[Senate Hearing 108-317]
[From the U.S. Government Publishing Office]
S. Hrg. 108-317
PROPOSALS TO REGULATE
ILLEGAL INTERNET GAMBLING
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
ON
PROPOSALS TO REGULATE ILLEGAL INTERNET GAMBLING, INCLUDING S. 627, TO
PREVENT THE USE OF CERTAIN PAYMENTS INSTRUMENTS, CREDIT CARDS, AND FUND
TRANSFERS FOR UNLAWFUL INTERNET GAMBLING
__________
MARCH 18, 2003
__________
Printed for the use of the Committee on Banking, Housing, and Urban
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
RICHARD C. SHELBY, Alabama, Chairman
ROBERT F. BENNETT, Utah PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky EVAN BAYH, Indiana
MIKE CRAPO, Idaho ZELL MILLER, Georgia
JOHN E. SUNUNU, New Hampshire THOMAS R. CARPER, Delaware
ELIZABETH DOLE, North Carolina DEBBIE STABENOW, Michigan
LINCOLN D. CHAFEE, Rhode Island JON S. CORZINE, New Jersey
Kathleen L. Casey, Staff Director and Counsel
Steven B. Harris, Democratic Staff Director and Chief Counsel
Peggy R. Kuhn, Senior Financial Economist
Stephen R. Kroll, Democratic Special Counsel
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
(ii)
C O N T E N T S
----------
TUESDAY, MARCH 18, 2003
Page
Opening statement of Chairman Shelby............................. 1
Opening statements, comments, or prepared statements of:
Senator Sarbanes............................................. 3
Senator Dodd................................................. 4
Senator Carper............................................... 27
Senator Bunning.............................................. 31
Senator Dole................................................. 31
WITNESSES
Jon Kyl, a U.S. Senator from the State of Arizonia............... 6
Prepared statement........................................... 32
John G. Malcolm, Deputy Assistant Attorney General, Criminal
Division
U.S. Department of Justice..................................... 8
Prepared statement........................................... 33
Richard Blumenthal, Attorney General, State of Connecticut, on
behalf
of the National Association of Attorneys General............... 9
Prepared statement........................................... 35
L. Richard Fischer, Attorney at Law, Morrison & Foerster, LLP.... 9
Prepared statement........................................... 36
Frank J. Fahrenkopf, Jr., President and CEO, American Gaming
Association.................................................... 11
Prepared statement........................................... 38
William S. Saum, Director of Agent, Gambling, and Amateurism
Activities
National Collegiate Athletic Association....................... 13
Prepared statement........................................... 41
Stewart A. Baker, General Counsel, U.S. Internet Service
Providers
Association.................................................... 15
Prepared statement........................................... 43
Frank Catania, President, Catania Consulting, on behalf of the
Interactive Gaming Council..................................... 16
Additional Material Supplied for the Record
Statement of Jeffrey Pash, Executive Vice President and General
Counsel National Football League............................... 47
Letter to Senator Richard C. Shelby from James C. Dobson, PhD,
President, Focus on the Family, Colorado Springs, Colorado,
dated March 14, 2003........................................... 51
(iii)
PROPOSALS TO REGULATE
ILLEGAL INTERNET GAMBLING
----------
TUESDAY, MARCH 18, 2003
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:05 a.m. in room SD-538 of the
Dirksen Senate Office Building, Senator Richard C. Shelby
(Chairman of the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY
Chairman Shelby. The Committee will come to order.
Today, the Committee begins its consideration of the proper
response of the Federal Government to the growing problem of
Internet gambling. I frame the issue in such a way because I
believe that there must be a Federal response to this rapidly
growing
social problem. As we all know, regulation of gambling has
traditionally been a matter of State law. As a conservative
Republican, I believe that a Federal response is appropriate to
a social evil only to compliment State or local enforcement.
But clearly, Internet gambling poses such a problem. Offshore
Internet casinos continue to proliferate and illegal Internet
gambling continues unabated, despite the fact that no State has
yet authorized a virtual casino.
The very nature of Internet gambling defies regulation at
the State or local level. Bets are electronic transactions in
which no physical good or commodity need be transferred between
the gambler and the casino. Clearly, the casinos themselves are
out of the reach of even Federal authorities, and can be
expected to continue to flaunt U.S. law. The only available
means of effective interdiction is through the media by which
the gambler and the casino interface--namely, through the
Internet service provider, or ISP, or the payment system
provider. This is the approach adopted in legislation that has
been introduced in the Senate and the House. Senator Jon Kyl
and Representative Jim Leach are the leading proponents of such
legislation. Last week, Senator Kyl, who is our first witness
today and has led the fight in the Senate against Internet
gambling, introduced legislation, S. 627, that would establish
a framework for preventing the use of our payment systems and
ISP's to engage in illegal gambling. I am proud to be an
original cosponsor of this important legislation. I believe
this legislation represents a measured and appropriate response
to a demonstrated social evil that grows worse by the day.
I describe Internet gambling as an ``evil,'' and I do not
use that word lightly. The dangers of gambling are manifest,
and that is why gambling is so heavily regulated in every
jurisdiction within the country in which it is permitted. The
Internet makes gambling accessible to those who are most
susceptible to the addictive power of gambling--the young. The
Internet offers ease of access and anonymity. Children are the
most computer-literate segment of our
society and can find these sites with ease. Unfortunately, they
are also the most susceptible to gambling's addictive powers.
And the overwhelming majority of Internet casinos have no
meaningful screening mechanism to block children from gambling.
Internet gambling may prove irresistible for the
pathological or problem gambler trying to overcome a gambling
addiction. For the recovering addict, the Internet makes casino
gambling easily accessible in the comfort and privacy of your
home. And, in so doing, it removes the impediment of traveling
to a casino or track, and shields the problem gambler from the
public stigma that may help the addict to refrain. And let us
not forget--for 15 million Americans with gambling problems,
gambling is every bit as addictive as alcohol or illegal drugs
can be. Recovering from a gambling problem is a lifelong
struggle and Internet access tilts the playing field against
the addict. Dr. Howard Schaeffer, Director of Addiction Studies
at Harvard Medical School, has described the effect of the
Internet through a disturbing analogy. And I quote: ``As
smoking crack cocaine changed the cocaine experience, I think
electronics is going to change the way gambling is
experienced.''
Gambling is not a harmless vice or a victimless crime.
According to the National Academy of Sciences, ``Pathological
gamblers engage in destructive behaviors: They commit crimes,
they run up large debts, they damage relationships with family
and friends, and they kill themselves.'' The fallout from
problem gambling--
domestic violence, theft, burglary, foreclosure, bankruptcy,
and
suicides--is as devastating to family and friends as it is to
the gambler himself. And unregulated, offshore Internet casinos
offer an anonymity and portability that make them a logical
medium for laundering money.
I look forward to hearing the testimony of the witnesses
today. I would like again to thank our first witness, our
colleague from Arizona, Senator Kyl, for his continued
leadership on this issue, and for his presence here today. Our
second panel includes the Deputy Assistant Attorney General of
the Criminal Division, as well as witnesses representing the
views of the various stakeholders in this debate--the gaming
and financial services industries, and collegiate athletics. I
look forward to their testimony on this very grave matter. I
would also like to thank my colleague, Senator Sarbanes, the
Ranking Democrat on this Committee, for his continued concern
about Internet gambling, and for his cooperation in organizing
this hearing. Curtailing illegal gambling operations is clearly
an issue on which there is bipartisan accord, and I look
forward to moving forward and working with my colleagues on
both sides of the aisle to move remedial legislation through
Committee as quickly as possible.
Senator Sarbanes.
STATEMENT OF SENATOR PAUL S. SARBANES
Senator Sarbanes. Thank you very much, Mr. Chairman.
Today, this Committee has an opportunity to hear testimony
about Internet gambling. I want to commend you, Mr. Chairman,
for calling a prompt hearing on this subject and I look forward
to working with you on this important issue. I also want to
welcome Senator Kyl, our colleague, here this morning as our
lead-off witness, and to commend both him and Senator Johnson
for their leadership on this important matter.
Gambling websites make possible immediate, 24-hour access
to the full range of wagering opportunities. Anyone, anywhere,
can bet at any hour on sporting events, and on casino games,
such as virtual roulette, poker, blackjack, et cetera. Bets can
be made from every home or office, or, indeed, from any
computer or Internet-ready hand-held device.
The GAO estimates that there may be between 1,500 and 1,800
Internet gambling websites--1,500 to 1,800. Virtually all of
those sites operate from computer servers located outside the
United States, in jurisdictions in which Internet gambling has
been legalized. The gambling website operators expect revenues
in 2003 of at least $4 billion. Fifty to 70 percent of that
amount is projected to come from wagering by individuals in the
United States, despite the fact none of the States permit
Internet gambling, and only one State, Nevada, permits general
betting on sporting events at all.
Defenders of Internet gambling assert that it is simply
another example of the Internet's ability to increase personal
freedom, and that we should replace outmoded laws to the
contrary. They also add, in a familiar refrain, that legalizing
Internet gambling could enhance Federal or even State revenues.
But the plain fact is that placement of bets, through the
Internet, with offshore gambling operators undercuts American
gambling regulation. The States decide the extent to which--and
the ways in which--gambling is permitted within their
respective borders. Federal law is designed to prevent
interstate or other attempts to evade or avoid State decisions;
for example, the Federal Appeals Court in New York recently
held that the operator of an offshore sports book who took
wagers from U.S. citizens, calling from a State where gambling
was illegal, had committed a Federal crime.
Offshore Internet gambling could not attract U.S. customers
without making use of our payments system. Every Internet
gambler must use a credit card, fund transfer, or bank
instrument to open and fund an account from which to gamble on
a website. The uncertain legal status of Internet gambling--
both in terms of potential criminal liability and of the
collectability of gambling debts incurred over the Internet--
has already led some responsible banks and Internet service
providers to move away from a connection with Internet gambling
websites. But those commendable private efforts do not amount
to an adequate solution to the problem.
The fact that the new ways to attract potential gamblers
and facilitate their wagering are clothed in the aura of the
Internet should not change our ideas of what is lawful or
socially responsible. This technology is being used to cloak
basic judgments and considerations of what is appropriate
social behavior. So they say, well, you know, it is the
Internet. And all of a sudden, since it is the Internet,
somehow it is supposed to assume some validity. We have this
technology and if we do not use it, somehow, we are creating
something approximating a moral sin. So, I emphasize that just
because we clothe it in the aura of the Internet, it shouldn't
change our ideas of what is lawful or socially responsible. I
am prepared to work closely with the Chairman and other Members
on legislation to deal comprehensively with this important
subject, and I look forward to hearing today's witnesses and to
reviewing the statements submitted to the Committee.
Thank you very much, Mr. Chairman.
Chairman Shelby. Senator Dodd.
STATEMENT OF SENATOR CHRISTOPHER J. DODD
Senator Dodd. Thank you, Mr. Chairman. I apologize for
being a few minutes late. But I want to welcome our colleague,
Senator Kyl, and thank him immensely for his work on this
issue. I want to thank you, Mr. Chairman, as well for holding
this hearing.
Senator Sarbanes, I only caught the last part of his
remarks, but I could not agree more with him. There is this
mystical quality--if it is the Internet, it must be somehow
inherently good. And there are obviously wonderful benefits
that have accrued to millions of people across the globe as a
result of the development and the expansion of Internet
services. But the idea that anything associated with it is
somehow inherently going to be good, or inevitable, is
troubling.
Mr. Chairman, thank you for having a very good panel of
witnesses on the subject matter as well. One of the witnesses
appearing on the second panel is the Attorney General from the
State of Connecticut, Dick Blumenthal, who has been I think one
of the longest-standing attorney generals now in the country
and has done a very fine job on these issues as well. He has
been very, very thoughtful and a tireless advocate for the
people of our State.
I have been told that 48 of the 50 States currently allow
gambling of one kind or another. Certainly, my State is an
example where we have significant gambling activities. Two of
the largest casinos in the world now are located in the State
of Connecticut and do a very fine job, in my view, with their
activities, their employment, and the like. But we are a little
small State, about the size of Yellowstone National Park, and
have become a major venue for people in gambling activities.
Internet gambling is illegal. As we know, at least to some
extent, the Federal Wire Act of 1961 was written to prevent
sports betting by telephone and has been successfully applied
to the Internet by some--though not all--of the Federal courts
in the country. As the Attorney General from Connecticut, Mr.
Blumenthal, points out in his written statement which you will
hear shortly, the mere existence of the Federal Wire Act and
the threat of possible criminal prosecution has been enough to
discourage the establishment of online gambling web-
sites here in the United States.
Unfortunately, there are two problems that have allowed
Internet gambling websites outside of the United States to
cater to Americans. First, the Wire Act was written before
anyone had any idea of course, or contemplated the Internet as
a means of communication and commerce, so there is some
confusion about how to apply the Act. The second problem is
enforcement, obviously. Because the online casinos are
physically located outside of the territory of the United
States, enforcement of the Wire Act is difficult, to put it
mildly.
The reality is, of course, that tens--perhaps hundreds--of
thousands of Americans are going online and losing millions of
dollars each day. The current estimates of online gambling
suggests that Americans are losing between $1.6 billion and
$4.1 billion each year to offshore Internet gambling
facilities. That fact alone is not in and of itself troubling--
because in our country the right to throw your money away has
never been in dispute.
[Laughter.]
But online gambling poses some particular risks that have,
likewise, never been in dispute. These include the risk of
children's welfare, not to mention their families' finances,
the risk of greater abuse and addiction, the risk of consumer
fraud by operators of rigged games, and the risk of money
laundering.
On the flip side, there is little to be gained in the way
of new jobs and other economic benefits associated with online
versus casino gambling.
The anonymity of the Internet also creates new problems.
Every State in the country prohibits minors from betting. It is
also illegal for adults to knowingly accept bets from children.
But online gambling sites do not see their customers and they
do not effectively check, of course, the age or the identity of
those who are using their services. According to the Federal
Trade Commission, it is now very easy for children to gamble
online, especially if they have access to credit cards. This is
a problem that I think the Congress must address.
I think it is wise for Congress to consider banning the use
of credit cards and other financial instruments in furtherance
of online gambling transactions. Indeed, I applaud the recent
actions taken by Citibank, Bank of America, Chase Manhattan
Bank, PayPal, and others who have started to block gambling
transactions. Offshore casinos and gambling websites should not
be able to take advantage of American citizens by taking
advantage of our credit card system.
However, I believe that we have to be careful not to
provide exceptions that will consume the rule. When Congress
passed the Federal Wire Act, Congress decided that it would be
a bad idea to allow the dial-a-bet industry to develop in the
United States and, as far as I can tell at this point in the
debate, it seems to me that the same reasoning should apply to
the Internet. It is hard to see why click-a-bet services--even
if sanctioned by State government--would be any better for
consumers than dial-a-bet.
Obviously, this is a complex issue. However, as we consider
reform, I think we must be certain that whatever Congress does
in this area is carefully measured to provide the fullest
possible protection to the public--especially children and
their families.
So, Mr. Chairman, I look forward to the testimony of our
witnesses today. I thank them for being here. And again, I
thank you for holding this hearing.
Chairman Shelby. Thank you.
Senator Kyl, your written statement will be made part of
the record in its entirety. We welcome you to the Committee.
Please proceed as you see fit.
STATEMENT OF JON KYL
A U.S. SENATOR FROM THE STATE OF ARIZONA
Senator Kyl. Thank you, Mr. Chairman, Senator Sarbanes, and
Senator Dodd. If I were still practicing law, I think I would
be tempted to say, I rest my case in view of your very strong
and supportive statements, which make most of the points that I
would make. I will be, therefore, very, very brief.
To note the bipartisan nature of this, Paul Simon was one
of the first people that helped to get me involved in this
issue and I have tried to keep him up-to-date with what we have
been doing in the years since we began work on this.
In December 1995, when I introduced the first Act, and then
we were complaining because there were two dozen Internet
gambling websites--and now, as you have noted, there are almost
2,000, according to the GAO report, with wagers estimated to be
upward of $5 billion.
You have also mentioned the addiction and, indeed, referred
to the testimony or the statement of Dr. Howard Schaeffer, who
talked about the addictive nature of the Internet and likening
it to crack cocaine.
I just saw in the paper, too, on the sports pages, the
problems that Jaromir Jagr has gotten into, racking up over
half a million dollars in Internet gambling losses, which just
illustrates the point and especially makes it with respect to
sports betting.
As you have also noted, youth are particularly susceptible
to this. The college dormitories are rife with this, we are
told by our friends at NCAA. And the thousands of dollars that
have been lost to gambling on the Internet by students is well-
documented. The American Psychiatric Association's Dr. Sheila
Blum confirms that young people are particularly susceptible to
Internet gambling addiction. There has also been similar
testimony before the National Council on Problem Gambling.
Unfair payouts are another matter that I do not think
anybody alluded to, but a national gambling impact study made
this point, that anybody who gambles over the Internet is
probably making a sucker bet.
Senator Dodd, you made the point that there are certain
kinds of gambling permitted in most of the States, which is
highly regulated, and that is the problem--this is something
that is just virtually impossible to regulate. The New York
Times recently cited one analyst who estimated that 35 percent
of Internet casinos might not pay what they owe, or might
fiddle with the odds in an underhanded way.
