about the feasibility and desirability of regulating
Internet gambling.
As you all know, the number of Internet gambling sites has
increased substantially in recent years. While there were approximately
700 Internet gambling sites in 1999, it is estimated that by the end of
2003, there will be approximately 1,800 such sites generating around
$4.2 billion. In addition to on-line casino-style gambling sites, there
are numerous off-shore sports books operations that take bets both over
the Internet and via the telephone. These developments are of great
concern to the United States Department of Justice, particularly
because many of these operations are currently accepting bets from
United States citizens, when it is illegal to do so.
The Internet and other emerging technologies, such as interactive
television, have made possible types of gambling that were not feasible
a few years ago. For example, a United States citizen can now, from his
or her home at any hour of the day or night, participate in an
interactive Internet poker game operated by a computer located in the
Caribbean. Indeed, a tech-savvy gambler can route his bets through
computers located in other countries, thereby obscuring the fact that
he is placing his bet from the United States.
GAMBLING BY MINORS
On-line gambling also makes it far more difficult to prevent minors
from gambling. Unlike traditional physical casinos and Off-Track-
Betting parlors, the operators of gambling websites cannot look at
their customers to assess their age and request photo identification.
Currently, Internet gambling businesses have no reliable way of
confirming that gamblers on their website are not minors who have
gained access to a credit card. Although some companies are developing
software to try to detect whether a player is old enough to gamble or
whether that player is from a legal jurisdiction, such software has not
been perfected and would, of course, be subject to the same types of
flaws and vulnerabilities that could be exploited by hackers.
COMPULSIVE GAMBLING
Unlike on-site gambling, on-line gambling is readily available to
anyone with an Internet connection at all hours of the day or night.
This presents a particular danger for compulsive gamblers. As was
recently pointed out by the American Psychiatric Society: ``Internet
gambling, unlike many other forms of gambling activity, is a solitary
activity, which makes it even more dangerous; people can gamble
uninterrupted and undetected for unlimited periods of time.'' Indeed,
the problems associated with pathological and problem gamblers, a
frighteningly-large percentage of which are young people, are well-
established and can be measured in the ruined lives of both the
gamblers themselves and their families.
POTENTIAL FOR FRAUD
Although there are certainly legitimate companies that either are
operating or want to operate on-line casinos in an honest manner, the
potential for fraud connected with casinos and bookmaking operations in
the virtual world is far greater than in the physical realm. On-line
casinos and bookmaking establishments operate in many countries where
effective regulation and law enforcement is minimal or non-existent.
Start-up costs are relatively low, and cheap servers and
unsophisticated software are readily-available. Like scam telemarketing
operations, on-line gambling establishments appear and disappear with
regularity, collecting from losers and not paying winners, and with
little fear of being apprehended and prosecuted.
Through slight alterations of the software, unscrupulous gambling
operations can manipulate the odds in their favor, make unauthorized
credit card charges to the accounts of unsuspecting gamblers, or alter
their own accounts to skim money. There is also a danger that hackers
can manipulate the online games in their favor or can steal credit card
or other information about other gamblers using the site.
POTENTIAL FOR ORGANIZED CRIME
Additionally, the Department of Justice is concerned about the
potential involvement of organized crime in Internet gambling.
Traditionally, gambling has been one of the staple activities in which
organized crime has been involved, and many indictments brought against
organized crime members have included gambling charges. We have now
seen evidence that organized crime is moving into Internet gambling.
INTERNET GAMBLING VIOLATES FEDERAL LAW
Most of these gambling businesses operate offshore in foreign
jurisdictions. If they are accepting bets or wagers from customers
located in the United States, then these businesses are violating
federal laws, including Sections 1084, 1952, and 1955 of Title 18,
United States Code. While the United States can indict these companies
or the individuals operating these companies, it may be difficult to
bring them to trial in the United States.
MONEY LAUNDERING AND INTERNET GAMBLING
Another major concern that the Department of Justice has about on-
line gambling is that such businesses provide criminals with an easy
and excellent vehicle for money laundering. This is due in large part
to the cash-intensive nature of the industry, the fact that most
Internet gambling sites are located offshore, and the volume, speed,
and international reach of Internet transactions.
It is a fact that money launderers have to go to financial
institutions to conceal their illegal funds and to recycle those funds
back into the economy for their use. Because criminals are well aware
of the fact that banks are now subject to greater scrutiny and
regulation, they have--not surprisingly--turned to other non-bank
financial institutions to launder their money. On-line casinos are a
particularly inviting target because, in addition to using the gambling
that on-line casinos offer as a way to hide or transfer money, on-line
casinos offer a broad array of financial services to their customers,
such as providing credit accounts, fund transmittal services, check
cashing services, and currency exchange services.
Individuals wanting to launder ill-gotten gains through an on-line
casino can do so in a variety of ways. For example, a customer could
establish an account with a casino using illegally-derived proceeds,
conduct a minimal amount of betting or engage in offsetting bets with
an overseas confederate, and then request repayment from the casino,
thereby providing a new ``source'' of the funds. If a gambler wants to
transfer money to an inside source in the casino, who may be located in
another country, he can just play until he loses the requisite amount.
Similarly, if an insider wants to transfer money to the gambler,
perhaps as payment for some illicit activity, he can rig the game so
the bettor wins.
The anonymous nature of the Internet and the use of encryption make
it difficult to trace the transactions. Further, the gambling business
may not maintain the transaction records, in which case tracing may be
impossible. While regulators in the United States can visit physical
casinos, observe their operations, and examine their books and records
to ensure compliance with regulations, this is far more difficult, if
not impossible, with virtual casinos.
COMMENTS ON H.R. 1223
If enacted, H.R. 1223 would establish a Commission to study the
existing legal framework governing Internet gambling and the issues
involved with the licensing and regulation of Internet gambling. Among
the topics to be studied, the Commission would review existing law,
assess the impact of Internet gambling on problem gamblers and minors,
assess the susceptibility of Internet gambling to money laundering, and
study the potential of regulatory measures to minimize any adverse
problems. As I previously stated, the Department has concerns about
these and other issues as they relate to Internet gambling. At this
time, the Department believes that Internet gambling should be
prohibited for many of the reasons I have mentioned, as well as others
cited by the Congressionally-created National Gambling Impact Study
Commission in its 1999 Report recommending that Internet gambling be
prohibited. Moreover, given differences in state law on the issue of
gambling in general, and given the fact that Internet gamblers could
come from any state, the Department also has concerns that such
regulation would need to ensure that the laws of all states were taken
into consideration when analyzing this issue.
While the Department would not necessarily oppose per se a
Commission that would revisit these issues and make recommendations on
the feasibility of regulating Internet gambling, H.R. 1223 provides
that this Commission shall issue proposed changes to Federal law and
regulations to provide for the licensing and regulation of Internet
gambling in the United States. This requirement appears to preordain
the outcome of the Commission's study and not permit this Commission to
reach the same conclusion that the National Gambling Impact Study
Commission reached just four years ago, to wit, that Internet gambling
be prohibited and not regulated.
Our review of H.R. 1223 is continuing, and we may have additional
comments at a later date. But if Congress elects to consider
legislation, such as H.R. 1223, that could, in theory, eventually lead
to the legalization of Internet gambling, it will be very important to
bear in mind and emphasize the debilitating and potentially disastrous
consequences of such a step that I noted previously--namely, the
problems of underage gambling, addictive gambling, and fraud, as well
as the possibility of organized crime involvement.
Even if H.R. 1223 is enacted, that should not preclude action on
H.R. 21 and S. 627, since these bills apply only to ``unlawful Internet
gambling'' and would not be applicable to lawful Internet gambling.
Given that illegal gambling exists in the physical world despite the
availability of legalized forms of gambling in many states, there is
every reason to believe that unlawful gambling would continue to exist
in the cyber world even if the United States were to regulate Internet
gambling.
COMMENTS ON H.R. 21
The Department has several comments on H.R. 21. First, the Justice
Department believes that H.R. 21 should apply to all means of wagering
that derive from the Internet. Many offshore sports books accept wagers
both over the telephone and over the Internet. As drafted, H.R. 21 is
only applicable to Internet gambling, so an otherwise illegal site
could avoid the bill's prohibitions by directing that wagers be placed
over the phone rather than via the Internet. The bill should apply to
all unlawful Internet gambling regardless of the communications medium
being used to place bets.
Second, the Justice Department opposes provisions of H.R. 21 that
weaken or alter existing federal law or standards. The Justice
Department recognizes the important role that federal regulators play
in regulating federally-insured financial institutions and is currently
discussing with the Treasury Department procedures whereby injunctive
relief would only be sought in full coordination with the appropriate
federal financial regulator. Nonetheless, the Justice Department
believes that Rule 65 of the Federal Rules of Civil Procedure should be
the sole standard used by courts in considering whether to grant
injunctive relief. Section 3(c)(5)(B) of H.R. 21 sets forth additional
factors that the district court must consider in determining whether to
grant injunctive relief against certain entities, including credit card
issuers and financial institutions. Rule 65 is the well-established
standard used in federal courts throughout the country in all cases in
which a party is seeking injunctive relief, and the Department opposes
any attempt to alter existing federal standards for the benefit of
specific entities. Moreover, the Department believes that, under a
standard Rule 65 analysis, a district court would already have the
discretion to consider the listed factors.
For the same reason, the Justice Department opposes Section
3(c)(4)(B) of H.R. 21, which provides, in essence, that interactive
service providers that are not liable under H.R. 21 shall not be liable
under Section 1084 of Title 18, United States Code, unless the ISP has
actual knowledge of the bets and wagers and owns, controls, operates,
manages, supervises, or directs a website at which unlawful bets or
wagers are offered, placed, or received. This provision constructively
amends Section 1084, an existing federal criminal statute, and weakens
its application by imposing a far higher standard of liability than
traditional aiding and abetting liability, which applies to everyone
else who must comply with the law. While the Department does not
believe that ISPs should be singled out for particularly harsh
treatment (and our ``track record'' bears this out), we do not believe
that ISPs should be singled out for uniquely favorable treatment
either.
