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




                               BEFORE THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION


                           NOVEMBER 14, 2007


                           Serial No. 110-116


         Printed for the use of the Committee on the Judiciary

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

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                       COMMITTEE ON THE JUDICIARY

                 JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California         LAMAR SMITH, Texas
RICK BOUCHER, Virginia               F. JAMES SENSENBRENNER, Jr., 
JERROLD NADLER, New York                 Wisconsin
ROBERT C. (BOBBY) SCOTT, Virginia    HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina       ELTON GALLEGLY, California
ZOE LOFGREN, California              BOB GOODLATTE, Virginia
MAXINE WATERS, California            DANIEL E. LUNGREN, California
ROBERT WEXLER, Florida               RIC KELLER, Florida
LINDA T. SANCHEZ, California         DARRELL ISSA, California
STEVE COHEN, Tennessee               MIKE PENCE, Indiana
HANK JOHNSON, Georgia                J. RANDY FORBES, Virginia
BETTY SUTTON, Ohio                   STEVE KING, Iowa
LUIS V. GUTIERREZ, Illinois          TOM FEENEY, Florida
BRAD SHERMAN, California             TRENT FRANKS, Arizona
TAMMY BALDWIN, Wisconsin             LOUIE GOHMERT, Texas
ANTHONY D. WEINER, New York          JIM JORDAN, Ohio
ADAM B. SCHIFF, California

            Perry Apelbaum, Staff Director and Chief Counsel
                 Joseph Gibson, Minority Chief Counsel

                            C O N T E N T S


                           NOVEMBER 14, 2007


                           OPENING STATEMENT

The Honorable John Conyers, Jr., a Representative in Congress 
  from the State of Michigan, and Chairman, Committee on the 
  Judiciary......................................................     1
The Honorable Lamar Smith, a Representative in Congress from the 
  State of Texas, and Ranking Member, Committee on the Judiciary.     2


The Honorable Shelley Berkley, a Representative in Congress from 
  the State of Nevada
  Oral Testimony.................................................     3
  Prepared Statement.............................................     5
The Honorable Bob Goodlatte, a Representative in Congress from 
  the State of Virginia
  Oral Testimony.................................................     6
  Prepared Statement.............................................     8
The Honorable Catherine L. Hanaway, United States Attorney, 
  Eastern District of Missouri, U.S. Department of Justice
  Oral Testimony.................................................    10
  Prepared Statement.............................................    13
The Honorable Valerie Abend, Deputy Assistant Secretary, Critical 
  Infrastructure Protection and Compliance Policy, U.S. 
  Department of the Treasury
  Oral Testimony.................................................    19
  Prepared Statement.............................................    21
Mr. Joseph H. H. Weiler, Professor and Director, Jean Monnet 
  Center for International and Regional Economic Law & Justice, 
  New York University School of Law
  Oral Testimony.................................................    23
  Prepared Statement.............................................    25
Ms. Annie Duke, on behalf of The Poker Players Alliance, Los 
  Angeles, CA
  Oral Testimony.................................................    33
  Prepared Statement.............................................    36
Mr. Thomas E. McClusky, Vice President of Government Affairs, 
  Family Research Council
  Oral Testimony.................................................    46
  Prepared Statement.............................................    48
Mr. Michael Colopy, Vice President for Communications, Aristotle, 
  Oral Testimony.................................................    50
  Prepared Statement.............................................    51


Prepared Statement of the Honorable John Conyers, Jr., a 
  Representative in Congress from the State of Michigan, and 
  Chairman, Committee on the Judiciary...........................     1
Material submitted by the Honorable Bob Goodlatte, a 
  Representative in Congress from the State of Virginia
  Letter from the National Association of Attorneys General, 
    dated March 21, 2006.........................................    81
  Letter from the Honorable Douglas Gansler, Maryland State 
    Attorney General, and the Honorable Bill McCollum, Florida 
    State Attorney General, dated September 28, 2007.............    86
  Letters from the National Basketball Association, the National 
    Collegiate Athletic Association, the National Hockey League, 
    Major Leage Baseball, and the National Football League, dated 
    May 31, 2007.................................................    88

               Material Submitted for the Hearing Record

Prepared Statement of the Honorable Jim McDermott, a 
  Representative in Congress, from the State of Washington.......    93
Letter from the Honorable Mitchell E. Daniels, Jr., Governor, 
  State of Indiana, dated November 9, 2007.......................    95
Prepared Statement of the Honorable L. Errol Cort, Minister of 
  Finance and the Economy, Government of Antigua and Barbuda.....    97
Prepared Statement of Craig Pouncey, Partner, Herbert Smith LLP 
  (Brussels).....................................................   100
Prepared Statement of John Lyons, Group Security Advisor, UC 
  Group..........................................................   105
Prepared Statement of Naotaka Matsukata, Ph.D., Senior Policy 
  Advisor, Alston & Bird, LLP....................................   110
Prepared Statement of I. Nelson Rose, Professor of Law, Whittier 
  Law School.....................................................   113
Prepared Statement of Richard Winning, President, the American 
  Greyhound Track Operators Association..........................   115
Prepared Statement of Steve Lipscomb, Chief Executive Officer, 
  President and Founder, WPT Enterprises, Inc....................   119
Prepared Statement of Harlan W. Goodson, President, Interactive 
  Skill Games Association........................................   120



                      WEDNESDAY, NOVEMBER 14, 2007

                          House of Representatives,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:09 a.m., in 
Room 2141, Rayburn House Office Building, the Honorable John 
Conyers, Jr. (Chairman of the Committee) presiding.
    Present: Representatives Conyers, Berman, Scott, Jackson 
Lee, Wexler, Cohen, Sherman, Baldwin, Ellison, Smith, Coble, 
Goodlatte, Chabot, Issa, Feeney, Franks, and Gohmert.
    Staff present: Gregory Barnes, Majority Counsel; Michael 
Volkov, Minority Counsel; and Teresa Vest, Chief Clerk.
    Mr. Conyers. Good morning, all. Let us begin the hearing. 
We have the dazzling diva of Las Vegas as a congressional 
witness, and then our ordinary Member from Virginia, Bob 
Goodlatte, former chairman of Agriculture and long-time serving 
Member of Judiciary.
    We welcome you both here, and we want to have you set the 
tone for us. The only thing I want to say before yielding to 
Mr. Smith is that we have a dilemma here. Gambling is a social 
evil, but the enforcement of it is sort of selectively picked 
and chosen. We have loopholes in the current system. There are 
people now beginning to talk about regulating, rather than 
banning. We have concerns about the rights of States over the 
Federal system, which we will hear about.
    They are telling us that some games are so much skill and 
so little chance that they shouldn't even be called gambling, 
per se. The only people not organized to my knowledge, Ranking 
Member Smith, are the crap-shooters, the guys that roll the 
dice. They don't have an association. They don't have anybody 
speaking up for them. They don't have lobbyists. So maybe, I 
hope I am not encouraging them to do something about it.
    But it is a pleasure to have our colleagues here. I am 
going to put my written statement in the record and yield to 
Lamar Smith.
    [The prepared statement of Chairman Conyers follows:]
Prepared Statement of the Honorable John Conyers, Jr., a Representative 
in Congress from the State of Michigan, and Chairman, Committee on the 
    Today's hearing is on the Internet and the need to establish 
consistent enforcement policies in the context of online wagers.
    At last count, federal prosecutors had at least six major federal 
laws at their disposal to go after and prosecute unlawful gaming 
activities. These laws include: the Wire Act, the Travel Act, RICO, the 
general prohibition against money laundering, the ban on illicit 
gambling operations, and the recently enacted ``Unlawful Internet 
Gambling Enforcement Act of 2006.'' Yet, despite such far reaching 
tools, questions still persist in the area of online gambling.
    Namely, we find ourselves questioning the selective nature of the 
federal government's enforcement efforts, to date. Indeed, for several 
years now, members of this Committee have heard repeated claims that 
the Wire Act prohibits several forms of online gambling, but we fail to 
see it enforced in the context of interstate bets connected to 
    Second, questions continue to persist as to whether the current 
approach establishes a workable framework, in terms of preventing 
unlawful gambling from occurring. Just last year, as previously 
mentioned, Congress passed the Unlawful Internet Gambling Enforcement 
Act of 2006. And, at the time of the bill's passage, proponents of the 
measure claimed that the legislation was absolutely necessary to 
``bring an end to unlawful online gaming once and for all.''
    A few days ago, however, we got a chance to review the Treasury 
Department's proposed implementing regulations. And, the proposed 
regulations make clear that many forms of online gambling will continue 
to proceed unfettered, despite the new set of regulations. To make 
matters worse, there's strong evidence that the new regulations will 
prohibit certain activities that are perfectly legal.
    The final question confronting us today relates to the viability of 
any ban given the nature of the internet and the infrastructure it 
uses. Admittedly, our track record thus far on this topic hasn't been 
too successful. In fact, our latest approach not only threatens 
legitimate businesses; it also poses substantial problems for the 
intellectual property community, as witnessed by the latest proceedings 
taking place before the World Trade Organization. Not to mention the 
fact that the current approach does very little to prevent underage 
gambling or thwart possible acts of money laundering.
    Continuing with the same old failed policies for the sake of feel 
good politics doesn't make sense. We can do better. We must do better.