You also alluded to the problem of crime. One estimate is
that up to 90 percent of pathological gamblers commit crimes to
pay off their wage-earning debts.
And there is an interesting State Department report cited
in the International Narcotics Control Strategy Report last
year that noted, and I am quoting now: ``Internet gambling
executed by the use of credit cards and offshore banks
represents yet another powerful vehicle for criminals to
launder funds from illicit sources, as well as to evade
taxes.''
For all of these reasons, and more, the National Gambling
Impact Commission recommended that Congress address the problem
of Internet gambling. We have been trying to do that now for
the last several years.
As you noted, Mr. Chairman, this is both a national problem
and a Federal problem because the Internet knows no State
boundaries.
And it was interesting to me that when we first began this
effort, the National Association of Attorneys General came back
to testify before my Subcommittee of the Judiciary Committee.
Now Governor of Wisconsin, then Attorney General, Jim Doyle,
testified, and I am quoting him here: ``The National
Association of Attorneys General took that step that many of us
never imagined. The organization recommended an expansion of
the Federal Government's traditional law enforcement role.''
Specifically, we urged the Federal Government to enact
legislation to prohibit gambling on the Internet. And he has
made a point of that before, that this is going to require
close cooperation between the States and the Federal Government
with the Federal Government playing a key role here because of
the interstate nature of this problem.
As you know, the Leach-Oxley bill passed the Financial
Services Committee in the House Thursday by a voice vote
without amendment. The version that is before you is virtually
identical to that.
I would like to thank both Senator Sarbanes and Senator
Shelby, and their staffs, who have been enormously helpful to
us in analyzing this. They have suggested a few changes to the
legislation, all of which in my view strengthen the
legislation. I appreciate the professional staff that you have
put to this problem as well.
As I said, I think all of you made the case, so I will not
take further time, unless you have any questions you would like
to ask me.
Chairman Shelby. Senator Sarbanes, any questions?
Senator Sarbanes. No questions, Mr. Chairman.
Chairman Shelby. Senator Dodd.
Senator Dodd. No. Thank you, Jon.
Senator Kyl. Thank you. Thank you very, very much for your
interest in this legislation.
Chairman Shelby. Thank you, Senator Kyl.
Moving on, our second panel will be: John G. Malcolm,
Deputy Assistant Attorney General, Criminal Division, U.S.
Department of Justice; Richard Blumenthal, Attorney General,
State of Connecticut, on behalf of the National Association of
Attorneys General; L. Richard Fischer, Attorney at Law,
Morrison & Foerster; Frank J. Fahrenkopf, Jr., President and
CEO, American Gaming Association; William S. Saum, Director of
Agent, Gambling, and Amateurism Activities, National Collegiate
Athletic Association; Stewart A. Baker, General Counsel, U.S.
Internet Service Provider Association; and Frank Catania,
President, Catania Consulting, on behalf of the Interactive
Gaming Council.
We welcome all of you here today. All of your written
testimony will be made part of the record in its entirety.
We will start with Mr. Malcolm.
Mr. Malcolm, welcome to the Committee.
STATEMENT OF JOHN G. MALCOLM
DEPUTY ASSISTANT ATTORNEY GENERAL
CRIMINAL DIVISION, U.S. DEPARTMENT OF JUSTICE
Mr. Malcolm. Thank you, Mr. Chairman.
Mr. Chairman, Members of this Committee, thank you for
inviting me to testify before you today. The issue before this
Committee is one of singular importance, and I commend the
Committee for holding a hearing on this issue. I would also
like to commend Senator Kyl, as well as Congressmen Goodlatte
and Leach, 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. As set forth more
fully in my prepared testimony, the Department of Justice has
concerns about Internet gambling because of the potential for
gambling by minors and compulsive gambling, the potential for
fraud and money laundering, and the potential for the
involvement of organized crime.
Most of these Internet gambling businesses are operated
offshore in foreign jurisdictions. If these businesses 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 of the
United States Code. While the United States can bring
indictments against these companies or the individuals
operating these companies, the Federal Government may not be
able to bring such individuals or companies to trial in the
United States.
In addition to online gambling itself, the U.S. Government
is also concerned about the substance and scope of advertising
for online gambling. Such advertisements are omni-present on
the Internet, in print ads, and over the radio. The sheer
volume of advertisements for offshore sports book and online
casinos is troubling because it misleads the public in the
United States into believing that such gambling is legal, when
in fact it is not. Indeed, many of these advertisements
affirmatively foster that erroneous belief.
In addition to the Federal Government, many State
governments have also taken actions against online gambling.
For instance, the New York State Attorney General reached an
agreement with Citibank to block credit card payments of online
gambling transactions by its customers. The same Attorney
General recently reached an agreement with PayPal to stop
processing payments from New York State customers to online
gambling merchants.
On behalf of the Department of Justice, I want to thank you
for inviting me to testify here today. We thank you for your
support over the years and reaffirm our commitment to work with
Congress to address this significant issue of Internet gambling
and to cut off the transfer of funds to and from illegal
Internet gambling businesses. While we have some technical and
other concerns about these bills, we support the sponsors'
efforts to address gambling on the Internet.
I will be happy to answer your questions.
Chairman Shelby. Mr. Blumenthal.
STATEMENT OF RICHARD BLUMENTHAL
ATTORNEY GENERAL, STATE OF CONNECTICUT
ON BEHALF OF THE
NATIONAL ASSOCIATION OF ATTORNEYS GENERAL
Mr. Blumenthal. Thank you very much, Mr. Chairman, and
thank you for including the Attorneys General of the States in
this hearing. We have been very vocal and vigorous advocates of
the kind of legislation that Senator Kyl has championed and you
have aided and others on this Committee, such as Senator
Sarbanes and Senator Dodd, have advocated as well. This area
offers a unique opportunity, indeed, an obligation, for
Federal-State cooperation.
Under current law, all of the difficulties mentioned by the
U.S. Department of Justice afflict our enforcement efforts and
many more. The challenge is one of enforcement against a
spreading evil that has all of the very troubling social and
economic impacts that Members of this Committee have described
so well.
As Senator Dodd said, the appeal to children, the
vulnerability to addiction, the possibility of fraud and money
laundering, all are aggravated by online and Internet gambling.
I believe that the States should continue to have a role,
as the legislation that we have seen suggests. The States
should continue to have an enforcement role, but should be
working with the U.S. Government to attack the financial
infrastructure, the financial lifeblood of this spreading
industry.
If we can shut down the means of payment, the credit card,
financial instruments, e-payment, and other kinds of similar
financial infrastructure, we can get to the root of this
problem and really have an effective enforcement mechanism with
tough penalties--and I urge that the penalties be tough--and
without exceptions.
If I can just leave you with one thought. I believe this
law should be clear, broad, unassailable, without any
exceptions, even for State-sanctioned gambling. If we have
exceptions, they will swallow the rule. And as much as we may
be advocates of State revenue in tough economic times, and many
of the State-sanctioned forms of gambling produce revenue for
the State, to provide an exception for that type of gambling, I
think, makes this system intolerably porous and open for abuse.
And so, I thank you for this opportunity to be with you and
I look forward to the other testimony.
Chairman Shelby. Thank you.
Mr. Fischer.
STATEMENT OF L. RICHARD FISCHER
ATTORNEY AT LAW, MORRISON & FOERSTER, LLP
Mr. Fischer. Thank you, Chairman Shelby, Ranking Member
Sarbanes, and Senator Dodd. I am Rick Fischer. I am a partner
in the law firm of Morrison & Foerster. I was asked to come in
here today because I have over 30 years' of experience advising
banks and payment systems on compliance issues, particularly
those, for purposes of this hearing, relating to blocking of
Internet gambling transactions and responding to litigation and
customer disputes arising out of Internet gambling.
As you have heard already, Internet gambling presents
unique challenges not only for law enforcement, but also for
payment systems. Internet gambling can be done entirely over
the Internet. There is no need for exchange of cash or illicit
goods.
And as we have heard, the casinos are typically located
offshore, where Internet gambling is illegal and beyond the
reach of U.S. law enforcement authorities. This makes gambling
uniquely difficult to detect or control, and I think that
really is the point here. As a result, efforts to address
Internet gambling have focused on payment systems--you have
heard that--including Visa and MasterCard. I am not here on
behalf of either of those associations. I am here because the
Committee staff asked me to come in as an expert in this area.
These associations are composed of thousands of regulated
financial institutions. They process billions of transactions
for millions of merchants located throughout the world.
Internet gambling casinos do, in fact, seek payment from the
associations or, really, from their card-issuing members.
But those card issuers and the associations have no
interest in these illegal Internet gambling transactions. In
fact, system rules in both associations prohibit the use of
cards for any illegal transactions. Internet gambling
transactions in particular have led to costly litigation. I
have advised clients in and through that litigation. And also,
customer disputes, including disputes with customers who
otherwise are model customers. Internet gambling also affects
the ability of cardholders to meet their account obligations
generally, not just these transactions, but generally. As a
result, they create risks that extend far beyond the gambling
transactions both to reputational risks and regulatory
responses.
Therefore, card issuers and the associations have taken
steps to limit the use of cards for this purpose. We have heard
reference to some of those already. But more specifically, the
associations require gaming merchants to use a combination of
codes--gaming codes and electronic commerce codes--to enable
those transactions to be blocked. And in fact, now most major
card-issuers already do block those transactions. According to
a December report from the GAO, the Internet casinos now
estimate that four out of every five requests for credit card
payments are denied.
Blocking these transactions, though, is no small
undertaking since the associations typically process thousands
of transactions every second. For example, Visa alone processes
between 3,000 and 6,000 transactions every second. As a result,
the associations and their members must rely on coding systems
to identify these Internet gambling transactions and to block
those transactions.
It is also important to recognize some of these
transactions are miscoded and, in fact, as a result, some
transactions will escape the blocking mechanisms.
It is also important to recognize that although the
legislation is directed at illegal Internet gambling
transactions, not all Internet gambling transactions are
illegal. For example, a U.S. cardholder who is visiting London
or, in fact, has moved to London for a period of time, using a
U.S. bank card, can engage in Internet gambling in the United
Kingdom, where it is completely legal.
As a result, what the coding systems can say is that these
transactions are likely Internet gambling transactions. They
cannot say whether they are legal or illegal. Therefore, with
the current blocking mechanisms, all transactions identified as
Internet gambling transactions are blocked. This means both
legal transactions and
illegal transactions.
As a result, the legislation you are considering should
recognize that fact and provide a safe harbor for both the card
issuers and the associations that are, in fact, blocking
transactions, whether or not those transactions are legal or
illegal. And in fact, that safe harbor also should extend to
situations where they are not covered.
Several card issuers are already blocking transactions as I
have indicated, and the participants in the system are prepared
to work with this Committee and the Congress and doing so in
the future.
Thank you.
Chairman Shelby. Mr. Fahrenkopf.
STATEMENT OF FRANK J. FAHRENKOPF, JR.
PRESIDENT AND CEO, AMERICAN GAMING ASSOCIATION
Mr. Fahrenkopf. Thank you, Mr. Chairman, Senator Dodd. I am
Frank Fahrenkopf, the Chairman of the American Gaming
Association, which is the national trade association for the
commercial
casino industry and commercial casino manufacturers. We do not
represent Native American casinos or the lotteries, the pari-
mutuel industry, and other legal gaming. They have their own
spokes-
people who represent them. Our member companies are industry
leaders, such as most of you have probably heard--MGM MIRAGE,
Harrah's Entertainment, Park Place Enterainment, and others. We
operate land-based casinos and riverboat casinos in 11
jurisdictions. The vast majority of our companies are publicly
held and listed either on the New York or Nasdaq stock
exchanges.
It is a pleasure to appear before you today on behalf of
the AGA with regard to S. 627.
The position of the American Gaming Association has
remained constant since Congress first began considering
Internet gambling legislation. I think, as Senator Kyl said, it
was 7 or 8 years ago when he made his first endeavor here in
the Senate. The AGA maintains the view that the technology
necessary to provide appropriate regulatory and law enforcement
oversight does not presently exist with regard to Internet
gambling so as to properly regulate the integrity of the games
and the security and legality of financial transactions, and to
minimize the potential for underage and pathological gambling.
Unless and until those concerns can be adequately addressed,
the AGA remains opposed to Internet gambling.
In addition, Mr. Chairman, as we review any bills here in
the Congress of the United States with regard to gaming
legislation, we look at them to try to meet three tests. One,
any legislation should not create an unfair advantage for any
one segment of the gaming industry. Two, it should not impinge
upon or curtail States' rights. And three, it should not make
anything that is currently legal, illegal.
Let me quickly talk about those.
First, we would not support any bill that gives
preferential treatment to any other form of legal gaming at the
expense of our segment of the industry. In other words, all
forms of legal gaming in this country should be treated with
parity.
Second, we oppose any changes to the 200-year-old framework
of the State-based oversight of gambling. Federal law has
always ``back stopped'' the right of each State to determine
its own policies on gaming pursuant to the 10th Amendment. As a
result, each State should have the right to determine whether
or not it will allow any form of gambling and, if so, how it
will be regulated and taxed. Federal Internet gaming
legislation, we believe, should follow the model of the Wire
Act and permit States to make decisions about the use of
technology within their borders by licensed gaming companies.
Third, I would ask you to take into account the rapid
advances in technology today and not criminalize activity that
is currently legal. Our industry, like other businesses, will
want to take advantage of these two technologies to make
operations more efficient.
In short, we feel that it is important to draw a
distinction between the use of technology to circumvent Federal
and State restrictions and regulations as we believe is done by
those operating illegal offshore Internet gambling sites and
the use of technology by licensed operators to more efficiently
deliver their services where, to whom, and under what
conditions they are authorized by Federal and State law to do
so. Any changes to Federal or State laws in the pursuit of
making Internet gambling illegal need not and should not be
drawn so broadly as to lump the use of technology within
otherwise legal limits in the same prohibited status as illegal
Internet operations. I think this position is consistent with
the Wire Act, which, since the 1960's, permits the use of wires
for wagers and information assisting in the placing of wagers
where the transactions are entirely intrastate, or between
States, in which the wagering in question is legal.
Our major concern with illegal Internet gambling as it
exists today is it allows the approximately 2,000 offshore
websites to circumvent State policies, including current
restrictions on the availability of gambling within each State.
Although every State except three have some form of legalized
gaming today, illegal Internet gambling makes casino gambling
and sports wagering available in every State, regardless of
existing Federal or State laws.
Illegal Internet gambling also allows unlicensed, untaxed,
unsupervised operators to conduct business alongside gaming
operators who are subject to some of the most comprehensive
Federal and State controls of any industry in this country.
Nearly every aspect of a commercial casino business--from
licensing to operations--is strictly regulated. In the 11
States where commercial casinos are legal, they are not
permitted to operate without prior State approval, which
includes exhaustive background checks on key personnel and
major shareholders and investors. Some States do the same for
major vendor-suppliers.
In addition to State regulations, there are important
Federal requirements applicable to commercial casinos and other
forms of legal wagering in this country. For example, U.S.
commercial casinos are subject to Federal corporate taxation,
publicly traded companies comply with financial disclosure and
other SEC rules. Our casinos file information reports on large
winnings. We withhold Federal taxes on certain winnings. And
most importantly, in this instance, our casinos adhere to
antimoney laundering legislation and statutes and regulations
administered by the U.S. Treasury Department's Financial Crimes
Enforcement Network.
These Federal laws, rules, and regulations, as well as the
States', are there to prevent abuse. Illegal Internet gambling,
we believe, threatens the integrity of all business involved in
legalized gambling in the United States.
In conclusion, Mr. Chairman, I would say that S. 627
attempts to find a way to address this problem by essentially
banning the use of credit cards and other financial instruments
to conduct illegal Internet gambling. The American Gaming
Association did not oppose similar legislation in the House. We
worked with Mr. Leach and Mr. Oxley's staff. I would say,
however, that that support was the result of careful
negotiation based upon those three rules that I talked about
earlier and how we view all attempts to limit gaming. We
believe that we are in the middle of evaluating the present
bill by Senator Kyl, whom we have worked with for years. We
just received the bill I think on Friday, so we haven't had a
chance to go through it. But assuming that there are no
substantial changes in the bill, we would expect to have the
same position here in the Senate with Senator Kyl's bill that
you are a co-sponsor of.
Thank you very much.
Chairman Shelby. Mr. Saum.
STATEMENT OF WILLIAM S. SAUM
DIRECTOR OF AGENT, GAMBLING
AND AMATEURISM ACTIVITIES
NATIONAL COLLEGIATE ATHLETIC ASSOCIATION
Mr. Saum. Chairman Shelby, Ranking Member Sarbanes, and
Senator Dodd, on behalf of the National Collegiate Athletic
Association, thank you for inviting me to testify today to
provide our perspective on collegiate sports wagering. This is
a matter of great importance for our over one thousand colleges
and unversities and hundreds of thousands of student athletes.
As an individual on the NCAA staff who has spent nearly 7 years
working daily on this issue, it is a matter of personal and
professional importance.
