[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]




               INTERNET GAMBLING PROHIBITION ACT OF 2006

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

                                HEARING

                               BEFORE THE

                   SUBCOMMITTEE ON CRIME, TERRORISM,
                         AND HOMELAND SECURITY

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                                   ON

                               H.R. 4777

                               __________

                             APRIL 5, 2006

                               __________

                           Serial No. 109-128

                               __________

         Printed for the use of the Committee on the Judiciary


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


                                 _____

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                           WASHINGTON : 2006 
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                       COMMITTEE ON THE JUDICIARY

            F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois              JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina         HOWARD L. BERMAN, California
LAMAR SMITH, Texas                   RICK BOUCHER, Virginia
ELTON GALLEGLY, California           JERROLD NADLER, New York
BOB GOODLATTE, Virginia              ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio                   MELVIN L. WATT, North Carolina
DANIEL E. LUNGREN, California        ZOE LOFGREN, California
WILLIAM L. JENKINS, Tennessee        SHEILA JACKSON LEE, Texas
CHRIS CANNON, Utah                   MAXINE WATERS, California
SPENCER BACHUS, Alabama              MARTIN T. MEEHAN, Massachusetts
BOB INGLIS, South Carolina           WILLIAM D. DELAHUNT, Massachusetts
JOHN N. HOSTETTLER, Indiana          ROBERT WEXLER, Florida
MARK GREEN, Wisconsin                ANTHONY D. WEINER, New York
RIC KELLER, Florida                  ADAM B. SCHIFF, California
DARRELL ISSA, California             LINDA T. SANCHEZ, California
JEFF FLAKE, Arizona                  CHRIS VAN HOLLEN, Maryland
MIKE PENCE, Indiana                  DEBBIE WASSERMAN SCHULTZ, Florida
J. RANDY FORBES, Virginia
STEVE KING, Iowa
TOM FEENEY, Florida
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas

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

                                 ------                                

        Subcommittee on Crime, Terrorism, and Homeland Security

                 HOWARD COBLE, North Carolina, Chairman

DANIEL E. LUNGREN, California        ROBERT C. SCOTT, Virginia
MARK GREEN, Wisconsin                SHEILA JACKSON LEE, Texas
TOM FEENEY, Florida                  MAXINE WATERS, California
STEVE CHABOT, Ohio                   MARTIN T. MEEHAN, Massachusetts
RIC KELLER, Florida                  WILLIAM D. DELAHUNT, Massachusetts
JEFF FLAKE, Arizona                  ANTHONY D. WEINER, New York
MIKE PENCE, Indiana
J. RANDY FORBES, Virginia
LOUIE GOHMERT, Texas

                     Michael Volkov, Chief Counsel

                          David Brink, Counsel

                        Caroline Lynch, Counsel

                 Jason Cervenak, Full Committee Counsel

                     Bobby Vassar, Minority Counsel


                            C O N T E N T S

                              ----------                              

                             APRIL 5, 2006

                           OPENING STATEMENT

                                                                   Page
The Honorable Howard Coble, a Representative in Congress from the 
  State of North Carolina, and Chairman, Subcommittee on Crime, 
  Terrorism, and Homeland Security...............................     1
The Honorable Robert C. Scott, a Representative in Congress from 
  the State of Virginia, and Ranking Member, Subcommittee on 
  Crime, Terrorism, and Homeland Security........................     2
The Honorable John Conyers, Jr., a Representative in Congress 
  from the State of Michigan, and Ranking Member, Committee on 
  the Judiciary..................................................     4

                               WITNESSES

The Honorable Bob Goodlatte, a Representative in Congress from 
  the State of Virginia
  Oral Testimony.................................................     7
  Prepared Statement.............................................     8
Mr. Bruce G. Ohr, Chief of the Organized Crime and Racketeering 
  Section, United States Department of Justice
  Oral Testimony.................................................     9
  Prepared Statement.............................................    12
Mr. John W. Kindt, Professor, University of Illinois
  Oral Testimony.................................................    17
  Prepared Statement.............................................    20
Mr. Samuel A. Vallandingham, Vice President and Chief Information 
  Officer, The First State Bank
  Oral Testimony.................................................    64
  Prepared Statement.............................................    66

                                APPENDIX
               Material Submitted for the Hearing Record

Prepared Statement of the Honorable Robert C. Scott, a 
  Representative in Congress from the State of Virginia, and 
  Ranking Member, Subcommittee on Crime, Terrorism, and Homeland 
  Security.......................................................    95
Response to Post-Hearing Questions from Bruce G. Ohr, Chief of 
  the Organized Crime and Racketeering Section, United States 
  Department of Justice..........................................    97
Response to Post-Hearing Questions from the Honorable William E. 
  Moschella, Assistant Attorney General, Office of Legislative 
  Affairs, United States Department of Justice, for the April 29, 
  2003 hearing on H.R. 21, the ``Unlawful Internet Gambling 
  Funding Prohibition Act''......................................   113
Prepared Statement of John A. Phillips, CEO, ARISTOTLE 
  International..................................................   118
Prepared Statement of Kobus Paulsen, Chief Executive, UC Group...   120
Letter to the Honorable Howard Coble from the Honorable Bob 
  Goodlatte......................................................   130
Letter to the Honorable Bob Goodlatte from Wendy Wright, 
  President, Concerned Women for America.........................   131
Letter to the Honorable Bob Goodlatte from Peter Brandt, Senior 
  Director, Government & Public Policy, Focus on the Family......   132
Letter to the Honorable Bob Goodlatte from Phyllis Schlafly, 
  President, the Eagle Forum.....................................   133
Letter to the Honorable Bob Goodlatte from Richard D. Land, 
  President, The Ethics & Religious Liberty Commission...........   134
Letter to the Honorable Bob Goodlatte from Dr. Guy C. Clark, 
  Chairman of the Board of Directors, The National Coalition 
  Against Gambling Expansion.....................................   135
Press Release: Family Research Council, dated February 16, 2006..   136
Press Release: Christian Coalition of America, Dated February 15, 
  2006...........................................................   137
Letter from a coalition of organizations in support of H.R. 4777.   138
News article from The Hill, entitled ``Abramoff gets payback in 
  gaming bills,'' dated March 29, 2006...........................   141
Transcript of speakers from the National Thoroughbred Racing 
  Association at the 28th Annual Symposium on Racing.............   146