    Mr. Smith. Thank you, Mr. Chairman.
    I do want to thank you for holding today's hearing because 
I think Internet gambling is a very important subject. And also 
at the outset, I want to commend my colleague, Congressman Bob 
Goodlatte, who is with us today, for his commitment to this 
issue. He has worked for years on the problem of Internet 
    The dangers of Internet gambling are well known. According 
to law enforcement officials, Internet gambling sites are often 
fronts for money laundering, drug trafficking, and criminal 
organizations. Furthermore, these sites evade gambling 
regulations that restrict gambling by minors, protect chronic 
gamblers, and ensure the integrity of the games. Young people 
and compulsive gamblers are particularly vulnerable.
    The characteristics of Internet gambling are unique. Online 
players can gamble 24 hours a day from home. Children may play 
without age verification, and betting with a credit card can 
lead to addiction, bankruptcy, and crime. Just over a year ago, 
Congress enacted the Unlawful Internet Gambling Enforcement 
Act. The act prohibits the acceptance of financial payments for 
unlawful Internet gambling. The law has, in fact, had its 
intended effect. It has reduced the availability of Internet 
    Many of the major players in the industry, such as publicly 
traded companies in the United Kingdom, have stopped their U.S. 
operations. For example, the Financial Times reported that 
PartyGaming quit the United States market entirely. The act has 
reduced gambling by young people. A recent study conducted by 
the National Annenberg Survey Center found that weekly use of 
the Internet for gambling among college-age youth declined from 
5.8 percent in 2006 to 1.5 percent in 2007. For college-age 
males, monthly Internet gambling dropped from 8.9 percent to 
only 2.9 percent.
    Even with these obvious benefits, media reports show that 
major Internet gambling companies are seeking to undo the 
prohibition against Internet gambling. Legislation has been 
introduced to legalize, tax, and regulate Internet gambling. 
Turning back the clock to permit Internet gambling will only 
encourage the problems we hope to avoid.
    At today's hearing, I am especially interested in learning 
more about the Treasury and Justice Departments' current 
enforcement efforts and their need for additional authorities 
or resources to tackle the problem of Internet gambling.
    Mr. Chairman, I yield back the balance of my time. Also, I 
certainly agree with you. I think we can eliminate going after 
the dice-throwers. [Laughter.]
    Mr. Conyers. Thank you very much, Mr. Smith.
    Bob Wexler is dying to make a statement, but I am not going 
to let him do it. I will recognize him first, though, when we 
begin our witnesses, or begin our Members' asking questions. 
Chairman Scott has graciously agreed to let you go first.
    We turn now to Shelley Berkley herself--fifth term, Ways 
and Means, Veterans Affairs. If anyone has been in or out of 
the state of Nevada and not seen Shelley Berkley, then 
something was wrong with their schedule. We are happy to have 
her begin this discussion. As Lamar Smith said, there are at 
least five laws on the books federally--RICO, Wire, money 
laundering. There is another one coming down the pike. So let 
us find out what the state of play is and we are welcome to 
have Ms. Berkley with us this morning.


    Ms. Berkley. Thank you very much, Mr. Chairman. I 
appreciate the opportunity to testify before the Committee 
today on the issue of Internet gaming. As you can certainly 
attest, Mr. Chairman, I have been requesting a hearing on this 
topic for some time. As Las Vegas' representative in Congress, 
and as the only Member of this body that has worked in the 
gaming industry, I feel I can offer the Committee an important 
perspective on this ongoing debate.
    I think the use of the word ``consistent'' in the title of 
today's hearing helps highlight the absurdity of the current 
situation with respect to Internet gaming. A combination of 
outdated laws, selective enforcement by the Justice Department, 
and an intentional lack of clarity by Congress resulted in a 
confusing environment for those law-abiding Americans who want 
to wager online, and that was before enactment of last year's 
Unlawful Internet Gambling Enforcement Act.
    The law actually made things worse by targeting the 
financial sector and creating a hypocritical carve-out for 
horseracing. Now, I don't know how those who say they are 
protecting the morals of their fellow Americans by prohibiting 
legal online betting can reconcile that with their equal 
enthusiasm to protect online horserace betting.
    After the vote last year, in which the ban on Internet 
gaming was sneaked into the Port Security bill, which was a 
must-pass bill, the horserace industry reps declared that this 
ban on online gaming was the biggest boon to their industry 
ever. If the Committee would like me to submit the direct 
quotes, I would be glad to do so.
    Although some Internet gaming executives have been arrested 
and reputable operators have stopped doing business in the 
United States, an estimated 10 million Americans are still 
wagering online on poker alone, and Mr. Smith, if you think for 
a minute that the kids on the college campuses and the 
dormitories aren't betting online, you need to go visit some of 
them. They all are.
    Americans are still wagering online even with this ban, and 
they are doing so without the benefit of protections afforded 
by Federal regulatory oversight.
    Mr. Smith. Since you mentioned my name, let me respond. 
Yes, I know they are, but my point was, and the figures that I 
cited, shows how dramatically they have dropped as a result of 
last year's bill.
    Ms. Berkley. I would challenge that assertion.
    In this era of global economy, this situation has only 
caused consternation among our closest trading partners. The 
WTO has ruled that our laws banning Internet gaming unfairly 
discriminate, and now the U.S. is on the hook for what could be 
a substantial penalty.
    The Bush administration responded to this embarrassing 
defeat in the WTO by seeking to withdraw any gambling-related 
service from our WTO commitments, opening us up to further 
liability in the form of compensation to the EU, Australia, 
Japan, and other allies. This is the trade equivalent of taking 
our ball and going home, and sets a dangerous precedent for 
other nations. You can be sure that if China one day decides 
that it shouldn't have to comply with its WTO obligations, we 
will be the first to object.
    So where do we go from here? I applaud this Committee for 
attempting to lay the groundwork for a legislative solution 
that ideally would legalize online gaming, subject it to some 
sort of regulation, and protect underage and problem gamblers. 
There are several pieces of legislation pending--Mr. Wexler's 
poker carve-out, Mr. Frank's financial instruments bill.
    I have also introduced legislation calling for a 1-year 
study by the National Research Council on this issue, something 
that should have been done before we went forward with last 
year's ban. I can't imagine why anybody would be opposed to 
actually having a congressionally authorized full-fledged study 
to determine whether or not the assertions that are made by the 
anti-Internet gaming people are true, or if they are not.
    I encourage the Committee to consider my bill so that we 
can have the unbiased information we need to make informed 
decisions on what is a very complicated topic.
    Now, may I say I grew up in Las Vegas. If you go to the 
grocery store for a container of milk, there are slot machines. 
If you want to take your kids to a movie, you go into a casino. 
That is where our movies are located. If you want to go 
bowling, if you belong to a bowling league, all the bowling 
alleys are in the casinos.
    If you want to go take your family for Sunday brunch after 
church, you go into a casino and you have brunch in the casino. 
I have been exposed to casinos and gambling my entire life. I 
have neither an interest in gambling nor do I have an 
    For those that claim that they are worried about problems 
gambling and underage gaming, there is technology available to 
identify these people and prevent them from betting online. 
There are 28 million self-identified poker players who want to 
play and bet online. They are adults who as American citizens 
have a right to play poker, a game of skill, in the privacy of 
their own homes on their own computers.
    There is a limit to how much government can interfere with 
our fellow citizens' rights to participate in a recreational 
activity of their choice. As far as addiction is concerned, 
there are far more people addicted to shopping online than 
gambling online. Unless Congress is going to ban Internet 
shopping, we better think long and hard about prohibiting 
people from Internet gaming because that is an area that 
government has no business intruding into.
    I urge this Committee to move forward with my study bill. 
Let us get the facts. Mr. Chairman, you mentioned that gambling 
in your opening remarks is a social evil. I respectfully would 
disagree with you. I grew up in Las Vegas. My father was a 
waiter when I was growing up. On a waiter's salary in Las 
Vegas, he put a roof over our head, food on the table, clothes 
on our backs, and two daughters through college and law school. 
Not so bad on a waiter's salary. The reason that was possible 
was because we have a strong economy fueled by the gaming 
industry. I don't see a social evil there.
    With that, I yield back the balance of my time.
    [The prepared statement of Ms. Berkley follows:]
 Prepared Statement of the Honorable Shelley Berkley, a Representative 
                  in Congress from the State of Nevada
    Thank you Mr. Chairman. I appreciate the opportunity to testify 
before the committee today on the issue of Internet gaming. As you can 
attest, Mr. Chairman, I have been agitating for a hearing on this topic 
for some time. As Las Vegas' representative in Congress, and as the 
only member of this body with actual gaming experience, I feel I can 
offer the committee an important perspective on this ongoing debate.
    I think the use of the word ``consistent'' in the title of today's 
hearing helps highlight the absurdity of the current situation with 
respect to Internet gaming. A combination of outdated laws, selective 
enforcement by the Justice Department, and an intentional lack of 
clarity by Congress resulted in a confusing environment for those law-
abiding Americans who want to wager online, and that was before 
enactment of last year's so-called Unlawful Internet Gambling 
Enforcement Act. The UIGEA actually made things even more confusing by 
targeting the financial sector rather than gamblers, and further 
memorializing the carve-out for horseracing. Although some Internet 
gaming executives have been arrested and some of the more reputable 
operators have stopped doing business in the U.S., an estimated 10 
million Americans are still wagering online on poker alone, and they 
are doing so without the benefit of the protections afforded by 
effective regulatory oversight.
    In this era of the global economy, this situation has also caused 
consternation among our closest trading partners who have been shut out 
of a potentially lucrative market. The WTO has ruled that our laws 
unfairly discriminate against Antigua, and now we're on the hook for 
what could be a substantial penalty. The Bush administration responded 
to this embarrassing defeat by seeking to withdraw any gambling-related 
service from our WTO commitments, opening us up to further liability in 
the form of compensation to the EU, Australia, Japan, and other allies. 
This is the trade equivalent of taking our ball and going home, and 
sets a dangerous precedent for other nations. You can be sure that if 
China one day decides that it shouldn't have to comply with its WTO 
obligations, we will be the first to object.
    So where do we go from here? I applaud this committee for 
attempting to lay the groundwork for a legislative solution that 
ideally would legalize online gaming, subject it to some sort of 
regulation, and protect underage and problem gamblers. While this 
debate continues, I have introduced legislation calling for a one-year 
study by the National Research Council on these very issues, something 
that should have been done before we went forward with last year's ban. 
I encourage the committee to consider my bill so that we can have the 
unbiased information we need to make informed decisions on what is a 
very complicated topic.
    Thank you again for holding this hearing.

