    [House Hearing, 107 Congress]
    [From the U.S. Government Publishing Office]

                    H.R. 556--THE UNLAWFUL INTERNET GAMBLING

                       FUNDING PROHIBITION ACT AND OTHER

                          INTERNET GAMBLING PROPOSALS

    =======================================================================

                                    HEARING

                                   BEFORE THE

                                SUBCOMMITTEE ON
                   FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                          ONE HUNDRED SEVENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 JULY 24, 2001

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 107-37

                            U.S. GOVERNMENT PRINTING OFFICE
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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        MICHAEL G. OXLEY, Ohio, Chairman

    JAMES A. LEACH, Iowa                    JOHN J. LaFALCE, New York
    MARGE ROUKEMA, New Jersey, Vice Chair   BARNEY FRANK, Massachusetts
    DOUG BEREUTER, Nebraska                 PAUL E. KANJORSKI, Pennsylvania
    RICHARD H. BAKER, Louisiana             MAXINE WATERS, California
    SPENCER BACHUS, Alabama                 CAROLYN B. MALONEY, New York
    MICHAEL N. CASTLE, Delaware             LUIS V. GUTIERREZ, Illinois
    PETER T. KING, New York                 NYDIA M. VELAZQUEZ, New York
    EDWARD R. ROYCE, California             MELVIN L. WATT, North Carolina
    FRANK D. LUCAS, Oklahoma                GARY L. ACKERMAN, New York
    ROBERT W. NEY, Ohio                     KEN BENTSEN, Texas
    BOB BARR, Georgia                       JAMES H. MALONEY, Connecticut
    SUE W. KELLY, New York                  DARLENE HOOLEY, Oregon
    RON PAUL, Texas                         JULIA CARSON, Indiana
    PAUL E. GILLMOR, Ohio                   BRAD SHERMAN, California
    CHRISTOPHER COX, California             MAX SANDLIN, Texas
    DAVE WELDON, Florida                    GREGORY W. MEEKS, New York
    JIM RYUN, Kansas                        BARBARA LEE, California
    BOB RILEY, Alabama                      FRANK MASCARA, Pennsylvania
    STEVEN C. LaTOURETTE, Ohio              JAY INSLEE, Washington
    DONALD A. MANZULLO, Illinois            JANICE D. SCHAKOWSKY, Illinois
    WALTER B. JONES, North Carolina         DENNIS MOORE, Kansas
    DOUG OSE, California                    CHARLES A. GONZALEZ, Texas
    JUDY BIGGERT, Illinois                  STEPHANIE TUBBS JONES, Ohio
    MARK GREEN, Wisconsin                   MICHAEL E. CAPUANO, Massachusetts
    PATRICK J. TOOMEY, Pennsylvania         HAROLD E. FORD Jr., Tennessee
    CHRISTOPHER SHAYS, Connecticut          RUBEN HINOJOSA, Texas
    JOHN B. SHADEGG, Arizona                KEN LUCAS, Kentucky
    VITO FOSSELLA, New York                 RONNIE SHOWS, Mississippi
    GARY G. MILLER, California              JOSEPH CROWLEY, New York
    ERIC CANTOR, Virginia                   WILLIAM LACY CLAY, Missouri
    FELIX J. GRUCCI, Jr., New York          STEVE ISRAEL, New York
    MELISSA A. HART, Pennsylvania           MIKE ROSS, Arizona
    SHELLEY MOORE CAPITO, West Virginia
    MIKE FERGUSON, New Jersey               BERNARD SANDERS, Vermont
    MIKE ROGERS, Michigan
    PATRICK J. TIBERI, Ohio

                 Terry Haines, Chief Counsel and Staff Director

           Subcommittee on Financial Institutions and Consumer Credit

                       SPENCER BACHUS, Alabama, Chairman

    DAVE WELDON, Florida, Vice Chairman  MAXINE WATERS, California
    MARGE ROUKEMA, New Jersey            CAROLYN B. MALONEY, New York
    DOUG BEREUTER, Nebraska              MELVIN L. WATT, North Carolina
    RICHARD H. BAKER, Louisiana          GARY L. ACKERMAN, New York
    MICHAEL N. CASTLE, Delaware          KEN BENTSEN, Texas
    EDWARD R. ROYCE, California          BRAD SHERMAN, California
    FRANK D. LUCAS, Oklahoma             MAX SANDLIN, Texas
    BOB BARR, Georgia                    GREGORY W. MEEKS, New York
    SUE W. KELLY, New York               LUIS V. GUTIERREZ, Illinois
    PAUL E. GILLMOR, Ohio                FRANK MASCARA, Pennsylvania
    JIM RYUN, Kansas                     DENNIS MOORE, Kansas
    BOB RILEY, Alabama                   CHARLES A. GONZALEZ, Texas
    STEVEN C. LaTOURETTE, Ohio           PAUL E. KANJORSKI, Pennsylvania
    DONALD A. MANZULLO, Illinois         JAMES H. MALONEY, Connecticut
    WALTER B. JONES, North Carolina      DARLENE HOOLEY, Oregon
    JUDY BIGGERT, Illinois               JULIA CARSON, Indiana
    PATRICK J. TOOMEY, Pennsylvania      BARBARA LEE, California
    ERIC CANTOR, Virginia                HAROLD E. FORD, Jr., Tennessee
    FELIX J. GRUCCI, Jr, New York        RUBEN HINOJOSA, Texas
    MELISSA A. HART, Pennsylvania        KEN LUCAS, Kentucky
    SHELLEY MOORE CAPITO, West Virginia  RONNIE SHOWS, Mississippi
    MIKE FERGUSON, New Jersey            JOSEPH CROWLEY, New York
    MIKE ROGERS, Michigan
    PATRICK J. TIBERI, Ohio

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        July 24, 2001................................................     1
    Appendix:
        July 24, 2001................................................    39

                                   WITNESSES
                             Tuesday, July 24, 2001

    Goodlatte, Hon. Bob, a Member of Congress from the State of
      Virginia.......................................................     7
    Kyl, Hon. Jon, a U.S. Senator from the State of Arizona..........     3
    Leach, Hon. James A., a Member of Congress from the State of Iowa     5
    Farmer, Michael L., Senior Vice President, Risk Management
      Operations, Wachovia Bank Card Services........................    25
    Frederick, Dr. Bob, Chair, NCAA Committee on Sportsmanship and
      Ethical Conduct................................................    26
    Kelly, Timothy A., Ph.D., Executive Director, National Gambling
      Impact Study Commission........................................    32
    McGuinn, Edwin J., CEO, eLOT, Inc., Norwalk, CT..................    30
    VanNorman, Mark, Executive Director, National Indian Gaming
      Association....................................................    28

                                    APPENDIX

    Prepared statements:
        Bachus, Hon. Spencer.........................................    40
        Oxley, Hon. Michael G........................................    46
        Carson, Hon. Julia...........................................    49
        Goodlatte, Hon. Bob..........................................    51
        Leach, Hon. James A..........................................    53
        Farmer, Michael L............................................    57
        Frederick, Dr. Bob...........................................    59
        Kelly, Timothy A.............................................    78
        McGuinn, Edwin J.............................................    69
        Stevens, Ernest Jr...........................................    62

                  Additional Material Submitted for the Record

    Bachus, Hon. Spencer:
        2000 Nellie Mae Credit Card Study............................    42
    Kelly, Timothy A.:
        ``Gambling Backlash: Time for a Moratorium on Casino and
          Lottery Expansion''........................................    86
        Written response to a question from Hon. Julia Carson........    85
    Department of Justice, prepared statement........................    96
    Department of the Treasury, prepared statement...................   101

                        H.R. 556--THE UNLAWFUL INTERNET

                      GAMBLING FUNDING PROHIBITION ACT AND

                       OTHER INTERNET GAMBLING PROPOSALS

                                  ----------

                             TUESDAY, JULY 24, 2001

                 U.S. House of Representatives,
                Subcommittee on Financial Institutions
                                   and Consumer Credit,
                               Committee on Financial Services,
                                                        Washington, DC.
        The subcommittee met, pursuant to call, at 10:05 a.m., in
    room 2128, Rayburn House Office Building, Hon. Spencer Bachus,
    [chairman of the subcommittee], presiding.
        Present: Chairman Bachus; Representatives Kelly, Ryun,
    Manzullo, Biggert, Grucci, Capito, Rogers, Tiberi, Waters, C.
    Maloney of New York, Sherman, Moore, Hooley, Hinojosa, Ken
    Lucas, Shows, Oxley, LaFalce and Goodlatte.
        Chairman Bachus. The Subcommittee on Financial Institutions
    and Consumer Credit will come to order. Without objection, all
    Members' opening statements will be made a part of the record.
    In order to permit us to hear from our witnesses and engage in
    a meaningful question-and-answer session, I'm encouraging all
    Members to submit their statements for the record. And in that
    regard, since we have three Members of Congress, I'm going to
    submit my statement for the record, which will save additional
    time.
        I think it is our custom to allow Members of the Senate to
    go first. Senator Kyl was a distinguished Member of this body.
    I'll recognize Mr. LaFalce for an opening statement. I'm sorry.
    Mr. LaFalce, why don't you go ahead?
        Mr. LaFalce. Thank you very much, Mr. Chairman. I've been
    interested in this issue for a long time. As some of you might
    recall when I was Chairman of the Small Business Committee, I
    conducted a number of hearings on the impact of gambling on the
    small business communities, and I introduced the first bill in
    1994 to create a national commission to study the impact of
    gambling. My chief co-sponsor was Congressman Frank Wolf.
        In the next Congress, when the Republicans took a Majority
    in 1995, Congressman Wolf took that bill and introduced it and
    I was the chief co-sponsor. And with the help of a good many
    groups such as the Christian Coalition, we got that enacted
    into law.
        They rendered a report in 1999. That report called for a
    number of things. I have introduced two bills dealing with two
    of the recommendations of that commission report, both of which
    have exclusive jurisdiction within our Financial Services
    Committee, Mr. Chairman. One deals with the issue of credit
    cards, ATMs, debit cards, and the proximity of those machines
    to the gambling table itself. The commission says there should
    be a separation to mitigate the problems of compulsive gambling
    with the location of those electronic funds transfer machines
    from the gambling tables themselves. That's not to say they
    couldn't be other places within the casino, but not at the
    tables themselves.
        The second issue deals with internet gambling. I am not
    aware of any study which shows any socially redeeming value to
    internet gambling. You can argue there's some value to casino
    gambling. It's tough to say that there is much value other than
    to the person who is making the money off of internet gambling.
        And there's been an explosion of internet gambling sites in
    recent years. This has made opportunities for high-stakes
    betting more widely available than ever before. As a result,
    more people are falling into serious debt because of gambling,
    and larger numbers of people facing the risk of gambling
    addiction. And young people are particularly vulnerable to its
    pitfalls. Because young people are experienced with--they're
    comfortable with the internet. And young people today have a
    plethora of credit cards: their own, their parents, and so
    forth. And they are increasingly lured to internet gambling.
    And they do this wherever they are. They do it in their
    dormitory room. And so the dormitory room becomes a virtual
    casino.
        But they also have Palm Pilots. They have wireless
    internets. And so they don't have to be wired now. They can go
    virtually anyplace in the world, on a beach, and that becomes a
    virtual casino.
        It is a huge problem, and Congress must address both those
    issues, not just the internet gambling, but the use of
    electronic funds transfer machines at the tables themselves.
    How do we deal with it? To me, and I think to a number of
    others, the answer is relatively simple: We cut off internet
    gambling at its source by prohibiting the primary payment
    vehicles that make online betting possible.
        Now Mr. Leach and I introduced a bill last year. Mr.
    Goodlatte introduced a bill. There was an amendment during a
    markup that was accepted when I was not present, when I was on
    the floor voting, and then the bill was reported out. As the
    amendment passed and the bill was reported out before I got
    back from the vote, that, in my opinion, may well have undercut
    and reversed the effect of the bill.
        And so we have to be very careful of the law of unintended
    consequences here. We ought not to pass a bill that proposes to
    prohibit payments only to unlawful internet gambling
    operations, because I'm very fearful that if one State makes it
    lawful, or one foreign jurisdiction makes it lawful, then you
    could have internet gambling worldwide on the basis of that
    site, and this proposed legislation would have virtually no
    effect. It would have the opposite effect. It would legally
    sanction it.
        And so I think we need legislation dealing with this issue
    as the commission recommended, but I think it's legislation
    that we have to draft rather than the proponents of internet
    gambling. I thank the Chair.
        Chairman Bachus. I thank Mr. LaFalce. What we're attempting
    to do is go ahead and let the three Members here give their
    testimony.
        Mr. Sherman. If I could just have 20 seconds, Mr. Chairman,
    I would just say----
        Chairman Bachus. Let me go ahead and make a brief opening
    statement, then I'll yield to him, and then, I want to commend
    Mr. LaFalce. I also want to commend Senator Kyl, who introduced
    a bill that passed unanimously in the Senate. I guess that was
    last year, is that right? Mr. Leach and Mr. Goodlatte. They've
    all worked to tackle a very complex problem. And hopefully we
    can build some consensus working with the Judiciary Committee
    on how to address the situation.
        I'll yield to the gentleman.
        [The prepared statement of Hon. Spencer Bachus can be found
    on page 40 in the appendix.]
        Mr. Sherman. Mr. Chairman, I commend you for holding these
    hearings. I commend the panelists for being before us. I
    associate myself with the Ranking Member's statements and
    simply say that we've had a tradition in this country that if
    you want to lose your house, you at least have to leave your
    house. And we ought to continue that tradition by making it
    impossible to gamble from your living room with the same ease
    that you turn on your television. Thank you.
        Chairman Bachus. Thank you.
        At this time we're going to hear from our first panel. We
    have a panel of private experts who will be on our second
    panel. At this time we will start with Senator Kyl, and then if
    it's all right, we'll go to Mr. Leach and Mr. Goodlatte.