 
                           INTERNET GAMBLING 
                        PROHIBITION ACT OF 2006

                              ----------                              


                        WEDNESDAY, APRIL 5, 2006

                  House of Representatives,
                  Subcommittee on Crime, Terrorism,
                              and Homeland Security
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2 p.m., in 
Room 2141, Rayburn House Office Building, the Honorable Howard 
Coble (Chairman of the Subcommittee) presiding.
    Mr. Coble. Good afternoon, ladies and gentlemen. The 
Ranking Member--the gentleman from Virginia, the primary 
sponsor, just entered the room; and Mr. Scott, the Ranking 
Member, is on his way. But in the interests of time, I am going 
to go ahead and give my opening statement and then recognize 
Mr. Scott when he gets here.
    Today, the Subcommittee on Crime, Terrorism, and Homeland 
Security is conducting a legislative hearing on H.R. 4777, the 
``Internet Gambling and Prohibition Act of 2006.'' H.R. 4777 is 
very similar to legislation that the Judiciary Committee 
considered and approved during the 107th Congress.
    Currently, Federal law is unclear as to whether or not 
Internet gambling is prohibited by section 1084 of title 18 of 
the United States Code. H.R. 4777 clarifies the law in this 
area by prohibiting Internet gambling and updates existing 
language to bar use of new technologies such as wireless access 
to gambling sites on the Internet, which were never envisioned 
when section 1084 was originally drafted in 1961.
    The dramatic explosion in Internet gambling raises complex 
criminal and social issues. From a law enforcement perspective, 
this new multibillion-dollar industry has attracted organized 
crime because of the ease by which criminals can launder money 
and increase illegal revenues without fear of prosecution or 
even investigation.
    Unlike authorized and regulated wagering in the United 
States, the Internet gambling business is operated in an 
environment free of regulatory oversight and even a remote 
possibility of civil or criminal enforcement. As a result, 
Internet gambling has turned into an industry ripe for 
organized crime domination.
    The rapid growth in this industry also raises other 
concerns for our communities. Millions of Americans suffer from 
gambling addiction resulting in financial debt, depression, 
unemployment, bankruptcy, divorce, homelessness, and in some 
cases, even suicide.
    While the Internet has certainly been a boon for our 
economy, our productivity and our general welfare, one downside 
of the Internet has been the ease by which troubled adults and 
our children gain access to addictive gambling sites. This is a 
problem which must be addressed in order to protect our 
communities and our youth.
    We are fortunate today to have the original sponsor of H.R. 
4777, the distinguished gentleman from Virginia, Representative 
Bob Goodlatte, to testify and explain the details of his bill. 
He is the sponsor of past Internet wagering bills and probably 
knows the issue as well or better than any Member of Congress.
    Mr. Goodlatte, as you know, our Subcommittee also has 
experience in this issue, and we look forward to your 
testimony.
    I just apologized to the distinguished gentleman from 
Virginia. I was not overlooking him, but in an effort to save 
time, I gave my opening statement before Mr. Scott got here 
because we are going to have a vote, I suspect, within an hour, 
but perhaps a little longer than that. So I hope we can get to 
the business at hand.
    And at this point, I am pleased to recognize the 
distinguished gentleman from Virginia, the Ranking Member, Mr. 
Bobby Scott.
    Mr. Scott. Thank you Mr. Chairman. Mr. Chairman, I noticed 
that at 1 minute past 2 that you are on the third page of your 
statement.
    Mr. Coble. If the gentleman will yield, look at the time we 
saved.
    Mr. Scott. It is a pleasure to be here, Mr. Chairman; I am 
pleased to join you in convening this hearing regarding Federal 
regulation of gambling over the Internet.
    I believe that all gambling should be tightly regulated, 
and it has traditionally been done by the State regulatory 
responsibilities. It should continue to be so, in my judgment, 
although it is appropriate for the Federal Government to have a 
role to assist the States in the total regulatory scheme.
    The Federal Government took such a role in 1961 with the 
Wire Communications Act as a way to assist in the fight against 
gambling by organized crime syndicates. The Department of 
Justice contends it can prosecute Internet gambling businesses 
under that law, but clearly that law was not designed with 
Internet gambling in mind.
    While I appreciate the desire of my distinguished 
colleague, the gentleman from Virginia, Mr. Goodlatte, to 
update the ability of the Department to address illegal 
gambling in today's context, I do not believe that H.R. 4777 is 
likely to be effective in doing so.
    Regulating anything over the Internet is problematic, even 
desirable. Most law enforcement is local or jurisdictional 
based. The Internet has no jurisdiction, and as a result, I 
suspect that even if we were successful in closing down 
business sites physically located in the United States, or in 
countries where we can get cooperation, because of the nature 
of the Internet and the ingenuity of people using it, the 
approach of H.R. 4777 will ultimately be ineffective.
    As we hear from our witness panel, this bill will create an 
enforcement nightmare for financial institutions because they 
would be required to look up and stop illegal gambling 
transactions. Identifying Internet gambling activities will be 
very difficult, if not impossible. While some companies may be 
able to identify some gaming transactions by codes used, such 
enforcement efforts can easily be thwarted. A business can have 
one code for payment purposes, but may be engaged in several 
activities, including Internet gambling.
    A casino, for example, may have a hotel or gambling. A 
foreign company may have a hotel, a casino, Internet gambling, 
an e-cash or an electronics payment system; or any outside 
escrow agent can relocate to another country and, therefore, 
evade enforcement mechanisms in the bill altogether. With some 
Internet gaming activities being legal, how would a financial 
institution distinguish between them and legal activities?
    Furthermore, we should not overestimate the cooperation we 
may get from other countries. According to Christiansen Capital 
Advisers, Internet gambling Web sites brought in over $14 
billion worldwide last year, which is up from 8 billion the 
year before. That number is expected to almost double to 24 
billion by 2010.
    Presently, over 85 foreign governments allow some form of 
gambling online. That number is likely to grow as well. So what 
governments are likely to cooperate with us in prosecuting 
businesses they authorize to operate? And even if we are 
successful in getting cooperation from some countries, we would 
be simply increasing the profit opportunities for uncooperative 
countries, especially those with whom the United States does 
not have normal diplomatic relations.
    This bill does not prohibit Internet gambling; it prohibits 
running the Internet gambling operation. If we want to be 
effective in prosecuting illegal gambling over the Internet, we 
should prosecute the individual gamblers. A few sting 
operations and the word would get around that if you gamble on 
the Internet, you will be caught. And so long as individuals 
can gamble over the Internet with impunity, a market will be 
provided for them which the regulatory scheme in this bill will 
not stop.
    For example, Mr. Chairman, we prohibit the sales of illegal 
drugs. But we see that as long as there remains a demand for 
drugs, we have only limited success in the war on drugs. But if 
we took the approach in this bill in enforcing drug laws, we 
would be prosecuting the seller, but not the buyer and have 
even less effect than we have now.
    Since we are not talking about prohibiting gambling on the 
Internet, but simply prohibiting the operation of the illegal 
gambling site in jurisdictions that the FBI can get to, I 
believe that there are more effective regulatory approaches 
than the approach offered in H.R. 4777. However, the approaches 
must be developed to take into account the technology and State 
policies with respect to gambling and Internet gambling 
practices and preferences.
    This is the effect of the bill authored by the full 
Committee Ranking Member, Mr. Conyers, last year, H.R. 1223. It 
established a commission that would study the issue and make 
recommendations for a regulatory environment for Internet 
gambling that would be controlled by the individual States. 
States do tend to prohibit individuals from gambling, so 
Internet gambling can both be effective--can be effective in 
individualized States and individualized to each State.
    Under the bill's regulatory scheme, if Nevada opted to 
allow Internet gambling within its borders, it could. If Utah 
prohibited individuals from that State from gambling over the 
Internet, it probably could, and that would be enforceable by 
the Federal Government and by the States that allow gambling as 
well as the States--as well as the State of Utah, because in 
the fullness of time, a gambler could be required to provide a 
mailing address in order to get paid.
    If protection of the public is the goal of regulating 
Internet gambling, it is much more likely that those who choose 
to gamble over the Internet will do so under a licensed, 
regulated entity under the Conyers approach than under 4777. 
First, the consumer in a State where Internet gambling was 
legal would have confidence that if they win, they will be paid 
by the licensed, regulated operation.
    A consumer would have no similar confidence in fly-by-night 
offshore Casino.com. As a result, from a licensed, regulated 
Internet gaming activity would drive business from the less 
reputable businesses, and they would essentially drive them out 
of business.
    Another significant result is that States that choose to 
authorize Internet gambling can tax it. At a time when 
unauthorized gambling is flourishing--as I said, over $14 
billion with over half of it originating in the United States--
and when most States are cash strapped, those States that have 
chosen to authorize regulated gambling could receive much-
needed revenue from both the operators and the winners while 
contributing to the control of the industry and protection of 
the gambling public.
    The overwhelming portion of those who buy--who play the 
numbers buy legal lottery tickets, which are regulated and 
taxed and actually pay lower odds compared to the illegal 
numbers operations. For the same reason, people will choose to 
gamble over Internet--who choose to gamble over the Internet 
will patronize legal domestic Web sites even if they have to 
pay taxes on the winnings.
    I believe we should regulate Internet gambling, but we 
should do so effectively. We should not subject any single 
business sector to the sole or principal responsibility of 
doing the bulk of the enforcement work, whether it is the 
banking industry in this bill or the Internet service industry, 
as we tried in prior bills. There are ways to regulate Internet 
gambling effectively, and a study commission to develop those 
ways is the best way to come up with them.
    And, again, Mr. Chairman, I thank you for holding the 
hearing and look forward to the testimony.
    Mr. Coble. I thank the distinguished gentleman from 
Virginia.
    We have been joined by the distinguished gentleman from 
Utah. While not a Member of the Subcommittee on Crime, 
Terrorism, and Homeland Security, he is a Member of the full 
Judiciary Committee. And we have been joined, as well, by the 
distinguished gentleman from Michigan, the Ranking Member of 
the full Committee.
    And, Mr. Conyers, if you have a statement, I will be glad 
to recognize you.
    Mr. Conyers. Thank you, Mr. Chairman and Members of the 
Committee and our distinguished witnesses here.
    I think we have to come far more specifically to grips 
about the issues raised, particularly by the gentleman from 
Virginia, Mr. Bobby Scott.
    Now, gambling is going on now; it is out of the barn, so to 
speak. But when you start doing something as futile as carve-
outs and a ban on racing, you are on a slippery slope that is 
going to create more problems.
    Let me just make a few points, and I will probably not use 
my full 5 minutes.
    First, this measure claims to ban all forms of online 
gambling, yet specifically exempts betting on horse racing, 
pay-to-play fantasy sports, State-owned and -operated 
lotteries. And so, we are doing a picking and choosing of which 
gambling activities to sanction while disapproving many others; 
and I will be looking carefully to find out how we arrived at 
the decision of which gambling will be sanctioned and which 
won't.
    Number two, the bill is not likely to lead to any 
meaningful reduction in the current number of Americans that 
place bets on line. Isn't that what the legislation ought to be 
about? Major financial service organizations already employ the 
bill's main enforcement mechanisms, and Americans can easily 
circumvent those prohibitions by using third-party payers or 
even foreign banks.
    Third, by eliminating a customer's access to the U.S. 
financial services industry, this bill may inadvertently make 
worse the most pressing dangers posed by the Internet gambling 
industry. After all, credit cards play a vital role in 
determining an individual bettor's wagers and tracking 
potential earnings and losses. By prohibiting their use, we 
effectively lose access to this key information.
    And finally, the bill proposes to establish a complex 
regulatory system for banks that is unworkable. It is all but 
impossible to comply with. And under the provisions of the 
bill, banks would be asked to determine whether a transaction 
occurring online was illegal or legal based upon the type of 
gambling activity involved and where the location of the 
transaction occurred, and whether or not the transaction 
involved interstate commerce.
    Now, let's be real, my friends. If we really want to gain 
effective control of the online gambling industry, we must 
regulate it. Establishing a partial ban, allowing some forms of 
gambling to continue without the benefit of adequate checks and 
balances only will make the current situation much worse.
    And I thank you, Chairman Coble, for allowing me to get 
these remarks in before our witnesses start their commentary.
    Mr. Coble. I thank the distinguished gentleman from 
Michigan.
    Gentleman, it is the practice of the Subcommittee to swear 
in all witnesses appearing before it; so if you would, please 
stand and raise your respective right hands.
    [Witnesses sworn.]
    Mr. Coble. You may be seated.
    Let the record show that each of the witnesses answered in 
the affirmative.
    We have four distinguished witnesses with us today. Our 
first witness is the Honorable Bob Goodlatte, whom I have 
previously mentioned. Representative Goodlatte serves the Sixth 
Congressional District in the State of Virginia and was first 
elected to the Congress in 1992. He is currently cochairman of 
the Congressional Internet Caucus. He was selected by Speaker 
Hastert to serve on the House Republican Cybersecurity Task 
Force.
    Prior to serving in the Congress, Representative Goodlatte 
was a partner in the law firm of Bird, Kinder & Huffman, and he 
is an alumnus of Bates College and the Washington and Lee 
School of Law in Virginia.
    And the statement about you, Mr. Goodlatte, is missing a 
conspicuous ingredient. You also serve as Chairman of the House 
Agriculture Committee, unless there has been a change that is 
not known to me.
    Our second witness is Bruce Ohr, Chief of the Organized 
Crime and Racketeering Section at the Justice Department. 
Previously, Mr. Ohr served as Assistant U.S. Attorney for the 
Southern District of New York and Chief of the Violent Gangs 
Unit in that office. He also worked as an associate at Ohr, 
Harrington and Sutcliffe. Mr. Ohr received his undergraduate 
and law degrees from Harvard.
    Our third witness is Mr. John Kindt, Professor at the 
University of Illinois School of Law. Previously, Professor 
Kindt was employed in several State and Federal Government 
positions, and he also has served as a Senior Fellow at the 
London School of Economics.
    Professor Kindt's research has resulted in over 30 articles 
in the areas of legalized gambling's economic impacts. He has 
earned several graduate degrees in law and business, including 
an MBA, a JD and an SJD.
    Our fourth witness is Mr. Sam--sir, help me with your 
surname.
    Mr. Vallandingham. Vallandingham.
    Mr. Coble. Mr. Vallandingham is Vice President and Chief 
Information Officer at the First State Bank. And headquartered 
where, Mr. Vallandingham?
    Mr. Vallandingham. Barboursville, West Virginia.
    Mr. Coble. Thank you, sir. Prior to serving in this 
capacity, Mr. Valling--try me one more time.
    Mr. Vallandingham. Vallandingham.
    Mr. Coble. It is really not that difficult--worked as Data 
Security Officer and Vice President of the Mortgage Department. 
He is also a member of the Independent Community Bankers of 
America where he serves on the Payments and Technology 
Committee.
    He was awarded his undergraduate degree from Florida State 
University and his graduate degree from Louisiana State 
University.
    Gentlemen, it is good to have each of you with us. And as I 
previously informed you, there will be a vote upcoming. We 
comply with the 5-minute rule here, as you all have previously 
been told. And when you see the amber light illuminate on the 
panel in front of you, that is your 1-minute warning.
    And then, when the red light appears, that is when the ice 
on which you are skating has become very thin. We will not 
unduly punish you; however, at that point, if you could wrap 
up, we would be appreciative.
    Now, Mr. Goodlatte, I am told that you have another 
engagement at what time?
    Mr. Goodlatte. Three o'clock, but I need to leave before 
that.
    Mr. Coble. We will start with you and you can depart, and 
if we are still going, you are welcome to come back.
    Mr. Goodlatte, you are recognized for 5 minutes.

 STATEMENT OF THE HONORABLE BOB GOODLATTE, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF VIRGINIA

    Mr. Goodlatte. Thank you, Mr. Chairman, for inviting me to 
testify before this Subcommittee on this very important issue.
    Gambling on the Internet has became an extremely lucrative 
business. Numerous studies have charted the explosive growth of 
this industry, both by the increases in gambling Web sites 
available and via industry revenues. Internet gambling is now 
estimated to be a $12 billion industry, with approximately 6 
billion coming from bettors based in the United States. It has 
been reported that there are as many as 2,300 gambling sites.
    Virtual betting parlors have attempted to avoid the 
application of United States law by locating themselves 
offshore and out of our jurisdictional reach. These offshore 
fly-by-night Internet gambling operators are unlicensed, 
untaxed and unregulated, and are sucking billions of dollars 
out of the United States. In addition, Internet gambling can 
serve as a vehicle for money laundering by organized crime 
syndicates and terrorists.
    Contrary to what many in the gambling community would lead 
you to believe, gambling is not a victimless activity. In fact, 
the negative consequences of online gambling can be more 
detrimental to the families and communities of addictive 
gamblers than if a bricks-and-mortar casino were built next 
door.
    The anonymity of the Internet makes it much easier for 
minors to gamble online. Furthermore, online gambling can 
result in addiction, in bankruptcy, divorce, crime and moral 
decline just as with traditional forms of gambling, the cost of 
which must ultimately be borne by society.
    In fact, I have been contacted by a constituent in my 
district whose son fell prey to an Internet gambling addiction. 
Faced with insurmountable debt from Internet gambling, he took 
his own life. Unfortunately, financial ruin and tragedy are not 
uncommon among online bettors.
    Traditionally, States have had the authority to permit or 
prohibit gambling within their borders. With the development of 
the Internet, however, State prohibitions and regulations 
governing gambling have become increasingly hard to enforce as 
electronic communications move freely across borders.
    Currently, Federal law already prohibits interstate 
gambling over telephone wires. However, because the Internet 
does not always travel over telephone wires, these laws which 
were written before the invention of the Internet have become 
outdated. H.R. 4777, the ``Internet Gambling Prohibition Act of 
2006,'' brings the current prohibition against wireline 
interstate gambling up to speed with the development of new 
technology. It also makes clear once and for all that the 
prohibition is not limited to sports-related bets and wagers.
    In addition, H.R. 4777 will add a new provision to the law 
that would prohibit a gambling business from accepting certain 
forms of noncash payment, including credit cards and electronic 
transfers. This bill also provides an enforcement mechanism to 
address the situation where the gambling business is located 
offshore, but accepts money from bank accounts in the United 
States. The bill also provides an additional tool to fight 
illegal gambling by giving Federal, State, local and tribal law 
enforcement new injunctive authority to prevent and restrain 
violations of the law.
    H.R. 4777 will return control to the States by protecting 
the rights of citizens in each State to decide through their 
State legislatures if they want to allow gambling within their 
borders. The regulation of intrastate gambling is within the 
jurisdiction of the States. So this bill leaves the regulation 
of wholly intrastate betting or wagering to the States with 
tight controls to ensure that such betting or wagering does not 
extend beyond their borders or to minors.
    While my legislation prohibits online, interstate gambling, 
it does not overturn previous act of Congress that address 
gambling. This is a strong antigambling bill that also protects 
the rights of States to determine what is and what is not 
prohibited within their borders.
    The opponents of this legislation have a lot to lose. 
Offshore online gambling Web sites are cash cows, and the greed 
that propels these companies leads them to solicit bettors in 
the U.S. despite the fact that the Department of Justice 
already believes this activity is illegal. The greed that 
motivates many of these offshore establishments has also 
motivated nefarious lobbyists such as Jack Abramoff to spread 
misinformation about previous attempts of the Congress to ban 
online betting.
    Internet gambling is a serious problem that must be 
stopped. The Internet Gambling Prohibition Act will help 
eliminate this harmful activity before it spreads further.
    I am happy to answer any questions from Members of the 
Subcommittee and address some of the misrepresentation that is 
already occurring about this legislation when that opportunity 
arises.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Goodlatte follows:]
Prepared Statement of the Honorable Bob Goodlatte, a Representative in 
                  Congress from the State of Virginia
    Thank you, Mr. Chairman, for inviting me to testify before the 
Subcommittee on this important issue.
    Gambling on the Internet has become an extremely lucrative 
business. Numerous studies have charted the explosive growth of this 
industry, both by the increases in gambling websites available, and via 
industry revenues. Internet gambling is now estimated to be a $12 
billion industry, with approximately $6 billion coming from bettors 
based in the U.S. It has been reported that there are as many as 2,300 
gambling sites.
    Virtual betting parlors have attempted to avoid the application of 
United States law by locating themselves offshore and out of our 
jurisdictional reach. These offshore, fly-by-night Internet gambling 
operators are unlicensed, untaxed and unregulated and are sucking 
billions of dollars out of the United States. In addition, Internet 
gambling can serve as a vehicle for money laundering by organized crime 
syndicates and terrorists.
    Contrary to what many in the gambling community would lead you to 
believe, gambling is not a victimless activity. In fact, the negative 
consequences of online gambling can be more detrimental to the families 
and communities of addictive gamblers than if a bricks-and-mortar 
casino was built right next door.
    The anonymity of the Internet makes it much easier for minors to 
gamble online. Furthermore, online gambling can result in addiction, 
bankruptcy, divorce, crime, and moral decline just as with traditional 
forms of gambling, the costs of which must ultimately be borne by 
society. In fact, I have been contacted by a constituent in my district 
whose son fell prey to an Internet gambling addiction. Faced with 
insurmountable debt from Internet gambling, he took his own life. 
Unfortunately, financial ruin and tragedy are not uncommon among online 
bettors.
    Traditionally, States have had the authority to permit or prohibit 
gambling within their borders. With the development of the Internet, 
however, state prohibitions and regulations governing gambling have 
become increasingly hard to enforce as electronic communications move 
freely across borders.
    Current federal law already prohibits interstate gambling over 
telephone wires. However, because the Internet does not always travel 
over telephone wires, these laws, which were written before the 
invention of the Internet, have become outdated. H.R. 4777, the 
Internet Gambling Prohibition Act, brings the current prohibition 
against wireline interstate gambling up to speed with the development 
of new technology. It also makes clear once and for all that the 
prohibition is not limited to sports-related bets and wagers.
    In addition, H.R. 4777 will add a new provision to the law that 
would prohibit a gambling business from accepting certain forms of non-
cash payment, including credit cards and electronic transfers. This 
bill also provides an enforcement mechanism to address the situation 
where the gambling business is located offshore but accepts money from 
bank accounts in the United States. The bill also provides an 
additional tool to fight illegal gambling by giving Federal, State, 
local and tribal law enforcement new injunctive authority to prevent 
and restrain violations of the law.
    H.R. 4777 will return control to the states by protecting the right 
of citizens in each State to decide through their State legislatures if 
they want to allow gambling within their borders. The regulation of 
intrastate gambling is within the jurisdiction of the states, so this 
bill leaves the regulation of wholly intrastate betting or wagering to 
the states with tight controls to ensure that such betting or wagering 
does not extend beyond their borders or to minors.
    While my legislation prohibits online, interstate gambling, it does 
not overturn previous acts of Congress that address gambling. This is a 
strong anti-gambling bill that also protects the rights of States to 
determine what is--and is not--prohibited within their borders.
    The opponents of this legislation have a lot to lose. Offshore 
online gambling websites are cash cows and the greed that propels these 
companies leads them to solicit bettors in the U.S. despite the fact 
that the Department of Justice already believes this activity is 
illegal. The greed that motivates many of these offshore establishments 
has also motivated nefarious lobbyists such as Jack Abramoff to spread 
misinformation about previous attempts of the Congress to ban online 
betting.
    Internet gambling is a serious problem that must be stopped. The 
Internet Gambling Prohibition Act will help eliminate this harmful 
activity before it spreads further. I am happy to answer any questions 
the members of this subcommittee may have regarding this legislation.