Third, the Justice Department has other concerns about how the bill
treats ISPs, particularly as it pertains to the removal of Internet
gambling websites and the cessation of ancillary services connected to
those sites. We are, however, working diligently with representatives
from several prominent interactive service providers.
CONCLUSION
On behalf of the Department of Justice, I want to thank you again
for inviting me to testify today. We thank you for your support over
the years and reaffirm our commitment to work with Congress to address
the significant issue of Internet gambling. I will be happy to answer
any questions that you might have.
Mr. Coble. Mr. Malcolm, your eyes weren't even close to
being fixated. You finished well ahead of the red light and I
commend you for that.
We have been joined by the gentlelady from Texas, Miss
Jackson Lee. It's good to have you with us, Sheila.
Thank you, Mr. Malcolm.
Mr. Modisett, am I pronouncing your surname correctly?
Mr. Modisett. You are, thank you.
Mr. Coble. It's good to have you with us, Mr. Modisett.
STATEMENT OF JEFFREY MODISETT, COUNSEL, BRYAN CAVE, LLP, AND
FORMER ATTORNEY GENERAL, STATE OF INDIANA
Mr. Modisett. Thanks very much.
Mr. Chairman and Members of the Committee, thank you for
the opportunity to testify today on this complex issue.
I have come to this issue today with both a law enforcement
and technology background. As you noted, I have been a Federal
prosecutor, a D.A., a State attorney general, but I have also
worked in Silicon Valley and currently represent some high tech
clients. The views I express today are my own.
As Indiana Attorney General, I issued an official opinion
on Internet gaming. In that opinion, I wrote that, under
Indiana law, only gambling that is specifically authorized by
statute is legal. Since there are no references to Internet
gaming in the Indiana code, it's not legal.
But the question of whether the Federal Government should
proactively attempt to prohibit all Internet gaming
preemptively is a different question. My experience convinces
me that the best antidote to an unregulated, offshore Internet
gambling industry is a fully licensed, highly regulated,
onshore Internet gambling industry based on strict American
standards and priorities. I would further suggest that the
enforcement mechanism proposed in H.R. 21, while well intended,
is likely to be ineffective, counter-productive, and prone to
unintended consequences.
H.R. 21 seeks to have the financial institutions operating
in America prevent Americans from using financial instruments
to place online wagers. I'm aware that one of the ostensible
reasons for this effort is the fear that Internet gambling will
provide an avenue for money laundering. Frankly, I find this
assertion strange, given that the majority of Internet wagers
are placed by credit cards, and credit card transactions are
almost always transparent.
I don't believe that H.R. 21 will stop Americans from
gambling on the Internet. I do believe it will change the
manner in which they do so. If Internet gamblers cannot use
their credit cards, many and perhaps most of them will instead
opt for e-cash accounts, electronic fund transfers, wire
transfers to accounts at offshore banks, and other less visible
means to settle their accounts.
It is impossible to predict, but none of the foregoing
financial transactions are particularly difficult to execute.
The added inconvenience might stop a few people who are rare or
occasional bettors, but it won't stop experienced gamblers,
including problem gamblers.
What the legislation will do, however, is potentially
worsen the very problem it sets out to solve. To the extent
that there's a potential for money laundering in the Internet
gaming space--and the financial industry itself believes that
this potential is small, according to the GAO--creating a
market for less transparent payment solutions will presumably
make illicit activities, including money laundering,
substantially worse. Creating a market for blind e-cash is not
the way to stop money laundering. The way to stop it is to make
sure Internet gaming takes place in highly regulated,
supervisory regimes.
I don't want American financial institutions to act as our
police on the Internet. They will err on the side of over-
inclusion and prohibit legal transactions out of an
overabundance of caution, as they already have. We have not
regulated Internet activity so directly before now, and now, at
a time when the current law is unsettled, is not the time to
begin.
Admittedly, the commission envisioned by H.R. 1223 would
have a difficult job, but if it's achieved, the results would
solve many of the problems that the prohibitionists sincerely
want to solve. In a licensed environment, it is possible to
verify identity online, using pin numbers and out-of-session
contacts. This and other technology could be used to help
ensure no minors gamble on the Internet.
Because all Internet gaming transactions are recorded, it
is actually easier to track problem gamblers in the cyber world
than in the bricks and mortar casino. Self-exclusion and preset
loss limits are more easily accomplished.
Another benefit would be economic. Instead of flowing
offshore, the money wagered on the Internet would remain in the
U.S. and help build the economies of the regulating States.
Mr. Chairman, when Evan Bayh became Governor of Indiana, he
did not support gambling, but the people spoke and voted for a
repeal of our constitutional ban on gambling. Governor Bayh
concluded that if gambling was to be legal in Indiana, he would
appoint people of unquestionable integrity and with law
enforcement background to head up the regulatory effort. It
worked. The Federal Government should also acknowledge now that
Internet gaming will continue to grow in America, and we should
appoint tough, fair-minded people with integrity to develop
model approaches and help establish international standards for
Internet gaming regulation.
In summary, Mr. Chairman, I don't believe the choice before
the Subcommittee is whether or not there will be Internet
gambling in the U.S. There will be. The question is what sort
of Internet gambling there will be. Under H.R. 21, it will be
an unlicensed, unregulated industry, where the Federal and
State governments afford no protection, and with no economic
benefit or tax revenue accruing to the U.S.
Under H.R. 1223, there is the potential for a tightly
regulated industry, overseen by Americans of integrity,
bolstered by laws and regulations that provide substantial
protections for minors and problem gamblers, remove the
potential for money laundering, and provide economic benefit
and tax revenue in the U.S.
Once again, thank you for the opportunity to testify. I
look forward to the questions.
[The prepared statement of Mr. Modisett follows:]
Prepared Statement of Jeffrey A. Modisett
Mr. Chairman and members of the Committee, let me begin by thanking
you for the opportunity to testify today on this complex issue.
It is difficult to discuss my opinion on the topics at issue today
without putting it in the context of my personal experience and so,
with your permission, I would like to briefly mention the more relevant
part of my background.
Upon graduation from Yale Law School and following a clerkship with
a federal judge, I began my career as an Assistant U.S. Attorney in Los
Angeles. In time, I became the Deputy Chief of the Public Corruption
and Government Fraud Unit, specializing in the prosecution of
violations of the U.S. Export Control laws. In 1988, I returned to my
home state of Indiana to work for Evan Bayh (now Senator Bayh), first
on his successful gubernatorial campaign and then as his Executive
Assistant for Public Safety. In this capacity, I served as Governor
Bayh's liaison to the State Police, Department of Correction, and
National Guard, as well as headed up the state's efforts in the war on
drugs. In 1990, I was elected Prosecuting Attorney for Marion County,
Indiana, which is the City of Indianapolis. In 1996, I was elected
state attorney general.
As attorney general, I issued official opinions, including one on
Internet gaming. That Official Opinion, by the way, concluded that
Internet gaming is illegal in Indiana. At the Governor's request, I
also chaired the state's Gambling Impact Study Commission. The
Commission met for two years and issued a lengthy report in December
1999.
Today, the committee has before it two bills, H.R. 21 and H.R.
1223, which pursue two very different approaches to Internet gambling.
To oversimplify, H.R. 21 seeks to enforce a prohibition on Internet
gambling, while H.R. 1223 seeks to create a commission to determine how
states and the federal government might work together to license and
regulate Internet gaming. Personally, I believe that H.R. 21 has great
surface appeal, especially (of course) for those who oppose gambling in
all forms. However, it is my opinion that H.R. 1223 is the preferable
approach; the reasons for this will be the focus of my testimony.
Internet gambling raises many thorny issues. There are the social,
fiscal, and economic impacts of all legalized gambling--which were the
focus of our two-year study in Indiana. There is a question of
political philosophy, that is, how much should the government do to
protect people from themselves, and to what extent the freedoms of the
many should be restricted to protect the vulnerabilities of the few.
There is the perplexing question of how to apply the varying state and
federal laws and regulations to transactions that are trans-
jurisdictional by their very nature. Finally, there are more nuanced
questions about the differences among sportsbook, casino-style,
lottery, pari-mutuel and other forms of gaming, and how the law should
treat each of these.
In dealing with all of these things, there are a few points upon
which I believe we all agree. I believe we all seek to minimize the
adverse consequences that can accompany gambling--we must do all we can
to prevent gambling by minors, we must be vigilant to identify
pathological gambling and have the tools and resources for dealing with
it when we find it, and we must investigate the potential for money
laundering. I also think we all agree that most Americans today have
the option to gamble if they so choose--only three states prohibit all
gambling, and even in those states, illegal gambling is an option.
There is no legal sports betting outside of Nevada, and yet there is
plenty of sports betting across the country. And, I think we can all
agree that Americans who want to gamble on the Internet are almost
certainly going to be able to do so--they can today, and they will be
able to do so in the future. Unless the federal government wants to
take draconian steps that would adversely affect both the Internet and
personal privacy, people who want to bet on the Internet will be able
to do so.
As I mentioned earlier, as Indiana Attorney General, I issued an
Official Opinion, which still has precedential authority in Indiana. In
that Opinion, I wrote that under Indiana law only gambling that is
specifically authorized by statute is legal. Since there are no
references to Internet gaming in the Indiana Code, it is not legal--
even though gambling on riverboats, on horse races, and by lotteries
are explicitly permitted in some fashion. I also warned in that Opinion
that many Hoosiers were likely gambling over the Internet anyway, and
that therefore parents especially should be mindful of how easy it is
to gamble on-line. This Opinion was widely interpreted as calling
prospectively for the outright prohibition of gambling on the Internet,
which was not accurate. As attorney general, I had an obligation to
advise my constituents on Indiana law as it then existed. But my
Opinion, as reinforced by my service on the state Gambling Impact Study
Commission and other experiences, was and is more complicated and
nuanced than the position advanced by the prohibitionists.
