    [House Hearing, 108 Congress]
    [From the U.S. Government Publishing Office]

      UNLAWFUL INTERNET GAMBLING FUNDING PROHIBITION ACT AND THE INTERNET
                GAMBLING LICENSING AND REGULATION COMMISSION ACT

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

                                    HEARING

                                   BEFORE THE

                       SUBCOMMITTEE ON CRIME, TERRORISM,
                             AND HOMELAND SECURITY

                                     OF THE

                           COMMITTEE ON THE JUDICIARY
                            HOUSE OF REPRESENTATIVES

                          ONE HUNDRED EIGHTH CONGRESS

                                 FIRST SESSION

                                       ON

                             H.R. 21 and H.R. 1223

                                   __________

                                 APRIL 29, 2003

                                   __________

                                 Serial No. 25

                                   __________

             Printed for the use of the Committee on the Judiciary

        Available via the World Wide Web: http://www.house.gov/judiciary

                                     ______

    86-705              U.S. GOVERNMENT PRINTING OFFICE
                                WASHINGTON : 2003
    ____________________________________________________________________________
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                           COMMITTEE ON THE JUDICIARY

                F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
    HENRY J. HYDE, Illinois              JOHN CONYERS, Jr., Michigan
    HOWARD COBLE, North Carolina         HOWARD L. BERMAN, California
    LAMAR SMITH, Texas                   RICK BOUCHER, Virginia
    ELTON GALLEGLY, California           JERROLD NADLER, New York
    BOB GOODLATTE, Virginia              ROBERT C. SCOTT, Virginia
    STEVE CHABOT, Ohio                   MELVIN L. WATT, North Carolina
    WILLIAM L. JENKINS, Tennessee        ZOE LOFGREN, California
    CHRIS CANNON, Utah                   SHEILA JACKSON LEE, Texas
    SPENCER BACHUS, Alabama              MAXINE WATERS, California
    JOHN N. HOSTETTLER, Indiana          MARTIN T. MEEHAN, Massachusetts
    MARK GREEN, Wisconsin                WILLIAM D. DELAHUNT, Massachusetts
    RIC KELLER, Florida                  ROBERT WEXLER, Florida
    MELISSA A. HART, Pennsylvania        TAMMY BALDWIN, Wisconsin
    JEFF FLAKE, Arizona                  ANTHONY D. WEINER, New York
    MIKE PENCE, Indiana                  ADAM B. SCHIFF, California
    J. RANDY FORBES, Virginia            LINDA T. SANCHEZ, California
    STEVE KING, Iowa
    JOHN R. CARTER, Texas
    TOM FEENEY, Florida
    MARSHA BLACKBURN, Tennessee

                 Philip G. Kiko, Chief of Staff-General Counsel
                   Perry H. Apelbaum, Minority Chief Counsel
                                     ------

            Subcommittee on Crime, Terrorism, and Homeland Security

                     HOWARD COBLE, North Carolina, Chairman

    TOM FEENEY, Florida                  ROBERT C. SCOTT, Virginia
    BOB GOODLATTE, Virginia              ADAM B. SCHIFF, California
    STEVE CHABOT, Ohio                   SHEILA JACKSON LEE, Texas
    MARK GREEN, Wisconsin                MAXINE WATERS, California
    RIC KELLER, Florida                  MARTIN T. MEEHAN, Massachusetts
    MIKE PENCE, Indiana
    J. RANDY FORBES, Virginia

                          Jay Apperson, Chief Counsel

                            Sean McLaughlin, Counsel

                            Elizabeth Sokul, Counsel

                              Katy Crooks, Counsel

                    Patricia DeMarco, Full Committee Counsel

                         Bobby Vassar, Minority Counsel

                                C O N T E N T S

                                  ----------

                                 APRIL 29, 2003

                               OPENING STATEMENT

                                                                       Page
    The Honorable Howard Coble, a Representative in Congress From the
      State of North Carolina, and Chairman, Subcommittee on Crime,
      Terrorism, and Homeland Security...............................     1
    The Honorable Robert C. Scott, a Representative in Congress From
      the State of Virginia, and Ranking Member, Subcommittee on
      Crime, Terrorism, and Homeland Security........................     2

                                   WITNESSES

    Honorable James A. Leach, a Representative in Congress From the
      State of Iowa
      Oral Testimony.................................................     5
      Prepared Statement.............................................     7
    Mr. John G. Malcolm, Deputy Assistant Attorney General, Criminal
      Division, U.S. Department of Justice
      Oral Testimony.................................................     8
      Prepared Statement.............................................     9
    Mr. Jeffrey Modisett, Counsel, Bryan Cave, LLP, and former
      Attorney General, State of Indiana
      Oral Testimony.................................................    13
      Prepared Statement.............................................    14
    Mr. William J. Hornbuckle, President and Chief Operating Officer,
      MGM Mirage Online
      Oral Testimony.................................................    17
      Prepared Statement.............................................    19

              LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

    The Honorable Sheila Jackson Lee, a Representative in Congress
      From the State of Texas........................................    25

                                    APPENDIX
                   Material Submitted for the Hearing Record

    Prepared Statement of the Honorable Howard Coble, a
      Representative in Congress From the State of North Carolina,
      and Chairman, Subcommittee on Crime, Terrorism, and Homeland
      Security.......................................................    35
    Prepared Statement of the Honorable Bob Goodlatte, a
      Representative in Congress From the State of Virginia..........    36
    Questions submitted by Rep. Bob Goodlatte to John G. Malcolm and
      William J. Hornbuckle regarding H.R. 21, the ``Unlawful
      Internet Gambling Funding Prohibition Act''....................    38
    Response, with attachments, from William J. Hornbuckle to
      questions submitted by Rep. Bob Goodlatte......................    39
    Response from John G. Malcolm to questions submitted by Rep. Bob
      Goodlatte......................................................    69
    Questions submitted by Rep. John Conyers, Jr., to John G. Malcolm
      regarding H.R. 21, the ``Unlawful Internet Gambling Funding
      Prohibition Act''..............................................    71

      UNLAWFUL INTERNET GAMBLING FUNDING PROHIBITION ACT AND THE INTERNET
                GAMBLING LICENSING AND REGULATION COMMISSION ACT

                                  ----------

                            TUESDAY, APRIL 29, 2003

                      House of Representatives,
                      Subcommittee on Crime, Terrorism,
                                  and Homeland Security
                                    Committee on the Judiciary,
                                                        Washington, DC.
        The Subcommittee met, pursuant to notice, at 2:04 p.m., in
    Room 2237, Rayburn House Office Building, Hon. Howard Coble
    [Chairman of the Subcommittee] presiding.
        Mr. Coble. Good afternoon, ladies and gentlemen. The
    Subcommittee on Crime, Terrorism, and Homeland Security will
    come to order.
        Today we are--at the outset I want to apologize to you all
    for my raspy voice. I have been plagued with a bad cold, so you
    all bear with me as we go along here.
        Today we address a serious and growing problem for our
    country: the problem of Internet gambling. It is now estimated
    that $4.2 billion is wagered over the Internet each year. This
    is an increase from $445 million just 6 years ago. There are
    currently more than 1,800 Internet gambling sites, and the
    total dollar amount wagered worldwide is expected to reach $10
    billion in the near future.
        The most troubling aspect of Internet gambling is the
    relative ease of accessibility for our Nation's children. The
    anonymous nature of the Internet makes it almost impossible to
    prevent underage gamblers from using their parents' credit
    cards, or even their own in some cases, to log on to a gambling
    website. Many Internet sites require nothing more than a name,
    address, and a credit card number. Those sites that do require
    a person to disclose his or her age make little or no effort to
    verify this information.
        Another group particularly susceptible to Internet gambling
    are Americans' problem, or addictive gamblers. The National
    Council on Problem Gambling estimates that there are currently
    11 million Americans directly suffering from gambling problems.
    High rates of financial debt, unemployment, bankruptcy,
    divorce, homelessness and suicide are all associated with
    problem gambling. Various casinos and their video game
    structure have been labeled ``the crack cocaine of gambling''.
        These facilities are open for the most part 24 hours a day,
    7 days a week, all within a person's own home. By making
    gambling more convenient, it can do nothing but make the
    problem worse.
        In addition to the social problems associated with Internet
    gambling, these Internet sites also offer organized crime
    groups a very simple and easy opportunity to launder the
    proceeds of their criminal activity. Because of the lack of
    oversight or regulations, and the high degree of anonymity,
    money laundering through Internet gambling sites is already a
    major concern to our Nation's law enforcement agencies.
        Federal law is currently unclear as to whether or not all
    types of Internet gambling is illegal. The statute that most
    directly restricts the use of the Internet to place bets is the
    Wire Act under section 1084 of title 18 of the U.S. Code.
    However, because this statute was written prior to the age of
    the Internet and the use of the wireless communication, there
    is ambiguity as to what type of bettering is or is not covered.
    Also, the types of gambling mentioned in the statute may not
    cover all the different types of gambling available on the
    Internet.
        Today we will examine two bills that attempt to address the
    problems of Internet gambling in two very different ways. H.R.
    21, the ``Unlawful Internet Gambling Funding Prohibition Act,''
    introduced by our friend from the Heartland, Congressman Jim
    Leach of Iowa, seeks to ban Internet gambling by prohibiting
    the use of financial instruments such as credit cards in any
    transaction involving illegal Internet gambling.
        H.R. 3215, the ``Combatting Illegal Gambling Reform and
    Modernization Act,'' introduced by Congressman John Conyers of
    Michigan, the Ranking Member of the full Judiciary Committee,
    seeks to establish a commission to study the feasibility of
    regulating Internet gambling rather than banning it.
        I look forward to the testimony of the witnesses here
    today, which will help this Subcommittee decide what is the
    best approach to take with regard to this very important
    subject.
        Now, prior to recognizing the distinguished gentleman from
    Virginia, the Ranking Member, I am advised that a Member of our
    Subcommittee will be celebrating a date of birth tomorrow, and
    with your permission, sir, I will extend a ``happy birthday''
    greeting to you.
        I now recognize the Ranking Member.
        Mr. Scott. Thank you, Mr. Chairman.
        You know, when I was growing up, we would always declare a
    ``birthweek.'' I didn't know that was going to extend to my
    congressional tenure. Thank you, Mr. Chairman.
        I am pleased to join you in convening this hearing
    regarding the Federal regulation of gambling over the Internet.
    I would also like to thank you and your staff for working with
    the minority on a bipartisan matter to develop the hearing and
    select witnesses for it.
        Mr. Chairman, gambling has traditionally been primarily a
    State regulatory responsibility. It should continue to be so,
    in my judgment, although it is appropriate for the Federal
    Government to have a role to assist States in the total
    regulatory scheme. The Federal Government undertook such a role
    in passing the 1961 Wire Communications Act as a way to assist
    the fight against gambling by organized crime syndicates. The
    Department of Justice contends that it can prosecute Internet
    gambling businesses under that law, but clearly, that law was
    not designed with Internet gambling in mind. So I appreciate
    the desire of my colleague, the gentleman from Iowa, to update
    the ability of the Department to address illegal gambling in
    today's context.
        However, I am concerned that his bill, H.R. 21, similar to
    the bills in the last several Congresses which attempted to
    regulate gambling, is not likely to be effective in doing so.
    When we address the real question on Internet gambling, we must
    acknowledge that the horses are literally already out of the
    gates. So let's be clear that the bill is not about prohibiting
    Internet gambling; it is only about regulating Internet
    gambling, and then only with respect to the United States'
    Internet gambling market.
        Regulating anything on the Internet is problematic, even
    when desirable. Most law enforcement is jurisdictionally
    dependent. The Internet has no jurisdiction and, as a result, I
    suspect that, even if we are successful in closing down
    business sites in the United States, or in countries that we
    can get to cooperate because of the Internet and electronic
    funds transfer, the approach of H.R. 21 will be ultimately
    ineffective. The gambling website can simply code an Internet
    gambling transaction as another type of transaction and thereby
    evade the total enforcement mechanism in the bill, or an e-cash
    or electronic payment system can relocate in another country
    and thereby evade the enforcement mechanisms in the bill.
        Furthermore, we should not overestimate the cooperation we
    might get from other countries. Presently, over 50 nations
    allow some form of gambling on line, and that number is likely
    to grow. And even if we're successful in getting cooperation
    from most countries, it would simply be increasing the profit
    opportunities for uncooperative countries, especially those
    with which the United States does not have diplomatic
    relations.
        To be effective in prosecuting illegal gambling over the
    Internet, I think we have to prosecute individuals. This bill
    does not. If we took the approach in this bill in enforcing
    drug laws, we would be prosecuting the sellers but not the
    buyers. Prosecuting individuals in Internet gambling would be
    more effective than what we're seeing in illegal drug
    prosecutions, because the technology of the Internet would be
    in the Government's favor, since the activities of illegal
    gambling would leave a trail leading directly back to the
    individual gambler. So, so long as individuals can gamble over
    the Internet with impunity, a market will be provided for them
    which the regulatory scheme in this bill will not be able to
    stop.
        Since we are not talking about prohibiting Internet
    gambling but simply regulating it, I believe there is a more
    effective regulatory approach than offered by H.R. 21. However,
    the approaches must be developed taking into account the
    technology, State policies with respect to gambling, and
    Internet gambling practices and preferences.
        This is the approach offered by H.R. 1223, the bill before
    us authored by Ranking Member of the full Committee, Mr.
    Conyers. That bill establishes a commission that would study
    the issue and make recommendations for a regulatory environment
    for Internet gambling which would be controlled by individual
    States. States do tend to prohibit individuals from gambling,
    so Internet gambling can be both effective and individualized
    in each State. Under the regulatory environment the bill
    provides for, if Nevada opts to allow Internet gambling within
    its borders, it can. If Utah does not opt to allow Internet
    gambling within its borders, it can prohibit it, and that would
    be enforceable by the Federal Government by the States that
    allow gambling, as well as by the State of Utah.
        Under such a regulatory environment, it is much more likely
    that those who choose to gamble over the Internet will do so
    through a licensed regulated entity than one operating
    illegally. First, the consumer in a State where Internet
    gambling is legal will have confidence that, if they win, they
    will be paid. And in a licensed regulatory entity, such as MGM
    Mirage.com, we would not have to worry about the licensing
    authorities in Las Vegas failing to adopt stringent controls on
    access to its website. A consumer would have no similar
    confidence in a fly-by-night offshore casino.com, so a likely
    result from licensing and regulating Internet gaming activities
    would be to drive less reputable businesses out of business,
    particularly those that are offshore.
        Another significant result is, if States choose to
    authorize Internet gambling, it can tax it. At a time when
    unauthorized Internet gambling is flourishing, and when most
    States are cash-strapped, those States that already have chosen
    to authorize regulated gambling could receive much more needed
    revenues while contributing to the control of the industry and
    protecting the gambling public.
        I believe that we should regulate Internet gambling, but we
    should do it effectively. We should not allow any single
    business sector with the sole responsibility for doing the bulk
    of the work of enforcement, whether it is the banking industry
    as in this bill, or the Internet service industry as we tried
    in prior bills. There are ways to regulate Internet gambling
    effectively, and the commission approach to develop those ways
    is the best way to come up with them.
        Again, Mr. Chairman, I thank you for working with us on
    these two bills. I look forward to hearing the testimony of the
    witnesses, and I thank you for your birthday congratulations.
        Mr. Coble. You're indeed welcome. And you still don't know
    how I came into that knowledge. I rarely have him guessing, but
    I have him guessing now.
        Folks, I believe members of the audience need to know
    something about our panelists, so I'm going to give brief
    introductory remarks prior to starting with Mr. Leach.
        Our first witness is the sponsor of H.R. 21, Representative
    James Leach. Congressman Leach has been a Member of Congress
    for 26 years and represents the 2nd District in Iowa. During
    his tenure, Congressman Leach has invested a tremendous amount
    of time and effort on the issue of Internet gambling. The
    Subcommittee looks forward to his testimony on this complex
    issue.
        Our next witness is Mr. John G. Malcolm. Mr. Malcolm is
    currently a Deputy Assistant Attorney General in the Criminal
    Division of the Department of Justice, where his duties include
    overseeing the Computer Crime and Intellectual Property
    Section, the Child Exploitation and Obscenity Section, the
    Domestic Security Section, and the Office of Special
    Investigations.
        He is an honors graduate of Columbia College and the
    Harvard School of Law. Mr. Malcolm served as a law clerk to
    Judges on both the United States District Court for the
    Northern District of Georgia, and the 11th Circuit Court of
    Appeals.
        Our third witness is Mr. Jeffrey Modisett. Mr. Modisett is
    currently counsel for the law firm of Bryan Cave, LLP, in Los
    Angeles, CA, and has recently published articles concerning the
    States' approach to on-line gambling, cyber-law, and e-
    commerce.
        An honors graduate of UCLA, Oxford University, and the Yale
    University School of Law, Mr. Modisett is also the former
    Indiana Attorney General. Mr. Modisett is the past president of
    the Family Advocacy Center, which he founded, and a former
    director of the National District Attorneys Association.
        Our final witness this afternoon is Mr. William Hornbuckle.
    Mr. Hornbuckle is president and chief operating officer of MGM
    Mirage Online, and executive vice president of marketing for
    MGM Mirage. He is a 23 year veteran of the gaming industry and
    was promoted to his current position in July, 2001.
        Mr. Hornbuckle has been serving as president and chief
    operating officer of the MGM Grand Hotel and Casino in Las
    Vegas since October, 1998. Prior to that role, he was executive
    vice president of operations for the resort.
        It's good to have all of you with us. We have written
    statements from each of the witnesses on the panel. I ask
    unanimous consent to submit them into the record in their
    entirety.
        Gentlemen, as you all have previously been told, we try to
    adhere to the 5-minute rule here, both as to you all and to
    ourselves. So when that red light illuminates into your face,
    you will know that you're skating on thin ice. So if you could
    wrap it up then.
        Mr. Leach, before you start, it's good to have you with us.
    I am a country bluegrass music aficionado, and Merle Haggard,
    who was known for years as the ``country balladeer'', once
    recorded a song entitled, ``The Kentucky Gambler.'' Has anyone
    in the audience ever heard of the song? Well, the concluding
    words in his song were these: ``...but a gambler loses much
    more than he wins.'' A sad story about a guy who abandoned his
    family because he was an addictive gambler.
        So, having said that, Mr. Leach, it's good to have you and
    the other people with us. Fire away.