    Mr. Coble. And you are to be congratulated. You beat the 
illumination of the red light.
    So the pressure is on you, Mr. Ohr. Mr. Ohr, good to have 
you with us.

  STATEMENT OF BRUCE G. OHR, CHIEF OF THE ORGANIZED CRIME AND 
   RACKETEERING SECTION, UNITED STATES DEPARTMENT OF JUSTICE

    Mr. Ohr. Good afternoon, Mr. Chairman, Ranking Member 
Scott.
    Mr. Coble. Pull that mike a little closer to you, Mr. Ohr.
    Mr. Ohr. Good afternoon Mr. Chairman, Ranking Member Scott, 
honorable Members of the Subcommittee. Thank you for inviting 
me to testify today.
    I would like to commend Congressman Goodlatte, as well as 
Congressman Leach and Senator Kyl for their efforts and long-
standing commitment to provide law enforcement with additional 
tools to combat Internet gambling. Today, I am happy to offer 
the views of the Department of Justice on H.R. 4777, the 
``Internet Gambling Prohibition Act of 2006.''
    I would like to begin by noting that the Government 
continues to investigate and prosecute illegal Internet 
gambling. Two recent examples: In January of this year, the 
U.S. Attorney's office in St. Louis announced a $7.2 million 
settlement with Sporting News to resolve claims that the 
Sporting News promoted illegal gambling from 2000 through 2003 
by accepting fees for advertising illegal gambling.
    In April of last year, the U.S. Attorney's Office in the 
District of Massachusetts indicted 13 individuals on 
racketeering charges which included allegations that the 
enterprise used an offshore gambling office and that customers 
placed bets over the Internet. The operator of the offshore 
gambling office has pled guilty.
    I would like to say that the Department supports H.R. 4777 
for several reasons. This legislation clarifies and strengthens 
our position that section 1084 of title 18 applies to both 
telephone and the Internet.
    This bill increases the penalties for a violation of 
section 1084. It prohibits the acceptance of credit cards for 
Internet gambling. It provides a civil enforcement mechanism to 
enforce that prohibition, and it provides a method to cut off 
the transfer of funds to and from illegal Internet gambling 
businesses.
    The Department does have some concerns about certain 
provisions of H.R. 4777 that may weaken current law, that may 
allow some Internet gambling from the home. We view the 
existing statutes as prohibiting interstate bets or wagers 
including bets or wagers on horse races. We have previously 
stated that we do not believe that the Interstate Horse Racing 
Act amended the existing criminal statutes. We are currently 
undertaking a criminal investigation related to potential 
violation of law regarding this activity. We would have 
concerns about any change in the law that could be construed as 
permitting interstate wagering on horse races.
    We are also concerned about the definition of intrastate 
for the purpose of exempting certain Internet gambling 
transactions from the reach of 1084. The definition focuses on 
the location of the bettor and the betting facility, but 
ignores the routing of the Internet communication placing the 
bet. Under current law, the routing of the Internet 
communication is of great importance in determining whether the 
transmission is in interstate commerce. We are concerned that 
the proposed definition might weaken existing law.
    While we welcome the bill's provision of an injunctive 
remedy to restrain any person from paying or assisting in the 
payment of illegal Internet bets and wagers, we have concerns 
over the bill's limitation or the type of injunctive relief 
that may be obtained against an Internet service provider. We 
believe that Federal Rule of Civil Procedure 65 should be the 
sole standard used by courts in considering whether to grant 
injunctive relief and what form that relief should take.
    We are concerned that H.R. 4777 permits gambling from the 
home, as this raises issues about gambling by minors and 
compulsive gambling. We have concerns about the requirement for 
the secure and effective customer verification and age 
verification set forth in the bill. Online gambling businesses 
cannot see the customer to do onsite age verification.
    Furthermore, the residents' verification requirements set 
forth in the bill may not be sufficient to ensure that the 
bettor is, in fact, physically located in the same State as the 
gambling business when he makes his wager.
    The Department believes that Internet gambling should 
remain illegal. We are concerned 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 involvement by organized crime.
    And to cite one example from this area, in January, 2005, 
the U.S. Attorney's Office in New York's Southern District of 
New York indicted 17 defendants in an 88-count indictment for 
running an illegal gambling business that included both 
telephone and Internet wagers being placed with offsite betting 
facilities both in the United States and abroad. The principals 
in this scheme are alleged to be associates of the Gambino 
organized crime family of La Cosa Nostra.
    Thank you, Mr. Chairman.
    Mr. Coble. Well, you too beat the red light.
    [The prepared statement of Mr. Ohr follows:]
                   Prepared Statement of Bruce G. Ohr










    Mr. Coble. But the pressure shifts to Mr. Kindt.
    You won't be unduly punished if the red light beats you Mr. 
Kindt.

            STATEMENT OF JOHN W. KINDT, PROFESSOR, 
                     UNIVERSITY OF ILLINOIS

    Mr. Kindt. Thank you, Mr. Chairman. I don't know of any 
academic who can do this in under 5 minutes, but I will give it 
a try; and I would ask for your kind permission for my written 
remarks be included in their entirety, if you would, sir.
    Mr. Coble. Without objection, it will be done.
    Mr. Kindt. Thank you, Mr. Chairman, Members of the 
Committee, participants and guests from the U.S. House of 
Representatives and the U.S. Senate. Thank you for your kind 
invitation to testify before the Committee.
    Internet gambling destabilizes U.S. national security and 
the strategic economic base. This is a State Department issue. 
And I would like to raise your eyes a little bit beyond the 
Beltway and look at this from an international perspective. 
This was brought before the full House Committee on the 
Judiciary before 1995 as an issue.
    Some of the problems with Internet gambling are, first, 
Internet gambling destabilizes U.S. and international 
economies. Secondly, it destabilizes and threatens the 
financial systems of the United States and the international 
economic system.
    Third, it destabilizes U.S. national security in the fight 
against terrorism. Fourth, it destabilizes military readiness. 
Fifth, it creates and facilitates new criminal activities.
    Sixth, Internet gambling fuels the fastest growing 
addiction among young people, gambling addiction. Seventh, 
Internet gambling creates enormous socioeconomic costs of $3 
for every $1 in benefits.
    And finally, Internet gambling creates and facilitates 
Government corruption in the United States and throughout the 
world. Internet gambling causes immediate harm and irreparable 
harm to the entire U.S. public.
    If you would reference the first overhead, you will see 
that we have a headline here, back in 1996, ``40 Economists 
Sided Against Internet Gambling.'' Can you get 40 economists to 
agree on anything? Well, they agree on this. This is a slam 
dunk. Gambling is lose-lose for the public. It is $3 in costs 
for every $1 in benefits.
    For examples of sworn testimony by professors, academics 
documenting the immediate and irreparable harm caused by 
Internet gambling and the advertising of such activities, I 
have appended statements from three expert witnesses, including 
myself, sworn testimony from a California case; and I would 
direct you to that, to those affidavits.\1\
---------------------------------------------------------------------------
    \1\ See also Denver University Law Review document at http://
www.ncalg.org/library/studies%20and%20white%20papers/economics/
kindtjoydenverlaw.pdf.
---------------------------------------------------------------------------
    Like drug addiction, the harms to the public are commonly 
referred to as the ABC's of legalized gambling, socioeconomic 
impacts caused by gambling activities via cyberspace and 
particularly via the Internet include new addicted gamblers, 
new bankruptcies and new crime.
    If I could have the second overhead, please.
    The second overhead here is from the Michigan State, 
Detroit College of Law, Law Review. You can see there at the 
bottom--this is an older statement--talks about the teen 
population being addicted. And at the top, in the upper right-
hand corner, it talks about the crack cocaine of gambling. Now 
this is a terminology that sociologists--this is not my 
terminology; and you can see that Internet gambling is well 
known as the crack cocaine of creating new addicted gamblers.
    In the case of these concentrated and multiple electronic 
gambling devices, the accessibility and the new acceptability, 
that is, the legalization to the public, dictate that new 
pathological, that is, addicted, gamblers will double from 
approximately 1 percent of the public, increasing to 2 percent. 
Similarly, the new problem gamblers will double from 
approximately 2 percent to 4 percent of the public.
    With the categories specifically focused on teens and young 
adults, these rates are virtually doubled again to between 4 
percent to 8 percent combined pathological, that is, addicted, 
and problem gamblers. Children, teens and young adults 
conditioned by the Nintendo phenomenon are already 
demonstrating double the pathological and problem gambling 
rates of the older adult population who matured without video 
games and without accessible legalized gambling venues.
    Accordingly, the 1999 Gambling Impact Study Commission 
recommended that there be no legalization of Internet gambling, 
actually called for a prohibition and that the U.S. laws 
criminalizing gambling over the wires be strengthened and 
expanded to other jurisdictions. I am sure you are familiar 
with this report.
    Gambling industry spokespersons have frequently referred to 
Internet gambling as the killer application of Internet 
technology because Internet gambling is crack cocaine to 
addicting new gamblers and because the feeder market is every 
living room, work station and school desk.
    What are the strategic solutions? It is to eliminate 
Internet gambling problems and other gambling problems by 
transforming those gambling facilities into educational and 
practical technology facilities, thereby stabilizing 
international financial institutions. Instead of legalizing the 
casino slot machine establishment at a failing racetrack in 
1997, the Nebraska legislature bulldozed the racetrack, cut out 
all the gambling and made it into an extension of the 
University of Nebraska and a high tech office park. And they 
just expanded that facility.
    On October 27, 2005, the Illinois House of Representatives 
voted 67 to 42 for the Senator Paul Simon memorial bill, one of 
the initial sponsors of the National Gambling Impact Study 
Commission. This bill was to recriminalize the Illinois 
casinos. It passed the House; it is currently awaiting action 
in the Illinois Senate.
    Similarly, suggestions have been made to recriminalize 
gambling facilities in other States and transform the gambling 
facilities into educational and high tech assets instead of 
giving the gambling industry tax breaks.
    On December 6, 2005, Pennsylvania Representative Paul 
Clymer, with 32 cosponsors, introduced a bill to recriminalize 
the Pennsylvania casinos.
    Finally, in conclusion, the immediate strategic solution to 
eliminate or curtail many of the problems caused by gambling 
activity is a total ban on Internet gambling activities. 
Socioeconomic history demonstrates that the eventual solution 
to the U.S. and international gambling problems is to 
recriminalize gambling, wipe the slate clean and transform 
gambling facilities into educational and practical technology 
facilities.
    Thank you, Mr. Chairman. Thank you, Committee.
    Mr. Coble. And I plead guilty for having been very naive. I 
should have known a professor could not have wrapped it up in 
the 5-minute time frame, but you didn't do too bad.
    Mr. Kindt. I did the best I could.
    [The prepared statement of Mr. Kindt follows:]
                  Prepared Statement of John W. Kindt
























































