I am not here today to promise that banning Internet
gambling is the total answer to such an insidious problem as
gambling on college sports, but it is part of the equation. The
NCAA believes that there should be a prohibition on all legal
and illegal sports
wagering. It is about what is right for student-athletes and it
is about what is right for college athletics.
The NCAA membership has adopted specific rules prohibiting
athletics department staff members, conference office staff,
and student-athletes from engaging in sports gambling
activities, which also include Internet wagering. It is not
permissible to provide information to individuals who are
involved in organized gambling activities, or to solicit or
accept a wager on college or professional athletics. This rule
also applies to NCAA national office staff.
We have established other Association policies for
activities associated with gambling. The NCAA Division I Men's
and Women's Basketball Championships may not be conducted in a
metropolitan area with an open legal sports book. For example,
there are no men's basketball championship sites in the State
of Oregon, where the lottery is based on the outcome of NFL
contests. The NCAA does not permit its committees to meet or
conduct formal social activities in casinos. We have also
requested our corporate champions not to engage in promotions
connected to the outcome of games. For the fourth straight
year, we have conducted background checks on game officials who
officiate in the Division I Men's and Women's Basketball
Championships to assure that they have had no involvement in
sports wagering. We do the same for the national office men's
basketball staff members; the agent, gambling, and amateurism
activities staff members; and the members of the Division I
Men's and Women's Basketball Committees.
While the Internet offers tremendous educational potential,
this technology should not be used to circumvent State and
Federal laws. Accessibility to the Internet is perhaps the
greatest reason for concern regarding Internet gambling. Many
students have unlimited use of the Internet and most of their
residences are wired for Internet access. In fact, there may be
no group in this country who has more readily available access
to computers and the Internet than college students. For the
NCAA, the potential exists for a student-athlete to place a
wager via the Internet and then attempt to influence the
outcome of the contest while participating on the court or the
playing field. Our students, many of whom have access to credit
cards, are lured into online gambling by unscrupulous
operators. A recent Nellie Mae study revealed that 90 percent
of 20-year-olds have credit cards, with the average number of
cards being four and the average debt being approximately
$2,200. The proliferation of Internet gambling is fueling the
growth of illegal sports gambling on college campuses across
our country.
As an organization, we have committed to conducting
national research regarding student-athletes and sports
gambling. We recognize that estimates indicate more than $3
billion will be wagered at approximately 2,000 Internet
gambling sites in 2003, with 50 to 70 percent of that total
coming from the United States.
The Association has developed relationships with and made
presentations to various law enforcement groups, including the
FBI and the U.S. Attorney General's advisory group, campus
security officers, coaches associations, and campus student
life personnel. This spring, we are again reaching hundreds of
our Association members through sessions about sports wagering
at our annual compliance seminars.
We use various tools to educate our student-athletes and
coaches with our messages about sports wagering. Among those
initiatives are locker room visits with members of the men's
and women's Final Four, the Frozen Four teams, and the
finalists of the College World Series. Our approach is truly
grassroots, and must be.
It is important to remember that the NCAA is a member of
the higher education community. Among our primary functions are
those of providing athletics participation opportunities within
the framework of higher education and providing protection for
student-athletes. We are about education and providing
information to our membership that can lead to life-changing
experiences both in the classroom and on the field. Our mission
as an Association is to build an infrastructure of awareness
and support to equip those involved with student-athletes with
the tools to educate them about damaging influences, including
sports wagering.
We are not an organization poised to infiltrate illegal
gambling networks. We are not an organization with the
authority or the charge to investigate illegal gambling
activities on college campuses or elsewhere. We have, and
continue to, process cases involving sports wagering when they
come within the authority of our organization. We have brought
attention for more than 5 years to a problem we would prefer
did not exist, which is there is illegal gambling on college
campuses involving student-athletes. We support closer scrutiny
of illegal wagering throughout society--this is not isolated
just to our college campuses--and certainly, it should be
discussed within the framework of the entire issue.
The NCAA's strategy to attack problems associated with
wagering on college sports is multifocused. We continue to
carry the message that sports wagering is an issue for our
student-athletes and we have worked diligently to educate them
about the problem. But we need assistance and we believe that
strong legislation is needed to prohibit gambling over the
Internet.
The system of intercollegiate athletics we have is unique
to the world. We must do everything we can to protect the rich
heritage, tradition, and integrity of its competition. We need
to do what is right for the college game and what is right for
our student-athletes and make gambling on college sports
illegal everywhere, all of the time.
Thank you.
Chairman Shelby. Mr. Baker.
STATEMENT OF STEWART A. BAKER
GENERAL COUNSEL
U.S. INTERNET SERVICE PROVIDERS ASSOCIATION
Mr. Baker. Chairman Shelby, Ranking Member Sarbanes, and
Senator Dodd, my name is Stewart Baker. I am here on behalf of
the U.S. ISP Association. But I am not here to tell you that
everything that happens on the Internet is a good thing.
We know that very well because our members have permanent
staff who do nothing but track down unlawful activity on the
Internet and put a stop to it. We work closely with the Justice
Department and John Malcolm and also with the attorneys
general.
I am here to tell you that if you are going to try to
regulate activity on the Internet, the best way to do it is in
a fashion that takes into account how the technology works.
In our written testimony, we have laid out some principles
that we think allow the Government to deal with unlawful
activity in ways that properly take account of how the Internet
works.
In that context, there are two or three principles that are
worth bearing in mind.
ISP's control parts of the Internet. No one controls the
whole thing. The parts that ISP's control, they are happy to
take action. When they get notice from courts that unlawful
activity is taking place there, they will put an end to it. And
all we ask is that the notice that we receive of the unlawful
activity come in an orderly way so that we can actually
identify that it is official and correct.
There are a couple of things that we ask that you not do.
And that is, please do not ask us to monitor and take
responsibility for being sure that everything that happens on
our network is lawful. That is like asking the phone company to
make sure that every conversation that occurs on the phone is
lawful. Also, please do not ask us to try to block activities
that are outside of our network some place else on the
Internet. That doesn't work and in the long run, it will cause
the Internet to cease to function properly.
Those are the basic principles. If I could take a personal
moment.
I am a former General Counsel of the National Security
Agency, Senator Shelby. And I have to say that the report, the
opinion that you have issued on the causes of September 11 is
the most insightful, the most eloquent statement of the
problems that the community faced, and we all owe a debt of
gratitude to you for producing that report.
Chairman Shelby. Thank you.
Mr. Catania.
STATEMENT OF FRANK CATANIA
PRESIDENT, CATANIA CONSULTING
ON BEHALF OF THE
INTERACTIVE GAMING COUNCIL
Mr. Catania. Chairman Shelby, Senator Sarbanes, Senator
Dodd, I would like to thank you for the opportunity to testify
today with regard to Internet gambling. I have been actively
involved in all aspects of gaming, having served as Assistant
Attorney General and Director of the New Jersey Division of
Gaming Enforcement, which is the world's largest gaming
regulatory enforcement agency. I have also served as Chairman
of the International Association of Gaming Regulators, Chairman
of the Forum of American Casino Regulators and Immediate Past
President of the International Masters of Gaming Law.
Internet gambling is a controversial subject in the United
States. Some opponents in Congress have advocated a total ban
on Internet gambling for Americans. Supporters of legal
Internet gambling have been steadily at work dispelling myths
and lobbying against prohibitory legislation. As a result, very
little consideration has been given to developing and proposing
a practical and politically palatable regulatory scheme for
legal and regulated Internet gambling in the United States.
Both supporters and opponents of legal Internet gambling agree
that something must be done. It is my opinion that a serious
discussion of regulation, rather than prohibition, is needed.
Gambling is one of the fastest growing forms of
entertainment in the world, particularly now when governments
are exploring other means to produce revenue. The application
of gambling to the Internet has created a market force that
cannot be stopped without pulling the plug on the entire World
Wide Web.
The total number of Internet gaming sites is estimated to
be 1,800, as was said before, with a projected gross income of
$4.3 billion for 2003. Remarkably, in spite of all attempts to
place a domestic ban on Internet gambling, approximately 60
percent of this figure will come from the United States.
Internet gambling revenues are not just being generated by
gamblers in the United States, but worldwide. Many countries
are either embracing Internet gambling or tolerating it because
there is no effective way to stop it, while some countries have
actually concluded that modern technology has rendered their
gambling laws obsolete.
Financial Crimes Enforcement Network recently completed a
survey of how other countries are dealing with the issue of
Internet gambling and they confirmed that most countries have
arrived at the conclusion that legalized Internet gambling,
with oversight and regulation, is a ``workable solution'' from
both an economic and law enforcement standpoint. For example,
Great Britain has recently publicly endorsed legalized and
regulated Internet gambling.
U.S. Representatives John Conyers and Christopher Cannon
recently introduced legislation to create a commission that
would recommend ways that the Federal and State governments
could potentially regulate Internet gambling.
It is my hope that the Members of this Committee will
recognize that legalization and strict regulation, rather than
prohibition, could achieve important policy goals. A commission
could learn about the Internet gaming industry and potentially
develop sensible solutions for the protection of U.S. residents
and businesses.
The debate on Internet gaming needs to include discussion
on how regulation can reverse the current situation where
monies from U.S. citizens leave the United States with no
subsequent benefit, directly or indirectly, to our Government
or to our citizens. One consequence of this is the fact that no
funds are dedicated for protecting children and problem
gamblers through education or other programs.
Money laundering is also a major concern today. Currently,
Internet gaming involves credit card transactions with a clear
record of every wager. The proposed legislation, similar to
Representative Leach's legislation in the House, would appoint
the
financial services industry as the Internet police. If credit
card companies and associations decline transactions for
Internet gambling, Internet gaming operators and players will
be forced to use alternative payment methods. Money laundering
is extremely difficult in a situation where cash is not an
option and every electronic transaction is recorded. However, I
would caution that a ban on credit cards and other financial
instruments for Internet gaming will likely result in the
development of settlement solutions that banks cannot recognize
and block--such as anonymous e-cash.
This industry is a new phenomenon and requires thoughtful
study. Some of the legal and technical issues a commission
exploring potential regulatory schemes would look at include:
Amending Federal law, preserving States' rights, cash
transaction reporting practices and procedural safeguards to
protect against money laundering, tax revenue sharing, random
testing of games and software to ensure fairness and consumer
protection, licensing requirements, background checks of
qualified operators, enforcement of underage gambling statutes,
and methods of identifying and helping problem gamblers.
Taxation and tax preservation are major consideration for
governments. Although Congress recently extended the ban on
Internet taxes, it still receives revenue from companies that
participate in e-commerce. However, the Federal and State
governments are currently receiving no revenue from Internet
gambling.
While many in Congress view study commissions as a strategy
to delay legislation, there has not been an issue more
deserving of further study than Internet gaming policy. The
complexities of Internet gaming demonstrate the complexities of
traditional, regulated businesses evolving to the new truly
global marketplace created by the Internet.
Once again, thank you, Mr. Chairman, for the opportunity to
speak here today.
Chairman Shelby. I thank all of you. In addition to the
witnesses that we have just heard from here, Dr. James Dobson,
of Focus on the Family, was unable to join us today. However,
he sent a strong letter in support of Congressional efforts to
ban unlawful Internet gambling. That letter will be made part
of the record in its entirety. But I would like to read just an
excerpt from the letter, and I will quote it. This is from the
letter from Dr. Dobson.
During the course of my service on the National Gambling
Impact Study Commission, my fellow Commissioners and I
overwhelmingly concurred that all forms of Internet gambling
should be outlawed. Because several of my colleagues were
themselves representatives of the gambling industry, our
findings are particularly significant.
In addition, you may be aware that there is emerging data
from other sources that points to the harmful consequences of
online gambling. Young people and individuals who struggle with
preexisting gambling addictions are among those who are
especially vulnerable to the lure of this activity.
And with more and more households gaining access to the web
every day, Internet gambling is poised to penetrate an even
broader segment of the population. Now is the time for our
Nation's leaders to put a stop to this dangerous pursuit before
it wreaks further havoc on the lives of these individuals and
their families across the country.
I have a few questions now.
The American Psychological Association has studied
pathological gambling in the United States and Canada and found
that the young suffer from gambling problems at much higher
rates than the adult population. Are these findings consistent
with your experience at the NCAA? And by this I mean, are young
people particularly susceptible to a gambling addiction?
Mr. Saum. Senator Shelby, that information is what we also
find as we go through our investigations and review. Young
people, especially athletes, have characteristics that put them
at risk, such as being risk-takers, being very aggressive
individuals, believing they do not do anything wrong and having
great confidence in what they do, all great characteristics of
great athletes. But when they go to the wrong side, it puts
them at risk for gambling issues.
Chairman Shelby. Any of us who know teenagers and who have
had children and have been around children and young adults are
well aware of how computer-literate and savvy these youngsters
are. It is a new generation.
College students in particular are very likely to have
access to the Internet, frequently in the comfort of their own
dorm room or apartment. What types of efforts are being made by
computer system administrators on college campuses to restrict
access to Internet gambling sites?
Mr. Saum. Our campuses, to be quite honest, still need to
get better at doing what you are suggesting. We are trying to
help educate them on how to do that.
We have put in some procedures and policies at our
collegiate athletic level by having to check for bookmarks.
Also, we issue computers to our athletes, so we continually
check those also.
Chairman Shelby. Mr. Catania, in your testimony, you call
for legalizing heavily regulated Internet gambling. However,
even if
legalized, it stands to reason that many Internet casinos would
remain offshore. Even if Internet gambling were legal in the
United States, what impetus would there be for an offshore
casino to move to the United States and subject themselves to
regulation and to the laws? And also, how do we regulate
casinos that are outside the jurisdiction of the United States?
Mr. Catania. Senator, I think that the first issue is if we
had a regulated system here, U.S. players would not be looking
offshore to play. They would be looking at the casinos that are
regulated basically the same way that the casinos are
regulated, land-based casinos are regulated.
I have to say that land-based casinos are probably the most
regulated industry in this country, in order to make sure the
players are protected.
That is what I think has to happen here. There has to be
player protection. And if that occurs, then what will happen is
that you then will have people moving away from the offshore
and coming and playing with the companies that are regulated by
the States.
Chairman Shelby. Mr. Malcolm, do you have a comment?
Mr. Malcolm. Yes, Senator. I think you hit the nail on the
head. I think that there are places in the world in which
regulation and law enforcement can be effective, and there are
many places in the world in which regulation and law
enforcement can be minimal or practically nonexistent. And
illegal ventures tend to gravitate to those areas, for obvious
reasons, as well to say that, all of a sudden, if we regulated
this industry in this country, that people would not be
attracted to offshore accounts, I think is to wink at reality.
I believe that offshore enterprises can make themselves
attractive in the same way that fraudsters today make
themselves attractive in all manner of ventures.
Chairman Shelby. How would you tell if a site is offshore
or regulated? You have the World Wide Web.
Mr. Malcolm. The short answer to your question is, not a
very satisfactory answer, that we need to do a lot of gumshoe
work and conduct an investigation. When you are using the
Internet, it is very easy to route communications throughout
the world.
Indeed, through the United States and all manner of
countries, it is easy to manipulate software, to change the
odds, to favor the casino in this case. Internet businesses
open and close. As you have already pointed out, they
frequently collect from the losers and do not pay off the
winners. You have to conduct an investigation.
Chairman Shelby. How would you design a regulatory regime
that would permit a casino to determine without a doubt that
the bettor in front of each terminal is not under age? That
would be hard, wouldn't it?
Mr. Catania. It is difficult, but I have to say that even
in the land-based casino where you have the physical presence
of an individual who is underage, it is still difficult to keep
an underage player off.
I think that there are different ways of doing the
registration process that could eliminate a large percentage,
if not most.
No one is going to say that it is going to be 100 percent.
I could say that you could probably keep off 90 to 95 percent
by the registration process, by having PIN numbers, by having
that person sign up and not be allowed to wager, a limit would
be placed on him until they get hard proof who that person is,
and then something be sent back to that person at that address.
Chairman Shelby. Mr. Fahrenkopf, do you have any comment?
Mr. Fahrenkopf. Mr. Chairman, we have talked a lot here
about States' rights and I think that that is something we
should reflect on for a moment.
As everyone has said, this industry is very tightly
regulated at the State level. There are State regulators with
law enforcement oversight in every one of the 11 States where
commercial casinos exist. Those regulators, those
professionals, do not believe the technology now exists to
adequately regulate and control.
I have people who come by my office every other day tell me
that they have software that can prevent juveniles from
gambling. They can prevent people in another jurisdiction where
it is illegal from gambling. I always tell them--go see the
Nevada Gaming Control Board. Go see the New Jersey Gaming
Commission. Go to Illinois. Go to Mississippi. You have to
convince those professionals first.
Chairman Shelby. Mr. Baker, in your testimony, you state
that the best way to remove gambling websites from the Internet
is to get them at their source. That is, to compel service
providers that actually operate the computer server on which
the site resides to remove the content.
Your statement indicates that to do otherwise would force
service providers to block access to nongambling websites with
the same IP address. Why is it such a priority to have shared
IP addresses? Won't the market solve the problem? That is,
websites will migrate from IP addresses shared with blocked
gambling sites, won't they? And what has been the success rate
of your industry with foreign service providers in obtaining
cooperation with requests to block access to gambling websites?