I submit that the best antidote to an unregulated offshore Internet
gambling industry is a fully-licensed, highly-regulated on-shore
Internet gambling industry based on strict American standards and
priorities. I would further suggest that the enforcement mechanism
proposed in Congressman Leach's bill--while well-intended--is likely to
be ineffective, counter-productive, and prone to unintended
consequences.
PROBLEMS WITH THE LEACH BILL
H.R. 21 seeks to have the financial institutions operating in
America prevent Americans from using financial instruments to place on-
line wagers. It would have the Department of the Treasury adopt
regulations aimed at blocking such wagers, and would empower state and
local law enforcement to seek injunctions to require financial
institutions to take additional enforcement steps.
I am aware that one of the ostensible reasons for this effort is a
fear that Internet gambling will provide an avenue for money
laundering. Frankly, I find this assertion strange, given that the
majority of Internet wagers are placed by credit cards, and credit card
transactions are almost always transparent. I do not believe that the
Leach bill will stop Americans from gambling on the Internet; however,
I do believe it will change the manner in which they do so.
If Internet gamblers cannot use their credit cards, many (perhaps
most) of them will instead opt for e-cash accounts, electronic funds
transfers, wire transfers to accounts at offshore banks, and other less
visible means to settle their accounts. Presumably, the bills' sponsors
proceed from the assumption that added inconvenience will dissuade many
or most gamblers from betting on-line. It is impossible to predict, but
none of the foregoing financial transactions are particularly difficult
to execute. The added inconvenience might stop a few people who are
rare or only occasional bettors. But it will certainly not stop
experienced gamblers, including problem gamblers.
What this legislation will do, however, is potentially worsen the
very problem that it sets out to solve. To the extent that there is a
potential for money laundering in the Internet gaming space, creating a
market for less transparent payment solutions will presumably make
illicit activities, including money laundering, substantially worse.
The obvious response to the Leach bill by the offshore industry will be
to create payment solutions that U.S. law enforcement and U.S. banks
cannot easily ``see''--that is, their transactions will be harder to
trace. Creating a market for blind e-cash is not the way to stop money
laundering.
SOLUTIONS IN THE CONYERS BILL
Admittedly, the commission envisioned by H.R. 1223 would have a
difficult job. The members would have to determine how best to preserve
state prerogatives in an Interstate medium. They would have to provide
guidance on which regulations will keep minors and pathological
gamblers from betting on-line, at least affording the same level of
protections as exist in land-based casinos. The would have to recommend
means to protect against money laundering. They would have to ensure
the fairness of games and ensure that winnings are paid out. Finally,
they would have to figure out how to appropriately tax the proceeds of
Internet wagers.
But if this is achieved, the results would solve many of the
problems that the prohibitionists sincerely want to solve. In a
licensed environment, it is possible to verify identity on-line using
PIN numbers and out-of-session contacts. This and other technology
could be used to help ensure no minors gamble on the Internet. Because
all Internet gaming transactions are recorded, it is actually easier to
track problem gamblers in the cyberworld than in a brick-and-mortar
casino. Self-exclusion and pre-set loss limits are more easily
accomplished.
Another benefit would be economic--instead of flowing offshore, the
money wagered on the Internet would remain in the U.S. and help build
the economies of the regulating states. One may oppose gambling for
various reasons, but it is undeniable that local economies have
benefited from gambling and state and local governments have gained
revenues from it. States could also collect taxes on Internet gambling
that they are losing today (from both casinos and bettors); this would
help with the substantial budget shortfalls most states now face. I
would not propose Internet gaming as a way of fixing state deficits,
but I would suggest that the revenue generated from American bettors in
cyberspace should help the United States and not Netherland Antilles or
the Grand Cayman Islands.
I should be clear: I most certainly am not an advocate of H.R. 1223
for economic reasons. I think there are better ways for government to
improve people's lives economically. But I do think it is short-sighted
to think that we can have any significant impact on such a huge
industry as Internet gaming by convincing ourselves that we can stop
offshore cybergaming at the border. Instead, and most importantly, we
should minimize and marginalize the offshore Internet gaming industry
by developing a fully-licensed, highly-regulated industry in the U.S.
We should use the marketplace to ``suck all of the oxygen'' out of the
offshore industry. U.S. customers prefer U.S. brands and U.S. companies
would quickly dominate the market. In terms of the U.S. market, much of
the offshore industry would probably give up entirely and shift their
focus from the U.S. to other countries where they might have a better
chance of competing successfully. In the meantime, U.S. companies would
set the standard for fairness and honesty because they would be
operating under a fully transparent regulatory regime.
In fact, dozens of countries have already begun the process of
licensing and regulating Internet gambling--most notably the United
Kingdom. The U.K.'s licensing and regulation regime will be complete
soon, and Australia, Denmark and other countries have legalized it as
well. We can benefit from their learning process and improve upon it.
Mr. Chairman, when Evan Bayh became Governor of Indiana in 1989, he
did not support gambling, but the people spoke and voted for a repeal
of our Constitutional ban on gambling. Soon, lawmakers passed a state
lottery followed by riverboat gambling. Governor Bayh concluded that if
gambling was to be legal in Indiana, he would appoint people of
unquestionable integrity to head up the regulatory effort. He appointed
a federal prosecutor as the Executive Director of the state gaming
commission and the commission passed tough regulations and made clear
from the outset that tough enforcement would be used against any law
violators. As a result, we had a remarkably clean operation from Day
One. The federal government should also acknowledge now that Internet
gaming will continue to grow in America and we should appoint tough,
fair-minded people with integrity to develop model approaches and help
establish international standards for Internet gaming regulation.
In summary, I do not believe that the choice before this
subcommittee is whether or not there will be Internet gambling in the
U.S.--there most certainly will be. The question is what sort of
Internet gambling there will be. Under H.R. 21, it will be an
unlicensed, unregulated industry where the federal and state
governments afford no protection to players, to minors or to problem
gamblers, and it will be funded by less-than-transparent transactions,
with no economic benefit or tax revenue accruing to the U.S. Under H.R.
1223, there is the potential for a tightly-regulated industry overseen
by Americans of integrity bolstered by laws and regulations that
provide substantial protections for minors and problem gamblers, remove
any potential for money laundering, and provide economic benefit and
tax revenue in the United States.
Once again, I thank you for the opportunity to testify, and I look
forward to the question and answer session.
Mr. Coble. Thank you, Mr. Modisett. I appreciate that.
Mr. Hornbuckle.
STATEMENT OF WILLIAM J. HORNBUCKLE, PRESIDENT AND CHIEF
OPERATING OFFICER, MGM MIRAGE ONLINE
Mr. Hornbuckle. Thank you, Mr. Chairman.
Mr. Chairman, distinguished Members of the Committee, thank
you for inviting me today to testify about the MGM MIRAGE
position on Internet gaming.
I am Bill Hornbuckle, President and Chief Operating Officer
of MGM MIRAGE Online, a wholly owned subsidiary of MGM MIRAGE,
with head offices in the Isle of Man and Las Vegas, NV.
MGM MIRAGE is one of the world's leading and most respected
entertainment, hotel, and gaming companies that owns and
operates 15 casino resorts located in Nevada, Mississippi, and
Michigan. We employ more than 43,000 men and women, we manage
$10 billion in assets, and generate over $4 billion in revenue
annually.
Since all of our casinos operate under privileged gaming
licenses, we clearly understood what was at stake for our
company and the industry when we decided to pursue online
gaming and seek the appropriate licensing. In September of
2001, MGM MIRAGE was awarded one of three online gaming
licenses from the Isle of Man. Our site went live in September
of 2002 and has been accepting wagers from a small number of
Western European countries.
I am here to testify today in opposition of H.R. 21. Given
the need to be brief, and the extensive nature of this subject,
I have made an additional submission of supplemental material
that cover the interactive gaming market, operations,
regulations, and anti-money laundering code that govern our
activity. While this material is voluminous--and I do apologize
for that--I thought it important to share with all stakeholders
before any legislation was passed.
My message today centers around the following three basic
premises:
Premise one. H.R. 21 will not stop Internet gaming in the
United States. We strongly suggest that prohibition in the
United States has a long list of failures associated with it.
Any attempt of prohibiting activity on the Internet, gaming or
otherwise, will unfortunately suffer a similar fate. We see
this activity as ubiquitous and impossible to control from an
end-user perspective, with long-term attempts to do so as
futile.
The commercial reality in the United States is that every
major financial institution has ceased taking credit and debit
card transactions for online gaming. Despite the banking
industry's preemptive move last spring, the recent General
Accounting Office report stated that the online gaming industry
would grow to $4.2 billion in 2003, at a growth rate of 20
percent. Nothing proposed in H.R. 21 will stop that growth.
This bill will have limited impact on a very resilient
industry.
Bets from America are prohibited on the MGM MIRAGE site;
yet, without any promotion, more than 60 percent of all
registration attempts are from U.S. citizens, none of which
have made it through our rigorous player protection system.
America is playing online. They are now simply doing it
offshore in unregulated markets.
Premise number two: the law of unintended consequences of
H.R. 21 is in direct contrast with the things it seeks to stop.
The bill would push offshore all regulatory and probity issues
of a product that is a click away from 110 million Internet
users in America. H.R. 21 will do nothing to protect these
consumers.
State gaming regulatory bodies and Federal law enforcement
agencies, which have been effective in the past in controlling
gaming, will be prevented from regulating an activity that
remains a click away. Further, by eliminating all regulated and
credible financial institutions, you have encouraged an e-
commerce market that is ripe for money laundering.
Premise three: you can properly regulate online gaming.
Unlike just a couple of years ago, the tools and business
methodology exist today to effectively regulate this industry.
The support material we have provided highlights that the four
key issues most commonly associated with online gaming--
jurisdictional control, age verification, responsible gaming,
and money laundering--can be properly administered.
Although no singular technology solution is perfect, MGM
MIRAGE, through our geo-verification module, has been able to
leverage database queries on customer location, residence, age
and fraud detection. After several thousand registration trials
and numerous attempts by regulators through State controlled
testing labs, we believe we have successfully blocked all
inquiries from nonviable jurisdictions and users who are
underage.
