[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
                        CAN INTERNET GAMBLING BE 
                    EFFECTIVELY REGULATED TO PROTECT 
                   CONSUMERS AND THE PAYMENTS SYSTEM? 
=======================================================================
                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                              JUNE 8, 2007

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 110-37

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37-553 PDF                 WASHINGTON DC:  2007
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York         DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois          MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York         PETER T. KING, New York
MELVIN L. WATT, North Carolina       EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York           FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana                RON PAUL, Texas
BRAD SHERMAN, California             PAUL E. GILLMOR, Ohio
GREGORY W. MEEKS, New York           STEVEN C. LaTOURETTE, Ohio
DENNIS MOORE, Kansas                 DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts    WALTER B. JONES, Jr., North 
RUBEN HINOJOSA, Texas                    Carolina
WM. LACY CLAY, Missouri              JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York           CHRISTOPHER SHAYS, Connecticut
JOE BACA, California                 GARY G. MILLER, California
STEPHEN F. LYNCH, Massachusetts      SHELLEY MOORE CAPITO, West 
BRAD MILLER, North Carolina              Virginia
DAVID SCOTT, Georgia                 TOM FEENEY, Florida
AL GREEN, Texas                      JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri            SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois            GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin,               J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee             JIM GERLACH, Pennsylvania
ALBIO SIRES, New Jersey              STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire         RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota             TOM PRICE, Georgia
RON KLEIN, Florida                   GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida                 PATRICK T. McHENRY, North Carolina
CHARLES WILSON, Ohio                 JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut   MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana                PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida               KENNY MARCHANT, Texas
JIM MARSHALL, Georgia                THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma

        Jeanne M. Roslanowick, Staff Director and Chief Counsel






















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 8, 2007.................................................     1
Appendix:
    June 8, 2007.................................................    41

                               WITNESSES
                          Friday, June 8, 2007

Balko, Radley, Senior Editor, Reason Magazine....................    12
Colopy, Michael, Senior Vice President, Communications, 
  Aristotle, Inc.................................................    22
Hogan, Reverend Gregory J., Sr...................................    20
Kitchen, Gerald, Chief Executive, SecureTrading Group Limited....    14
Prideaux, Jon, Chief Executive, Asterion Payments................    16
Schmidt, Jeff, Chief Executive Officer, Authis...................    18

                                APPENDIX

Prepared statements:
    Carson, Hon. Julia...........................................    42
    Cleaver, Hon. Emanuel........................................    44
    Balko, Radley................................................    45
    Colopy, Michael..............................................    49
    Hogan, Reverend Gregory J., Sr...............................    53
    Kitchen, Gerald..............................................    59
    Prideaux, Jon................................................    71
    Schmidt, Jeff................................................    81

              Additional Material Submitted for the Record

Statement of the Antigua Online Gaming Association...............    84
Paper submitted by the Gaming Law Review.........................    89
Statement of Mark Holland, Partner, Baker Tilly..................   105
Statement of Craig Pouncey, Partner, Herbert Smith LLP (Brussels)   108
Statement of the Remote Gambling Association.....................   113
Statement of Keith Whyte, Executive Director, National Council on 
  Problem Gambling...............................................   119
Statement of Mary Williams, Chief Secretary, Isle of Man 
  Government.....................................................   122
Statement of Andre Wilsenach, Chief Executive Officer, Alderney 
  Gambling Control Commission, Channel Islands...................   132
Letter to Chairman Barney Frank from Frank Catania, Catania & 
  Associates, LLC................................................   147
Letter to Chairman Barney Frank and Ranking Member Spencer Bachus 
  from Chad Hills, Analyst for Gambling Research & Policy, Focus 
  on the Family..................................................   149
Letter to Chairman Barney Frank from Andrew Poole, Head of Online 
  Services, GamCare..............................................   151
Letter from the General Board of Church and Society of the United 
  Methodist Church...............................................   165
Letter from the National Coalition Against Gambling Expansion....   167
Letter from the National Association of Attorneys General........   169
Joint letter from the National Basketball Association, the 
  National Collegiate Athletic Association, the National Hockey 
  League, Major League Baseball, and the National Football League   174


                        CAN INTERNET GAMBLING BE 
                    EFFECTIVELY REGULATED TO PROTECT 
                   CONSUMERS AND THE PAYMENTS SYSTEM?