Mr. Baker. The difficulty that would occur if you tried to
block sites in that fashion is that, first, this is a very
surprising and recent development. Because there is a shortage
of numbers on the Internet, people have begun sharing them
without even telling their customers that the customer now
shares an actual IP address with 40 or 50 other sites. We were
astonished to discover that more than two-thirds of the sites
on the Internet now share their number with as many as 50 other
sites.
You do not know, if you are on the Internet, that you are
in that situation and you do not know that you have been
blocked. Your traffic goes down without knowing why. It is
actually a difficult thing to track back to determine why you
might have been blocked.
Bear in mind that you have to serve blocking orders on
dozens of ISP's in order to achieve effective coverage in the
United States. As these sources blink out for you, if you are a
perfectly innocent site that happens to be served by the same
website that has the gambling operation, you do not know it is
happening until perhaps days or months afterwards. That is one
of the problems that arises. Many innocent sites are going to
get shut down in those circumstances.
Second, the methods, as we have heard, even college
campuses, which have an enormous interest in preventing access
to these sites, have great difficulty actually making those
methods work in practice. It is very, very difficult where you
have a site that wants to reach customers and customers who
want to reach the site to keep them with technical measures
from finding each other.
The blocking mechanisms, though they can clog up the
Internet for everybody, and will, actually probably won't
prevent the most pathological gamblers from reaching the most
aggressive sites.
Chairman Shelby. The programmers could not solve that
problem, could they?
Mr. Baker. Well, there are programmers and there are
counter-programmers.
[Laughter.]
Chairman Shelby. Absolutely.
[Laughter.]
They might not want to solve that problem. It has been
reported that as many as 5 percent of collegiate athletes have
gambled on one of their own games, have shaved points or have
provided inside information to gamblers. Does your experience
bear these numbers out? Do you believe that access to Internet
casinos will increase the likelihood college athletes will be
tempted to bet on events in which they participate?
Mr. Saum. We do believe those numbers. Those numbers have
been reflected in two different studies. And we also have cases
that we have become involved in that reflect those numbers,
yes.
Chairman Shelby. Senator Sarbanes.
Senator Sarbanes. Thank you very much, Mr. Chairman.
Mr. Malcolm, what is the Administration's specific position
on the legislation in the House, and the legislation that
Senator Kyl has introduced here?
Mr. Malcolm. Senator, of course, with respect to the Kyl
bill, we just received it and are still analyzing it. I would
say that we do have certain concerns with respect to the
criminal provisions. Specifically, they would be three.
The first is that it does not cover telephone bets and a
lot of these organizations that operate over the Internet
receive the bets via telephone.
Second is that, in terms of being an additional tool for
law enforcement to use, the criminal provisions set forth in
the Kyl bill, which is 5363, states that you need to prove that
unlawful Internet gambling is occurring. So, you have to prove
the violation of an existing Federal law in order for this
provision to apply. In terms of getting an added tool, we would
question whether its utility will be particularly great.
Then the third category of concern is Section 5364(d)(2)
provides a carve-out for ISP's.
I do not disagree with anything my friend Mr. Baker said
about not wanting to impose additional obligations on ISP's.
But the way the bill is written, it requires that ISP's get
exemptions from 1084, unless they violate this provision, have
actual control over bets and wagers, and operate, manage,
supervise, or direct websites. That is a significantly higher
standard than standard aiding and abetting theory which applies
now under criminal law.
Senator Sarbanes. If those three matters were appropriately
addressed, does the Administration support the legislation?
Mr. Malcolm. Senator, I think it would be fair to say that
Justice, which again is still studying the bill, also has some
concerns about the standards that are applied for injunctive
relief. However, we are having discussions with other agencies,
including Treasury, for instance, and haven't formed a position
yet.
Senator Sarbanes. Well, when does Justice figure that they
can reach a conclusion and come to the Committee and say,
``This is our position?''
Mr. Malcolm. I think that is a fair----
Senator Sarbanes. We are in the process of legislating up
here, obviously. The House, they are out of committee on that.
What is your position on the House bill?
Mr. Malcolm. Senator, I believe that the concerns that I
have addressed are mimicked in the Leach bill. The same
criticisms would apply with respect to getting a definitive
position----
Senator Sarbanes. Did you enter into the legislative
crafting process on the House side?
Mr. Malcolm. I am sorry, Senator.
Senator Sarbanes. Did the Department of Justice enter into
the crafting of the legislation on the House side?
Mr. Malcolm. If I may have just a moment.
[Pause.]
No, sir, we were not.
Senator Sarbanes. Well, when does the Department of Justice
intend to get involved?
You have a statement which is pretty strong, I thought, in
terms of what the problems are. But now as I question you, we
cannot get you to participate in the solution.
Mr. Malcolm. Senator, I agree with respect to the strong
statements about the concern. I believe that I have addressed
three very specific points dealing with criminal liability.
With respect to the concerns about the standards for injunctive
relief, you have a fair criticism. We will consult with
Treasury and respond to you promptly.
Senator Sarbanes. Mr. Chairman, I suggest that the Justice
Department get to work and let us have the benefit of their
thinking.
Chairman Shelby. I agree with you. I hope that they will
get to work, sooner rather than later.
Mr. Malcolm. I agree, Senator.
Senator Sarbanes. Mr. Catania, I could not help but think
as you listed all of the regulatory measures that might be
advisable, or all of the matters that would be looked at by the
study commission--you went right through a whole laundry list--
that the current situation must really have many harmful
aspects to it because you have set out a lot of things that you
think any regulation would have to address. But putting that to
one side, what are these alternate payments measures that you
are referring to?
Mr. Catania. Senator, those are payment methods in which
operators are able to have a card. And patrons are able to
download on a particular card, very similar to an ATM card or a
debit card. They download--either put on, whatever amount it
is, onto that card and then use that card on the Internet.
It is not specifically used for gaming. It is used for
other forms of purchases on the Internet. And there is not any
type of classification as you have with credit card companies.
Senator Sarbanes. They still have to use the payment system
in some way, though, to realize payment, don't they?
It is not some Internet version of the hawalas, which we
have heard a lot about in this Committee.
Mr. Catania. It is not specifically used for gaming. You
would use your recash transaction and download onto that card.
You can download with your credit card. You can download by
sending money into that card company. It doesn't have to be a
bank right here in the United States. It could be any bank that
is doing it. It doesn't even need a bank to do it.
You would be inclined to do this because these companies
are
actually paying for them to open up the accounts because they
get paid every time there is a download on to that particular
card.
Senator Sarbanes. Mr. Malcolm, you put your statement into
the record. You did not touch on certain parts of it. But you
have a long section in there on the money laundering issue. Now
that is a matter that has been of key concern to this
Committee. In fact, we passed a significant money laundering
title after Septemeber 11. Could you just elaborate a little
bit on the money laundering dimensions of this Internet
gambling?
Mr. Malcolm. Certainly, Senator. This entire industry is a
cash-intensive business. It operates at a huge volume and
speed. These are international transactions that frequently
occur in offshore locations. There is encryption used with
respect to these communications frequently, so anonymity is at
a maximum.
The maintenance of records for these offshore businesses
can be minimal or nonexistent, and that creates a real haven
for money laundering. People who wish to move cash quickly will
gravitate to casinos because banks are increasingly being
regulated. And in addition to that, a number of these casinos
provide financial transactions, credit payments, or whatnot. It
is a very good vehicle for money laundering.
Senator Sarbanes. Is it in fact so being used, do you know?
Are you just telling me about its potential, or is there actual
use in this respect?
Mr. Malcolm. I would say that it is safe to say, Senator,
that we have matters under investigation that indicate that
criminal organizations have entered the field of Internet
gambling and money laundering is certainly something that they
do.
Senator Sarbanes. Now, Mr. Fahrenkopf, could I ask you, how
do you in the gaming industry control minors from
participating?
Mr. Fahrenkopf. That is one of the things that is subject
to State regulation. Any casino that is licensed in any of the
11 States where we do business that allows minors--in fact,
with casinos, Senator, it is different than, in fact, other
forms of gambling in this country. You have to be 21 years of
age to go into a casino.
As you know, many people can bet on the lottery at 18 or
they can go to a horserace track at 18. But in the commercial
casino industry, you have to be 21.
And so, just as the beverage industry has to be careful who
they serve, we do our best to check the ID's of people who
gamble. If we make a mistake, we are subject to severe
sanctions from the States in which we are licensed for those
mistakes.
Senator Sarbanes. I am reflecting my own ignorance here,
but do you have to be 21 to go into the casino, can you go in
if you are under 21, but you cannot engage in gambling?
Mr. Fahrenkopf. You can go into the casino if you are under
21 if you are with an adult. In other words, in some hotels,
for example, in Las Vegas, Reno, or in Mississippi or other
States, where you may have to check in to get your room, you
may have to walk past slot machines or part of the casino. You
have to be with an adult when you do that.
Senator Sarbanes. All right.
Thank you, Mr. Chairman. My time is almost up.
Chairman Shelby. Senator Dodd.
Senator Dodd. Thank you, Mr. Chairman.
Let me just ask the follow-up on Senator Sarbanes'
question, Mr. Malcolm. Is it then the position of the
Administration that you would oppose the Kyl bill as it
presently is crafted?
Mr. Malcolm. I would not say, Senator Dodd. I would say
that we have concerns that we would hope to address to you
shortly. I apologize for the fact that we have been remiss in
not doing so, but we will respond promptly to those concerns.
Senator Dodd. All right. That will be helpful. I want to
underscore the point that Senator Sarbanes raised. I think that
we are moving rather rapidly here, and the fact that you
weren't involved in the House draft is troublesome.
Mr. Malcolm. It is a fair criticism, Senator.
Chairman Shelby. Senator Dodd, if you would yield for just
an observation.
I cannot imagine that this Justice Department under any
circumstances, headed by our former colleague, John Ashcroft,
would oppose this legislation. You may not have evaluated all
of it, but I cannot imagine that. I would be dumbfounded if he
did.
Mr. Malcolm. Certainly, the concern it seeks to address is
of great importance to the Department.
Senator Sarbanes. Can I ask something?
Senator Dodd. Yes, certainly.
Senator Sarbanes. The Justice Department should be more
than just a somewhat acknowledging bystander in this process.
You have a lot of skill down there and obviously, we want to
draw upon it in order to frame a good piece of legislation.
I share Senator Dodd's view that it is troubling that
apparently you weren't involved in the House process. I am
trying to give you an opportunity, I think, to get into the
Senate process.
Senator Dodd. And the point being, obviously, that any good
idea, and this is a good idea, you have heard us talk about it,
that there are provisions that could be written into a good
idea that can cause terrible problems for people down the road.
I think at the State level and other places, if we created
exceptions here that complicate the lives of attorneys general
at the State level, I think that the bill can then become a
problem, even though the goals are laudable, that if in the
crafting of it and the provisions included in the legislation
make the ability to pursue
illegal activities that much more difficult at other levels
because of what we put in here, then this becomes a bad bill,
despite the laudable goals included.
So, I would be surprised as well, given the laudable goals
here. We count on you guys down there to help us sort our way
through this. It becomes very, very important.
Let me raise a question. I think most of the bills here
impact to some extent, or could impact State lotteries. It has
been raised just peripherally the issue of 18 being the age--I
think, Frank, you mentioned the point that State lotteries can
be conducted. Isn't it true that these bills include exemptions
for State-approved gambling, which they do. And then couldn't
this open up the door to Internet sales of lottery tickets.
Mr. Blumenthal. If I may respond, Senator. Yes, they could
and that is the reason why we oppose any exception for them.
And I would just like to emphasize because I think this
dialogue has been very useful in exposing one very overriding
and profoundly important fact about Internet gambling. And that
is, its appeal to young people. Not just at college age, but
children of the age that are now in this room. That is a fact
that pervades gambling now as we see it across the country--its
increasing appeal to young people.
Internet gambling provides the forum, the means, the
vehicle. It is the Wild West of gambling because of its
anonymity and access.
And so, reluctant as we are to handicap somewhat our own
lotteries and our own State-sanctioned gambling, we would
oppose any exception for lotteries or other kinds of games that
are now sponsored by the State.
Indeed, many States, including Connecticut, have specific
provisions of law that forbid appeals to young people. We just
shut down the beginning of a new State lottery game that would
have appealed to young people in our view because it used
cartoon characters. But the point that you raise I think is
very important.
Senator Dodd. Obviously, of course, that raises the issue
of credit card sales at the State level.
I am presuming then that all of you, with the possible
exception of Mr. Catania, would support the Federal preemption
of State law when it came to Internet sales of lottery tickets.
Is that correct?
Mr. Blumenthal. Much as it pains me to agree with any pre-
emption----
[Laughter.]
--and I am not sure I speak for all of my colleagues here--
--
Senator Dodd. Using the magical words here.
[Laughter.]
Mr. Blumenthal. --in even acceding to the use of that word
and agreeing with it. We believe that Federal authority should
be meshed with State preclusions so as to offer support for
that general policy.
Senator Dodd. I will raise the question.
Mr. Fahrenkopf. I am not sure that I could totally agree
with the Attorney General. I do not speak for the lotteries,
but I know them, and I am sure that there are a lot of attorney
generals for States who have lotteries that would not
necessarily agree with that view also.
I would have to look at the language very carefully,
Senator. Again, my concerns, just to make sure about
fundamental States' rights and that fundamental view that each
State has the right to determine what type of gambling exists
within its borders, how they are going to regulate and how they
are going to tax it. So, I cannot give you a blanket yes now.
Senator Dodd. But you understand the problem.
Mr. Fahrenkopf. I understand the problem, absolutely.
Senator Dodd. You can have Internet sale of a lottery
ticket in Connecticut, that is not going to prohibit someone
from Utah or Hawaii, the two States that do not allow any
gambling, to be able to access that market, thus violating what
Utah and Hawaii want to provide----
Mr. Fahrenkopf. You have somewhat of that problem now,
although it is not used with the Internet. You have the Big
Game, and I am not an expert on lotteries, I think has eight or
nine States that presently share the pot. They gamble. But I
think you have to buy the lottery ticket in each individual
State.
But there are some real concerns there. I agree with you.
But I would have to see language before I could necessarily
agree.
Senator Dodd. Does anyone else want to comment on this
point before I move to another subject matter?
[No response.]
I have raised issues over the years about the proliferation
of credit cards on college campuses. I haven't been very
successful with it, but I have been deeply disturbed about the
proliferation, in fact, the solicitation, people receiving,
when they become freshmen in college, a credit card, whether
they deserve it or not, and the problems of consumer debt among
young people has been a
serious problem and a growing one.
I wonder if there is any knowledge or any background
information to the extent of college consumer credit card debt,
that is accumulated as a result of Internet gambling? Do you
have any data on that?
Mr. Saum. We have a Nellie Mae study that is not
necessarily connected to the Internet, but connected to the
number of credit cards and the average balances.
Sixty-seven percent of entering freshmen have credit cards.
And the average balance is about $2,000. About 25 percent of
freshmen have four credit cards. We are actually seeing young
people come to college with credit cards. Certainly, several
years ago, it was at college that they were first receiving
them. But now they are coming with them.
This fall, the NCAA will survey 30,000 of our student-
athletes, both male and female, in all sports, in all three
divisions, about some of the very questions you just asked, and
we will have really good numbers by fall.
Senator Dodd. I wonder if there is any way, given the
record of several of the major banks that are being very
cooperative in the area of trying to curtail Internet gambling,
whether or not they have accumulated information about who
those gamblers are in terms of whether or not they would be
able to pull out information regarding the amount of that debt
that young people are accumulating? Is it related specifically
to Internet gambling?
Mr. Fischer. Senator Dodd, let me respond to that, although
I am not responding on behalf of any particular issuer.
First of all, at present, if you think about four out of
five of all requests for payments on credit cards these days
being rejected, you can see that really, at least from a
prospective basis, there is not going to be much.
When we committed to the House Members and we have
committed to staff here as well, that individual issuers and
the two associations would cooperate, we meant that. And so,
the blocking is in place.
In terms of what is happened historically, because it is so
decentralized in terms of individual issuers, I do not think
you are going to see numbers in that sense. It is conceivable
that you could go back and reverse engineer in terms of codes.
But I think that is highly unlikely.
Senator Dodd. Thank you very much. I am just curious. I saw
this morning, Mr. Saum, where the NCAA made a mistake in
scheduling potentially a basketball game with BYU. Now, we are
assuming, since they are playing the University of Connecticut
in the first game, that they won't get to a second round.
[Laughter.]
But if miracles occur, and they do, and we do a third
round, you are going to have to shift them from one bracket to
another.
At least that is the news story this morning.
Now, I am not promoting office pools, but how is that going
to affect office pools?
[Laughter.]
Mr. Saum. It actually is an assistance in regards to
fighting office pools.
Senator Dodd. There you go.
[Laughter.]
Thank you, Mr. Chairman.
Chairman Shelby. Senator Carper.
COMMENT OF SENATOR THOMAS R. CARPER
Senator Carper. Thank you, Mr. Chairman, and to each of
you, welcome today.
I was the Governor of Delaware for 8 years. We actually put
in place slot machine gambling, gosh, about 6 or 7 years ago.