We urge you to consider the merits of H.R. 1223, which
calls for an Internet Gambling Licensing and Regulatory Study
Commission. Only through research and study can sound and
effective legislation be drafted, passed and enforced. In order
to determine the best way to protect the public's interest, we
are strongly suggesting that further study needs to be
completed on this complex subject before any law is enacted
upon.
The public, which clearly enjoys this activity, is
deserving of proper protections from operators who are held
only to the highest standards. The debate should not center on
how do we prohibit online gaming, but rather, now that online
gaming is in American homes to stay, how do we effectively
regulate and control it. This activity simply cannot be
legislated away.
Again, I thank you for allowing me to testify. I would be
pleased to answer any questions you may have on this matter
today or in the future.
[The prepared statement of Mr. Hornbuckle follows:]
Prepared Statement of William J. Hornbuckle
Mr. Chairman, distinguished members of the Committee, thank you for
inviting me to testify today about the MGM MIRAGE position on Internet
gaming.
I am Bill Hornbuckle, President and Chief Operating Officer of MGM
MIRAGE Online, a wholly owned subsidiary of MGM MIRAGE, with head
offices in the Isle of Man and Las Vegas, Nevada.
MGM MIRAGE is one of the world's leading and most respected
entertainment, hotel, and gaming companies that owns and operates 15
casino resorts located in Nevada, Mississippi, and Michigan. We
employee more than 43,000 men and women, manage 10 billion dollars in
assets and generate over 4 billion dollars in operating revenues
annually.
Since all of our casinos operate under privileged gaming licenses,
we clearly understood what was at stake for our company and the
industry when we decided to pursue online gaming and seek appropriate
licensing. In September of 2001, MGM MIRAGE was awarded one of the
first three online gaming licenses from the Isle of Man. Our site went
live in September of 2002 and has been accepting wagers from a small
number of Western European countries.
I am here to testify today in opposition of H.R. 21.
Given the need to be brief and the extensive nature of this
subject, I have made an additional submission of supplemental material
that cover the interactive gaming market, operations, regulations, and
anti-money laundering code that govern our activity. While this
material is voluminous, I thought it important to share with all
stakeholders before any legislation was passed.
My message today centers around the following three basic premises:
Premise 1. H.R. 21 will not stop Internet gaming in the United States.
We strongly suggest that prohibition in the United States has a
long list of failures associated with it. Any attempt of prohibiting
activity on the Internet, gaming or otherwise will unfortunately suffer
a similar fate.
We see this activity as ubiquitous and impossible to control from
end-user perspective, with long-term attempts to do so as futile.
The commercial reality in the United States is that every major
financial institution has ceased taking credit and debit card
transaction for online gaming. Despite the banking industry's
preemptive move last spring, the recent General Accounting Office
report stated that the online gaming industry would continue to grow to
4.2 billion dollars in 2003 at a growth rate of 20 percent.
Nothing proposed in H.R. 21 will stop that growth. This bill will
have limited impact on a very resilient industry.
Bets from America are prohibited on the MGM MIRAGE site, yet
without any promotion more than 60 percent of all registration attempts
are from U.S. citizens.
America is playing online; they are now simply doing it offshore in
unregulated markets.
Premise 2. The law of unintended consequences of H.R. 21 is in direct
contrast with the things it seeks to stop.
The bill would push offshore all regulatory and probity issues of a
product that is a click away from 110 million Internet users in
America. H.R. 21 will do nothing to protect these consumers.
State gaming regulatory bodies and federal law enforcement
agencies, which have been effective in the past in controlling gaming
will be eliminated from regulating an activity that remains a click
away.
Further, by eliminating all regulated and credible financial
institutions, you have encouraged an e-commerce market that is ripe for
money laundering.
Premise 3. You can properly regulate online gaming.
The tools and business methodology exist today to regulate this
industry. The support material we have provided highlights that the
four key issues most commonly associated with online gaming;
jurisdictional control, age verification, responsible gaming, and money
laundering can be properly administered.
Although no singular technology solution is perfect, MGM MIRAGE
through our geo-verification module has been able to leverage database
queries on customer location, residence, age and fraud detection. After
several thousand registration trials and numerous attempts by
regulators through state controlled testing labs, we believe we have
successfully blocked all inquiries from non-viable jurisdictions and
users who are underage.
We urge you to consider the merits of H.R. 1223, which calls for an
Internet Gambling Licensing and Regulatory Study Commission. Only
through research and study can sound and effective legislation be
drafted, passed, and enforced.
We are strongly suggesting today that further study needs to be
completed on this complex subject before any law is enacted upon.
The debate, should not center on how do we prohibit online gaming,
but rather now that online gaming is in American homes to stay, how do
we effectively regulate and control it.
This activity simply cannot be legislated away.
Thank you again for allowing me to testify today. I again would
encourage you to review the material submitted. I would be pleased to
answer any questions you may have on this matter today or in the
future.
Mr. Coble. Gentlemen, the Members of the Subcommittee thank
you, express our thanks to each of you, for this contribution.
Let me start with Mr. Malcolm.
Mr. Malcolm, some have said that the way H.R. 21 is
drafted, it could be interpreted as a weakening of the Wire
Act. Do you agree with this statement (a), and could you give
us an example of how this could weaken that statute?
Mr. Malcolm. Certainly, Mr. Chairman.
It weakens it in a couple of rather subtle ways. The main
one perhaps deals with section 3(c)(4)(B) of the bill, which I
would contend presents a carve out for Internet service
providers for liability under section 1084. That section
essentially says that before an ISP can be held liable under
the Wire Act, one must prove a violation of this law and, in
addition to that, one would have to prove that the ISP not only
had knowledge of the bets or wagers being placed, but in
addition to that, also had to own, operate or control the
gambling website in question.
That increases the quantum of proof that the Government
would have to offer against an ISP under 1084, well above that
which would be established under an aiding and abetting theory.
For example, if an ISP were taking money for advertising for an
Internet gambling site, clearly connecting supply and demand,
with knowledge that that is what they were doing, even if you
put the ISP on notice, and even though they were clearly
facilitating this gambling activity, they would not longer
violate 1084. They would say well, we have knowledge of the bet
or wager, but we don't own, control or supervise the Internet
gambling website. Therefore, they would be carved out of 1084.
There are some other brief anomalies dealing with the
definitional sections between this section and 1084, but we can
deal with the staff on that.
Mr. Coble. All right. Thank you, Mr. Malcolm.
Mr. Hornbuckle, I have been asked by my colleague from
Utah, Mr. Cannon, to ask this question that is peculiar to his
State of Utah.
Utah law prohibits gambling. Could you technologically
prevent people in Utah from gambling on the Internet? If so,
how would you do that?
Mr. Hornbuckle. Mr. Chairman, yes, we could.
When we went forward with licensing, as you know, we're
privilege licensed in the States I mentioned earlier. Nevada,
of note, where most of our assets reside, made us commit to and
we created technology that, if a country has made gambling
illegal, or specifically made Internet gambling illegal--and
I'll use the case of Japan, where gambling is illegal, and Hong
Kong, where Internet gambling is illegal--we have put forth in
our system through IP blocking and other methodologies, which
are laid out here, a system that says ``no, you cannot get
in''. It has been 99.9 percent effective in doing that.
No system is perfect, but we can deliver with reasonable
assurance to the Congressman that the folks from Utah, if he
didn't want them in, wouldn't be put in.
Mr. Coble. All right. I'll convey that to him.
Mr. Hornbuckle. Thank you.
Mr. Coble. Mr. Leach, we know that you have been involved
in this issue for a long time. Some believe that Internet
gambling should be licensed and regulated rather than
prohibited, as we have heard today. Can you tell us, based upon
your years of investigating this issue, whether or not
licensing and regulating is a realistic alternative to
prohibition, and why?
Mr. Leach. Well, certainly you can license and regulate.
The question is, is it good for the country? Is it good for the
individuals involved? I think, when you go to the individual,
you have this dilemma of do you want to turn the home into a
casino, where there is virtually no constraints, particularly
in people that appear, as has been described by the medical
profession, in an almost quasi-genetic way, where one-and-a-
half to 2 percent of Americans, once they start to gamble, it's
pretty hard to stop. You have working in the home less
constraints than you would have in going to an actual casino. I
think you would open that problem up rather dramatically. In
addition, you keep all the social problems that currently
exist, with a single positive of--you have to recognize that
there is good and bad to almost any proposal, where you would
probably bring a little more gambling onshore. But if one has
real doubts about the individual and social implications of
Internet gambling, then I don't think that would be a wise way
to go.
I would make one final comment, because it relates to the
very thoughtful testimony of someone who has a different
judgment than mine from MGM. When they say there's no consumer
protection, the ultimate consumer protection is that the
consumer will not have to pay an Internet gambling debt if he
cannot use a financial instrument. So the lack of ability of a
casino that's on the Internet to take the losses, which are
virtually assured over any period of time, will protect the
American consumer maximally.
Mr. Coble. Thank you, sir. I see that my time has expired.
The gentleman from Virginia.
Mr. Scott. I had one technical question. On page 6 of the
bill, Mr. Malcolm, of H.R. 21, line 15, it says that one of the
things it exempts is ``any lawful transaction with a business
licensed or authorized by a State.''
Does that exempt lotteries? It's page 6, line 15.
Mr. Malcolm. If I may have just a moment. [Examining.]
Absolutely, Mr. Scott.
Mr. Scott. Okay.
Mr. Malcolm, you indicated that there ar 1,800 sites now.
Are those 1,800 accessible from the United States that you're
talking about?
Mr. Malcolm. Well, it's possible there are a handful of
sites, such as Mr. Hornbuckle's site for the MGM MIRAGE, where
they may be able to successfully block access to the United
States. But by and large, the Internet is an open territory
where one can route computer communications through any
country. I would think that, with a little ingenuity by a tech-
savvy person, yep, they would all be available.