      STATEMENT OF HONORABLE JAMES A. LEACH, A REPRESENTATIVE IN
                    CONGRESS FROM THE STATE OF IOWA

        Mr. Leach. Thank you very much, Mr. Chairman, Mr. Scott,
    distinguished Committee counsel. Thank you for holding his
    hearing. Your leadership on this issue is deeply appreciated.
        As I have testified previously in this Committee, gambling
    on the Internet is fast becoming one of the critical issues
    confronting thousands of American families. The financial and
    economic implications of Internet gambling may not be intuitive
    to those unfamiliar with the workings of the industry, but the
    consequences cannot be exaggerated. It is simply not good for
    the economy at large, as well as each individual gambler, but
    the economy at large, to have Americans send billions to
    overseas Internet casinos which have shady or unknown owners.
        Casino gambling, while it competes for jobs with other
    sectors of the economy, such as restaurants and the retail
    trade, also partly balances job losses elsewhere with some job
    creation. Internet gambling, on the other hand, may be the only
    sector of the economy where the case of greater efficiency is
    not altogether compelling. It reduces jobs in competing parts
    of the American economy, but creates few in itself and all, to
    date, are abroad. In other words, this is a ``jobs'' as well as
    a moral and regulatory issue.
        The very characteristics that make the Internet such a
    valuable resource are also the reasons why it has such a huge
    potential to impinge on the stability of American financial
    institutions, as well as the American family. The easy access,
    anonymity, and speed of transactions which make such positive
    contributions to the level of efficiency and cost of financial
    services. also make routine safeguards impractical and leave
    the financial services industry open to abuse. Internet
    gambling increases consumer debt, makes bankruptcy more likely,
    money laundering an easy endeavor, and identity theft a likely
    burden.
        Gambling, in general, and Internet gambling in particular,
    provide one of the most accessible platforms for money
    laundering. Money launderers tend to seek out areas where there
    is a low risk of detection by law enforcement. Internet
    gambling is a particularly attractive method to launder money
    because of the heightened level of anonymity and a virtual lack
    of governmental regulation. Nearly 80 percent of the $10
    billion in revenue generated by Internet gambling sites is
    impossible to account for, since most operators are located in
    the Caribbean and other jurisdictions with loose regulatory
    structures and limited financial reporting requirements.
        Reports from the OECD's Financial Action Task Force
    specifically point to Internet gambling as a major loophole in
    anti-money laundering regimes. The U.S. Treasury's Financial
    Crimes Enforcement Network has a special anti-money laundering
    program designed for the traditional domestic gaming industry.
    No such strategy exists for illegal gambling sites located in
    unregulated offshore jurisdictions. Given the hard work of this
    Committee, and also that of the Financial Services Committee,
    to quash the money laundering efforts of terrorists and narco
    traffickers, it would be irresponsible to leave such an
    enormous institutional loophole unplugged.
        Suggestions to legalize and regulate Internet gambling
    address none of these concerns. No regulatory system can
    prevent the social and economic ramifications of online
    gambling. This was the conclusion of the National Gambling
    Impact Study Commission report issued in 1999. This
    congressionally mandated report concluded that Internet
    gambling should be illegal at the Federal level and suggested
    prohibiting the use of financial instruments for these
    transactions, thus serving as a model for this legislation.
        I stress this point, that we have had a national commission
    on gambling, that was congressionally mandated----
        Mr. Scott. Jim, did you say it should be legal on the
    national basis, or illegal?
        Mr. Leach. No, no. Illegal.
        Mr. Scott. Illegal?
        Mr. Leach. Illegal. I'm sorry. I'm reading a little too
    quickly. I apologize.
        Mr. Scott. No, I'm just listening too slowly.
        Mr. Leach. While it's true that one can have more
    formalized prohibitions--and I would certainly favor them--it
    is not necessarily the case that it is easy to get Congress to
    adopt bigger steps, so this bill is designed to accept the law,
    whatever this Committee determines to be, and then, using the
    Banking Committee's jurisdiction, come up with an approach
    which is basically functional regulation or a functional
    deterrent to whatever laws this Committee determines are
    appropriate.
        I would simply stress that this is a functional ban. It is
    partly working today because, voluntarily, several of the major
    credit card companies have taken this direction as their own
    practice. We have already seen the Bear Stearns report that
    about half the Internet gambling profits have been reduced, and
    a number of companies are seeing some difficulties based on
    certain voluntary steps in this direction. So an assertion that
    there is no effectiveness defies the current partial steps that
    are being taken in the private sector.
        In conclusion, let me stress that at a personal level I am
    a skeptic about all forms of gambling. But each of us are
    obligated to the maximum extent possible to be respectful of
    legitimate choices made by others. Casino gambling, as it
    exists in America, is at least regulated by the State to
    protect the participants. Generally, casinos also add
    entertainment and involve elements of socialization.
        Gambling alone, on the other hand, whether using a laptop
    at home or a computer in the workplace, involves no
    entertainment or socialization element, and lacks the
    fundamental protections of law and regulation. Casino gambling,
    as it has been sanctioned in all Western democracies, has only
    been allowed to exist with comprehensive regulation. Internet
    gambling lacks such safeguards. It is a danger to the family
    and society at large. It should be ended.
        From a family perspective, the home may be considered a
    castle, but it should never be a casino.
        Thank you all very much.
        [The prepared statement of Mr. Leach follows:]

    Prepared Statement of the Honorable James A. Leach, a Representative in
                        Congress From the State of Iowa

        Mr. Chairman, thank you for holding this hearing on legislation
    addressing the epidemic problem of Internet gambling. Your leadership
    on this issue is deeply appreciated.
        As I testified previously, gambling on the Internet is fast
    becoming one of the most critical issues confronting thousands of
    American families and the social and economic implications of Internet
    gambling can no longer be ignored. The ramifications of Internet
    gambling are now showing themselves on college campuses and even
    professional athletes have admitted addiction. Approximately 15 million
    Americans are at-risk or problem gamblers, who are more likely to have
    drug addictions, alcohol dependency, serious family dysfunction, and,
    at the extreme, especially when gambling losses accumulate, a higher
    rate of suicide.
        The financial and economic implications of Internet gambling may
    not be intuitive to those unfamiliar with the workings of the industry,
    but the consequences cannot be exaggerated.
        It simply is not good for the economy at large to have Americans
    send billions to overseas Internet casinos which often have shady or
    unknown owners.
        Casino gambling, while it competes for jobs with other sectors of
    the economy, such as restaurants and the retail trade, also partly
    balances job losses elsewhere with some job creation. Internet
    gambling, on the other hand, may be the only sector of the economy
    where the case of greater efficiency is not altogether compelling. It
    reduces jobs in competing parts of the American economy, but creates
    few in itself and all, to date, are abroad. In other words, this is a
    ``jobs'' as well as a moral and regulatory issue.
        The very characteristics that make the Internet such a valuable
    resource are also the reasons why it has such a huge potential to
    impinge on the stability of American financial institutions, as well as
    the American family. The easy access, anonymity, and speed of
    transactions which make such positive contributions to the level of
    efficiency and cost of financial services also make routine safeguards
    impractical and leave the financial services industry open to abuse.
    Internet gambling increases consumer debt, makes bankruptcy more
    likely, money laundering an easy endeavor, and identity theft a likely
    burden.
        Gambling in general and Internet gambling in particular provide one
    of the most accessible platforms for money laundering. Money launderers
    tend to seek out areas where there is a low risk of detection by law
    enforcement. Internet gambling is a particularly attractive method to
    launder money because of the heightened level of anonymity and a
    virtual lack of governmental regulation. Nearly 80 percent of the $10
    billion in revenue generated by Internet gambling sites is impossible
    to account for, since most operators are located in the Caribbean and
    other jurisdiction with loose regulatory structures and limited
    financial reporting requirements.
        Reports from the OECD's Financial Action Task Force specifically
    point to Internet gambling as a major loophole in anti-money laundering
    regimes. The U.S. Treasury's Financial Crimes Enforcement Network has a
    special anti-money laundering program designed for the traditional
    domestic gaming industry. No such strategy exists for illegal gambling
    sites located in unregulated offshore jurisdictions. Given the hard
    work of this Committee, and also that of the Financial Services
    Committee, to quash the money laundering efforts of terrorists and
    narco-traffickers, it would be irresponsible to leave such an enormous
    institutional loop-hole unplugged.
        Suggestions to legalize and regulate Internet gambling address none
    of these concerns. No Internet gambling site will subject themselves to
    taxation and the cost of regulation when they can remain offshore. And
    no regulatory system can prevent the social and economic ramifications
    of online gambling. This was the conclusion of the National Gambling
    Impact Study Commission Report issued in 1999. This congressionally
    mandated report concluded that Internet gambling should be illegal at
    the federal level and suggested prohibiting the use of financial
    instruments for these transactions, thus serving as a model for this
    legislation.
        In conclusion, let me stress that at a personal level I am a
    skeptic about all forms of gambling, but each of us are obligated to
    the maximum extent possible to be respectful of legitimate choices made
    by others. Casino gambling as it exists in America is, at least,
    regulated by the State to protect the participants. Generally, casinos
    also add entertainment and involve elements of socialization. Gambling
    alone, on the other hand, whether using a laptop at home or a computer
    in the workplace, involves no entertainment or socialization element
    and lacks the fundamental protections of law and regulation. Casino
    gambling as it has been sanctioned in all Western democracies has only
    been allowed to exist with comprehensive regulation. Internet gambling
    lacks such safeguards. It is a danger to the family and society at
    large. It should be ended.
        From a family perspective, the home may be considered a castle; but
    it should never be a casino.
        Thank you.

        Mr. Coble. Thank you, Mr. Leach.
        We have been joined by the gentleman from Florida, Mr.
    Feeney, and Mr. Chabot, the gentleman from Ohio.
        Mr. Malcolm.

