[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


                                 ______

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                            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.

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