      STATEMENT OF HON. JON KYL, A U.S. SENATOR FROM THE STATE OF
                                ARIZONA

        Senator Kyl. Thank you. Mr. Chairman, thank you very much,
    and thanks to Chairman Oxley. I commend my colleagues,
    Representative Leach and Goodlatte, for their efforts in this
    matter as well. I feel like just saying amen to what's been
    said already, because the two critical points have been made.
        There is a huge need here that is growing in proportion
    every year. And second, because of the amount of money
    involved, all of the various gambling interests--and I have a
    rather broad blanket to describe those interests--are very
    clever about the way that they can insert in the language of
    the bill little exceptions or definitions that have the effect
    of precluding what we're trying to do here, and that's what we
    need to be careful of.
        Just a little bit of flesh on the bones here. The growth in
    the number of sites. In December 1995 when I first introduced
    the bill to ban internet gambling, we had a problem, because
    there were about two dozen internet gambling websites already
    operating. Now there are more than 1,200 such sites according
    to Bear Stearns. The cost of wagering has increased
    significantly. It is estimated to total $1.5 billion last year
    and to go to a total of about $5 billion in just a couple of
    years, again according to Bear Stearns.
        With regard to the addiction problem that was mentioned by
    Representative LaFalce, Dr. Howard Schaffer of the Harvard
    Medical School's Division of Addictive Studies likened the
    internet to, and I'm quoting here: ``new delivery forms for
    addictive narcotics.'' He said: ``As smoking crack cocaine
    changed the cocaine experience, I think electronics is going to
    change the way gambling is experienced.'' And that is
    especially true, Mr. Chairman, Members of the subcommittee,
    with regard to youth, who are particularly at risk.
        We have quite a bit of testimony and evidence to that
    effect, especially college students, who have literally lost
    thousands of dollars gambling on the internet. The payouts are
    significantly unfair. We know that this kind of activity leads
    to further crime. In fact, up to 90 percent of pathological
    gamblers commit crimes to pay off their wagering debts
    according to testimony that we had before my subcommittee. And
    the FBI has noted that organized crime groups are heavily
    involved in internet gambling.
        Let me repeat that: Organized crime groups are heavily
    involved in internet gambling according to the Racketeering
    Records Analysis Unit of the FBI.
        Moreover, internet gambling is used to facilitate money
    laundering. Again, testimony that we have received. These are
    some of the reasons why the National Gambling Impact Commission
    recommended that we enact legislation to prohibit internet
    gambling. It's both a national and a Federal problem. Not all
    national problems are Federal. But in this case, the attorneys
    general national organization, State attorneys general, came to
    our subcommittee in the Senate and said we cannot protect our
    citizens from internet gambling notwithstanding the fact that
    we have State laws to do it.
        And therefore, the entire organization headed by Jim Doyle,
    the Democratic attorney general from Wisconsin, who has
    testified before our subcommittee at least twice I know,
    testified that the National Association of Attorneys General,
    he says, ``took a step many of us never imagined.'' I'm quoting
    him now: ``The organization recommended an expansion of the
    Federal Government's traditional law enforcement role.
    Specifically, we urged the Federal Government to enact
    legislation to prohibit gambling on the internet.'' End of
    quotation.
        Now, for the State attorneys general to come to Washington
    to say we need your help, because the internet knows no State
    boundaries--it can go anywhere--I think is a huge step and
    should tell us what we need to do to help our States out.
        I am very supportive of the efforts of both Representative
    Leach and Goodlatte. They come at the problem in two somewhat
    different ways. But I think that by the end of the effort,
    we're going to find out which one of the enforcement mechanisms
    is going to work the best or perhaps whether they can even be
    combined in some way to ensure that there is an ability to
    enforce the prohibition against internet gambling.
        In conclusion, I would urge those who think that they are
    going to be able to get away with internet gambling because the
    legislation was defeated last year to be very careful in their
    thinking here. And I hope we drive down the value of the stocks
    that support this kind of activity with what I'm going to say
    here.
        First of all, remember, the Federal Wire Act remains in
    force. It is still illegal to engage in sports gambling by
    telephone or wire, and that's going to catch a very broad group
    of activity.
        Second, the State laws still remain in force even though
    they are difficult to enforce.
        And third, we're going to pass legislation in this Congress
    that's going to broaden the blanket of coverage here and make
    internet gambling illegal. I am convinced of that. Our bill
    passed, Mr. Chairman, unanimously, right at the end of 1999. It
    was in the last session of the Congress. And I think we can do
    it again in the Senate, but I think it's a good idea to have
    our House colleagues go first to see what will work here in the
    House of Representatives so that we can then take it over to
    the Senate. That's kind of the strategy that I am pursuing with
    my colleagues here. And with your support, I think we can
    accomplish that goal.
        I thank you very much for holding this hearing. I hope that
    this will help to generate the momentum for legislation to be
    adopted this year.
        Chairman Bachus. I appreciate that.
        Mr. Leach, who was formerly Chairman of the full Banking
    Committee, we welcome you back and look forward to hearing your
    testimony.

    STATEMENT OF HON. JAMES A. LEACH, A MEMBER OF CONGRESS FROM THE
                             STATE OF IOWA

        Mr. Leach. Thank you, Mr. Chairman. Your holding of this
    hearing is very appreciated, and your leadership on all issues
    is much in my admiration.
        I'm pleased to join you and Representative LaFalce, and
    obviously Bob Goodlatte and Senator Kyl, who have led these
    efforts in the House and the Senate.
        Mr. LaFalce. Jim, I'm having a lot of difficulty hearing
    you. Could you please speak up a bit more?
        Mr. Leach. It's my mother's fault, John.
        [Laughter.]
        Mr. Leach. In any regard, there are a number of approaches
    to this issue, and one that John LaFalce and I worked on last
    year relates to an enforcement mechanism. Senator Kyl and
    Congressman Goodlatte have more comprehensive bills in general,
    and I am supportive of them, although I haven't seen Bob's bill
    this session. But I'm confident it will be a first class
    effort.
        The approach that comes before the Banking Committee,
    however, relates to a technique of enforcement which is a
    preclusion of the use of bank instruments for settling debts
    that relate to internet gambling. In my view, it is the most
    effective enforcement mechanism that we can consider as an
    approach and is a very critical one. It becomes a better and
    stronger approach if combined with more comprehensive
    preclusions as are envisioned by Congressman Goodlatte and
    Senator Kyl. But as a stand-alone approach, it is also helpful,
    in fact, quite positive. And so the approach that Jon and I
    have crafted, to a similar, although slightly more
    comprehensive extent, that comes before the jurisdiction of
    this subcommittee, can work alone, and it would provide a new
    tool for law enforcement based on current law. It becomes even
    better if it's tied to an approach of Mr. Goodlatte or Senator
    Kyl that becomes even more preclusive.
        But I would simply stress that the enforcement mechanism
    approach that is under the jurisdiction of this subcommittee
    is, I think, the best approach at this time. I have frankly
    been a little disconcerted that there's been some indifference
    to date, and in fact, anxiety, within the financial industry
    and the credit card provider industry, about approaches of this
    nature, and surprising indifference among regulators to date.
        But I believe the internet gambling problem is one of those
    mushrooming kinds of social and economic phenomenons that
    people avoid at real risk to the economy and at real risk to
    aspects of the financial community.
        And so let me just conclude by saying that everyone has the
    statistics in mind of what's happening in growth. And, for
    example, it looks like over the next 3 years, internet gambling
    is likely to increase at least threefold, and some predictions
    are now more than that. It looks as if the social effects are
    rather astonishing that relate not only to bankruptcy--for
    example, a quarter of the people in my State of Iowa that are
    in gambling assistance programs have declared bankruptcy, where
    the effects on the family and the community are very large--and
    the social effects for those that don't participate can be very
    large as well, in terms of higher interest rates and defaults.
        It isn't simply a gambler's concern, it's also a non-
    gambler's concern as well. And I would only conclude then by
    noting that there are many approaches to this issue. But
    enforcement is the key one. One can come up with all sorts of
    concerns about what is happening, but unless there is an
    enforcement mechanism, we cannot get at the issue. And it ends
    up that the financial community has the only enforcement tool I
    know of that's credible. It does involve a new burden on the
    industry, although I think it's a very slight burden relative
    to the protections that would be created in terms of
    protections against losses that would otherwise exist.
        And so I would hope this would be one of these issues that
    the American public can come together on, and which the
    financial community can come to embrace, and which regulators
    can come to endorse. And if we don't move in the very near
    future, the hand-wringing and social cost in subsequent
    Congresses will be just sensational.
        So this is the time to act, and I'm hopeful we will. We've
    passed this particular approach that applies to the Banking
    Committee in the last Congress. Unfortunately, it wasn't
    allowed to be voted on in the House floor. I would be hopeful
    it would be in this Congress. I thank you very much, sir.
        [The prepared statement of Hon. James A. Leach can be found
    on page 53 in the appendix.]
        Chairman Bachus. Thank you.
        Representative Goodlatte from Virginia. And we commend you
    on your work on this and many other issues.