    Mr. Conyers. Thank you. We on the Committee feel we got off 
light, Shelley, this morning. [Laughter.]
    You are very kind and understanding of our approach to this 
matter. We do remember, though, and know that you are not 
ordinary. You are quite special. So I am not quite sure if we 
can use your experience as the prototypical model that we would 
emulate. But I am glad that you represent in person the fact 
that you can grow up around gaming or gambling and that it can 
reap very good results. I thank you for that.
    Bob Goodlatte is a Member of this Committee in his eighth 
term. He has divided his career between Judiciary and 
Agriculture. He has been the Chairman of that latter Committee. 
He is one of our experts in particular areas in the Judiciary 
Committee. We welcome him to come before the Committee at this 
time. Of course, we will include all the statements of our 
guest Members of Congress and Members of the Committee in the 
    Welcome, Bob.


    Mr. Goodlatte. Thank you, Mr. Chairman. I appreciate your 
inviting me to testify on this important issue. It is a 
pleasure to be here with my colleague from Las Vegas, Ms. 
    Let me start by saying that I concur with your observation 
about the social ills of gambling. Contrary to what many in the 
gambling community would lead you to believe, gambling is not a 
victimless activity. In fact, the negative consequences of 
online gambling can be more detrimental to the families and 
communities of addictive gamblers than if a bricks-and-mortar 
casino was built right next door or in your community like Las 
Vegas, because Las Vegas and other communities like that have 
an organized regulatory structure that the Internet is not 
suited for.
    Sadly, I have even been contacted by a constituent in my 
district whose son fell prey to an Internet gambling addiction. 
Faced with insurmountable debt from Internet gambling, he took 
his own life. Unfortunately, financial ruin and tragedy are not 
uncommon among online bettors.
    We are all familiar with the Lehigh University student body 
president who last year was arrested for armed robbery to pay 
an Internet gambling debt. We are aware of the family problems, 
the youth gambling problems, the addictive gambling problems, 
the organized crime problems, the bankruptcy problems that 
occur with gambling.
    Traditionally, States have had the authority to permit or 
prohibit gambling that occurs wholly within their borders. 
Indeed, State gambling laws vary greatly, with states like 
Nevada, represented by Ms. Berkley, that allow and regulate 
almost every form of gambling. The neighboring state of Utah 
bans every form of gambling.
    With the development of the Internet, however, State 
prohibitions and regulations governing gambling have become 
increasingly hard to enforce as electronic communications, and 
thus illegal bets and wagers, move freely across borders. 
Congress has acted to help enforce State laws before.
    In 1961, Congress passed the Federal Wire Act which cracked 
down on illegal gambling operations that were using telephone 
lines to communicate bets and wagers across State lines in 
violation of State law. Today the Internet and wireless 
technologies are the preferred method of communicating illegal 
bets and wagers across State lines and we need to make sure the 
law also contemplates Internet transactions.
    While the Department of Justice continues to state publicly 
that the Wire Act covers Internet technologies and also covers 
all forms of gambling, it has also welcomed legislation to 
clarify these provisions. Virtually all State law enforcement 
agencies support Federal laws to give teeth to their gambling 
laws. Last Congress, 48 of the 50 State attorneys general 
signed a letter to Congress calling for legislation to combat 
Internet gambling.
    In order to provide more tools to law enforcement, the 
House of Representatives passed H.R. 4411 last Congress by an 
overwhelming bipartisan vote of 317 to 93. This legislation was 
perhaps the strongest legislation prohibiting Internet gambling 
that has been considered on the House floor in the past few 
decades. It contained important provisions to update and 
clarify the Wire Act, as well as a new tool to require 
financial transaction providers to block payments of illegal 
bets and wagers.
    Contrary to the assertions of some that there was no public 
debate on this bill, this legislation was the subject of 
hearings and markups in the Judiciary and Financial Services 
Committees, as well as a robust debate on the House floor. 
Ultimately, only the portion of the bill blocking illegal 
Internet gambling payments was signed into law. In keeping with 
previous laws, the new law only applies to transactions that 
violate State and Federal gambling laws, thus continuing to 
leave the decision of whether to allow or prohibit gambling 
primarily to the States.
    While it was only one piece of the broader House-passed 
bill, this new law, coupled with stepped-up enforcement actions 
by the Department of Justice, has already proven extremely 
effective. A new study by the Annenberg Public Policy Center, 
cited by the Ranking Member, Mr. Smith, shows that card playing 
for money among college-age youth has declined from 16.3% in 
2006 to 4.4% in 2007. The same study shows that weekly use of 
the Internet for gambling among the same age bracket has 
declined from 5.8% in 2006 to 1.5% in 2007.
    Perhaps even more promising is the fact that problem 
gambling symptoms have declined since last year. Among males 
ages 18 to 22, those who reported some type of gambling on a 
weekly basis and who also reported at least one symptom of 
problem gambling dropped from 20.4% in 2006 to 5.9% in 2007.
    This has been aided significantly by recent significant 
prosecutions by the Department of Justice, most notably some of 
the publicly traded online gambling interests, some of the 
largest have done that, have withdrawn from our market, and 
NetTeller, which announced that it would continue in the market 
notwithstanding the legislation passed by Congress, quickly 
withdrew from the market after two of its directors were 
prosecuted. They were transferring over $6 billion a year 
outside the country and may well account for the largest gain 
in the significant reduction we have experienced in online 
gambling since last year.
    The Department of Treasury has issued draft regulations 
implementing the anti-gambling statute we passed last Congress, 
and it is my understanding that there will be a witness in the 
next panel to explain in detail the proposed regulations.
    While there is overwhelming bipartisan Congressional 
support for a strong ban on Internet gambling, as reflected by 
the vote in the House just last year, that has not stopped many 
in Congress from introducing legislation this year to overturn 
and even reverse the new Federal statute, to exempt poker and 
other forms of gambling from the law, and to study whether we 
should regulate Internet gambling.
    These types of bills are premature at best since the 
regulations have not even been finalized yet. At worst, these 
bills have the potential to reverse the positive trend 
mentioned above of reducing addictive behaviors that destroy 
the lives, families, and financial well-being of America's 
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Goodlatte follows:]
Prepared Statement of the Honorable Bob Goodlatte, a Representative in 
                  Congress from the State of Virginia
    Mr. Chairman, thank you for inviting me to testify on this 
important issue.
    Contrary to what many in the gambling community would lead you to 
believe, gambling is not a victimless activity. In fact, the negative 
consequences of online gambling can be more detrimental to the families 
and communities of addictive gamblers than if a bricks-and-mortar 
casino was built right next door.
    The anonymity of the Internet makes it much easier for minors to 
gamble online. Furthermore, online gambling can result in addiction, 
bankruptcy, divorce, crime, and moral decline just as with traditional 
forms of gambling, the costs of which must ultimately be borne by 
society. In fact, I have been contacted by a constituent in my district 
whose son fell prey to an Internet gambling addiction. Faced with 
insurmountable debt from Internet gambling, he took his own life. 
Unfortunately, financial ruin and tragedy are not uncommon among online 
    Traditionally, States have had the authority to permit or prohibit 
gambling that occurs wholly within their borders. Indeed, state 
gambling laws vary greatly with states like Nevada permitting and 
regulating virtually all gambling and states like Utah prohibiting 
virtually all forms of gambling.
    With the development of the Internet, however, state prohibitions 
and regulations governing gambling have become increasingly hard to 
enforce as electronic communications move freely across borders. Many 
gambling operations are beginning to take advantage of the ease with 
which communications can cross state lines in order to elicit illegal 
bets and wagers from individuals in jurisdictions that prohibit those 
activities. The most egregious types of these operations are those 
overseas operations that have little fear of violating U.S. and state 
    Congress has acted in this area before. In 1961 Congress passed the 
Federal Wire Act which cracked down on illegal gambling operations that 
were using telephone lines to communicate bets and wagers across state 
lines in violation of state law. This statute was passed to help states 
enforce their own gambling laws, and was cutting-edge at the time. 
However, today the Internet and wireless technologies are the preferred 
method of communicating illegal bets and wagers across state lines and 
we needed to make sure the law contemplates Internet transactions, as 
well as traditional wire communications.
    Virtually all State law enforcement agencies support federal laws 
to give teeth to their gambling laws. Last Congress, 48 Attorneys 
General signed a letter to Congress calling for legislation to combat 
Internet gambling. The letter declared that ``We, the undersigned 
Attorneys General, wish to express our strong support for the efforts 
of the 109th Congress to pass legislation seeking to combat illegal 
Internet gambling in the United States. While we do not support federal 
preemption of our state laws related to the control of gambling, 
Internet gambling transcends state and jurisdictional boundaries and 
requires that all segments of the law enforcement community (state, 
federal and local) work together to combat its spread.''
    The Department of Justice has consistently stated publicly that it 
believes that the Wire Act covers Internet technologies and also covers 
all forms of gambling. However, DOJ has also welcomed legislation to 
clarify these provisions in order to allow it to more efficiently 
prosecute violations. One only has to look as far as the prosecutions 
of the payment processing company NETeller and the Internet gambling 
site BetonSports to see that DOJ can and does aggressively and 
effectively enforce the laws.
    In order to provide more tools to law enforcement, the House of 
Representatives passed H.R. 4411 last Congress by an overwhelming 
bipartisan vote of 317-93. This legislation was perhaps the strongest 
legislation prohibiting Internet gambling that has been considered on 
the House Floor in the past few decades. It contained important 
provisions to update the Wire Act, including clarifying that it covers 
all forms of gambling as well as all forms of technology that allow 
interstate gambling activities to occur. This legislation also 
contained important provisions to give law enforcement an additional 
tool to prohibit illegal Internet gambling, namely, it required 
financial transaction providers to block payments of illegal bets and 
wagers. This legislation was the subject of hearings and markups in the 
Judiciary and Financial Services Committees, as well as robust debate 
on the House Floor.
    Ultimately, only the portion of the bill blocking illegal Internet 
gambling payments was signed into law. In keeping with previous laws, 
the new law only applies to transactions that violate state and federal 
gambling laws, thus continuing to leave the decision of whether to 
allow or prohibit gambling primarily with the states.
    While it was only one piece of the broader House-passed bill, this 
new law, coupled with stepped-up enforcement actions by DOJ, has 
already proven extremely effective. A new study by The Annenberg Public 
Policy Center shows that card playing for money among college-age youth 
has declined from 16.3% in 2006 to 4.4% in 2007. The same study shows 
that weekly use of the Internet for gambling among the same age bracket 
has declined from 5.8% in 2006 to 1.5% in 2007. Perhaps even more 
promising is the fact that problem gambling symptoms have declined 
since last year. Among males ages 18-22, those who reported some type 
of gambling on a weekly basis and who also reported at least one 
symptom of problem gambling dropped from 20.4% in 2006 to 5.9% in 2007.
    The Department of Treasury has issued draft regulations 
implementing the anti-gambling statute we passed last Congress, and it 
is my understanding that there will be a witness in the next panel to 
explain in detail the proposed regulations.
    While there was overwhelming bipartisan Congressional support for a 
strong ban on Internet gambling in the House just last year, that has 
not stopped many in Congress from introducing legislation this year to 
overturn and even reverse the new federal statute, including 
legislation to override all state laws and permit all Internet gambling 
at the federal level and legislation to exempt poker and other forms of 
gambling from the definition of bets and wagers in the law. These types 
of bills are premature at best since the regulations have not even been 
finalized yet. At worst, these bills have the potential to reverse the 
positive trend mentioned above of reducing addictive behaviors that 
destroy the lives, families, and financial well-being of America's 
    Thank you again for allowing me to testify on this important issue.