STATEMENT OF SAMUEL A. VALLANDINGHAM, VICE PRESIDENT AND CHIEF 
           INFORMATION OFFICER, THE FIRST STATE BANK

    Mr. Vallandingham. You certainly took the pressure off me. 
So, Mr. Chairman, Ranking Member Scott and Members of the 
Committee, my name is Sam Vallandingham. I am Vice President of 
the 101-year-old First State Bank in Barboursville, West 
Virginia. I am also a member of the Payments and Technology 
Committee for the Independent Community Bankers of America.
    Barboursville is a historical town of 3,183 people in the 
far western part of the State near the Kentucky border. We have 
50 employees, two branches and 127 million in assets.
    I appreciate the opportunity to testify on the proposed use 
of checking electronic payments systems to limit Internet 
gambling. I commend this Committee and Members for fighting 
against terrorism and money laundering. We urge you to 
recognize that small banks like mine have a substantial 
regulatory burden under the USA PATRIOT Act and the Bank 
Secrecy Act to identify our customers while documenting and 
reporting suspicious transactions.
    ICBA believes that it is critical that our resources be 
focused where risk to national safety and financial soundness 
are greatest. Our concern is that the added burden of 
monitoring transactions for Internet gambling will drain 
resources currently engaged in antiterrorism and anti-money-
laundering compliance and divert our attention from the daily 
operation of our bank.
    Ultimately, we question whether this legislation will 
actually reduce Internet gambling. Can Congress justify the 
time and expense required by community banks to comply with 
another layer of regulation?
    Additionally, regulatory burden is detrimental not only to 
the bank, but to the community that depends on us for economic 
stimulus, small business funding, job creation and continued 
community revitalization.
    There are two bills pending before the House of 
Representatives that attempt to end Internet gambling through 
restriction of payments--H.R. 4777, sponsored by Representative 
Goodlatte of Virginia, and H.R. 4411, recently passed by 
Financial Services Committee. Although the bills have many 
similarities, there are some important differences.
    H.R. 4411 prohibits any person engaged in the gambling 
business from accepting credit, electronic funds transfer, 
checks or other types of payment. The bill directs the Treasury 
Department, the Federal Reserve and the Justice Department to 
work together to develop regulations requiring banks to 
identify and block restricted financial transactions.
    H.R. 4777 would update the law against interstate gaming to 
include Internet gambling and criminalize acceptance of credit, 
electronic fund transfers or other payments by anyone in the 
gambling business.
    The regulation and compliance burden created by these 
proposals is substantial. Their key enforcement mechanism would 
require banks to identify and block transactions between 
customers and Internet gaming companies. This will not work 
because it failed to recognize the differences between the 
credit card systems and the check clearing and automated 
clearinghouse or HCS networks.
    Credit cards operate within an electronic system that 
assigns codes to identify the merchants and the type of 
transaction. Checks and ACH payments are routed from the 
originator of the payment, the merchant, to the receiver, the 
customer, using only bank routing and account numbers. The 
payee is not identified. And unlike credit cards, the check 
clearing and HCS networks cannot identify and block payments to 
Internet gambling companies, and they cannot reconfigure to 
function as a transaction monitoring service.
    This legislation, therefore, should exempt check and HCS 
transactions; otherwise, it would require a massive overhaul of 
the check and HCS systems, create enormous regulatory burden 
and give police-like powers to financial institutions to 
identify and block illegal transactions.
    The bill should give the Federal Reserve rule-writing and 
regulatory oversight. The Federal Reserve is well acquainted 
with payment system and knows the limitations of the check 
clearing and HCS networks. If the check and ACH transactions 
are not exempted, the resulting compliance cost to the banks 
and payment system would be enormous.
    The CBO's analysis of H.R. 4411 determined that the costs 
to the private sector would be less than 128 million if it 
applies to credit card transactions only. CBO added, quote, 
``If the regulations also include the requirement for banks to 
identify and block checks and other bank instruments, the 
direct cost to comply with the mandates could increase 
significantly,'' end quote. These costs would include the 
redesign and rebuilding of the payment system structure, 
increasing labor and training costs to banks, redesign the 
checks and HCS formats and education of the customer, as well 
as payment delays and significantly slowed payment systems.
    If the Congress wants to make certain transactions illegal, 
it should look for solutions that do not harm the Nation's 
payment systems and do not saddle our banks with the burden of 
enforcement. Responsibility for identifying and blocking 
prohibited credit and debit transactions should lie with the 
credit card networks, not the financial institutions. Only the 
credit and debit card networks have the ability to determine 
the origin of the transaction, and thus, only the credit and 
debit card networks have adequate information to identify an 
illegal transaction.
    Neither banks nor our Nation's payment systems can function 
as transaction monitoring and blocking service as envisioned by 
this legislation. To the extent that this legislation attempts 
to protect families and minor children, I assure the Committee, 
there are processes and procedures in place that permit a 
customer to rescind fraudulent HCS or check transactions.
    On behalf of my community bank and nearly 5,000 members of 
the Independent Community Bankers of America, I ask you to 
remember this as you consider the legislation and increased 
regulatory burden it would create for our industry.
    Thank you.
    Mr. Coble. Thank you, Mr. Vallandingham.
    [The prepared statement of Mr. Vallandingham follows:]
             Prepared Statement of Samuel A. Vallandingham


