        STATEMENT OF JOHN G. MALCOLM, DEPUTY ASSISTANT ATTORNEY
         GENERAL, CRIMINAL DIVISION, U.S. DEPARTMENT OF JUSTICE

        Mr. Malcolm. Mr. Chairman, Members of the Subcommittee,
    thank you for inviting me to testify today. The issue before
    the Subcommittee is one of singular importance and I commend
    the Subcommittee for holding this hearing.
        I would also like to commend Congressman Leach, as well as
    Congressman Goodlatte and Senator Kyl, for their tireless
    efforts and longstanding commitment to provide law enforcement
    with additional tools to combat Internet gambling. Today, I am
    pleased to offer the views of the Department of Justice about
    Internet gambling.
        As you all know, the number of Internet gambling sites has
    increased substantially in recent years. While there were
    approximately 700 Internet gambling sites in 1999, it is
    estimated that, by the end of 2003, there will be approximately
    1,800 such sites, generating between $4.2 and $4.3 billion. In
    addition to online casino-style gambling sites, there are
    numerous offshore sports book operations that take bets both
    over the Internet and via the telephone. These developments are
    of great concern to the United States Department of Justice
    because of the potential for fraud, the opportunities they
    create for money launderers and organized criminal
    organizations, and the problems of gambling by minors and by
    compulsive gamblers, which are exacerbated by Internet
    gambling. I discuss each of these issues in greater detail in
    my written testimony.
        Additionally, most of these gambling businesses operate
    offshore in foreign jurisdictions. Many of them accept bets
    from United States citizens, which is a violation of several
    Federal laws, including sections 1084, 1952 and 1955 of title
    18, United States Code.
        The Department of Justice generally supports the efforts of
    the drafters of H.R. 21, to enable law enforcement to cut off
    the transfer of funds to and from illegal Internet gambling
    businesses.
        With respect to H.R. 1223, the Department has concerns
    about the feasibility and desirability of regulating Internet
    gambling. I have more extensive comments on H.R. 21 and H.R.
    1223 in my written testimony. Of course, I am happy to answer
    any questions you may have about those bills.
        Before concluding, I would just like to thank you again for
    inviting me to testify today. The Justice Department also
    thanks you for your support over the years, and we reaffirm our
    commitment to work with Congress to address the significant
    issue of Internet gambling.
        Thank you.
        [The prepared statement of Mr. Malcolm follows:]

                     Prepared Statement of John G. Malcolm

        Mr. Chairman and Members of the Subcommittee:
        Thank you for inviting me to testify today. The issue before this
    Subcommittee is one of singular importance, and I commend the
    Subcommittee for holding this hearing. I would also like to commend
    Congressman Leach, as well as Congressman Goodlatte and Senator Kyl,
    for their tireless efforts and longstanding commitment to provide law
    enforcement with additional tools to combat Internet gambling. Today I
    am pleased to offer the views of the Department of Justice about
    Internet gambling, including the potential for gambling by minors and
    compulsive gamblers, the potential for fraud and money laundering, the
    potential for infiltration by organized crime, and recent state
    actions. The Department of Justice generally supports the efforts of
    the drafters of H.R. 21 and S. 627 to enable law enforcement to cut off
    the transfer of funds to and from illegal Internet gambling businesses.
    With respect to H.R. 1223, the Department has concerns, which I shall
    address below, about the feasibility and desirability of regulating
    Internet gambling.
        As you all know, the number of Internet gambling sites has
    increased substantially in recent years. While there were approximately
    700 Internet gambling sites in 1999, it is estimated that by the end of
    2003, there will be approximately 1,800 such sites generating around
    $4.2 billion. In addition to on-line casino-style gambling sites, there
    are numerous off-shore sports books operations that take bets both over
    the Internet and via the telephone. These developments are of great
    concern to the United States Department of Justice, particularly
    because many of these operations are currently accepting bets from
    United States citizens, when it is illegal to do so.
        The Internet and other emerging technologies, such as interactive
    television, have made possible types of gambling that were not feasible
    a few years ago. For example, a United States citizen can now, from his
    or her home at any hour of the day or night, participate in an
    interactive Internet poker game operated by a computer located in the
    Caribbean. Indeed, a tech-savvy gambler can route his bets through
    computers located in other countries, thereby obscuring the fact that
    he is placing his bet from the United States.

                               GAMBLING BY MINORS

        On-line gambling also makes it far more difficult to prevent minors
    from gambling. Unlike traditional physical casinos and Off-Track-
    Betting parlors, the operators of gambling websites cannot look at
    their customers to assess their age and request photo identification.
    Currently, Internet gambling businesses have no reliable way of
    confirming that gamblers on their website are not minors who have
    gained access to a credit card. Although some companies are developing
    software to try to detect whether a player is old enough to gamble or
    whether that player is from a legal jurisdiction, such software has not
    been perfected and would, of course, be subject to the same types of
    flaws and vulnerabilities that could be exploited by hackers.

                              COMPULSIVE GAMBLING

        Unlike on-site gambling, on-line gambling is readily available to
    anyone with an Internet connection at all hours of the day or night.
    This presents a particular danger for compulsive gamblers. As was
    recently pointed out by the American Psychiatric Society: ``Internet
    gambling, unlike many other forms of gambling activity, is a solitary
    activity, which makes it even more dangerous; people can gamble
    uninterrupted and undetected for unlimited periods of time.'' Indeed,
    the problems associated with pathological and problem gamblers, a
    frighteningly-large percentage of which are young people, are well-
    established and can be measured in the ruined lives of both the
    gamblers themselves and their families.

                              POTENTIAL FOR FRAUD

        Although there are certainly legitimate companies that either are
    operating or want to operate on-line casinos in an honest manner, the
    potential for fraud connected with casinos and bookmaking operations in
    the virtual world is far greater than in the physical realm. On-line
    casinos and bookmaking establishments operate in many countries where
    effective regulation and law enforcement is minimal or non-existent.
    Start-up costs are relatively low, and cheap servers and
    unsophisticated software are readily-available. Like scam telemarketing
    operations, on-line gambling establishments appear and disappear with
    regularity, collecting from losers and not paying winners, and with
    little fear of being apprehended and prosecuted.
        Through slight alterations of the software, unscrupulous gambling
    operations can manipulate the odds in their favor, make unauthorized
    credit card charges to the accounts of unsuspecting gamblers, or alter
    their own accounts to skim money. There is also a danger that hackers
    can manipulate the online games in their favor or can steal credit card
    or other information about other gamblers using the site.

                         POTENTIAL FOR ORGANIZED CRIME

        Additionally, the Department of Justice is concerned about the
    potential involvement of organized crime in Internet gambling.
    Traditionally, gambling has been one of the staple activities in which
    organized crime has been involved, and many indictments brought against
    organized crime members have included gambling charges. We have now
    seen evidence that organized crime is moving into Internet gambling.

                     INTERNET GAMBLING VIOLATES FEDERAL LAW

        Most of these gambling businesses operate offshore in foreign
    jurisdictions. If they are accepting bets or wagers from customers
    located in the United States, then these businesses are violating
    federal laws, including Sections 1084, 1952, and 1955 of Title 18,
    United States Code. While the United States can indict these companies
    or the individuals operating these companies, it may be difficult to
    bring them to trial in the United States.

                     MONEY LAUNDERING AND INTERNET GAMBLING

        Another major concern that the Department of Justice has about on-
    line gambling is that such businesses provide criminals with an easy
    and excellent vehicle for money laundering. This is due in large part
    to the cash-intensive nature of the industry, the fact that most
    Internet gambling sites are located offshore, and the volume, speed,
    and international reach of Internet transactions.
        It is a fact that money launderers have to go to financial
    institutions to conceal their illegal funds and to recycle those funds
    back into the economy for their use. Because criminals are well aware
    of the fact that banks are now subject to greater scrutiny and
    regulation, they have--not surprisingly--turned to other non-bank
    financial institutions to launder their money. On-line casinos are a
    particularly inviting target because, in addition to using the gambling
    that on-line casinos offer as a way to hide or transfer money, on-line
    casinos offer a broad array of financial services to their customers,
    such as providing credit accounts, fund transmittal services, check
    cashing services, and currency exchange services.
        Individuals wanting to launder ill-gotten gains through an on-line
    casino can do so in a variety of ways. For example, a customer could
    establish an account with a casino using illegally-derived proceeds,
    conduct a minimal amount of betting or engage in offsetting bets with
    an overseas confederate, and then request repayment from the casino,
    thereby providing a new ``source'' of the funds. If a gambler wants to
    transfer money to an inside source in the casino, who may be located in
    another country, he can just play until he loses the requisite amount.
    Similarly, if an insider wants to transfer money to the gambler,
    perhaps as payment for some illicit activity, he can rig the game so
    the bettor wins.
        The anonymous nature of the Internet and the use of encryption make
    it difficult to trace the transactions. Further, the gambling business
    may not maintain the transaction records, in which case tracing may be
    impossible. While regulators in the United States can visit physical
    casinos, observe their operations, and examine their books and records
    to ensure compliance with regulations, this is far more difficult, if
    not impossible, with virtual casinos.

                             COMMENTS ON H.R. 1223

        If enacted, H.R. 1223 would establish a Commission to study the
    existing legal framework governing Internet gambling and the issues
    involved with the licensing and regulation of Internet gambling. Among
    the topics to be studied, the Commission would review existing law,
    assess the impact of Internet gambling on problem gamblers and minors,
    assess the susceptibility of Internet gambling to money laundering, and
    study the potential of regulatory measures to minimize any adverse
    problems. As I previously stated, the Department has concerns about
    these and other issues as they relate to Internet gambling. At this
    time, the Department believes that Internet gambling should be
    prohibited for many of the reasons I have mentioned, as well as others
    cited by the Congressionally-created National Gambling Impact Study
    Commission in its 1999 Report recommending that Internet gambling be
    prohibited. Moreover, given differences in state law on the issue of
    gambling in general, and given the fact that Internet gamblers could
    come from any state, the Department also has concerns that such
    regulation would need to ensure that the laws of all states were taken
    into consideration when analyzing this issue.
        While the Department would not necessarily oppose per se a
    Commission that would revisit these issues and make recommendations on
    the feasibility of regulating Internet gambling, H.R. 1223 provides
    that this Commission shall issue proposed changes to Federal law and
    regulations to provide for the licensing and regulation of Internet
    gambling in the United States. This requirement appears to preordain
    the outcome of the Commission's study and not permit this Commission to
    reach the same conclusion that the National Gambling Impact Study
    Commission reached just four years ago, to wit, that Internet gambling
    be prohibited and not regulated.
        Our review of H.R. 1223 is continuing, and we may have additional
    comments at a later date. But if Congress elects to consider
    legislation, such as H.R. 1223, that could, in theory, eventually lead
    to the legalization of Internet gambling, it will be very important to
    bear in mind and emphasize the debilitating and potentially disastrous
    consequences of such a step that I noted previously--namely, the
    problems of underage gambling, addictive gambling, and fraud, as well
    as the possibility of organized crime involvement.
        Even if H.R. 1223 is enacted, that should not preclude action on
    H.R. 21 and S. 627, since these bills apply only to ``unlawful Internet
    gambling'' and would not be applicable to lawful Internet gambling.
    Given that illegal gambling exists in the physical world despite the
    availability of legalized forms of gambling in many states, there is
    every reason to believe that unlawful gambling would continue to exist
    in the cyber world even if the United States were to regulate Internet
    gambling.

                              COMMENTS ON H.R. 21

        The Department has several comments on H.R. 21. First, the Justice
    Department believes that H.R. 21 should apply to all means of wagering
    that derive from the Internet. Many offshore sports books accept wagers
    both over the telephone and over the Internet. As drafted, H.R. 21 is
    only applicable to Internet gambling, so an otherwise illegal site
    could avoid the bill's prohibitions by directing that wagers be placed
    over the phone rather than via the Internet. The bill should apply to
    all unlawful Internet gambling regardless of the communications medium
    being used to place bets.
        Second, the Justice Department opposes provisions of H.R. 21 that
    weaken or alter existing federal law or standards. The Justice
    Department recognizes the important role that federal regulators play
    in regulating federally-insured financial institutions and is currently
    discussing with the Treasury Department procedures whereby injunctive
    relief would only be sought in full coordination with the appropriate
    federal financial regulator. Nonetheless, the Justice Department
    believes that Rule 65 of the Federal Rules of Civil Procedure should be
    the sole standard used by courts in considering whether to grant
    injunctive relief. Section 3(c)(5)(B) of H.R. 21 sets forth additional
    factors that the district court must consider in determining whether to
    grant injunctive relief against certain entities, including credit card
    issuers and financial institutions. Rule 65 is the well-established
    standard used in federal courts throughout the country in all cases in
    which a party is seeking injunctive relief, and the Department opposes
    any attempt to alter existing federal standards for the benefit of
    specific entities. Moreover, the Department believes that, under a
    standard Rule 65 analysis, a district court would already have the
    discretion to consider the listed factors.
        For the same reason, the Justice Department opposes Section
    3(c)(4)(B) of H.R. 21, which provides, in essence, that interactive
    service providers that are not liable under H.R. 21 shall not be liable
    under Section 1084 of Title 18, United States Code, unless the ISP has
    actual knowledge of the bets and wagers and owns, controls, operates,
    manages, supervises, or directs a website at which unlawful bets or
    wagers are offered, placed, or received. This provision constructively
    amends Section 1084, an existing federal criminal statute, and weakens
    its application by imposing a far higher standard of liability than
    traditional aiding and abetting liability, which applies to everyone
    else who must comply with the law. While the Department does not
    believe that ISPs should be singled out for particularly harsh
    treatment (and our ``track record'' bears this out), we do not believe
    that ISPs should be singled out for uniquely favorable treatment
    either.
        Third, the Justice Department has other concerns about how the bill
    treats ISPs, particularly as it pertains to the removal of Internet
    gambling websites and the cessation of ancillary services connected to
    those sites. We are, however, working diligently with representatives
    from several prominent interactive service providers.

                                   CONCLUSION

        On behalf of the Department of Justice, I want to thank you again
    for inviting me to testify today. We thank you for your support over
    the years and reaffirm our commitment to work with Congress to address
    the significant issue of Internet gambling. I will be happy to answer
    any questions that you might have.

        Mr. Coble. Mr. Malcolm, your eyes weren't even close to
    being fixated. You finished well ahead of the red light and I
    commend you for that.
        We have been joined by the gentlelady from Texas, Miss
    Jackson Lee. It's good to have you with us, Sheila.
        Thank you, Mr. Malcolm.
        Mr. Modisett, am I pronouncing your surname correctly?
        Mr. Modisett. You are, thank you.
        Mr. Coble. It's good to have you with us, Mr. Modisett.