    Mr. Conyers. Thank you so much. We appreciate that.
    Are you okay with a study, Bob?
    Mr. Goodlatte. Mr. Chairman, I think the most appropriate 
thing to do right now is to have the new law take effect and 
have enforcement of that measure operate. And then if at some 
point in the future it appears that questions arise about 
whether it is effective, a study would be appropriate. But I 
don't believe a study is necessary at this point in time. What 
I think would be appropriate would be to see stepped-up 
enforcement and implementation of the new regulations that the 
Treasury Department has put forward.
    Mr. Conyers. Thank you.
    The last word goes to the lady.
    Ms. Berkley. I would respectfully disagree with my 
colleague on whether or not a study is warranted. The reality 
is the study should have been conducted before the ban on 
Internet gaming was passed initially. What Mr. Goodlatte 
asserts as the negative consequences of Internet gaming are the 
exact same negative consequences that the anti-gaming people 
bring out and talk about every time there is a bill that would 
eliminate some form of gaming. There is nothing new in what he 
is saying.
    I believe it would be responsible on the part of Congress 
that we actually had a congressional study by the National 
Academy of Sciences to determine whether or not there are 
negative impacts caused by Internet gaming. I cannot imagine 
why anybody would be opposed to it. We should have done this a 
year ago before we banned the sport.
    Mr. Conyers. Well, thank you. This has been a good way to 
start us off. I would like to call up now our witnesses on the 
second panel: The Honorable Catherine Hanaway, Ms. Valerie 
Abend, Professor Joseph Weiler, Ms. Annie Duke, Tom McClusky, 
and Michael Colopy.
    If you would all join us? I will start with our United 
States Attorney for the Eastern District of Missouri, from the 
Department of Justice, Catherine Hanaway. She was the former 
Speaker of the House of the State of Missouri, and is a lawyer, 
graduated Catholic University of America, Columbus School of 
Law. We are delighted to have you here. We have everyone's 
testimony that will be included in the record. You may begin 
your discussion. Welcome.


    Ms. Hanaway. Thank you, Mr. Chairman, Members of the 
Committee. Good morning. My name is Catherine Hanaway. I am the 
United States Attorney in the Eastern District of Missouri. I 
am pleased to offer the views of the Department of Justice 
about Internet gambling.
    As you all know, gambling in the cyber-world takes on many 
different forms. The Department of Justice's view is and has 
been for some time that all forms of Internet gambling, 
including sports wagering, casino games and card games, are 
illegal under Federal law. While many of the Federal statutes 
do not use the term ``Internet gambling,'' we believe that the 
statutory language is sufficient to cover it.
    As we have noted on several occasions, the Department 
believes that Internet gambling should remain illegal. As set 
forth more fully in my prepared testimony, the Department of 
Justice has concerns about Internet gambling because it poses 
an unacceptable risk due to the potential for gambling by 
minors and for compulsive gambling. Current cases also show the 
potential for fraud and money laundering, and the involvement 
of organized crime in online gambling.
    As we have stated on previous occasions, the Department 
interprets existing Federal statutes, including 18 U.S.C. 
Sections 1084, 1952, and 1955, as pertaining to and prohibiting 
Internet gambling. In October, 2006, the Unlawful Internet 
Gambling Enforcement Act, also known as the UIGEA, was enacted. 
This statute was codified at 31 U.S.C. Sections 5361 through 
5367, and it prohibits the acceptance of specified forms of 
payment for unlawful Internet gambling by a business of betting 
or wagering.
    It is the view of the Department that Internet gambling was 
illegal under existing Federal criminal statutes even before 
the UIGEA. Since the enactment of this statute, several 
Internet gambling businesses have ceased accepting bets and 
wagers from individuals in the United States.
    The UIGEA required the Department of Treasury and the Board 
of Governors of the Federal Reserve, in consultation with the 
attorney general, to issue regulations to implement applicable 
provisions of the UIGEA. These agencies consulted with the 
Department during the drafting process. The regulations were 
published for public comment in the Federal Register on October 
4, 2007. The time period for the public to submit comments on 
the proposed regulations to the Department of Treasury or to 
the Board of Governors of the Federal Reserve ends on December 
12, 2007.
    The Department of Justice continues to prosecute illegal 
gambling over the Internet. Most of the prosecutions are the 
result of joint investigations by Federal and State law 
enforcement agencies. As set forth more fully in my prepared 
statement, the United States has several successful and ongoing 
    For example, in the NetTeller prosecution in the Southern 
District of New York, the company NetTeller admitted criminal 
wrongdoing and agreed to forfeit $136 million for its part in a 
conspiracy to promote illegal Internet gambling businesses and 
to operate an unlicensed money-transmitting business.
    Two founders of NetTeller pled guilty to conspiracy 
charges. Other cases have been charged and are awaiting trial. 
For example, on June 28, 2007, in the Eastern District of 
Missouri, the Federal grand jury returned a superseding 
indictment in United States v. BetonSports, PLC, et al. 
BetonSports was a publicly traded company that owns a number of 
Internet sports books and casinos. The company, BetonSports, 
pled guilty to Federal racketeering charges on May 24, 2007.
    In addition to these prosecutions, the Department also has 
reached several settlements concerning Internet gambling. In 
January, 2006, the United States Attorney's office in St. Louis 
announced a $7.2 million settlement with the Sporting News to 
resolve claims that the Sporting News promoted illegal gambling 
from early 2000 through December, 2003, accepting fees in 
exchange for advertising illegal gambling. As part of the 
settlement, the Sporting News is conducting a public service 
campaign to advise the public of the illegality of commercial 
Internet and telephonic gambling.
    On behalf of the Department of Justice, I want to thank you 
for inviting me to testify today. We thank you for your support 
over the years, and reaffirm our commitment to work with 
Congress to address the significant issue of Internet gambling. 
I will be happy to take any questions you want to ask.
    [The prepared statement of Ms. Hanaway follows:]
               Prepared Statement of Catherine L. Hanaway

    Mr. Conyers. Thank you for starting us off.
    We welcome now Deputy Assistant Secretary of Treasury 
Valerie Abend. In her capacity, she serves as advisor to 
Internet gambling issues, money laundering, identity theft, and 
other related matters that occur in the course of the duties of 
the Treasury Department. She was before that been associate 
director of public policy at the public accounting firm of 
    We welcome you this morning.