    STATEMENT OF HON. BOB GOODLATTE, A MEMBER OF CONGRESS FROM THE
                           STATE OF VIRGINIA

        Mr. Goodlatte. Thank you, Mr. Chairman, and I very much
    appreciate the opportunity to testify today and thank you for
    your leadership on this issue and your subcommittee. I also
    want to thank Congresswoman Kelly for the excellent hearing
    that was held in her subcommittee just a couple of weeks ago,
    and Congressman LaFalce who has been a leader on this issue for
    some time.
        It's my pleasure to be here today with Senator Kyl and
    Congressman Leach, both of whom have shown some tremendous
    initiative on this issue. Senator Kyl has passed this bill
    through the Senate unanimously twice in two Congresses. We've
    come close in the House. In the last Congress we got 61 percent
    under suspension of the rules, so I am confident that we will
    have the opportunity to bring up this legislation again this
    year and that we will pass it.
        This year it's my hope that it will include the efforts of
    Congressman Leach, who I think has, along with Congressman
    LaFalce, come up with one of the most effective methods of
    enforcement.
        I have a written statement for the record, but what I'd
    like to do is point out the nature of this problem. The Wire
    Act, which is our principal Federal law in this area, was
    written in 1961. Obviously, not in contemplation of a whole
    host of different telecommunications measures, but certainly
    not the internet. It was designed to address the problem of
    people placing bets, primarily sports bets, by telephone across
    State lines and has been an effective tool in enforcing the law
    in that area. But the Wire Act is out of date with the advent
    of the internet.
        For one thing, there is a question about the application of
    that law to internet gambling. Does that law cover this form of
    technology? Does that law cover other forms of gambling that
    are not contemplated by it? For example, casino gambling. You
    couldn't effectively have casino gambling over the telephone in
    1961, but you can very effectively have it today.
        The law has worked in many jurisdictions. That's why the
    overwhelming majority of these sites are offshore in the
    Caribbean islands and in other parts of the world, and that's
    why we need to update the law to address it. That's why
    Congressman Leach's solution of imposing a ban on the use of
    various financial instruments in order to engage in illegal
    gambling is so vitally important to the solution to this
    problem. That, coupled with an updating of the law to make sure
    that modern forms of communications are covered, is the key to
    this.
        Internet gambling is something that is sucking billions of
    dollars out of the country. It's unregulated, untaxed, illegal
    and offshore, and we need legislation to address that. The
    problem has been pretty effectively dealt with in this country,
    but we need to find ways to give law enforcement the tools to
    combat these offshore folks, and that's what the legislation
    that I will introduce shortly will address.
        Internet gambling is a concern to everybody. I am strongly
    anti-gambling. I would ban forms of gambling that are legal in
    my State of Virginia, such as the State lottery. However, there
    are regulated by the States many forms of legal gambling in the
    United States, and virtually every one of those industries is
    also being affected by this illegal, offshore, unregulated
    effort to promote gambling outside of the jurisdiction of
    American laws, so that the State lotteries are suffering a loss
    of revenue. Casinos in Atlantic City and Las Vegas and other
    communities around the country--they're also facing an untaxed,
    unregulated form of competition.
        So if we focus our efforts here, I would love to focus them
    on addressing all forms of gambling. But if we focus our
    efforts on giving the States and the Federal Government the
    authority to challenge these illegal, untaxed, unregulated
    gambling sites, I think we have the prospect of having the kind
    of support in the House that we had in the Senate.
        I note that obviously, the two Senators from Nevada were
    supportive of Senator Kyl's efforts. Again, I have concerns
    about gambling, but I think we need to focus on the immediate
    threat, which is this unbelievable growth in gambling on the
    internet and give law enforcement the tools that they need to
    combat that. We've been working with the Justice Department and
    with other law enforcement entities, the National Association
    of Attorneys General, to formulate this legislation, and I look
    forward to moving it with the help of this subcommittee.
        [The prepared statement of Hon. Bob Goodlatte can be found
    on page 51 in the appendix.]
        Chairman Bachus. Thank you.
        I appreciate your testimony. Mr. Goodlatte mentioned, and I
    think others have mentioned, that Mrs. Kelly held some
    extensive hearings on this earlier this month. If you read that
    testimony, I think, if for no other reason, you see the social
    and the financial hazards that young people have when they are
    exposed to internet gambling. They are computer-sophisticated.
    They normally have access to a credit card. They become
    addicted at a young age to this form of gambling. And if for no
    other reason, I think we need to address it. And it is a
    tremendously growing problem with our young people who become
    addicted to gambling at such an early age.
        So I for one have no equivocation about whether we should
    pass legislation.
        Mr. Leach. Mr. Chairman, might I make just one final
    comment based upon what Representative Goodlatte said and what
    you just noted? It's hard for a child to become addicted to
    gambling at the horse tracks or at the casino. But as you point
    out, it's very easy, and as the experts say, it's easy to click
    the mouse and bet the house at home.
        And that's one of the reasons why we distinguish between
    this form of gambling and those regulated types of gambling. I
    agree with Representative Goodlatte. If I could, I'd do away
    with all gambling. But that is not our effort here. And to
    clear up a misunderstanding, we were actually accused of trying
    to protect other forms of gambling because we drew the line at
    legal, regulated gambling and said we're not going to do
    anything about that. But this far, and no further. That was our
    bill. It didn't protect anybody. It didn't advance the
    interests of State lotteries or horse racing or anything else.
    But it was misrepresented as having done that.
        So to be crystal clear, I think all of us here and many
    others have said we're not going to do anything about the
    existing gambling. We're not going to cut it back. We're not
    going to allow it--at least we're not going to do anything to
    cause it to increase. But we're just going to draw a line and
    say with respect to internet gambling, it isn't going to be
    legal here in the United States of America.
        So I hope that that's clear to everybody. Our bill doesn't
    have anything to do with any other form of gambling. And to the
    extent that there are definitions in the law that relate to
    them, it is simply to be clear that our bill isn't intending to
    either advance or subtract from what they already do. Thank
    you.
        Chairman Bachus. I appreciate that. The other thing which I
    think was hit on is that our teenagers love sports. They follow
    sports intently. They have a computer sophistication. And when
    they're offered the opportunity to bet on their favorite sport
    online, they're doing it in increasing numbers and at an
    increasingly early age. And it is a tremendous problem that
    faces this country.
        I do want to ask one question. The Federal Wire Act, Mr.
    Goodlatte, you mentioned when it was passed, obviously it
    couldn't have anticipated the internet. There has been a
    decision down in Louisiana now that it may not apply to
    internet gambling. Does it apply? Should we also, as part of
    our efforts, should we amend the Federal Wire Act? Do you
    believe the current law prohibits internet gambling already?
        Mr. Goodlatte. I don't believe I would reach the same
    conclusion that the trial court judge did in Louisiana. I
    believe that the Wire Act can be read to cover more types of
    activity and can be read to cover internet-type activity.
        However, because of that kind of uncertainty and because
    the Wire Act clearly did not contemplate changes in technology
    and any ambiguities need to be addressed, we need to have a new
    law that effectively updates and modernizes the Wire Act.
        The problem from my perspective is that you can't have the
    incentive for law enforcement to take an aggressive stance
    about this if they don't know when they go into court whether
    the court is going to respond favorably or whether what they're
    trying to do is even covered by the law that they're operating
    under. So we definitely need a modern law that addresses
    changes in technology.
        Chairman Bachus. Yes. I think that Louisiana decision, we
    certainly hope it's not a precursor to some other decisions.
    And it ought to give us some more incentive to address this
    issue. I'm going to yield to Mr. LaFalce for questions and then
    to the Chairman of the full Committee, Mr. Oxley.
        Mr. LaFalce. Thank you very much, Mr. Chairman. And Mr.
    Chairman, let me tell you how pleased I am at the statements
    that you have made, because I know we have a similar heart and
    similar mind on this issue, and I know with your outstanding
    legal expertise, we will make sure that what we intend is
    what's enacted into law, not what others might intend.
        Let me distinguish a number of things now. This is very
    important. There's Leach I. That was the bill that I co-
    sponsored in the last Congress. There is now Leach II and my
    bill. And Leach II basically is the product that was reported
    out of last year's House Banking Committee as amended by
    Congressman John Sweeney. We had a few things intervening
    between then and now, too. We had the Louisiana decision
    interpreting the Wire Act. And U.S. District Judge Stanwood R.
    Duval, Jr. dismissed the lawsuit in March of 2001 saying that
    the pending legislation on internet gambling--that's our
    legislation--quote: ``Reinforces the Court's determination that
    internet gambling on a game of chance is not prohibited
    conduct,'' under the Wire Act.
        We also have another phenomenon that's happened, too. There
    has been a change within the thinking of the Nevada gambling
    establishment. About half of them are now becoming sponsors
    themselves of internet gambling. And that changes the political
    dynamic, and we ought to be aware of that as we proceed.
        The difficulty I have, if you take the bill that Leach,
    LaFalce and I this Congress, it is entitled ``Internet Gambling
    Payments Prohibition Act.'' Same title as last year. If you
    take the title of this year's bill, it's the ``Unlawful
    Internet Gambling Funding Prohibition Act.'' So the question
    is, what's unlawful? And there you run into a real dilemma. If
    something is not unlawful under the Wire Act, or if it's lawful
    in just one jurisdiction, you run the risk--or if there's just
    a void. If the law doesn't address the issue, it can't be
    deemed to be unlawful. You would have to have a specific
    prohibition.
        Now, I know there is language saying whether it initiates
    or where it's received, and so forth. But, if I'm a credit card
    company, how am I going to know what the law is in every single
    jurisdiction along the way? And it seems to me that we've
    created an enforcement impossibility, and we've created an
    opportunity to just drive trucks through such a law.
        It's unnecessary, I believe. Now I know that the intent was
    to accommodate some existing interests such as horse wagering,
    and so forth. And therefore, the total prohibition was thought
    to be perhaps too draconian. Maybe so. And maybe we can tailor
    it. But if I had to choose between being too draconian and too
    loose, that's an easy one for me. At least let's start off as
    too draconian. And that's very important, Mr. Chairman, where
    you start off.
        If you start off with a prohibition, that's one thing. If
    you start out with something that says it's got to be unlawful,
    then you're making your lot in life an awful lot more
    difficult. I hope you'll start off basically where we started
    off in committee in the last Congress.
        Any comments, anybody?
        Mr. Leach. Let me respond briefly, John. I was here for the
    debate and voted against the amendment that weakened the bill,
    but it was the will of the committee to move in a fractionally
    looser direction, partly because of the horse racing
    phenomenon. I would prefer the stronger prohibition. And if we
    can get consensus to that degree, that's my strong preference.
        Mr. LaFalce. I think that was a voice vote, Jim.
        Mr. Leach. No, no, sir.
        Mr. LaFalce. On the amendment and on the final passage.
        Mr. Leach. Well, I don't know the final passage, but we had
    a strong vote, and it was an unhappy vote from my perspective.
    But I am simply laying it as a marker where the committee was
    last year.
        Now having said that, there are reasons to go in that
    direction, there are reasons against it. I would prefer the
    stronger preclusions. Mr. Goodlatte, I know, has a possibly
    different perspective.
        Mr. Goodlatte. Well, the only thing I would add is that I
    think this points up the importance of these two efforts moving
    in tandem. I don't know what the will of the Financial Services
    Committee will be on this question. I favor greater
    restrictions on the use of financial instruments in gambling.
        However, it is clear that the gentleman from New York
    raises a very valid point. And that is that if it's not clear
    what is legal and what is illegal, then we certainly must
    define what is illegal. That is the jurisdiction of the
    Judiciary Committee, and so that's why we have to have these
    bills or one bill working in tandem and a great deal of
    cooperation between these two committees as we move forward so
    that we are very clear about what we are attempting to
    accomplish and the means by which we get there, which is to
    make it clear that gambling on the internet is illegal, so that
    no matter how you resolve that issue this time, whatever you do
    accomplish does have meaning.
        Mr. LaFalce. That would mean we'd have to preempt a State
    law like Nevada, which is specifically making it legal, as I
    understand. I'm not sure of the status of that. Does anybody
    know the exact status of that? Does my counsel know?
        I guess it gives the State gambling commission--I'd like to
    introduce legislation that wherever the word ``gaming'' exists,
    change it to ``gambling,'' you know, to authorize internet
    gambling.
        Chairman Bachus. All right. I think the time has expired.
        Senator Kyl. Mr. Chairman, I was just going to say that
    Representative LaFalce is correct about the status of the
    Nevada law as I understand it. And this illustrates a problem.
    If we, those of us who agree that we should ban internet
    gambling, can simply agree on the basic premise, which is we're
    going to leave these other existing legal forms of gambling
    alone, but not permit them to move into internet gambling,
    which they're not doing now, to basically codify the status
    quo, but not permit it to go any further, then we all agree on
    the goal.
        The problem is that these various interests have very
    clever lawyers and lobbyists, and they're skilled at playing us
    off against one another and of creating definitions which
    advantage their particular group, whether it's the lottery or
    the horse racing or whatever. I have supported each of the
    drafting definitions which make it clear that the status quo is
    protected, but that they can't get into internet gambling.
        Now if we could just all commit to do exactly that, then
    they're protected. They continue to get to do exactly what
    they're doing, but they don't get to move into internet
    gambling, which would be prohibited. The Nevada experience
    illustrates the fact that we've got to move quickly. Because
    here you have a State that has now moved into legal State
    internet gambling of a sort. It's supposed to be highly
    regulated. But there's a real question about whether they can
    create the technology which will permit them to enforce this in
    a way that doesn't permit the kinds of abuses that we're all
    concerned about. And that really speaks to the need to act on
    this and to act on it quickly.
        Chairman Bachus. Thank you.
        Next I'm going to recognize the Chairman of the full
    Committee for not only a statement, but also for questions. And
    we went over, Mr. LaFalce went over, so I would allow you to do
    the same. I would like to say just one thing.
        The hearing that Chairwoman Kelly held pretty much calls
    into question whether we even can regulate; whether regulating
    internet gambling is a viable alternative. I'm not sure, and
    I'm beginning to believe that we either ban it or do nothing at
    all. Because I'm not sure the technology allows us to regulate
    it. And certainly the financial institutions we have heard from
    said that was problematic. So a much plainer solution would be
    a ban.
        Chairman Oxley.
        Mr. Oxley. Thank you, Mr. Chairman, and thank you for
    recognizing me. And I would make my opening statement a part of
    the record and spare everyone a lengthy opening statement and
    welcome our distinguished panel, our old friend and former
    colleague, Senator Kyl, Bob Goodlatte, who has done yeoman work
    in this area for a number of years, and our colleague on the
    subcommittee, former Chairman Jim Leach, for all of the good
    work that you have done.
        The discussion that you had just prior to my questions,
    brought up an issue not only that deals with legal gambling now
    that takes place in Nevada--which we all agree is the case--I'm
    wondering about the proliferation of gambling with Indian
    casinos, riverboat gambling that takes place in States like
    Iowa and Ohio, and some of those other rather conservative
    bastions of areas that normally aren't considered to be dens of
    gambling.
        And so it appears to me, and I would like to hear from the
    panel, as to whether we are just dealing with the Nevada
    situation or the potential for many other casinos that exist
    throughout the country. Let me just begin with Senator Kyl.
        Senator Kyl. Thank you, Chairman Oxley. Our effort is not
    to deal with existing casinos, riverboat, Indian gambling or
    any of these things in any way. In other words, what's legal
    today would continue to be legal, but they can't get into
    internet gambling. That's all. We just draw the line for them
    just the same as everybody else. Everybody would be treated the
    same.
        Mr. Oxley. Do you agree with that, Mr. Goodlatte?
        Mr. Goodlatte. I do, Mr. Chairman. My sentiment would be to
    try to address that concern, but I don't know that we would
    have the kind of legislative success we need if we took on the
    entire problem of gambling in one fell swoop. Gembling has
    traditionally been illegal unless regulated by the States. And
    to confront those State decisions to allow it in the myriad
    forms that you described, I think is perhaps a challenge beyond
    the scope of this bill.
        We are trying to stop gambling from expanding on the
    internet. Those same entities could not only offer what they're
    doing on the riverboat, but have a computer on the riverboat
    that offers it across the country, and we want to stop that.
        Mr. Oxley. And let me ask you, have you introduced your
    bill yet?
        Mr. Goodlatte. I have not introduced it yet, Mr. Chairman.
    We've been working with a number of groups--and most especially
    the Justice Department--to come up with legislation that we
    think we can move forward with.
        Mr. Oxley. But the concept you talked about, and that is
    recognizing the legality of the current gambling situation,
    only saying that they can't get into internet gambling, would