     STATEMENT OF JEFFREY MODISETT, COUNSEL, BRYAN CAVE, LLP, AND
               FORMER ATTORNEY GENERAL, STATE OF INDIANA

        Mr. Modisett. Thanks very much.
        Mr. Chairman and Members of the Committee, thank you for
    the opportunity to testify today on this complex issue.
        I have come to this issue today with both a law enforcement
    and technology background. As you noted, I have been a Federal
    prosecutor, a D.A., a State attorney general, but I have also
    worked in Silicon Valley and currently represent some high tech
    clients. The views I express today are my own.
        As Indiana Attorney General, I issued an official opinion
    on Internet gaming. In that opinion, I wrote that, under
    Indiana law, only gambling that is specifically authorized by
    statute is legal. Since there are no references to Internet
    gaming in the Indiana code, it's not legal.
        But the question of whether the Federal Government should
    proactively attempt to prohibit all Internet gaming
    preemptively is a different question. My experience convinces
    me that the best antidote to an unregulated, offshore Internet
    gambling industry is a fully licensed, highly regulated,
    onshore Internet gambling industry based on strict American
    standards and priorities. I would further suggest that the
    enforcement mechanism proposed in H.R. 21, while well intended,
    is likely to be ineffective, counter-productive, and prone to
    unintended consequences.
        H.R. 21 seeks to have the financial institutions operating
    in America prevent Americans from using financial instruments
    to place online wagers. I'm aware that one of the ostensible
    reasons for this effort is the fear that Internet gambling will
    provide an avenue for money laundering. Frankly, I find this
    assertion strange, given that the majority of Internet wagers
    are placed by credit cards, and credit card transactions are
    almost always transparent.
        I don't believe that H.R. 21 will stop Americans from
    gambling on the Internet. I do believe it will change the
    manner in which they do so. If Internet gamblers cannot use
    their credit cards, many and perhaps most of them will instead
    opt for e-cash accounts, electronic fund transfers, wire
    transfers to accounts at offshore banks, and other less visible
    means to settle their accounts.
        It is impossible to predict, but none of the foregoing
    financial transactions are particularly difficult to execute.
    The added inconvenience might stop a few people who are rare or
    occasional bettors, but it won't stop experienced gamblers,
    including problem gamblers.
        What the legislation will do, however, is potentially
    worsen the very problem it sets out to solve. To the extent
    that there's a potential for money laundering in the Internet
    gaming space--and the financial industry itself believes that
    this potential is small, according to the GAO--creating a
    market for less transparent payment solutions will presumably
    make illicit activities, including money laundering,
    substantially worse. Creating a market for blind e-cash is not
    the way to stop money laundering. The way to stop it is to make
    sure Internet gaming takes place in highly regulated,
    supervisory regimes.
        I don't want American financial institutions to act as our
    police on the Internet. They will err on the side of over-
    inclusion and prohibit legal transactions out of an
    overabundance of caution, as they already have. We have not
    regulated Internet activity so directly before now, and now, at
    a time when the current law is unsettled, is not the time to
    begin.
        Admittedly, the commission envisioned by H.R. 1223 would
    have a difficult job, but if it's achieved, the results would
    solve many of the problems that the prohibitionists sincerely
    want to solve. In a licensed environment, it is possible to
    verify identity online, using pin numbers and out-of-session
    contacts. This and other technology could be used to help
    ensure no minors gamble on the Internet.
        Because all Internet gaming transactions are recorded, it
    is actually easier to track problem gamblers in the cyber world
    than in the bricks and mortar casino. Self-exclusion and preset
    loss limits are more easily accomplished.
        Another benefit would be economic. Instead of flowing
    offshore, the money wagered on the Internet would remain in the
    U.S. and help build the economies of the regulating States.
        Mr. Chairman, when Evan Bayh became Governor of Indiana, he
    did not support gambling, but the people spoke and voted for a
    repeal of our constitutional ban on gambling. Governor Bayh
    concluded that if gambling was to be legal in Indiana, he would
    appoint people of unquestionable integrity and with law
    enforcement background to head up the regulatory effort. It
    worked. The Federal Government should also acknowledge now that
    Internet gaming will continue to grow in America, and we should
    appoint tough, fair-minded people with integrity to develop
    model approaches and help establish international standards for
    Internet gaming regulation.
        In summary, Mr. Chairman, I don't believe the choice before
    the Subcommittee is whether or not there will be Internet
    gambling in the U.S. There will be. The question is what sort
    of Internet gambling there will be. Under H.R. 21, it will be
    an unlicensed, unregulated industry, where the Federal and
    State governments afford no protection, and with no economic
    benefit or tax revenue accruing to the U.S.
        Under H.R. 1223, there is the potential for a tightly
    regulated industry, overseen by Americans of integrity,
    bolstered by laws and regulations that provide substantial
    protections for minors and problem gamblers, remove the
    potential for money laundering, and provide economic benefit
    and tax revenue in the U.S.
        Once again, thank you for the opportunity to testify. I
    look forward to the questions.
        [The prepared statement of Mr. Modisett follows:]

                   Prepared Statement of Jeffrey A. Modisett

        Mr. Chairman and members of the Committee, let me begin by thanking
    you for the opportunity to testify today on this complex issue.
        It is difficult to discuss my opinion on the topics at issue today
    without putting it in the context of my personal experience and so,
    with your permission, I would like to briefly mention the more relevant
    part of my background.
        Upon graduation from Yale Law School and following a clerkship with
    a federal judge, I began my career as an Assistant U.S. Attorney in Los
    Angeles. In time, I became the Deputy Chief of the Public Corruption
    and Government Fraud Unit, specializing in the prosecution of
    violations of the U.S. Export Control laws. In 1988, I returned to my
    home state of Indiana to work for Evan Bayh (now Senator Bayh), first
    on his successful gubernatorial campaign and then as his Executive
    Assistant for Public Safety. In this capacity, I served as Governor
    Bayh's liaison to the State Police, Department of Correction, and
    National Guard, as well as headed up the state's efforts in the war on
    drugs. In 1990, I was elected Prosecuting Attorney for Marion County,
    Indiana, which is the City of Indianapolis. In 1996, I was elected
    state attorney general.
        As attorney general, I issued official opinions, including one on
    Internet gaming. That Official Opinion, by the way, concluded that
    Internet gaming is illegal in Indiana. At the Governor's request, I
    also chaired the state's Gambling Impact Study Commission. The
    Commission met for two years and issued a lengthy report in December
    1999.
        Today, the committee has before it two bills, H.R. 21 and H.R.
    1223, which pursue two very different approaches to Internet gambling.
    To oversimplify, H.R. 21 seeks to enforce a prohibition on Internet
    gambling, while H.R. 1223 seeks to create a commission to determine how
    states and the federal government might work together to license and
    regulate Internet gaming. Personally, I believe that H.R. 21 has great
    surface appeal, especially (of course) for those who oppose gambling in
    all forms. However, it is my opinion that H.R. 1223 is the preferable
    approach; the reasons for this will be the focus of my testimony.
        Internet gambling raises many thorny issues. There are the social,
    fiscal, and economic impacts of all legalized gambling--which were the
    focus of our two-year study in Indiana. There is a question of
    political philosophy, that is, how much should the government do to
    protect people from themselves, and to what extent the freedoms of the
    many should be restricted to protect the vulnerabilities of the few.
    There is the perplexing question of how to apply the varying state and
    federal laws and regulations to transactions that are trans-
    jurisdictional by their very nature. Finally, there are more nuanced
    questions about the differences among sportsbook, casino-style,
    lottery, pari-mutuel and other forms of gaming, and how the law should
    treat each of these.
        In dealing with all of these things, there are a few points upon
    which I believe we all agree. I believe we all seek to minimize the
    adverse consequences that can accompany gambling--we must do all we can
    to prevent gambling by minors, we must be vigilant to identify
    pathological gambling and have the tools and resources for dealing with
    it when we find it, and we must investigate the potential for money
    laundering. I also think we all agree that most Americans today have
    the option to gamble if they so choose--only three states prohibit all
    gambling, and even in those states, illegal gambling is an option.
    There is no legal sports betting outside of Nevada, and yet there is
    plenty of sports betting across the country. And, I think we can all
    agree that Americans who want to gamble on the Internet are almost
    certainly going to be able to do so--they can today, and they will be
    able to do so in the future. Unless the federal government wants to
    take draconian steps that would adversely affect both the Internet and
    personal privacy, people who want to bet on the Internet will be able
    to do so.
        As I mentioned earlier, as Indiana Attorney General, I issued an
    Official Opinion, which still has precedential authority in Indiana. In
    that Opinion, I wrote that under Indiana law only gambling that is
    specifically authorized by statute is legal. Since there are no
    references to Internet gaming in the Indiana Code, it is not legal--
    even though gambling on riverboats, on horse races, and by lotteries
    are explicitly permitted in some fashion. I also warned in that Opinion
    that many Hoosiers were likely gambling over the Internet anyway, and
    that therefore parents especially should be mindful of how easy it is
    to gamble on-line. This Opinion was widely interpreted as calling
    prospectively for the outright prohibition of gambling on the Internet,
    which was not accurate. As attorney general, I had an obligation to
    advise my constituents on Indiana law as it then existed. But my
    Opinion, as reinforced by my service on the state Gambling Impact Study
    Commission and other experiences, was and is more complicated and
    nuanced than the position advanced by the prohibitionists.
        I submit that the best antidote to an unregulated offshore Internet
    gambling industry is a fully-licensed, highly-regulated on-shore
    Internet gambling industry based on strict American standards and
    priorities. I would further suggest that the enforcement mechanism
    proposed in Congressman Leach's bill--while well-intended--is likely to
    be ineffective, counter-productive, and prone to unintended
    consequences.

                          PROBLEMS WITH THE LEACH BILL

        H.R. 21 seeks to have the financial institutions operating in
    America prevent Americans from using financial instruments to place on-
    line wagers. It would have the Department of the Treasury adopt
    regulations aimed at blocking such wagers, and would empower state and
    local law enforcement to seek injunctions to require financial
    institutions to take additional enforcement steps.
        I am aware that one of the ostensible reasons for this effort is a
    fear that Internet gambling will provide an avenue for money
    laundering. Frankly, I find this assertion strange, given that the
    majority of Internet wagers are placed by credit cards, and credit card
    transactions are almost always transparent. I do not believe that the
    Leach bill will stop Americans from gambling on the Internet; however,
    I do believe it will change the manner in which they do so.
        If Internet gamblers cannot use their credit cards, many (perhaps
    most) of them will instead opt for e-cash accounts, electronic funds
    transfers, wire transfers to accounts at offshore banks, and other less
    visible means to settle their accounts. Presumably, the bills' sponsors
    proceed from the assumption that added inconvenience will dissuade many
    or most gamblers from betting on-line. It is impossible to predict, but
    none of the foregoing financial transactions are particularly difficult
    to execute. The added inconvenience might stop a few people who are
    rare or only occasional bettors. But it will certainly not stop
    experienced gamblers, including problem gamblers.
        What this legislation will do, however, is potentially worsen the
    very problem that it sets out to solve. To the extent that there is a
    potential for money laundering in the Internet gaming space, creating a
    market for less transparent payment solutions will presumably make
    illicit activities, including money laundering, substantially worse.
    The obvious response to the Leach bill by the offshore industry will be
    to create payment solutions that U.S. law enforcement and U.S. banks
    cannot easily ``see''--that is, their transactions will be harder to
    trace. Creating a market for blind e-cash is not the way to stop money
    laundering.

                         SOLUTIONS IN THE CONYERS BILL

        Admittedly, the commission envisioned by H.R. 1223 would have a
    difficult job. The members would have to determine how best to preserve
    state prerogatives in an Interstate medium. They would have to provide
    guidance on which regulations will keep minors and pathological
    gamblers from betting on-line, at least affording the same level of
    protections as exist in land-based casinos. The would have to recommend
    means to protect against money laundering. They would have to ensure
    the fairness of games and ensure that winnings are paid out. Finally,
    they would have to figure out how to appropriately tax the proceeds of
    Internet wagers.
        But if this is achieved, the results would solve many of the
    problems that the prohibitionists sincerely want to solve. In a
    licensed environment, it is possible to verify identity on-line using
    PIN numbers and out-of-session contacts. This and other technology
    could be used to help ensure no minors gamble on the Internet. Because
    all Internet gaming transactions are recorded, it is actually easier to
    track problem gamblers in the cyberworld than in a brick-and-mortar
    casino. Self-exclusion and pre-set loss limits are more easily
    accomplished.
        Another benefit would be economic--instead of flowing offshore, the
    money wagered on the Internet would remain in the U.S. and help build
    the economies of the regulating states. One may oppose gambling for
    various reasons, but it is undeniable that local economies have
    benefited from gambling and state and local governments have gained
    revenues from it. States could also collect taxes on Internet gambling
    that they are losing today (from both casinos and bettors); this would
    help with the substantial budget shortfalls most states now face. I
    would not propose Internet gaming as a way of fixing state deficits,
    but I would suggest that the revenue generated from American bettors in
    cyberspace should help the United States and not Netherland Antilles or
    the Grand Cayman Islands.
        I should be clear: I most certainly am not an advocate of H.R. 1223
    for economic reasons. I think there are better ways for government to
    improve people's lives economically. But I do think it is short-sighted
    to think that we can have any significant impact on such a huge
    industry as Internet gaming by convincing ourselves that we can stop
    offshore cybergaming at the border. Instead, and most importantly, we
    should minimize and marginalize the offshore Internet gaming industry
    by developing a fully-licensed, highly-regulated industry in the U.S.
    We should use the marketplace to ``suck all of the oxygen'' out of the
    offshore industry. U.S. customers prefer U.S. brands and U.S. companies
    would quickly dominate the market. In terms of the U.S. market, much of
    the offshore industry would probably give up entirely and shift their
    focus from the U.S. to other countries where they might have a better
    chance of competing successfully. In the meantime, U.S. companies would
    set the standard for fairness and honesty because they would be
    operating under a fully transparent regulatory regime.
        In fact, dozens of countries have already begun the process of
    licensing and regulating Internet gambling--most notably the United
    Kingdom. The U.K.'s licensing and regulation regime will be complete
    soon, and Australia, Denmark and other countries have legalized it as
    well. We can benefit from their learning process and improve upon it.
        Mr. Chairman, when Evan Bayh became Governor of Indiana in 1989, he
    did not support gambling, but the people spoke and voted for a repeal
    of our Constitutional ban on gambling. Soon, lawmakers passed a state
    lottery followed by riverboat gambling. Governor Bayh concluded that if
    gambling was to be legal in Indiana, he would appoint people of
    unquestionable integrity to head up the regulatory effort. He appointed
    a federal prosecutor as the Executive Director of the state gaming
    commission and the commission passed tough regulations and made clear
    from the outset that tough enforcement would be used against any law
    violators. As a result, we had a remarkably clean operation from Day
    One. The federal government should also acknowledge now that Internet
    gaming will continue to grow in America and we should appoint tough,
    fair-minded people with integrity to develop model approaches and help
    establish international standards for Internet gaming regulation.
        In summary, I do not believe that the choice before this
    subcommittee is whether or not there will be Internet gambling in the
    U.S.--there most certainly will be. The question is what sort of
    Internet gambling there will be. Under H.R. 21, it will be an
    unlicensed, unregulated industry where the federal and state
    governments afford no protection to players, to minors or to problem
    gamblers, and it will be funded by less-than-transparent transactions,
    with no economic benefit or tax revenue accruing to the U.S. Under H.R.
    1223, there is the potential for a tightly-regulated industry overseen
    by Americans of integrity bolstered by laws and regulations that
    provide substantial protections for minors and problem gamblers, remove
    any potential for money laundering, and provide economic benefit and
    tax revenue in the United States.
        Once again, I thank you for the opportunity to testify, and I look
    forward to the question and answer session.