                              ----------                              


                          Friday, June 8, 2007

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10 a.m., in room 
2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Present: Representatives Frank, Carson, Cleaver, Wexler; 
Bachus, Paul, and LaTourette.
    The Chairman. Good morning. The hearing will come to order. 
First, let me apologize to the witnesses for the fact that only 
a couple of us are here. When I originally scheduled this 
hearing, we were under the impression that there would be votes 
this morning. On the other hand, your testimony will not be 
interrupted by our having to go off for an hour while you all 
sit here, so there are pluses and minuses to that. Staff 
members of various members are here, and they are often a very 
good way to get information to us.
    This hearing is on the subject of the regulation of 
Internet gambling. Gambling in general is not the jurisdiction 
of this committee, and in fact, I had a conversation on Monday, 
I believe of this week, or Tuesday, rather, with John Conyers, 
the chairman of the Judiciary Committee, which has primary 
jurisdiction over gambling.
    In the previous Congress, we did enact legislation to 
restrict the payment of Internet debts where credit cards were 
involved, and that's wholly within our jurisdiction. I voted 
against that bill, and I think it's important to be clear about 
what I think is really at issue here.
    The bill was justified in part by people who said that we 
must prevent money laundering for the purposes of either 
terrorism or drugs, and that we must prevent young people from 
doing things that they shouldn't do. But my own conviction, 
having talked to a lot of members, and listening to the debate, 
is that the primary motivation came from people who think 
gambling is wrong.
    Now, I have no quarrel with people who think that gambling 
is wrong. My quarrel is with people who, thinking that gambling 
is wrong, want to prevent other people from doing it.
    This whole debate has driven me back to a book that I only 
vaguely remembered, and I have now become impassioned with: 
John Stuart Mill's, ``On Liberty.'' I recommend it to people 
for the great philosophic text in our tradition.
    The book makes the essential point that it is not the role 
of the government to send people with guns, under the threat of 
imprisonment, to make you better. We can give people 
information. We can, through various institutions in the 
society, give people instruction. But in the end, adults ought 
to be able to decide for themselves how they will spend the 
money that they earn themselves, as long as it does not have an 
effect on others.
    Now, it is possible to argue that everything we do affects 
everybody else. People have said, ``Well, you say it doesn't 
affect others, but if you gamble too much, then you're 
affecting others.'' Well, if you do anything too much, it 
affects others. The problem with that is it's a classic case of 
an argument that proves too much.
    If you take that argument that, in fact, people have a 
right to your services, that people have a right for you to be 
healthy, it goes to extremes. People start telling each other 
what to eat, when to exercise; all of those things affect you.
    Clearly, there is in the minds of most of us a distinction 
between those things we do that primarily affect ourselves and 
those who choose voluntarily to associate with us, and those 
things that we do that inevitably impact on others. That is a 
line that I think government would be well advised to respect, 
and this bill undoes that.
    It is one of the rare cases where some of my conservative 
friends and some of my liberal friends come together. I have 
conservative friends who tell me gambling is wrong, and 
apparently I hear from some that there are biblical injunctions 
against it, although apparently there is an exception for 
bingo, which I have not yet been able to--I don't have a good 
enough textual expertise to find it, but I gather it is there. 
On the part of my liberal friends, to be honest, I think many 
of them think it's tacky. I think that they just don't think 
it's a nice thing to do, and therefore feel free to ban other 
people from doing it.
    Some argue, well, we must protect the poor from spending 
their money unwisely. I reject that. If you want to help poor 
people, there are other ways to do it.
    I suppose if you don't have enough money, there are a lot 
of things that I might advise you not to do: drink beer; go to 
baseball games; buy certain things; or spend too much on 
articles of clothing. Yes, there are a lot of pieces of advice 
we should give people. But I would not legally ban lower-income 
people from spending too much on their athletic shoes and their 
jeans, and I don't think we should do that here.
    Now, I know the argument is, well, but there are abuses 
here. I believe we can deal with the abuses. Let me deal with 
one, and that is young people. There is a great danger in this 
society that we will substantially circumscribe the freedom 
that adults ought to have because we are afraid that some young 
people might abuse it.
    It is incumbent upon us to try to differentiate in our laws 
between what adults can do and young people can do, and as far 
as Internet is concerned, I will say, from a lot of my 
conservative colleagues, I hear the mantra, ``Never regulate 
the Internet.''
    And I guess what they really mean is, ``Never regulate the 
Internet unless we find something offensive, and then we'll 
regulate it,'' because this is the most substantive 
interference with the freedom of the Internet that has ever 
been enacted into law.
    People are entitled to be for this. They are not entitled 
to be for this and then say, ``Oh, but we respect the integrity 
of the Internet to be free.''
    And let me just close by saying this: We do allow a number 
of things to go on through the Internet that should be age-
restricted. You can buy wine over the Internet. You can buy 
cigarettes over the Internet. You can look at--in fact, the 
courts have said to us, to the Congress, ``You have gone too 
far in terms of First Amendment rights in banning certain kinds 
of sexual-oriented material.'' Instead, they have said, 
``Differentiate according to age.''
    So we have been told by the courts, by the Supreme Court of 
the United States, that it is not appropriate simply to ban 
something entirely because young people might abuse it. 
Instead, we are under the obligation constitutionally to do the 
best we can to differentiate.
    I think we know that there are ways that you can not 
totally prevent, but substantially diminish, age-inappropriate 
uses through the Internet. That ought to be done here.
    But I again want to repeat, and we're also told, ``Well, 
gambling is this possible front for terrorism.'' Well, 
everything is a possible--everything. But there is zero 
evidence that we have, in fact, had people playing poker so 
they can bomb buildings. I await that evidence. I hope it isn't 
there. If it is, I'll look at it. But I don't believe it is.
    I think, just to close, what we have is people who don't 
like gambling and think that they have a right, through the 
government, to prevent other people from doing it. I regard 
that as a very grave crossing of the line that we in government 
ought to respect.
    I now recognize the gentleman from Alabama.
    Mr. Bachus. I thank the chairman, and I appreciate the 
opportunity for us to discuss the legislation that we passed 
last year.
    One of the last acts that this Congress passed last year 
was the Unlawful Internet Gambling Enforcement Act. It passed 
317 to 93, and enforcement of the Act capped a multi-year 
effort to protect American families from the well-documented 
ill effects of illegal online gambling.
    The new law attacks the problem of Internet gambling, 
illegal Internet gambling, through the payment systems, by 
prohibiting financial intermediaries from processing 
transactions involving unlawful gambling under applicable State 
and Federal laws, including the Federal Wire Act, and the 
Professional and Amateur Sports Protection Act.
    It does not prohibit anything which is not already illegal. 
It simply enforces the law that has existed in this country for 
years.
    As the record developed by this committee and the Judiciary 
Committee over the past several years has shown, gambling too 
often, illegal Internet gambling, results in addiction, 
bankruptcy, the destruction of families, and criminal activity. 
Internet gambling magnifies the destructiveness of gambling by 
bringing the casino into the home.
    According to an extensive study conducted by the University 
of Connecticut Health Center, 74 percent of those who have used 
the Internet to gamble have serious, chronic problems with 
addiction, and many of those have resorted to criminal 
activities to pay for their habit.
    One of the witnesses who is with us this morning, Pastor 
Greg Hogan, will share with this committee the story of how 
Internet gambling addiction placed his high-achiever son on a 
path that ultimately led to prison.
    The NBA, the NCAA, major league baseball, all of those 
testified before our committee as to the corrupting influence 
of illegal Internet gambling on athletes. Some claim that 
illegal Internet gambling is a victimless crime. The chairman 
has done that this morning.
    In fact, the real, the very real victims of illegal 
Internet gambling, the ones I'm concerned about, are the ones 
he spoke of, the underage gamblers who, by the tens of 
thousands, are becoming compulsive, addictive gamblers.
    They can't go in a casino. They can't go in debt legally. 
So they do it on the Internet, which is prohibited and illegal, 
but they do it anyway. They do it in their bedrooms. They do it 
in their dorm rooms. It is a mushrooming epidemic, leaving in 
its wake suicides, crime, and financial and family tragedies.
    The Judiciary Committee, and our committee, had several 
instances of college students who committed suicide as a result 
of Internet gambling and the debts they drove up. When it comes 
to illegal Internet gambling--and I stress, we're talking about 
illegal Internet gambling. So those who are testifying in favor 
of this bill are actually talking about taking away 
prohibitions on what is already illegal.
    If the activity was legal, then it would have been in our 
court to try to make it illegal, but this is not a debate over 
whether it's illegal or not. Every State in this union has a 
prohibition against this type of gambling.
    When it comes to this type of gambling, illegal Internet 
gambling, there are three reasons in particular why it is 
dangerous.
    Number one, the Harvard Medical School, the University of 
South Florida, and the American Psychiatric Association all 
conducted studies showing that the earlier one begins gambling, 
the more likely it is he or she will become an addicted, 
problem gambler. In fact, the Harvard study--and you are a 
graduate of Harvard, Mr. Chairman--showed that teenagers are 3 
or 4 times more likely to become addicted than the older 
population.
    Second, pre-teens, teens, and college students have 
unlimited access to the Internet, 24 hours a day, 7 days a 
week. Because of the repeated exposure they have to illegal 
Internet sites, gambling sites, they fall victim by the 
thousands. These are illegal sites operated, most of them 
offshore, or all of them offshore, I would assume.
    So the people who are operating these sites are violating 
the laws of our country. I don't know any other way to say it, 
other than that they are criminals. If you violate the criminal 
laws of our country, does that make you a criminal? I think it 
does. In fact, a University of Connecticut study showed that as 
many as three in four pre-teens and teens who are exposed to 
Internet gambling become addicted.
    Third, compulsive, problem gambling, particularly among 
young people, has been shown to result in the following: 
Increased withdrawal from normal activities; and turning to 
criminal activities to recoup financial losses.
    The NCAA testified before the Judiciary Committee about the 
starting quarterback at Florida State University, who on an 
illegal Internet site ran up over $10,000 worth of debt, turned 
to burglary to try to solve this problem, was betting on games 
involving his own institution, and ended up in prison. He is 
only 1 of about 14 NCAA athletes who have been convicted in the 
past few years of illegal Internet gambling. A lot of people 
don't care about this. They make money on these games, they 
make money on these athletes, and so they aren't really 
concerned with whether the athletes end up in jail.
    But this same study, the Connecticut study, showed that 
many of these teens turn to criminal activities to recoup their 
financial losses, they take drugs to deal with the depression, 
and as the Harvard study showed, the South Florida study, the 
American Psychiatric study, and 48 other studies by 
universities and health groups showed, their irresponsible 
behavior leads also to family and other relational problems.
    A study by McGill University, and this is in the past 2 
years--we didn't have the benefit of this study--found that 
nearly one-third of teen compulsive gamblers have attempted 
suicide.
    The University of Pennsylvania has recently found that the 
number of young people addicted to gambling, largely due to 
what they found was an increased exposure to illegal Internet 
gambling, is growing by an alarming 20 percent between 2004 and 
late 2005.
    They call this an epidemic which the country will deal with 
socially and economically for decades to come.
    Thus, Congress's failure to act for many years, because of 
the resistance of many of the people pushing for today's bill, 
we are seeing the devastating consequences of efforts in this 
Congress for 2 or 3 years to stall our efforts.
    The law we passed last year has already had a significant 
impact on the market for illegal gambling services, prompting 
the major players in the industry, many of which are publicly 
traded companies in the United Kingdom, to cease their U.S. 
operations immediately.
    As reports in the Washington Post and others showed, they 
spent over $100 million resisting our effort to pass this bill. 
And yet, just as the new law is in the process of being 
implemented, through regulations that the Treasury and the 
Federal Reserve are expected to issue shortly, a concerted 
effort is already underway to undo it.
    Chairman Frank has introduced legislation that we regulate 
rather than prevent gambling over the Internet. I don't 
question his motive, but the bill would establish the 
presumption in favor of legalized online casinos and sports 
betting--something that the NBA, major league baseball, the 
National Football League, and the NCAA worked for years to 
stop--and reward and legalize offshore Internet gambling sites 
that accept debts from Americans in violation of the U.S. law.
    The licensing regime contemplated by the legislation is 
premised upon the ability of Internet gambling sites to detect 
and block attempts to gamble online by minors, compulsive 
gamblers, and individuals located in jurisdictions that legally 
prohibit gambling.
    Let me say in conclusion, Mr. Chairman, that experts in the 
field of online protection and identity verification have 
openly questioned the effectiveness of technology currently 
available that attempts to verify age and identity in online 
settings, and advise the Judiciary Committee that only the 
prohibition we passed would work.
    In summary, Mr. Chairman, there is no compelling reason to 
change the course that Congress wisely charted last year when 
it passed strong legislation to combat the scourge of Internet 
gambling.
    Rather than spending our time trying to undermine the new 
law, we should be devoting our energies to rigorous 
implementation. America's youth, their families, and 
communities should expect no less.
    Thank you, Mr. Chairman.
    And let me say this--
    The Chairman. We're over 10 minutes.
    The gentleman from Florida.
    Mr. Wexler. Thank you, Mr. Chairman.
    I will be brief. I just want to make a couple of quick 
points.
    First, I very much want to associate myself with Chairman 
Frank's remarks and simply want to point out what I think are 
certain misunderstandings in terms of the current law.
    If you were to listen only to those last year who advocated 
in support of the Unlawful Internet Enforcement Gambling Act 
and listen to the ranking member this morning, you might have 
the impression that there is no legal gambling on the Internet 
today in the United States. That's not true.
    The law, the way it was crafted last year, in the current 
state of the law, if you want to bet on horse racing on the 
Internet today, you can do it with perfect legality. So if your 
thing is betting on horses, you can bet on the Internet, and we 
sanction it. If you want to participate in lotteries, in many 
of the States across the Nation, you can bet on lotteries all 
you want, on the Internet. Off-track betting is now on the 
Internet.
    So the uneven state of the law simply says that if you're a 
horse racing fan, you can bet on the Internet, but if you're a 
poker player, you can't bet on the Internet. If you play Mah 
Jongg, and I represent a district that is probably the Mah 
Jongg capital of the world, if you play Mah Jongg, you can't 
bet on the Internet.
    So this statement of gambling versus non-gambling is not, I 
don't think, reflective of the reality of the law the way we 
are today.
    And if I can make one point as to personal responsibility, 
which I think gets to the heart of some of the objections, I 
have three kids. You could turn on HBO at 1:30 in the morning, 
and probably very simply watch movies I wouldn't want my 14-
year-old child to watch. Does that mean we should shut down 
HBO? Of course not. What it means is, I or my wife ought to be 
wondering why my 14-year-old is up at 1:30 in the morning, and 
if he is, checking to see what he's watching on television to 
see if we permit it.
    But it's not HBO's fault if he's watching something at 1:30 
in the morning, and I'm not bothering to check on my 14-year-
old. Likewise, to bet on gambling on almost all sites, and I 
understand there are some exceptions, you need a credit card. 
Well, how does a kid get a credit card? He or she gets a credit 
card usually because mom or dad or the caregiver or the 
guardian permits them to have a credit card. And if they're 
really industrious and they're going about getting these phone 
cards from Eastern Europe or whatever it is, again, parental 
responsibility.
    So I find it somewhat ironic that those that often are so 
quick to argue parental responsibility, individual 
responsibility, when it comes to online gambling, all of a 
sudden parents have no responsibility at all, apparently, to 
monitor the conduct of their teenage children.
    The real issue is, adults that want to gamble on games of 
skill in particular, like poker and Mah Jongg, why not? Why 
should we make it into an illegal behavior?
    And with respect to adults gambling, they do it today 
legally with the Congress's blessing, with State legislatures' 
blessing, all across America, but they happen to be the 
preferred choice of gambling apparently, horse racing and 
lotteries, but if you want to bet on poker and Mah Jongg, and 
other games, dog racing, apparently that's somehow immoral.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman from Texas.
    Dr. Paul. Thank you, Mr. Chairman. I appreciate the 
opportunity to talk about this bill, since I am an original co-
sponsor. I'm not sure that I can improve on John Stuart Mill, 
or your statement, because I endorse essentially what you said, 
but I do want to make a few comments about this.
    It has already been mentioned, but I strongly believe there 
are two major reasons why this is a good bill. One, freedom of 
choice is important in a free society. Responsibility for 
improving one's behavior should be on the individual, the 
family, and the church and local community, not on the Federal 
Government. It hasn't worked before, and it probably won't ever 
work in the future.
    Also, I strongly believe in supporting this type of 
legislation because I want to do my utmost to protect the 
Internet, in that this is a source of the spread of 
information. Even for good reasons, regulating the Internet can 
backfire on us and be used for other reasons.
    I was particularly interested in the chairman's comments 
about the economic right to spend one's own money, and I 
strongly endorse that principle, but I would like to emphasize 
that I'd like to see the day when the individual has an 
economic right to spend all their money and not just the money 
left over after the government took their share. So I would 
make a distinction there that I would like to see that we, as 
individuals, have the right to spend all our money.
    But I would like to identify with the ranking member's 
statement, as well, because he has made some very good points, 
and I agree with his concerns about the danger of gambling.
    Obviously, the issue of gambling doesn't interest me that 
much, because I don't like it, and I taught my kids not to do 
it, but it's back to the problem of who is really responsible.
    One thing, if we look at our history, prohibitions never 
worked. It was a total failure for alcohol, and we're currently 
failing with drugs, so if you come in and have another 
prohibition, it won't work. It will just drive it into the 
underground, and even in the electronic age, there are ways of 
doing that.
    One thing that is interesting in this new age of 
prohibition is that in the original prohibition era, when we 
thought we had to prohibit the use of alcohol to improve one's 
behavior, we did it, and because of great concern for the 
Constitution, we amended the Constitution. Then we repealed it 
when we found out it didn't work.
    Today, there's no concern. We just write laws of 
prohibition, whether it's gambling or drugs or whatever. And I 
think the way we do these things is every bit as important as 
the issue itself.
    But I'm a strong supporter of this legislation, and over 
the years, I had opposed the efforts of H.R. 4411, but I 
strongly support H.R. 2046 to restore the rights of Americans 
to decide for themselves whether or not to gamble online.
    I yield back.
    The Chairman. The gentleman from Ohio.
    Mr. LaTourette. Thank you, Mr. Chairman. I'll attempt to be 
brief.
    I want to welcome all our witnesses here today, in 
particular Reverend Hogan, whose church I understand is in 
Congresswoman Sutton's district, but you live in Hudson, Ohio, 
so I guess I get to claim you, and welcome you.
    And I think that, as I listen to the other opening remarks, 
I have to tell you, maybe after this hearing, the gentleman 
from Florida can tell me how you bet on Mah Jongg. I'm not 
familiar with that.
    And the other observation about parental responsibility--
    The Chairman. If the gentleman would yield, I think the 
interesting question is, from my experience, how do you teach 
Mah Jongg players to use the Internet?
    [Laughter]
    Mr. LaTourette. It has been probably 25 years since I 
played Mah Jongg, so I don't know.
    But relative to the credit card issue, I understand the 
whole thing about HBO and bad movies, but I have two children, 
one 23 and one 19. I have more than two children, but those are 
the ones who are of age, and both of them have three credit 
cards, and neither one of them have a job. I was horrified to 
find that out, and it certainly wasn't done with my permission 
or consent,
    A former member of this committee, who is now elevated, I 
guess we call it, elevated to the United States Senate, Senator 
Sanders, I was always willing to join with him on this notion 
of these unsolicited credit card solicitations that go to 
people without jobs who are not of age. And so I think it's 
pretty easy for a person without a parent's knowledge, who is 
in college, to have a credit card and engage in this activity.
    I respect the chairman's principled opposition to the bill 
that we passed last year. I guess I'm saddened that before the 
regulations are written, we are attempting to adjust that.
    But I do hope that today's hearing does address some of the 
serious concerns, that even if the chairman's idea is a good 
idea, that the technology exists to actually do what the 
chairman envisions.
    And the only case that I'm aware of, that I've had the 
chance to review, was ACLU v. Gonzales, and I think in that 
case, the judge said that the stuff doesn't exist, and if it 
does exist, it doesn't work.
    So I respect the chairman's observations about children and 
keeping them from gambling and age restrictions, but if we 
don't have the software or hardware or whatever ware we need to 
accomplish what he's attempting to accomplish, I have to remain 
opposed to this legislation.
    And I yield back.
    The Chairman. I thank the gentleman.
    I'm going to recognize myself for additional time. There 
are a couple of points that I want to make.
    First of all, with regard to credit cards, frankly, I'm 
somewhat surprised to hear my Republican colleagues complain 
about the excessively free use of credit cards. I didn't vote 
for the bill, the bankruptcy bill that gave the credit card 
companies all those advantages. Some of the people on the 
Democratic side of the aisle, our colleague from North 
Carolina, Mr. Watt, had tried to put some restrictions on 
credit card company solicitations to young people.
    So I do think it is the case that many of my Republican 
colleagues, in particular, have in every other aspect supported 
the ability of the credit card companies to solicit, to have 
special protections in bankruptcy, and now to complain that 
some of the people who get the credit cards that you have made 
so freely available and so iron-clad in terms of their 
collectability, that some people are misusing them, seems to me 
impinge on the freedom of others.
    And I am struck that what I heard from the ranking member 
and others is that some people will abuse this. The argument 
that you ban something entirely because some people will abuse 
it seems to me the wrong principle for society.
    I'm also struck by the inconsistency--my conservative 
friends, in particular, usually say, ``Listen, if you've 
committed a crime, you're responsible.'' This notion that 
society made me do it is generally mocked by Republicans when 
we talk about criminal behavior.
    And now what we're told is, ``Oh, you must stop everybody 
in America from doing this because a minority of them will be 
led into criminal behavior and it won't be their fault.'' Well, 
that is an abdication of the principle of personal 
responsibility.
    And the other thing I would say is that in terms of age 
restriction, I assume we will soon have legislation to ban the 
sale of cigarettes and alcoholic beverages over the Internet. 
To my understanding, you can buy cigarettes and alcoholic 
beverages over the Internet. Those are age-restricted, and I 
think they're very important.
    Actually, I am struck that we--and I may have misunderstood 
here. I thought we were talking about young people, though as 
the gentleman from Florida said, if your pre-teen has a credit 
card, for God's sakes, take it away. Don't come and tell adults 
that they can't do something because you can't keep your 9-
year-old's hands off of your credit card. But we're talking 
apparently about adults, about people in their 20's, and I 
think we should make whatever we can available.
    I would also say this: If you are in your 20's, and you 
have this predilection to do something wrong, it's very hard 
for a free society to stop you. At some point, there are other 
ways you can do it.
    But I am struck again that what we are told here is not 
that this is inherently something wrong. You know, most things 
that I want to ban are just wrong. You should never take 
someone else's money. You should never assault someone. You 
should never start a fire. You should never cheat someone. But 
the argument that you make something illegal because a minority 
are going to abuse it is a problem,.
    And the last thing I would say is this, in terms of the 
consistency issue. Many of my Republican friends have again 
talked about the importance of free trade and living up to our 
international free trade obligations, and we have been told 
that we can't do certain things because we did adhere to the 
World Trade Organization--I voted no, but we did--and we have 
to live up to those obligations.
    We have been found in violation of our World Trade 
Organization obligations under this bill, and people are 
basically saying, ``Well, who cares? The people who complain 
about us are little, so we can ignore them.'' But, you know, 
people are entitled to one side or other of the argument, but 
not to both.
    Mr. LaTourette. Does the gentleman have any more time left?
    The Chairman. Yes. You have 2 minutes left on your side.
    Mr. LaTourette. Thank you. I'll try and just use about 30 
seconds of it.
    I hope the chairman was using the royal ``you'' because 
when we had the discussions on credit cards and everything 
else, I did in fact join with Sanders and Watt and so forth and 
so on.
    I happen to not think that this unbridled solicitation of 
minors and people who aren't financially responsible should 
have credit cards, one, I thought it was a bad idea then, and I 
continue to think it's a bad idea now.
    And so--
    The Chairman. I acknowledge that, but I was talking about, 
I thought I was explicit, the great majority of the Republican 
party. The bankruptcy bill was passed by--
    Mr. Bachus. Will the gentleman yield?
    The Chairman. I yield to the gentleman.
    Mr. Bachus. How much time do we have left on this?
    The Chairman. On your side, none, but go ahead.
    Mr. Bachus. Okay.
    [Laughter]
    Mr. Bachus. That concludes my remarks. No.
    Let me just again say that the chairman has used the words 
``make illegal,'' ``ban,'' ``prohibit,'' and ``stop.'' What we 
did late last year did none of those things.
    Illegal Internet gambling was illegal, prohibited in all 50 
States except in one or two rare cases, and in those cases, we 
didn't--the law didn't operate.
    So yes, we have the right to decide what we're going to 
make legal and illegal, and we did that in this country, and 
that's why the--
    The Chairman. I would ask the gentleman, what's the purpose 
of the law? If it was already illegal, what did you need this 
law for?
    Mr. Bachus. I mean, we didn't decide that--
    The Chairman. But why did you want this law, then, if it 
was already illegal?
    Mr. Bachus. The law is an enforcement mechanism because 
even though there was a prohibition, it was a criminal activity 
to engage in it, people did it in offshore sites, and we 
weren't able to shut them down.
    And I will agree with you, the WTO has come in and said 
it's a violation of the WTO and our international trade 
agreement for us to try to stop illegal Internet gambling in 
our own homes, which, boy, is--
    The Chairman. No, let me--
    Mr. Bachus.--the testimony of the WTO and--
    The Chairman. No, what the WTO said is what the gentleman 
from Florida pointed out, that it's hypocritical and 
inconsistent to allow your own gambling if it takes place at a 
racetrack in America or a dog track in America and ban it when 
it takes place in a foreign country.
    What the WTO found us guilty of was blatant hypocrisy and 
violating the fundamental principle of the WTO, namely, that 
you cannot give yourself economic rights that you then deny to 
other countries.
    Mr. Bachus. I think we let other countries come in if they 
want to come in and gamble at our racetracks--
    The Chairman. You might, but again, you misstated the WTO's 
principle. The WTO, if we had banned all gambling in America, 
then I don't think you would have had this WTO case.
    But what they hit on was that we allow gambling in America, 
you can gamble on a racetrack in America, or a dog track in 
America, or State lotteries, or a whole lot of other things, 
but you can't--you know, And I guess, look, I suppose the next 
thing we'll see is that young people are buying too many 
scratch tickets. I don't know how you stop them doing that.
    Mr. Bachus. Well, of course, your scheme--you know, this 
legislation today, still the WTO has indicated they're still 
going to challenge what you do because it restricts access to 
our U.S. market.
    The Chairman. Yes. And I would like to, if we had 
jurisdiction, I would restrict that, as well, but our committee 
doesn't have jurisdiction over that.
    Mr. Bachus. In fact, they have indicated that it's going to 
be easier to challenge, the WTO challenge, if this legislation 
passes.
    The Chairman. Oh, I don't believe that's the case. We've 
already been found in violation. How can it be easier?
    Mr. Bachus. Well, you have arbitrary opt outs--
    The Chairman. But it's already--
    Mr. Bachus.--and carve outs, which they prohibit.
    The Chairman. You mean for the sports teams, the leagues? 
Yes, we did give those arbiters of absolute moral superiority, 
the professional athletic leagues, in a concession to reality, 
the right to opt out.
    Well, let's get to the witnesses. The gentleman from Texas 
is going to introduce the first witness.
    Dr. Paul. Thank you, Mr. Chairman.
    Chairman Frank, Ranking Member Bachus, I am pleased to 
welcome Radley Balko, senior editor of Reason Magazine, one of 
my favorite publications, to the hearing.
    Mr. Balko is one of the most perceptive critics of 
government policies that prevent individuals from engaging in 
what the government considers immoral or unhealthy behavior. 
Mr. Balko's defense of civil liberties has appeared in a wide 
range of publications, including the Wall Street Journal, the 
Washington Post, and foxnews.com.
    His writings on the militarization of law enforcement were 
cited by Justice Stephen Breyer's dissent in the Hudson v. 
Michigan case.
    I'm sure my colleagues will benefit from Mr. Balko's 
thought on how banning Internet gambling is inconsistent with 
constitutional government and a free society.
    Welcome.
    The Chairman. Mr. Balko, go ahead. I know you went to some 
considerable trouble to get here, and we appreciate that.