I vetoed the first bill and allowed the second one to
become law without my signature. So these issues are ones that
I have actually thought a little bit about in that position.
We debated in the Senate last year, legislation of a
different sort, but I think it may have some connection here
and I just wanted to share it with all of you.
The people who live in States with a sales tax can go to
their local merchant and buy a particular item and pay sales
tax for it. Many of those same people can get on the Internet
and acquire from a remote vendor the same item and not pay any
sales tax at all. And we are seeing a proliferation of that
thing since people find purchasing over the Internet very
convenient.
States are struggling, as you know, with their finances
these days. Particularly States that have sales taxes are
hurting. Part of the reason why they are struggling is because
they are losing sales tax revenues from remote purchases over
the Internet.
We debated, and we will probably debate again this year,
what we should do about that. In my own view, I think there
should be a level playing field and if a person is buying from
a local merchant, the brick and mortar presence, they should
pay a sales tax if their State has a sales tax. We do not in
Delaware. We are one of about five States who do not. And if
they are buying over the Internet from a remote vendor, but the
purchaser lives in a State with a sales tax, that tax should be
collected and turned over to the State.
That is a long way of leading into my question. Here is my
question. Is there a potential similar effect on the finances
of States from Internet gambling that we have seen through the
purchase of items over the Internet? And if so, has it been
quantified? Has any thought been given to that?
Mr. Fahrenkopf. I will take a shot at that, Senator.
Senator Carper. Yes, sir.
Mr. Fahrenkopf. We constantly do surveys, and again, I am
talking about the commercial casino industry that does business
in 11 States. We do not see a competitive nature.
Our analysis show that people come to Las Vegas or go to
Biloxi or go to Atlantic City for other reasons than just to
gamble. They go there for good shows, food, rooms,
entertainment, the whole entertainment package.
That person who wants to sit in the quiet of their den with
a beer playing against some computer in Belize is not really
the same customer base that we have.
So, we have not been able to, in our part of the industry,
see anything of that effect. There is a study, however, that
was done by--and his name escapes me right now, a professor in
Boston, looking at the impact of one type of gaming coming into
a jurisdiction and the effect upon the lottery.
I will get you that information. There may be an analogy
that can be made from it.
Mr. Blumenthal. If I may offer a kind of supplement to
that, just judging by the effect in Connecticut where we have
two casinos operated by Federally recognized tribes.
I would concur, we do not have studies, at least that are
accessible to the State, that I am aware of. However, there is
a harm to the State from Internet gambling that is obvious. It
has been mentioned here, on our young people, on our elderly,
who become victims and who unknowingly will play these games
and be unable to recover their winnings. And of course, there
is no benefit to the State from any tax, nor could there be.
And that is obviously one of the reasons why we are in favor
of, in effect, cutting off the air supply for Internet
gambling. We receive no benefit. There are just negatives for
us.
Mr. Fischer. Senator, let me bring one back to Delaware.
Obviously, a good number of card issuers are located within
the State. There are no studies that I am aware of that would
distinguish the two, except experience. And I think that the
experience of card issues where customers take their cards and
physically go to a casino location and the number of disputes
that result from those in person transactions are very small.
On the other hand, the disputes and the litigation that arise
out of Internet gambling transactions are much higher. Now that
is not a study, but it is experience.
Senator Carper. Thank you.
In our State, when slot machine gambling was put into
place, it was established with several horse race tracks and it
was put in our horse race tracks.
There was a variety of factors that I think led the
legislature to support making that decision. Among the
interests were to preserve open space in the northern part of
our State. Delaware Park, a large race track and really, a
lovely area surrounded by a lot of development and there was
interest in preserving that open space that led some people to
support the introduction of slot machine gambling.
In the central and southern part of our State, a place
called Harrington, just south of Dover, which is the home of
our Delaware State Fair every year, and a race track as well,
the people who, the board of directors of the State fair board
were interested in finding some alternative sources of capital
investment for the fairgrounds. They saw this as something that
might be helpful.
We have other legislators who are interested in helping to
develop and nurture a horse-breeding industry in the central
and southern part of our State. And all of those factors came
together and the open space that is represented by Delaware
Park is still open space. The Delaware State Fairground looks a
whole lot better than it did 10 years ago, remarkable
improvements have been made. And there is a burgeoning horse-
breeding industry that is starting to show up in our State. So
those who supported the introduction of slot machine gambling
say that there has been some public benefit for our area.
You have to balance that off by the fact that we have seen
a resurgence, a strong surge of growth in addictive gambling,
people who are addicted to gambling, which is very unsettling.
What is the public benefit to people in this country from
the introduction of Internet gambling? How does the public in
this country benefit from that?
Mr. Blumenthal. I think none, absolutely none. Of the many
difficult questions before this body, and all of us as public
officials, that is comparatively an easy one to answer. There
is no benefit. There is no economic development or preservation
of open space or other welcome byproduct of Internet gambling.
But I would emphasize the very important point that you
have just made, Senator, which is that Internet gambling is
many more times likely to lead to addictive gambling. That is,
to addiction. And these studies have been done. There is one
that was recently done by the University of Connecticut which I
can provide to you, which shows, again, the anonymity and ease
of gambling--the fact that it is done out of sight and maybe
out of mind, maybe even the close relatives, until there is a
crisis--is a major cause of addiction.
Mr. Malcolm. Senator, if I may add briefly.
Senator Carper. Yes, sir.
Mr. Malcolm. No less a body than the American Psychiatric
Society has stated, and I quote: ``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.''
So, I believe precisely the anonymity and the availability
24/7 makes it attractive to pathological gamblers.
Mr. Catania. Senator.
Senator Carper. Yes, sir.
Mr. Catania. No matter what happens with this bill, if this
bill is passed, it will not stop Internet gambling in this
country. That is why I am saying that the alternative is
regulation. If you provide regulations and all that I have said
in my presentation, you are able to provide player protection
to those people that do want this as a form of entertainment.
Gambling is a form of entertainment, no matter whether it
is a riverboat, a land-based casino, Internet is no different.
But what happens with regulations, we provide protections for
the players. Otherwise, what is going to happen, yes, you are
going to have those people still playing from Belize without
any type of protections at all, not knowing whether the games
are honest, not knowing who the people they are playing with.
That will happen, unless there is some regulation, because it
is not going to stop, even if you ban the use of credit cards
and other banking instruments.
Senator Carper. Okay. Gentlemen, thank you very much.
Mr. Chairman, thank you very much.
Chairman Shelby. Mr. Fischer, your written statement
indicates that illegal Internet gambling transactions have led
to extensive and costly litigation on whether participating
cardholders are liable for charges to their accounts. How much
money have the card issuers lost on this type of litigation?
Mr. Fischer. Chairman Shelby, there has been no money lost
in the litigation at this point. Tremendous expenses. Most of
the litigation is in California, some of it still ongoing.
There have been a number of cases where the amounts that
were outstanding have been settled. Those obviously are losses
for transactions to the industry.
There have been no penalties as a result of this. But
litigation, as you know, is very expensive.
Chairman Shelby. Gentlemen, we appreciate your testimony
today.
Mr. Malcolm, we would ask again that the Justice Department
work with us to address some of the issues that you raise so
that we can move ahead with this legislation.
Mr. Malcolm. We certainly will, Senator.
Chairman Shelby. We think it is very important, not only to
you, but to the States, to all of us; and also especially the
future victims, that we might keep them from destroying
themselves.
Mr. Malcolm. Absolutely.
Chairman Shelby. This hearing is adjourned.
[Whereupon, at 11:40 a.m., the hearing was adjourned.]
[Prepared statements and additional material supplied for
the record follow:]
PREPARED STATEMENT OF SENATOR JIM BUNNING
Mr. Chairman, I would like to thank you for holding this very
important hearing.
I do not think anyone here is not thinking about the probable
military action in the Middle East. There is some hope that Saddam
Hussein will seek exile, or the Iraqi military or others inside of Iraq
will overthrow him. But that does not seem very likely, and it looks
like many brave Americans will soon go into harm's way. Our thoughts
and prayers are with those brave young men and women and their
families.
We must continue, however, with the work of the Senate, and we do
have a very important issue before us today. My good friend Senator Kyl
has worked very hard on this bill to outlaw illegal Internet gambling
for a number of years and I have worked with him. I believe he has
crafted a very fine balance in this legislation. A balance that will
address illegal gambling and money laundering concerns, without
intruding on legal gambling.
I would especially like to applaud Senator Kyl for working with me
to ensure his legislation would not harm State's rights in relation to
the parimutuel gaming industry. Thoroughbred racing is not only very
important to the economy of Kentucky, but also part of our heritage.
Anyone who has heard ``My Old Kentucky Home'' sung by over one hundred
thousand on the first Saturday in May knows how important horse racing
is to Kentucky. I thank my good friend, Senator Kyl, for working with
me to ensure his legislation does not harm Kentucky's heritage.
However, I know there are some out there who might entertain
altering this bill for their constituents or gaming interests. I will
be watching this bill very carefully, and reserve all of my rights as a
U.S. Senator to ensure that what is legal under a State's authority
regarding parimutuel betting is not harmed by legislation before the
Senate. If others introduce amendments that I believe may be
detrimental, I will not only oppose them, but I also may feel the need
to introduce my own amendments. It is my hope that it will not come to
that and we can pass this bill as is with little, if any, changes.
Once again, Mr. Chairman, I thank you for holding this important
hearing.
----------
PREPARED STATEMENT OF SENATOR ELIZABETH DOLE
I would like to express my appreciation for your holding this
hearing today. In a few short years, the Internet gambling industry has
exploded. According to an Internet gambling committee of the National
Association of Attorneys General, there were less than 25 such sites on
the Web in the mid-1990's. Today, the General Accounting Office
estimates there are approximately 1,800 e-gaming websites. The GAO
projects that such Internet sites could generate an estimated $5
billion in revenues this year. That figure approximates more than half
of the year 2002 casino earnings in the State of Nevada.
The most serious threat in the Internet gambling arena is the
virtual casinos operating offshore, beyond the reach of U.S. law. One
estimate puts the number of foreign jurisdictions authorizing or
tolerating Internet gambling at fifty. This includes not just the well-
known bank secrecy jurisdictions of the Caribbean but other countries
like Australia. The lure of lucrative licensing fees and the
possibility of sharing in gambling receipts are proving to be powerful
incentives to enter the Internet gambling business. Antigua and Barbuda
have reportedly licensed more than 80 Internet gaming websites already,
charging a $75,000-$85,000 licensing fee for a sports betting site and
$100,000 for a virtual casino. A report prepared for the South African
Government revealed that Internet gaming revenues could yield up to
$140 million in foreign exchange.
While Internet gambling represents a jackpot for such foreign
jurisdictions, it is a wheel of misfortune for far too many Americans
who, with a click of a computer mouse and a credit card, can have
instant, anonymous access to round-the-clock gambling from the privacy
of their homes. All of the social hazards associated with problem
gambling at brick-and-mortar sites are of equal, if not greater,
concern when it comes to online gambling.
Furthermore, Internet gambling poses a serious problem to our
youth. In the areas in which gambling is legal, strict laws have been
enacted to ensure our children are prohibited from participating. In
many homes the children are far more computer literate than the parents
who possibly would stop a child from placing a bet with their credit
card. Since our society has made a conscious decision to keep our
children away from this activity, we must take steps to ensure that
online casinos do not victimize our children.
In addition to the social problems associated with Internet
gambling, U.S. authorities warn that Internet gaming offers a powerful
vehicle for laundering funds from illicit sources, as well as to evade
taxes. A 2000-2001 Financial Action Task Force (FATF) report on money
laundering typologies indicates that there is evidence in some FATF
jurisdictions that criminals are using the Internet gambling industry
to commit crime and to launder the proceeds thereof. The use of credit
cards and the placement of sites offshore make locating the relevant
parties, gathering the necessary evidence, and prosecuting those
parties difficult if not impossible.
I look forward to working with my colleagues to enact a law to stop
the threat of illegal Internet gambling and to protect our children.
Thank you.
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PRESS RELEASE OF JON KYL
A U.S. Senator from the State of Arizona
March 18, 2003
U.S. Senator Jon Kyl (R-AZ) will testify Tuesday before the Senate
Banking Committee on behalf of legislation he authored to ban the
practice of Internet gambling.
``Internet gambling is not a fun diversion, but feeds a dangerous
and growing
addiction,'' said Kyl. ``It is linked to organized crime, rife with
fraud, ruins credit ratings, and allows many young people to build up
thousands of dollars in debt on their parents' credit cards.''
``When I first proposed a ban in late 1995, there were roughly two
dozen gaming sites. Today, there are nearly 2,000. Without
Congressional action, nearly $5 billion will be wagered on Internet
gaming sites this year alone.''
Senator Kyl's bill, S. 627, applies criminal penalties of up to 5
years in prison to operators of Internet gambling sites. Legislative
action was requested by a Congressional commission in 1999 and by the
National Association of Attorneys General.
Internet Gambling Lures Addicts
More than 15 million Americans today suffer from a serious gambling
addiction and the easy access to the Web is often an irresistible
draw--what one expert from Harvard Medical School equated to a new
delivery system for crack cocaine. The National Coalition Against
Gambling Expansion reports as many as 90 percent of ``pathological
gamblers'' commit crimes to pay off their debts.
Internet Gambling Linked to Crime
The FBI reports that organized crime groups are heavily involved in
Internet gambling, often using it to facilitate money laundering.
Potential for Fraud
As opposed to licensed casinos, the Internet allows unlicensed,
hard-to-track operators to defraud bettors and then disappear.
Targeting Young People
The National Collegiate Athletic Association reports that many
college students lose thousands of dollars on gaming sites--often using
their parents' credit cards. Young people use the Internet more than
any other age group.
Debts Can Be Staggering
Washington Capitals hockey star Jaromir Jagr lost $500,000 from
betting on sports events via an Internet site.
Senator Kyl's bill is co-sponsored by Senator Dianne Feinstein (D-
CA) and Senate Banking Committee Chairman Richard Shelby (R-AL). A
similar House bill was introduced by U.S. Representative Jim Leach (R-
IA). A ban was approved by the House and Senate before, but not in time
to become law.
PREPARED STATEMENT OF JOHN G. MALCOLM
Deputy Assistant Attorney General, Criminal Division
U.S. Department of Justice
March 18, 2003
Mr. Chairman and Members of the Committee, thank you for inviting
me to testify before you today. The issue before this Committee is one
of singular importance, and I commend the Committee for holding a
hearing on this issue. I would also like to commend Senator Kyl, as
well as Congressmen Goodlatte and Leach, 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 gambling, the potential for fraud and
money laundering, the potential for organized crime, and recent State
actions. The Department of Justice generally supports the efforts of
the drafters of these bills to enable law enforcement to cut off the
transfer of funds to and from illegal Internet gambling businesses.
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 online casino-style gambling sites, there
are also numerous offshore sports books operating telephone betting
services. These developments are of great concern to the U.S.
Department of Justice, particularly because many of these operations
are currently accepting bets from U.S. citizens, when we believe that
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
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 throughout the world, thereby obscuring the
fact that he is placing his bet from the United States or from some
other country where it is illegal to do so.
Gambling by Minors
Online gambling also makes it far more difficult to prevent minors
from gambling. Gambling websites cannot look at their customers to
assess their age and request photo identification as is possible in
traditional physical casinos and Off-Track-Betting parlors. Currently,
Internet gambling businesses have no reliable way of confirming that
the gamblers are not minors who have gained access to a credit card and
are gambling on their website. 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 onsite gambling, online gambling is readily available to all
at all hours and it permits the user to gamble, in many cases,
anonymously. This presents a greater danger for compulsive gambling and
can cause severe financial consequences for an unsuccessful player. 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 are either
operating or want to operate online 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. Start-up
costs are relatively low and cheap servers and unsophisticated software
are readily available. Online casinos and bookmaking establishments
operate in many countries where effective regulation and law
enforcement is minimal or nonexistent. Like scam telemarketing
operations, online 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 has a concern about the
potential for the involvement of organized crime in Internet gambling.
Traditionally, gambling has been one of the staple activities in which
organized crime has been involved. Indeed, many of the recent
indictments brought against members of organized crime groups 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 are operating offshore in foreign
jurisdictions. If these businesses 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 bring
indictments against these companies or the individuals operating these
companies, the Federal Government may not be able to bring such
individuals or companies to trial in the United States.
Money Laundering and Internet Gambling
Another major concern that the Department of Justice has about
online gambling is that Internet gambling businesses provide criminals
with an easy and excellent vehicle for money laundering, due in large
part to the volume, speed, and international reach of Internet
transactions and the offshore locations of most Internet gambling
sites, as well as the fact that the industry itself is already cash-
intensive.
It is a fact that money launderers have to go to financial
institutions either to conceal their illegal funds or recycle those
funds back into the economy for their use. Because criminals are aware
that banks have been subjected to greater scrutiny and regulation, they
have--not surprisingly--turned to other nonbank financial institutions,
such as casinos, to launder their money. Online casinos are a
particularly inviting target because, in addition to using the gambling
that casinos offer as a way to hide or transfer money, 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 online
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. The gambling business may also
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.