Mr. Scott. Mr. Hornbuckle, you said you could block out a
Utah address. If someone calls a long distance number to kind
of log in, how would you know they were physically in Utah and
not in Nevada?
Mr. Hornbuckle. Through IP mapping, through a product we
use called QUOVA, you can not only identify the origin, you can
tell if they're using an anonomizer. It's a layered weighted
system that tells you if it's direct or dial up.
Based on those indicators and other things that layer into
the approach we take, in terms of banking institutions,
address, voter registrar, you know, we go back and check data
queries and we can determine with reasonable assurance where
they're coming from.
Mr. Scott. You can verify the residence of the name of the
person the account is in?
Mr. Hornbuckle. That's correct.
Mr. Scott. You would have no way of knowing whether or not
that named person is, in fact, the one doing the gambling?
Mr. Hornbuckle. That's correct, other than there is a pin
code that goes back to the customer through the regular mail.
To the extent they have that pin code, that's the
identification we have on the other end.
Mr. Scott. How do you deal with responsible gaming?
Mr. Hornbuckle. There is a player protection module on our
site, which I have identified and laid out in great detail in
the material we have submitted. It enables a potential customer
to go online and limit their stake activity in terms of time,
amount wagered, deposits, or withdrawals for that matter. It's
a device that enables them to monitor what their own play
activity is, as well as we can monitor it if we choose to.
Mr. Scott. Mr. Malcolm, are gambling debts enforceable
under this bill? I know in Virginia, at least the law used to
be that you couldn't legally collect a gambling debt. Would
this scheme affect any of that?
Mr. Malcolm. Under H.R. 21, there are civil remedies,
including the ability to essentially freeze an account to
prevent any financial activity going to and from that
operation. If you're asking as a matter of civil law whether
you can collect on a gambling debt, generally one can't collect
on unenforceable or illegal contracts. But, you know, that's
not my area of expertise particularly.
Mr. Scott. Mr. Modisett, you indicated ways of evading this
H.R. 21. Could you go into a little more detail about that? You
mentioned wire to an offshore bank, escrow accounts, I assume
long-distance calls into an Internet provider, and using an
access number in Canada would be another way?
Mr. Modisett. Yes. Actually, you're listing all of them
there as an example, the point being that you want transparency
to be able to follow these transactions. Credit cards are one
of the best ways to have that sort of transparency. So when you
start closing down that aspect of the financial transaction,
like the balloon, it's going to spread out into other areas.
They will find ways to go ahead and gamble. Those other ways
that you cited will be less transparent and more difficult to
follow, and to the extent there is a potential for abuse, my
concern is that that is going to worsen the problem rather than
make it better.
Mr. Scott. Mr. Hornbuckle, who regulates your site to make
sure that the odds that people think they're playing against
are, in fact, the odds?
Mr. Hornbuckle. The actual licensing is with the Isle of
Man government, but we also have made submissions of our
license in our games to the other jurisdictions that we operate
in--Mississippi, Nevada, New Jersey and...I'm missing one.
Mr. Scott. Who gets the tax benefit on the profits?
Mr. Hornbuckle. The Isle of Man government.
Mr. Scott. Does the United States get any benefit from
that?
Mr. Hornbuckle. No, they do not, because we do not accept
U.S. wagers at this time.
Mr. Coble. Mr. Hornbuckle, I didn't hear the last thing you
said to Mr. Scott.
Mr. Hornbuckle. I'm sorry. No, they do not. He asked if the
U.S. was any beneficiary from taxes, and the answer is no, nor
are other jurisdictions, other than the Isle of Man, because we
do not take U.S. bets at this time.
Mr. Coble. Very well. Thank you.
Mr. Feeney, the gentleman from Florida. Were you through,
Bobby?
Mr. Scott. Yes, thank you.
Mr. Feeney. Thank you, Mr. Chairman.
Mr. Hornbuckle, do you have any estimates, either your
company or the industry, do you have any estimates of what
percentage of Internet gambling is run through companies like
yours, that have submitted their odds that Mr. Scott asked
about, for example, to Mississippi, New Jersey and Nevada, and
what percentage is completely unregulated at the present time?
Mr. Hornbuckle. I would suggest to you that all operators,
where they have their jurisdiction and licensing regimes, would
tell you that they're regulated. So I think it's a matter of
what you would consider regulation.
What we go through in the Isle of Man and what ultimately
holds us to our standard based in Nevada and all that we have
at stake, is a different bar and a bar we all ought to get to,
and potentially what happens in a Caribbean country. But they
would tell you that they are regulated. Our games are out
there, registered with the Isle of Man government, within
certain standards that they call out, and we have to adhere to
those standards.
Mr. Feeney. What you have suggested without saying it is
that some of your competitors may not have the integrity that
MGM does. I guess my question would be, what percentage of the
Internet gambling today is with less credible entities than
MGM, in your opinion?
Mr. Hornbuckle. With all due respect, sir, I would like to
hold comment on that. [Laughter.]
I couldn't accurately give that estimation anyhow.
Mr. Feeney. Maybe Mr. Malcolm has an opinion about that.
Mr. Malcolm. My guess, Mr. Feeney, would be that a whole
bunch of them are less scrupulous and less honorable than MGM
MIRAGE.
Mr. Feeney. Assuming that most consumers in America are
reasonably wise, that would suggest the addictive tendencies of
Internet gamblers to me, anyway, because to the extent that I
want to be entertained for a reasonable value for my buck and I
want some reasonable odds in return, I'm probably going to
pursue regulated places to gamble, where I can be assured of a
fair square deal, even though I understand it's ultimately in
the house's advantage.
Isn't this suggestive that Internet gamblers behaviorally,
Mr. Hornbuckle, may tend to be more addictive and less
responsible gamblers?
Mr. Hornbuckle. I don't know that it suggests it's more
addictive. I will tell you that the commercialities of odds and
what goes on in the Internet world at large are such that, to
be competitive and to survive, nobody is taking huge advantage
of customers out there, or they won't.
Gamblers are savvy, particularly the ones that are on line.
To the extent they then ultimately get compensated for their
wagers and their winnings, if they have some--and they do have
some--I think speaks to the credibility of who the operator is.
That's where you get into issues of are they licensed, are they
credible, is a brand like MGM MIRAGE meaningful or not. That's
something that would ultimately be up to the general public to
decide.
Mr. Feeney. I would like to ask my colleague, Congressman
Leach, if he has an opinion about the elasticity of demand for
gambling as it relates to Internet opportunities
Our staff estimates that, in the last 10 years, we have had
roughly a ten-fold increase in American dollars wagered over
the Internet. I would like to ask my colleague if he's got an
opinion. Does that come at the expense of gambling on things
like lotteries, regulated casinos, gambling ships, penny ante
games and office pools, or is this increase likely to be in
addition to all the above? Not to mention pork belly futures on
the mercantile market.
Mr. Leach. Well, I'm not an expert. Frankly, the
competitive aspect would be better asked of someone from MGM
that would know that better than I.
I would say there are two things that stand out. One is the
terrific growth in the Internet. Clearly, there is some
competition with casino gambling. How big that is, I don't
know.
Secondly, the fact is that there are lots of studies of the
gambling issue, per se. Your National Commission on Gambling
went into some of this, which shows that there is part of
America that really does get hooked in analogous ways to
alcohol or drugs, and then some correlation between the two.
That is, if one is likely to be hooked on a drug or alcohol
addition, one is as little more likely to be an addictive
gambler. But the key thing is, one can quite quickly and
rapidly lose a great deal.
Certainly there is a case, as MGM has made, that it would
be better if you were to deal with a reputable company versus
less reputable. But I think the more compelling case is to deal
with nobody.
I would defy anyone on this panel to give me a strong
social case for Internet gambling. I mean, what is it? Is there
a national interest case for it? Is there an individual family
case for it? And then to think in reverse terms, are there some
disadvantages to the country, some disadvantages to the
individual? I think it gets pretty compelling.
Mr. Coble. The gentleman's time has expired.
The gentlelady from Texas.
Ms. Jackson Lee. Thank you very much, Mr. Chairman. I would
ask unanimous consent that my opening statement be allowed to
be submitted in the record.
Mr. Coble. Without objection.
[The prepared statement of Ms. Jackson Lee follows:]
Prepared Statement of the Honorable Sheila Jackson Lee, a
Representative in Congress From the State of Texas
I would like to thank Chairman Coble and Ranking Member Scott for
convening this very important hearing today.
We are here today to hear testimony and discuss two bills related
to Internet gambling--H.R. 21 and H.R. 1223.
There have been attempts in the last two Congresses to outlaw
internet gambling, or in the alternative to restrict internet gambling
such as restricting how bets are made. The bills we are considering
today are continuation of those prior efforts.
H.R. 21 prohibits internet gambling businesses from accepting bets
from credit cards, electronic fund transfers, money transmitting
business transfers, and instruments or transactions drawn through
financial institutions. It also grants Federal district courts
jurisdiction over violations of bill, requires the Secretary of the
Treasury to prescribe regulations on payment systems and policies to
prevent restricted transactions, and calls for U.S. and foreign
governments to cooperate to prevent money laundering and other crimes.
The issue of internet gambling is always debated vigorously. The
Internet gambling industry receives wagers amounting to an estimated
$4.2 billion dollars per year through 1,800 internet gambling sites.
Internet gambling has a high likelihood of causing personal bankruptcy,
provides a fertile ground for fraud and money laundering, is difficult
for states to regulate, and offers an addictive and appealing gambling
outlet for children.
I was an original co-sponsor of H.R. 3215, an internet gambling
bill considered in the last Congress, because of my grave concern that
children and teenage gamblers, who have wide access to the Internet,
will abuse the Internet for gambling. A study released by the American
Psychological Association finds that pathological gambling is more
prevalent among youths than adults. Between five and eight percent of
young Americans and Canadians have a serious gambling problem, compared
with one to three percent of adults. The study went on to say that with
gambling becoming more accessible in U.S. society, it will be important
to be able to intervene in children's and adolescent's lives before the
activity can develop into a problem behavior.