   STATEMENT OF RADLEY BALKO, SENIOR EDITOR, REASON MAGAZINE

    Mr. Balko. Thank you, Mr. Chairman.
    Mr. Chairman, and distinguished members of the committee, 
my name is Radley Balko, and I am a senior editor with Reason 
Magazine. I am also a former policy analyst at the Cato 
Institute.
    I have spent a good deal of my time writing and researching 
civil liberties issues, including the problems associated with 
the prohibition of victimless crimes. I'd also like to commend 
Chairman Frank for his work defending individual freedom, and I 
thank the committee for inviting me today.
    The Unlawful Internet Gaming Act was passed under rather 
dubious circumstances. It passed the U.S. Senate on the last 
day of Congress, late at night, with no Floor debate, after 
being attached to an unrelated port security bill. My problem 
with how the bill passed, however, is beside the point. Let's 
get to the crux of this issue, Mr. Chairman.
    What Americans do in their own homes, with their own money, 
on their own time, is none of the Federal Government's 
business. Take online poker, by far the most popular form of 
online gambling. Poker has enjoyed a surge in popularity over 
the last several years. The game is about as mainstream and 
uniquely American as baseball.
    Poker evolved from similar card games in the early 1800's, 
then flourished in popularity on Mississippi's river boats, 
winning over such iconic American aficionados as Mark Twain. 
Today, most daily newspapers have a poker column, including the 
New York Times. The game saturates cable television. And until 
recently, even members of the Supreme Court had a monthly poker 
game.
    Online poker is merely a new evolution of the game, similar 
to the way Civil War poker games introduced the straight, and 
gave us variations like draw and stud poker. The Internet 
merely removes the geographic barrier preventing those who love 
the game from finding opponents of similar skill who are 
willing to wager similar amounts of money.
    No one is hurt when two or more consenting adults sit down 
for a game of poker, be it online or in person. Why any of this 
should be of concern to the Federal Government is rather 
perplexing.
    I respect the fact that many Americans and many Members of 
Congress may have moral objections to gambling, online or 
otherwise. To them, I'd say simply, well, don't gamble, then.
    But in a Nation where Las Vegas is one of our fastest-
growing cities and most popular tourist destinations, where 
Indian casinos are commonplace, where horse racing is a 
national pastime, where nearly every State in the union derives 
public funds from State lotteries, singling out Internet 
gambling for prohibition seems arbitrary, and, frankly, 
hypocritical.
    Yes, it's possible that a parent could bet away their 
family's savings or their child's education fund in an online 
poker game. They could also fritter that money away on eBay or 
on booze or fancy cars or exotic travel. But these are personal 
decisions, and if a free society means anything, it means we 
should have the freedom to make bad choices in addition to good 
ones.
    The ban on Internet gambling punishes the millions of 
Americans who are wagering online responsibly due to anecdotal 
evidence of a few who may do so irresponsibly. It's an affront 
to personal responsibility and symptomatic of a government that 
treats its citizens like children. A government based on the 
principle of liberty doesn't police the personal lives of its 
citizens for bad habits at any level, much less the Federal 
level.
    Supporters of a ban on Internet gambling say that the 
industry is unregulated, that underage people are more likely 
to gamble online, and that it supports money laundering and 
similar criminal enterprises. These are all problems wrought 
not by the decision of a consenting adult to gamble, but by the 
Government's decision to prohibit it.
    Were Congress to give its blessing to legalized online 
gambling, I suggest you'd soon see brand names like Harrah's, 
MGM, and Trump immediately enter the market. Reputable offshore 
brands like FullTilt Poker and PartyPoker would almost 
certainly incorporate in the United States and subject 
themselves to U.S. market regulation and Government oversight, 
including age restrictions.
    Customers want to know that they're playing a fair game, 
that their bankrolls are secure, and that their privacy is 
protected. Companies that set up shop in the United States with 
the blessing and encouragement of the U.S. Government will 
almost certainly dominate the market. Winning could be taxed. 
Market forces and, if necessary, the Federal Government, could 
regulate and monitor gaming sites for fairness and 
transparency.
    Most importantly, if online gambling were decriminalized, 
the Federal Government could get out of the trivial business of 
breaking up online poker games and Federal law enforcement 
officials and prosecutors could expend taxpayer-funded 
resources on more appropriate endeavors, like pursuing Internet 
or interstate fraud, theft, and protecting the country from 
terrorism.
    In closing, the Unlawful Internet Gaming Act is a 
significant and disturbing and disturbing encroachment on 
individual liberty. I'd urge the committee to correct this 
overreach and let Americans do as they please within the 
privacy of their own homes.
    Thank you.
    [The prepared statement of Mr. Balko can be found on page 
45 of the appendix.]
    The Chairman. Thank you.
    Next, we have Mr. Gerald Kitchen, the chief executive 
officer of the Secure Trading Group. He has worked in a number 
of relevant capacities involving the administration of credit 
cards.
    Mr. Kitchen.