    Mr. Cannon. Mr. Chairman.
    Mr. Coble. The gentleman from Utah.
    Mr. Cannon. I am not a Member of this Subcommittee, as you 
know, but because of the peculiar effect that this has on my 
State, I would ask unanimous consent that I be allowed 5 
minutes at some point in time to question the witnesses.
    Mr. Coble. Without objection, I will do this caveat, Mr. 
Cannon. I will recognize you after I recognize the Members of 
the Subcommittee.
    Mr. Cannon. Thank you, Mr. Chairman.
    Mr. Coble. Without objection. It is good to have you with 
us, Mr. Cannon.
    Before I start questioning, we thank each of you. And each 
of the witnesses alluded to gambling oftentimes.
    I am a country music fan and Merle Haggard, the popular 
country balladeer, recorded a song some recent years ago 
entitled ``The Kentucky Gambler,'' and the concluding words of 
the chorus were these, ``But a gambler loses much more than he 
wins,'' and I think with rare exception, that is true.
    Now, some of these sports shows, Mr. Scott, I have seen 
lately, gambling, some of these guys, I think, win much more 
than they lose. But I think generally, the Haggard conclusion 
is correct, more lost than won.
    Mr. Goodlatte, the authority to authorize and regulate 
wagering has in large part been reserved to the States. What 
impact would your bill have on a State's ability to authorize 
and regulate wagering over the Internet, A; and B, if a State 
chose to permit wagering over the Internet, what steps would 
need to be taken?
    Mr. Goodlatte. Well, thank you, Mr. Chairman, as it is an 
excellent question. And this bill is primarily designed to 
buttress the ability of the States to do what has traditionally 
always been the case in the United States; gambling has been 
illegal in this country unless regulated by the States.
    The States, however, because of the very nature of the 
Internet find it difficult to do that; and so, by prohibiting, 
modernizing the Wire Act to cover the new types of transactions 
that were not contemplated in 1961 when the Wire Act was 
written 45 years ago, we are recognizing that new tools need to 
be provided to all levels of the Government, certainly to the 
Justice Department, but also to State and local governments to 
enforce the laws that the States have to regulate gambling in 
those States.
    Now, because we also recognize that the States have had the 
primary responsibility in this area, we tell the States in this 
legislation that they can regulate gambling on the Internet in 
their State if they meet two criteria which, in my opinion, 
today cannot be met. Perhaps some day in the future technology 
may allow it, in which case then I think it would be up to each 
individual State to do that.
    Mr. Coble. Hurry along because we have the 5-minute rule.
    Mr. Goodlatte. They have to make sure that the gambling is 
restricted to the confines of the State and, two, that minors 
do not participate. The technology does not exist to allow 
either of those, so Internet gambling under this legislation 
will nonexistent unless that technology changes.
    Mr. Coble. I thank you, sir. Mr. Ohr, in your prepared 
statement, you express concern over the possible weakening of 
Federal law covering Internet wagering on horse racing. Are 
there other industries similarly situated to horse racing and 
are they addressed in this bill?
    Mr. Ohr. Mr. Chairman, the Department obviously continues 
to have the position that Internet gambling should continue to 
be banned; and we would oppose--we would have very serious 
concerns about any possible weakening of that ban. With respect 
to the existence of other industries, I am not really qualified 
to speak.
    We would have the same concerns with respect to those other 
industries as we would as to whether horse racing or any other 
industry is construed under the bill as getting some kind of 
permission.
    Mr. Coble. Mr. Goodlatte, are industries so involved?
    Mr. Goodlatte. No. I want to make that very clear. In 
response to some of the comments already made, there is no 
carve-out in this legislation for horse racing, for lotteries, 
or any other type of gambling.
    There is, however, as noted by Mr. Ohr, a separate Federal 
statute that addresses the issue related to gambling on horses. 
And some maintain that that legislation, that previous 
legislation, allows it. The Justice Department maintains that 
it does not.
    This legislation takes no position on that issue 
whatsoever. We do not attempt to repeal the statute. But we 
also do not interpret that statute in as much a way to legalize 
gambling.
    Mr. Coble. And that was enacted in the early 1970's?
    Mr. Goodlatte. I believe that is correct.
    Mr. Coble. Mr. Kindt, in your opinion, what are the 
distinct concerns related to Internet gambling versus gambling 
in person or other forms of gambling, A; and B, is the better 
way to cure the social ills associated with Internet gambling 
to regulate the industry or to make it illegal?
    Mr. Kindt. Thank you, Mr. Chairman.
    First of all, let me clarify one thing you introduced me as 
a law professor. I am a professor of business and legal policy. 
We make more money.
    Mr. Coble. I stand corrected, and congratulate you for 
that.
    Mr. Kindt. Thank you, Mr. Chairman.
    If we can get the overheads up there, my No. 4 overhead 
might help visualize this. It is entitled Annual Social Costs 
Per Pathological Gambler.
    Basically, we are talking about two phenomena here. One is 
called the acceptability factor and the other is called the 
accessibility factor. If you have the acceptability factor, 
that means it is legalized or we see common today we see PR 
everywhere that says gamble, gamble, gamble; and the younger 
generation is getting this message everywhere that it is okay 
to gamble on the Internet.
    I see students walking around my campus with T-shirts 
advertising illegal poker sites, and they don't know it is 
illegal.
    So what we are talking about here is what sociologists and 
academics reference as the acceptability factor and that is, 
the message that it is okay to gamble, and of course we have 
legalized certain types of gambling. And that further confuses 
it and sends a message.
    And then there is also the accessibility factor, and that 
is maximized by Internet gambling. Accessibility, you don't 
have to fly out to Las Vegas anymore. You don't have to go down 
to the casino anymore. It is right there at every work desk and 
every school desk, in every living room.
    And so you will see an explosion in the numbers of 
pathological and problem gamblers, and the social costs are 
enormous. These are the top studies in a table for the 
Committee to review, and the social costs are at least $3 for 
every $1 in benefit.
    Mr. Coble. When my red light illuminates, I am going to the 
recognize Mr. Scott.
    But, Mr. Kindt, do you think outright illegal or 
regulation?
    Mr. Kindt. I think outright illegal, and I testified before 
the National Gambling Impact Study Commission. They said 
``prohibition''; if you can't prohibit it, you can't regulate.
    Mr. Coble. And, Mr. Banker, hopefully we will have a second 
round. I will get to you subsequently.
    The distinguished gentleman from Virginia, Mr. Scott.
    Mr. Scott. Thank you, Mr. Chairman.
    I think--as Professor Kindt has just indicated, one of the 
problems I have where you seek to kind of make it illegal--it 
is not illegal to do it, but it is illegal to run the 
operation--if you want to prohibit the activity, it is my view 
that it ought to be illegal to gamble on the Internet and that 
would clearly be enforceable.
    Is that right, Professor Kindt?
    Mr. Kindt. Well, I think that I would like to leave the 
details of the practicality of this to the people drafting the 
legislation, and I do that with respect to your question, 
Representative Scott.
    Mr. Scott. Well, Mr. Ohr, if it were illegal to gamble over 
the Internet, would you have any problem catching people 
gambling? If you busted a site, you can get their mailing list 
and you can go after each and every one of them. Word would get 
around, and they would stop doing it.
    Mr. Ohr. Congressman, as Congressman Goodlatte has already 
mentioned, the approach of the Federal Government from the 
beginning of gambling legislation has been to support the 
States as the primary regulators or the ones with primary 
jurisdiction.
    Mr. Scott. With any kind of illegal activity, you catch 
both sides. You don't just go after the sellers, you also go 
after the buyers; is that right?
    Mr. Ohr. Well, the Government has, the Department has 
traditionally focused on trying to--focusing on the large rings 
and trying to go after the most sophisticated and the largest 
operators; and we would continue that approach under this bill.
    Mr. Scott. Is it illegal to gamble on the Internet?
    Mr. Ohr. Not at the Federal level.
    Mr. Goodlatte. Mr. Scott, if I might respond to that. We 
have had this discussion before, and I certainly understand 
your point of view. But the fact of the matter is--as Mr. Ohr 
indicates, we have always at the Federal level focused on 
supporting the States and targeted the entities offering 
gambling services. But virtually every State has their own 
regulations regarding what individual bettors may or may not 
do. And so we are simply supporting their efforts in that 
regard.
    We don't think there needs to be a Federal law in 
conjunction, in addition to the State laws that already target 
the individual bettors.
    Mr. Scott. Okay.
    Well, Mr. Ohr, are you aware of anyone who has ever been 
recently busted for gambling on the Internet?
    Mr. Ohr. I am not. At the Federal level, as I said, we 
don't have a prohibition; and I am not qualified to talk about 
what the States have or who they have busted.
    Mr. Scott. You are qualified to speak of what you ever 
heard.
    Mr. Ohr. I am not familiar with any such case.
    Mr. Scott. In your prosecutions, have you gotten anybody 
that lived and worked and didn't come within the jurisdiction 
of the United States?
    Mr. Ohr. Yes, we have prosecuted people who have conducted 
offshore gambling sites. Yes, we have.
    Mr. Scott. And how did you--where was the prosecution?
    Mr. Ohr. Prosecutions took place in the district courts 
here. One example----
    Mr. Scott. How did you get them here?
    Mr. Ohr. In one case, I think the defendant entered the 
United States and stood trial.
    Your question goes, I think, to the problems of 
international law enforcement and----
    Mr. Scott. You are familiar with--I forgot his name--
selling pot seeds in Canada.
    Mr. Ohr. I am aware of that case.
    Mr. Scott. And they won't extradite him, so we haven't been 
able to do anything about it.
    Do we expect countries to extradite people running these 
sites to the United States so you can prosecute them?
    Mr. Ohr. We have a number of ways of attempting to enforce 
our criminal laws against people outside the United States who 
violate our laws--through extradition, through----
    Mr. Scott. These sites are running all over the Internet. 
Who have you prosecuted that hasn't entered the United States?
    Mr. Ohr. We need to get them here to the United States 
before we can prosecute them. There are many ways of achieving 
that.
    We certainly work very hard with our international partners 
to go after criminals who are violating U.S. law, even if they 
are located in other jurisdictions. It is not just a problem 
limited to Internet gambling.
    It is related to all kinds of crimes, and certainly the 
Department does not believe that the difficulties we face in 
prosecuting people outside the U.S. who commit crimes within 
the U.S. should stop us from trying. And we will continue to 
work on this.
    Mr. Scott. It is illegal now; is that right?
    Mr. Ohr. Yes.
    Mr. Scott. To run a gambling operation. And anybody--how 
long would it take you to find a gambling site on the Internet, 
a minute?
    Mr. Ohr. I think anybody can find an Internet gambling 
site.
    Mr. Scott. And it is not illegal to do it, to gamble on the 
Internet.
    Mr. Ohr. There is no Federal prohibition. That is up to the 
individual States.
    Mr. Scott. Do you have any idea how much money is being 
made by the companies with gambling, with the gambling done in 
the United States both in the untaxed winnings and what we 
could get in taxes from the operator if they would submit to 
the jurisdiction and let us tax their operation?
    Mr. Ohr. Well, the tax question I can't really answer. The 
amount of business that is taking place on Internet gambling 
sites has been cited in this hearing to be billions of dollars, 
and I believe that is correct.
    Mr. Scott. Is any of it taxed, so far that you know?
    Mr. Ohr. Not that I am aware of.
    Mr. Coble. I thank you, Mr. Scott.
    The distinguished gentleman from Michigan and Ranking 
Member, Mr. Conyers.
    Mr. Conyers. Thank you, gentlemen, for your testimony. We 
seem to begin this discussion with a bit of a conundrum here 
dealing with horse racing. The Department of Justice asserts, 
and before Mr. Ohr testified today, that horse racing is not 
legal. But 4777 would make it legal.
    Mr. Goodlatte is shaking his head vigorously, ``no.'' I 
want it to be in the record.
    Mr. Ohr, can you give us a little enlightenment on it? I 
have read your position, particularly page 2. Where are we on 
horse racing in terms of gambling and its illegality?
    Mr. Ohr. Congressman, as I stated, the Department's 
position is that betting, interstate betting on horse races is 
illegal under 1084, and that was not modified by the Interstate 
Horse Racing Act.
    My understanding from what Congressman Goodlatte has stated 
is that it is not his intention to change that. We certainly 
look forward to working with Congressman Goodlatte and Members 
of this Committee to effectuate that intent.
    Mr. Conyers. Well, it is mentioned in the bill, though. 
Members claim that an amendment to the Commerce, Justice, State 
appropriations bill in 2000 legalized Internet gambling on 
horse races under the Interstate Horse Racing Act.
    Mr. Goodlatte. Mr. Conyers, if I might be permitted----
    Mr. Conyers. You could be permitted.
    What is your position on this? Is that true?
    Mr. Goodlatte. What the legislation does is, it does not 
attempt to----
    Mr. Conyers. No. No. No. Wait. Let me pose the question.
    Does--did the 2000 year appropriations bill legalize 
Internet gambling on horse races under the Interstate Horse 
Racing Act?
    Mr. Goodlatte. I don't have an opinion on that particular 
piece of legislation. This legislation does nothing to change 
the status of that legislation. So if that legislation 
authorizes interstate horse racing, we don't change that.
    If the Justice Department's position is correct, that that 
legislation has never allowed betting on horses via the 
Internet across State lines, we don't change that either.
    This legislation does not attempt in any way to overturn 
that statute, which was passed by the Congress and subsequently 
amended by the Congress, nor does it attempt to ratify the 
position taken by the horse racing industry on that.
    So there is no carve-out in this legislation for horse 
racing.
    Mr. Conyers. Well, but let's look at the bill itself, 
subsection F, ``Nothing in this section shall be construed to 
prohibit an activity allowed under Public Law 9515 U.S.C. 
3001.''
    Mr. Goodlatte. That's correct, Mr. Conyers.
    Mr. Conyers. So, wait a minute, ``nothing shall be 
construed to prohibit activity,'' so you are making it clear.
    Mr. Goodlatte. No. No. That says, ``Nothing shall be 
construed to prohibit an activity allowed,'' but the Justice 
Department has already testified that they do not believe that 
that statute allows that activity. The horse racing industry 
will tell you to the contrary.
    We don't take a position what any particular activity may 
be allowed or not allowed under that act. We are making it very 
clear. We are not overturning the act. We are also making it 
very clear that we do not take any position on what that act 
allows.
    Mr. Conyers. Let me read to you from the Department of 
Justice statement that they submitted:
    ``The Department of Justice views the existing criminal 
statutes as prohibiting the interstate transmission of bets or 
wagers including wagers on horse races. The Department is 
currently undertaking a civil investigation relating to a 
potential violation of law regarding this activity.
    ``We have previously stated that we do not believe that the 
Interstate Horse Racing Act amended the existing criminal 
statutes. H.R. 4777, however, would change current law and 
amend it to permit the interstate transmission of bets and 
wagers on horse races. This proposal would weaken existing 
law.''
    Is that essentially what you said here, Mr. Ohr?
    Mr. Ohr. Congressman, that was our--that is a statement 
that was, I understand, from Congressman Goodlatte; that is not 
what he intended to do by this provision of the bill.
    Mr. Conyers. Well, wait a minute. This was after you wrote 
this, you talked to Goodlatte, and then you found out that this 
is not correct.
    Mr. Ohr. Right.
    Mr. Conyers. So you want to change it?
    Mr. Ohr. Our concern would be, we would be concerned if the 
law could be construed as changing current law; and obviously 
we look forward to working with Congressman Goodlatte and the 
Members of the Subcommittee to make sure----
    Mr. Conyers. In other words, you think think should be--
what you have given us is a change of--what you are telling us 
now is a change from what you said here?
    Mr. Ohr. That is correct.
    Mr. Conyers. And you didn't bother to explain it during 
your testimony, and--I mean, this is a very unusual situation, 
Mr. Chairman. We have got the Department of Justice 
representative telling us that what he has submitted to the 
Committee is not accurate, because he has talked to Chairman 
Goodlatte, and they have gotten this straightened out.
    [2:59 p.m.]
    Mr. Ohr. We remain concerned to the extent that the bill's 
provision could be construed as legalizing that activity 
because we think--and that is a concern. I can't say that our 
concern has been fully addressed.
    Mr. Conyers. I am feeling better already. This is a heck of 
a way to conduct--here is a multibillion dollar subject matter 
before us and I need you to please carefully resubmit to 
Chairman Coble and this Committee where all of this comes out. 
Because we can't have it both ways. Either there is a carve-out 
here, which is widely regarded to exist, or there isn't.
    I thank the Chairman.
    Mr. Coble. I thank the gentleman.
    I say to the distinguished gentleman from Utah, the 
distinguished gentlelady from Texas, Ms. Jackson Lee, has 
consented to let you precede her. So you are recognized, Mr. 
Cannon, for 5 minutes.
    Mr. Cannon. I thank the Chairman and Ms. Jackson Lee.
    As I said earlier, Utah has a particular interest in this 
issue because it is one of the few States that actually has a 
total prohibition. Only one other State, like Utah, has a total 
prohibition on gambling. While I am a clear, adamant opponent 
to gambling, one of the things I don't want to see is the 
opportunity for gambling in my State because we preempt State 
law. So I have got to acknowledge I am as confused as Mr. 
Conyers is about where we actually are.
    Let me ask Mr. Ohr a question, and maybe we can elaborate. 
I read your testimony, and it lays out the issues pretty well. 
But just to be clear for the record, it is my understanding the 
Department's position on Internet gambling bills, whether 
Leach, Kyl or Goodlatte is those bills, should not have 
exceptions or carve-outs like the ones in section 1084(d) and 