    Ms. Abend. Thank you.
    Mr. Chairman, Ranking Member Smith, and Members of the 
Committee, it is my privilege to represent the Treasury 
Department today to discuss the Unlawful Internet Gambling 
Enforcement Act of 2006.
    The act is designed to require the various payment systems 
to stop the flow of funds from gamblers to businesses providing 
unlawful Internet gambling services. To accomplish this, the 
act requires the Treasury Department and the Federal Reserve 
Board, in consultation with the Justice Department, to jointly 
prescribe regulations requiring participants in designated 
payment systems to establish policies and procedures that are 
reasonably designed to prevent or prohibit such funding flows.
    On October 4, 2007, the Treasury Department and the Federal 
Reserve Board published a notice of proposed rulemaking seeking 
public comment on the proposed rule. Our goal when writing this 
proposed rule was to faithfully adhere to the mandate set forth 
by Congress in the act.
    We have learned a lot since the passage of the statute by 
working with both the Federal Reserve Board and the Justice 
Department. Payment systems are complex and vary greatly. They 
are built to meet the needs of particular participants, and 
while some are modernized, others are paper-based systems. The 
complexity and differences necessitate different approaches to 
meet the requirements of the statute effectively. We expect to 
learn more from the comments that we will receive during the 
comment period, which extends through December 12, 2007.
    As I mentioned earlier, our overarching principle has been 
that the proposed rule should faithfully adhere to the 
congressional mandate in the act. First, the act requires us to 
designate payment systems that could be used in connection with 
unlawful Internet gambling. The proposed rule designates the 
following five payment systems: automated clearinghouse 
systems; card systems, including credit cards, as well as 
stored value cards; check collection systems; money 
transmitting systems; and wire transfer systems.
    Second, the act requires us to provide exemptions if the 
Treasury Department and the Federal Reserve Board jointly 
determine that it is not reasonably practical for participants 
in designated payment systems to prevent or prohibit unlawful 
Internet gambling transactions. No payment system is exempted 
completely from this proposed regulation.
    However, the proposed rule does partially exempt certain 
participants within some of the designated payment systems from 
having to establish policies and procedures. The Treasury and 
the Federal Reserve Board determined that this was the most 
appropriate way to implement the act consistent with 
congressional intent.
    Under the proposed rule, the gambling business's bank, or 
if abroad, the first U.S. bank dealing with that bank, is not 
exempted because it could through reasonable due diligence 
ascertain the nature of its customer's business and ensure that 
the customer relationship is not used to receive unlawful 
Internet gambling transactions. Let me emphasize that there are 
requirements under the proposed rule for the bank in the United 
States that has a corresponding relationship with a gambling 
business's bank. The proposed exemptions generally extend to 
the gambler's bank.
    Third, the act requires us to provide nonexclusive examples 
of policies and procedures which would be deemed ``reasonably 
designed'' to prevent or prohibit unlawful Internet gambling 
transactions. As a result, this proposed rule contains a ``safe 
harbor'' provision, as mandated by the act, that includes for 
each designated payment system nonexclusive examples of 
reasonably designed policies and procedures.
    Fourth, the act requires us to ensure that certain 
transactions excluded from the definition of the term 
``unlawful Internet gambling'' are not prevented or prohibited 
by the proposed rule.
    Through our efforts to date, we are making great progress 
in reaching our objective of promulgating a final rule that 
strictly adheres to the statute. We expect to receive a large 
number of comments as we approach the close of the comment 
period. We have an open mind on all aspects of the proposed 
    We will be providing analysis of the comments received, and 
reasons for any decisions that will be made, as we publish the 
final rule. Let me assure you that we are committed to giving 
fair consideration to all relevant comments as we work toward 
promulgating a final rule. We have much work to do, but we 
understand the task ahead and what we will need to do to reach 
our objective.
    Thank you very much for your time. I would be happy to 
answer any of your questions.
    [The prepared statement of Ms. Abend follows:]
                  Prepared Statement of Valerie Abend

    Mr. Conyers. Thank you very much.
    Welcome, Professor Weiler. We are delighted to have you 
here today. We introduce you as a professor of law at the New 
York University School of Law. You have specialized in 
international law for quite a while and taught at both Harvard 
School and the University of Michigan Law School. You have had 
a lot of contact with the World Trade Organization.
    We would like to get your perspective on Internet gambling 
this morning, and we are glad that you are before us today.


    Mr. Weiler. Thank you, Chairman Conyers and Members of the 
Committee for inviting me to be here today. This is the first 
time I have testified before a congressional Committee, so I 
apologize in advance if inadvertently I do something that goes 
against the conventions.
    My name is Joseph Weiler.
    Mr. Conyers. We have our people standing out by the door in 
case you make a mistake of any magnitude. [Laughter.]
    Mr. Weiler. I have already prepared my neck. [Laughter.]
    My name is Joseph Weiler. I am married. I have five 
children. I want to say at the outset that I express no views 
on gambling, remote Internet gambling, or any other form of 
gambling. My testimony is only as regards the compliance of the 
United States with its international legal obligations and the 
rule of law.
    The WTO is the central world organization which regulates 
trade. The United States is a founding and prominent member, 
the prominent member. Under the rules of the WTO, contrary to 
some myth, a State is not obliged to accept any services from 
outside. It is not obliged to accept any goods from outside. It 
is entirely up to them whether or not to give a commitment. 
Once a State gives a commitment, it is expected that it will 
follow it because other economies and other individuals base 
their commercial activities on that commitment.
    The United States gave a commitment which has been 
interpreted authoritatively on three distinct occasions as 
covering remote gambling. The United States contested that 
before the WTO. It lost before a panel. It lost before the 
appellate body, which is, if you want, the World Trade Court, 
and it lost again before a compliance panel. There is simply no 
question in anybody's mind that the ban on remote gambling 
coming from other members of the WTO is in violation of the 
United States's international legal obligations.
    The United States also claimed in those proceedings that 
there were serious public policy reasons why remote Internet 
gambling should be banned. The WTO did not reject in principle 
that type of justification, but said that it had to be across-
the-board, and yet it found on three distinct occasions that 
the United States was discriminating, that what it was banning 
for outside providers was in fact allowed legally within the 
United States, so that it gave in that organization the 
distinct impression that this was in some respect 
protectionism, not protecting consumers, but protecting special 
remote gambling interests within the United States.
    I repeat: the WTO does not oblige the United States to have 
remote gambling. What it does not allow is to pick and choose, 
to have legalized remote gambling within the United States, and 
to ban it when it comes from outside partners to whom the 
United States gave a commitment.
    The reaction to this ruling by the WTO has been curious, to 
use a neutral word, in two respects. First of all, despite the 
fact of this clear and egregious and unambiguous illegality, 
the United States, or I should say the executive branch of the 
United States, continues to indict, prosecute and threaten 
indictment of corporations and individuals who are exercising a 
commercial activity which the United States guaranteed to its 
partners would be available to them. They are doing that under 
the shield of the Uruguay Round Agreement Act which in the 
opinion of the executive branch allows them to do that despite 
the abject illegality at the international level.
    And secondly, the United States has announced that it will 
withdraw its commitment in respect of remote betting. My view 
is that these two reactions are damaging to the United States. 
Being a law professor, I will explain the first with a 
hypothetical. Imagine another country, say India, gave a 
commitment to the United States in respect of supply of medical 
services. On the basis of that, American corporations and 
doctors set up a hospital and a medical facility, invested and 
practiced and offered their services. And then this country in 
violation of that commitment one day announced this can no 
longer take place.
    We would be outraged. They would lose all the investment. 
Imagine further, not only did they suddenly pull the rug from 
that commitment, but they prosecuted the doctors, the 
administrators, the nurses which were offering these medical 
services, and put them in prison. We would be doubly outraged. 
And if they said even though we acknowledge the international 
legal violation, we are still going to prosecute these 
    We would be most outraged, Mr. Chairman and Members of the 
Committee, if then they turned around and said, and in doing 
that, we are simply following the example of the United States 
in the gambling case. The United States is the world leader in 
trade matters, and it leads by example. This is not a good 
example in which we should conduct our trade policy.
    The second reason is that if our economy is increasingly a 
service-oriented economy, and increasingly directed to exports; 
if today it is the only instance to my knowledge in which in 
the face of an adverse ruling of the world body to which the 
United States agreed to give unconditional compliance, that the 
country is withdrawing its commitment. It would be detrimental 
to the interests of the United States in the future when other 
countries, when we win the case, their response is to withdraw 
the commitment.
    Finally and lastly, Mr. Chairman, the statements of the 
executive branch are putting the responsibility on you, on the 
Congress. They are saying we are doing this on behalf of the 
Congress of the United States. That is how we were instructed 
to conduct this business when the Uruguay Round Agreement Act 
was passed. I do not think this is wise.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Weiler follows:]
               Prepared Statement of Joseph H. H. Weiler

    Mr. Conyers. We appreciate very much your testimony here 
today. There will be a number of questions following.
    We are now joined by Ms. Annie Duke, a graduate from 
Columbia University where she double-majored in English and 
psychology. That later held her in good stead as she went on to 
become the holder of the women's record for the most in-the-
money finishes in the World Series of Poker. She has helped 
tutor and train many people in the skill of poker, none of 
which are Members of the Judiciary Committee of which you are 
before now.