    be inherent in your bill?
        Mr. Goodlatte. Yes. We don't recognize them. We simply say
    that we are not attempting to roll back existing legal forms of
    gambling regulated by the States.
        Mr. Oxley. Thank you.
        Mr. Leach.
        Mr. Leach. Well, I'm doubtful of all forms of gambling. In
    fact, if I had my druthers, I'd abolish State lotteries. But I
    don't. This is a very narrowly crafted approach that only gets
    to internet gambling and then recognizes that whatever one's
    personal views are, there are forms of gambling that are legal
    in States, whether they be horse racing or casinos. And this
    does not basically challenge that legality. It only goes to the
    internet.
        Mr. Oxley. I had read somewhere where the gambling casinos
    in Vegas had--and maybe you've addressed this before I came
    in--that there was some indication that they were considering
    moving into internet gambling. Senator, do you have any
    evidence that is the case?
        Senator Kyl. Mr. Chairman, Chairman Oxley, there were news
    accounts that suggested the problem was more pervasive than I
    think it is. According to my colleague, John Ensign, who of
    course recently served in this body, he has done a sort of
    informal survey of the situation, and it is his view that there
    is mainly one casino that has decided to try to get into
    internet gambling. He's not currently aware of any others. But
    he shares my view that we had better get at this pretty quickly
    or more of them could decide to get into it.
        Mr. Oxley. That was, in other words, kind of a race to the
    bottom, at least if you look at it that way. And clearly, when
    those trends start to develop, particularly if they're
    reasonably successful, you would expect that others in the
    industry would follow suit. And I guess that really is the
    issue. Whether, if we don't do anything legislatively, that
    indeed, you could see a huge proliferation of domestic-based
    internet gambling.
        Senator Kyl. Mr. Chairman and Chairman Oxley, it offers us
    a point to make another point. These casinos in Las Vegas spend
    billions of dollars to create wonderful palaces that attract
    people to come stay with them and gamble. That costs a lot of
    money, just like horse racing costs a lot of money. You know,
    horses eat a lot of hay. The thing about internet gambling is,
    it's really cheap to do. With just a few hundred dollars and a
    smart programmer, you can set up an internet site. And that's
    the competitive aspect that all of these other legal forms of
    gambling are afraid of.
        But what at least one casino in Las Vegas has concluded is,
    ``Look, we have a lot of money, we have a lot of technology
    available to us, and we have a site that attracts people
    anyway. So if this is not going to be made illegal, let's get
    in the action. And with our brand name, we can probably compete
    pretty well with all of those independent operators that have
    started up on the internet.'' So that's the reason why we've
    got to get at this and get at it now while those people are
    generally still supportive of banning this activity, before
    they decide that they want to get in on it too.
        Mr. Oxley. Thank you. Mr. Chairman, thank you for your
    patience on this issue. And I want to again congratulate you
    and Mrs. Kelly for the hearings on this very important issue.
    And I think you can tell from the size of the group here and
    the attention it has received in the media, this is a very
    important issue that we're going to have to chew on. And again,
    we appreciate the leadership of the three gentlemen at the
    witness table, and I yield back.
        Chairman Bachus. Ms. Hooley.
        Ms. Hooley. Thank you, Mr. Chairman, for holding these
    hearings and for the panelists. I really appreciate you being
    here. I have a couple of questions just to clarify some things.
    Maybe some of you know that New Jersey is also looking at
    regulating internet gambling. Have you heard about that?
        [No response.]
        Ms. Hooley. OK. Well, whether it is or isn't, the question
    is, as you look at prohibiting internet gambling--and I agree
    it should be--what do you do with, if you say, OK, we're going
    to stop at this point unless it's regulated, unless the State
    allows it, or what's already there is fine, and then we're
    going to prohibit internet gambling from here on out. What
    would that do to Nevada? Are you talking about if there's a
    casino there already online and it is regulated by the State,
    is that going to be OK?
        Mr. Goodlatte. Congresswoman Hooley, with regard to your
    first question, I think there has been discussion in the State
    of New Jersey about legalized internet gambling, but my
    understanding is that there has not been sufficient support in
    the legislature. That may be, in part, due to the fact that in
    New Jersey, Atlantic City is where they have sort of
    quarantined legal gambling. And so legislators from the rest of
    the State are concerned about the fact that if you allow it
    online, even if it's restricted to within the State of New
    Jersey, you're going to essentially spread that to everyone's
    living room across the entire State. So I don't expect to see
    the same movement there that occurred in Nevada.
        However, the issue is will legislation contain a provision
    that says the State can regulate within its boundaries? I don't
    believe the technology exists for them to do that, but that is
    certainly something we are struggling to address in our
    legislation. If we allow the States to regulate it, including
    internet gambling within the State, we have to be absolutely
    assured that it's not going to go beyond the boundaries of the
    State. The internet is international in nature. That's what the
    nature of this very problem is and why we have these hundreds
    of offshore sites that we're struggling to deal with, because
    they're all in people's living rooms right now.
        How do you regulate it so that it is only within the State?
    We may leave that up to the States to figure out, with strict
    prohibitions on going beyond the boundaries, or we may attempt
    to have an across-the-board ban. But that is a very good
    question, and I think technology is going to provide the answer
    to it.
        Ms. Hooley. OK. Another question that maybe any one of you
    can answer, and that is, what's the rise in addiction? What's
    that been in the last couple of years? And can you relate that
    at all to the forms of gambling where people can do it very
    much in private, whether that's going to a tavern or a bar or a
    restaurant where they can go to a machine and no one sees them
    gamble versus what happens in a casino? Do we have any
    information about that?
        Mr. Leach. Well, we have some statistics. A million people
    gamble on the internet daily, and what's impressive about that
    is that it isn't of a population of say almost 300 million, one
    person once a day, it's likely a lot of repeat people. And
    those people are defined as compulsive or addicted gamblers.
        And it's one of the misleading aspects of gambling. All of
    us, from one time or another, gamble. Let's say you sit down
    and play bridge for a tenth of a cent or whatever. It's a zero-
    sum game within that table. But with gambling on the internet,
    the odds are always stacked against you, whereas if you're in a
    zero-sum situation with friends or whatever, someone is going
    to win and someone is going to lose. But when you enter these
    games of chance in this particular way that we're talking
    about, the more you gamble, the more you are certain to lose.
        And so, it's a real problem. If you've got a million a day,
    and the projections are it will triple in 3 years, that's three
    million a day. And I think you can triple that again quite
    rapidly. And so this is going to be a very major social
    phenomenon if the Congress does not act very rapidly. And I
    would only stress, too, that we're seeing in State after State
    not only bankruptcies rise, but it's a family issue in terms of
    what it does to the family. And frankly, it's a harm issue
    because of the instance of people that, a: abuse their kids;
    and b: abuse themselves based upon getting in huge gambling
    loss situations, is very high.
        Ms. Hooley. And how do we address the offshore gambling?
        Mr. Leach. Well, it ends up that the only effective
    mechanism in dealing with the offshore, because these, by
    definition, are legal jurisdictions that we cannot put American
    law to change, except that if you preclude the payment
    mechanism. That is the one truly effective, or at least largely
    effective, tool to deal with offshore. Because the offshore
    gambling can continue to be legal. But on the internet, if you
    cannot pay, that will damage the offshore gambling very
    largely. And so it is the one thing that has a really serious
    impact on offshore gambling.
        Ms. Hooley. Thank you.
        Mr. Goodlatte. I agree with Congressman Leach. I would add
    that we also need to beef up our laws so that when individuals
    offshore come into the United States, as has happened, we can
    effectively prosecute them. And in addition, there is the
    issue, the controversial issue, of blocking; whether we should
    require internet service providers to attempt to block these
    offshore sites from coming into the United States, a
    technologically difficult thing to do, but nonetheless,
    something we've also looked at.
        Getting back to your first question, however, you may be
    familiar with a recent study of Oregon residents. This study
    showed--and we'll make this available to you--out of a total of
    14 different types of gambling activities, internet gambling
    was the only one that saw an increase in participation among
    Oregon residents between 1997 and the year 2000. Internet
    gambling has increased from \1/10\ of a percent in 1997 to \7/
    10\ of a percent in 2000. And while internet gambling
    participation rates are still low, the 260 percent increase in
    lifetime internet gambling participation in Oregon corresponds
    to an estimated annual growth rate of approximately 54 percent.
    A sixfold increase, 600 percent in past year internet gambling
    participation in Oregon, corresponds to an estimated annual
    growth rate of more than 91 percent.
        So other forms of gambling are there. They're a problem.
    The same types of problems with crime and bankruptcy and
    addiction exist there, but they aren't growing out of control
    like internet gambling is.
        Ms. Hooley. Thanks to all three of the panelists for your
    commitment to this issue. I appreciate it.
        Thank you, Madam Chairwoman.
        Mrs. Kelly. [Presiding] Thank you, Ms. Hooley.
        It apparently is my turn next. I'm going to say a couple of
    things. I, too, Senator Kyl, have spoken with John Ensign. He
    agrees with the need for speed. In my hearing it came out that
    there were a number of people that felt the same way. Gambling
    is a social problem.
        Currently in New York State, the New York State Lottery
    states your possibility of winning is 1-in-18,946,000, right
    now. Now you probably have a better chance of being hit by
    lightning than winning the lottery. It's intermittent
    reinforcement. And that, psychologists tell us, is the
    strongest reinforcement in the world. That's why people become
    addicted to gambling.
        I lost a very good friend through gambling. Believe it or
    not, he started on the stock market and began playing penny
    ante bridge on the trains commuting. The next thing, he got
    deeper and deeper and deeper until he lost his wife and both of
    his children and he himself wound up on the streets.
        I think it's very important that we address the social
    concerns with regard to gambling. Senator Kyl, you said
    organized crime groups are heavily involved in internet
    gambling right now. My concern is, how do we enact some kind of
    legislation so that we don't drive internet gambling
    underground, and make it possible for an amplification, turn it
    into an underground business that's controlled by organized
    crime? Right now, sports are bet to the extent that the sport
    becomes secondary and the point spread is the most important
    thing.
        Do either of you have anything in your bills that addresses
    that problem? I'm talking about any of the three of you if you
    could answer.
        Senator Kyl. Madam Chairwoman, the subcommittee I chair of
    the Judiciary Committee in the Senate has had numerous hearings
    on this. We've taken quite a bit of testimony, and it's ranged
    all the way from a former gambling commissioner in New Jersey,
    for example, who says this is the kind of thing that you just
    cannot regulate. It's very, very difficult to regulate. You've
    either got to ban it and then enforce that or let it go. And
    that's the conclusion I think several people have reached here.
        The way that you do it is either through the blocking--and
    the technology does exist, but obviously the internet service
    providers don't want to do that if they don't have to--and the
    credit card and banking enforcement that Representative Leach
    has come up with here.
        If you say that it's illegal in the United States to engage
    in this conduct, and we have an aggressive enforcement
    mechanism through both the FBI and the banking regulators, then
    while organized crime may attempt to get into it, and they may
    control it offshore, we could make it very difficult for them
    to engage in the activity here in the United States. And
    remember, once we get personal jurisdiction over somebody here,
    we can put him in jail. We're not trying to do that with these
    offshore sites. They can do all they want to offshore. It's
    when they come into the United States with the activity that we
    can take action against them.
        So this is really an effort to begin to enforce something
    that is beginning to get out of hand and that law enforcement
    right now is not doing much about, because they don't know what
    to do about it. And the what to do about it is what we hope to
    supply with this legislation.
        Mrs. Kelly. Thank you very much. In the United States,
    regulation guarantees payment. That's another thing, a positive
    thing that regulation actually does.
        I'm wondering, I read Mr. McGuinn's testimony, and I think
    he proves in his testimony when he says Virginia has the
    highest per capita sale of tickets in the Hampton Roads area,
    but the lowest percentage of tickets in Fairfax County, I think
    he proves very well that gambling often hits the poorest people
    in the United States rather than those people who have a little
    extra money and want to respond by gambling.
        Congressman Leach, there's one question I'd like to ask
    you. Some people have raised some concerns about your
    legislation saying that it would hurt privacy by forcing credit
    card companies to develop a system of locating where a customer
    is when they make a transaction. Would you be willing to
    respond to that, please?
        Mr. Leach. Well, I don't know precisely what you mean. I
    don't know that criticism. I don't know the notion of knowing
    where the customer is. But certainly there is an implication
    that people should be very concerned on who the company that
    places someone in debt is. We're very careful that the credit
    card company only has to be knowing accountable. Because
    obviously, some things will develop and there will be an
    unknowing relationship.
        But, I think it's impressive that some banks now are
    starting to move on their own in this direction, and we're
    going to hear later today from Wachovia, a very principled
    American bank that is making some rules in its regard,
    presumably in its own self-interest, that seem to be common
    sense.
        And so this is something that all forms of information do
    involve privacy umbrages. We all understand that. And the
    question is, is there a reason for that from the credit card
    company's point of view or the bank's point of view, and
    obviously it isn't shared publicly, and so there isn't a public
    disclosure. But there might be a trivial privacy umbrage, but I
    can't visualize it being very significant.
        Mrs. Kelly. The concern, obviously, of even people like
    Wachovia is that there can be a subversion of whether or not
    this credit card is being used in a gambling institution or, if
    I understand it correctly, that number comes through as a
    merchant's number, and it looks as though it's a sale, not a
    gambling debt. And I think that's the question that goes to the
    question of privacy. But thank you very much.
        Next we have Mr. Hinojosa.
        Mr. Hinojosa. Thank you, Madam Chairwoman. This has been a
    very interesting discussion, and I would like to ask one
    question.
        What do you think should be the financial penalties and
    maximum prison sentences to those involved in this discussion
    that we're having? And I'm talking about the gambler, the
    credit card companies, including the banks, gambling
    institutions, underground participants, and finally, offshore
    entities? Bob, would you like to answer that?
        Mr. Goodlatte. Mr. Hinojosa, with regard to the gamblers,
    we leave that to State law. In other words, the consumer that
    engages in this activity, we don't attempt to impose criminal
    fines or penalties on them because those engaging in it are
    located in a particular State. The State has jurisdiction over
    them. They can impose those.
        However, for those engaged in offering these illegal
    gambling services, the legislation that I introduced in the
    last Congress had 4 years. I believe it was the same with
    Senator Kyl, a maximum 4 years imprisonment. The Justice
    Department has been recommending 5 years. So we are again in
    discussion with them about whether it would be 4 years or 5
    years, but something in that range is what we contemplate.
        Mr. Hinojosa. Would you combine sentence and financial
    penalties?
        Mr. Goodlatte. Yes. There are also financial penalties
    involved.
        Mr. Hinojosa. And what would they be?
        Mr. Goodlatte. A person engaged in a gambling business who
    violates this section shall be fined an amount equal to or not
    more than the greater of the total amount that such person bet
    or wagered or placed, received or accepted in bets or wagers as
    a result of engaging in that business in violation of this
    section, or $20,000. Imprisonment not more than 4 years or
    both.
        Mr. Hinojosa. How did you come up with $20,000?
        Mr. Goodlatte. Twenty thousand dollars is basically a
    minimum amount here.
        Mr. Hinojosa. Well, the minimum is $20,000, but it could be
    higher?
        Mr. Goodlatte. Right. The greater of that or the
    calculation that is in the formula. In other words, we wanted
    something that was a threshold amount that would be a
    disincentive for somebody to engage in this activity, but it
    could be far greater than that, depending upon the magnitude of
    their offense.
        Mr. Hinojosa. Fine. I understand. Now if he used the credit
    card and spent $100,000, then it could be as high as $100,000,
    but not less than $20,000. Is that what I heard you say?
        Mr. Goodlatte. It could be $100,000 or higher, depending
    upon the nature of their activity. Twenty thousand is a
    minimum.
        Mr. Hinojosa. I think you've answered my question.
        Thank you, Madam Chairwoman.
        Mrs. Kelly. Thank you very much.
        Next we go to Mrs. Biggert.
        Mrs. Biggert. Thank you, Madam Chairwoman. We seem to be
    talking about college students using credit cards to gamble
    from their college dorm or from the house. But it seems to me
    that most college students have a pretty low limit on their
    credit cards. Is there another way that they can do this? If
    they're using their parents' card, it might be illegal. But how
    do they get so involved in this with the limits on credit
    cards?
        Senator Kyl. Madam Chairwoman, we've had quite a bit of
    anecdotal testimony about college students. There doesn't seem
    to be a study that I'm aware of anyway. But in testimony by
    William Saum before this subcommittee on July 12th, I'll just