(f). Is this correct this is the same policy position the 
Department has articulated for at least the last 6 years?
    Mr. Ohr. That is correct.
    Mr. Cannon. What has that changed base had upon your 
discussions with Mr. Goodlatte?
    Mr. Ohr. We continue to believe that interstate gambling on 
horse racing is illegal under 1084. My understanding from what 
Congressman Goodlatte has said is that he does not intend to 
affect the current state of the law, so obviously we want to 
continue to work with him on that, but that does not change the 
Department's position that we believe this activity is and 
should remain illegal.
    Mr. Cannon. If I have a kid in Utah that gets addicted to 
games, computer games and Nintendo and the like, and he then 
gets addicted to gambling and he decides he likes horse racing, 
you are going to argue that whoever is providing that horse 
racing opportunity is violating the law and the kid who is 
doing it is violating the law.
    Mr. Ohr. Certainly that the person providing that service, 
if they are doing it in an interstate fashion, is violating 
1084. The kid would be violating the law under the laws of the 
State of Utah, as I understand it.
    Mr. Cannon. You would cooperate with the State of Utah in 
helping kids get a very clear understanding they should not be 
gambling.
    Mr. Ohr. Absolutely.
    Mr. Cannon. What happens when a clever lawyer argues that 
this bill ratifies because it doesn't take a clear position on 
precluding horse racing?
    Mr. Ohr. That is our concern, and that is why we continue 
to have a concern with that provision.
    Mr. Cannon. It just seems to me you sort of shifted 
positions. In talking to Mr. Goodlatte, you said it not a 
carve-out. This is a very difficult position because, of 
course, what I want is clarity going back to the people in Utah 
that you can't gamble in Utah. It is clear to me that is going 
to be a tack or part of the response that anybody trying to 
argue before courts that horse racing is legal, they are going 
to focus on this and say everything was precluded except us; 
therefore, we are obviously not precluded, and the bill says we 
are not precluded. Doesn't that seriously undermine your 
position?
    Mr. Ohr. That is why we have concerns, and we understand 
Congressman Goodlatte's statement to be that he does not intend 
to legalize or change the current law which we believe 
prohibits this kind of activity. To the extent that his bill 
could be read or construed to permit that, that is a big 
concern of ours.
    Mr. Cannon. It will be argued by proponents of horse racing 
that that is the meaning of this bill.
    Mr. Ohr. Our concern is, if the bill passes in its current 
form, it would; and that would raise the concerns I have 
stated.
    Mr. Conyers. Would the gentleman yield for just a second?
    I just wanted to make sure that our friend from the 
Department of Justice understands the Reno Justice Department 
has a view that this kind of legislation that has carve-outs, 
the Ashcroft Justice Department had the view that this bill has 
carve-outs, the Gonzalez Justice Department has taken the same 
view, and now the Ohr Justice Department agrees with all the 
previous Justice Departments.
    Mr. Coble. I believe the time belongs--I think the time 
belongs to Mr. Cannon, Mr. Conyers.
    Mr. Conyers. He yielded.
    Mr. Coble. I am sorry.
    Mr. Cannon. I note I only have a moment remaining, so let 
me just say that I think the weight of the Federal thinking on 
this issue is pretty consistent, and it is a cause for grave 
concern. I don't want Utah to get bombarded with gambling that 
becomes legal and back-door a system that is going to lead many 
kids to the kind of difficulty that Mr. Kindt has already 
talked about, which I think is an abomination.
    Unfortunately, Mr. Goodlatte had to leave, so we are not 
going to be able to clarify some of these things, but this is 
the core problem that I have with this issue, and either we 
resolve that for the sake of Utah or I have to oppose the 
legislation strenuously.
    Thank you, Mr. Chairman. I yield back.
    Mr. Coble. I thank the gentleman.
    The gentleman from Michigan.
    Mr. Conyers. I just want unanimous consent to proceed for 
one additional minute.
    Mr. Coble. Without objection.
    Mr. Conyers. Because it is very important that we 
understand that this carve-out didn't just get invented this 
afternoon. This has gone through several Administrations. Mr. 
Ohr, I think, has come around to what is more consistent with 
his written statement, submitted that there are likely carve-
outs.
    Now the good intentions of an author of legislation 
notwithstanding doesn't really amount to much in a Judiciary 
Committee hearing. We may in good faith intend a lot of things, 
but horse racing is a very lucrative business and gambling is 
part of it, so we need to be very careful about this and ask 
the gentleman to give us his best thinking on this, and if 
there is anything he wants to submit to the Chairman after this 
hearing, we would be delighted to receive it.
    Mr. Coble. Mr. Conyers, we will keep the record open for 7 
days. We will have a second round.
    Now have you finished, Mr. Conyers?
    The gentlelady--and I apologize, I didn't realize that Mr. 
Cannon had yielded to you, and to you I apologize for that.
    The gentlelady from Texas, Ms. Jackson Lee, is recognized 
for 5 minutes.
    Ms. Jackson Lee. Mr. Chairman, I appreciate the fact that 
we had a Member and proponent against the legislation, and 
seems that he has disappeared.
    Let me, first of all, raise the question of what--very sort 
of broad question.
    I would be happy to yield.
    Mr. Conyers. I just wanted to ask Mr. Ohr if he knows that 
we have comments from the horse racing industry that confirm 
that they obtained a carve-out for their industry, that that is 
their attitude on the subject. Are you familiar?
    Mr. Ohr. I am not familiar with their comments.
    Mr. Conyers. You wouldn't be surprised if that were the 
case?
    Mr. Ohr. That causes us concern, yes, sir.
    Mr. Conyers. Thank you very much. I thank the gentlelady 
for yielding to me.
    Ms. Jackson Lee. I am delighted to yield.
    Mr. Ohr, I will follow up with you then. Mr. Goodlatte is 
not present, and forgive me for being detained at another 
meeting and engaged in another meeting in the outer office 
here. Give me again the assessment that you have from the 
Department of Justice on the necessity of this legislation.
    Mr. Ohr. I would be happy to do that, Ms. Congresswoman.
    The Department supports this legislation. We believe that, 
primarily because it strengthens the position the Department 
has taken throughout, that section 1084 applies both to 
telephone and to the Internet gambling, interstate gambling 
over telephone or interstate gambling over the Internet, and 
for that reason as well as some additional tools that are 
provided in the bill, the Department supports the bill.
    We do have several concerns about certain provisions of the 
bill, some of which we have been discussing here. They are 
outlined in my written testimony.
    Ms. Jackson Lee. My colleague just mentioned the carve-out 
for horse racing. Are you aware or is the Department aware of 
the various companies that offer online betting on horse racing 
already existing, as I understand it?
    Mr. Ohr. I don't have a specific--I would have to get back 
to you on specific examples, if that is what you are asking.
    Ms. Jackson Lee. I am looking for that kind of explanation, 
if you would.
    Because I guess where I am going on this questioning, and I 
will include the other gentlemen in just a moment, is both the 
necessity but also the discriminatory fact or discriminatory 
aspects that may incur out of this particular legislation if we 
don't get it right. And so I am sensing that we are not getting 
it right, and even with your support I have great questions.
    I understand the Reno Justice Department, Ashcroft Justice 
Department and the Gonzalez Justice Department all have taken 
the view that the bill has carve-outs that I think you are 
concerned about, is that my understanding?
    Mr. Ohr. We have concerns about any carve-outs. We 
certainly believe that we would have any very serious concerns 
about any bill that would create an exception to 1084 and 
allow, for example, interstate gambling on horse races.
    Ms. Jackson Lee. With that in mind, since we have a state 
of confusion, I would be concerned about legislation that poses 
more confusion than solutions.
    Is it Mr. Kindt from the University of Illinois? Just 
because I missed Mr. Goodlatte, give me your assessment on a 
bill that seems to have a discriminatory aspect. What are you 
trying to focus on on this legislation?
    Mr. Kindt. I was asked to appear with regard to the 
socioeconomic impacts of gambling, and to that end let me just 
mention one thing that Representative Scott raised earlier and 
that was about all the flow of income coming in. What I put up 
here in one of the overheads were the eight leading studies, 
and no matter how much money you have coming in in tax revenue, 
it doesn't cover the social costs. All eight of those studies--
it is usually a three to one ratio, of $3 in cost for every $1 
in benefits.
    Ms. Jackson Lee. Let me make this point on your point, 
which is have we challenged the industries across the board to 
actually invest in correcting whatever these social ills might 
bring about? Have we ever had a scenario where the industries 
have been taxed, if you will, to create a better atmosphere if, 
for example, some may have thought that the bill has defects in 
it?
    Mr. Kindt. The industry has created, sometimes voluntarily, 
sometimes with the encouragement of the States, programs to 
address addicted gambling, but it is usually extremely low 
considering what the problems are, and when you add up the 
benefits and you do a valid cost-benefit analysis, the costs 
simply overwhelm the benefits. I put up two or three overheads 
in this hearing to demonstrate that.
    It is really a slam dunk when it comes--this is not a 
debatable issue. There is no debate on this. The costs are 
really just very large. It is like drug addiction. They call it 
the crack cocaine of creating addiction, is this gambling 
addiction. So that is not my terminology. That is the 
overwhelming terminology of the majority of sociologists and 
psychologists who deal with the area.
    I remember Jesse Jackson, Jr., coming to Chicago on Martin 
Luther King Day and saying--and this is a very contentious 
statement, but he said ``these are the new economic chains on 
our people.''
    Ms. Jackson Lee. My time is gone. Let me conclude, Mr. 
Chairman, if you would just indulge me an additional minute.
    I cannot pose a question to Mr. Vallandingham, but let me 
say this, even without this legislation, I think what you are 
suggesting is that this legislation would go to the expansion 
of what may be a vastly costly disease, which is gambling, 
period. My concern would be, are we finding a solution to the 
cancer or are we narrowing it to one isolated form of gambling 
or one we can bring the industry in and challenge it to do a 
better job, period. If we don't have Internet gambling or we 
have these carve-outs, we have a fractured bill, then we are 
still not getting to the sickness of gambling for those who are 
sick in doing it.
    So I make that point, and I make the point that the bill 
seems to--as I said, the proponent is not in the room, and I am 
sorry that he is not, but hopefully we will have some further 
explanation. I think we went through this before, Mr. Coble; 
and, to Mr. Scott, we went through this before.
    I conclude by saying this, that the issue of this gambling 
issue, Mr. Chairman and Mr. Ranking Member, needs to be broader 
than the immediate hearing that we have. I am going to put two 
questions on the record. So I am going to end, and they can 
give it to me in writing.
    Then I will pose a question, because I was taken aback by a 
hearing by the Energy and Commerce Committee on criminal 
activity with children and Internet sexual activities. Again, I 
am just making a brief comment; and I would commend to the 
Chairman and the Ranking Member that, since they were talking 
about criminal penalties in the Energy and Commerce Committee, 
that we might have a subsequent hearing dealing with the 
utilization of the Internet for abuse against children.
    Let me read these two questions: Does the Administration 
support total ban or does it wish to permit the interpretation 
of horse racing--excuse me, looks like interpretation of horse 
racing to be a subject to controversy. If the exception were 
deleted from H.R. 4777, would the domestic horse racing 
industry stop this practice?
    In any event, we will have these in writing; and I thank 
the Chairman and the Ranking Member for the indulgence.
    Mr. Coble. I thank the gentlelady.
    Folks, we are on a stopwatch to try to meet that floor 
vote, so I think we are going to have a second round.
    Mr. Kindt, you indicated you might want to make a statement 
during Mr. Conyer's questioning. Did you get a chance to do 
that?
    Mr. Kindt. No, sir. I am fine, and I know that I was 
behind, going out of order. I apologize to Mr. Scott, as a 
fellow Virginian in my former life, when I addressed one of my 
comments to Representative Lee.
    Mr. Coble. I wanted to be sure that you were heard.
    Mr. Kindt. Let me just say, in response to Ms. Lee's 
question, that from my limited knowledge of reading through the 
bill my interpretation would be I do not believe it either 
enables or overturns the horse racing. Now, again, the bill 
changes rapidly, but that is my interpretation at this point.
    The only other point I would make with regard to Mr. 
Cannon--I hope I am not speaking out of order again--is that I 
think this debate in the legislative hearing would be 
introduced into any court proceeding. So Mr. Goodlatte and the 
intent of Congress would in fact be determinative, I would 
hope, if the court was having trouble deciding how to interpret 
the particular statute.
    Mr. Coble. I thank you, Mr. Kindt.
    Mr. Banker--I pronounce that better. You testified, as it 
pertains to banks, H.R. 4777 would create a, quote, ``an added 
burden of monitoring all payment transactions for the taint of 
Internet gambling.'' What section of 4777 are you stating that 
would create that burden?
    Mr. Vallandingham. As I understand it, Mr. Chairman, it 
would criminalize anybody who was involved in the process of 
transferring those payments, including the banks, knowingly or 
unknowingly. So, ultimately, we would be responsible for the 
monitor of those payments and the prohibition of those 
payments.
    Mr. Coble. Is it true, sir, that the banking industry is 
already taking steps to assist in the identification of money 
laundering, one of the serious concerns related to Internet 
gambling?
    Mr. Vallandingham. Yes, sir. The Anti-Money Laundering Act 
is something that we are vigorously pursuing, and in doing so 
we identify those customers which we deal with, and we also 
monitor transactions of a certain threshold and report those. 
But we are not responsible for making any decisions about 
whether they are legal or illegal. We are only responsible for 
the recording of those transactions in which another entity 
makes the determination whether those are viable transactions 
or not.
    Mr. Coble. Thank you, sir.
    Professor Kindt, I apologize for having demoted you to the 
school of law. It was an innocent omission on my part.
    I have exhausted my time. I will yield to the gentleman 
from Virginia, Mr. Scott.
    Mr. Scott. Thank you, Mr. Chairman.
    Mr. Kindt, you mentioned the question of whether the taxes 
could offset the social costs. If you have got $24 billion a 
year gambling on the Internet, a large portion which is from 
the United States from which you are getting no taxes, some 
taxes would be more than what you are getting now.
    Mr. Kindt. Representative Scott, we hear this or I have 
heard this argument in academic circles for years; and 
basically I think you raise the issue that I tried to start out 
with, which is that this is an international issue. We need to 
get the State Department in on this and start talking about 
this in terms of international economics and our friendship, 
commerce and navigation treaties; and that would alleviate this 
type of problem.
    Mr. Scott. If you are going to have an international 
agreement and come to an agreement, I think we are going to be 
on the short end of that stick. Because in most of the other 
countries it is already legal. So if there is going to be a 
consensus, it is going to be to legalize and regulate.
    Mr. Kindt. With respect, Representative Scott, I think what 
we are really doing here, and I have provided several law 
review articles just as introductions, with citations, I think 
we are destabilizing----
    Mr. Scott. You would simplify the thing by making it 
illegal to gamble on the Internet, would you not?
    Mr. Kindt. It has been illegal to gamble on the Internet 
for ages past.
    Mr. Scott. That is how you would address it.
    Mr. Kindt. Yes. I think that is how the national commission 
said they would address it as well.
    Mr. Scott. Thank you.
    Mr. Ohr, of the people that you have prosecuted for 
gambling, have any of them been for--involving horse racing?
    Mr. Ohr. I would have to get back to you on that, 
Congressman. I am afraid I don't have the answer.
    Mr. Scott. You believe the present law, it is illegal to 
gamble on the Internet on horse racing?
    Mr. Ohr. That is correct.
    Mr. Scott. At one time, having read the bill before you 
talked to anybody, you concluded that it would not be illegal 
if the bill passed.
    Mr. Ohr. We certainly have concerns that the bill's 
language could being construed to permit that.
    Mr. Scott. Mr. Vallandingham, do you know the average size 
of a transaction for gambling?
    Mr. Vallandingham. I am told about $110.
    Mr. Scott. When you do drug money, you look for $10,000 
transactions?
    Mr. Vallandingham. Five thousand, generally.
    Mr. Scott. So they kind of stick out. Hundred, couple of 
hundred.
    Mr. Vallandingham. Couple hundred sequential.
    Mr. Scott. Do you know what the credit card entry on Paypal 
would be if somebody paid for one of these bills through 
Paypal?
    Mr. Vallandingham. No, I would have to get back to you as 
far as what--I assume you are requesting the merchant code 
through Paypal for the identification of the payee, is that is 
what you are asking about?
    Mr. Scott. That wouldn't help you, because you wouldn't 
know what it was for. If you knew it was a casino, you wouldn't 
know if it was legal or illegal, you just know the payee.
    Mr. Vallandingham. Which is one of the problems.
    Mr. Scott. If the payee were an attorney who is serving an 
escrow agent in France----
    Mr. Vallandingham. The identification of the payee would 
not be sufficient enough to determine whether it was a valid or 
non-valid payment.
    Mr. Scott. Are you aware of procedures that can identify 
someone in terms of age and residence?
    Mr. Vallandingham. No, I am not, not based on the Internet. 
Obviously, if you meet with them in person, you do have that 
information.
    Mr. Scott. Mr. Goodlatte is not here. I had a question on 
how they can do an interstate--legalize and regulate 
intrastate. Anybody want to make a comment on that?
    I yield back.
    Mr. Coble. Thank the gentleman.
    I will leave it up to Ms. Jackson Lee, you are next in 
line, or Mr. Cannon.
    Ms. Jackson Lee. I will yield to Mr. Cannon.
    Mr. Coble. Mr. Cannon, you are recognized for 5 minutes.
    Mr. Cannon. Thank you, Mr. Chairman.
    Let me state as that I believe gambling is a pernicious 