  STATEMENT OF GERALD KITCHEN, CHIEF EXECUTIVE, SECURETRADING 
                         GROUP LIMITED

    Mr. Kitchen. Mr. Chairman, and distinguished members of the 
committee, thank you for the opportunity to provide this 
testimony.
    I have over 20 years global experience in the card and 
payments industry. I have served in various positions during 
this time, including as a director of Visa and Master Card, 
respectively. Until my current role of chief executive of 
SecureTrading, I was the managing director of Barclay Card in 
the United Kingdom, one of the largest processors of card and 
payment transactions in the world.
    SecureTrading is a U.K. company which operates a financial 
payments business providing secure processing and settlement of 
Internet payments across all sectors of industry.
    Mr. Chairman, the card and payment industry is a multi-
layered cooperative and interdependent system that has matured 
and continues to mature over many years. This system provides 
regulation and compliance policies for consumers, credit card 
companies, transaction processes, acquirers, and operators. An 
overriding consideration of all participants in this system is 
balancing convenience and risk.
    In my decades-long experience, it is only in a licensed and 
regulated world that we participants are able to enforce such 
policies to protect all participants. The aim of the U.K. law 
relating to gambling is protection against underage and problem 
gambling, protection against consumer and operator fraud, and 
finally, protection against money laundering and organized 
crime. These objectives have largely been achieved.
    Achieving these objectives, however, comes at a price. The 
price is investment in appropriate technology and processes to 
achieve these regulations. The successful outcome is consumer 
protection, and, we believe, freedom of choice. It is far 
easier to protect consumers when they use industry issued bank 
cards to register and play.
    While other forms of payment may be possible, we do not 
believe they provide the same degree of security assurance as 
that associated with the bank cards. This approach keeps cash 
out of the system, a further protection against money 
laundering, and also allows player transactions to be tracked 
in the case of a dispute, and simplifies regulation.
    I will, Mr. Chairman, in this testimony, attempt to address 
some of the more obvious concerns being raised here today.
    As part of the responsibility of the operator in protecting 
against underage gambling and identity theft, strict, and at 
times lengthy and inconvenient consumer identity validations 
are enforced at both the time of consumer registration and 
during ongoing play. These today include production of a 
driver's license, a utility bill, and even a passport.
    Know your customer or, as we refer to it, KYC, provides a 
critical form of protection to the consumer when playing and 
when registering. Under prohibition, with unregistered 
operators, it is not possible to validate or authenticate that 
this practice is being adhered to.
    Underage gambling is, without doubt, a concern. As a 
father, I, too, share this concern. A further guard against 
that is the rules of credit card companies today, who do not 
issue cards to minors. In the case that a card is issued to 
minors, they can be tracked, as the issuing bank flags these 
cards at the time of issue, and subsequent authorization of 
credits from such a card is declined when it is received from a 
gambling operator in a regulated world.
    The challenge of compulsive gambling is not something we 
underestimate, nor am I an expert in this field. We do, 
however, recognize this problem, and work relentlessly and 
responsibly with various support groups and authorities to 
protect and attempt to support the vulnerable consumers.
    By way of example, operators and processors like ourselves 
provide daily limit-setting parameters for consumers to limit 
their betting. Operators limit the amount of daily bets 
accepted. Consumers can only use one card at a time with an 
operator, which further limits credit exposure. Further, too, 
we do provide and support access to self-exclusion databases 
for consumers to register themselves.
    One thing is certain, Mr. Chairman, and members of the 
committee. In an unregulated world, the consumer is far more 
vulnerable and at risk than in a regulated world. A further 
consideration is the question of enforcing laws where certain 
jurisdictions opt out from Internet gambling.
    Our implementations in place today allow for the exclusion 
of customers based on their location, in the event that a 
jurisdiction chooses to opt out. The individual's location can 
be identified using various forms of IP geo-location 
technology. This involves matching the customer's IP address to 
a specific State, and in some cases, a city or town.
    This evolving technology is provided by a number of third 
parties. These systems, under independent audit by companies 
such as PWC, are known to provide accuracy up to levels of 99.9 
percent at a State level. This accuracy can be further enhanced 
by considering IP location together with both the registration 
information provided by the customer and the address of the 
payment card.
    Finally, our collaboration with Baker Tilly, the global 
accountancy firm which provides back office processing services 
for us, is an important part of the service. We insist that all 
gambling operators, and in fact all other potentially high-risk 
sectors, like travel, are required to open an escrow account or 
a rolling reserve with the back account being under the 
independent control of Baker Tilly.
    This deposit provides immediate access to funds in the 
event of a valid consumer dispute. Further, too, this rolling 
reserve provides protection against the risk of money 
laundering.
    Mr. Chairman, and members of the committee, I thank you for 
the opportunity to provide this testimony. I trust that our 
experience gives you helpful insight as to how a regulated 
environment can work, and why we believe prohibition does not.
    Thank you.
    [The prepared statement of Mr. Kitchen can be found on page 
59 of the appendix.]
    The Chairman. Thank you.
    By the way, I should have said that without objection, any 
written material that any of the witnesses wish to submit will 
be made a part of the record.
    Next, we have Mr. Jon Prideaux, who is an independent 
payments consultant.
    Mr. Prideaux.

 STATEMENT OF JON PRIDEAUX, CHIEF EXECUTIVE, ASTERION PAYMENTS

    Mr. Prideaux. Thank you very much, Mr. Chairman, and 
members of the committee. Thank you very much for the honor and 
the privilege of giving my testimony to you today.
    As you said, my name is Jon Prideaux, I am an independent 
payments consultant, and I have nearly 2 decades of experience 
in the payments industry in Europe. Most of this was with Visa, 
though I should emphasize to the committee that I'm not 
speaking on behalf of Visa today.
    I've worked together with banks and as a consultant with 
payment systems providers and also with marketing companies. I 
must tell you that I have never consulted for any Internet 
gambling company and I have no plans to do so.
    Gambling in Europe, and in the U.K. in particular, is 
widely available, both on the main street and also online. 
Internet gambling, as has been mentioned, is offered by multi-
billion dollar companies listed on public exchanges that are 
well-regulated and their shares are widely held and traded.
    To place a bet and to withdraw one's winnings for an 
Internet gaming transaction is a multi-stage process. In each 
of these stages, there is independent validation and checking. 
By definition, Mr. Chairman, in a regulated world, Internet 
gamblers cannot be anonymous.
    In this electronic medium, they must go through multiple 
``know your customer'' stages in order to establish an account, 
and will necessarily leave an audit trail of their actions when 
they play.
    So what are the control processes that are in place in 
Europe?
    There is an important role for the State. In the U.K., the 
National Gambling Commission has the job of ensuring that the 
operator plays fair and also that the vulnerable are protected.
    And in addition, the Financial Services Authority, or FSA, 
the agency in the U.K. which performs an oversight role similar 
to that of the Federal Reserve, is charged with protecting the 
integrity of the payment system, is charged with ensuring 
protection of consumers, and also with minimizing financial 
crime.
    My own particular expertise, Mr. Chairman, is in the 
regulation and compliance programs operated by payment schemes. 
Visa, and to the best of my knowledge, Master Card and the 
other card companies, operate such regulatory and compliance 
programs and regimes directed at various different stages of 
the payment process.
    The first process is directed at the accurate flagging and 
identification of Internet gaming transactions. Controls also 
apply at the moment at which transactions are authorized. When 
they're cleared through the system, monitoring can be done for 
unusual patterns, as can also be done when credits or payouts 
are made.
    And in addition, as an important safeguard, there is a 
possibility to monitor the level of disputes or chargebacks.
    So these are the controls, this multi-leg process. What 
results do they give, Mr. Chairman?
    Well, in my experience in Europe, regulated Internet 
gambling transactions are less likely to give rise to a dispute 
than e-commerce in general. Certainly, regulated Internet 
gambling is significantly less dispute prone than other digital 
sales, such as music downloading or Internet service provider 
subscriptions.
    During my many years as the chairman of Visa Europe's 
compliance committee, I can tell you, Mr. Chairman, that I did 
become aware from time to time of many different complaints 
that consumers had about various aspects of the Visa system.
    But during this same period, Mr. Chairman, I can tell you 
that I did not receive a complaint, nor was I aware of any 
complaint relating to Visa of problem gambling, nor was I aware 
of complaints relating to operators cheating their customers on 
regulated sites, and neither did our anti-money laundering 
procedures cause us to make any suspicious transaction reports 
in the regulated sector.
    I conclude, therefore, Mr. Chairman, that Internet gambling 
can and should be regulated effectively.
    The arrival of the Internet, Mr. Chairman, has changed many 
industries. The gambling industry is no different. The genie 
cannot be put back in the bottle. Internet gambling is a fact. 
We must deal with it.
    This change of access to gambling has certainly brought 
with it new challenges, but, Mr. Chairman, it also brings with 
it new tools for management and for control, and a modernized 
regulatory regime will surely lead to better outcomes for all 
concerned.
    It is a matter of incentives, I would say. A prohibition 
regime provides incentives for operators to go underground. In 
a regulated regime, the incentive is to act responsibly. 
Surely, Mr. Chairman, that's what we all want.
    Thank you for your time.
    [The prepared statement of Mr. Prideaux can be found on 
page 71 of the appendix.]
    The Chairman. Thank you.
    And to introduce the next witness, I'll call on the ranking 
member.
    Mr. Bachus. Thank you.
    Jeff Schmidt is a recognized expert, author, and speaker on 
the topics of information security and infrastructure 
protection.
    He worked with MicroSoft Corporation in the Windows 
production security department. He was one of the CIOs of the 
Ohio State University, chief information officer. He was the 
founder and elected director of the InfoGuard National Members 
Alliance, which was the private sector component of the FBI's 
InfoGuard program. He's an entrepreneur who has started several 
successful ventures in the information security space. He 
actually worked with the FBI to start the InfoGuard program in 
1998, and received his MBA from Fisher College of Business at 
Ohio State University.
    I welcome him.

   STATEMENT OF JEFF SCHMIDT, CHIEF EXECUTIVE OFFICER, AUTHIS

    Mr. Schmidt. Thank you very much, Mr. Chairman, and 
committee members. I appreciate the biographical information. I 
can now scratch that off of my list here.
    I have been in the information security space for the last 
15 years, and have focused specifically on identity and 
authentication-related issues for the last 3 years.
    I come to you today with the luxury of not having an 
opinion about Internet gambling. That's not what I'm here to 
talk about. I'm a security practitioner, and it's my job to 
give you a candid review of the state-of-the-art with respect 
to two specific technologies and techniques that we've been 
talking a lot about today, namely, identity and age 
verification, as well as geographic location or IP geo-
location.
    My written submitted testimony contains several pages of 
excruciating detail on these particular technologies and 
techniques and again, a candid explanation of the state-of-the-
art.
    I'm going to skip to the highlights. These technologies are 
not reliable in their current form today. Technologies that 
attempt to identify a person's age as well as identify their 
geographic location will fail on the order of 20 percent.
    These numbers come from the vendors of these technologies 
themselves. They come from independent parties that have 
researched these particular techniques. And they come from my 
own research and my company's own research.
    Again, 20 percent, I don't know if that's good, bad, or 
indifferent for the application that we're talking about today. 
It is my job to make sure that the committee is fully informed 
about this reality when considering the policy decisions that 
are in front of us.
    The policy decisions are again, fortunately for me, well 
above my pay grade. So the best way to demonstrate this is with 
a couple of very simple demonstrations.
    On this piece of paper I have written down my user name and 
my password, as do 70 percent of all Americans in this country. 
Mr. Hogan. Now, Mr. Hogan is Jeff Schmidt. Online, anywhere 
else, if that were an age verified credential, Mr. Hogan would 
now be my age. It really is that simple, and recent data has 
confirmed that.
    First of all, ACLU v. Gonzales, with respect to CAPA, did a 
lengthy discussion about age verification and identity 
verification technologies, and found them to be unreliable.
    Also, I would remind the committee that the largest and 
most quickly growing complaint to the FTC has consistently been 
around identity fraud and identity theft-related issues.
    It really is, that is the sad state of affairs right now. 
We will see failure rates. Another way to think about what the 
failure rates might be is to consider a very simple and very 
common age verification problem, the problem that we see when 
credentialing a youth at a bar.
    According to research done by the University of Wisconsin, 
the University of Arizona, and the FBI, use of forged, faked, 
or borrowed IDs for the purchase of cigarettes and alcohol 
exceeds 20 to 25 percent. Online age verification is a much 
harder problem. You're not in person, you're not inspecting a 
government-issued ID. Therefore, it is safe for us to assume 
that failure rates will be higher in the online scenario.
    The second technology that we've discussed is IP geo-
location. The way that the Internet is constructed, it is 
extremely difficult to determine the geographical location with 
any sort of precision or reliability.
    Again, a very simple demonstration. Mr. Chairman, Boston is 
one of my very, very favorite cities. I was there yesterday. I 
used this Verizon card to access the Internet. I used the same 
card again this morning to access the Internet from my hotel 
here in the District.
    And in both cases, I received different answers from all 
the major IP geo-location providers. One had me in Dallas, 
Texas; one had me in Reston, Virginia; and one had me in 
Minneapolis. In no case did they agree or in no case did they 
actually put me in the accurate locations.
    Now, I understand that the use of these wireless cards is 
somewhat of a curve ball. However, this is the emerging 
technology, and this technology is standard equipment in almost 
every new laptop that is being built today.
    My other personal research around geo-location technologies 
has demonstrated failure rates for non-curve ball types of 
applications in the 20 to 30 percent range, as well.
    So again, it's critical to understand that you will see 
very high failure rates and it is critical to factor that in 
when making these important policy decisions.
    Thank you.
    [The prepared statement of Mr. Schmidt can be found on page 
81 of the appendix.]
    The Chairman. Thank you.
    And to introduce our next witness, the gentleman from Ohio.
    Mr. LaTourette. Thank you very much, Mr. Chairman. I did 
welcome this witness earlier, but Gregory Hogan, Sr., is the 
pastor of the First Baptist Church in Barberton, Ohio, which is 
in Representative Betty Sutton's district.
    He has a Bachelor's Degree in Education from Tennessee 
Temple University. He is married with 4 children, and he is 
here to talk about the experience of his family and one of his 
children.
    And so welcome, Reverend Hogan. We look forward to hearing 
from you.