        Mr. Coble. Thank you, Mr. Modisett. I appreciate that.
        Mr. Hornbuckle.

        STATEMENT OF WILLIAM J. HORNBUCKLE, PRESIDENT AND CHIEF
                  OPERATING OFFICER, MGM MIRAGE ONLINE

        Mr. Hornbuckle. Thank you, Mr. Chairman.
        Mr. Chairman, distinguished Members of the Committee, thank
    you for inviting me today to testify about the MGM MIRAGE
    position on Internet gaming.
        I am Bill Hornbuckle, President and Chief Operating Officer
    of MGM MIRAGE Online, a wholly owned subsidiary of MGM MIRAGE,
    with head offices in the Isle of Man and Las Vegas, NV.
        MGM MIRAGE is one of the world's leading and most respected
    entertainment, hotel, and gaming companies that owns and
    operates 15 casino resorts located in Nevada, Mississippi, and
    Michigan. We employ more than 43,000 men and women, we manage
    $10 billion in assets, and generate over $4 billion in revenue
    annually.
        Since all of our casinos operate under privileged gaming
    licenses, we clearly understood what was at stake for our
    company and the industry when we decided to pursue online
    gaming and seek the appropriate licensing. In September of
    2001, MGM MIRAGE was awarded one of three online gaming
    licenses from the Isle of Man. Our site went live in September
    of 2002 and has been accepting wagers from a small number of
    Western European countries.
        I am here to testify today in opposition of H.R. 21. Given
    the need to be brief, and the extensive nature of this subject,
    I have made an additional submission of supplemental material
    that cover the interactive gaming market, operations,
    regulations, and anti-money laundering code that govern our
    activity. While this material is voluminous--and I do apologize
    for that--I thought it important to share with all stakeholders
    before any legislation was passed.
        My message today centers around the following three basic
    premises:
        Premise one. H.R. 21 will not stop Internet gaming in the
    United States. We strongly suggest that prohibition in the
    United States has a long list of failures associated with it.
    Any attempt of prohibiting activity on the Internet, gaming or
    otherwise, will unfortunately suffer a similar fate. We see
    this activity as ubiquitous and impossible to control from an
    end-user perspective, with long-term attempts to do so as
    futile.
        The commercial reality in the United States is that every
    major financial institution has ceased taking credit and debit
    card transactions for online gaming. Despite the banking
    industry's preemptive move last spring, the recent General
    Accounting Office report stated that the online gaming industry
    would grow to $4.2 billion in 2003, at a growth rate of 20
    percent. Nothing proposed in H.R. 21 will stop that growth.
    This bill will have limited impact on a very resilient
    industry.
        Bets from America are prohibited on the MGM MIRAGE site;
    yet, without any promotion, more than 60 percent of all
    registration attempts are from U.S. citizens, none of which
    have made it through our rigorous player protection system.
    America is playing online. They are now simply doing it
    offshore in unregulated markets.
        Premise number two: the law of unintended consequences of
    H.R. 21 is in direct contrast with the things it seeks to stop.
    The bill would push offshore all regulatory and probity issues
    of a product that is a click away from 110 million Internet
    users in America. H.R. 21 will do nothing to protect these
    consumers.
        State gaming regulatory bodies and Federal law enforcement
    agencies, which have been effective in the past in controlling
    gaming, will be prevented from regulating an activity that
    remains a click away. Further, by eliminating all regulated and
    credible financial institutions, you have encouraged an e-
    commerce market that is ripe for money laundering.
        Premise three: you can properly regulate online gaming.
    Unlike just a couple of years ago, the tools and business
    methodology exist today to effectively regulate this industry.
    The support material we have provided highlights that the four
    key issues most commonly associated with online gaming--
    jurisdictional control, age verification, responsible gaming,
    and money laundering--can be properly administered.
        Although no singular technology solution is perfect, MGM
    MIRAGE, through our geo-verification module, has been able to
    leverage database queries on customer location, residence, age
    and fraud detection. After several thousand registration trials
    and numerous attempts by regulators through State controlled
    testing labs, we believe we have successfully blocked all
    inquiries from nonviable jurisdictions and users who are
    underage.
        We urge you to consider the merits of H.R. 1223, which
    calls for an Internet Gambling Licensing and Regulatory Study
    Commission. Only through research and study can sound and
    effective legislation be drafted, passed and enforced. In order
    to determine the best way to protect the public's interest, we
    are strongly suggesting that further study needs to be
    completed on this complex subject before any law is enacted
    upon.
        The public, which clearly enjoys this activity, is
    deserving of proper protections from operators who are held
    only to the highest standards. The debate should not center on
    how do we prohibit online gaming, but rather, now that online
    gaming is in American homes to stay, how do we effectively
    regulate and control it. This activity simply cannot be
    legislated away.
        Again, I thank you for allowing me to testify. I would be
    pleased to answer any questions you may have on this matter
    today or in the future.
        [The prepared statement of Mr. Hornbuckle follows:]

                  Prepared Statement of William J. Hornbuckle

        Mr. Chairman, distinguished members of the Committee, thank you for
    inviting me to testify today about the MGM MIRAGE position on Internet
    gaming.
        I am Bill Hornbuckle, President and Chief Operating Officer of MGM
    MIRAGE Online, a wholly owned subsidiary of MGM MIRAGE, with head
    offices in the Isle of Man and Las Vegas, Nevada.
        MGM MIRAGE is one of the world's leading and most respected
    entertainment, hotel, and gaming companies that owns and operates 15
    casino resorts located in Nevada, Mississippi, and Michigan. We
    employee more than 43,000 men and women, manage 10 billion dollars in
    assets and generate over 4 billion dollars in operating revenues
    annually.
        Since all of our casinos operate under privileged gaming licenses,
    we clearly understood what was at stake for our company and the
    industry when we decided to pursue online gaming and seek appropriate
    licensing. In September of 2001, MGM MIRAGE was awarded one of the
    first three online gaming licenses from the Isle of Man. Our site went
    live in September of 2002 and has been accepting wagers from a small
    number of Western European countries.
        I am here to testify today in opposition of H.R. 21.
        Given the need to be brief and the extensive nature of this
    subject, I have made an additional submission of supplemental material
    that cover the interactive gaming market, operations, regulations, and
    anti-money laundering code that govern our activity. While this
    material is voluminous, I thought it important to share with all
    stakeholders before any legislation was passed.
        My message today centers around the following three basic premises:

    Premise 1.  H.R. 21 will not stop Internet gaming in the United States.
        We strongly suggest that prohibition in the United States has a
    long list of failures associated with it. Any attempt of prohibiting
    activity on the Internet, gaming or otherwise will unfortunately suffer
    a similar fate.
        We see this activity as ubiquitous and impossible to control from
    end-user perspective, with long-term attempts to do so as futile.
        The commercial reality in the United States is that every major
    financial institution has ceased taking credit and debit card
    transaction for online gaming. Despite the banking industry's
    preemptive move last spring, the recent General Accounting Office
    report stated that the online gaming industry would continue to grow to
    4.2 billion dollars in 2003 at a growth rate of 20 percent.
        Nothing proposed in H.R. 21 will stop that growth. This bill will
    have limited impact on a very resilient industry.
        Bets from America are prohibited on the MGM MIRAGE site, yet
    without any promotion more than 60 percent of all registration attempts
    are from U.S. citizens.
        America is playing online; they are now simply doing it offshore in
    unregulated markets.

    Premise 2.  The law of unintended consequences of H.R. 21 is in direct
            contrast with the things it seeks to stop.
        The bill would push offshore all regulatory and probity issues of a
    product that is a click away from 110 million Internet users in
    America. H.R. 21 will do nothing to protect these consumers.
        State gaming regulatory bodies and federal law enforcement
    agencies, which have been effective in the past in controlling gaming
    will be eliminated from regulating an activity that remains a click
    away.
        Further, by eliminating all regulated and credible financial
    institutions, you have encouraged an e-commerce market that is ripe for
    money laundering.

    Premise 3.  You can properly regulate online gaming.
        The tools and business methodology exist today to regulate this
    industry. The support material we have provided highlights that the
    four key issues most commonly associated with online gaming;
    jurisdictional control, age verification, responsible gaming, and money
    laundering can be properly administered.
        Although no singular technology solution is perfect, MGM MIRAGE
    through our geo-verification module has been able to leverage database
    queries on customer location, residence, age and fraud detection. After
    several thousand registration trials and numerous attempts by
    regulators through state controlled testing labs, we believe we have
    successfully blocked all inquiries from non-viable jurisdictions and
    users who are underage.
        We urge you to consider the merits of H.R. 1223, which calls for an
    Internet Gambling Licensing and Regulatory Study Commission. Only
    through research and study can sound and effective legislation be
    drafted, passed, and enforced.
        We are strongly suggesting today that further study needs to be
    completed on this complex subject before any law is enacted upon.
        The debate, should not center on how do we prohibit online gaming,
    but rather now that online gaming is in American homes to stay, how do
    we effectively regulate and control it.
        This activity simply cannot be legislated away.
        Thank you again for allowing me to testify today. I again would
    encourage you to review the material submitted. I would be pleased to
    answer any questions you may have on this matter today or in the
    future.