vice; and, Mr. Kindt, I agree with you entirely. From 
everything I have seen, the costs of gambling far outweigh any 
kind of benefits that a State or society can ever gain from 
gambling. I can't understand lotteries. I think they are the 
craziest thing we do. It is a tax on people that can't do math, 
and they tend to be poor anyway. So it is a horrible thing, 
from my point of view.
    As I was speaking about Utah and the problem that we have 
with having Utah law diluted, you were nodding. I take it you 
would agree you would not want to see any carve-outs, horse 
racing, or whether we characterize it some other way, or 
lotteries online. You would like to see that not happen, I 
would think.
    Mr. Kindt. Are you addressing your question to me?
    Mr. Cannon. Mr. Kindt, yes.
    Mr. Kindt. From my limited reading of the bill and the way 
I read it and I understand it, I don't believe that it enables 
or overturns--I don't think it changes the status quo.
    Mr. Cannon. With regard to horse racing.
    Mr. Kindt. With regard to horse racing.
    Mr. Cannon. You pointed out what we are doing here, we are 
writing a law review article or a brief for a court. And the 
problem is, and I think, Mr. Goodlatte, at the end of my time, 
you may want to address this, but seems to me what we are doing 
with this bill is being absolutely unclear about what we are 
doing with horse racing. That makes the argument for the horse 
racers when they go into court, and I believe Mr. Ohr has said 
that is probably going to be the case, so this bill is going to 
affect the arguments in court, at least. And I don't know how 
you can say that we intend--this represents a policy against 
horse racing when, in fact, what we are doing is not dealing 
with horse racing.
    Now that Mr. Goodlatte is back, I would appreciate if you 
would address that, but not right now because I have another 
couple of questions.
    I have always resisted this bill only because of the narrow 
interest of the States. Utah is only one of two shining stars 
in the country that don't have any gambling. That has always 
been my concern about this particular bill.
    Let me ask, Mr. Ohr, dog racing interests have stated that 
section 1084(f) will give horse racing an unfair advantage over 
other forms of racing. Convenience stores have stated section 
1084(f) or (d) will allow States to take their lotteries 
online. Do you agree with those two statements, that is, that 
it is unfair, not whether it would make horse racing legal, 
but----
    Mr. Ohr. We continue to oppose all forms of Internet 
gambling. I think I have made that general statement.
    Mr. Cannon. What about the lotteries and convenience 
stories and their concerns in particular?
    Mr. Ohr. I would make the same statement.
    Mr. Cannon. Mr. Vallandingham, if I understand your 
testimony correctly, you are concerned this bill would burden 
you with trying to determine the purpose of electronic fund 
transfers, and that is a concern, right?
    Mr. Vallandingham. Yes, it is. Our transactions, check, ACH 
transactions are uncoded. We would not only have to determine 
whether it was illegal or legal but where it occurred and 
several other facets in determining whether it should be paid 
or not.
    Mr. Cannon. You talked a little about credit card 
transactions and the kind of coding they have, but ACH 
clearinghouse transactions, those are much harder for you to 
track.
    Mr. Vallandingham. Yes. We don't collect that information 
on ACH transactions. They generally contain the routing number, 
the account number and the amount. Therefore, the payee is not 
known, and it is not tracked, and, as we identified earlier, 
identification of the payee is not enough to determine if this 
is a valid transaction.
    Mr. Cannon. Do you see that there would be a tendency for 
people to move away from these relatively traceable 
transactions? Do you see there is a tendency to move away to 
less traceable transactions like e-commerce transactions or 
foreign banking transactions?
    Mr. Vallandingham. If it was a criminalized activity, I 
think they would. Currently, I think that checks in ACH are not 
a predominant method of payment for these type of transactions, 
but I think most of the transactions occur through the credit 
and debit card industries.
    Mr. Cannon. If you track those, the ability for a person, 
even a very young person, committed to gambling by setting up a 
Paypal account or e-commerce transactions and maybe setting up 
a bank account offshore, that is not a very difficult thing to 
do for someone who has a compulsion.
    Mr. Vallandingham. That is correct; and I think those 
involved in the gaming industry would make that information 
readily available, making it that much easier.
    Mr. Cannon. In the few moments I have left, we had an 
earlier discussion--and I know you had to leave, Mr. 
Goodlatte--but I am deeply concerned about the idea that this 
debate becomes the predicate for a legal argument that 
transcends what we may have in our hearts and minds 
individually or as a body; and I think that issue is sort of 
enjoined again in my last question to Mr. Ohr. Would you like 
to respond to that?
    Mr. Goodlatte. I very much would like to respond to that. 
As you know----
    Mr. Coble. If Mr. Goodlatte would suspend just a moment. We 
are up against the wall on this. This vote is imminent, so, 
Bob, if you could be terse, I would appreciate that.
    Mr. Goodlatte. Let me make one point very clear, and that 
is no matter what the outcome of the dispute between the horse 
racing industry and the Justice Department of another statute 
not a part of this legislation authorizes or doesn't authorize, 
no matter how that turns out, it would still be illegal for 
Utah residents to bet on horse racing, so Utah could still 
prosecute no matter what the outcome was of that dispute 
between those parties.
    More to the broader question about this, we had this same 
legislation with some modification before this Committee 5 
years ago, and if you make the perfect the enemy of the good, 
you can see exactly what happens. During those 5 years, 
offshore gambling, sucking billions of dollars out of this 
country, including from Utah residents, has quadrupled.
    Mr. Cannon. Mr. Chairman, may I make one comment in 
response? I appreciate that.
    Mr. Coble. Very tersely.
    Mr. Cannon. We are looking at the issue of preemption. I 
think we decided last cycle it would preempt Utah law. I would 
like to work with you on that.
    Mr. Goodlatte. We would very much like to work with you.
    Mr. Cannon. How we solve the larger pernicious problem is 
vital in the context of how we keep those places where we 
actually reject gambling pure. Thank you.
    Mr. Coble. The gentleman's time has expired.
    We have been joined by the distinguished gentleman from 
Ohio. Mr. Chabot, good to have you with us.
    I am going to recognize the distinguished gentlelady from 
Texas, Ms. Jackson Lee, but I want to say, Mr. Goodlatte, in 
your absence, Mr. Scott--and I don't want to beat this race 
horse to death, but horse racing has attracted much attention 
in your absence.
    Ms. Jackson Lee.
    Ms. Jackson Lee. We welcome him back.
    A lot of issues have gotten a lot of attention.
    Let me just recognize the good faith, Mr. Goodlatte, of 
this legislation but argue or at least make the provocative 
argument as to whether or not there are elements that we are 
not curing. For example, it comes to my attention--has come to 
my attention that an Internet gambling industry and prohibition 
thereof may prevent, or the way the legislation is written, 
gaming operations from verifying, one, the age of potential 
customers, identify problem gamblers, which I believe Mr. Kindt 
is interested in, and preventing the use for fraudulent 
activities. Your bill may, in fact, be standing in the way.
    Let me, as I pose those thoughts for you, suggest that H.R. 
4777 would require, as I understand, States that authorize 
Internet gambling within their borders to impose secure and 
effective customer ID and age verification systems to ensure 
compliance with age and residence requirements. But is it your 
understanding that such technology exists, technology that can 
reliably prevent minors from gambling on the Internet?
    If I can finish my line of questioning, I heard Mr. 
Vallandingham--I didn't have a question before--talk about the 
complication dealing with money laundering or banking scenarios 
which leads us from one pool of dirty water into other. If you 
might comment on that aspect of it.
    Then let me just say that it has also come to my attention, 
again, with the United Kingdom and Australia, they regulate 
their Internet gaming companies. For example, companies 
regulated in the United Kingdom reportedly must use special age 
verification software, record all bets, place caps on how much 
an individual can wager at a time and be subject to routine 
audits for fraud or money laundering. Might be interesting, Mr. 
Goodlatte, that we didn't take that approach. Have you taken a 
look at these regulatory regimes and assessed their 
effectiveness in preventing underage use and abuse by problem 
gamblers and money launderers or of regulated gaming sites?
    I think we should look further to both of those nation 
states as to whether that has been an effective approach to 
take.
    Mr. Goodlatte. Thank you, Congresswoman. Those are very 
good questions.
    To take the last one first, we have looked at what other 
countries have attempted to do, but the fact of the matter is, 
as we have all acknowledged here today, the way the Internet 
operates, it goes to the lowest common denominator. So the 
country that is going to regulate the least is the one where 
these sites are going to flock to. I think you will find that 
an attempt to regulate in the United States, where we have 50 
different States, that each have different forms of regulations 
today would be an impossibility.
    With regard to your first question, also very good, we 
require States that might like to do this to be able to both 
verify age so that minors don't gamble and verify that the 
person betting is inside the State when they do that. Neither 
of those technologies exist that are effective today; and 
notwithstanding what is said about what is done in Britain, 
they cannot effectively verify the age of the people placing 
bets online.
    So if that occurs and if that technology is there to 
satisfy other States and prosecutors that a State can contain 
it within their State, we don't stop recognizing States have 
the right to regulate gambling as they always have, we don't 
stop them here on the Internet, but they have to keep it 
contained within their State.
    Ms. Jackson Lee. I guess I didn't hear why we couldn't go 
the route of Australia and the U.K., which seems to have some 
semblance of working. I don't think I have heard clearly why we 
can't go that route.
    I am going to let Mr. Vallandingham answer this question 
about how murky this gets for you, if you would, please, in 
terms of the assessment you have to make in the banking 
industry.
    Mr. Vallandingham. To make sure that I answer your question 
correctly, would you please indicate----
    Ms. Jackson Lee. What difficulties does the bill pose for 
you as presently drafted? I am reminded of an earlier hearing 
we had this week on sex activity with children on the Internet, 
and there was some kind of pay line they had to deal with. But 
I am asking specifically how does it impact you negatively.
    Mr. Vallandingham. First and foremost, our systems aren't 
set up to be a payment monitoring system. So in order to do 
that there would be a required major overhaul of both the check 
clearing system and the ACH system and ultimately increase the 
cost to the banking industry and ultimately to the consumer in 
the long haul.
    Additionally, I think that the continued change in the way 
these sites would collect their payments would force us--it 
would be a moving target. We would continue to have to alter 
the systems, even if we were in some way able to make it work, 
so it would be continued overhead in the long haul.
    Additionally, it adds yet another layer of regulation in 
trying to assess these payments and determine whether they are 
valid or not valid and should we block them or not; and it 
would divert attention away from things that are being 
successful such as anti-money laundering and know your customer 
programs that ultimately help us keep the fight against 
terrorism being successful.
    Ms. Jackson Lee. Mr. Chairman--and I thank you very much. 
Let me, if you would allow me, to conclude very briefly.
    Because I respect Mr. Goodlatte greatly. He knows that we 
have been dealing now with a series of events that included the 
former lobbyist, Mr. Abramoff, but I want to make sure as we 
are discussing anew, and I think it is important for you to 
state, are we free of the taint of the e-lottery debacle and 
writing in language or not writing in language or supporting 
this legislation or not supporting this legislation? Because my 
particular company or client that I am representing was not 
satisfied. Are we free of that now so whatever our position is 
on this bill, for or against it, that we don't have this taint? 
I understand he was arguing about protection of State 
lotteries. We may still have that as an issue. But help us know 
that we are free of that taint as the legislation is before us.
    Mr. Goodlatte. If I might have leave to respond to the 
gentlelady.
    Mr. Coble. I hate to keep you on a short leash. I have been 
advised that there is a second Judiciary Subcommittee hearing 
that will commence at 4:00, so we have to wrap up.
    Proceed, Mr. Goodlatte.
    Ms. Jackson Lee. Thank you, Mr. Chairman.
    Mr. Goodlatte. Ms. Jackson Lee, first of all, thank you. 
You have been dedicated to working on this issue. You have been 
working with me on this issue, and I very much appreciate that.
    I will say I think it is very important Members of Congress 
address the fact this legislation was derailed several years 
ago because of misrepresentations by the legislation made by 
Mr. Abramoff and others, and I think it is very important that 
we address it now and we address it as thoroughly and 
responsibly as we can. That is the effort we have made with 
this legislation. I think it is very good and goes a long way 
to address any problem, but we are going to work with other 
Members to make sure we are getting it right and make sure this 
Congress is not pulled down by misrepresentations by lobbyists 
about the nature of the legislation.
    Ms. Jackson Lee. I thank the gentleman. I yield back.
    Mr. Coble. Thank the gentlelady.
    Mr. Scott and I have one remaining question.
    Mr. Vallandingham--am I getting better, Mr. Vallandingham?
    Mr. Vallandingham. Getting better.
    Mr. Coble [continuing]. Is it your belief that Mr. 
Goodlatte's bill creates criminal penalties for banks and/or 
financial institutions?
    Mr. Vallandingham. It is my understanding that it would 
create criminal penalties for anybody who facilitated those 
payments. So I would say yes.
    Mr. Coble. Mr. Goodlatte, I was thinking that the civil 
penalties were only directed at gambling businesses. Now do you 
want to address that, Mr. Goodlatte?
    Mr. Goodlatte. Yes, I would very much welcome the 
opportunity to address that and assure the members of the 
banking industry that there are no criminal penalties that 
apply to banks. The fact of the matter is that this is directed 
at the gambling institutions, and the only authority that is 
provided to law enforcement with regard to any financial 
institution is the right to seek civil injunctive relief.
    Mr. Coble. How about civil penalties against banks or 
lending institutions?
    Mr. Goodlatte. Only under what is already in existence 
under laws related to failure to comply with injunctions that 
might be approved by a court after they are approached by a law 
enforcement agency that says that somebody is in violation of 
the law and they want them enjoined from----
    Mr. Coble. Mr. Vallandingham, when you return to West 
Virginia, will this cause you to sleep more soundly at night 
after hearing that?
    Mr. Vallandingham. No, it won't. Because the bill doesn't 
define gambling business other than to say the business of 
betting and wagering. Other statutes use similar terms, having 
construed to include within its scope anyone that conducts a 
gambling business if that person performs any act, duty or 
function which is necessary or helpful in operating the 
enterprise. This includes waitresses and other servers, even if 
they weren't paid. It included custodians, telephone clerks and 
doormen, also bookkeepers and secretaries. So, clearly, a bank 
can be viewed as necessary or helpful to an Internet gambling 
enterprise. No bank acting prudently could ignore that risk.
    Mr. Coble. This will be for another day.
    I know Mr. Scott has a question, and 4 is imminent. So, Mr. 
Scott.
    Mr. Scott. Let me just pose the question, and we can get 
the information in due course. I wanted more information on how 
a State could--if a State wanted to--if Nevada wanted to 
legalize gambling on the Internet, how would that work? If you 
have information on that.
    Also, if you are aware of identification processes where a 
person over the Internet can be identified as the person who is 
over 21 and possibly where their residence happens to be.
    Mr. Goodlatte. Mr. Scott, thank you.
    As I have indicated earlier, we don't believe that such 
technology exists today. So while the legislation would 
recognize the rights of States to continue to regulate 
gambling, including gambling on the Internet, unless they can 
meet those two criteria of being able to identify where the 
person is placing the bet and whether or not they are a minor, 
they will not be able to proceed.
    If that technology is developed in the State of Nevada or 
some other State wanted to proceed to do that, they would 
proceed to do that; and if some other State believed they were 
not using technology adequate to that purpose, then they would 
seek the remedies under this legislation to establish that they 
should be enjoined from doing that.
    Mr. Coble. I thank the gentleman.
    Mr. Goodlatte, you were chomping at the bit. I didn't want 
to cut you off. Did you want to be heard one final minute in 
response to Mr. Vallandingham?
    Mr. Goodlatte. Only to ensure him that the intent of this 
legislation is not to put banks in the situation he described, 
and we are more than happy to work with his association to 
accomplish that goal.
    As the gentleman knows, another piece of legislation 
similar but operating somewhat differently in its effect passed 
the financial services industry and is headed to the floor of 
the Congress. We want to make sure that these two pieces of 
legislation are made harmonious and in the process are as 
friendly to the banking industry as we possibly could make it.
    Mr. Coble. This has been a productive hearing, and I thank 
the witnesses and I thank those in the audience who have very 
patiently endured the time with us.
    We thank you for your testimony, gentlemen, and in order to 
ensure a full record and adequate consideration of this 
important issue, the record will be left open for additional 
submissions for 7 days. Also, any written questions that a 
Member wants to submit to the witnesses should be submitted 
within that same 7-day period.
    This concludes the legislative hearing on H.R. 4777, the 
``Internet Gambling Prohibition Act of 2006.'' We thank you for 
your cooperation and attendance, and the Subcommittee stands 
adjourned.
    [Whereupon, at 3:43 p.m., the Subcommittee was adjourned.]
                            A P P E N D I X