Many Internet gambling sites require bare minimum information from
gamblers to participate. Security on bets placed over the Internet has
proven ineffective. And unlike traditional regulated casinos, Internet
operators have no demonstrated ability or requirement to verify a
participant's age or identification. Also, an Internet gambling site
can easily take a person's money, shut down their sites, and move on.
Gambling over the Internet, particular because of the danger it
poses to our children, is a business that I simply cannot condone.
Given the fact that the majority of our citizens have access to
computers and the Internet, we must ensure that laws are in place to
eliminate the potential harm of internet gambling.
While I am concerned about the impact of gambling, I am also
concerned with protecting individual freedoms and personal choices. The
freedom to gamble is such a choice. I look forward to hearing the
testimony and comments by our speakers today in order to reconcile
these issues. We must find a way to address this very serious problem
of Internet gambling.
Ms. Jackson Lee. I thank you very much, and I thank the
gentlemen for their presentation, and Congressman Leach as
well.
Over the course of my tenure in Congress, I have had the
opportunity to be supportive of restrictions on Internet
gambling, for a variety of reasons, but I think particularly on
the issues dealing with money laundering, underage gambling,
and gambling addiction, which permeate in many instances
throughout the industry, regardless of whether it's Internet or
person to person.
I do compliment the industry for being particularly
sensitive to these issues over the years and working
collaboratively with mental health groups and State groups on
trying to prevent this. So I would like to find the best
approach, the best reasonable approach to address a concern
that will continue to grow with the utilization of Internet
technology. Computer technology is growing, and we're going to
find people doing everything with respect to computer software,
and I think we have to be sensitive to that.
Let me ask Mr. Hornbuckle how much Federal regulation does
the industry have now, just in general.
Mr. Hornbuckle. As it relates specifically to my activity
on line, little to none.
Ms. Jackson Lee. And overall?
Mr. Hornbuckle. Currently in our activity, it all comes out
of the Isle of Man, and it is underwritten by what our code,
what our licensing requirements are for places like Nevada and
Mississippi, Michigan, et cetera. We have a great deal of
respect for what we have there, so the way we conduct our
business activity and the code that's called out, which I have
included, both against anti-money laundering and the regs
themselves from the Isle of Man govern our overall activity.
Ms. Jackson Lee. So you're saying that you are registered
under or incorporated under the Isle of Man. Are you're talking
about all the MGM properties, for example, the ones in Las
Vegas?
Mr. Hornbuckle. No, no, just for online activity. I'm
sorry.
Ms. Jackson Lee. Let me ask you to put on your other hat,
just put on the hat for the overall. Tell me what kind of
regulation it is for the overall business.
Mr. Hornbuckle. For overall business, we're probably one of
the most licensed, if not the most licensed, industries in this
country. From Nevada, Mississippi, New Jersey and Michigan,
there's an extensive amount of licensing we go through, and
probity, both as individuals and for our company. From
understanding the Wire money control Act, from understanding
our customers, know your customer regimes, all of that activity
goes on in our buildings. We have strict Reg 6-A requirements
that we adhere to.
So, from a licensing perspective, and from a responsible
gaming perspective, we have a full plate of things that we do
that we look to bring to bear ultimately in this space.
Ms. Jackson Lee. So by licensing, obviously that equates to
regulation, that equates to, as I understand it, State law
enforcement, who are pretty much knowledgeable about your
business.
Mr. Hornbuckle. One hundred percent knowledgeable.
Ms. Jackson Lee. In the respective States, whether it's
Michigan, Mississippi or Las Vegas----
Mr. Hornbuckle. Correct.
Ms. Jackson Lee.--you certainly are well-known and your
business is well-known, and State legislators have regulated
you, it is my understanding, correct?
Mr. Hornbuckle. That is correct.
Ms. Jackson Lee. And you adhere to those regulatory
requirements, which subject you to either civil and/or criminal
penalties?
Mr. Hornbuckle. That's correct.
Ms. Jackson Lee. This is a business that you would say has
gotten more dynamic over the last how many years? I'm talking
about Internet gambling.
Mr. Hornbuckle. The last two to 3 years specifically.
Ms. Jackson Lee. And it brings in about how much money?
Mr. Hornbuckle. It's suspect, but our best guess is between
$4-5 billion and growing, growing particularly in Asia and
Europe, as well as in the U.S. Despite the activity that has
gone on over the last year, the U.S. continues to grow at about
a 20 percent rate, we believe.
Ms. Jackson Lee. Why the approach using the Isle of Man as
opposed to the different jurisdictions that you're already in,
the different States that you're already in?
Mr. Hornbuckle. Because of concerns for the Wire Act, and
what is happening here in the U.S., we didn't think it prudent,
given all that was at stake. We do not accept U.S. bets. We
consider that off limits for now, and until this is made
crystal clear to us, we will not accept U.S. bets.
The Isle of Man presented a jurisdiction that was very
serious about money laundering. It has, much like Nevada is
based on gaming, it is based on financial market sectors. They
restricted their operation in taking U.S. bets, and they
required all their operators to put up a two million pound bond
to protect consumers. Those are some of the things that
regulation would bring. We couldn't get licensed unless we put
up two million pounds, that sits in trust for consumers if we
decide to cease doing business.
Ms. Jackson Lee. Do you think you're prone to more criminal
activity, or have you surmised, or are you willing to give me
the honest truth? Have you surmised a great deal of criminal
activity in light of your present structure?
Mr. Hornbuckle. No. To the contrary. We are very focused on
our business. We have so much at stake for this venture, we're
very focused on our business.
Ms. Jackson Lee. Let me talk to Mr. Malcolm at this point.
As I indicated, I have been supportive, but I would think--Mr.
Chairman, would you yield me an additional minute?
Mr. Coble. One additional minute.
Ms. Jackson Lee. Thank you.
I have noted that the Department of Justice has its hands
quite full. What component with the Wire Act, I know, and what
other aspects of the gambling industry here in the States do
you regulate presently?
Mr. Malcolm. Specifically, there are----
Ms. Jackson Lee. Federal jurisdiction. That's what I mean.
Mr. Malcolm. There are several Federal statutes that cover
this particular topic. The Wire Act is only one of them. The
Wire Act makes it a crime to transmit in interstate or foreign
commerce bets on----
Ms. Jackson Lee. Existing. These are existing----
Mr. Malcolm. Right. In 1952, the Travel----
Ms. Jackson Lee. I could run through them rather quickly
because my time is going to go, and I just want to----
Mr. Malcolm. 1084, 1952, 1955, RICO could arguably apply.
There are several other statutes.
Ms. Jackson Lee. RICO I know could apply to what I would
call person-to-person gambling, or the industry itself. Is
there something in particular that--just forget about on-line.
Do you regulate the industry, or do you interact with the
States? You have specific laws to regulate the industry as it
stands now, without online?
Mr. Malcolm. I'm not sure of the interplay between the
Federal regulators and the State regulators, but suffice it to
say we work closely with them. Some of the Federal statutes are
specifically enabled based on a violation of State law.
Ms. Jackson Lee. Let me just comment on that. I appreciate
it very much. I have always been one, when it comes to
enhancing protection by utilizing the Federal authority, I am
certainly open to it. I respect the work of Chairman Leach, but
I perceive more potential confusion than not without a full
appreciation of the impact of the prohibition on using credit
cards and other vehicles, other bank instruments, to gambling
on the Internet.
What I would propose, Mr. Chairman, and would think would
be valuable, is to look carefully at 1223--additional 30
seconds, Mr. Chairman. I just want to close this sentence. What
I'm concerned about, Mr. Chairman, is the fact that we need to
study this question and understand it a little better, to see
how the mix of State regulations, which Mr. Hornbuckle seems to
be very much regulated on his regular gambling, and see how
that works in order to tell us what is the best way to get to
the point of prohibiting money laundering, underage gambling,
and gambling addictions, versus the total prohibition, before
we know what the facts are.
I thank the gentleman for yielding.
Mr. Coble. The gentlelady's time has expired.
Folks, we have another hearing scheduled for this
afternoon, but since there are only four of us here, I'm going
to do a second round. Let's do a second round real quickly. I
have three questions I want to put to you, and I am going to
start with Mr. Malcolm.
Mr. Malcolm, I think you have some problems with the
injunction provisions, do you not?
Mr. Malcolm. That is correct.
Mr. Coble. Is there a more effective way of drafting the
injunction provisions of the bill?
Mr. Malcolm. Specifically, I have problems with a couple of
the injunction provisions. With respect to the ISPs, section
3(c)(4) imposes limitations on the relief that ISPs--that can
be granted against ISPs. In addition, the websites themselves
have ancillary services. But we're working with the industry to
tinker with that.
More particularly, Mr. Chairman, there are limitations,
there are various factors set forth in section 3(c)(5) of the
bill. We believe that, while we recognize the important role
the regulators have to play--and we're working with Treasury to
ensure coordination--we object to the addition of any factors
beyond the standard factors set forth in Federal Rules of Civil
Procedure 65.
Mr. Coble. Thank you.
Mr. Hornbuckle--strike that. Mr. Modisett, your argument, I
believe, seems to suggest that to legalize Internet gambling
seems to be based upon the size of the industry and the rate of
growth that it's increasing. Some would suggest that it is not
responsible for governments to legalize a criminal activity
simply because it's growing or flourishing.
What do you say to that?
Mr. Modisett. I would not say that my argument is based on
the growth factor. I would say it is based on, first of all,
the fact that those people who are playing, whatever the size,
are currently in a highly unregulated environment. And I'm not
referring to Mr. Hornbuckle's enterprise. I'm referring to
those that are basically out of the Caribbean Islands and some
of the other 1,800 that have been referred to here today.
I would like to drive those into a highly regulated space
so that we have more control, more consumer protections, could
impose preset loss limits, we could do a better job of making
sure that minors aren't gambling, various other advantages that
would come from this highly regulated regime.