    Ms. Duke. Thank you, Chairman Conyers and Members of the 
Committee, and thank you for giving me the opportunity to 
testify today. I am testifying as a representative of the 
800,000 members of the Poker Players Alliance, but also as an 
American citizen who is keenly interested in the issues of 
personal freedom and responsibility.
    I am a mother of four young children ages 12, 9, 7, and 5. 
As Chairman Conyers pointed out, I attended Columbia University 
for my BA and then went on to pursue my Ph.D. in cognitive 
psychology at the University of Pennsylvania. From there, I 
chose not to go into academics, but in 1994 I used my education 
to become a professional poker player, which I am sure the 
National Science Foundation which gave me the grant to go to 
graduate school, is quite happy about. [Laughter.]
    But I did excel at my profession, becoming the leading 
female money-winner in the history of the game, and I have 
supported my four young children for 13 years on my poker 
    Mr. Conyers. Can some of the Committee Members join in your 
    Ms. Duke. Absolutely. I actually just gave a class last 
weekend, is what I was doing. And I do do private tutoring if 
anybody's interested.
    So for me, obviously, the freedom to play poker is an 
extremely important one, and the freedom to play where and when 
I want is extremely important. So the basic issue for me is 
personal freedom, the right to do what I want in the privacy of 
my own home.
    As part of the wonderful core curriculum at Columbia 
University, I was compelled to read John Locke and John Stuart 
Mill. They were the first to put forward the idea that except 
where one is doing direct harm to others, the government should 
not direct the activities of the people. Madison and Jefferson 
enshrined this idea in our country's founding documents. It is 
my opinion that Congress strayed significantly from these 
founding principles in passing the Unlawful Internet Gaming 
Enforcement Act in the late and closing hours of the 
legislative session in 2006.
    Now, some of you may believe that gaming is immoral or 
unproductive. I certainly respect your beliefs. I absolutely 
respect your opinion, and I respect your choice not to engage 
in those activities if they are against your moral code. What I 
do not respect, though, is that they should seek to have 
government prevent others from engaging in those activities. 
Ronald Reagan said, ``I believe in a government that protects 
us from each other. I don't believe in a government that 
protects us from ourselves.'' I believe that the UIGEA is in 
violation of Mr. Reagan's words.
    Prohibitionists site compulsive gambling as one of the 
reasons that they want to prohibit gaming. The Committee has 
received a study from Dr. Howard Schaffer of Harvard Medical 
School to the effect that the incidence of problem gambling is 
less than 1 percent, and the U.K. gambling study which was just 
completed confirms that. So I am not going to speak to that.
    But if the government is going to ban every activity that 
can lead to compulsion, they are going to have to ban nearly 
every activity--shopping, day-trading, sex, chocolate, even 
water-drinking can lead to compulsion. I am aware of one person 
who died from an addiction to water. Like gambling, compulsive 
shopping happens to a very small percentage of the population, 
and yet we don't seek to ban it. In terms of costs to society, 
the damage caused by problem gambling is far less than that of 
alcohol, tobacco, fatty foods, sugary soft drinks, or any other 
number of things that the government does not seek to ban.
    Prohibitionists also point to the possibility of children 
playing online as a justification to ban it. Now, Mr. Colopy, 
my colleague on the witness panel, will show technology 
designed to prevent children from getting on the Internet to 
gamble, and will speak to the regulatory programs in the U.K. 
and elsewhere that work well, so I won't speak to those in 
    But as a mom of four children ages 12, 9, 7 and 5, I would 
like to say that in my opinion whether children gamble online 
is primarily a parent's responsibility, and it is their 
responsibility to know what their children are doing on the 
Internet, make sure they are not stealing their credit card, 
and make sure that they have control of what is happening in 
their household.
    Frankly, if a child is gambling behind their parents' back 
and stealing their credit cards, I imagine that online gambling 
isn't really the problem there and there are larger issues in 
that family. But I do believe that if I do choose to enforce 
those rules in my household, that we should have good 
government policy to support my rules.
    The UIGEA is not that good government policy. In the 
closing hours of the last Congress, Senator Bill Frist slipped 
the UIGEA into the port security bill. The UIGEA essentially 
deputizes financial institutions and makes them function as the 
Internet morality police. The Internet gambling laws that we 
have right now are a hodge-podge of antiquated laws, most of 
which don't even contemplate the Internet. The governing 
Federal statute, the Wire Act of 1961, has been interpreted by 
the Fifth Circuit Court to only apply to sports betting, and 
not other forms of gambling like poker, and few States actually 
have laws that speak directly to Internet wagering.
    In the proposed rule, the Treasury and the Fed make clear 
that they do not intend to clarify what unlawful Internet 
gambling means. In other words, they are going to create a 
crime, but they are not going to tell anyone what the crime is. 
The regulators say that it would be too difficult for them to 
go through the laws of each and every State with respect to 
every form of gambling and ascertain what is or isn't legal in 
each State. And yet that is exactly what they are requiring the 
general counsel of each and every bank to do.
    This is no way to make regulatory law, and in my opinion, 
not good government policy. Instead, the Poker Players 
Association supports Representative Frank's legislation to 
create a Federal licensing and regulation system for Internet 
gaming where States can opt in or out of any or all forms of 
    We also support Representative McDermott's bill to impose a 
small tax on Internet gaming deposits, which would yield 
billions of dollars for Federal and State governments. We also 
support Representative Wexler's bill to clarify that poker, 
bridge, mahjong, backgammon, and other games of skill are 
outside the ambit of the Federal gambling statutes, provided 
they have adequate protections against minors and compulsive 
    The Poker Players Association also supports Representative 
Berkley's bill to study the issues with Internet gambling. 
Although we believe there is adequate information available 
today, we believe that additional study will only make it more 
clear that licensing and regulation is always better than 
    In closing, though, I do want to go back to what I 
originally said, that this for me is an issue of personal 
freedom and civil liberties. Again, I would like to thank you 
for the opportunity to testify today.
    [The prepared statement of Ms. Duke follows:]
                    Prepared Statement of Annie Duke

    Mr. Conyers. Thank you so much.
    Tom McClusky, Vice President of the Family Research 
Council--and they study a variety of issues, and for our 
purposes the one that we are concerned with is gambling policy. 
He has written, done television, radio. His works have appeared 
in Forbes magazine, Investors Business Daily, and the 
Washington Times. We are delighted to have him here as a 
witness today. Welcome to the Committee.