        Mr. Coble. Gentlemen, the Members of the Subcommittee thank
    you, express our thanks to each of you, for this contribution.
    Let me start with Mr. Malcolm.
        Mr. Malcolm, some have said that the way H.R. 21 is
    drafted, it could be interpreted as a weakening of the Wire
    Act. Do you agree with this statement (a), and could you give
    us an example of how this could weaken that statute?
        Mr. Malcolm. Certainly, Mr. Chairman.
        It weakens it in a couple of rather subtle ways. The main
    one perhaps deals with section 3(c)(4)(B) of the bill, which I
    would contend presents a carve out for Internet service
    providers for liability under section 1084. That section
    essentially says that before an ISP can be held liable under
    the Wire Act, one must prove a violation of this law and, in
    addition to that, one would have to prove that the ISP not only
    had knowledge of the bets or wagers being placed, but in
    addition to that, also had to own, operate or control the
    gambling website in question.
        That increases the quantum of proof that the Government
    would have to offer against an ISP under 1084, well above that
    which would be established under an aiding and abetting theory.
    For example, if an ISP were taking money for advertising for an
    Internet gambling site, clearly connecting supply and demand,
    with knowledge that that is what they were doing, even if you
    put the ISP on notice, and even though they were clearly
    facilitating this gambling activity, they would not longer
    violate 1084. They would say well, we have knowledge of the bet
    or wager, but we don't own, control or supervise the Internet
    gambling website. Therefore, they would be carved out of 1084.
        There are some other brief anomalies dealing with the
    definitional sections between this section and 1084, but we can
    deal with the staff on that.
        Mr. Coble. All right. Thank you, Mr. Malcolm.
        Mr. Hornbuckle, I have been asked by my colleague from
    Utah, Mr. Cannon, to ask this question that is peculiar to his
    State of Utah.
        Utah law prohibits gambling. Could you technologically
    prevent people in Utah from gambling on the Internet? If so,
    how would you do that?
        Mr. Hornbuckle. Mr. Chairman, yes, we could.
        When we went forward with licensing, as you know, we're
    privilege licensed in the States I mentioned earlier. Nevada,
    of note, where most of our assets reside, made us commit to and
    we created technology that, if a country has made gambling
    illegal, or specifically made Internet gambling illegal--and
    I'll use the case of Japan, where gambling is illegal, and Hong
    Kong, where Internet gambling is illegal--we have put forth in
    our system through IP blocking and other methodologies, which
    are laid out here, a system that says ``no, you cannot get
    in''. It has been 99.9 percent effective in doing that.
        No system is perfect, but we can deliver with reasonable
    assurance to the Congressman that the folks from Utah, if he
    didn't want them in, wouldn't be put in.
        Mr. Coble. All right. I'll convey that to him.
        Mr. Hornbuckle. Thank you.
        Mr. Coble. Mr. Leach, we know that you have been involved
    in this issue for a long time. Some believe that Internet
    gambling should be licensed and regulated rather than
    prohibited, as we have heard today. Can you tell us, based upon
    your years of investigating this issue, whether or not
    licensing and regulating is a realistic alternative to
    prohibition, and why?
        Mr. Leach. Well, certainly you can license and regulate.
    The question is, is it good for the country? Is it good for the
    individuals involved? I think, when you go to the individual,
    you have this dilemma of do you want to turn the home into a
    casino, where there is virtually no constraints, particularly
    in people that appear, as has been described by the medical
    profession, in an almost quasi-genetic way, where one-and-a-
    half to 2 percent of Americans, once they start to gamble, it's
    pretty hard to stop. You have working in the home less
    constraints than you would have in going to an actual casino. I
    think you would open that problem up rather dramatically. In
    addition, you keep all the social problems that currently
    exist, with a single positive of--you have to recognize that
    there is good and bad to almost any proposal, where you would
    probably bring a little more gambling onshore. But if one has
    real doubts about the individual and social implications of
    Internet gambling, then I don't think that would be a wise way
    to go.
        I would make one final comment, because it relates to the
    very thoughtful testimony of someone who has a different
    judgment than mine from MGM. When they say there's no consumer
    protection, the ultimate consumer protection is that the
    consumer will not have to pay an Internet gambling debt if he
    cannot use a financial instrument. So the lack of ability of a
    casino that's on the Internet to take the losses, which are
    virtually assured over any period of time, will protect the
    American consumer maximally.
        Mr. Coble. Thank you, sir. I see that my time has expired.
        The gentleman from Virginia.
        Mr. Scott. I had one technical question. On page 6 of the
    bill, Mr. Malcolm, of H.R. 21, line 15, it says that one of the
    things it exempts is ``any lawful transaction with a business
    licensed or authorized by a State.''
        Does that exempt lotteries? It's page 6, line 15.
        Mr. Malcolm. If I may have just a moment. [Examining.]
    Absolutely, Mr. Scott.
        Mr. Scott. Okay.
        Mr. Malcolm, you indicated that there ar 1,800 sites now.
    Are those 1,800 accessible from the United States that you're
    talking about?
        Mr. Malcolm. Well, it's possible there are a handful of
    sites, such as Mr. Hornbuckle's site for the MGM MIRAGE, where
    they may be able to successfully block access to the United
    States. But by and large, the Internet is an open territory
    where one can route computer communications through any
    country. I would think that, with a little ingenuity by a tech-
    savvy person, yep, they would all be available.
        Mr. Scott. Mr. Hornbuckle, you said you could block out a
    Utah address. If someone calls a long distance number to kind
    of log in, how would you know they were physically in Utah and
    not in Nevada?
        Mr. Hornbuckle. Through IP mapping, through a product we
    use called QUOVA, you can not only identify the origin, you can
    tell if they're using an anonomizer. It's a layered weighted
    system that tells you if it's direct or dial up.
        Based on those indicators and other things that layer into
    the approach we take, in terms of banking institutions,
    address, voter registrar, you know, we go back and check data
    queries and we can determine with reasonable assurance where
    they're coming from.
        Mr. Scott. You can verify the residence of the name of the
    person the account is in?
        Mr. Hornbuckle. That's correct.
        Mr. Scott. You would have no way of knowing whether or not
    that named person is, in fact, the one doing the gambling?
        Mr. Hornbuckle. That's correct, other than there is a pin
    code that goes back to the customer through the regular mail.
    To the extent they have that pin code, that's the
    identification we have on the other end.
        Mr. Scott. How do you deal with responsible gaming?
        Mr. Hornbuckle. There is a player protection module on our
    site, which I have identified and laid out in great detail in
    the material we have submitted. It enables a potential customer
    to go online and limit their stake activity in terms of time,
    amount wagered, deposits, or withdrawals for that matter. It's
    a device that enables them to monitor what their own play
    activity is, as well as we can monitor it if we choose to.
        Mr. Scott. Mr. Malcolm, are gambling debts enforceable
    under this bill? I know in Virginia, at least the law used to
    be that you couldn't legally collect a gambling debt. Would
    this scheme affect any of that?
        Mr. Malcolm. Under H.R. 21, there are civil remedies,
    including the ability to essentially freeze an account to
    prevent any financial activity going to and from that
    operation. If you're asking as a matter of civil law whether
    you can collect on a gambling debt, generally one can't collect
    on unenforceable or illegal contracts. But, you know, that's
    not my area of expertise particularly.
        Mr. Scott. Mr. Modisett, you indicated ways of evading this
    H.R. 21. Could you go into a little more detail about that? You
    mentioned wire to an offshore bank, escrow accounts, I assume
    long-distance calls into an Internet provider, and using an
    access number in Canada would be another way?
        Mr. Modisett. Yes. Actually, you're listing all of them
    there as an example, the point being that you want transparency
    to be able to follow these transactions. Credit cards are one
    of the best ways to have that sort of transparency. So when you
    start closing down that aspect of the financial transaction,
    like the balloon, it's going to spread out into other areas.
    They will find ways to go ahead and gamble. Those other ways
    that you cited will be less transparent and more difficult to
    follow, and to the extent there is a potential for abuse, my
    concern is that that is going to worsen the problem rather than
    make it better.
        Mr. Scott. Mr. Hornbuckle, who regulates your site to make
    sure that the odds that people think they're playing against
    are, in fact, the odds?
        Mr. Hornbuckle. The actual licensing is with the Isle of
    Man government, but we also have made submissions of our
    license in our games to the other jurisdictions that we operate
    in--Mississippi, Nevada, New Jersey and...I'm missing one.
        Mr. Scott. Who gets the tax benefit on the profits?
        Mr. Hornbuckle. The Isle of Man government.
        Mr. Scott. Does the United States get any benefit from
    that?
        Mr. Hornbuckle. No, they do not, because we do not accept
    U.S. wagers at this time.
        Mr. Coble. Mr. Hornbuckle, I didn't hear the last thing you
    said to Mr. Scott.
        Mr. Hornbuckle. I'm sorry. No, they do not. He asked if the
    U.S. was any beneficiary from taxes, and the answer is no, nor
    are other jurisdictions, other than the Isle of Man, because we
    do not take U.S. bets at this time.
        Mr. Coble. Very well. Thank you.
        Mr. Feeney, the gentleman from Florida. Were you through,
    Bobby?
        Mr. Scott. Yes, thank you.
        Mr. Feeney. Thank you, Mr. Chairman.
        Mr. Hornbuckle, do you have any estimates, either your
    company or the industry, do you have any estimates of what
    percentage of Internet gambling is run through companies like
    yours, that have submitted their odds that Mr. Scott asked
    about, for example, to Mississippi, New Jersey and Nevada, and
    what percentage is completely unregulated at the present time?
        Mr. Hornbuckle. I would suggest to you that all operators,
    where they have their jurisdiction and licensing regimes, would
    tell you that they're regulated. So I think it's a matter of
    what you would consider regulation.
        What we go through in the Isle of Man and what ultimately
    holds us to our standard based in Nevada and all that we have
    at stake, is a different bar and a bar we all ought to get to,
    and potentially what happens in a Caribbean country. But they
    would tell you that they are regulated. Our games are out
    there, registered with the Isle of Man government, within
    certain standards that they call out, and we have to adhere to
    those standards.
        Mr. Feeney. What you have suggested without saying it is
    that some of your competitors may not have the integrity that
    MGM does. I guess my question would be, what percentage of the
    Internet gambling today is with less credible entities than
    MGM, in your opinion?
        Mr. Hornbuckle. With all due respect, sir, I would like to
    hold comment on that. [Laughter.]
        I couldn't accurately give that estimation anyhow.
        Mr. Feeney. Maybe Mr. Malcolm has an opinion about that.
        Mr. Malcolm. My guess, Mr. Feeney, would be that a whole
    bunch of them are less scrupulous and less honorable than MGM
    MIRAGE.
        Mr. Feeney. Assuming that most consumers in America are
    reasonably wise, that would suggest the addictive tendencies of
    Internet gamblers to me, anyway, because to the extent that I
    want to be entertained for a reasonable value for my buck and I
    want some reasonable odds in return, I'm probably going to
    pursue regulated places to gamble, where I can be assured of a
    fair square deal, even though I understand it's ultimately in
    the house's advantage.
        Isn't this suggestive that Internet gamblers behaviorally,
    Mr. Hornbuckle, may tend to be more addictive and less
    responsible gamblers?
        Mr. Hornbuckle. I don't know that it suggests it's more
    addictive. I will tell you that the commercialities of odds and
    what goes on in the Internet world at large are such that, to
    be competitive and to survive, nobody is taking huge advantage
    of customers out there, or they won't.
        Gamblers are savvy, particularly the ones that are on line.
    To the extent they then ultimately get compensated for their
    wagers and their winnings, if they have some--and they do have
    some--I think speaks to the credibility of who the operator is.
    That's where you get into issues of are they licensed, are they
    credible, is a brand like MGM MIRAGE meaningful or not. That's
    something that would ultimately be up to the general public to
    decide.
        Mr. Feeney. I would like to ask my colleague, Congressman
    Leach, if he has an opinion about the elasticity of demand for
    gambling as it relates to Internet opportunities
        Our staff estimates that, in the last 10 years, we have had
    roughly a ten-fold increase in American dollars wagered over
    the Internet. I would like to ask my colleague if he's got an
    opinion. Does that come at the expense of gambling on things
    like lotteries, regulated casinos, gambling ships, penny ante
    games and office pools, or is this increase likely to be in
    addition to all the above? Not to mention pork belly futures on
    the mercantile market.
        Mr. Leach. Well, I'm not an expert. Frankly, the
    competitive aspect would be better asked of someone from MGM
    that would know that better than I.
        I would say there are two things that stand out. One is the
    terrific growth in the Internet. Clearly, there is some
    competition with casino gambling. How big that is, I don't
    know.
        Secondly, the fact is that there are lots of studies of the
    gambling issue, per se. Your National Commission on Gambling
    went into some of this, which shows that there is part of
    America that really does get hooked in analogous ways to
    alcohol or drugs, and then some correlation between the two.
    That is, if one is likely to be hooked on a drug or alcohol
    addition, one is as little more likely to be an addictive
    gambler. But the key thing is, one can quite quickly and
    rapidly lose a great deal.
        Certainly there is a case, as MGM has made, that it would
    be better if you were to deal with a reputable company versus
    less reputable. But I think the more compelling case is to deal
    with nobody.
        I would defy anyone on this panel to give me a strong
    social case for Internet gambling. I mean, what is it? Is there
    a national interest case for it? Is there an individual family
    case for it? And then to think in reverse terms, are there some
    disadvantages to the country, some disadvantages to the
    individual? I think it gets pretty compelling.
        Mr. Coble. The gentleman's time has expired.
        The gentlelady from Texas.
        Ms. Jackson Lee. Thank you very much, Mr. Chairman. I would
    ask unanimous consent that my opening statement be allowed to
    be submitted in the record.
        Mr. Coble. Without objection.
        [The prepared statement of Ms. Jackson Lee follows:]

           Prepared Statement of the Honorable Sheila Jackson Lee, a
               Representative in Congress From the State of Texas

        I would like to thank Chairman Coble and Ranking Member Scott for
    convening this very important hearing today.
        We are here today to hear testimony and discuss two bills related
    to Internet gambling--H.R. 21 and H.R. 1223.
        There have been attempts in the last two Congresses to outlaw
    internet gambling, or in the alternative to restrict internet gambling
    such as restricting how bets are made. The bills we are considering
    today are continuation of those prior efforts.
        H.R. 21 prohibits internet gambling businesses from accepting bets
    from credit cards, electronic fund transfers, money transmitting
    business transfers, and instruments or transactions drawn through
    financial institutions. It also grants Federal district courts
    jurisdiction over violations of bill, requires the Secretary of the
    Treasury to prescribe regulations on payment systems and policies to
    prevent restricted transactions, and calls for U.S. and foreign
    governments to cooperate to prevent money laundering and other crimes.
        The issue of internet gambling is always debated vigorously. The
    Internet gambling industry receives wagers amounting to an estimated
    $4.2 billion dollars per year through 1,800 internet gambling sites.
    Internet gambling has a high likelihood of causing personal bankruptcy,
    provides a fertile ground for fraud and money laundering, is difficult
    for states to regulate, and offers an addictive and appealing gambling
    outlet for children.
        I was an original co-sponsor of H.R. 3215, an internet gambling
    bill considered in the last Congress, because of my grave concern that
    children and teenage gamblers, who have wide access to the Internet,
    will abuse the Internet for gambling. A study released by the American
    Psychological Association finds that pathological gambling is more
    prevalent among youths than adults. Between five and eight percent of
    young Americans and Canadians have a serious gambling problem, compared
    with one to three percent of adults. The study went on to say that with
    gambling becoming more accessible in U.S. society, it will be important
    to be able to intervene in children's and adolescent's lives before the
    activity can develop into a problem behavior.
        Many Internet gambling sites require bare minimum information from
    gamblers to participate. Security on bets placed over the Internet has
    proven ineffective. And unlike traditional regulated casinos, Internet
    operators have no demonstrated ability or requirement to verify a
    participant's age or identification. Also, an Internet gambling site
    can easily take a person's money, shut down their sites, and move on.
        Gambling over the Internet, particular because of the danger it
    poses to our children, is a business that I simply cannot condone.
    Given the fact that the majority of our citizens have access to
    computers and the Internet, we must ensure that laws are in place to
    eliminate the potential harm of internet gambling.
        While I am concerned about the impact of gambling, I am also
    concerned with protecting individual freedoms and personal choices. The
    freedom to gamble is such a choice. I look forward to hearing the
    testimony and comments by our speakers today in order to reconcile
    these issues. We must find a way to address this very serious problem
    of Internet gambling.

