[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












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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



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