          STATEMENT OF REVEREND GREGORY J. HOGAN, SR.

    Rev. Hogan. Thank you very much.
    Chairman Frank, Ranking Member Bachus, my own Congressman, 
Mr. LaTourette, and members of the House Financial Services 
Committee, thank you for inviting me here today.
    As a parent, we dread a call that often comes to us. That 
call came to me on December 9, 2005. On the other end of the 
line was my son. It was not his cell phone number that showed 
up on my wife's phone, but one we did not recognize.
    He immediately started crying, and he said, ``I've done 
something terribly wrong. I'm in jail for robbing a bank.'' 
Time stopped. My wife couldn't even drive across the street, 
and I do not remember today how we got home from the restaurant 
that evening. But my son was under arrest for doing something 
that was inconceivable for him.
    What could have put my son in a state of mind to do that 
act? He was president of the sophomore class at Lehigh 
University. He was second-tier cellist in their orchestra. The 
high school psychologist who worked with him for 4 years called 
him a ``straight arrow.'' And no one who knew Gregory could 
believe that he had done such an act.
    How could this young man who appeared twice at Carnegie 
Hall in New York City think that he could rob a bank? The 
answer has to do with illegal Internet gambling.
    It all began when a non-student came into his room, walked 
over to his computer and said, ``Hey, look how much money I 
made on the Internet.'' He keystroked a few things into my 
son's computer, and up on the screen popped $120,000. He 
downloaded the program so my son could gamble through his 
preferred site.
    And then for 14 months, we began to watch our son's descent 
into the black hole of addiction to Internet gambling, 
especially poker. It began when a few overdraft charges showed 
up at our house, and our first conversation was on wasting 
money and avoiding spending money frivolously.
    It included a battle with depression, daily notices from 
the banks about overdrafts, and I had to live at a home that I 
did not like. I had to take out all the computers in our house. 
I had to lock them up. I had to make sure that my wallet was 
beside my bedside every night and all my financial papers were 
in the safe.
    Whenever Greg was around, I had to secure our family 
finances, and the TV was always turned to Texas Hold 'em. After 
interviews with a certified gambling therapist, with members of 
GA, and begging colleges to provide a counselor for him, we 
sent Greg back to Lehigh University for his sophomore year.
    With him he had taken, without our knowledge, $2,000 in 
savings bonds from our family safe, and he began to gamble 
again. Greg's student account at the bank in Bethlehem, 
Pennsylvania, did not allow Internet payments, so he found an 
intermediary site to continue his gambling.
    I installed Gamblock, an anti-gambling program, on his 
personal computer, and so he began gambling at the Lehigh 
University library, up to 12 hours a day. I asked the 
university to block his access to the computer, and I was told 
that nothing could be done.
    By December of 2005, he had been shut out of all the sites 
because of bad bank transactions. His fraternity brothers were 
asking for their money back so they could buy Christmas gifts 
for their families. Greg's grades were slipping. And he was 
descending into the pit of addiction. He became two different 
people.
    The weekend before his arrest, he ran a volleyball 
tournament to raise money for the local Boys and Girls Club. He 
had to make one more bet. So, with the bravado of a bluffing 
gambler, dressed as a typical college sophomore, Greg walked 
into a bank, waited in line, passed a note to a teller, and 
walked out with the money in his backpack.
    He was arrested that evening, as he came into the college 
arts center on his way to orchestra practice. Greg has pleaded 
guilty to a first-degree felony, and is now serving 22 months 
to 10 years in Pennsylvania.
    After Greg's arrest, we sent him to a gambling rehab 
center, CORE, in Shreveport, Louisiana. He came home and said, 
``Dad, you never told me gambling was evil.'' You can't imagine 
a Baptist pastor not saying gambling is evil, but I never had 
talked that way to my children. He realized how evil it was, 
emotionally and intellectually, and how it was damaging so many 
lives.
    This time next year, instead of watching my son receive his 
diploma from Lehigh University as president of his class, I'll 
be waiting proudly outside the gates of prison to see my son 
released. I will count myself fortunate, because many dads have 
stood by the graves of their sons who took more drastic steps 
to end their addiction to Internet gambling, such as suicide.
    Why tell my personal story for a piece of Federal 
legislation? Well, Greg's story is being repeated in so many 
young lives. According to the AMA, the APA, up to 5 percent of 
all college students will become compulsive gamblers when 
exposed to Internet gambling. Are we willing to see up to 16 
million new gambling addicts in our Nation?
    Greg's story is one that recounts loss. I have met many 
people who have $30,000 to $50,000 in online gambling debts. 
Many people drop out of college. They drop out of life. They 
drop out of society, to pursue online gambling.
    The World Series of Poker that's going on this week may be 
glamorous, but the life of an addicted gambler on the Internet 
is not. It is just a series of broken hopes, promises, dreams, 
and lives.
    The question I ask this committee today is the same that 
the apostle Paul asked the Romans: ``Shall we continue to do 
good, or shall we continue to do evil that good may prevail?'' 
The answer to that, obviously, is no.
    Thank you, Mr. Chairman.
    [The prepared statement of Reverend Hogan can be found on 
page 53 of the appendix.]
    The Chairman. Next, Mr. Michael Colopy from Aristotle 
International, who manages communications for Aristotle.
    And I know you are the first non lawyer, the Wall Street 
Journal noted, to be a general partner in a U.S. law firm. I 
don't know if you're the last, but you're the first.
    Go ahead.

      STATEMENT OF MICHAEL COLOPY, SENIOR VICE PRESIDENT, 
                COMMUNICATIONS, ARISTOTLE, INC.