Other Recent State Actions
In addition to the Federal Government, various State governments
have also taken actions against online gambling. For instance, in New
York State, where unauthorized gambling is illegal, the New York State
Attorney General reached an agreement with Citibank to block credit
card payments of online gambling transactions by its customers. The
same Attorney General recently reached an agreement with PayPal, which
agreed to stop processing payments from New York State customers to
online gambling merchants.
Some companies have taken steps themselves against online gambling
businesses. For instance, in 2002 PayPal was acquired by E-Bay, the
online auction service, which announced that it would phase out
PayPal's online gambling. Both Discover and American Express have
company policies that restrict the use of their credit cards for
Internet gambling and prevent Internet gambling sites from being issued
credit card merchant accounts.
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. While we have some technical and other concerns about these
bills, we support the sponsors' efforts to address gambling on the
Internet. I will be happy to answer any questions that you might have.
----------
PREPARED STATEMENT OF RICHARD BLUMENTHAL
Attorney General, State of Connecticut
on Behalf of the
National Association of Attorneys General
March 18, 2003
I appreciate the opportunity to speak on the issue of Internet
gambling.
Use of the Web to place bets on the starting date of a war with
Iraq speaks volumes about the sordid, despicable nature of an
unregulated, faceless, nameless Internet gambling industry. Internet
gambling is growing. Beginning with the first Internet gambling website
in 1995, the industry has exploded--Bear Stearns estimates--to more
than $8 billion in revenues in 2002.
Now, without delay, clear and specific Federal measures are vital
to add deterrent strength to current general prohibitions. State and
Federal law enforcement authorities have the historic opportunity and
obligation to work together and halt the ongoing abuse.
Internet gambling threatens the integrity of our athletic and
sports institutions--from college basketball to professional football.
It turns homes into betting parlors and lures bettors with pop-up
advertising. If bettors finally stop playing--typically after losing
thousands of dollars or maybe even after seeking counseling for
gambling addiction--the industry barrages them with personal emails.
A 2002 study by the University of Connecticut found Internet
gamblers are most likely to develop signs of problem gambling. The
anonymity of Internet gambling makes it easier for problem gamblers to
conceal their activity. These addicted gamblers do not have to explain
the hours spent at a casino, OTB parlor, or face a store owner every
day while purchasing hundreds of dollars in instant lottery tickets.
Congress must act now to clearly and unequivocally ban Internet
gambling. There are a number of Federal laws--including the Federal
Wire Act, 18 U.S.C. 1084--that provide a legal basis for prosecuting
Internet gambling websites located within the United States. In fact,
several years ago, a successful prosecution was upheld involving the
use of the Internet for sports betting. U.S. v. Cohen, 260 F.3d 68 (2nd
Cir. 1999). The presence of these laws has been enough to prevent any
organization from establishing a gambling website based in our country.
There is still a need for Congress to make the prohibition clear and
unassailable.
Congress should enact provisions prohibiting the use of credit
cards, debit cards, checks, and other financial instruments for the
purposes of Internet gambling. As in our battle against money
laundering and terrorism, we must take steps to eradicate the financial
infrastructure for this illegal activity. If Federal law prohibits the
use of credit cards and other financial instruments for Internet
gambling, financial institutions are in a stronger position to reject
any charge from such sources.
In fact, Citibank, Discover, American Express, PayPal and others
have already announced that they will not accept charges from online
gambling facilities. A Federal law would ensure full industry-wide
compliance with this common sense policy. It would also prevent any
online gambling business from seeking a court order for such payments.
Without American dollars flowing through our credit card and debit card
facilities, Internet gambling companies will be stunted if not stifled.
Any new Federal law must include Federal and State enforcement
provisions as well as criminal and civil sanctions. Because of the
international and interstate
nature of the Internet, Federal criminal and civil enforcement is
critical to the success of a law prohibiting Internet gaming and the
use of credit and debit cards. States also must have enforcement
authority. Many Federal consumer protection laws include authorization
for State attorneys general to bring civil actions against violators of
Federal law. This State enforcement role often meaningfully supplements
Federal enforcement efforts and leads to greater compliance with the
law's provisions.
Finally, any ban on Internet gambling and the use of financial
instruments in
furtherance of such gambling must be clear and broad, admitting no
exceptions. I
oppose legislative proposals authorizing the use of the Internet for
State-sanctioned gambling. These exceptions would almost certainly
encourage States to use the Internet for State lotteries, OTB, and
other gaming. These exceptions swallow the rule, leading to the use of
credit card and debit cards to fund purchases of State lottery tickets
and for other State gambling.
Currently, no State, except for California's Off-Track-Betting
game, uses the Internet for State gaming. Few States allow use of
credit and debit cards to pay for State lottery tickets and other
games. An exception may create more problems by encouraging people to
play on the Internet and use credit or debit cards to fund excessive
gambling, creating crushing personal debt and tragedy.
Congress should take the simple, straightforward approach: Prohibit
all online gambling and prohibit the use of credit and debit cards and
other financial instruments for Internet gambling.
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PREPARED STATEMENT OF L. RICHARD FISCHER
Attorney at Law, Morrison & Foerster, LLP
March 18, 2003
Chairman Shelby, Ranking Member Sarbanes, and Members of the
Committee, my name is Rick Fischer. I am a partner in the law firm of
Morrison & Foerster, and practice in the firm's Washington, DC office.
I have over 30 years of experience in advising financial institutions
and payment systems on regulatory and compliance issues. In particular,
for purposes of this hearing, I have advised card issuers and payment
systems on responding to legal and operational issues involving the use
of payment cards for Internet gambling transactions, including the
development and implementation of procedures to block such
transactions. I also have advised card issuers on questions relating to
litigation and other customer disputes arising out of the use of
payment cards for Internet gambling transactions. Thank you for the
invitation to participate in this hearing.
Internet gambling presents unique challenges for both law
enforcement and U.S. payment systems. Because Internet gambling can be
conducted entirely over the Internet, transactions can be initiated
quickly and quietly--entirely in the privacy of the gambler's own home,
or wherever else the gambler has access to the Internet. There is no
need to exchange physical cash or illicit goods between the gambler and
the gambling operation. Moreover, Internet gambling operations are
typically situated at offshore locations that are beyond the reach of
U.S. law enforcement
agencies. Authorities in these foreign locations may consider the
Internet gambling operations to be not only profitable, but also fully
legal under local laws and, therefore, the foreign authorities may have
no incentive to shut down these operations. In addition, Internet
gambling has proven to be popular for both gamblers and gambling
operations. The General Accounting Office (GAO) has reported that
worldwide revenues for Internet gambling in 2003 are projected to
exceed $5 billion. These factors make Internet gambling uniquely
difficult to detect or control.
In part because many Internet gambling operations are physically
beyond the reach of jurisdictions where such transactions are illegal,
efforts to address the unique and growing problem of illegal Internet
gambling have included a focus on the payment systems that often have
been used to fund illegal Internet gambling transactions, including the
principal payment card associations--MasterCard and Visa. These
associations are composed of tens of thousands of regulated financial
institution members located throughout the world. Banks that are
members of these associations issue credit cards and debit cards to
their customers that can be used in person, over the telephone and over
the Internet with merchants located throughout the world. Merchants
submit proposed transactions to banks that act as acquirers of credit
card and debit card transactions for authorization and, if authorized,
the transactions are then submitted to the card-issuing bank for
payment. The acquiring bank obtains authorization and payment from the
issuing bank through the complex, worldwide communications and
settlement systems established and maintained by the associations.
These payment systems process billions of transactions originating at
tens of millions of merchant locations throughout the world, usually
delivering responses on individual transactions in seconds. Because
such payment cards are the most efficient consumer payment vehicles in
the world, and because payment cards are particularly well-suited for
Internet and telephone transactions, illegal Internet gambling
operations often seek to obtain payment from their customers through
the use of payment cards.
However, payment card issuers and the associations have no interest
in having their cards used for illegal transactions. In fact, for
example, Visa prohibits the use of Visa branded payment cards for
illegal transactions of any kind. Illegal Internet gambling
transactions in particular have led to extensive and costly litigation
over whether participating cardholders are liable for charges to their
accounts, even when the cardholders do not dispute that they
participated in the gambling transactions. Even where the illegal
Internet gambling transactions do not result in litigation, they often
generate severe customer relationship problems with cardholders who
otherwise may be model customers. In addition, repayment problems
resulting from illegal Internet gambling transactions can adversely
affect the ability of cardholders to meet their account obligations
generally--including those relating to legal, nongambling transactions.
As a result, illegal Internet gambling transactions create credit risks
for financial institutions that extend far beyond the illegal
transactions themselves, as well as reputational risks and regulatory
responses harmful to both the financial institutions and the payment
systems. In short, the costs to the payment card industry in the United
States of illegal Internet gambling transactions far exceed any
benefits that could possibly be gained by the marginal additional
transaction volume due to such transactions.
Consequently, both payment card issuers and the associations have
taken a number of steps in their efforts to address the use of credit
cards and debit cards for illegal Internet gambling. The good news is
that these steps are having a demonstrable effect on the volume of
Internet gambling transactions. According to a
December 2002 GAO report on Internet gambling, the card industry's
efforts to restrict the use of payment cards for Internet gambling has
already had a substantial adverse effect on the growth and revenues of
the Internet gaming industry. The bad news is that, according to this
same GAO report, Internet gambling operations are already developing
alternative ways to obtain payment for Internet gambling transactions,
outside of the payment card systems.
As to the specifics of the payment card industry's efforts to
counter illegal Internet gambling, both of the associations require
Internet gaming merchants that
accept association branded payment cards to use a combination of
``gaming'' merchant category and electronic commerce indicator codes
for all Internet gambling transactions when they request authorizations
from card issuers for payment card transactions. These codes are
transmitted through the networks as part of the authorization message.
The combination of codes informs the card issuer that the transaction
is likely to be an Internet gambling transaction, thereby enabling the
issuer to deny authorization for (or block) such transactions to
protect the interests of both the card issuer and its cardholders.
Many, if not most, card issuers already have taken advantage of this
blocking capability, as well as other tools they have devised to deny
authorization to any transaction coded as an Internet gambling
transaction. The GAO report described earlier confirms that the
blocking efforts of card issuing banks already are having an impact on
Internet gambling transactions, and that, according to the GAO, some
Internet casino operators now estimate that four out of every five
requests for credit card payments are denied.
It is no small undertaking for payment system participants to block
Internet gambling transactions even when they can be identified through
coding systems; and since the associations typically process thousands
of authorizations per second, both the associations and card issuers
must necessarily rely on such coding systems to identify illegal
Internet gambling transactions. For example, since the Visa system
alone currently processes between 3,000 and 6,000 transactions a
second, it is operationally impossible to individually recognize, let
alone examine, payment card transactions except through their routing,
financial, and transaction codes. In fact, any effort to individually
examine transactions would threaten the entire operation of the payment
systems that all U.S. consumers rely on to conduct instantaneous
transactions around town, across the country, and throughout the world.
Because these systems rely on proper coding by merchants, the
blocking may not be complete, for example, if Internet gambling
operations miscode authorization messages, despite the aggressive
efforts of the associations to enforce their coding rules. Also, as the
GAO has recognized, blocking payment card transactions may lead to the
use of other payment methods and, therefore, may not solve the problem
of illegal Internet gambling. In addition, given the enormous volume of
transactions handled by the payment card systems and card issuers, it
is important to recognize that some Internet gambling transactions will
evade even the most sophisticated
detection and blocking mechanisms. For these reasons, any legislation
designed to address illegal Internet gambling by focusing on the
responsibilities of payment
system participants to identify and block such Internet gambling
transactions must recognize that mechanisms for achieving this end will
not be infallible and that some transactions inevitably will leak
through.
It also is important to recognize that not all Internet gambling
transactions are illegal Internet gambling transactions. For example, a
cardholder residing in a particular State may engage in gambling
transactions at a legal Internet gambling site located in that same
State in a manner where both the gambler and the gambling institution
are acting in full compliance with applicable State law; or the
cardholder may be purchasing nongambling items on an online casino's
website, such as tickets for casino shows. Alternatively, a U.S.
cardholder currently visiting, or even residing in, London may engage
in gambling transactions through use of a card issued by a United
States bank at a legal Internet gambling site in the United Kingdom in
full compliance with applicable United Kingdom law. These intrastate
and international jurisdictional and choice of law questions present
complex and politically sensitive issues, but these are policy issues
for Congress, the Administration, and their counterparts in the States
and in other countries, rather than for payment system participants.
In addition, payment system participants have only a limited
ability to differentiate between transactions. In this regard, it is
important to recognize that coding mechanisms only inform the payment
system and the card issuer that a transaction presented for
authorization is likely to be an Internet gambling transaction; it
cannot tell the payment system or the card issuer whether the
particular transaction is illegal or not. As a result, the application
of coding and blocking capabilities by payment systems and/or card
issuers will necessarily result in the blocking of many legal, as well
as illegal, transactions. In order to ensure that payment systems and
individual financial institutions are not exposed to liability for
contractual or regulatory violations because they failed to carry out
transactions, in some cases fully legal transactions, requested by
cardholders, any legislation focusing on the responsibilities of
payment system participants to identify and block illegal Internet
gambling transactions must provide that those engaged in attempting to
block Internet gambling transactions will not be liable, by virtue of
those actions, for violations of any statutory, regulatory, or
contractual requirements because they have blocked, or attempted to
block, any transactions coded as Internet gambling transactions,
regardless of whether those transactions actually are gambling
transactions or not, and regardless of whether the Internet gambling
transactions actually are legal or not. In short, such a legislative
safe harbor cannot be limited to blocking illegal Internet gambling
transactions, but should extend to all transactions blocked in response
to the statute. In addition, because payment systems and card issuers
can only block Internet gambling transactions that are identified as
such, the legislative safe harbor should extend to transactions which
are not blocked, because they are not identified as Internet gambling
transactions.
Members of Congress, and other proponents of Internet gambling
legislation, have reported that illegal Internet gambling presents
significant and unique risks, and payment card issuers themselves have
been confronted by significant litigation and unique credit and
reputational risks as a result of such transactions. As a result,
several card issuers already have expressed support for pending
Internet gambling legislation and I would expect card issuers generally
to work with Congress to address this issue by blocking Internet
gambling transactions. Most major card issuers are already doing so
and, as indicated above, as a result of these industry efforts,
Internet casino operators estimate that four out of every five requests
for credit card payments are already denied.
Again, I appreciate the opportunity to participate in this hearing,
and I would be pleased to answer questions from the Committee.
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PREPARED STATEMENT OF FRANK J. FAHRENKOPF, JR.
President and CEO, American Gaming Association
March 18, 2003
Mr. Chairman, distinguished Members of the Committee, thank you for
inviting me to testify today about the American Gaming Association's
position on Internet gambling.
I am Frank J. Fahrenkopf, Jr., President and CEO of the American
Gaming Association (AGA). The AGA is the national trade association of
commercial casino companies, gaming equipment manufacturers, and other
vendor-suppliers to the gaming industry. The Association acts as a
national clearinghouse for information about commercial casinos and as
an advocate on Federal legislative and regulatory issues for its member
companies, including tens of millions of employees, patrons, and
shareholders. Other trade associations represent Native American
casinos, the lotteries, the parimutuel industry, and other legal gaming
entities. Our member companies are gaming industry leaders such as
Alliance Gaming, Ameristar Casinos, Argosy Gaming, Aristocrat
Technologies, Atronic Americas, Aztar, Boyd Gaming, Harrah's
Entertainment, Horseshoe Gaming, IGT, Isle of Capri Casinos, JCM
American, Kerzner International, Konami Gaming, MGM MIRAGE, Mikohn
Gaming, Park Place Entertainment, Penn National Gaming, Pinnacle
Entertainment, Shufflemaster, Station Casinos, and Wynn Resorts. Our
casino companies operate land-based and riverboat casinos in 11 States
across the country, and our manufacturers sell equipment to those
casinos. A majority of our members are publicly held companies listed
on the New York and Nasdaq stock exchanges.
On behalf of the AGA, I appreciate this opportunity to address the
topic of Internet gambling generally and, more specifically, discuss
our position on S. 627, a bill introduced last week by Senator Kyl that
would in essence prevent the use of credit cards and other financial
instruments for illegal Internet gambling.
The position of the American Gaming Association has remained
constant since Congress first began considering Internet gambling
legislation. The AGA maintains the view that the technology necessary
to provide appropriate regulatory and law enforcement oversight does
not presently exist with regard to Internet gambling so as to properly
regulate the integrity of the games and the security and legality of
financial transactions, and to minimize the potential for underage and
pathological gambling. Unless and until those concerns can be
adequately addressed, the AGA remains opposed to Internet gambling.
In addition, it is our view that any bill considered by this
Committee should meet three tests: (1) It should not create an unfair
advantage for any one segment of the gaming industry; (2) It should not
impinge upon or curtail States' rights; and (3) It should not make
anything that is currently legal illegal.
Let me briefly address each of those elements.
First, we would not support any bill that gives preferential
treatment to any other form of legal gaming at the expense of our
segment of the industry. In other words, all forms of legal gambling
should be treated with parity.