                              ----------                              


               Material Submitted for the Hearing Record

 Prepared Statement of the Honorable Robert C. Scott, a Representative 
      in Congress from the State of Virginia, and Ranking Member, 
        Subcommittee on Crime, Terrorism, and Homeland Security
    Thank you, Mr. Chairman. I am pleased to join you in convening this 
hearing regarding federal regulation of gambling over the Internet. I 
believe that all gambling should be tightly regulated. It has 
traditionally been, primarily, a state regulatory responsibility. It 
should continue to be so, in my judgment, although it is appropriate 
for the federal government to have a role to assist states in the total 
regulatory scheme.
    The federal government undertook such a role in passing the 1961 
Wire Communications Act as a way to assist in the fight against 
gambling by organized crime syndicates. The Department of Justice 
contends that it can prosecute Internet gambling businesses under that 
law, but, clearly, that law was not designed with Internet gambling in 
mind. While I appreciate the desire of my colleague, the gentleman from 
Virginia, to update the ability of the Department to address illegal 
gambling in today's context, I do not believe that H.R. 4777 is likely 
to be effective in doing so.
    Regulating anything on the Internet is problematic, even where 
desirable. Most law enforcement is jurisdiction dependent. The Internet 
has no jurisdiction and, as a result, I suspect that even if we are 
successful in closing down business sites in the United States or in 
countries that we can get to cooperate, because of the nature of the 
Internet, and the ingenuity of persons using it, the approach in H.R. 
4777 will be, ultimately, ineffective. As we will hear from our witness 
panel, this bill will create an enforcement nightmare for the financial 
institutions it requires to look for and stop illegal internet gambling 
transactions. Identifying Internet gambling activities will be very 
difficult if not impossible. While some companies may be able to 
identify some gaming transactions by the codes used, such enforcement 
efforts can be easily thwarted. A business may have one code for 
payment purposes but may engage in several activities, including 
Internet gambling. Caesar's Palace could have a hotel and a gaming 
operation or a foreign company could have a hotel and a casino that 
could be paid as a single account over the Internet. Or, an e-cash or 
electronic payment system, or any escrow agent can relocate in another 
country and thereby evade the enforcement mechanism in this bill, or 
even domestically. All the bank knows is that the payment came from 
``PayPal''. And with some Internet gaming activities being legal, how 
would a financial institution distinguish between them and illegal 
activities?
    Further, we should not overestimate the cooperation we will get 
from other countries. According to Christiansen Capital Advisors, 
Internet gambling websites brought in $14.71 billion worldwide last 
year, which is up from $8 billion the year before. This number is 
expected to almost double to an expected $24 billion by 2010. 
Presently, over 85 foreign governments allow some form of gambling 
online, and that number is likely to grow, as well. So what governments 
are likely to cooperate with us in prosecuting businesses they 
authorize to operate? And even if we are successful in getting 
cooperation from some countries, we would simply be increasing the 
profit opportunities for uncooperative countries, especially those with 
whom the United States does not have normal diplomatic relations.
    This bill does not prohibit internet gambling; it prohibits running 
the operation. If we wanted to be effective in prosecuting illegal 
gambling over the Internet, we would prosecute individual gamblers. A 
few sting operations would get the word out that if you gamble over the 
Internet, you are at the mercy of law enforcement, because you leave a 
trail they can follow. So long as individuals can gamble over the 
Internet with impunity, a market will be provided for them which the 
regulatory scheme in this bill will not be able stop. For example, we 
prohibit sales of illegal drugs but we see that as long as there 
remains a demand for drugs, we only have limited success in the war on 
drugs. If we took the approach of this bill in enforcing drug laws, we 
would be prosecuting the seller but not the buyer, and have even less 
effect than we have now.
    Since we are not talking about prohibiting Internet gambling but 
simply prohibiting the operation of internet gambling sites in 
jurisdictions the FBI can get to, I believe that there are more 
effective regulatory approaches than the approach offered by H.R. 4777. 
However, the approaches must be developed, taking into account the 
technology, state policies with respect to gambling, and Internet 
gambling practices and preferences. This was the effect of the bill 
authored by full Committee Ranking Member Conyers last Congress, H.R. 
1223. It established a Commission that would study the issue and made 
recommendations for a regulatory environment for Internet gambling that 
would be controlled by individual states. States do tend to prohibit 
individuals from gambling, so Internet gambling can be both effective 
and individualized to each state. Under the bill's regulatory scheme, 
if Nevada opted to allow Internet gambling within its borders, it 
could. If Utah prohibited individuals in that state from gambling over 
the Internet, it could and that would be enforceable by the federal 
government, by the states that allow gambling as well as by the state 
of Utah because in the fullness of time, a gambler could be required to 
provide a mailing address in order to get paid.
    And if protecting the public is a goal of regulating Internet 
gambling, it is much more likely that those who chose to gamble over 
the Internet will do so through a licensed, regulated entity under the 
Conyers approach than under H.R. 4777. First, a consumer in a state 
where Internet gambling is legal will have confidence that, if they 
win, they will get paid by the licensed, regulated operation. A 
consumer would have no similar confidence in ``fly-by-night-off-shore-
casino.com''. So, a likely result from licensed regulated Internet 
gaming entities would be to drive less reputable businesses, who do not 
abide by the law, out of business.
    Another significant result is that states that chose to authorize 
Internet gambling can tax it. At a time when unauthorized Internet 
gambling is flourishing (over $14 billion dollars with half of it 
originating in the U.S.), and when most states are cash strapped, those 
states that have already chosen to authorize regulated gambling could 
receive much needed revenues from both the operators and winners, while 
contributing to the control of the industry and protections to the 
gambling public.
    The overwhelming portion of those who play the numbers buy legal 
lottery tickets which are regulated and taxed and actually pay lower 
odds compared to illegal numbers operations. For the same reasons, 
people who choose to gamble over the Internet will patronize legal 
domestic websites, even if they have to pay taxes on winnings. I 
believe we should regulate Internet gambling, but we should do it 
effectively. And we should not subject any single business sector to 
sole or principle responsibility for doing the bulk of the enforcement 
work, whether it is the banking industry, as in this bill, or the 
Internet service industry, as we tried in prior bills. There are ways 
to regulate Internet gambling effectively, and a study Commission to 
develop those ways is the best way to come up with them. Again, I thank 
you, Mr. Chairman, for holding this hearing and look forward to hearing 
the testimony of the witnesses.
  Response to Post-Hearing Questions from Bruce G. Ohr, Chief of the 
 Organized Crime and Racketeering Section, United States Department of 
                                Justice
































   Response to Post-Hearing Questions from the Honorable William E. 
 Moschella, Assistant Attorney General, Office of Legislative Affairs, 
United States Department of Justice, for the April 29, 2003 hearing on 
  H.R. 21, the ``Unlawful Internet Gambling Funding Prohibition Act''










  Prepared Statement of John A. Phillips, CEO, ARISTOTLE International
    ``Law enforcement and consumer protection agencies as well as 
industry self-regulatory bodies have long recognized the need for rapid 
online identity verification for Patriot Act and anti-money laundering 
compliance, fraud prevention and risk mitigation involving age-
restricted products such as tobacco, alcohol, pharmaceuticals, video 
games and mature content.
    The private sector is responding to mounting public pressure in an 
increasingly socially responsible manner by deploying reliable state-
of-the-art technology that effectively addresses this important need.
    According to Forbes Magazine, Aristotle's INTEGRITY verification 
service is the market leader in online identity and age verification 
technology. INTEGRITY is utilized today by global Fortune 1000 
enterprises that are required by law or best-practices professional 
codes of conduct to identify individuals requesting permission to enter 
a facility, a website, open an account or conduct certain transactions 
online.
    Institutions relying on INTEGRITY include more than 350 of the 
nation's largest financial services companies, government agencies and 
airport security authorities, wineries, distillers, makers of premium 
cigars, video game publishers and major motion picture studios.
    The Federal Trade Commission and other governmental agencies have 
urged that reliable state-of-the-art methodologies available on the 
market be deployed to protect children from accessing promotions 
intended only for adults. In its 2003 report to Congress on the 
marketing of beverage alcohol products, the FTC pointed to the 
emergence of online methods, and Aristotle's service in particular, as 
addressing this public need. (See FTC Report to Congress: Alcohol 
Marketing and Advertising September 2003).
    Aristotle's INTEGRITY verification technology is a logical response 
to the acute need of responsible marketers for reliable, robust and 
commercially reasonable protective screening.
    INTEGRITY today is utilized, for example, to comply with the multi-
state Tobacco Master Settlement Agreement provisions that prohibit 
marketing to minors. The service exceeds the strict standards of such 
laws for online age-verification as California's Business and 
Professions Code Sec. 22963, and Virginia Code Sec. 18.2-246.8, 
governing online tobacco sales. Since adoption, not one INTEGRITY 
service client has ever been found to have improperly marketed a 
tobacco product to a minor.
    The major motion picture studios also use INTEGRITY to comply with 
the Motion Picture Association of America (MPAA) guidelines for 
restricting minors' online access to studio promotions with ``R'' rated 
content. Blocking underage teens from purchasing tobacco online is 
another important value. The Campaign for Tobacco-Free Kids (http://
tobaccofreekids.org/Script/DisplayPressRelease.php3?Display=425) 
presents the urgency of this issue on its website.
    Vendors in the beverage alcohol business use INTEGRITY as well. In 
the new era of direct wine shipments, for example, online age 
verification is an essential component for compliance and responsible 
marketing across the United States. Without a service such as 
INTEGRITY, Members of Congress, and the general public would not be 
able to purchase fine cigars or quality wine, purchase lottery tickets 
or an R-rated movie by mail, by telephone or online.
    In the United Kingdom, INTEGRITY is widely used by licensed casino 
operators to comply with the strict UK requirements for age 
verification online.
    In addition to the risk mitigation and child protection benefits of 
age and identity verification, INTEGRITY will benefit those individuals 
who acknowledge that they are problem gamblers and wish to avoid 
relapse, or who, for whatever reason, do not wish to be solicited for 
products or services that are potentially harmful or personally 
offensive. At the INTEGRITY web site, individuals will be able to put 
their own names on a confidential list of those who do not wish to be 
solicited or allowed to open an account with a casino.
    Many states have enacted legislation enabling each gaming venue to 
maintain a list of individuals who have identified themselves as 
problem gamblers. The problem is that there are many forms of gaming 
available, each with its own regulatory agency and there is currently 
no coordination among or between them. Some of the regulations are 
written in such a way that in Nevada, for instance, you have to 
register in person at every single casino where you may want to be 
blocked from temptation.
    Leaving aside the irony of sending people to the very places they 
are trying to avoid, with hundreds of casinos in Clark County alone 
you'd have to visit several per day every day to achieve comprehensive 
coverage--and then start over to find the new casinos that had been 
built in the interim
    Aristotle is working on a proposal with the National Council on 
Problem Gambling, the national non-profit advocate for programs to 
assist problem gamblers and their families, to enhance INTEGRITY's 
ability to address this problem. The proposed program would deploy 
current technology to allow individuals to voluntarily place their 
names on a self-exclusion master list--one time, at a single web site, 
rather than having to seek out hundreds of separate sites or physical 
locations.
    The list would be strictly confidential, and the names would not be 
disclosed to anyone. Individuals could remove their names from the list 
after a minimum period. Should someone whose name is on the list 
attempt to open an account with a merchant in the gambling industry, 
INTEGRITY would not return a match (approval) code to the merchant. The 
reason for the non-return of the match code would not be specified to 
the merchant.
    In their determination to comply with the law, market responsibly, 
and meet best practice standards, a rapidly growing number of 
enterprises across a broad spectrum of commerce and government use 
Aristotle's INTEGRITY solution.
    In its simplest terms, the case for robust ID authentication has 
never been more apparent, urgent or efficient, thanks in large part to 
the capabilities of Aristotle International's online service, 
INTEGRITY.''
     Prepared Statement of Kobus Paulsen, Chief Executive, UC Group




















 Letter to the Honorable Howard Coble from the Honorable Bob Goodlatte


  Letter to the Honorable Bob Goodlatte from Wendy Wright, President, 
                      Concerned Women for America


    Letter to the Honorable Bob Goodlatte from Peter Brandt, Senior 
       Director, Government & Public Policy, Focus on the Family


Letter to the Honorable Bob Goodlatte from Phyllis Schlafly, President, 
                            the Eagle Forum


Letter to the Honorable Bob Goodlatte from Richard D. Land, President, 
               The Ethics & Religious Liberty Commission


 Letter to the Honorable Bob Goodlatte from Dr. Guy C. Clark, Chairman 
  of the Board of Directors, The National Coalition Against Gambling 
                               Expansion


    Press Release: Family Research Council, dated February 16, 2006


 Press Release: Christian Coalition of America, Dated February 15, 2006


    Letter from a coalition of organizations in support of H.R. 4777






News article from The Hill, entitled ``Abramoff gets payback in gaming 
                     bills,'' dated March 29, 2006










     Transcript of speakers from the National Thoroughbred Racing 
           Association at the 28th Annual Symposium on Racing
















































                                 