    Mr. Colopy. Thank you, Mr. Chairman. I just want to add to 
your comment about John Stuart Mill. Your predecessor, and my 
family friend, Bob Drinan, said years ago, referring to how 
some of these debates develop, that policy is often formed by 
the voices that are heard rather than the realities that exist.
    He said, if Rene Descartes were alive today, he wouldn't 
say, ``Cogito ergo sum,'' he would say, ``Dico ergo sum''--``I 
speak, therefore I am.'' And so, reluctantly drawn by that 
dictum, I'm here today.
    The Chairman. My predecessor, Father Drinan, was much more 
adept at Latin than I, I should acknowledge.
    Mr. Colopy. Moving right along, there are so many things 
that, in his day and now, have to be elucidated by these 
hearings, and that is why Aristotle, the company that is the 
leading provider of verification technology for most elected 
officials of the United States, and is also now the industry 
leader in online age and ID verification, insisted that I 
respond to your request and be here today.
    So I'm going to make a few generic remarks, and I want to 
address some things that are said here today and that are put 
about by PR and interested parties in confusing an issue that 
must be seen clearly for policy to be framed in a coherent and 
an effective manner.
    Number one, let's look at what society wants to do, which 
presumably is to do the right thing--protect our most 
vulnerable members, mitigate risk of fraud and abuse and so on.
    And then the second question is, what is the market, what 
is the free enterprise system doing to address these issues?
    Those are two fundamental questions.
    First off, we have to point out the fact that while time 
flies, technology rockets forward, that technologies that were 
discussed in just the last Congress are now almost obsolete.
    I know, for example, that there was a report aired in 
November 2005, which I believe we have, right? Let's take a 
look at it. This is from ``60 Minutes,'' November 2005.
    [A videotape was played.]
    Mr. Colopy. Mr. Chairman, many of the points you made 
resonate with this report, but as I said, that was in November 
of 2005.
    ``60 Minutes'' re-aired it in November of 2006, because 
members here and elsewhere were saying they weren't aware that 
there were any technologies available that could age verify and 
identity verify.
    The court record that was referred to earlier is already 
being noted as an example of judicial opinion that is way 
behind the times.
    Right now, the company that I represent here today, 
Aristotle, and others, are doing tens of millions of high-risk 
verifications all the time. All of the major motion picture 
studios that show R-rated trailers use the verification system 
to keep kids out.
    Tobacco sales. In the State of Virginia, it's on the books 
that you have to have online age verification. We have not had 
a single sale get through the system.
    California has similar rules. So do--
    The Chairman. Internet sales?
    Mr. Colopy. Online Internet sales and marketing.
    So I'd like to point out that, like 120 years ago, there 
was a great cartoon in ``Punch,'' where two wealthy socialites 
are rolling along in a carriage, and on all sides of them are 
vehicles driving by.
    And one fancy lady says to the other, ``They're showoffs. 
They say bold things about what they can do.'' That cartoon 
applies to much of what I hear being said now about online age 
and ID verification.
    I'm not making a bid for gaming in any form. I'm simply 
saying that we have to have an honest and truthful 
representation of what is possible, and that brings me to the 
second part of it.
    What's the market doing? Why does American Express use it? 
Why do 350 major financial institutions use it all the time? 
They're not doing it for their health. They're doing it to 
mitigate risk. They're doing it to make sure they're not sued 
for dealing with underage kids.
    On the question of credit cards, by the way, a very 
important point should be made. The U.S. operations of Visa, 
Master Card, American Express, and others have a prohibition on 
the use of credit cards for verification for a very specific 
reason--that credit cards were in fact sold and distributed to 
many people who are, therefore, underage.
    But there are also other reasons why they do not believe 
that a credit card by itself is a sufficient proxy for age. 
That is a very important point. It's not a sufficient proxy for 
age. It is a system with lots of weaknesses if just the credit 
card is used.
    However, when you use a mix of data, as Nigel Payne 
mentioned here, and as others have said, and you use state-of-
the-art technology, including geo-location, which despite what 
Mr. Schmidt said here today, which was a technologically 
incorrect representation of the technology, you can identify up 
to a very high degree the location of an individual from where 
they are accessing your site.
    I'd like to make another point. Many of these arguments are 
put forward by interested parties who don't want to be 
inconvenienced by child protection. That should not be taken as 
a technological argument. Ours is the leading technology in 
this field, but there are many others.
    None of us have been surveyed by the opponents of this. The 
most definitive paper, by Adam Tier, includes on data, and he 
spurned a request to look at the state-of-the-art of online age 
and ID verification.
    I put that before you when you're listening to these 
dramatic tales about how unreliable these systems are.
    [The prepared statement of Mr. Colopy can be found on page 
49 of the appendix.]
    The Chairman. Thank you. If we get to the questioning now, 
we may have a chance for a couple of rounds.
    I'm struck here, actually. We talked about age, but it does 
seem to me, as I listen to the sad stories of some of the 
younger people who are involved, that we're not talking about 
10 or even 15-year-olds; we're talking about college students. 
So first of all, we ought to be clear that the age verification 
issue seems to me to be secondary, in that the sad tales we've 
heard tend to be young adults.
    And whether age verification is good or not good isn't 
going to resolve the problem of people who are 18 or beyond, 
and then you do get to the philosophical question, do you 
prohibit some adults from doing something because a small 
number of adults are going to abuse it?
    But with regard to age verification, I want to ask Mr. 
Schmidt one question. You said that 20 percent was the failure 
rate, but you then suggested that it would be much higher by 
comparison because you said the FBI statistics are that in 
person failure rates for alcohol and cigarettes are higher than 
25 percent, and therefore it's probably higher online.
    How does that square with your citation of the 20 percent 
figure?
    Mr. Schmidt. Mr. Chairman, the 20 percent number was a 
general number for both cases.
    I think you can make a case very strongly that age and ID 
verification would fail to that level or greater--
    The Chairman. Well, no, I guess--
    Mr. Schmidt.--comparison.
    The Chairman.--no, if it's 25 percent for in person and it 
averages out to 20 percent, online must be below 20 percent, 
because how do you get--if you start with 25 percent and you 
wind up with 20, somebody has to be below 20.
    But I don't want to bog down too much here. I do think 
we're not talking age verification.
    But I want to ask you this, in the figures that you gave, 
you said that it is probably about 25 percent. That's based on 
alcohol and cigarettes.
    Can I ask, do members of the panel think we should ban the 
sale of alcohol and cigarettes online?
    Mr. Schmidt, what would you think the incidence is of 
underage people buying wine or cigarettes online?
    Mr. Schmidt. I'm not aware of any direct research about 
incidents--
    The Chairman. But you would expect it to be well above 20 
percent?
    Mr. Schmidt. Well, it's a little different, because there's 
a delivery of a physical product, that would increase the rates 
of success, that, you know, a bottle a wine or a pack of 
cigarettes that showed up. I would expect--
    The Chairman. You don't think that children--
    Mr. Schmidt.--lower.
    The Chairman. You don't think that 15-year-olds clever 
enough to get by this couldn't find a place to have the mail 
delivered?
    Mr. Schmidt. I would expect it to be lower, probably not 
dramatically lower, but--
    The Chairman. Well, but I do want to make that point, that 
my point is this.
    You know, we have real reasons and reasons that are 
advanced. I think the real reason for this legislation is that 
people don't like gambling, and they don't think other people 
ought to gamble. I think there is a moral disapproval of 
gambling.
    And I don't gamble. For one thing, I have a short attention 
span, and you can't gamble if you're thinking about something 
else. You're going to lose your pants. And that's why I don't 
gamble.
    But I don't do a lot of things, and I certainly do not 
think the world should be restricted to things I like to do.
    But to the extent that it is age, here is the great 
inconsistency. I have had people who were strong advocates of 
this bill, but they're also strong advocates of selling wine 
over the Internet.
    And, you know, it seems to me, just a clear contradiction 
with regard to that, and how people can be for this and talk 
about underage, and continue to support the sale of tobacco and 
wine, just seems to me to show that's not the real reason.
    But let me ask philosophically, because this--and Reverend 
Hogan, and I sympathize and admire--the story you told is of an 
extremely dedicated parent, the lengths you went to to try and 
be supportive and protective of your son.
    But would you, if you could, restrict other forms of legal 
gambling? People can bet on horses. They can go to lotteries. 
And we have certainly had addicts.
    I have been in public life for 40 years. I've heard stories 
of addictions to gambling when we considered a lottery in the 
Massachusetts legislature in the 1970's. People said, ``Don't 
do that, there are addicted gamblers.'' Casinos, we talked 
about casino gambling in Massachusetts. Again, all in-person 
gambling. And so the problem of addiction, a sad problem, 
certainly pre-existed the Internet and continues today.
    Would you personally propose--you said, you know, that 
gambling is evil, or your son said--would you restrict other 
forms of gambling that are now legal in the United States?
    Rev. Hogan. Thank you, Mr. Chairman.
    In 2005, the Media Awareness Network said that 23 percent 
of male students in grades 10 and 11 reported visiting a 
gambling site, so there is a lot of underage gambling going on, 
and I have known families who do that.
    In my own personal life, as some people--personally, 
myself, I would recommend that no one gamble, because--
    The Chairman. So would I, by the way. But the question is, 
there is a difference between what we individually would do and 
what we would recommend to others, and what we would use the 
law enforcement mechanism to enforce.
    Would you, given the prevalence of addiction in other parts 
of gambling, not just you, or the fact of it, would you legally 
ban other forms of gambling that are now legal in the United 
States, non-Internet gambling?
    Rev. Hogan. I was relieved last year when the Congress 
passed the Internet gambling bill, because it reinforced the 
Wire Act of 1961. I was relieved because I knew that my son was 
doing an illegal activity, and yet it seemed like I was 
powerless to stop him from doing it.
    We have a principle, I believe, in the government, that we 
allow the States to decide these questions, and now you're 
trying to make the Federal Government decide the question.
    The Chairman. I guess I would differ with you on this, and 
I understand, and I admire the lengths to which you went to 
work with your son.
    But the argument is not one of federalism, in substance, it 
is if gambling is wrong and that you get into addiction, and I 
guess again, it is--I am not very confident that if you were 
able to ban all Internet gambling, that addictive gambling 
would go away.
    Addictive gambling preceded that, and wouldn't go away, and 
if we ban Internet gambling, or increase the effectiveness of 
the ban on Internet gambling, because there is addiction, then 
I don't understand, again, we let cigarettes and tobacco be 
sold on the Internet.
    Why don't we shut down all forms of gambling? Because it is 
certainly the case that there is a wide range of addiction, 
gambling addiction, other than that.
    But my time has expired. The gentleman from Alabama.
    I'm sorry. I don't mean to--
    Rev. Hogan. I'm sorry. Thank you, Mr. Chairman.
    I'm an American Baptist pastor, and the American Baptist 
denomination has passed a resolution against gambling--
    The Chairman. In all forms, legal gambling?
    Rev. Hogan.--warning people against gambling that really is 
not a profitable aspect of State government.
    I used to be employed by a public school district. Our 
public school district received very little money from the 
State lottery, but the lottery was perceived as the panacea for 
paying for public schools.
    And I just don't see where gambling is a necessary--
    The Chairman. I appreciate the consistency, and I think 
that's an honest and consistent answer.
    But I don't see one for saying, let's restrict Internet 
gambling more, but allow it to go elsewhere.
    The gentleman from Alabama.
    Mr. Bachus. Thank you, Mr. Chairman.
    Mr. Balko, in your testimony, one of the brands that you 
singled out for praise was FullTilt Poker?
    Mr. Balko. Well, it is one of the more reputable poker--
    Mr. Bachus. One of the more reputable firms.
    Have you looked at their Web site?
    Mr. Balko. Yes, I have.
    Mr. Bachus. Did you read--you know, they have the 
biographies of some of the players, and you've seen those, 
haven't you?
    Mr. Balko. I'm familiar with several of the biographies of 
the top poker players, yes.
    Mr. Bachus. Are you familiar with Ross Boatman's biography 
on their Web site?
    Mr. Balko. No, I'm not.
    Mr. Bachus. Let me tell you about him.
    Ross was 10 years old when he played poker for the first 
time. His brother Barney, who is a little older than Ross, was 
playing with some friends, and after much pleading, they let 
him sit in.
    His gambling career really didn't get started until a 
couple of years later, though, when he was 12 years old. Ross 
was too young and didn't have the money to play with those 
guys--I guess they're talking about his 14-year-old brother--
but they let him sit and watch, and he learned plenty.
    I guess the verification system didn't work.
    Mr. Balko. I believe that was well before the age of 
Internet gambling, Congressman.
    Mr. Bachus. Okay. Was it? I wonder why it's still on the 
site today.
    Mr. Balko. Well, I think--well, first of all, if I 
understand the biography correctly, he didn't actually wager, 
he was allowed to sit and watch.
    Mr. Bachus. Oh, just sit and watch. Okay.
    At 18--this is Howard--deferred college for a year, moved 
to New York to pursue his passion.
    He discovered poker. He was immediately hooked. For the 
next 2 years, he played poker relentlessly, clocking 70 to 80 
hours a week. He went home broke 9 nights out of 10. Well, 
they're pretty honest about that.
    Alan attended UCLA where he planned on pursuing an 
engineering degree. While he enjoyed his study, he discovered 
playing poker. Soon, the success he experienced led him to 
leave school and pursue poker full-time. It's a move he hasn't 
regretted. It worked out well for him.
    Mr. Balko. Can I respond, Congressman?
    Mr. Bachus. What?
    Mr. Balko. Can I respond very quickly?
    Mr. Bachus. Yes.
    Mr. Balko. The second part of the question, I guess, all 
occurred after he was 18, and in this country, I think we 
recognize 18 as the age of consent to contract.
    Mr. Bachus. You know, at 18, in every State in the union, 
and I have a letter from attorneys general that I'll introduce 
at this time, where they wrote us last year, illegal Internet 
gambling that he was doing is prohibited in all 50 States.
    I'd like to introduce that for the record.
    The Chairman. Reserving the right to object, I guess.
    Mr. Bachus. Let me--Mr. Kitchen, you process Internet 
gambling payments, your company?
    Mr. Kitchen. We process transactions in all industry 
sectors, yes.
    Mr. Bachus. Okay. So you actually make a lot of money 
processing the payments of these illegal Internet gambling 
sites?
    Mr. Kitchen. We don't process for any illegal companies, 
and I'm not sure that the--
    Mr. Bachus. They're legal companies, and you can--you're 
aware that they're engaging, they're allowing people in the 
United States, where it's illegal--are you aware that it's 
illegal to gamble over the Internet in the--
    Mr. Kitchen. I am aware that companies that we process for 
do not take U.S. bets.
    Mr. Bachus. Okay. Are you aware that the companies that you 
process payments for, that a lot of those payments are people 