Second, we oppose any changes to the 200-year-old framework for
State-based oversight of gambling. Federal law has always ``back
stopped'' the right of each State to determine its own policies on
gambling. The 10th Amendment of the U.S. Constitution states that any
right not explicitly granted to the Federal Government lies with the
States or with the people. As a result, each State should have the
right to determine whether or not it will allow any form of gambling
and, if so, how it would be regulated and taxed. Federal Internet
gambling legislation should follow the model of the Wire Act and permit
States to make decisions about the use of technology within their
borders by licensed gaming companies.
Finally, I would ask you to take into account the rapid advances in
technology today and not criminalize activity that is currently legal.
Our industry, like other businesses, will want to take advantage of
these new technologies to make operations more efficient. Because some
of those technologies will involve the Internet and others will involve
non-Internet interactive computers, it is important that this reality
is taken into account in considering any new legislation. Examples of
these new technologies include common pool wagering, interactive
computer systems, the use of the World Wide Web to advertise casino
resorts or accept hotel and show reservations, and new technology to
facilitate and safeguard the operation of intrastate account wagering
on sporting events.
In short, we feel that it is important to draw a distinction
between the use of technology to circumvent Federal and State
restrictions and regulations (as is done today by those operating
offshore Internet gambling sites) and the use of technology by licensed
operators to more efficiently deliver their services where, to whom,
and under what conditions they are authorized by Federal and State law
to do so. Any changes to Federal or State laws in the pursuit of making
Internet gambling illegal should not be drawn so broadly as to lump the
use of technology within otherwise legal limits into the same
prohibited status as technology used by illegal operators. This
position is consistent with the policy of the Wire Communications Act,
which, since the 1960's, has permitted the use of the wires for wagers
and information
assisting in the placing of wagers where the transactions are entirely
intrastate or between States in which the wagering in question is
legal.
However, our major concern with illegal Internet gambling as it
exists today is that it allows the approximately 2,000 offshore
websites to circumvent State policies, including current restrictions
on the availability of gambling within each State. Although all States
except three allow some form of legalized gambling, illegal Internet
gambling makes casino gambling and sports wagering available in every
State, regardless of existing Federal or State laws.
Illegal Internet gambling also allows unlicensed, untaxed,
unsupervised operators to conduct business alongside gaming operators
who are subject to some of the most comprehensive Federal and State
controls of any industry in this country. Nearly every aspect of a
commercial casino business--from licensing to operations--is strictly
regulated. In the 11 States where commercial casinos are legal, they
are not permitted to operate without prior State approval, which
includes exhaustive background checks on key personnel and major
investors. Some States do the same for major vendor-suppliers.
In addition to State regulations, there are important Federal
requirements applicable to commercial casinos and other forms of legal
wagering. For example, U.S. commercial casinos are subject to Federal
corporate taxation, publicly traded com-
panies comply with financial disclosure and other Securities and
Exchange Commission rules, casinos file information reports on larger
winnings with the IRS and withhold Federal taxes on certain winnings,
and casinos adhere to antimoney laundering statutes and regulations
administered by the Department of the Treasury's Financial Crimes
Enforcement Network. By contrast, those engaged in the business of
illegal Internet wagering in the United States from offshore are not
subject to U.S. law enforcement jurisdiction on these important matters
of public administration.
These Federal and State regulations exist to, among other things,
guarantee the fairness of the games; ensure proper taxation of
revenues; acknowledge problem gambling and offset any potential
consequences; prevent underage gambling; and prevent theft, loss,
embezzlement, or any other illegal activity--all safeguards that are
vital to maintaining public trust and confidence in our business.
Illegal Internet gambling threatens the integrity of all businesses
involved in
legalized gambling in the United States. S. 627 attempts to find a way
to address this problem by essentially banning the use of credit cards
and other financial instruments to conduct illegal Internet gambling.
The AGA does not oppose similar legislation in the House. However, that
position evolved only after careful evaluation and negotiation, which
could be jeopardized by any modifications that violate the three tests
outlined earlier in my remarks. The AGA will need to evaluate this bill
to determine if our position on it is any different than our position
on the House version of this legislation. If there are no significant
differences between the two versions, our position on the Senate bill
will likely mirror our position on the House bill.
Despite our industry's consistent position on Internet gambling,
some misper-
ceptions persist, so I would like to take a few moments to address
them.
There have been assumptions by many, particularly those in the
media, that the commercial casino industry is concerned about Internet
gambling because we are worried about competition from Internet
gambling sites. The fact is that if Internet gambling were legalized,
it is our members--the well-branded casino companies--who would be best
positioned to garner the major share of the market. Many of our
companies have explored Internet gambling as a business strategy, some
more aggressively than others, in the event that it becomes legal here
in the United States.
There is simply no comparison between the social, group-oriented
entertainment experience of visiting a casino resort and the solitary
experience of placing a bet or wager using a personal computer.
Visiting a casino today is about much more than legal wagering
opportunities. Whether measured by how people spend their time or how
they spend their dollars, guests of U.S. commercial casinos are
increasingly
attracted as much or more by restaurants, shows, retail, recreation,
and other nongaming amenities.
The view that Internet gambling is not a competitive threat to U.S.
commercial casinos is shared by financial analysts at major Wall Street
firms, whose job it is to analyze the competitive impact of market
developments on the industries and firms they cover, including the
major publicly traded gaming companies the AGA represents.
Another common misperception is that the State of Nevada has
legalized Internet gambling. The fact is that with Internet gambling
growing by leaps and bounds, Nevada, the world leader in the gaming
industry, believed it had the responsibility to step forward and act to
determine what current and future regulatory actions might be taken in
this area. As a result, the Nevada legislature passed a bill in 2001
authorizing the Nevada Gaming Commission, the State body that sets
regulatory policy, to promulgate regulations IF--and that was a big
IF--certain conditions could be met: (1) The State had to be in
compliance with all Federal laws; (2) There had to be an effective way
to restrict access to those under age 21; (3) There had to be an
effective way to limit access to those residing in jurisdictions that
permitted Internet gambling; and (4) It had to be determined that
Internet gambling would promote the general welfare of the State.
The legislation established a licensing framework similar to the
stringent requirements already in place to acquire a casino operator's
license. Only existing Nevada licensees were eligible to become
licensed Internet gambling operators. There were other requirements,
depending on the location of the establishment within the State, that
required existing licensees to have either a resort hotel, a certain
number of rooms or seats or have held a license for at least 5 years.
Each licensee would be required to pay a fee of $500,000 for the first
2 years, in addition to a renewal fee of $250,000 a year. In addition,
each operator would be required to pay a 6.25 percent tax on gross
gaming revenue, the same tax rate paid by the land-based
casino. Identical licensing requirements would apply to equipment
manufacturers and suppliers. Any operators who created a site without
the proper license would be subject to felony prosecution.
While they were not spelled out in the legislation, other factors
were considered by the Nevada Gaming Commission to provide additional
safeguards for customers who might not be able to gamble responsibly.
The Commission was going to ensure self-exclusion for individuals who
wanted to prevent their access. It also planned to establish betting
limits and time limits that would apply to not just one site but across
all Nevada Internet gambling sites.
Recently, activity in Nevada to legalize Internet gambling came to
a screeching halt when the first of those conditions set forth in the
legislation was not met: According to an August 2002 letter from the
U.S. Department of Justice, the Federal Government declared Nevada's
proposal illegal under the 1961 Wire Act. Today, this view is in direct
conflict with a November 2002 decision by the U.S. Court of Appeals for
the Fifth Circuit (Thompson v. MasterCard International et al.), which
affirmed a lower court ruling that sports betting conducted over the
Internet is illegal, but casino games are legal. Perhaps today when you
hear from the Justice Department you will learn how they plan to
proceed now that the courts have reached a different conclusion.
Another area of confusion is the differing views of our member
companies on Internet gambling. As I mentioned earlier, some of our
member companies already are pursuing Internet gambling as part of
their business strategies. MGM MIRAGE, for example, has launched an
Internet gambling site on the Isle of Man. The difference between the
MGM MIRAGE site and other sites located offshore is that
www.playmgmmirage.com is located in a jurisdiction that has instituted
tight regulatory requirements and limited its licenses to a small
number of companies that met strict criteria. The MGM MIRAGE site only
accepts wagers from jurisdictions where Internet gambling is clearly
legal--in other words, not from the United States--and is employing
technology to address concerns about underage gambling and problem
gambling. If MGM MIRAGE were to engage in conduct in direct contrast to
regulatory requirements in its U.S. jurisdictions, it could jeopardize
the company's casino licenses in Nevada, Mississippi, and Michigan.
When you work in a privileged industry such as the gaming industry, you
must adhere to certain standards wherever you conduct your business.
The bottom line is that the AGA is a trade association. Our members
may make different business decisions as individual companies, but they
also recognize the need to reach consensus on some of those issues as
an industry. While we may be taking slightly different paths, we all
share one thing in common: We are all opposed to illegal, unregulated
gambling.
Thank you again for the opportunity to discuss our views on
questions surrounding Internet gaming. I would be pleased to answer any
questions you may have on this matter.
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PREPARED STATEMENT OF WILLIAM S. SAUM
Director of Agent, Gambling, and Amateurism Activities
National Collegiate Athletic Association
March 18, 2003
Chairman Shelby, Senator Sarbanes, and the other distinguished
Members of the Committee, on behalf of the National Collegiate Athletic
Association, thank you for inviting me to testify today to provide the
Association's perspectives on collegiate sports wagering. This is a
matter of great importance to the more than 1,000 colleges and
universities that are members of the NCAA and to the hundreds of
thousands of student-athletes who participate in intercollegiate
athletics annually. As an individual on the NCAA staff who has spent
nearly 7 years working daily on this issue, it is a matter of personal
and professional importance, as well.
Our message to you today is simple: We are asking you to do what is
right for the college game and what is right for the young people who
have earned the privilege of participating in those games. We are
asking you to take steps to eliminate the opportunity for individuals
to place bets on intercollegiate sports contests on the Internet.
I am not here to promise that banning Internet gambling is the
total answer to such an insidious problem as gambling on college
sports, but it is part of the equation. The NCAA believes that there
should be a prohibition on all legal and illegal sports wagering. It is
about what is right for student-athletes. It is about what is right for
college athletics.
NCAA Sports Wagering Policies and Rules
The NCAA has a clear, direct policy regarding sports gambling. The
NCAA's position on sports gambling is this: The NCAA opposes all forms
of legal and illegal sports wagering. Sports wagering has the potential
to undermine the integrity of sports contests and jeopardizes the
welfare of student-athletes and the intercollegiate athletics
community. Sports wagering demeans the competition and competitors
alike by a message that is contrary to the purposes and meaning of
sport. Sports competition should be appreciated for the inherent
benefits related to participation of
student-athletes, coaches and institutions in fair contests, not the
amount of money wagered on the outcome of the competition. For these
reasons, the NCAA membership has adopted specific rules prohibiting
athletics department staff members and student-athletes from engaging
in gambling activities as they relate to intercollegiate or
professional sporting events.
The NCAA membership has adopted specific legislation prohibiting
athletics department staff members, conference office staff and
student-athletes from engaging in sports gambling activities, which
include Internet wagering. It is not permissible to provide information
to individuals who are involved in organized gambling activities, or
solicit or accept a wager on college or professional athletics. This
rule also applies to NCAA national office staff.
In addition, in 2000, the membership imposed stricter sanctions on
those who violate our rules. Student-athletes who participate in point-
shaving activities or who solicit or accept bets that involve their own
institution lose all of their remaining eligibility. Those who are
found to have bet or accepted bets on intercollegiate or professional
athletics are ineligible for intercollegiate competition for a minimum
of 1 year and lose one season of competition.
We have established other Association policies for activities
associated with gambling. The NCAA Division I Men's and Women's
Basketball Championships may not be conducted in metropolitan areas
with an open legal sports book. For example, there are no men's
basketball championship sites in the State of Oregon, where the lottery
is based on the outcome of National Football League contests. The NCAA
does not permit its committees to meet or conduct formal social
activities in casinos. We have also requested our corporate champions
not to engage in promotions connected to the outcome of games. For the
fourth straight year, we have conducted background checks on game
officials who officiate in the Division I Men's and Women's Basketball
Championships to assure they have had no involvement in sports
wagering. We do the same for the national office men's basketball staff
members; the agent, gambling, and amateurism activities staff members;
and the members of the Division I Men's and Women's Basketball
Committees.
NCAA Internet Gambling Studies and Statistics
While the Internet offers tremendous educational potential, this
technology should not be used to circumvent State and Federal laws.
Accessibility to the Internet is perhaps the greatest reason for
concern regarding Internet gambling. Many students have unlimited use
of the Internet and most residences are wired for Internet access. In
fact, there may be no group in this country who has more readily
available access to computers and the Internet than students. For the
NCAA, the potential exists for a student-athlete to place a wager via
the Internet and then attempt to influence the outcome of the contest
while participating on the court or the playing field. Our students,
many of whom have access to credit cards, are lured into online
gambling by unscrupulous operators. A recent Nellie Mae study revealed
that 90 percent of 20-year-olds have credit cards, with the average
number of four cards and the average debt of $2,264. The proliferation
of Internet gambling is fueling the growth of illegal sports gambling
on college campuses across the country.
As an organization, we have committed to conducting national
research regarding student-athletes and sports gambling. We recognize
that estimates indicate more than $3 billion will be wagered at 1,800
Internet gambling sites in 2003, with 50 to 70 percent of that total
coming from the United States.
NCAA Educational Efforts
The association has developed relationships with and made
presentations to various law enforcement groups, including the FBI and
the U.S. Attorney General's advisory group, campus security officers,
coaches associations, and campus student life personnel. This spring we
are again reaching hundreds of our association members through sessions
about sports wagering at our annual compliance seminars at three
locations across the country.
We use a multitude of tools to educate our student-athletes and
coaches with our messages about sports wagering. Among those
initiatives are locker room visits with members of the men's and
women's Final Four basketball teams, the Frozen Four teams, and the
finalists of the College World Series. Our approach is truly grassroots
and must be.
It is important to remember that the NCAA is a member of the higher
education community. Among our primary functions are those of providing
athletics participation opportunities within the framework of higher
education and providing protection for student-athletes. We are about
education and providing information to our membership that can lead to
life-changing experiences, both in the classroom and on the playing
field. Our mission as an association is to build an infrastructure of
awareness and support to equip those involved with student-athletes
with the tools to educate them about damaging influences, including
sports wagering.
We are not an organization poised to infiltrate illegal gambling
networks. We are not an organization with the authority or the charge
to investigate illegal gambling activities on college campuses or
elsewhere. We have and continue to process cases involving sports
wagering when they come within the authority of the organization. We
have brought attention for more than 5 years to a problem we would
prefer did not exist, which is there is illegal gambling on college
campuses, some involving student-athletes. We support closer scrutiny
of illegal wagering throughout society--this is not isolated to college
campuses--and certainly it should be discussed within the framework of
the entire issue.
Conclusion
The NCAA's strategy to attack problems associated with wagering on
college sports is multifocused. We continue to carry the message that
sports wagering is an issue for our student-athletes and we have worked
diligently to educate them about the problem. But we need assistance.
We believe that strong legislation is needed to prohibit gambling over
the Internet.
The system of intercollegiate athletics we have is unique to the
world. We must do everything we can to protect the rich heritage,
tradition, and integrity of intercollegiate competition. We need to do
what is right for the college game and what is right for our student-
athletes and make gambling on college sports illegal everywhere all of
the time.
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PREPARED STATEMENT OF STEWART A. BAKER
General Counsel, U.S. Internet Service Provider Association
March 18, 2003
Mr. Chairman and Members of the Committee, my name is Stewart
Baker. I serve as General Counsel to the U.S. Internet Service Provider
Association (US ISPA). US ISPA is a trade association made up of major
service providers. Its members include America Online, Cable &
Wireless, EarthLink, eBay, Teleglobe, SBC Communications, Verizon
Online, and WorldCom. US ISPA focuses on legal and
policy issues that have a direct impact on the service provider
industry in the areas of cybercrime, security, content liability,
critical infrastructure protection, and unsolicited email. Its major
goal is to work with lawmakers to formulate sound policy that avoids
unintended consequences that may stifle the growth of the Internet.
We appreciate the Chairman's invitation to testify at the hearing
on ``Proposals to Regulate Illegal Internet Gambling.'' We welcome the
opportunity to discuss several key principles that we believe Internet
gambling legislation must contain to help foster industry and law
enforcement cooperation without placing an undue burden on the service
provider industry.
Service providers are committed to a safe and secure online
experience for our customers. Our members go above and beyond what the
law requires to combat criminal activity online, at considerable
expense to themselves, because they understand the need for good
corporate citizenship and because they realize that building consumer
trust in their service is critical to their own business success. Among
other industry initiatives, US ISPA supports measures that encourage
greater cooperation between law enforcement and service providers to
combat online crime.
Our members share your opposition to criminal conduct online. All
of our members rigorously cooperate actively with law enforcement to
combat illegal conduct. US ISPA's members have longstanding working
relationships with law enforcement at both the Federal and State level.
For example, our members work to respond thousands of times daily to
judicial process to furnish electronic evidence relevant to
investigations, and have worked to put in place internal procedures so
that their responses are both timely and effective. They likewise
include explicit language in customer contracts that prohibits illegal
activity and makes clear that service providers have the right to
terminate the accounts of customers who act in violation of the law.