My other concern is based on the fact that we have
heretofore not jumped into an Internet space and called for an
out-and-out prohibition, with the possible exception of such an
obvious evil as child pornography. But with regard to something
that is legal in some areas, not legal in other areas, this
would be our first jump in, where we just out-and-out said that
we are not going to allow an American business to have any
financial transactions whatsoever.
I think that is a very big move, and it's a move that
should take place only after further study.
Mr. Coble. Good. Thank you, sir.
Finally, Mr. Leach. Some contend that Internet gambling is
already illegal under the Wire Act and, therefore, this
legislation is unnecessary. I'm not saying that. Some say it.
Comment on this, if you will, and explain why your bill is
necessary?
Mr. Leach. I accept the premise that I believe the Wire Act
covers Internet gambling, although some court jurisdictions
have gone to the contrary. But what our bill does--and it's
carefully crafted to fit into whatever your Committee does--it
is an added enforcement mechanism of whatever the law is at any
point in time. So if you want to expand or contract the law,
that's the jurisdiction of this Committee with the Congress.
But all we do is add an enforcement mechanism.
It happens, and it's really a bizarre fact of how the
private sector interrelates with the public, that the public
has had virtually no capacity to enforce this, so your
Department of Justice can testify that there are all these
gambling sites but it cannot testify that it has terribly
effectively shut them down. I'm not saying that the fault of
the Department of Justice. All I'm saying is that that's a
circumstance.
The approach of this bill is designed simply to serve as a
functional deterrent, based on enforcement utilizing the
private sector. Let me tell you, it has taken a lot of effort
to get acceptability or consensus, as grudgingly as it may be,
because you're putting a new obligation on the private sector,
a private sector that principally the Financial Services
Committee interrelates with more than other Committees of the
Congress.
I personally accept the broad interpretation that the
Justice Department has applied, that the Wire Act does apply to
Internet gambling, but there is no precise reference in the
Wire Act to that, so it's a broad interpretation of intent, I
think, would be the description, as a nonlawyer having the
disadvantage of addressing all of you that are better educated.
Mr. Coble. Thank you, Mr. Leach. I see my red light is
about to appear.
The gentleman from Virginia.
Mr. Scott. Thank you, Mr. Chairman.
The gentleman from Iowa indicated or asked us to make the
social case for Internet gambling. Frankly, I think it's a
difficult case to make, but that's not the question before us.
I think the Justice Department official, Mr. Malcolm, has
indicated that it's already out there, so the question is what
are you going to do.
This bill, H.R. 21, doesn't prohibit Internet gambling. It
makes it a little more administratively challenging to place
the bet, but as we've heard, not impossible and not even that
difficult, after you do a little investigation. So the social
case isn't the question before us. The question is what to do
about reality.
I would ask Mr. Hornbuckle, can you access your site from
outside of the United States, anywhere outside of the United
States?
Mr. Hornbuckle. There are about ten countries that we
accept wagers from. UK is our principal market, though, by
example.
Mr. Scott. Canada?
Mr. Hornbuckle. No.
Mr. Scott. Mexico?
Mr. Hornbuckle. No. Mostly Western Europe, South Africa,
New Zealand, principally in Western Europe and a couple of
Scandinavian countries.
Mr. Scott. Now, you pay off your bets because your
reputation would be at stake if you didn't. The problem with
websites is you can create a website today and shut it down
tomorrow afternoon. If we don't regulate it, what prohibition
would there be, or how would you deal with a website that sets
up, takes a lot of money, and then just closes down? What
remedy would a gambler have if that happened?
Mr. Hornbuckle. In today's environment--I can think of
three sites over the most recent Super Bowl, where the underdog
won and it closed. I know it's reality, but they did, in fact,
close. To my understanding, those people were left unpaid.
In the Isle of Man, or in any regulated environment--in our
example of the Isle of Man, we are bonded for two million
pounds. That's what that money is for. To the extent we went
out of business, or anybody else would go out of business,
there would be reserve funds to take care of those people.
Mr. Scott. Does the two million pounds, how does that
compare to the money that's coming in and out?
Mr. Hornbuckle. Right now, the money that comes in and out
on an ongoing basis, that we hold in balance, where people
leave an account, it's maybe 5 percent of that number. It's
not--and it's monitored constantly by the government. To the
extent it approaches it, they have reserved the right to look
at that number again.
Mr. Scott. So that you would be bonded for the amount that
would be owed if you went out of business?
Mr. Hornbuckle. That's the theory behind it, yes.
Obviously, it's a new industry, but that is absolutely the
theory behind that bond.
Mr. Scott. And if somehow I got access to a fancy looking
website and gambled and happened to win, and they went out of
business, if they were unregulated I would have no recourse?
Mr. Hornbuckle. That's correct.
Mr. Scott. Thank you, Mr. Chairman.
Mr. Coble. Thank you.
The gentleman from Florida.
Mr. Feeney. Mr. Hornbuckle, when it is your physical casino
at MGM, you entertain ``high rollers''. Do you pre-qualify them
with credit applications and verification, the same way a
banker would do?
Mr. Hornbuckle. In some instances, that's correct.
Mr. Feeney. Do you do that with any of your Internet
gamblers as well?
Mr. Hornbuckle. Yes, we do. Again, the documents that we
submitted, under the money laundering provisions, anybody who
puts over a thousand dollars on deposit has got to then give to
us copies of either a passport, national ID, or some other form
of ID that the Government has specified. So the answer is, at
that level or above, it's not identical but close in principle
to what we do in highly regulated markets like in Nevada.
Mr. Feeney. But presumably, if we did not disallow or
prohibit financial institutions from providing credit to
gamblers, presumably there would be no prohibition from
somebody without the ability to comfortably lose a significant
sum of money, $500 or $1,000 or more. There would be nothing to
require the casino or the financial institution, other than the
credit limit on their credit card, to regulate whether or not
this was a prudent amount of money for somebody to be putting
down on a game of chance.
Mr. Hornbuckle. In an unregulated market, I would have to
agree with that. In a regulated market, at least you have an
opportunity to get into that discussion. I guess that could be
said about many things in life as well. I mean, this happens to
be gaming, but I think regulatory restrictions on that are key.
Mr. Feeney. I guess I wanted to ask Congressman Leach,
because I'm very sympathetic toward the goals of H.R. 21. But
it does seem to me that in certain types of high risk
investments, for example, the SEC and other regulators require
that the sellers and the marketers of the instruments, they are
a very high risk insurer that is only a small percentage of the
net worth of the individual that's being put into this high
risk venture.
Isn't there an opportunity through regulation that doesn't
exist through prohibition to sort of, you know, protect people
from themselves?
Mr. Leach. Well, I think you can provide a modicum of
protection. You know, that's clear. Whether that protection is
very significant in relationship to the broad scope of the
problem is a matter of individual judgment. I would fully
acknowledge that there are advantages to some types of
protection relative to no types of protection, but I believe
the subject matter in general is one that, if you can't make a
social case for it, what difference does it make if you have a
little more protection? So I don't find it a compelling
concern. Certainly, parts of things that MGM would propose
today are quite respectable.
Mr. Feeney. I think that's a fair admission. I mean,
certainly we have a lot of seniors in Florida, and some of them
have been to the dog track every day of their adult lives. They
get to a point where they can't drive, can't travel, and if
somebody with a net worth of a million dollars wants to bet $20
on the third race every day at Calder from his living room, I
don't think you're suggesting that that is necessarily anti-
social or dangerous behavior.
Mr. Leach. I think there are examples where one could find
this is quite a tolerable circumstance. There are also examples
where one would say this is truly tragic for the individuals
involved.
Mr. Feeney. Mr. Modisett, or maybe Mr. Malcolm as well may
want to answer this last question. The ingenuity and creativity
and the technical skills of young people never ceases to amaze
me. They are able to break into Pentagon-secure matters and
they are able to turn upside down the whole computer networks
of corporations. My oldest son is just 10, but at some point,
if he wants to get into my credit card system and my computer
system and avail himself, I have no doubt that he or somebody
like him, at age 14 or 16, will have all of the knowledgeable
capabilities necessary.
How do you deal with the issue that, at least if he tries
to enter a casino, somebody is going to have to look him in the
eye and presumably be responsible for physically carding him,
physical security, et cetera. How do you answer the question
that there simply is no way to regulate what goes on inside
that house with people under age? It's not addicts,
necessarily, but people who are not able to lawfully consent to
the contract.
Mr. Modisett. I think that with regard to actual computer
hackers, those that are quite proficient at getting around
particular systems, as Mr. Hornbuckle said, there is no
foolproof way that you could say 100 percent to keep them out.
But I would say that the instance with regard to Internet
gaming would be no worse than it would be with regard to any
other activity on the Internet.
There is technology out there--and MGM has referred to some
of it--that is about as foolproof as you can get in modern
society and high technology. I would rather see a piece of that
sort of technology--I was advising at one point another company
that was skill-based, so it wasn't wasn't gaming but was skill-
based on the Internet. They had the technology, and others do
now, to make sure that no juveniles were using it. They had
preset limits so that no one could go over a particular amount,
the sort of regulation that you would like to see instead of it
being the ``wild west'', which we have, with regard to too many
of these Internet gaming sites now.
Mr. Malcolm. May I briefly respond, Mr. Feeney?
I think you hit the nail on the head. While perhaps there
is software out there that is as good as it can be, my
understanding is that that software is far from perfect. In
addition to that, software is easily manipulable. If you have a
physical location where a minor has to go, they can get proof
of identification, they can eyeball that person. This is not a
hypothetical problem. One in ten boys, every month, is engaging
on a monthly basis in Internet gambling. College students, who
have recently gotten credit cards but have no money, are up to
their eyeballs in debt because they're spending all night on
online gaming poker situations.
Mr. Modisett. If I could just add to that, Mr. Congressman,
I was chair of the Indiana Gambling Impact Study Commission,
and when we did our poll, we also asked questions about
Internet gaming among youth. We came up with 0.4 percent that
had said they had even attempted to gamble on the Internet.