    quote one sentence. He talks about some of the specific cases
    he's aware of. He says: ``I've spoken with students who have
    lost thousands of dollars gambling on the internet. In fact,
    last year at a Congressional hearing, we played a videotape
    account of a college student who in just 3 months lost $10,000
    gambling on sports over the internet.'' And he noted that prior
    to placing his first bet online, the student never wagered on
    any sporting event. And he goes on to say: ``Please be assured
    that this student's experience is not unique.''
        Now I can't answer the question about how specifically they
    are able to get that much value on a credit card, or whether
    it's a combination of cards or they're using mom and dad's
    card, or what. I'm sure that all of those things are possible.
    But I will tell you that probably the biggest proponents of
    this legislation are the professional sports organizations like
    the NFL and the NBA and Major League baseball, as well as the
    NCAA, the amateur athletic association. And I have heard a lot
    of anecdotal evidence from both the professional and the
    amateur sports side of their fears, their great fear.
        There is a lot of money involved in professional sports,
    and they can't afford to have these sports adulterated by the
    possibility that the event is being fixed. And they're just
    scared to death that because of the rise of gambling on sports
    activities over the internet this is going to happen. So these
    professional sports organizations, in particular, have spent a
    lot of money trying to get this legislation through. I think
    that shows you the degree of concern that they have about it.
        Mr. Leach. If I could add to that, Mrs. Biggert, college
    kids are the computer-literate generation. They're also
    intensely loyal to their new institutions. And it's becoming
    kind of the thing to do to bet for your school. And to simply
    add on to what John Kyl has just said, all of a sudden----
        Mrs. Biggert. Could you talk a little bit louder, please?
        Mr. Leach. All of a sudden, all of the major college
    football and basketball coaches in America have become
    exceptionally alarmed on this issue, and I think for very good
    reason. This thing is exploding on college campuses.
        There aren't good studies. There is a Los Angeles Times
    article that is really rather profound indicating a lot of
    anecdotal kinds of circumstances. But at this time, this is a
    subject that is so fast-changing that everything is anecdotes
    rather than deep study, and a study that was done 6 months ago
    is out of date. And that is the dilemma.
        Mrs. Biggert. Well, if things change so much with the
    credit cards, or whatever means that would be used to pay for
    these, won't someone come up with some way then to get around
    using a credit card, or the way that they electronically
    transfer money to pay for this to these offshore companies?
        Mr. Leach. That's always possible, and that's why we're
    trying to write law as broadly as possible, giving lots of
    discretion to regulators on bank financial types of instruments
    with the idea those may develop in the future as well. And so
    we're trying to write legislation that is very expansive in
    terms of definitional approaches. And partly because of the
    problems that we've seen with the Wire Act definition, to make
    it clear that there are ways you can change definitions over
    time.
        Mrs. Biggert. And the credit card companies, if they make a
    mistake, they are liable under your bill?
        Mr. Leach. They are not liable under the bill unless they
    knowingly do things or participate themselves. There is a great
    recognition that there will be a realm of the unknown.
        Mrs. Biggert. Is that a due diligence standard?
        Mr. Leach. I can't tell you that. I don't know.
        Mrs. Biggert. Thank you.
        Thank you, Mr. Chairman.
        Chairman Bachus. Thank you. Mr. Leach, I understand you
    have an amendment on the floor?
        Mr. Leach. Yes, sir.
        Mrs. Biggert. So Mr. Ryun has a question.
        Mr. Ryun. I would actually like to yield my time to Mrs.
    Kelly.
        Chairman Bachus. Mr. Leach, if you need to be excused, we
    can understand that.
        Mr. Leach. Thank you.
        Mrs. Kelly. Mr. Leach, there's one more question I wanted
    to ask you, and that is about what in your bill would prevent
    someone from going into a place like Western Union, plunking
    down a lot of cash, and wiring it offshore in terms of betting?
    And the reason I'm asking this is you know as well as I do,
    that some of the internet gambling sites are being used for
    money laundering. This would be a neat way to money launder.
        Mr. Leach. Actually, there are many aspects of the internet
    gambling issue. Money laundering is one. Organized crime, as
    has been indicated, is another, not just the traditional Mafia.
    We have a Russian Mafia that's operating offshore that is of
    real alarm to law enforcement. But clearly, there are many ways
    you can settle transactions, but this would be intended to
    apply to a Western Union-type setting.
        Mrs. Kelly. The language in your bill would be intended to
    apply to that? Is that what you're saying?
        Mr. Leach. Yes, ma'am.
        Mrs. Kelly. Thank you very much for clarifying that.
        Senator Kyl. Mrs. Kelly, if I could add to that. I think
    it's going to be an ongoing challenge. Obviously, those engaged
    in criminal activities who want to launder money, or even a
    determined gambler, may well find ways to get around our
    efforts. However, what we're intending to do is to cover all
    forms of financial transactions, and we want to make it as
    inconvenient as possible, because we think that 95 to 99
    percent of the people who find the convenience of sitting down
    at home at their computer and are able to punch their credit
    card number in are not going to go to that additional step of
    going to the Western Union station with cash.
        However, if a law enforcement entity knows that an entity
    offshore is engaged in accepting bets from the United States in
    violation of the law, they could then have the mechanism under
    Congressman Leach's bill, and under the legislation that we're
    drafting, to notify them that they are aware that this entity
    where the money is being wired to is engaged in illegal
    activity, and they would then be on a list that Western Union
    would have, or that a credit card company would have, or a bank
    would have, that said ``do not wire funds to this entity,
    because they're engaged in criminal activity in violation of
    the laws of the United States.''
        I think that is probably the most effective way to deal
    with that particular type of transaction. I don't know if the
    gentleman from Iowa agrees.
        Mrs. Kelly. And your legislation would include the little
    money, check-cashing entities that will also wire money rather
    than just the big places like Western Union? In other words,
    you will cover everything?
        Senator Kyl. Everyone will be covered. It will be up to law
    enforcement to take the necessary steps under the legislation
    and under the law after it's passed to be able to notify that
    entity that they cannot transfer money to the offshore entity
    that has been identified through a legal proceeding as engaged
    in activities in violation of the law in the United States.
        Mrs. Kelly. Thank you.
        Mr. Goodlatte. Excuse me. I have a vote, I believe.
        Chairman Bachus. I yield at this time to Mr. Grucci. I
    understand, Mr. Goodlatte, you have a vote. You may need to be
    dismissed. Mr. Leach has a bill on the floor, so he's been
    dismissed. Mr. Grucci, Senator Kyl is certainly anxious to
    answer your questions.
        [Laughter.]
        Mr. Grucci. Senator, I appreciate you sticking around. Just
    a quick question. We have the sites on the internet that are
    offshore where we probably don't have jurisdiction under the
    laws of the United States to enforce those laws there.
        You have situations where you can get the internet service
    into your home. You're suggesting a ban on internet gambling or
    regulations on internet gambling? And if I can, I'd like to
    follow up on that.
        Senator Kyl. Mr. Grucci, this is a ban. It is not to
    regulate, but to prohibit internet gambling within the United
    States. This is what the State attorneys general asked us to
    provide, Federal enforcement of the policies that the States
    have right now.
        And you're correct, we couldn't exercise jurisdiction
    abroad over somebody setting up one of these sites. But, there
    are two ways to stop them from engaging in their illegal
    activity in the United States. One is to require the internet
    service providers to block the access from those sites at the
    point that they enter the United States. That's what the Senate
    bill did. And the other, which is being proposed by
    Representative Leach, is to enforce it by preventing the
    monetary transaction from ever being settled so that the
    payment would never be made to the gambling entity enforced
    through the banking regulators.
        Both of those enforcement mechanisms have promise, and what
    both the House and Senate decide to do at the end of the day
    with respect to having one or the other, or both, we'll have to
    decide upon. But primarily, we've been focused this morning on
    Representative Leach's idea of enforcing it through the banking
    regulators and the financial services entities.
        Mr. Grucci. With gambling being such an old vice and
    embedded into society as deeply as it has been, do you think
    that banning it is the effective way to control it? When you
    look at the banning of alcohol during the 1920s, it certainly
    didn't accomplish the goal. Do you see that being akin to
    trying to ban the internet gambling? And if so, is there
    another vehicle that we could use to accomplish the same goal?
        Senator Kyl. Mr. Grucci, of course all of the existing
    gambling that is legal in the States would continue to exist.
    So there are still plenty of gambling outlets for people. What
    we're saying is, though, the 1961 Wire Act, which prohibited
    the making of a sports bet by telephone or wire, would, in
    effect, be updated to say that if it's done by fiber-optic
    cable or microwave satellite transmission--it doesn't matter
    how it's actually transmitted--that it would be illegal.
        And in addition to that, these virtual casinos would be
    illegal as well. So it only covers that aspect of betting. But
    it would ban all forms of internet gambling. And we believe
    that through the enforcement mechanisms that have been
    suggested here that there is an adequate opportunity to enforce
    it. We also have testimony from people, over on the Senate side
    at least, that say that this is a particularly difficult kind
    of gambling to regulate. You can regulate a casino. You can
    regulate the horse track. It is very difficult to regulate
    internet gambling. And that's why the conclusion is both
    because it is pernicious, because it's a worse form of gambling
    than the others, and because it's more difficult to regulate,
    that the idea is to ban this particular kind of activity and
    then enforce that ban.
        Mr. Grucci. Thank you, sir. I yield back my time.
        Mrs. Kelly. Thank you, Mr. Grucci.
        Mr. Manzullo, do I understand you would like to be
    recognized at this time?
        Mr. Manzullo. Yes. Thank you very much. I appreciate your
    coming here. I agree with everything you're saying. The
    question is the constitutionality and the mechanisms of
    blocking an internet site. I think it is France that is
    presently blocking some internet sites? And I don't know if an
    issue went to the World Trade Organization on that. Mr.
    Goodlatte, do you have the information on that?
        Mr. Goodlatte. Yes. It is a very controversial issue, and I
    very much understand the concerns of the internet service
    providers, because they are engaged in dealing with a whole
    host of different countries that want them to block different
    types of sites, including sites that here in the United States
    we would regard as a violation of our First Amendment free
    speech rights.
        That is not the case with regard to illegal gambling,
    because that has never been recognized as protected speech
    under the First Amendment. However, because we are in
    essentially an international marketplace, we have to be
    sensitive to the concerns that they have. While the French may
    say, well, that has no effect in our country; we don't
    recognize such a right. We want you to ban sites talking about
    hate speech or Nazi memorabilia and some of the different types
    of things that they have attempted to ban there.
        So we are looking at that and share the concern they have,
    but it does not have a constitutional implication whether or
    not we were to require blocking of gambling sites.
        Mr. Manzullo. Do you know the status of that action in
    France? Is it in courts, or what form?
        Mr. Goodlatte. I don't know the exact details of it at this
    point in time. I think it is still an ongoing controversy in
    France.
        Mr. Manzullo. Is it difficult for an internet service
    provider to try to block those sites?
        Mr. Goodlatte. It has difficulties because the illegal
    gambling site you are attempting to block could change its
    information and switch off and take a new identity and avoid
    you that way. That's not a perfect solution for the illegal
    gambling entity, because they want to use their known e-mail
    address, their own website address as a means of communication.
    They would have to constantly change that. Blocking is not a
    perfectly effective tool. It is, however, done by the ISPs for
    their own purposes today if they are aware that somebody is
    engaged in activities that they do not approve of, or that are
    in violation of child pornography laws, and so, right now, they
    do presently block sites.
        Mr. Manzullo. ISPs do block the websites that deal with
    child pornography?
        Mr. Goodlatte. They do, yes.
        Mr. Manzullo. Is that difficult for them to do that?
        Mr. Goodlatte. I don't think it's an easy proposition. And
    again, people are constantly finding ways to get around it, and
    that's why we don't think it is at all the perfect tool for
    combatting this, but it is one that we certainly have to weigh
    in the balance.
        Mr. Manzullo. Senator Kyl, your bill places the burden upon
    the ISPs to block. Is that correct?
        Senator Kyl. Congressman Manzullo, not exactly. The law
    enforcement entity, let's say, for example, the U.S. Attorney
    for the State of Arizona, would go to court and prove to the
    judge that there is an illegal site operating offshore and that
    the service provider for that site is XYZ service provider. The
    service provider could then be ordered by the court to come in
    and basically answer the following questions: Are you the one
    providing the service? Yes. Is it too expensive or too
    difficult for you to block the site? If they say yes and can
    demonstrate that, then they don't have to block the site. But
    if it is not too expensive or too difficult for them to do it,
    then the court could order them to block the site.
        So they have no monitoring burden. They're passive. They
    don't do anything until some law enforcement entity taps them
    on the shoulder and says ``You guys are carrying an illegal
    site here, and if you can do something about it, you should.''
        Mr. Manzullo. Where does the ISP industry stand on your
    bill?
        Senator Kyl. We worked out an accommodation with the
    industry in the Senate, or we wouldn't have gotten the bill
    through the Senate. But some of the sites that we dealt with,
    or some of the ISPs that we dealt with, said however, this is
    without prejudice to dealing with the House in a different way
    should we decide to do that. And at that point, I'll hand it
    off to Representative Goodlatte, because they had a little more
    aggressive stance here in the House. And in the end, they were
    one of the reasons why the bill didn't get through the House.
        Mr. Goodlatte. The fact of the matter is that we have
    worked with them and we did modify the language before it went
    to the floor, but the Senator is correct. They did have a very
    different approach dealing with us in the House than they did
    in the Senate, and we are continuing to work with them to try
    to address their concerns while still giving law enforcement
    effective tools to deal with the problem.
        Mr. Manzullo. Thank you.
        Chairman Bachus. This concludes the first panel. Let me say
    this. Our counsel, Tom Montgomery, noted a few minutes ago that
    both you gentlemen were really committed, as well as Mr. Leach,
    to the time you spent here this morning. You are not just
    interested in the issue or involved in the issue, but obviously
    willing to devote your time with other issues going on. And
    Senator Kyl, for you to come over from the Senate and devote
    this much time, not just sit in, you know, a cameo appearance,
    let me tell you, I think everyone in the audience, those of us
    who have been around the process, I think everyone has taken
    notice of that, and it speaks very clearly as to the level of
    your commitment and dedication to this.
        Senator Kyl. Thank you, Mr. Chairman. You're correct that
    our degree of commitment is very, very intense. By the way, I
    don't ever mind coming back to the old House of Representatives
    here. I really enjoy it. I get a chance to visit old
    colleagues. Thank you.
        Chairman Bachus. Mr. Leach actually, after his own
    amendment hit the floor of the House of Representatives, he
    continued to stay here and answer questions until he was
    actually asked for the third time to go to the floor.
        Mr. Goodlatte. I just want to thank you, Mr. Chairman, for
    allowing me to testify and for shining a spotlight on this very
    serious problem that we intend to address.
        Chairman Bachus. Well, your testimony here today has
    energized this body. Thank you very much.
        At this time we will recognize the second panel. I'm going
    to introduce the first panelist, and then I'm going to defer to
    Mr. Ryun from Kansas to introduce the second panelist. There
    are six panelists.
        Mr. Michael L. Farmer, Senior Vice President of Wachovia
    Bank Card Services, I want to particularly--and I think Mrs.
    Kelly mentioned this--commend Wachovia for deciding that their
    credit cards would not be used for internet gambling purposes.
    And I think this is an occasion where a corporation stepped up
    to bat and did what was right. And I just wish that others had
    followed your lead. But I salute you and what Wachovia has
    done.
        Mr. Farmer. Thank you.
        Chairman Bachus. Let me go to Mr. Ryun to introduce our
    second panelist.
        Mr. Ryun. Thank you, Mr. Chairman.
        It's my privilege to introduce a friend of mine from the
    University of Kansas, which happens to be my alma mater, Bob
    Frederick, who just recently retired as the athletic director.
    He was there for 14 years. He has a long-time interest in
    college athletics. He has worked very hard with the National
    Collegiate Athletic Association on sports gambling. He began as
    a basketball student-athlete at the University of Kansas, and
    during his time there as athletic director did a wonderful job.
    I know one of his concerns has been watching a lot of what's
    happened with student-athletes going to prison as a result of
    their participation in illegal schemes, and we look forward to
    his testimony today. Thank you very much for coming. Thank you,
    Mr. Chairman.
        Chairman Bachus. Thank you. Our third panelist is Mr. Mark
    VanNorman, who is the Executive Director of the National Indian
    Gaming Association. We welcome you, Mr. VanNorman.
        Mr. Edwin J. McGuinn, CEO of eLottery, we appreciate your
    testimony here. And Dr. Timothy A. Kelly, Former Executive
    Director of the National Gambling Impact Study Commission. I'm
    familiar with your work, Dr. Kelly, and commend you for your
    testimony.
        At this time we will start to my left with Mr. Mike Farmer,
    and we'll proceed down the row. Mr. Farmer.