We believe that law enforcement and the service provider industry
can most effectively work together to remove illegal gambling sites
from the Internet by identifying its source and the service provider
that controls the computer server (a machine on which users may make
the website available) where that content has been placed online. Only
the website operator or the service provider that controls the computer
server where the material is located can make the content inaccessible
to Internet users in a reliable and effective manner.
We appreciate the opportunity to testify today and work with the
Committee to develop legislation that will provide an effective tool
against illegal Internet gambling. The service provider industry has
worked with various lawmakers in the past in attempt to strike an
appropriate balance between developing effective measures to combat
unlawful Internet gambling, and avoiding unworkable measures that will
stifle future economic growth on the Internet. In our efforts, we have
developed key principles that any Internet gambling legislation must
contain before it begins to strike this appropriate balance. First,
Internet gambling legislation must not require service providers to
block customer access to Internet gambling sites not residing on their
networks and not under their control. This type of regulatory scheme is
unworkable and will disrupt e-commerce and speech on the Internet. The
most effective way to combat Internet gambling is by attacking it at
the source, requiring website operators or service providers that
control an illegal gambling website to take it down after receiving
notice from a court of the illegal activity.
Second, legislation should contain clear court-ordered notice and
takedown procedures to ensure appropriate employees receive notices of
illegal websites, so the service provider can quickly take down the
illegal material. The notice and takedown procedures should also give
these websites an opportunity to appear to refute notices for illegal
activity that may not reside on the service providers networks or may
not be illegal.
Third, the service providers should be given immunity from
liability for good faith efforts to comply with a notice. Service
providers should not be held liable for complying with a notice and the
inadvertent takedown of an innocent website.
Fourth, any Internet gambling legislation should contain language
that clearly states that no service provider has any duty or obligation
to monitor its networks for illegal activity, or disable or block
customer access to websites not under the service provider's direct
control or residing on its network. Such obligations are not
technically feasible in most circumstances, and in any event would
create an incredible burden on the service provider industry that would
have dire economic consequences.
Finally, as service providers are already subject to portions of
the Wire Act, 18 U.S.C. Sec. 1084, it is important that there be a
single, clear Federal standard governing service providers' obligations
with regard to gambling material that third parties place on their
systems.
No Requirement for Service Providers To Block or Disable Access
to Websites that Do Not Reside on Their Networks
Internet gambling legislation must not contain any requirement for
service providers to block or disable access to websites that do not
reside on their networks. Service providers are unable to block user
access to websites on other service providers' networks with any
reliability. Blocking efforts can be easily circumvented and will
seriously disrupt legitimate e-commerce and speech. But, illegal gaming
websites can easily circumvent blocking methods by rapidly change
locations, or proliferate at multiple Internet addresses using the same
Uniform Resource Locator (URL) (www.____.com/filename). This is because
the actual location of a website on the Internet is not its URL
(www.____.com/filename), but something called an ``IP address''--a long
string of numbers punctuated by periods that is sometimes visible, for
example, when a user types in a URL into a browser. All devices on the
Internet communicate with each other using IP addresses, but because IP
addresses are difficult for people to remember, web browsers allow
users to access a site by using URL's instead of an IP address. When a
user types the URL into a browser on the user's computer, that request
is translated into a request for an IP address by one of many domain
name system (DNS) servers located throughout the world. DNS thus
operates like a set of phone books for the Internet. These DNS servers
are not controlled by any one service provider. Rather, control of the
domain name system is distributed among many unrelated entities in many
different countries, with multiple levels of redundancy, and the
various DNS servers are updated
constantly.
Blocking an unlawful website by its IP address also runs the risk
of seriously disrupting a large number of lawful communications and
legitimate e-commerce. The main reason for this is different websites
can share the same IP address. In fact, it is a fairly common practice
for large web hosting companies to place a large number of customer
websites on the same IP address. According to a recent study entitled
``Websites Sharing IP Addresses: Prevalence and Significance,''
developed by Benjamin Edelman of Harvard Law School's Berkman Center
for Internet and Society, finds that ``eighty-seven percent of all
active domain names are found to share their IP addresses with one, and
more than two-third of active domain names share their addresses with
fifty or more additional domains.'' If a service provider controlling
another network attempts to block one of these websites by its IP
address, it will block user access to all the other sites. This type of
approach will almost certainly disrupt e-commerce by decreasing traffic
to legitimate online businesses.
The only way reliably to combat illegal Internet gambling is to
make sure that the content is removed from the Internet at the source
where it resides on the Internet. For example, service providers in the
United States and in other countries routinely cooperate with law
enforcement to remove illegal content from their computer servers when
it appears there. Such cooperation cuts off availability of the illegal
activity. It is essential to the service provider industry that any
Internet gambling legislation does not require service providers to
block access to remote websites not located on their networks.
Internet Gambling Legislation Should Contain Clear Notice
and Takedown Procedures
Any Internet gambling proposal, requiring service providers to
remove illegal gambling sites from their networks, must contain clear
court-ordered notice and takedown procedures. A lack of clear
procedures has serious consequences for operators and the effectiveness
of the law. Notice and takedown procedures ensure the appropriate
person in a service provider will receive appropriate notice from a
court, and will quickly act to remove the website from the Internet.
Without a clear procedure in place, it is very possible notices could
be delivered to the wrong employee (possibly a low-level employee like
a customer service representative). Once received, an untrained
customer service representative may not understand the importance of
the notice and not act on it; thereby increasing the time it takes to
remove the illegal material, and possibly opening up an operator to
criminal liability. To avoid confusion, and increase the efficiency and
effectiveness of the statute, Internet gambling proposals should make
it clear that an appropriate officer or counsel for the service
provider shall receive the notice from a court to remove illegal
content. Clear and simple notice procedures will make certain that
court-ordered notices are quickly acted on and decrease the burden
placed on service providers.
Also, Internet gambling proposals should give service providers the
ability to challenge a notice in the instance that the notice does not
pertain to illegal activity. Service providers should have the ability
to contest the legitimacy of a notice. Notices should not have the full
weight of the law without giving a website any type of process to
appear and refute a notice.
Immunity for Good Faith Efforts To Comply with a Notice
If an operator is acting in good faith under the orders of law
enforcement, it should be given protection from potential lawsuits
resulting in the unintentional takedown of innocent material. In an
effort to combat illegal activity, it is possible for a law enforcement
agent mistakenly to order the takedown of a legitimate website, not
engaged in gambling. In the spirit of cooperation and compliance, a
service provider will probably not question the notice, and in good
faith may remove a legitimate website from the Internet. Under these
circumstances, a service provider should not be held liable for
cooperating and complying with a law enforcement notice to takedown a
website. An operator does not determine whether or not a website
contains illegal material, and should not be held accountable for
mistakes made by law enforcement.
No Duty To Monitor Networks or Disable Access to Websites Not
Residing on the Service Providers Network
Service providers do not have the ability or means to monitor their
networks for illegal activity, nor should they be required to serve as
the policemen for the Internet. This principle has been widely accepted
and included in various Federal and State statutes. Any Internet
gambling bill should contain language that reinforces this principle by
clearly stating that the statute does not require a service provider to
monitor networks for illegal activity. Any Internet gambling
legislation should also contain the principle already enacted in 47
U.S.C. Sec. 230, which protects from liability service providers who
voluntarily restrict access to objectionable or unlawful material. Any
provision should make plain that Section 230(c) applies to any action
taken by service providers against Internet gambling or provide similar
protection. At the same time, the United States should embrace the
concept that requiring service providers to block customer access to
websites not under the service provider's control is an ineffective and
unworkable solution for the reasons described in this testimony.
Language should be included in Internet gambling legislation stating
that service providers do not have any duty to block or disable
customer
access to websites not under that service provider's control or
residing on its system. Requiring service providers to block access to
websites not under their control threatens the functionality of the
Internet.
Single Federal Standard Governing Service Providers' Obligations
Finally, it is important that Congress adopt a single, clear
standard governing service providers' obligations under Federal law for
gambling content that third party users may place on service providers'
networks. In particular, portions of the Wire Act, 18 U.S.C. Sec. 1084,
apply to service providers' operations. It would be very helpful if the
Congress adopted a single set of requirements that govern service
providers' obligations under the Wire Act, and any legislation that
this Committee may adopt.
Conclusion
Members of US ISPA are committed to taking action against illegal
activity on the Internet. When lawmakers craft liability rules, we ask
that you do so carefully to assign liability to actual wrongdoers,
while respecting free speech and legitimate e-commerce. Obviously,
enforcement strategies must start with and focus on wrongdoers by
deterring and punishing illegal conduct. Service providers play an
important role in supporting enforcement of such laws by devoting
significant resources to assisting law enforcement investigations
promptly, taking down illegal sites and hypertext links to illegal
material that they learn has been posted on their computer servers.
Internet gambling proposals should adopt effective, efficient
enforcement approaches to illegal gambling on the Internet, approaches
that are adapted to the ways that Internet technologies function. At
the same time, proposals should reward service providers for quickly
cooperating and complying with the law by granting immunity for
potential mistakes made in the enforcement of the law.
We thank you, Mr. Chairman and Members of the Committee, for
considering our views, and hope that you and other Members of this
Committee will keep these principles in mind when considering what
sorts of enforcement strategies should apply in the area of Internet
gambling.
STATEMENT OF JEFFREY PASH
Executive Vice President and General Counsel, National Football League
March 18, 2003
Mr. Chairman and Members of the Subcommittee. My name is Jeffrey
Pash. I am the Executive Vice President and General Counsel of the
National Football League. I appreciate the opportunity to submit this
statement expressing the NFL's strong support for the Unlawful Internet
Gambling Funding Prohibition Act (S. 627). We commend Senator Kyl,
Chairman Shelby, and Senator Feinstein for introducing this important
legislation. As we stated with respect to the House companion bill
(H.R. 556), in a letter last September to the Chairman and Ranking
Minority Member of this Committee, the NFL strongly supports this
legislation. We strongly support the legislation because it would
strengthen and extend existing prohibitions on gambling, including
gambling on sports events, and provide enhanced enforcement tools
tailored to the unique issues presented by Internet gambling. I attach
a copy of our letter and ask that it be included in the record of this
hearing, together with this statement.
Today, new technologies are undermining long-standing prohibitions
against sports gambling. These new technologies are undermining the
prohibitions on sports gambling that Congress approved when it passed
the Professional and Amateur Sports Protection Act in 1992 (PASPA) (28
U.S.C. Sec. 3702 et seq.) and the earlier statute that regulates
interstate gambling, the 1961 Wire Act (18 U.S.C. Sec. 1081 et seq.).
Congress did not contemplate these new technologies when it enacted
PASPA in 1992, much less when it enacted the Wire Act in 1961. We are
convinced that the proposed legislation provides tools that will help
combat the rapid spread of Internet gambling and protect Congress's
well-established policy against sports gambling in particular.
Simply put, gambling and sports do not mix. Sports gambling
threatens the integrity of our games and all the values our games
represent--especially to young people. For this reason, the NFL has
established strict policies relative to gambling in general and sports
betting in particular. The League prohibits NFL club owners, coaches,
players, and anyone else connected with the NFL from gambling on NFL
games or associating in any way with persons involved in gambling.
Anyone who does so faces severe disciplinary action by the
Commissioner, including a potential lifetime suspension. We have posted
our antigambling rules in every stadium locker room and have shared
those rules with every player and every other individual associated
with the NFL.
The League has also sought to limit references to sports betting or
gambling that in any way are connected to our games. For example, we
have informed the major television networks that we regard sports
gambling commercials and the dissemination of wagering information as
inappropriate and unacceptable during football game telecasts.
Commissioner Tagliabue reemphasized recently that gambling and
participation in the NFL are incompatible. The Commissioner has
reiterated that no NFL club owner, officer, or employee may own any
interest in any gambling casino, whether or not the casino operates a
``sports book'' or otherwise accepts wagering on sports. The
Commissioner has specifically stated that no club owner, officer, or
employee may own, directly or indirectly, or operate any ``online,''
computer-based, telephone, or Internet gambling service, whether or not
such a service accepts wagering on sports.
The League also has been an active proponent of Federal efforts to
combat sports gambling. We strongly supported the passage of the PASPA,
and the League has worked for the past several years to promote the
passage of Internet gambling legislation, including legislation
sponsored as early as 1997 by Senator Kyl, whose leadership and efforts
in this area have been truly outstanding. Like PASPA, the
proposed legislation is a logical and appropriate extension of existing
Federal law and policy. The precedents for Federal action in this area
were well-canvassed by the full Judiciary Committee in its report
accompanying the 1992 legislation.
The Unlawful Internet Gambling Funding Prohibition Act is a
necessary and
appropriate Federal response to a growing problem that, as the State
attorneys general have testified in previous years, no State can
adequately address on an individual basis. Ten years ago, a gambler
might have used the telephone to call his bookie. Today, he simply logs
on. Gambling businesses around the country--and around the world--have
turned to the Internet in an obvious attempt to circumvent the existing
prohibitions on gambling contained in the Wire Act and PASPA. Many
offshore gambling businesses provide betting opportunities over the
Internet, effectively beyond the reach of Federal and State law
enforcement authorities.
The proposed legislation is needed because it updates our laws to
reflect new technology. In its report accompanying the PASPA
legislation over a decade ago, the
Judiciary Committee noted the growth of ``new technologies''
facilitating gambling, including the use of automatic teller machines
to sell lottery tickets, and proposals to allow ``video gambling'' at
home. It was, in significant part, the specter of expanded gambling
raised by those ``new technologies'' that spurred Congress to enact
PASPA. In those days, the ``new technologies'' did not yet include the
Internet. That day, however, has now come.
Internet gambling today is widespread. It is widespread largely
because so little effort is required to participate. Unlike traditional
casinos, which require gamblers to travel to the casino and place their
bets onsite, Internet gambling allows bettors to access online wagering
facilities 24 hours per day, 7 days a week. Gamblers can avoid the
hassle and expense of traveling to a casino, which in many parts of the
country requires out-of-State travel. Internet gamblers also can avoid
the stigma that may be attached to gambling in public on a regular
basis.
Internet gambling sites are easily accessible and offer a wide
range of gambling opportunities from all over the world. Any personal
computer can be turned into an unregulated casino where Americans can
lose their life savings with the click of a mouse. Many of these
gambling websites have been designed to resemble video games, and
therefore are very attractive to children. But gambling--even on the
Internet--is not a game. Studies have shown that sports betting is a
growing problem for high school and college students, who develop
serious addictions to other forms of gambling as a result of being
introduced to ``harmless'' sports wagering.
As the Internet reaches more and more college students and
schoolchildren, the rate of Internet gambling among young people is
certain to rise. Because no one currently stands between Internet
casinos and their gamblers to check identification, our children will
have the ability to gamble on the family computer after school, or even
in the schools themselves. And we must not be lulled by the paper tiger
set up by proponents of Internet gambling--that children cannot access
gambling websites because they lack credit cards. It does not take much
effort for a child to ``borrow'' one of his or her parents' credit
cards for the few minutes necessary to copy down the credit card number
and use it to access an Internet gambling service. The problems
connected with Internet gambling transcend the NFL's concerns about
protecting the integrity of professional sports and the values they
represent. According to experts on compulsive or addictive gambling,
access to Internet sports wagering dramatically increases the risk that
people will become active, pathological gamblers. The National Council
on Problem Gambling has reported that sports betting is among the most
popular form of gambling for compulsive gamblers. in the United States.
That means that once individuals become exposed to sports betting,
there is a real problem with recurrent and uncontrollable gambling.
Conducting a gambling business using the Internet is illegal under the
Wire Act of 1961 and indeed has been prosecuted. But as prosecutors
have recognized, asserting jurisdiction over offshore gambling
businesses that use the Internet can be problematic. Just as Congress
enacted the Wire Act to prohibit the use of the telephone as an
instrument of gambling, so Congress or should now enact specific
legislation to prohibit the use of the Internet as an instrument
ofgambling. In supporting the PASPA legislation to prevent the spread
of legalized sports betting, Commissioner Tagliabue testified:
Sports gambling threatens the character of team sports. Our
games embody the very finest traditions and values. They stand
for clean, healthy competition. They stand for teamwork. And
they stand for success through preparation and honest effort.
With legalized sports gambling, our games instead will come to
represent the fast buck, the quick fix, the desire to get
something for nothing. The spread of legalized sports gambling
would change forever--and for the worse--what our games stand
for and the way they are perceived.
Quoted in S. Rep. No. 248, supra, at 4.
Left unchecked, Internet gambling amounts to legalized gambling.
Its effects on the integrity of professional and amateur sports and the
values they represent are just as pernicious. Just as Congress
intervened to stem the spread of legalized sports gambling in 1992, so
it should intervene to stem the spread of Internet gambling today.
Mr. Chairman, we applaud your efforts and those of your colleagues
to address this important problem. The Unlawful Internet Gambling
Funding Prohibition Act will strengthen the tools available to prevent
the spread of Internet gambling into every home, office, and
schoolhouse in this country, and will send the vital message--to
children and adults alike--that gambling on the Internet is wrong. We
strongly support the passage of this legislation. Thank you.