        Ms. Jackson Lee. I thank you very much, and I thank the
    gentlemen for their presentation, and Congressman Leach as
    well.
        Over the course of my tenure in Congress, I have had the
    opportunity to be supportive of restrictions on Internet
    gambling, for a variety of reasons, but I think particularly on
    the issues dealing with money laundering, underage gambling,
    and gambling addiction, which permeate in many instances
    throughout the industry, regardless of whether it's Internet or
    person to person.
        I do compliment the industry for being particularly
    sensitive to these issues over the years and working
    collaboratively with mental health groups and State groups on
    trying to prevent this. So I would like to find the best
    approach, the best reasonable approach to address a concern
    that will continue to grow with the utilization of Internet
    technology. Computer technology is growing, and we're going to
    find people doing everything with respect to computer software,
    and I think we have to be sensitive to that.
        Let me ask Mr. Hornbuckle how much Federal regulation does
    the industry have now, just in general.
        Mr. Hornbuckle. As it relates specifically to my activity
    on line, little to none.
        Ms. Jackson Lee. And overall?
        Mr. Hornbuckle. Currently in our activity, it all comes out
    of the Isle of Man, and it is underwritten by what our code,
    what our licensing requirements are for places like Nevada and
    Mississippi, Michigan, et cetera. We have a great deal of
    respect for what we have there, so the way we conduct our
    business activity and the code that's called out, which I have
    included, both against anti-money laundering and the regs
    themselves from the Isle of Man govern our overall activity.
        Ms. Jackson Lee. So you're saying that you are registered
    under or incorporated under the Isle of Man. Are you're talking
    about all the MGM properties, for example, the ones in Las
    Vegas?
        Mr. Hornbuckle. No, no, just for online activity. I'm
    sorry.
        Ms. Jackson Lee. Let me ask you to put on your other hat,
    just put on the hat for the overall. Tell me what kind of
    regulation it is for the overall business.
        Mr. Hornbuckle. For overall business, we're probably one of
    the most licensed, if not the most licensed, industries in this
    country. From Nevada, Mississippi, New Jersey and Michigan,
    there's an extensive amount of licensing we go through, and
    probity, both as individuals and for our company. From
    understanding the Wire money control Act, from understanding
    our customers, know your customer regimes, all of that activity
    goes on in our buildings. We have strict Reg 6-A requirements
    that we adhere to.
        So, from a licensing perspective, and from a responsible
    gaming perspective, we have a full plate of things that we do
    that we look to bring to bear ultimately in this space.
        Ms. Jackson Lee. So by licensing, obviously that equates to
    regulation, that equates to, as I understand it, State law
    enforcement, who are pretty much knowledgeable about your
    business.
        Mr. Hornbuckle. One hundred percent knowledgeable.
        Ms. Jackson Lee. In the respective States, whether it's
    Michigan, Mississippi or Las Vegas----
        Mr. Hornbuckle. Correct.
        Ms. Jackson Lee.--you certainly are well-known and your
    business is well-known, and State legislators have regulated
    you, it is my understanding, correct?
        Mr. Hornbuckle. That is correct.
        Ms. Jackson Lee. And you adhere to those regulatory
    requirements, which subject you to either civil and/or criminal
    penalties?
        Mr. Hornbuckle. That's correct.
        Ms. Jackson Lee. This is a business that you would say has
    gotten more dynamic over the last how many years? I'm talking
    about Internet gambling.
        Mr. Hornbuckle. The last two to 3 years specifically.
        Ms. Jackson Lee. And it brings in about how much money?
        Mr. Hornbuckle. It's suspect, but our best guess is between
    $4-5 billion and growing, growing particularly in Asia and
    Europe, as well as in the U.S. Despite the activity that has
    gone on over the last year, the U.S. continues to grow at about
    a 20 percent rate, we believe.
        Ms. Jackson Lee. Why the approach using the Isle of Man as
    opposed to the different jurisdictions that you're already in,
    the different States that you're already in?
        Mr. Hornbuckle. Because of concerns for the Wire Act, and
    what is happening here in the U.S., we didn't think it prudent,
    given all that was at stake. We do not accept U.S. bets. We
    consider that off limits for now, and until this is made
    crystal clear to us, we will not accept U.S. bets.
        The Isle of Man presented a jurisdiction that was very
    serious about money laundering. It has, much like Nevada is
    based on gaming, it is based on financial market sectors. They
    restricted their operation in taking U.S. bets, and they
    required all their operators to put up a two million pound bond
    to protect consumers. Those are some of the things that
    regulation would bring. We couldn't get licensed unless we put
    up two million pounds, that sits in trust for consumers if we
    decide to cease doing business.
        Ms. Jackson Lee. Do you think you're prone to more criminal
    activity, or have you surmised, or are you willing to give me
    the honest truth? Have you surmised a great deal of criminal
    activity in light of your present structure?
        Mr. Hornbuckle. No. To the contrary. We are very focused on
    our business. We have so much at stake for this venture, we're
    very focused on our business.
        Ms. Jackson Lee. Let me talk to Mr. Malcolm at this point.
    As I indicated, I have been supportive, but I would think--Mr.
    Chairman, would you yield me an additional minute?
        Mr. Coble. One additional minute.
        Ms. Jackson Lee. Thank you.
        I have noted that the Department of Justice has its hands
    quite full. What component with the Wire Act, I know, and what
    other aspects of the gambling industry here in the States do
    you regulate presently?
        Mr. Malcolm. Specifically, there are----
        Ms. Jackson Lee. Federal jurisdiction. That's what I mean.
        Mr. Malcolm. There are several Federal statutes that cover
    this particular topic. The Wire Act is only one of them. The
    Wire Act makes it a crime to transmit in interstate or foreign
    commerce bets on----
        Ms. Jackson Lee. Existing. These are existing----
        Mr. Malcolm. Right. In 1952, the Travel----
        Ms. Jackson Lee. I could run through them rather quickly
    because my time is going to go, and I just want to----
        Mr. Malcolm. 1084, 1952, 1955, RICO could arguably apply.
    There are several other statutes.
        Ms. Jackson Lee. RICO I know could apply to what I would
    call person-to-person gambling, or the industry itself. Is
    there something in particular that--just forget about on-line.
    Do you regulate the industry, or do you interact with the
    States? You have specific laws to regulate the industry as it
    stands now, without online?
        Mr. Malcolm. I'm not sure of the interplay between the
    Federal regulators and the State regulators, but suffice it to
    say we work closely with them. Some of the Federal statutes are
    specifically enabled based on a violation of State law.
        Ms. Jackson Lee. Let me just comment on that. I appreciate
    it very much. I have always been one, when it comes to
    enhancing protection by utilizing the Federal authority, I am
    certainly open to it. I respect the work of Chairman Leach, but
    I perceive more potential confusion than not without a full
    appreciation of the impact of the prohibition on using credit
    cards and other vehicles, other bank instruments, to gambling
    on the Internet.
        What I would propose, Mr. Chairman, and would think would
    be valuable, is to look carefully at 1223--additional 30
    seconds, Mr. Chairman. I just want to close this sentence. What
    I'm concerned about, Mr. Chairman, is the fact that we need to
    study this question and understand it a little better, to see
    how the mix of State regulations, which Mr. Hornbuckle seems to
    be very much regulated on his regular gambling, and see how
    that works in order to tell us what is the best way to get to
    the point of prohibiting money laundering, underage gambling,
    and gambling addictions, versus the total prohibition, before
    we know what the facts are.
        I thank the gentleman for yielding.
        Mr. Coble. The gentlelady's time has expired.
        Folks, we have another hearing scheduled for this
    afternoon, but since there are only four of us here, I'm going
    to do a second round. Let's do a second round real quickly. I
    have three questions I want to put to you, and I am going to
    start with Mr. Malcolm.
        Mr. Malcolm, I think you have some problems with the
    injunction provisions, do you not?
        Mr. Malcolm. That is correct.
        Mr. Coble. Is there a more effective way of drafting the
    injunction provisions of the bill?
        Mr. Malcolm. Specifically, I have problems with a couple of
    the injunction provisions. With respect to the ISPs, section
    3(c)(4) imposes limitations on the relief that ISPs--that can
    be granted against ISPs. In addition, the websites themselves
    have ancillary services. But we're working with the industry to
    tinker with that.
        More particularly, Mr. Chairman, there are limitations,
    there are various factors set forth in section 3(c)(5) of the
    bill. We believe that, while we recognize the important role
    the regulators have to play--and we're working with Treasury to
    ensure coordination--we object to the addition of any factors
    beyond the standard factors set forth in Federal Rules of Civil
    Procedure 65.
        Mr. Coble. Thank you.
        Mr. Hornbuckle--strike that. Mr. Modisett, your argument, I
    believe, seems to suggest that to legalize Internet gambling
    seems to be based upon the size of the industry and the rate of
    growth that it's increasing. Some would suggest that it is not
    responsible for governments to legalize a criminal activity
    simply because it's growing or flourishing.
        What do you say to that?
        Mr. Modisett. I would not say that my argument is based on
    the growth factor. I would say it is based on, first of all,
    the fact that those people who are playing, whatever the size,
    are currently in a highly unregulated environment. And I'm not
    referring to Mr. Hornbuckle's enterprise. I'm referring to
    those that are basically out of the Caribbean Islands and some
    of the other 1,800 that have been referred to here today.
        I would like to drive those into a highly regulated space
    so that we have more control, more consumer protections, could
    impose preset loss limits, we could do a better job of making
    sure that minors aren't gambling, various other advantages that
    would come from this highly regulated regime.
        My other concern is based on the fact that we have
    heretofore not jumped into an Internet space and called for an
    out-and-out prohibition, with the possible exception of such an
    obvious evil as child pornography. But with regard to something
    that is legal in some areas, not legal in other areas, this
    would be our first jump in, where we just out-and-out said that
    we are not going to allow an American business to have any
    financial transactions whatsoever.
        I think that is a very big move, and it's a move that
    should take place only after further study.
        Mr. Coble. Good. Thank you, sir.
        Finally, Mr. Leach. Some contend that Internet gambling is
    already illegal under the Wire Act and, therefore, this
    legislation is unnecessary. I'm not saying that. Some say it.
        Comment on this, if you will, and explain why your bill is
    necessary?
        Mr. Leach. I accept the premise that I believe the Wire Act
    covers Internet gambling, although some court jurisdictions
    have gone to the contrary. But what our bill does--and it's
    carefully crafted to fit into whatever your Committee does--it
    is an added enforcement mechanism of whatever the law is at any
    point in time. So if you want to expand or contract the law,
    that's the jurisdiction of this Committee with the Congress.
    But all we do is add an enforcement mechanism.
        It happens, and it's really a bizarre fact of how the
    private sector interrelates with the public, that the public
    has had virtually no capacity to enforce this, so your
    Department of Justice can testify that there are all these
    gambling sites but it cannot testify that it has terribly
    effectively shut them down. I'm not saying that the fault of
    the Department of Justice. All I'm saying is that that's a
    circumstance.
        The approach of this bill is designed simply to serve as a
    functional deterrent, based on enforcement utilizing the
    private sector. Let me tell you, it has taken a lot of effort
    to get acceptability or consensus, as grudgingly as it may be,
    because you're putting a new obligation on the private sector,
    a private sector that principally the Financial Services
    Committee interrelates with more than other Committees of the
    Congress.
        I personally accept the broad interpretation that the
    Justice Department has applied, that the Wire Act does apply to
    Internet gambling, but there is no precise reference in the
    Wire Act to that, so it's a broad interpretation of intent, I
    think, would be the description, as a nonlawyer having the
    disadvantage of addressing all of you that are better educated.
        Mr. Coble. Thank you, Mr. Leach. I see my red light is
    about to appear.
        The gentleman from Virginia.
        Mr. Scott. Thank you, Mr. Chairman.
        The gentleman from Iowa indicated or asked us to make the
    social case for Internet gambling. Frankly, I think it's a
    difficult case to make, but that's not the question before us.
    I think the Justice Department official, Mr. Malcolm, has
    indicated that it's already out there, so the question is what
    are you going to do.
        This bill, H.R. 21, doesn't prohibit Internet gambling. It
    makes it a little more administratively challenging to place
    the bet, but as we've heard, not impossible and not even that
    difficult, after you do a little investigation. So the social
    case isn't the question before us. The question is what to do
    about reality.
        I would ask Mr. Hornbuckle, can you access your site from
    outside of the United States, anywhere outside of the United
    States?
        Mr. Hornbuckle. There are about ten countries that we
    accept wagers from. UK is our principal market, though, by
    example.
        Mr. Scott. Canada?
        Mr. Hornbuckle. No.
        Mr. Scott. Mexico?
        Mr. Hornbuckle. No. Mostly Western Europe, South Africa,
    New Zealand, principally in Western Europe and a couple of
    Scandinavian countries.
        Mr. Scott. Now, you pay off your bets because your
    reputation would be at stake if you didn't. The problem with
    websites is you can create a website today and shut it down
    tomorrow afternoon. If we don't regulate it, what prohibition
    would there be, or how would you deal with a website that sets
    up, takes a lot of money, and then just closes down? What
    remedy would a gambler have if that happened?
        Mr. Hornbuckle. In today's environment--I can think of
    three sites over the most recent Super Bowl, where the underdog
    won and it closed. I know it's reality, but they did, in fact,
    close. To my understanding, those people were left unpaid.
        In the Isle of Man, or in any regulated environment--in our
    example of the Isle of Man, we are bonded for two million
    pounds. That's what that money is for. To the extent we went
    out of business, or anybody else would go out of business,
    there would be reserve funds to take care of those people.
        Mr. Scott. Does the two million pounds, how does that
    compare to the money that's coming in and out?
        Mr. Hornbuckle. Right now, the money that comes in and out
    on an ongoing basis, that we hold in balance, where people
    leave an account, it's maybe 5 percent of that number. It's
    not--and it's monitored constantly by the government. To the
    extent it approaches it, they have reserved the right to look
    at that number again.
        Mr. Scott. So that you would be bonded for the amount that
    would be owed if you went out of business?
        Mr. Hornbuckle. That's the theory behind it, yes.
    Obviously, it's a new industry, but that is absolutely the
    theory behind that bond.
        Mr. Scott. And if somehow I got access to a fancy looking
    website and gambled and happened to win, and they went out of
    business, if they were unregulated I would have no recourse?
        Mr. Hornbuckle. That's correct.
        Mr. Scott. Thank you, Mr. Chairman.
        Mr. Coble. Thank you.
        The gentleman from Florida.
        Mr. Feeney. Mr. Hornbuckle, when it is your physical casino
    at MGM, you entertain ``high rollers''. Do you pre-qualify them
    with credit applications and verification, the same way a
    banker would do?
        Mr. Hornbuckle. In some instances, that's correct.
        Mr. Feeney. Do you do that with any of your Internet
    gamblers as well?
        Mr. Hornbuckle. Yes, we do. Again, the documents that we
    submitted, under the money laundering provisions, anybody who
    puts over a thousand dollars on deposit has got to then give to
    us copies of either a passport, national ID, or some other form
    of ID that the Government has specified. So the answer is, at
    that level or above, it's not identical but close in principle
    to what we do in highly regulated markets like in Nevada.
        Mr. Feeney. But presumably, if we did not disallow or
    prohibit financial institutions from providing credit to
    gamblers, presumably there would be no prohibition from
    somebody without the ability to comfortably lose a significant
    sum of money, $500 or $1,000 or more. There would be nothing to
    require the casino or the financial institution, other than the
    credit limit on their credit card, to regulate whether or not
    this was a prudent amount of money for somebody to be putting
    down on a game of chance.
        Mr. Hornbuckle. In an unregulated market, I would have to
    agree with that. In a regulated market, at least you have an
    opportunity to get into that discussion. I guess that could be
    said about many things in life as well. I mean, this happens to
    be gaming, but I think regulatory restrictions on that are key.
        Mr. Feeney. I guess I wanted to ask Congressman Leach,
    because I'm very sympathetic toward the goals of H.R. 21. But
    it does seem to me that in certain types of high risk
    investments, for example, the SEC and other regulators require
    that the sellers and the marketers of the instruments, they are
    a very high risk insurer that is only a small percentage of the
    net worth of the individual that's being put into this high
    risk venture.
        Isn't there an opportunity through regulation that doesn't
    exist through prohibition to sort of, you know, protect people
    from themselves?
        Mr. Leach. Well, I think you can provide a modicum of
    protection. You know, that's clear. Whether that protection is
    very significant in relationship to the broad scope of the
    problem is a matter of individual judgment. I would fully
    acknowledge that there are advantages to some types of
    protection relative to no types of protection, but I believe
    the subject matter in general is one that, if you can't make a
    social case for it, what difference does it make if you have a
    little more protection? So I don't find it a compelling
    concern. Certainly, parts of things that MGM would propose
    today are quite respectable.
        Mr. Feeney. I think that's a fair admission. I mean,
    certainly we have a lot of seniors in Florida, and some of them
    have been to the dog track every day of their adult lives. They
    get to a point where they can't drive, can't travel, and if
    somebody with a net worth of a million dollars wants to bet $20
    on the third race every day at Calder from his living room, I
    don't think you're suggesting that that is necessarily anti-
    social or dangerous behavior.
        Mr. Leach. I think there are examples where one could find
    this is quite a tolerable circumstance. There are also examples
    where one would say this is truly tragic for the individuals
    involved.
        Mr. Feeney. Mr. Modisett, or maybe Mr. Malcolm as well may
    want to answer this last question. The ingenuity and creativity
    and the technical skills of young people never ceases to amaze
    me. They are able to break into Pentagon-secure matters and
    they are able to turn upside down the whole computer networks
    of corporations. My oldest son is just 10, but at some point,
    if he wants to get into my credit card system and my computer
    system and avail himself, I have no doubt that he or somebody
    like him, at age 14 or 16, will have all of the knowledgeable
    capabilities necessary.
        How do you deal with the issue that, at least if he tries
    to enter a casino, somebody is going to have to look him in the
    eye and presumably be responsible for physically carding him,
    physical security, et cetera. How do you answer the question
    that there simply is no way to regulate what goes on inside
    that house with people under age? It's not addicts,
    necessarily, but people who are not able to lawfully consent to
    the contract.
        Mr. Modisett. I think that with regard to actual computer
    hackers, those that are quite proficient at getting around
    particular systems, as Mr. Hornbuckle said, there is no
    foolproof way that you could say 100 percent to keep them out.
    But I would say that the instance with regard to Internet
    gaming would be no worse than it would be with regard to any
    other activity on the Internet.
        There is technology out there--and MGM has referred to some
    of it--that is about as foolproof as you can get in modern
    society and high technology. I would rather see a piece of that
    sort of technology--I was advising at one point another company
    that was skill-based, so it wasn't wasn't gaming but was skill-
    based on the Internet. They had the technology, and others do
    now, to make sure that no juveniles were using it. They had
    preset limits so that no one could go over a particular amount,
    the sort of regulation that you would like to see instead of it
    being the ``wild west'', which we have, with regard to too many
    of these Internet gaming sites now.
        Mr. Malcolm. May I briefly respond, Mr. Feeney?
        I think you hit the nail on the head. While perhaps there
    is software out there that is as good as it can be, my
    understanding is that that software is far from perfect. In
    addition to that, software is easily manipulable. If you have a
    physical location where a minor has to go, they can get proof
    of identification, they can eyeball that person. This is not a
    hypothetical problem. One in ten boys, every month, is engaging
    on a monthly basis in Internet gambling. College students, who
    have recently gotten credit cards but have no money, are up to
    their eyeballs in debt because they're spending all night on
    online gaming poker situations.
        Mr. Modisett. If I could just add to that, Mr. Congressman,
    I was chair of the Indiana Gambling Impact Study Commission,
    and when we did our poll, we also asked questions about
    Internet gaming among youth. We came up with 0.4 percent that
    had said they had even attempted to gamble on the Internet.
    So----
        Mr. Malcolm. I would just refer to--There's a study coming
    out by the Annenberg Public Policy Center at the University of
    Pennsylvania, and that's where I got that statistic from.
        Mr. Coble. The gentleman's time has expired.
        Mr. Scott?
        Mr. Scott. Mr. Chairman, I would ask Mr. Malcolm if he
    would be willing to respond to questions in writing,
    particularly about the section that I indicated, and I think
    the Ranking Member of the Committee has some questions about
    that section.
        Mr. Malcolm. I would be delighted to, Mr. Scott.
        Mr. Scott. With that, Mr. Chairman, I would ask unanimous
    consent that the hearing record be kept open until at least the
    mark up on either of these bills.
        Mr. Coble. And I would also say that any Member of the
    Subcommittee who wanted to submit written requests, that would
    be in order.
        Gentlemen, we thank you all for your contribution today.
    This concludes the hearing and we appreciate your contribution.
        The record will remain open for 1 week. Thank you for your
    cooperation. The Subcommittee stands adjourned.
        [Whereupon, at 3:20 p.m., the Subcommittee adjourned.]