      STATEMENT OF MICHAEL L. FARMER, SENIOR VICE PRESIDENT, RISK
           MANAGEMENT OPERATIONS, WACHOVIA BANK CARD SERVICES

        Mr. Farmer. Chairman Bachus and Members of the
    subcommittee, good morning, if it's still morning. As
    introduced, my name is Mike Farmer, and I am Senior Vice
    President of Risk Management Operations for Wachovia Bank Card
    Services. Thanks for your invitation to participate in this
    hearing, as this is a very important issue.
        I have worked in the credit card and debit card industry
    for 14 years in various roles, but most intently focusing on
    risk management. In my current position, I have responsibility
    for fraud and credit losses and authorization system
    performance.
        It was late in 1999 that Wachovia was issued several
    summonses on lawsuits involving internet gambling. Our
    cardholders that incurred internet gambling debts and losses on
    their credit cards were calling upon the law to protect them
    from repayment of their debts. They cited that the transactions
    were illegal. At the time, in the absence of any immediate
    decision on lawsuits, Wachovia developed a policy to decline
    internet gambling charges in order to mitigate our losses.
        This policy was executed by systematically using the
    payment systems' merchant category codes and electronic
    commerce indicators to identify and decline the internet
    transactions. In order to communicate this policy to our
    customers, we issued a statement message which read:
        ``Please note: Due to various State legal restrictions
    governing gaming activities, Wachovia will no longer authorize
    internet gambling transactions made with your Wachovia credit
    card.''
        Now it is understood that while this policy is being
    executed, its effectiveness is based entirely on the integrity
    of the data passing through the authorization system. As
    Wachovia and other credit card issuers deny authorization for
    internet gambling transactions, there are considerable
    incentives for merchants to circumvent this policy. For
    example, internet casinos may seek to conceal the true nature
    of their transactions by altering the data message to make
    themselves appear to be merchant types other than gambling
    institutions. In cases such as this, internet gambling charges
    may be unknowingly approved.
        In addition, alternate payment types can be used to
    complete internet gambling transactions. For example, a gambler
    may use a payment card or a checking account or other source of
    funds to establish an electronic cash account with a third
    party, which could then be used for internet gambling.
    Wachovia's systems would not capture these transactions as
    internet gambling.
        Now there are a number of other reasons why using financial
    institutions to control internet gambling would be of limited
    effect. In particular, it is important to recognize that
    alternative payment types such as automated clearing house
    payments and checks are not designed to allow for monitoring of
    payees.
        But once again, Wachovia appreciates the opportunity to
    participate in this hearing. We look forward to working with
    the subcommittee on this important issue.
        [The prepared statement of Michael L. Farmer can be found
    on page 57 in the appendix.]
        Chairman Bachus. Thank you.
        Dr. Frederick.

     STATEMENT OF DR. BOB FREDERICK, CHAIRMAN, NATIONAL COLLEGIATE
      ATHLETIC ASSOCIATION COMMITTEE ON SPORTSMANSHIP AND ETHICAL
                                CONDUCT

        Dr. Frederick. Mr. Chairman and Members of the
    subcommittee, I appreciate the opportunity to testify on behalf
    of the intercollegiate athletics community and to share with
    you our concerns about the rapid growth of sports gambling on
    the internet and the need for effective legislation.
        I currently serve as Chair of the NCAA Committee on
    Sportsmanship and Ethical Conduct. Sports gambling issues fall
    under our committee's purview. In addition, I recently
    concluded a 14-year tenure as Athletics Director at the
    University of Kansas. As a long-time college athletics
    administrator and coach, I am very much aware of the dangers
    that sports gambling presents. I have witnessed the struggles
    of my colleagues in the aftermath of point-shaving scandals on
    their campuses, and I have sadly watched young student-athletes
    go to prison as a result of their participation in these
    illegal schemes.
        Sports gambling has been a threat to the integrity of our
    collegiate contests. However, the most significant change since
    I was a basketball student-athlete at the University of Kansas,
    is the rise of the internet and its ability to make sports
    gambling accessible from almost anywhere. In just 5 years,
    internet gambling has grown from a dozen, to according to our
    sources, 1,400 unique gambling websites.
        Despite Federal and State laws prohibiting sports gambling
    over the internet, offshore operators continue to market
    aggressively their products in the United States.
    Advertisements in in-flight magazines, on sports talk shows, in
    newspapers, in billboards, all tout the excitement and the ease
    of placing sports bets over the internet. Visit any college
    campus and I assure you you will hear about the number of
    unsolicited e-mail ads received by students from sports
    gambling sites.
        Unfortunately, almost all of this illegal activity
    continues to thrive virtually unchecked in the United States.
    Its impact is already being felt in the intercollegiate
    athletics community. NCAA staff members have begun processing
    rules, violation cases involving internet sports gambling. It's
    clear that internet sports gambling is flourishing in the U.S.
        As a father of four sons, three of whom are currently
    either in college or coaching on a college campus, I am
    concerned that the growth of internet gambling could be fueled
    by college students. Today's college students undoubtedly are
    the most wired group in the United States. They can surf the
    web in their school library, in the computer lab, or the
    privacy of their campus housing. The emergence of internet
    gambling now enables students to wager behind closed doors
    anonymously and with a guarantee of absolute privacy.
        How do students have the means to place bets online? Credit
    cards. According to a 2000 survey by Nellie Mae, 78 percent of
    college students have credit cards and 32 percent have four or
    more cards. The average credit card balance for undergraduates
    has risen nearly 50 percent since 1998. One-in-10 students will
    graduate with balances exceeding $7,000.
        Unfortunately for some, internet gambling may stand in the
    way of obtaining their college degree. Last year at a House
    Congressional hearing, a NCAA witness played a videotape
    account of a college student who, in just 3 months, lost
    $10,000 gambling on sports over the internet. He reported that
    a friend at another institution lost $5,000 on a single
    internet wager on the Super Bowl and was forced to drop out of
    school.
        Unfortunately, these stories are not unique. The NCAA has
    heard similar accounts, and the news media has been widely
    reporting on this rapidly growing problem among young people.
    Clearly, there is a need to address this issue.
        For the past 4 years, the NCAA has worked closely with the
    House and Senate sponsors of internet gambling prohibition
    legislation. Of course, we are concerned that despite the 1961
    Wire Act, internet sports gambling continues to prosper in the
    United States. Clearly, as the internet goes wireless, there is
    need to update current statutes related to sports gambling so
    that the laws keep pace with technology.
        In addition, any proposed legislation must provide an
    effective enforcement mechanism that will impact an industry
    that is located outside the United States. This is critical,
    and the success of any legislative effort will be dependent on
    ensuring that law enforcement agencies have the priority to
    crack down on violators.
        The NCAA is pleased that this subcommittee is examining
    ways to address internet gambling. It is our hope that with the
    passage of Federal legislation, any further growth related to
    sports gambling on the internet will be achieved largely
    without United States participation. Thank you.
        [The prepared statement of Dr. Bob Frederick can be found
    on page 59 in the appendix.]
        Chairman Bachus. Thank you, Dr. Frederick.
        Mr. VanNorman.