So----
Mr. Malcolm. I would just refer to--There's a study coming
out by the Annenberg Public Policy Center at the University of
Pennsylvania, and that's where I got that statistic from.
Mr. Coble. The gentleman's time has expired.
Mr. Scott?
Mr. Scott. Mr. Chairman, I would ask Mr. Malcolm if he
would be willing to respond to questions in writing,
particularly about the section that I indicated, and I think
the Ranking Member of the Committee has some questions about
that section.
Mr. Malcolm. I would be delighted to, Mr. Scott.
Mr. Scott. With that, Mr. Chairman, I would ask unanimous
consent that the hearing record be kept open until at least the
mark up on either of these bills.
Mr. Coble. And I would also say that any Member of the
Subcommittee who wanted to submit written requests, that would
be in order.
Gentlemen, we thank you all for your contribution today.
This concludes the hearing and we appreciate your contribution.
The record will remain open for 1 week. Thank you for your
cooperation. The Subcommittee stands adjourned.
[Whereupon, at 3:20 p.m., the Subcommittee adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record
Prepared Statement of the Honorable Howard Coble, a Representative in
Congress From the State of North Carolina
Today, the Subcommittee on Crime, Terrorism, and Homeland Security
addresses a serious and growing problem for our Country. The problem of
Internet gambling. It is now estimated that $4.2 billion is wagered
over the Internet each year. This is an increase from $445 million just
six years ago. There are currently more than 1,800 Internet gambling
sites, and the total dollar amount wagered worldwide is expected to
reach $10 billion in the near future.
The most troubling aspect of Internet gambling is the relative ease
of accessibility for our nation's children. The anonymous nature of the
Internet makes it almost impossible to prevent underage gamblers from
using their parents' credit cards, or even their own in some cases, to
log on to a gambling website. Many Internet sites require nothing more
than a name, address, and credit card number. Those sites that do
require a person to disclose his or her age make little or no effort to
verify this information.
Another group of people particularly susceptible to Internet
gambling are America's problem gamblers. The National Council on
Problem Gambling estimates that there are currently eleven million
Americans directly suffering from gambling problems. High rates of
financial debt, unemployment, bankruptcy, divorce, homelessness, and
suicide are all associated with problem gambling. Virtual casinos and
their video game structure have been labeled the ``crack cocaine of
gambling.'' These facilities are open twenty-four hours a day, seven
days a week, all within a person's own home. By making gambling more
convenient, it can do nothing but make the problem worse.
In addition to the social problems associated with Internet
gambling, these Internet sites also offer organized crime groups a very
simple and easy opportunity to launder the proceeds of their criminal
activity. Because of the lack of oversight or regulations and the high
degree of anonymity, money laundering through Internet gambling sites
is already a major concern to our nation's law enforcement agencies.
Federal law is currently unclear as to whether or not all types of
Internet gambling is illegal. The statute that most directly restricts
the use of the Internet to place bets is the ``Wire Act'' under section
1084 of Title 18 of the U.S. Code. However, because this statute was
written before the age of the Internet and the use of wireless
communication, there is ambiguity as to what type of betting is or is
not covered. Also, the types of gambling mentioned in the statute may
not cover all of the different types of gambling available on the
Internet.
Today we will examine two bills that attempt to address the
problems of internet gambling in two very different ways. H.R. 21, the
``Unlawful Internet Gambling Funding Prohibition Act'' introduced by
Congressman Jim Leach of Iowa, seeks to ban Internet gambling by
prohibiting the use of financial instruments, such as credit cards, in
any transaction invoving illegal Internet gambling. H.R. 3215, the
``Combatting Illegal Gambling Reform and Modernization Act'' introduced
by Congressman John Conyers of Michigan, seeks to establish a
commission to study the feasibility of regulating Internet gambling
rather than banning it.
I look forward to the testimony of the witnesses here today which
will help this Subcommittee decide what is the best approach to take
with regard to this very important subject.
Prepared Statement of the Honorable Bob Goodlatte, a Representative in
Congress From the State of Virginia
Thank you Mr. Chairman for holding this very important hearing. I
would like to commend my colleague, Congressman Jim Leach, on his
tireless efforts to address the problem of Internet gambling.
The Internet is a revolutionary tool that dramatically affects the
way we communicate, conduct business, and access information. As it
knows no boundaries, the Internet is accessed by folks in rural and
urban areas alike, in large countries as well as small. The Internet is
still expanding by leaps and bounds and more and more citizens are
logging on to the Internet at home; however, it has not yet reached its
full potential as a medium for commerce and communication.
One of the main reasons that the Internet has not reached its
potential is that many folks view it as a wild frontier, with no
safeguards to protect children and very few legal protections to
prevent online criminal activity. The ability of the World Wide Web to
penetrate every home and community across the globe has both positive
and negative implications--while it can be an invaluable source of
information and means of communication, it can also override community
values and standards, subjecting them to whatever may or may not be
found online. In short, the Internet presents a challenge to the
sovereignty of civilized localities, States, and nations to decide what
is appropriate and decent behavior.
Gambling is an excellent example of this situation. Gambling is
currently illegal in the United States unless regulated by the States.
As such, every state has gambling statutes to determine the type and
amount of legal gambling permitted. With the development of the
Internet, however, prohibitions and regulations governing gambling have
been turned on their head. No longer do people have to leave the
comfort of their homes and make the affirmative decision to travel to a
casino--they can access the casino from their living rooms with the
click of a button.
Since 1868, the federal government has enacted federal gambling
statutes when a particular type of gambling activity has escaped the
ability of states to regulate it. For over one hundred years, Congress
has acted to assist states in enforcing their respective policies on
gambling when developments in technology of an interstate nature, such
as the Internet, have compromised the effectiveness of state gambling
laws.
The negative consequences of online gambling can be as detrimental
to the families and communities of addictive gamblers as if a bricks-
and-mortar casino was built right next door. Online gambling can result
in addiction, bankruptcy, divorce, crime, and moral decline just as
with traditional forms of gambling, the costs of which must ultimately
be borne by society.
Gambling on the Internet is especially enticing to minors,
pathological gamblers, and criminals. There are currently no mechanisms
in place to prevent youths--who make up the largest percentage of
Internet users--from using their parents' credit card numbers to
register and set up accounts for use at Internet gambling sites. In
addition, pathological gamblers may become easily addicted to online
gambling because of the Internet's easy access, anonymity and instant
results. Dr. Howard J. Shaffer, director of addiction studies at
Harvard, likens the Internet to new delivery forms of addictive drugs:
``As smoking crack cocaine changed the cocaine experience, I think
electronics is going to change the way gambling is experienced.''
Finally, Internet gambling can provide a nearly undetectable harbor for
criminal enterprises. The anonymity associated with the Internet makes
online gambling more susceptible to organized crime and money
laundering.
I have long been a champion of the Internet and an advocate of
limited government regulation of this new medium. However, that does
not mean that the Internet should be a regulatory free zone or that our
existing laws should not apply to the Internet. I think we can all
agree that it would be very bad public policy to allow offline activity
deemed criminal by states to be freely committed online and to go
unpunished simply because we are reluctant to apply our laws to the
Internet.
Gambling on the Internet has become an extremely lucrative
business. Numerous studies have charted the explosive growth of this
industry, both by the increases in gambling websites available, and via
industry revenues. The Internet gambling industry's revenues grew from
$445 million in 1997 to an estimated $4.2 billion in 2003. It has been
reported that there are currently more than 1,800 gambling sites.
Furthermore, industry analysts estimate that Internet gambling could
soon easily become a $10 billion a year industry.
Most of the more than 1,800 Internet gambling websites are operated
from offshore locations. Virtual betting parlors accepting bets from
individuals in the United States have attempted to avoid the
application of United States law by locating themselves offshore and
out of our jurisdictional reach. These offshore, fly-by-night Internet
gambling operators are unlicensed, untaxed and unregulated and are
sucking billions of dollars out of the United States. In addition, the
FBI and the Department of Justice have recently testified that Internet
gambling serves as a vehicle for money laundering and can be exploited
by terrorists to launder money.
H.R. 21, the Unlawful Internet Gambling Funding Prohibition Act
will add a new provision to the law that would prohibit a gambling
business from accepting certain forms of non-cash payment, including
credit cards and electronic funds transfers, for the transmission of
illegal bets and wagers. The bill also gives Federal and State law
enforcement new injunctive authority to prevent and restrain violations
of the law.
H.R. 21 will return control to the states by protecting the right
of citizens in each State to decide through their State legislatures if
they want to allow gambling within their borders and not have that
right taken away by offshore, fly-by-night operators.
The 104th Congress created the National Gambling Impact Study
Commission and charged it with conducting a comprehensive legal and
factual study of gambling, including an assessment of the interstate
and international effects of gambling by electronic means, including
the use of interactive technologies and the Internet. The Commission
recommended to Congress that federal legislation is needed to halt the
expansion of Internet gambling.
As the National Gambling Impact Study Commission has documented,
and Senate and House hearings have confirmed, Internet gambling is
growing at an explosive rate. It evades existing anti-gambling laws,
endangers children in the home, promotes compulsive gambling among
adults, preys on the poor, and facilitates fraud. H.R. 21 will help to
stop this harmful activity before it spreads further. I urge my
colleagues to support this very important legislation.
HR 1223, the Internet Gambling Licensing and Regulation Commission
Act, attempts to attack the Internet gambling problem from another
angle, namely regulation. The bill establishes a commission to study
the issues involved with the licensing and regulation of Internet
gambling activities.
However, there are many concerns associated with setting up a
national commission to regulate the offshore Internet gambling
industry. Regulation would legitimize gambling activities, which have
been shown to cause addictive behavior, bankruptcies, and associated
family problems. In addition, it is doubtful that regulation would
effectively curb the fraud, money laundering and other organized
criminal activities associated with offshore Internet gambling
websites.
Thank you again, Mr. Chairman, for holding this important hearing.
----------
Note: At the time of the printing of this hearing, no response to
Rep. Conyers' questions had been received by the Subcommittee on Crime,
Terrorism, and Homeland Security.