                                A P P E N D I X

                                  ----------

                   Material Submitted for the Hearing Record

     Prepared Statement of the Honorable Howard Coble, a Representative in
                   Congress From the State of North Carolina
        Today, the Subcommittee on Crime, Terrorism, and Homeland Security
    addresses a serious and growing problem for our Country. The problem of
    Internet gambling. It is now estimated that $4.2 billion is wagered
    over the Internet each year. This is an increase from $445 million just
    six years ago. There are currently more than 1,800 Internet gambling
    sites, and the total dollar amount wagered worldwide is expected to
    reach $10 billion in the near future.
        The most troubling aspect of Internet gambling is the relative ease
    of accessibility for our nation's children. The anonymous nature of the
    Internet makes it almost impossible to prevent underage gamblers from
    using their parents' credit cards, or even their own in some cases, to
    log on to a gambling website. Many Internet sites require nothing more
    than a name, address, and credit card number. Those sites that do
    require a person to disclose his or her age make little or no effort to
    verify this information.
        Another group of people particularly susceptible to Internet
    gambling are America's problem gamblers. The National Council on
    Problem Gambling estimates that there are currently eleven million
    Americans directly suffering from gambling problems. High rates of
    financial debt, unemployment, bankruptcy, divorce, homelessness, and
    suicide are all associated with problem gambling. Virtual casinos and
    their video game structure have been labeled the ``crack cocaine of
    gambling.'' These facilities are open twenty-four hours a day, seven
    days a week, all within a person's own home. By making gambling more
    convenient, it can do nothing but make the problem worse.
        In addition to the social problems associated with Internet
    gambling, these Internet sites also offer organized crime groups a very
    simple and easy opportunity to launder the proceeds of their criminal
    activity. Because of the lack of oversight or regulations and the high
    degree of anonymity, money laundering through Internet gambling sites
    is already a major concern to our nation's law enforcement agencies.
        Federal law is currently unclear as to whether or not all types of
    Internet gambling is illegal. The statute that most directly restricts
    the use of the Internet to place bets is the ``Wire Act'' under section
    1084 of Title 18 of the U.S. Code. However, because this statute was
    written before the age of the Internet and the use of wireless
    communication, there is ambiguity as to what type of betting is or is
    not covered. Also, the types of gambling mentioned in the statute may
    not cover all of the different types of gambling available on the
    Internet.
        Today we will examine two bills that attempt to address the
    problems of internet gambling in two very different ways. H.R. 21, the
    ``Unlawful Internet Gambling Funding Prohibition Act'' introduced by
    Congressman Jim Leach of Iowa, seeks to ban Internet gambling by
    prohibiting the use of financial instruments, such as credit cards, in
    any transaction invoving illegal Internet gambling. H.R. 3215, the
    ``Combatting Illegal Gambling Reform and Modernization Act'' introduced
    by Congressman John Conyers of Michigan, seeks to establish a
    commission to study the feasibility of regulating Internet gambling
    rather than banning it.
        I look forward to the testimony of the witnesses here today which
    will help this Subcommittee decide what is the best approach to take
    with regard to this very important subject.

    Prepared Statement of the Honorable Bob Goodlatte, a Representative in
                      Congress From the State of Virginia

        Thank you Mr. Chairman for holding this very important hearing. I
    would like to commend my colleague, Congressman Jim Leach, on his
    tireless efforts to address the problem of Internet gambling.
        The Internet is a revolutionary tool that dramatically affects the
    way we communicate, conduct business, and access information. As it
    knows no boundaries, the Internet is accessed by folks in rural and
    urban areas alike, in large countries as well as small. The Internet is
    still expanding by leaps and bounds and more and more citizens are
    logging on to the Internet at home; however, it has not yet reached its
    full potential as a medium for commerce and communication.
        One of the main reasons that the Internet has not reached its
    potential is that many folks view it as a wild frontier, with no
    safeguards to protect children and very few legal protections to
    prevent online criminal activity. The ability of the World Wide Web to
    penetrate every home and community across the globe has both positive
    and negative implications--while it can be an invaluable source of
    information and means of communication, it can also override community
    values and standards, subjecting them to whatever may or may not be
    found online. In short, the Internet presents a challenge to the
    sovereignty of civilized localities, States, and nations to decide what
    is appropriate and decent behavior.
        Gambling is an excellent example of this situation. Gambling is
    currently illegal in the United States unless regulated by the States.
    As such, every state has gambling statutes to determine the type and
    amount of legal gambling permitted. With the development of the
    Internet, however, prohibitions and regulations governing gambling have
    been turned on their head. No longer do people have to leave the
    comfort of their homes and make the affirmative decision to travel to a
    casino--they can access the casino from their living rooms with the
    click of a button.
        Since 1868, the federal government has enacted federal gambling
    statutes when a particular type of gambling activity has escaped the
    ability of states to regulate it. For over one hundred years, Congress
    has acted to assist states in enforcing their respective policies on
    gambling when developments in technology of an interstate nature, such
    as the Internet, have compromised the effectiveness of state gambling
    laws.
        The negative consequences of online gambling can be as detrimental
    to the families and communities of addictive gamblers as if a bricks-
    and-mortar casino was built right next door. Online gambling can result
    in addiction, bankruptcy, divorce, crime, and moral decline just as
    with traditional forms of gambling, the costs of which must ultimately
    be borne by society.
        Gambling on the Internet is especially enticing to minors,
    pathological gamblers, and criminals. There are currently no mechanisms
    in place to prevent youths--who make up the largest percentage of
    Internet users--from using their parents' credit card numbers to
    register and set up accounts for use at Internet gambling sites. In
    addition, pathological gamblers may become easily addicted to online
    gambling because of the Internet's easy access, anonymity and instant
    results. Dr. Howard J. Shaffer, director of addiction studies at
    Harvard, likens the Internet to new delivery forms of addictive drugs:
    ``As smoking crack cocaine changed the cocaine experience, I think
    electronics is going to change the way gambling is experienced.''
    Finally, Internet gambling can provide a nearly undetectable harbor for
    criminal enterprises. The anonymity associated with the Internet makes
    online gambling more susceptible to organized crime and money
    laundering.
        I have long been a champion of the Internet and an advocate of
    limited government regulation of this new medium. However, that does
    not mean that the Internet should be a regulatory free zone or that our
    existing laws should not apply to the Internet. I think we can all
    agree that it would be very bad public policy to allow offline activity
    deemed criminal by states to be freely committed online and to go
    unpunished simply because we are reluctant to apply our laws to the
    Internet.
        Gambling on the Internet has become an extremely lucrative
    business. Numerous studies have charted the explosive growth of this
    industry, both by the increases in gambling websites available, and via
    industry revenues. The Internet gambling industry's revenues grew from
    $445 million in 1997 to an estimated $4.2 billion in 2003. It has been
    reported that there are currently more than 1,800 gambling sites.
    Furthermore, industry analysts estimate that Internet gambling could
    soon easily become a $10 billion a year industry.
        Most of the more than 1,800 Internet gambling websites are operated
    from offshore locations. Virtual betting parlors accepting bets from
    individuals in the United States have attempted to avoid the
    application of United States law by locating themselves offshore and
    out of our jurisdictional reach. These offshore, fly-by-night Internet
    gambling operators are unlicensed, untaxed and unregulated and are
    sucking billions of dollars out of the United States. In addition, the
    FBI and the Department of Justice have recently testified that Internet
    gambling serves as a vehicle for money laundering and can be exploited
    by terrorists to launder money.
        H.R. 21, the Unlawful Internet Gambling Funding Prohibition Act
    will add a new provision to the law that would prohibit a gambling
    business from accepting certain forms of non-cash payment, including
    credit cards and electronic funds transfers, for the transmission of
    illegal bets and wagers. The bill also gives Federal and State law
    enforcement new injunctive authority to prevent and restrain violations
    of the law.
        H.R. 21 will return control to the states by protecting the right
    of citizens in each State to decide through their State legislatures if
    they want to allow gambling within their borders and not have that
    right taken away by offshore, fly-by-night operators.
        The 104th Congress created the National Gambling Impact Study
    Commission and charged it with conducting a comprehensive legal and
    factual study of gambling, including an assessment of the interstate
    and international effects of gambling by electronic means, including
    the use of interactive technologies and the Internet. The Commission
    recommended to Congress that federal legislation is needed to halt the
    expansion of Internet gambling.
        As the National Gambling Impact Study Commission has documented,
    and Senate and House hearings have confirmed, Internet gambling is
    growing at an explosive rate. It evades existing anti-gambling laws,
    endangers children in the home, promotes compulsive gambling among
    adults, preys on the poor, and facilitates fraud. H.R. 21 will help to
    stop this harmful activity before it spreads further. I urge my
    colleagues to support this very important legislation.
        HR 1223, the Internet Gambling Licensing and Regulation Commission
    Act, attempts to attack the Internet gambling problem from another
    angle, namely regulation. The bill establishes a commission to study
    the issues involved with the licensing and regulation of Internet
    gambling activities.
        However, there are many concerns associated with setting up a
    national commission to regulate the offshore Internet gambling
    industry. Regulation would legitimize gambling activities, which have
    been shown to cause addictive behavior, bankruptcies, and associated
    family problems. In addition, it is doubtful that regulation would
    effectively curb the fraud, money laundering and other organized
    criminal activities associated with offshore Internet gambling
    websites.
        Thank you again, Mr. Chairman, for holding this important hearing.

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        Note: At the time of the printing of this hearing, no response to
    Rep. Conyers' questions had been received by the Subcommittee on Crime,
    Terrorism, and Homeland Security.