       STATEMENT OF MARK VanNORMAN, EXECUTIVE DIRECTOR, NATIONAL
                       INDIAN GAMING ASSOCIATION

        Mr. VanNorman. Thank you, Mr. Chairman, Members of the
    subcommittee. My name is Mark VanNorman. I'm the Executive
    Director of the National Indian Gaming Association (NIGA), and
    our Chairman, Ernie Stevens, sends his regrets that he is
    unable to be here today, but he had a death in his family.
        NIGA is an association of 168 tribes engaged in
    governmental gaming to fund governmental programs and community
    infrastructure.
        Chairman Bachus. Mr. VanNorman, would you pull that mike a
    little closer? And I know that it does appear that when you
    pull it close, it appears it's echoing, but it is better.
        Mr. VanNorman. Certainly. About 196 of the 561 tribes in
    the United States engage in gaming. That's about 40 percent. By
    comparison, 37 of the 50 States operate State lotteries, just
    over 70 percent.
        I'll just touch on three points: The Indian Gaming
    Regulatory Act; the strength of tribal regulatory systems; and
    our position on internet gaming.
        To begin with, I should make very clear that we are not
    seeking to move the overall internet gaming debate. We are not
    generally in favor of legislation, nor do we generally oppose
    internet legislation. Our position is that if internet gaming
    is permitted in the United States, then Indian tribes should
    have a fair and equitable opportunity to use the modern
    technology of the internet.
        The United States in its Constitution, treaties and laws
    has consistently recognized that Indian tribes are sovereigns
    that possess governmental authority over their members and
    territory. Through the Indian Gaming Regulatory Act, Congress
    acknowledged the sovereign status of tribes and sought to
    protect Indian gaming as a means to generate tribal economic
    development and tribal government revenue. And the Act works.
    Indian gaming provides 250,000 jobs nationwide. Indian tribes
    use their governmental revenue to build schools, hospitals,
    water systems, roads, and to fund education, health care, day-
    care, after-school programs, elderly nutrition, and police and
    fire protection.
        Indian gaming also helps tribes overcome the barriers to
    economic development in Indian country: The lack of
    infrastructure and the lack of investment. Tribes are using
    Indian gaming revenue to diversify their economies. And Indian
    gaming benefits neighboring communities. For example, after an
    Air Force base closed in central New York with the loss of
    2,000 jobs, the Oneida Nation opened its gaming facility,
    hotel, restaurant, golf course and events center in central New
    York and employs 3,000 people.
        Of course, Indian gaming doesn't cure all our problems.
    Most tribes are still struggling with poverty because our
    remote lands are not accessible to people. To give you an
    understanding of the situation, the Federal Communications
    Commission reported in 1999 that only 49 percent of Indian
    reservation households have telephones. The Indian Health
    Service reports that 43 percent of Indian children under the
    age of 5 live in poverty. In Indian country, we still have a
    long way to go to catch up with the rest of America.
        Internet gaming is an expanding industry generating
    substantial revenue. Nevada and the Virgin Islands are now
    working to establish legal regimes to regulate internet gaming.
    Industry and computer experts are now working to overcome
    problems of internet gaming such as remote identification
    systems to verify that all bettors are adults. And many believe
    that these issues will be resolved soon.
        In our view, if internet gaming is to be permitted in the
    United States, Indian tribes should have a fair and equitable
    opportunity to participate in that gaming. When Congress
    enacted the Indian Gaming Regulatory Act in 1988, Congress was
    aware that Indian tribes were remote and isolated, and Congress
    authorized the use of the wires and also made clear that Indian
    tribes should have access to modern technology. Of course, that
    was prior to the rise of the internet, but we believe tribes
    should have access to this technology as well as others.
        Internet gaming would permit players to access remote
    Indian lands and provide economic opportunity for the tribes
    that are otherwise too remote for gaming. In our view, it makes
    sense for tribes to have access to internet technology, because
    we already have strong regulatory systems in place. Tribes
    dedicate substantial resources and personnel to regulate gaming
    comparable to the resources that Nevada, New Jersey and other
    State gaming regulatory systems employ.
        Tribes have highly qualified, experienced, and effective
    regulators. In addition, our system is backed up by the
    National Indian Gaming Commission, which reviews licenses,
    audits, management contracts and tribal ordinance.
        The U.S. Department of the Treasury's Financial Crimes
    Enforcement Network also works with tribes to safeguard our
    gaming facilities from Bank Secrecy Act violations, and the
    Justice Department has authority to prosecute anyone, employee
    or customer, who might steal from an Indian gaming facility. In
    our view, tribes are well situated to conduct internet gaming,
    and any internet gaming legislation should treat tribes fairly.
        If the legislation takes the form of a Federal prohibition
    with exceptions for State lotteries, horse and dog tracks, jai-
    alai and fantasy sports betting, the Indian tribes should be
    able to engage in internet gaming in a similar manner. If the
    legislation takes the form of State option legislation, then
    the Indian tribes should have the option to engage in internet
    gaming where such gaming is permitted. Of course, any
    legislation should contain a savings clause to ensure that it
    does not impact existing Indian gaming.
        The fundamental concept of the Indian Gaming Regulatory Act
    is that tribes have an inherent right to engage in economic
    activities to generate tribal governmental revenue and build
    livable tribal economies. If internet gaming is to be a
    permitted activity in the United States, tribes should have a
    fair and equitable access to internet gaming.
        That concludes my remarks. Thank you.
        [The prepared statement of Ernest Stevens, Jr. can be found
    on page 62 in the appendix.]
        Chairman Bachus. I appreciate that.
        Mr. McGuinn.
        Mr. McGuinn. Thank you, Mr. Chairman.
        Chairman Bachus. It is Mr. McGuinn?
        Mr. McGuinn. It's McGuinn.
        Chairman Bachus. McGuinn.
        Mr. McGuinn. Close enough. There are many variations.
        Chairman Bachus. I've missed it three times. Thank you.

             STATEMENT OF EDWIN J. McGUINN, CEO, eLOT, INC.

        Mr. McGuinn. My name is Ed McGuinn, and I'm the CEO of
    eLOT, Inc. We do business under the name of eLottery. We are a
    Connecticut- and New York-based company. We are the leading
    provider of web-based retailing and internet marketing services
    exclusively for governmental without being governmental
    lotteries.
        A brief review of our core competencies. We've conducted
    millions of e-commerce lottery transactions using a full line
    of internet and telephone-based applications.
        We've developed and field-tested technology that assures
    necessary security, age and border controls required to process
    a lottery transaction.
        We presently provide sophisticated internet-based marketing
    services for the Idaho Lottery, Indiana's Hoosier Lottery, the
    New Jersey Lottery, the Jamaica Lottery, and the Maryland
    Lottery.
        I appreciate the opportunity provided to me by the
    subcommittee and I hope that I will be able to shed some light
    on how our company, and others like us, can provide service to
    State and governmental lotteries. I would also like to buttress
    the testimony given to this subcommittee by Ms. Penelope Kyle,
    the Director of the Virginia Lottery and the current President
    of the National Association of State and Provincial Lotteries,
    also known as NASPL. At that time, Ms. Kyle said that NASPL
    could not support any legislation that would remove the
    authority of the governors and State legislatures in regulating
    the sale of their lottery tickets. This has been a right that
    has been traditionally reserved to the States, and they have
    experienced no major problems to this date in implementing a
    regulatory process and enforcing those regulations.
        The issue that I am discussing here today is focused solely
    on the purchase of authorized State lottery tickets over the
    internet. The issue of State lotteries has been long-since
    resolved in the United States. Today there are 38 State
    lotteries and the District of Columbia, and just this year the
    legislature of Nevada authorized the creation of a lottery in
    Nevada.
        The funds from these lotteries have gone to a wide variety
    of public causes, most notably education. Using the latest
    numbers available, we find that Ohio has provided over $700
    million for education; in New York, approximately $1.4 billion
    was sent to education; and in Massachusetts, approximately $800
    million was provided to local towns and cities. The list goes
    on. But clearly, lotteries are being very responsible with
    their funding.
        E-commerce--in my opinion, and I would like to think also
    yours--is here. We see it in every facet of life. We are told
    that we will shop on the internet for all things in the future,
    and in many cases, the future is now.
        Now I would like to address some arguments that have been
    put forward in the past in opposition to lottery tickets being
    sold on the internet. As Ms. Kyle stated previously, this is
    moving into the area of restricting the rights of governors and
    legislatures to control their own lotteries. NASPL objects to
    this, and we agree with them on this key point. We find it
    incomprehensible that Congress would allow wagers on horse
    racing and other parimutuel events, but restrict the activities
    of an authorized State lottery, especially when approximately
    30 percent of the gross proceeds are targeted to good causes
    like education.
        Another point deals with some of the red herring arguments
    that have surfaced by those that would ban the sale of lottery
    tickets over the internet. The first argument against the sale
    of lottery tickets has been that people will be able to buy
    lottery tickets around the Nation, and this is utterly false.
    States now prohibit the sale of lottery tickets across State
    lines, and if you are resident of the State of Ohio and the
    Ohio Lottery decides to authorize the sale of tickets over the
    internet, then only Ohio residents can buy them. Again, the
    registration process will detect anyone that is not an Ohio
    resident. But let us assume that someone finds a way around the
    system. They purchase a winning ticket in the Ohio Lottery, and
    they are not a resident of Ohio. The lottery knows the ticket
    was purchased over the internet, just as they know which store
    sold a ticket, and they will deny payment of any prize.
        The State lottery industry has already adopted and has been
    conducting sales of lottery tickets using the U.S. Postal
    Service. Applications are received by mail containing their
    name and address. Only in-State applications are processed;
    out-of-State applications are rejected. Instead of using the
    U.S. Postal Service to deliver the application, we would
    deliver the application by e-mail. Same rules. Same controls,
    both as far as border and age control. Simply a more efficient
    delivery mechanism.
        Another argument against the sale of lottery tickets over
    the internet is this would allow minors to purchase lottery
    tickets. Notwithstanding Senator Kyl's comments, this argument
    does not have a factual base to support its claim. There are no
    studies available to suggest that minors are interested in
    playing the lottery. Every study shows that base players for
    State lotteries are middle- and older-aged Americans. Further,
    internet sales would use the same process already adopted by
    the States in their subscription sales. Instead of the
    application being delivered by the U.S. Postal Service, the
    application would delivered by e-mail.
        In closing, what I would like to do is take the
    subcommittee through a process whereby a player would be able
    to purchase a ticket over the internet. If a State authorized
    eLOT, or any other vendor in the field, to become a vendor for
    their lottery tickets, the player would go to our website, or
    the State's very own website, and register to play. They would
    be required to submit their name, address and age. Right now,
    eLottery is using Equifax, a very significant and large data
    information provider, along with Department of Motor Vehicle
    and voter registration records, regarding this important and
    necessary control. This information would be checked against
    comprehensive data sources for correctness.
        Once it had been determined that the player was, in fact, a
    resident of the State in question and over the legal age, the
    player would be issued a PIN number and a password to access
    the site where the purchase could be made. I should point out
    that eLottery does not purchase the ticket for the player. We
    only facilitate the purchase through the normal electronic
    channels that the players currently buy valid tickets.
        In summary, we strongly support the concept of States
    regulating their own State lotteries. Some States have already
    decided not to offer lottery tickets over the internet while
    others have received authorization from the State legislature
    to do so.
        I have no comment on regulation of other forms of gaming,
    but I urge the Members of the subcommittee to consider the
    slippery slope they enter upon as they begin to further erode
    the rights of States to regulate commerce within the States
    borders.
        I thank you all for your time and will respectfully respond
    to any questions that the Members may have.
        [The prepared statement of Edwin J. McGuinn can be found on
    page 69 in the appendix.]
        Chairman Bachus. I thank you.
        Dr. Kelly.