who are gambling here in our country?
    Mr. Kitchen. Will you repeat that, please, sir?
    Mr. Bachus. Are you aware that the companies, that some of 
the companies that you're processing their payments, you say 
they're legal. They're legal in the U.K. But are you aware that 
they are gambling sites that are--people in the United States 
are gambling on those sites?
    Mr. Kitchen. The companies that we process for do not take 
bets from U.S. consumers.
    Mr. Bachus. Okay. How about the ones that did before the 
law passed last year?
    Mr. Kitchen. Well, I joined the firm as previously managing 
director--joined before the ban, and at that point my company 
was doing none of that.
    Mr. Bachus. So you don't have any financial interest in any 
of these, in any Internet gambling sites?
    Mr. Kitchen. Absolutely not. We are a processing company, 
and we process transactions--
    Mr. Bachus. And you don't do business with Internet 
gambling sites?
    Mr. Kitchen. We do business with Internet gambling sites 
which are legalized and regulated in the United Kingdom.
    Mr. Bachus. Okay.
    I'd also, Mr. Chairman, like to introduce a letter from the 
National Coalition Against Gambling Expansion, and they 
actually pointed out again, reminded me in their letter of June 
the 6th that it was Mr. Abramoff who lobbied for 10 years 
against the bill we passed last year on Internet gambling.
    I'd like to introduce it for the record.
    The Chairman. Without objection.
    Mr. Bachus. And finally, I'd like to introduce a letter 
which I received last week from the NFL, major league baseball, 
the NBA, the NHL, and the NCAA.
    And I'll say this to all members of the panel. Are you all 
aware that this Congress in 1992 bipartisanly and 
overwhelmingly, with a vote in the Senate of 88 to 5, passed 
the Professional and Amateur Sports Protection Act which 
prohibits Internet gambling of sporting events online? So it 
wasn't actually our bill last year.
    Mr. Kitchen, were you aware of that Act? Are you familiar 
with that Act?
    Mr. Kitchen. I've been asked to comment on the 
effectiveness of regulation of the Internet. I'm not aware of 
the--
    Mr. Bachus. Okay.
    Mr. Kitchen. No, I'm not.
    Mr. Bachus. I'll just--let me introduce this.
    It also points out that--well, their very strong opposition 
to this bill today, which they believe will allow, if passed, 
that sports betting will likely proliferate and the integrity 
of American athletes would be compromised.
    Now, that's the NFL, major league baseball, the NBA, the 
National Hockey League, and the NCAA.
    The Chairman. Was that about steroids?
    Mr. Bachus. I'm sorry?
    The Chairman. Was that about steroids?
    Mr. Bachus. About what?
    The Chairman. Was that about steroids?
    Mr. Bachus. I couldn't hear you.
    The Chairman. Was that about steroids, this letter?
    Mr. Bachus. No, but I'll try to get you a letter on that, 
if you like.
    [Laughter]
    The Chairman. The gentleman from Ohio.
    Mr. LaTourette. Thank you, Mr. Chairman.
    Mr. Chairman, I'm glad that you talked in your questioning 
about it's not just underage, and I think that Mr. Hogan, 
Reverend Hogan's story does point to the fact that it's a 
problem that goes to these people who are maybe away from home 
for the first time.
    And I mean, I probably shouldn't tell this story in public, 
but even though I'm from Ohio, I went to the University of 
Michigan, and the reason that I went to the University of 
Michigan is, at the time, Michigan had a drinking age that was 
18, and Ohio was still 21. It was not a good reason to pick an 
educational path, but I benefitted from my degree.
    But I think Reverend Hogan's story is not unusual, in 
someone being away from home for the first time, with a credit 
card, in a dorm room or apparently even after he loads software 
onto his computer at the library, and you can do it all night.
    And so I appreciate this hearing, and I appreciate your 
principled stance.
    I have enjoyed this hearing, because it's very rare, we 
often have people coming in with different opinions, but unless 
I'm wrong, we now have people have different facts, and have a 
severe disagreement.
    So Mr. Colopy, I understood you, and I think also Mr. 
Kitchen, to talk about effective rates of the, let's take the 
IP locator technology of 99 percent or some such thing, and Mr. 
Schmidt's testimony is a 20 percent failure rate.
    So Mr. Colopy, I'll put it as directly as I can, being from 
the midwest. I mean, you think that Mr. Schmidt is full of 
baloney with his observations?
    Mr. Colopy. I only insist on what the evidence shows. What 
Mr. Schmidt referred to is no evidence; what we do daily is 
evidence.
    You know, arguments and PR have no beta test. Data and 
companies that use them do. They perform or they're not used. 
They're effective or they're not paid for.
    No company takes on age verification, the extra burden of a 
check, unless it has a direct material impact on benefits to 
that company, meaning to their consumers.
    So what I'm talking about are facts, and as I mentioned 
earlier, in the research that's been bandied about about this 
topic, efforts to actually look at real-time online age and 
identity verification were not accepted.
    No one has never asked us for any information on what we do 
that opposes this. That is significant, because public 
relations is often damaged by data.
    What we're talking about is hard data, what's happening 
today, what the marketplace is doing.
    Whether you're liberal, moderate, or conservative, in our 
society, we have this combination of humane principles and a 
market economy.
    In both cases, the movement of the market under those 
humane principles is toward real-time, effective, robust, 
reliable age verification and identity verification.
    Mr. LaTourette. Let me ask, and then I'll go to you, Mr. 
Schmidt.
    I have trouble turning my computer on, so I don't know a 
lot of the different things, but there is something called 
spooling or spoofing, and when Mr. Schmidt was talking about 
using his phone card, in my small world, when we said spoofing, 
when I was growing up, it meant playing a joke on your parents, 
but apparently now it's a computer term.
    Are you indicating that Mr. Schmidt's experience with 
whatever he used, and I'll ask him about that again, where he 
got three different answers on where he was and none of them 
were Boston and Washington, is nothing more than a story that 
he's telling?
    Mr. Colopy. Again, I can't comment on data I haven't seen 
or a fact base that's put before me. I've never seen any of 
that information. In prior events like this, there's been no 
hard data presented.
    The hard data that I see all the time is what the Aristotle 
operation shows.
    Now, the other important point here is that in doing work, 
for example, for the New York State lottery--no offense, Mr. 
Chairman, but we actually assist them in complying with 
agreements they have with other States.
    I don't mean an offense to what you said, but to bring up 
that lottery question again, this is a contentious issue, and 
as the reverend said, people have different views about it.
    But, as an operational matter, which is the only thing I'm 
talking about, as an operational matter, it's fundamentally 
important that the State of New York know that the purchaser of 
that ticket is within the State of New York.
    It's also fundamentally important for banking operations, 
both internationally and nationally, to know where somebody is 
when they're attempting to execute a transaction.
    What was said earlier about how unreliable it is does not 
square with the facts of 2007, but it probably is relevant to 
the facts of 2001.
    I'm suggesting that technology in the service of social 
good in the private sector is here, it's available, it's 
effective, and we should be using it.
    Mr. LaTourette. I appreciate that, and just by way of a 
commercial, I use your software and have never been fined by 
the FSA, so I appreciate it very much.
    Mr.--
    The Chairman. If the gentleman would yield, for a 
representative from Ohio, that's a significant--
    [Laughter]
    Mr. LaTourette. Well, Mr. Schmidt, let me ask you the same 
question, because I listened to your testimony, and I listened 
to your story about the IP locator and your experience.
    And so is it a fair representation that you and Mr. Colopy 
don't agree on this issue, and I guess are you willing to stand 
up for yourself, because basically he says that you have--well, 
I'm not going to put words in his mouth. You heard him.
    So what do you have to say?
    Mr. Schmidt. I believe it was full of baloney.
    Mr. LaTourette. No, no, no, that was my question. He did 
not say you're full of baloney. I asked him if you were full of 
baloney and he would not respond in that kind.
    Mr. Schmidt. First of all, as an Ohioan who went to 
Michigan, I'm having a little trouble over here, as a Buckeye 
myself.
    Mr. LaTourette. I got it.
    Mr. Schmidt. I, in addition, rely on the facts and the 
data, and the leading provider of IP go-location data says that 
their data is 99 percent accurate to the country, 85 percent 
accurate to the city, and 80 percent--I'm sorry--85 percent 
accurate to the State, and 80 percent accurate to the city.
    That's the leading provider, in their own--so in our 
research, and we use, my company uses geo-location data as one 
of many factors to determine information.
    It cannot be solely relied on, because it is unreliable, 
but it is perfectly valid for, you know, one of many factors.
    We found reliability in the 70 to 80 percent range, in 
general. Again, that's from factual operational experience.
    Now, two comments.
    First of all, the experience that I had with the wireless 
card that I mentioned with respect to D.C. and Boston, that was 
with no attempts on my part to actively circumvent the system.
    That's a standard issue piece of technology from the 
carrier, not unlike the technology that's embedded in many 
laptops these days, with no active attempt by the user to 
circumvent it. IP geo-location is absolutely trivial for a user 
to actively circumvent.
    So in addition to its inherent unreliability, with no 
active attempt to subvert the system, it is absolutely trivial 
to subvert through a whole host of technical measures, none of 
which are terribly difficult.
    And moreover, anybody with an engineering and technical 
understanding of how the Internet works would not disagree with 
my statements here. It simply was not designed to allow 
geographic location.
    It was designed to survive failures, it was designed to 
allow, you know, an infinite number of paths between any two 
points, and there are a whole host of reasons why, technically 
and engineering-wise, it is just not reliable technology.
    Mr. LaTourette. Mr. Chairman, I know my light is on. Mr. 
Colopy stuck his hand up, and I think he wants to respond to 
that.
    The Chairman. Go ahead.
    Mr. Colopy. I think it's an important point to make that, 
just like an automobile does not run alone on its transmission 
or on its cylinders, it needs brakes, tailpipe, and the works, 
we're talking about a system that, to be effective as age an 
identity verification, has many component parts.
    These systems, by the way, have several levels of 
tolerance, which are set according to the risk confronted. What 
they call it is, process matched to risk. Therefore, it is a 
complex mix, algorithm if you will, of capabilities that are 
adjusted in the cases in which they are used.
    It is not appropriate to make any general statement about 
all of these cases and give a statistical number without 
looking at the context and the set of data you're talking 
about.
    Again, the data tells the story. The data tells the story 
in the marketplace every day, in the tens of millions, where a 
lot is at risk. That is what we do.
    Mr. LaTourette. Thank you, Mr. Chairman.
    The Chairman. The gentleman from Missouri has joined us.
    Mr. Cleaver. Thank you, Mr. Chairman. I apologize. I had 
another committee hearing.
    Thank you for this meeting on gambling.
    We had a very lively debate last year when we considered 
legislation to address unlawful Internet gambling, and I'm 
always in a struggle with these kinds of issues.
    I served as the Mayor of Kansas City for 8 years, and 
during that 8-year period, we enacted riverboat gaming, which I 
did not support as the Mayor. However, I wasn't elected to 
serve as the pope of Kansas City, so I signed it into law.
    I normally believe that Congress should not be involved in 
any way, shape, or form with regard to regulating morals as a 
policy or as a practice, so I always struggle when these kinds 
of issues surface.
    But where there is a longstanding public policy interest in 
regulating activities that do harm our society, such as illegal 
gambling, then there is an appropriate Federal legislative 
role.
    I'd like to thank all of you for coming. I apologize for 
not hearing your comments, but I do have your comments.
    And Mr. Prideaux--hopefully I pronounced that--
    Mr. Prideaux. Prideaux, in fact.
    Mr. Cleaver. Prideaux--you mentioned that the U.K. is 
starting to regulate online gambling.
    I wonder how many people are gambling on the regulated 
sites versus the ones in countries such as Antigua, that have 
fewer regulations, and is there any data available that the 
U.K.'s experience with regulating has actually reduced the 
problem with regard to gambling behaviors?
    Mr. Prideaux. I wish I had precise data, but the weight of 
evidence essentially is that gamblers are attracted towards 
regulated sites, for a number of reasons.
    The first thing is, that gamblers are attracted towards 
regulated sites because they know that they're going to be 
treated fairly.
    I mean, if you're operating in an underground prohibition 
environment, where there are sites who are not subject to 
regulation, then gamblers have less confidence in the fairness 
of the games that they're being offered, and they have less 
confidence in the payment scheme they're operating. So, there 
is a huge commercial incentive for sites to operate within a 
regulated regime.
    I think it's also the case, Congressman, that there is 
evidence that within a regulated regime, better safeguards can 
be put in place to protect vulnerable people playing on sites.
    And so you do have this kind of self-reinforcing process, 
whereby consumers come to sites that are regulated, and that 
tends to capture, as it were, the overwhelming preponderance of 
the market.
    Mr. Cleaver. Thank you.
    You know, talking about this conflict I have anytime 
something like this comes up, the Bible actually supports 
gambling, which is a bit troubling theologically, but I think, 
Reverend, you would agree that there are some rather bold 
examples of gambling in the Bible. But my struggle continues, 
anyway.
    Mr. Balko, you have an interesting blog, theagitator.com.
    You recently wrote, ``On Friday, I'll be testifying before 
the House Banking Committee in support of Representative Barney 
Frank's bill to repeal the Internet gambling ban. I'll be 
taking the it's-none-of-the government's-damn-business 
position, though I'll probably refrain from using the word 
damn.''
    I've been your surrogate.
    [Laughter]
    Mr. Cleaver. If I read this blog correctly, you understand 
H.R. 2046 to be a bill that will legalize many forms of 
currently illegal gambling and expand the U.S. market for 
Internet gambling.
    Mr. Balko. Yes.
    Mr. Cleaver. Yes. Okay.
    Mr. Balko. Yes.
    Mr. Cleaver. And so the chairman has invited you here to 
testify, so I think that your understanding is instructive.
    By contrast, some persons advocating this bill have claimed 
that it is designed to be a more effective system for enforcing 
U.S. gambling laws.
    If this argument were true, and the net effect of us 
passing this bill would be less Internet gambling, would you 
still support this bill?
    Mr. Balko. I'm not sure that this bill would result in less 
Internet gambling.
    I think, had this bill passed before the Unlawful Internet 
Gambling Act passed, I think you may have been correct, but I 
think what this bill does is it gives Web site operators a path 
to legitimacy and a way to establish legitimacy with consumers, 
and it also allows consumers of Internet gambling sites to have 
a reputable site where they can wager, knowing that their money 
is secure, that they're playing on a fair site, that if 
something does happen, they have some recourse.
    You know, also, the law that was passed last year didn't 
really stop Internet gambling. It put a significant dent in it, 
but it still goes on, and it's still fairly easy to place a 
wager online.
    The difference now is that the companies that are 
facilitating the wagers are less reputable, and there are less 
avenues for recourse if a consumer is defrauded.
    So I think what it's actually done is, like a lot of 
prohibitions, it's forced a lot of this stuff underground, and 
it's removed some of the market regulation, in addition to a 