    Mr. McClusky. Thank you, Chairman and all the distinguished 
Members of the Committee, for allowing me to testify today.
    Part of me was also hoping that Senator Al D'Amato, the 
well-paid lobbyist for the Poker Players Alliance, would be 
here and join us today. In one of those odd twists of fate, 
both the Senator and my Dad used to play poker together when 
they attended Syracuse University when they were younger. From 
the stories I have heard, if poker is a game of skill, they 
could certainly use your teaching there, Ms. Duke.
    What the Senator and his colleagues lobby for today, 
though, is very different from the mostly innocent gambling my 
Dad and the Senator did way back when. In lobbying for 
legislation such as Congressman Frank's bill, which seeks to 
overturn Federal and State laws in relation to Internet 
gambling, and also the bill sponsored by Representative Wexler 
which seeks to carve out an exemption for poker, Senator 
D'Amato and his friends seek to open up a Pandora's box of 
consequences. Adoption of these bills will lead to an ominous 
corruption, dissolution of families and disruption of today's 
delicate negotiations between the United States and other 
    There are many reasons why Congress originally decided to 
take a look at Internet gambling. It was only after continued 
prodding from a unique coalition that Congress finally passed 
the Unlawful Internet Gambling Enforcement Act, UIGEA, of 2006. 
This coalition's members represent a wide range of support, not 
only from organizations like my own and Eagle Forum, but a host 
of State family groups, religious organizations such as the 
United Methodists, Southern Baptists, National Council of 
Churches, every major sports association, many major financial 
organizations, including the American Bankers Association also 
supports this legislation. They were joined by the National 
Association of Attorneys General, the National District 
Attorneys Association, and the Fraternal Order of Police.
    This deep and diverse support on the Federal and State 
level contributed to a version of the Unlawful Internet 
Gambling Enforcement Act passing Congress in July of 2006 with 
a vote of 317 to 93. And it persuaded the Senate to include the 
bill in the Safe Port Act.
    Clearly, this bill was not some fly-by-night piece of 
legislation, but a well thought-out measure that was years in 
the making. For the answer to why such a large and diverse 
group would gather in support of the UIGEA, one need only look 
at the study that Congress did quite a few years ago in 1999 
under the National Gambling Impact Study Commission.
    The commission documented the grave toll gambling takes on 
society. The report estimated the lifetime costs of gambling, 
including bankruptcy, arrests, imprisonment, legal fees for 
divorce, et cetera, mounted to about $10,550 per pathological 
gambler, and $5,130 per problem gambler. With those figures, it 
calculated that the annual cost of pathological gambling caused 
by the factors cited above were approximately $5 billion, in 
addition to $40 billion in estimated lifetime costs.
    This financial cost to gamblers in turn affects their 
families. The report continued that many families of 
pathological gamblers suffer from a variety of financial, 
physical and emotional problems, including divorce, domestic 
violence, child abuse and neglect, and a range of problems 
stemming from the severe financial hardship that commonly 
results from pathological gambling.
    Children of compulsive gamblers are more likely to engage 
in delinquent behaviors such as smoking, drinking and using 
drugs, and have increased risk of developing problems of 
pathological gambling themselves. As access to money becomes 
more limited, gamblers often resort to crime in order to pay 
debts, appease bookies, maintain appearances, and garner more 
money to gamble.
    Now, the aforementioned concerns address gambling as a 
whole. When you add the anonymity of the Internet, the troubles 
caused by gambling increase exponentially. It is the uniqueness 
of the Internet when it comes to gambling that inspired the 
aforementioned Dr. Howard Schaffer, the director of Harvard's 
Medical School's Division on Addiction Studies, to call 
Internet gambling the ``crack-cocaine of the Internet.''
    Due to the ease with which online gamblers can play from 
home, online players can gamble 24 hours a day from home with 
no real sense of the losses they are incurring. Additionally, 
while many Internet gambling sites require gamblers to certify 
that they are of legal age, most make little or no attempt to 
verify the accuracy of the information. The intense use of the 
Internet by those under the age of 21 has led to concerns that 
they may be particularly susceptible to Internet gambling.
    Now, in September, the British Gambling Prevalence Survey 
was published by the National Center for Social Research in the 
United Kingdom. This large objective government study shows the 
Internet and electronic forms of gambling are far more 
addictive than traditional social forms of gambling.
    Only 1 percent to 2 percent of Britons who play the lottery 
are problem gamblers. The study found that 1 percent of people 
who bet on horse races off-line are problem gamblers, and the 
rate is about 3 percent for bingo and slot machines. Before I 
get the question, the rate of problem gambling for private 
betting, as in the case of the Senator and my Dad, was a much 
lower 2.3 percent, so I think they are okay.
    But compare that with the problem gambling rates for people 
who gamble on computers: 11 percent for fixed-odds betting 
terminals, similar to video poker or video lottery terminals in 
the U.S.; 12 percent for systems that take spread-bets and 
outcomes ranging from sports races to stock prices; 7.4 percent 
for other types of online betting such as poker.
    Now, I see that my time is up, except the aforementioned 
Annenberg study I think found that the UIGEA is working before 
it has even had a chance to be implemented. According to 
PokerSiteScout.com, a website dedicated to web statistics for 
online gambling sites, a number of online gambling operators 
has stopped accepting bets from players identified to be in the 
United States.
    Now, as I can picture my Dad saying to former Senator 
D'Amato and the questionable alliance behind him, when you have 
the law, the States, financial institutions, religious and 
family organizations and an array of law enforcement agencies 
against you, it is about time to fold your cards and go home.
    Thank you.
    [The prepared statement of Mr. McClusky follows:]
                Prepared Statement of Thomas E. McClusky
    Thank you, Mr. Chairman, and all the distinguished Members of the 
Committee for allowing me to testify today. Part of me was also hoping 
that former Senator Al D'Amato, the well-paid lobbyist for the Pokers 
Players Alliance would join us here today. In one of those odd twists 
of fate the Senator used to play poker with my Dad many years ago when 
they were at Syracuse University together.
    However, what the Senator and his colleagues lobby for today is 
very different from the mostly innocent gambling they did back in their 
youth. In lobbying for legislation such as Congressman Frank's bill, 
H.R. 2046, which seeks to overturn federal and state laws in relation 
to Internet gambling, and H.R. 2610, sponsored by Representative Robert 
Wexler (D-FL), which seeks to carve out an exemption for online poker, 
they seek to open up a Pandora's Box of consequences. Adoption of these 
bills will lead to anonymous corruption, the dissolution of families, 
and the disruption of today's delicate negotiations between the United 
States and other countries, notably the United Kingdom and Antigua.
    There are many reasons why Congress decided to take a look at 
Internet gambling, and it was only after continued prodding from a 
unique coalition that Congress finally passed the Unlawful Internet 
Gambling Enforcement Act of 2006. This coalition's members represented 
a wide range of support not only from organizations like Family 
Research Council and Eagle Forum and a host of state family groups, but 
also from religious organizations such as the United Methodists, 
Southern Baptists and the National Council of Churches. Every major 
sports association and many major financial organizations including the 
American Bankers Association also supported the legislation. They were 
joined by the National Association of Attorneys General, the National 
District Attorneys Association, and the Fraternal Order of Police. This 
deep and diverse support on the federal and state level contributed to 
a version of the Unlawful Internet Gambling Enforcement Act passing 
Congress in July of 2006 with a vote of 317-93, and it persuaded the 
Senate to include the bill in the SAFE Port Act.
    Clearly this bill was not some fly-by-night piece of legislation 
but a well-thought-out measure that was years in the making. For the 
answer to why such a large and diverse group would gather in support of 
the UGIEA, one need only look at the National Gambling Impact Study 
Commission, which was created by Congress in 1996 and issued its final 
report in 1999. The Commission documented the grave toll gambling takes 
on society. The report estimated that lifetime costs of gambling 
(including bankruptcy, arrests, imprisonment, legal fees for divorce, 
etc.) amounted to $10,550 per pathological gambler, and $5,130 per 
problem gambler. With those figures, it calculated that the aggregate 
annual costs of pathological gambling caused by the factors cited above 
were approximately $5 billion, in addition to $40 billion in estimated 
lifetime costs.
    This financial cost to gamblers in turn affects their families. The 
report continues that ``many families of pathological gamblers suffer 
from a variety of financial, physical, and emotional problems, 
including divorce, domestic violence, child abuse and neglect, and a 
range of problems stemming from the severe financial hardship that 
commonly results from pathological gambling. Children of compulsive 
gamblers are more likely to engage in delinquent behaviors such as 
smoking, drinking, and using drugs, and have an increased risk of 
developing problem or pathological gambling themselves. As access to 
money becomes more limited, gamblers often resort to crime in order to 
pay debts, appease bookies, maintain appearances, and garner more money 
to gamble.''
    The aforementioned concerns address gambling as a whole. When you 
add the anonymity of the Internet, the troubles caused by gambling 
increase exponentially. The theft of credit card numbers from customers 
is a very real concern and it is much easier for gambling web sites to 
manipulate games than it is in the physical world of highly regulated 
casinos. Additionally, gambling on the Internet provides remote access, 
encrypted data and, most importantly, anonymity. Because of this, a 
money launderer need only deposit funds into an offshore account, use 
that money to gamble, lose a small amount of that money, and then cash 
out the remaining funds.
    It is the uniqueness of the Internet when it comes to gambling that 
inspired Dr. Howard Shaffer, the director of Harvard Medical School's 
Division on Addiction Studies, to call Internet gambling the ``crack 
cocaine of the Internet'' due to the ease with which online gamblers 
can play from home. Online players can gamble 24 hours a day from home 
with no real sense of the losses they are incurring. Additionally, 
while many Internet gambling sites require gamblers to certify that 
they are of legal age, most make little or no attempt to verify the 
accuracy of the information. The intense use of the Internet by those 
under the age of 21 has led to concerns that they may be particularly 
susceptible to Internet gambling.
    Problem gamblers between the ages of 18 and 25 lose an average of 
$30,000 each year and rack up $20,000 to $25,000 in credit card debt, 
according to the California Council on Problem Gambling. In a health 
advisory issued by the American Psychiatric Association in 2001, ten 
percent to 15 percent of young people reported having experienced one 
or more significant problems related to gambling.
    In September, the British Gambling Prevalence Survey 2007 was 
published by the National Centre for Social Research. This large, 
objective government study shows that Internet and electronic forms of 
gambling are far more addictive than traditional and social forms of 
gambling. Only 1-2% of Britons who play the lottery are problem 
gamblers. The study found that 1.7% of people who bet on horse races 
offline are problem gamblers, and the rate is about 3% for bingo and 
slot machines. But compare that with problem gambling rates for people 
who gamble on computers: 11% for fixed-odds betting terminals (similar 
to video poker or video lottery terminals in the U.S.), 12% for systems 
that take spread bets on outcomes ranging from sports to political 
races to stock prices, 6% for online betting with bookmakers, and 7.4% 
for other types of online betting, such as online poker. The data is 
unequivocal: gambling online is several times more addictive, and 
regulation of online gambling in Britain doesn't change this fact.
    And before I get the question, the rate of problem gambling for 
``private betting,'' as in the case of my Dad and Senator D'Amato many 
years ago, is a much lower 2.3%.
    In June of this year an aggrieved father, Pastor Greg Hogan, Sr., 
gave powerful testimony to the House Financial Services Committee on 
how his son, also named Greg--a college student with a bright future 
ahead of him--became addicted to online gambling. Mr. Hogan told the 
heartbreaking story of how his son became obsessed with playing poker 
online and, due to the ease with which it was offered to him (as it is 
offered to college students across the U.S.), Pastor Hogan's son soon 
found himself saddled with such deep losses that he turned to bank 
robbery to pay his debts. Now the main debt Greg Hogan, Jr. is paying 
is to society in the form of a 20-year sentence in federal prison. What 
Greg Hogan, Jr. did was wrong and he is paying for it. However, his 
family and other families continue to suffer as those they love become 
obsessed with Internet gambling.
    By passing the Unlawful Internet Gambling Enforcement Act of 2006 
Congress was sending a strong message that it was willing both to 
protect states' prerogatives and to protect families. Even before the 
recent release of the Department of Treasury's regulations in 
connection with the UIGEA, Congress's efforts to combat unlawful 
Internet gambling showed immediate fruit.
    A recent National Annenberg Survey Center study found that the 
number of college students who gambled in 2006 fell by 70 percent the 
next year, following the passage of the UIGEA. The new law restricts 
banks from transferring funds to Internet gambling sites, all of which 
operate outside the U.S., so many sites closed as a result.
    According to Pokersitescout.com, a web site dedicated to web 
statistics for online gambling sites, a number of the online gambling 
operators have stopped accepting bets from players identified to be in 
the United States and the overall use of these sites has dropped 
drastically. These losses for online gambling sites are victories for 
American families; it would be a shame if this Congress decided to 
reverse the rare strong bipartisanship and rapid progress that have 
been shown on this important issue.
    As I can picture my Dad saying to former Senator D'Amato and the 
questionable alliance behind him, when you have the law, the states, 
financial institutions, religious and family organizations, and an 
array of law enforcement agencies against you--it is time to fold your 
cards and go home.

    Mr. Conyers. Thank you very much, Mr. McClusky.
    Mr. Michael Colopy is the Vice President of Aristotle, 
Incorporated, a major developer of computer software, and has 
recently developed one brand called INTEGRITY, which provides 
comprehensive age and identity verification services to its 
customers. This verification software has been featured very 
widely and I think he would want to explain it a little bit 
    Welcome to our hearings today, sir.

                        ARISTOTLE, INC.