       STATEMENT OF TIMOTHY A. KELLY, Ph.D., EXECUTIVE DIRECTOR,
               NATIONAL GAMBLING IMPACT STUDY COMMISSION

        Dr. Kelly. Good morning, Mr. Chairman, Members of the
    subcommittee. I am Dr. Tim Kelly, former Executive Director of
    the National Gambling Impact Study Commission. I do appreciate
    this opportunity to give testimony on internet gambling,
    especially as it relates to H.R. 556 and other internet
    gambling legislative proposals.
        As you know, in 1996, Congress created the National
    Gambling Impact Study Commission and charged us with studying
    the economic and social effects of legalized gambling in
    America. The report has 77 far-reaching recommendations, but
    most importantly for this subcommittee, the report calls for
    prohibition of internet gambling not already authorized. This
    is especially noteworthy in light of the fact that four of the
    nine commissioners represented or endorsed the gambling
    industry.
        The Commission came about as a result of the expansion of
    gambling in America over the last 20 years or so, from an
    industry that took in about $1 billion profit to over $50
    billion last time we counted. Gambling expansion, however, has
    come with a high social cost, and we mustn't lose sight of
    that. 15.4 million Americans today at least are already
    suffering from problem and pathological gambling, also called
    gambling addiction, which is devastating to both the individual
    and the family. We hired the National Academies of Science to
    do a study on this topic. They stated--and they are not known
    for overstatement--quote: ``Pathological gamblers engage in
    destructive behaviors. They commit crimes. They run up large
    debts. They damage relationships with family and friends, and
    they kill themselves.'' End quote.
        In fact, it's not unusual for a gambling addict to end up
    in bankruptcy with a broken family, facing a criminal charge
    from his or her employer. These matters are relevant to
    internet gambling.
        What I would like to do--in fact, my submitted testimony is
    largely out of the chapter on internet gambling that's in our
    final report--I'll just walk you very quickly through some of
    the most salient points there.
        The first chapter is entitled ``Candidates for
    Prohibition.'' There are three reasons why prohibition should
    be considered for internet gambling. The first has to do with
    youth gambling. Because the internet can be used anonymously,
    the danger exists that internet gambling can be abused by
    underage gamblers. In most instances, a would-be gambler merely
    has to fill out a registration form in order to play. Most
    sites rely on the registrant to disclose his or her correct age
    and make little or no attempt to verify the accuracy of the
    information. Underage gamblers can use their parents' credit
    cards, or even their own credit cards, and set up accounts.
    Given their knowledge of computers and familiarity with the
    web, young people may find gambling on the internet hard to
    refuse. In fact, I think it was that concept that most drove
    the commissioners to consider prohibition. The idea that this
    form of gambling would be beamed into the homes, the dens, the
    bedrooms, the dorms, across America. That was the first
    candidate for prohibition.
        The second reason for considering prohibition is the issue
    of pathological gambling, or gambling addiction. Pathological
    gamblers are quite susceptible to internet gambling. Because
    internet gambling comes with a high level of privacy, it
    exacerbates the problem of pathological gambling. Pathological
    gamblers can traverse dozens of websites and gamble 24 hours a
    day, so experts in the field of pathological gambling have
    expressed concern over the potential abuse of this technology.
    The director of Harvard Medical School's Division on Addiction
    Studies stated that: ``As smoking crack cocaine changed the
    cocaine experience, I think electronics is going to change the
    way gambling is experienced.''
        Third was criminal activity. I think that's been covered by
    the others. Money laundering and fraud were mentioned in our
    report. I will skip over that since my time is running kind of
    short here.
        The fourth section dealt with the fact that the Wire Act of
    1961 is indeed ambiguous, and it leaves a lot of questions
    unanswered. Does it or does it not apply to the internet?
    That's not clear. Where are bets and wagers actually taking
    place when one places a bet on the internet? Are they taking
    place on the site where the person downloads a web page? Is it
    at the site of the bank account or the credit card companies?
    These questions would need to be addressed if ever legal action
    is going to be taken.
        We noted, too, as has been noted here, that the National
    Association of Attorneys General unusually asked for help here.
    Usually they take a position against Federal intrusion.
    However, they did send us a statement, which I believe Senator
    Kyl referred to, that they have taken the unusual position that
    this activity must be prohibited by Federal law and that State
    regulation would, in fact, be ineffective.
        As a result of these things, the Commission came up with
    four recommendations. The first was to prohibit internet
    gambling not already authorized. The second was to prohibit
    wire transfers and credit card debts related to those wire
    transfers. The third recommendation was to not permit the
    expansion of any form of gambling into America's homes. And the
    fourth was to encourage, or enable, foreign governments to work
    against these very things as well.
        In conclusion, the Commission found that internet gambling
    poses a potential threat to the Nation. It puts our youth at
    risk, exacerbates pathological gambling and opens the door for
    fraud and money laundering.
        H.R. 556 prohibits financial transfers and calls for
    working with other nations, and it would help limit in-home
    gambling. But all of this would apply to, quote: ``unlawful
    internet gambling.'' This implies, of course, that there are
    lawful forms of internet gambling as well, and opens the door
    to endless debate as to whether or not a given internet
    gambling site is legal. In so doing, H.R. 556 skips over the
    primary Commission recommendation on internet gambling
    prohibition, even though it addresses the other recommendations
    well.
        The subcommittee now has before it an alternative bill for
    consideration, H.R. 2579, that removes the word ``unlawful''
    from that text. This would prohibit internet gambling per se,
    and in my opinion, more closely accomplish the full
    recommendations of the National Gambling Impact Study
    Commission on this critical matter. So although H.R. 556 is a
    good bill worth supporting, the alternative is, in my opinion,
    even better.
        Thank you, Mr. Chairman, for this opportunity to speak with
    you today, and I will be glad to answer questions.
        [The prepared statement of Dr. Timothy A. Kelly can be
    found on page 78 in the appendix.]
        Chairman Bachus. I appreciate that, Dr. Kelly.
        I'm just going to make two comments. One is, having read
    Dr. Kelly's testimony last night, it is astounding how in the
    last 30 years we've moved from where we heard of people going
    to Nevada to gamble, or where they went down to the dog track,
    to today when it's in the home. It's a profound change in our
    society, and I think it has implications for all of us.
        The other thing I'd say, I have five children. Thankfully,
    three of them are out of school. One of them is a senior.
    Having read Dr. Frederick--I do have a 16-year-old, and having
    read your remark that a number of unsolicited e-mails are now
    coming over the internet promoting sports gambling, I'm happy
    that four of them are almost out of school. But you've given me
    another reason to worry about that 16-year-old who is an avid
    sports fan. So that's one more thing to worry about.
        I would ask unanimous consent that my 5 minutes be yielded
    to the gentleman from Vermont--I mean from Virginia. You look
    so much like Bernie Sanders.
        [Laughter.]
        Mr. Goodlatte.
        Mr. Goodlatte. That's scary, Mr. Chairman. I do appreciate
    your generosity in allowing me to ask questions.
        Mr. Farmer, I've read your testimony and I'm encouraged
    that Wachovia has taken the initiative to attempt to screen out
    these transactions by customers with illegal gaming entities,
    or gaming entities that are engaged in activities that may be
    illegal in the United States. And I understand you've
    experienced some difficulties with people changing the codes
    with regard to the nature of the transaction and so on.
        How would you react to a different approach, which would be
    to have a law which says that under circumstances where law
    enforcement presents evidence to a court that a gambling
    merchant, if you will, is engaged in illegal activities by
    offering these services in the United States--in other words,
    they're set up, say, on the island of Antigua. Maybe a
    perfectly legal activity there and in other countries, but when
    they offer those services to U.S. citizens, they're engaging in
    illegal activity.
        Law enforcement could present evidence that they are doing
    just that, get an order, and the court order would then allow
    them to notify various financial institutions that this
    activity is taking place, and those institutions would cut off
    services. For example, if you're administering a Visa card or a
    MasterCard, you'd cut off that institution from being able to
    engage in any credit transactions because of their illegal
    activities in violation of the law here. That, to me, seems to
    be a more effective way to get the message to them that they
    can't violate U.S. laws.
        Mr. Farmer. It's an interesting idea, and I think it
    definitely has some merit. The problem would be in execution in
    this case, because even if we were to know the name of the
    institution, it doesn't mean that that name is going to be
    reflected when they authorize or settle a transaction. And
    therefore, we may unknowingly participate in payment of that
    debt.
        Mr. Goodlatte. We would have to give you immunity from any
    liability for doing that where they attempted to disguise
    exactly who they are. But that would be the approach that I
    would recommend to the subcommittee.
        Mr. McGuinn, I'm interested in your comments regarding the
    ability to keep this from crossing State lines. When somebody
    in Virginia goes into Maryland, buys a lottery ticket and they
    win, the State of Maryland doesn't say, ``Well, you're a
    Virginia resident, you can't recover your winnings.'' Would you
    propose to have a different treatment of the consuming bettors
    if they buy the ticket online, as opposed to if they buy it in
    a convenience store?
        Mr. McGuinn. Well, I think it really depends on each
    State's interpretation. And at the end of the day, it's not
    eLottery that's going to mandate what's appropriate from
    security, age, or border control standards that could be used
    on a State-by-State basis.
        Mr. Goodlatte. But, if we were to buy your argument that we
    should let the State do what it wants to within its borders, we
    would have to be absolutely assured that this is not going to
    bleed over into other States and that it become an interstate
    lottery system by people simply doing what Mr. Farmer says the
    folks can do with regard to credit card transactions--conceal
    who they are or where they are. They could say, ``Well, I live
    in Virginia, but I was in Maryland at my relative's or on a
    convenience store's internet device when I purchased this
    ticket over the internet.'' We've got to have a way to screen
    out that type of activity if we're going to follow the proposal
    that you recommend.
        Mr. McGuinn. I appreciate that. And at the end of the day,
    I think there are acceptable border-control internet provider
    filtering capabilities and age control databases that are
    available that can give the individual States and their
    representative executive directors of that authorized lottery
    the power to put that into process.
        Mr. Goodlatte. If somebody's 15-year-old son says that they
    are their father instead of the 15-year-old son, how do you
    know that that's the case when they're doing this online?
        Mr. McGuinn. Well, depending upon the sophistication that
    may be warranted by each individual State, at the highest end
    of the level is biometrics, which could be something very
    expensive as retinal scanning, which would certainly not be a
    good application this early in the technology curve. But look
    at some of the processes that Equifax uses for example. They
    ask very significant financial or information questions, which
    I don't expect my 14-year-old daughter, or 18-year-old
    daughter, or 21-year-old daughter to know. Where is your
    mortgage? What do you think the balance is? Tell me what credit
    cards you have. Some information that would not be readily
    applicable or available to a child.
        And as I said, you can create as deep a filter as would be
    of some value. I might add, the same questions are not being
    asked of kids in my neighborhood that are buying alcohol or
    buying cigarettes who are under age at the convenience store
    level. So in one instance, you're really holding the internet
    to a much higher standard. The good news is, the internet is
    not anonymous. I would probably beg to differ with Dr. Kelly's
    comments from that standpoint. There is sufficient information
    that can be drawn out within a dialogue between this particular
    sale, if you like, using the databases that are available to
    satisfy, I think, every Member of this subcommittee and
    certainly the requisite State lottery directors.
        Mr. Goodlatte. Thank you. Mr. Chairman, I appreciate your
    forbearance.
        Chairman Bachus. Thank you.
        Mr. McGuinn, I was legal counsel for the Alabama Beverage
    Control Board for some period of time. If my teenager goes down
    to the local convenience store, 16 years old, he would have to
    show a valid driver's license before he could buy liquor. He
    would also, even if he showed an illegal credit card, be
    responsible if they sell him liquor, because they're supposed
    to actually check that. That would be quite different from him
    getting on the internet and gambling, wouldn't it? There's
    certainly a gatekeeper at the convenience store. I guess I
    don't see the analogy.
        Mr. McGuinn. Well, qualitatively, the gatekeeper has some
    wide variances. And in some cases, the ulterior motive is to
    grow sales and it's a high-margin sale. So I appreciate the
    fact that there is a physical I.D. of a process more often than
    not. But the problems break down with the quality of the staff,
    and I would probably also ultimately argue with the fact that
    the identification--it's not too hard to get fake proof,
    unfortunately, and I can speak about that. I have kids about
    the same age as yours, and a couple of more in college. So it's
    a distressing issue to me as a parent.
        I take a lot more comfort from the fact that for using
    database services like Aristotle, Equifax and the like that
    they can ask some very, very significant questions which I
    would have some pretty strong comfort that my 21- or 18-year-
    old are not going to know. And I think that creates a
    gatekeeper. Granted, a cyber gatekeeper. But at the end of the
    day, questions which I think are very important. The fact that
    I can tie into, in many States, both Department of Motor
    Vehicle and also voter registration databases can be used as a
    supplementary value.
        So I think there's some pretty good capabilities out there,
    and we're not even talking about biometrics, which again I
    think is a couple of years down the line, but ultimately
    represent opportunities to be using fingerprints and other
    types of scanning capabilities. There are also, I might add,
    some ``net nanny'' products that are out there, where you can
    use a mouse to simulate your signature, which ultimately has
    some broad value. And as I said, I think you'd be pleasantly
    surprised with some of the emerging trends right now relative
    to security on the internet, both as far as age, border
    control, and ultimately the IP considerations as to where and
    what venue a particular person logs on.
        Chairman Bachus. And the way to get around the liquor thing
    is someone else goes in and buys it. But then if an underage
    youth drinks, he can be arrested. There's a law against that
    that's easy to enforce, at least. But, you know, right now the
    law on internet gambling isn't in force.
        Mr. McGuinn. Well, let's differentiate, Mr. Chairman,
    between the purchase of lottery tickets from playing offshore.
    The important thing is, you can't cash the ticket. If an
    underage youth goes in and tries to cash the ticket, they're
    not going to get it.
        Chairman Bachus. You're not talking about sports gambling?
    You're simply talking about the lottery, and your testimony is
    totally restricted to that.
        Mr. McGuinn. We are a service that works with authorized
    State lotteries supporting intrastate sales. So from that
    standpoint, I'm very deeply in agreement with Dr. Frederick's
    comments regarding sports betting. I appreciate Dr. Kelly's
    comments. Again, I take comfort from the fact that there are
    major studies out there where youths--and I'll define that as
    16 to even 25 if we want to broaden the range--are not
    interested in lottery tickets. They do like the experience of
    going into an offshore gaming site where it's exciting. You can
    bet $50 and win $50. It's a little bit different.
        Chairman Bachus. So your testimony is that the States ought
    to have the right to sell lottery tickets over the internet?
        Mr. McGuinn. Exactly right.
        Chairman Bachus. OK. That concludes our hearing. I
    appreciate you gentlemen being here today. I would say this. I
    would like the subcommittee, without objection, to also include
    in the record the Nellie Mae Government survey of credit card
    use by collegiate students. We've heard some of those same
    statistics in our bankruptcy hearings and in our credit card
    hearings. But I think that would be very enlightening for the
    subcommittee to have.
        [The information referred to can be found on page 42 in the
    appendix.]
        Also, without objection, the record for this hearing will
    remain open for 45 days to allow the Department of the Treasury
    and the Department of Justice to submit written statements and
    to permit Members to submit questions in writing to the
    witnesses and have their responses placed in the record.
        With that, I appreciate this panel, appreciate their
    testimony, their attendance here today. And I now adjourn this
    hearing. Thank you.
        [Whereupon, at 12:15 p.m., the hearing was adjourned.]

                                A P P E N D I X

                                 July 24, 2001
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