lot of the government regulations that were in place.
    Mr. Cleaver. Thank you, Mr. Chairman.
    The Chairman. I'm just going to give myself a second round.
    First of all, I'm sorry the ranking member isn't here, 
because I want to take very strong exception to what I think 
was an unusual breach of appropriateness on his part by noting 
that this bill had been opposed, the one that was passed by 
Jack Abramoff. That kind of ``McCarthyite'' guilt by 
association has no place in this discussion. I did note that my 
colleague seemed a little abashed as he was reading it.
    But bad people support good things and good people support 
bad things, and this is a position I've long held, wholly 
unrelated to Mr. Abramoff, and I would not think it would 
behoove members of the Republican Party to start tallying up 
who more often found themselves on the side of Mr Abramoff. 
It's an irrelevancy.
    Mr. Balko.
    Mr. Balko. I'd actually like to respond to that, because 
Mr. Abramoff's name was invoked in the original bill to ban 
Internet gambling by the proponents of the bill several times, 
and in fact, if you look at the bill that Mr. Abramoff was 
pushing, it was actually a prohibition on Internet gambling 
with carveouts for the clients that Mr. Abramoff was 
representing, including State lotteries. That's exactly the 
bill that we have now.
    So Mr. Abramoff actually was pushing for the bill that we 
have--
    The Chairman. Thank you for that correction, and obviously, 
it doesn't affect the merits one way or the other.
    I do want to get back, first of all, I want to say on 
geography, to me that's an irrelevancy.
    Mr. Colopy has inspired me to ``Latinize'' a little bit 
more, and I think one important set of Latin phrases here is 
the distinction between ``mala prohibita'' and ``mala per 
se''--something evil only because it is banned and something 
which is evil in and of itself.
    Gambling to me is clearly ``mala prohibita,'' and underage 
gambling, gambling by 12-year-olds and 13-year-olds, I would 
say was ``per se.'' That's a bad thing.
    Gambling by someone who happens to live in one State rather 
than another is simply because of prohibition, so I would 
distinguish. I am much more concerned about our ability to do 
age distinctions. Geographic distinctions, I cannot understand 
why any rational human being would care whether you put the bet 
down in one State or another.
    And you say what about federalism? We're talking about 
national laws. And again, we have been told over and over again 
by many people that the Internet, after all, doesn't know 
interstate versus intrastate commerce. The Internet is 
transcendent of State boundaries, so I would put aside the 
geographic location. I think that is irrelevant.
    The age one is relevant, but again, I would say, and I just 
want to reiterate as we talk, I think even if we had a 100 
percent foolproof age cut, that opposition to this--the sides 
wouldn't change.
    That is, I believe the motivation for trying to further 
restrict the ability of people to gamble on the Internet is 
based on a moral disapproval of gambling, a fear about 
addiction, but all of the examples we've heard about addiction 
have been from older people, who are of age.
    The last thing I just would want to agree with Mr. Prideaux 
about, and this--my basic motivation here is, I spend a lot of 
time here, as a Member of Congress, trying to protect people 
from other people who would treat them unfairly, certainly 
people who would physically abuse them and steal their 
property, people who would unduly pollute the atmosphere in 
which we all have to live, people who would be economically 
exploitative in ways in which you have to come together.
    I have no energy left to protect people from themselves. 
Adults have to do that without me. And I think once the 
government does that, once we accept the principle that we have 
the right to protect people from things to which they might 
become addicted, our lives would become very much poorer in 
terms of the richness of things we could do.
    I think it is a terrible mistake to say that government has 
an obligation to protect adults from making poor choices in 
matters that affect them.
    And addiction, there are addictions to gambling, there are 
addictions to sex, there are addictions to video games. We've 
heard about kids who spend much too much time on video games, 
or young adults. There are addictions to alcohol, to tobacco.
    We should give people the information with which they can 
be told that this is bad for them. We should--I'm prepared to 
provide funding through various medical programs to recognize 
inability to fight addiction. But banning something because 
adults will misuse it in a minority, when it is not otherwise 
harmful, is a grave error.
    The last thing I would say with regard to Mr. Prideaux, I 
would agree with him that intelligently regulating something 
may--in that it does take away from the illegal site, and the 
best example is, it has been the experience, I believe, in 
Massachusetts, and much elsewhere, 30 years ago, before you had 
State lotteries, what was called the numbers racket was very 
prevalent. People would bet on what number was going to come 
out. Maybe it was a parimutuel handle, etc.
    I know that has substantially diminished. The existence of 
legal lotteries has essentially, in a way that no law 
enforcement and no rules could ever have done, substantially 
diminished the numbers racket in America, because people do 
prefer, most rational people, a legal status.
    And, you know, people can be upset about the State 
treasurers, they can be upset about the State lottery, but I 
know of no State treasurer who has ever broken a kneecap, or 
refused to pay when someone hit it.
    With that, I have no further questions. Does anybody in the 
panel--the gentleman from Ohio.
    Mr. LaTourette. Thank you very much, Mr. Chairman.
    Just a piece of housekeeping.
    The ranking member has asked that I ask unanimous consent 
to submit a letter dated today to you and he from Focus on the 
Family, and I would ask that it be included in the record.
    The Chairman. It's a letter to me from Focus on the Family? 
I will treasure that. I get so few of them.
    [Laughter]
    The Chairman. I thank you. I thank the gentleman.
    Mr. LaTourette. It is, in fact, addressed to you and to Mr. 
Bachus.
    The Chairman. Could I just ask the gentleman, is it signed, 
``Yours truly,'' or ``With great affection?''
    Mr. LaTourette. Let me just see.
    The Chairman. What is that?
    Mr. LaTourette. ``Sincerely.''
    The Chairman. Oh. Well, all right. That's good.
    Mr. LaTourette. If we're doing a second round, does that 
mean I can have 5 minutes?
    The Chairman. Yes. But let me recognize the gentlewoman 
from Indiana first.
    Mr. LaTourette. Okay.
    The Chairman. And then I'll give the gentleman a second 
round. She came in afterwards. The gentlewoman from Indiana.
    Ms. Carson. Thank you very much, Mr. Chairman, and members 
of the committee.
    I come from Indianapolis, Indiana, probably the State that 
has more gambling casinos than any other State in the United 
States.
    I have a question in terms of consistency.
    The race, the Kentucky Derby held in Louisville, Kentucky, 
you could bet on it from anywhere in Indiana, by computer.
    According to the question, what's the difference between 
Internet gambling and being able to gamble on the horses?
    Could one of you refined gentlemen answer that question for 
me, please?
    You're not going to answer?
    Mr. Kitchen. I'm not sure there is a difference.
    Ms. Carson. I'm not, either. That's why I'm confused.
    [Laughter]
    Mr. Kitchen. I think we all are.
    Rev. Hogan. Madam Congresswoman, to me, as the chairman 
said to me, last November in Ohio, we had an issue on the 
ballot which basically would allow slot machines in Ohio. The 
vast majority of Ohioans said no to that.
    And the vast majority of Ohioans also said yes to the 
election of Mr. Brown to the Senate, which gives your party--
helps them quite a bit to have a majority in the Senate.
    Ms. Carson. How do you know what party I'm with?
    Rev. Hogan. You're on that side of the room.
    [Laughter]
    Rev. Hogan. But coming down to this issue, I think the 
issue of this bill is that in Ohio, we said no, but West 
Virginia said yes, and I have friends who drive down to West 
Virginia. I don't think we should put roadblocks over the West 
Virginia border saying you can't go play slot machines in West 
Virginia.
    But the issue is, with the Internet gambling, the situation 
has been, we do not want to see bets put across State lines. I 
know that they made an exception for horse racing, and now 
we're not going to discuss the wisdom in that, but still, right 
now, we're actually expanding that, so why should we have more 
of it?
    And the issue is now it is illegal, it has been illegal 
since 1961 before Al Gore invented the Internet, and it's going 
to--and we want to continue to keep it at that standing there.
    So that's why I'm saying, I would love to see every 
individual locality continue being consistent, the Federal 
Government being consistent, and allowing the locals to decide 
what they want to do, and we've all said Internet gambling is 
illegal in all 50 States, or at least the majority of them.
    Thank you.
    Ms. Carson. Thank you.
    I know I have heard objections to this for family reasons, 
because they feel like they'll gamble all their money before 
they bring the paycheck home to their spouses, but they do that 
now. It doesn't require Internet gambling to make some 
irresponsible person not accommodate his or her 
responsibilities first for the family.
    But I'm still confused on how you can bet at a racetrack--
you go up, they put your numbers in by computer, give you a 
receipt, and in this situation, beginning with this 
legislation, you can do it over the Internet, either by credit 
card or whatever kind of card you use.
    And I guess the bottom line, and I don't want to belabor 
the point, is why are we debating this? People gamble because 
they want to gamble.
    As long as it's consensual adults gambling, whether they're 
being responsible or not responsible--wouldn't it be wonderful 
if we could legislate responsibility among human beings of age? 
We can't do it.
    So while I think I voted for restrictions the last time--
and I don't feel hypocritical, either--I just think more time 
has passed, and you understand better what it is that you're 
trying to do.
    We have changed a lot of laws, reversed a lot, and I don't 
know what the chairman is going to do with this one, but if he 
wants to repeal what we did, I'm going to vote to repeal it, 
because it just doesn't make any sense, to me. But I'm not the 
brightest star in the galaxy, either, so I have to have some 
help.
    I've enjoyed the testimony. Believe it or not, I've read 
it. And I thank you very much.
    The Chairman. I thank the gentlewoman for her support, and 
I would caution the witnesses, if they haven't already figured 
this out, that it is when the gentlewoman from Indiana is at 
her most self-deprecatory, that I would be very careful, if I 
were you.
    [Laughter]
    The Chairman. The gentleman from Ohio.
    Mr. LaTourette. Thank you very much, Mr. Chairman.
    And Reverend, most of the folks who live in the northern 
part of the district where I am, in Lake County, go to Niagara 
Falls instead of West Virginia, but now they can't get 
passports, so there will probably be more of them going down to 
West Virginia.
    And I want to associate myself with the remarks of the 
chairman on Mr. Abramoff. A lot of the stuff that goes around 
reminds me of gang reporting, the way they used to in the 
1920's and the 1930's, and I really think it's disgusting, and 
as I said on the Floor the other night, even though I didn't 
get a lot of converts to join me, I really think that we're 
engaged in a race to the bottom on some of these things. People 
who do bad things should be punished, and they have.
    But Mr. Prideaux, I want to focus on Page 8 of your 
testimony, and get to the compulsive gambler. I think we've 
talked about the technology, we've talked about the underage 
problem, but the compulsive person.
    And you talk about velocity controls, and maybe somebody 
else talked about velocity controls.
    I know, even though it pisses me off, sometimes I go to an 
ATM and it only lets me take out $200 of my own money, then 
charges me $2.50 for the privilege of giving me my own money 
back, but they won't give me $300, they'll give me $200.
    And so it seems to me that may be a way to deal with the 
compulsion problem, and I'm not aware of any constitutional 
right to be able to not only bet online, but bet a lot of money 
online.
    Can you describe for me what you mean about the velocity 
controls and how that's utilized in your experience relative to 
online gambling?
    Mr. Prideaux. Yes. Thank you, Congressman.
    In essence, though, I mean, if I could just interpret your 
question a little broadly, and talk about velocity controls in 
general--and clearly, some can be applied by the payment 
scheme, I think as you have said, particularly for credit 
cards, where gaming transactions are considered quasi-cash.
    The risk profile that issuers take is to not extend the 
whole of a credit line for quasi-cash style transactions, and 
certainly that's one mechanism as far as the payment scheme 
that can operate, that can provide some safeguards to the 
problem of compulsive gambling.
    At the same time, I mentioned in my testimony that there 
was a multi-layered approach from this. I think there are a 
number of other important aspects to talk about.
    The first one, of course, is that of the operator 
themselves acting in their self-interest, and the majority of 
reputable regulated sites will establish limits for new players 
to the extent that they can play, and indeed, they will also 
make available to players the ability for that individual to 
self-limit, a sort of a cooling off period.
    And of course, the regulators themselves, if they felt it 
was appropriate, could enforce some of these mechanisms.
    I think the point that I want to make is that we talked 
about how the Internet was transforming businesses, and clearly 
it transforms the Internet. And they also have access based 
controls, being substituted by these controls here, to address 
compulsive gambling.
    None of the features that I've described have really been 
available in the face-to-face gaming environment. This is a 
good example of a place where the problem of compulsive 
gambling which exists today can be better controlled in a 
regulated environment for Internet gambling as opposed to 
gambling in the face-to-face environment.
    Mr. LaTourette. Thank you.
    And just my last question relative to the bill that the 
chairman has put forward, I understood from your testimony that 
in the United Kingdom, the Gambling Commission regulates the 
gambling activities, while the Financial Services Authority has 
no particular responsibility for gambling.
    As I understand the chairman's bill, the Treasury 
Department takes responsibility for the financial transactions, 
which it obviously knows, but it doesn't know much about 
gambling, I would assume.
    Have you looked at the chairman's bill, and have you had 
the chance to compare his proposed regulatory scheme to the one 
that exists in the United Kingdom that you are familiar with?
    Mr. Prideaux. I must profess that I'm not an expert in the 
regulatory apparatus of the United States, but to the extent 
that I have looked at the bill, it does seem to me that the 
same twin regulatory structures of the financial system on the 
one hand and of the gambling perspective on the other do seem 
to be features of the chairman's bill.
    Mr. LaTourette. Thank you very much.
    Thank you, Mr. Chairman.
    The Chairman. If the gentleman would yield--because there 
was a concern raised when the bill was passed about money 
laundering, terrorism, etc. That's why we did assign the FinCen 
operation there.
    I thank the members for participating on a Friday. Frankly, 
I like Friday hearings. The fewer members you have, the more 
you can get in.
    I thank the witnesses. It is a topic on which reasonable 
people can differ. I think, on the whole, we have done that 
today.
    Before we adjourn, I am going to ask for a blanket 
unanimous consent to insert various statements into the record. 
I have one from our colleague, Congresswoman Berkeley, from the 
United Methodist Church, and one from the National Coalition on 
Gaming, basically agreeing with the point Mr. Prideaux made 
about how to do this, and I know that on the Republican side, 
there are also a number of statements, o we'll get unanimous 
consent to put those statements into the record.
    And with that, the hearing is adjourned.
    [Whereupon, at 12:02 p.m., the hearing was adjourned.]


                            A P P E N D I X



                              June 8, 2007

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