    Mr. Colopy. Thank you, Mr. Chairman.
    As somebody who worked here many years ago on the 
Democratic side of the aisle, it has been something I learned 
from previous Chairmen that unless strong coffee has been 
served, it is best not to read your statement if there have 
been witnesses ahead of you. So taking that advice, I am going 
to paraphrase what I have to say, and also get to some issues 
that have been touched on earlier so that the Q&A might be more 
practical in its focus.
    Also, I should add that despite the fact that Aristotle is 
one of the global leaders in age and identity verification, I 
am not, technologically speaking, the sharpest card in the 
deck, with apologies to Ms. Duke. But there are policy issues 
and there are practical modalities that we need to discuss that 
directly respond to issues that have been raised--two in 
    One is, of course, screening out the underaged. I was happy 
to hear that Congressman Goodlatte did not say again what was 
said here last year, which we never had the chance--we were not 
called, as we were today, so we weren't here to present 
evidence to the contrary. But for a few years, responsible 
major industries that wished to adhere to best practices and 
reflecting the fact that the courts have always held the State 
has a compelling interest in protecting children, they sought 
to use technology not just to market, but to protect.
    When it comes to those who are underage, of course, there 
are restricted products and services--tobacco, alcohol and so 
on. These industries, and today on a massive scale, deploy age 
and ID verification to screen out the underaged. In fact, 
screening online is far more effective than checking a driver's 
license at the local 7-11.
    There simply is no argument to be made anymore and there 
hasn't been for a while, that effective and available age 
identification is deployable and affordably so. That is being 
done by the largest beer brewers in the United States today. It 
is being done by 358 major financial institutions. It is being 
done by distillers. It is being done even by State lotteries.
    The second question I wish to address of the two principal 
ones is the one of protecting people from themselves. Aside 
from the philosophical issue of it--and I must say this is the 
second hearing in which we have been asked to testify where I 
have heard John Stuart Mill mentioned. Perhaps he should be 
made an honorary witness at the table hereafter. But the 
argument that addiction per se is a disqualification for the 
implementation of a given policy is one that can and must be 
addressed in terms of its practical solutions.
    One thing that this company did when it went first way out 
on a limb, and now became the leader in this field, it sought 
to look at the social downside and benefit to the use of its 
technology. It created something called the ``self-exclusion 
list.'' SEL is a global system that allows an individual, 
acknowledging addiction, to put themselves within the system so 
that any casino, online or bricks and mortar, when they present 
their identification would essentially as a proxy for that 
individual, exclude them as voluntary self-therapy.
    It is only one of many pieces if we are talking about 
therapy, but nonetheless, to help an addicted individual avoid 
relapse is one piece of that therapy. It is something that 
social service organizations the world over recognize the value 
of. It also directly addresses the question of whether or not 
there are tools that can be built into the system to address 
addiction and are also currently available and deployable. And 
yes, indeed, they are.
    There are other points to be made. For example, the 
question of verification, and I know from questions I have from 
Members that there has been some confusion, particularly 
because in dealing with alcohol over the years, the Federal 
Trade Commission has used the term ``verification'' in a rather 
sloppy way, allowing for example that sites that simply have an 
age screen that says ``you must be 18, tell us you are 18 and 
in you go,'' can and should not be characterized as 
verification. I mean, every run-of-the-mill legal or illegal 
operation can do this and does it. In fact, the most 
disreputable ones do it with more panache than legal ones.
    So I would point out, and I would ask the Committee if its 
definition corresponds to the Latin roots of this word, that is 
``to establish as true.'' That is the term as we use it, as 
verification. Ronald Reagan was mentioned earlier. In the 
entire negotiations over strategic weapons limitation, 
verification was used as the standard of immutable proof beyond 
arbitrary self-selection or self-attestation. So in the case of 
verification as we use the term and as we deploy it, it is 
against public records of data. It is not somebody simply 
alleging that they are of age.
    And finally, there is the question of credit card usage. 
Credit cards are common among teenagers, my own included. They 
cannot and should not be used as proxies for age, as the credit 
card issuers themselves say. That is something that also should 
be addressed in discussing these issues.
    Thank you very much.
    [The prepared statement of Mr. Colopy follows:]
                  Prepared Statement of Michael Colopy
    Mr. Chairman and Members of the Committee, good morning.
    I am here at the Chairman's request as the representative of 
Aristotle Inc., a leading provider of verification services for child 
protection online. Age and ID verification online first emerged several 
years ago as a solution of choice for many industries concerned about 
their social responsibilities to the broader society, especially where 
their marketing and sales efforts might reach underage teens or expose 
children to risk. Even three years is a generation in the lifecycle of 
technology. The Internet has brought an acceleration of technological 
remedies that are far more effective today than they were at the start 
of the last Congress: state-of-the-art online verification illustrates 
this pattern.
    The Sixty Minutes report you just viewed is a relevant illustration 
of how in the instance of online gaming robust technology can be used 
by responsible private enterprise to perform a necessary social good. 
But the robust verification capability you witnessed is unfamiliar to 
those who do not follow these technological developments closely. As 
recently as last fall, some Members of this body professed to be 
unaware of the online age verification and ID methods the CBS report 
appropriately demonstrated, giving this as their reason to support the 
selective online gaming ban. Yet, the tech savvy son of the producer of 
Sixty Minutes could not enter the gaming site that uses an effective 
verification service but easily penetrated those that do not deploy it. 
That report first aired in November, 2005: the robust system that kept 
the youngster out of the gambling site is even more effective today and 
in vastly more widespread use across the United States and in other 
parts of the world.
    I am here as a stand-in for John Phillips, the CEO of Aristotle 
Inc. whose age and ID verification system, INTEGRITY, is the backend of 
the effective system in the unscripted test you just saw. Commenting on 
what Aristotle does for its many clients is not our custom but we were 
persuaded to appear because of erroneous assumptions about age 
verification that should not be left uncorrected, particularly where 
they pertain to child protection.
    America is a society guided by humane principles: we are also an 
economy built on free enterprise. In the context of today's hearing, 
therefore, there are two considerations that should guide this 
exploration: First, what is necessary to provide reasonable protection 
to society's most vulnerable members, reduce fraud and mitigate risk, 
and, second, how is the market choosing to do this?
    Over the last ten years, law enforcement and consumer protection 
agencies as well as industry self-regulatory bodies have recognized the 
need for rapid online identity verification for Patriot Act and anti-
money laundering compliance, fraud prevention and for risk mitigation 
involving age-restricted products such as tobacco, alcohol, 
pharmaceuticals, video games and mature content from many sources.
    Alongside the steep rise in public concern, online age and ID 
verification has matured as a needed solution such that any merchant 
may do online what is routinely done at stores every day across 
America. In fact, as ever more efficient technologies and databases 
have been developed, online transactions have become in many instances 
faster and less risky than the visual driver's license scans that 
suffice for alcohol or cigarette purchases in America's neighborhood 
convenience stores, restaurants and bars. And although it is certainly 
true that no manmade system is foolproof--whether it be a seatbelt, an 
airbag or an airplane, the verification methods now deployed justify a 
relatively high degree of confidence. Which is why they have earned 
broad adoption across American commerce.
    Government agencies that monitor commerce have been notably slower 
than the market in recognizing what has been happening but that too is 
gradually changing. The Federal Trade Commission and other agencies 
have urged that reliable state-of-the-art methodologies available on 
the market be deployed to protect children from accessing promotions 
intended only for adults. In its 2003 report to Congress on the 
marketing of beverage alcohol products, the FTC pointed to the 
emergence of online methods, and Aristotle's service in particular, as 
addressing this public need. (See FTC Report to Congress: Alcohol 
Marketing and Advertising September 2003).
    Aristotle's INTEGRITY verification technology is one logical 
response to the acute need of marketers for reliable, robust and 
commercially reasonable protective screening that also addresses 
important privacy and security concerns. Depending primarily on public 
records data rather than on personal financial information, INTEGRITY 
comprises several levels of authentication in a methodology that 
matches process to risk. The INTEGRITY system is now a major component 
of the private sector's accommodation of mounting public pressure for a 
technological solution that is both socially responsible and commerce 
    According to Forbes Magazine, Aristotle's INTEGRITY verification 
service is the market leader in online identity and age verification. 
INTEGRITY is utilized today by global Fortune 1000 enterprises that are 
required either by law or best-practices professional codes of conduct 
to identify individuals requesting permission to enter a facility, a 
website, open an account or conduct certain transactions online.
    Institutions relying on INTEGRITY include more than 350 of the 
nation's largest financial services companies, government agencies and 
airport security authorities, wineries, distillers, makers of premium 
cigars, video game publishers and the major motion picture studios. In 
general, the firms with the greatest market share are the most 
assiduous users of INTEGRITY.
    It is utilized to comply with the multi-state Tobacco Master 
Settlement Agreement provisions that prohibit marketing to minors. The 
service exceeds the strict standards of such laws for online age-
verification as California's Business and Professions Code Sec. 22963, 
and Virginia Code Sec. 18.2-246.8, governing online tobacco sales. 
Aristotle's INTEGRITY service offers indemnification in the event of 
failure. Since adoption, not once has that happened. Blocking underage 
teens from purchasing tobacco online is believed by most citizens to be 
an important social value. (The Campaign for Tobacco-Free Kids (http://
tobaccofreekids.org/Script/DisplayPress Release.php3?Display=425) 
presents the urgency of this issue on its website.)
    Hollywood has also seen the wisdom of the new approach to 
marketing. The major motion picture studios use INTEGRITY to comply 
with the Motion Picture Association of America (MPAA) guidelines for 
restricting minors' online access to studio promotions with ``R'' rated 
content. In fact the overwhelming majority of visitors to studio sites 
with restricted ads are age verified through Integrity.
    Vendors in the beverage alcohol business use INTEGRITY as well. In 
the new era of direct wine shipments, for example, online age 
verification has become an essential component for compliance and 
responsible marketing across the United States. Without a verification 
service such as INTEGRITY, Members of Congress and the general public 
would not be able legally to purchase fine cigars, wines, lottery 
tickets or R-rated movies by mail, by telephone or online.
    Another social mandate that relates to the question, online gaming, 
before the committee today, that INTEGRITY is designed to meet is in 
the area of problem gambling. In addition to the risk mitigation and 
child protection benefits of age and identity verification, this 
service benefits those individuals who acknowledge that they are 
problem gamblers and wish to avoid relapse. There are several 
components to effective therapy for this affliction but allowing an 
individual to establish a blocking mechanism is one part of such a 
program. A central self-exclusion list program (SEL) has been under 
development over the last several months and is now deployed. Through 
the SEL individuals will be able to put their own names on a 
confidential list of those who do not wish to be solicited or allowed 
to open an account with a casino. As with all data in the INTEGRITY 
system, the list is strictly confidential, and the names would not be 
disclosed to anyone. Individuals could remove their names from the list 
after a set minimum period.
    In the United Kingdom, INTEGRITY is widely used by licensed casino 
operators to comply with the strict UK requirements for age 
verification online.
    The question sometimes arises: in the web world, how can a 
governmental jurisdiction mandate the exclusion of persons entering 
online from outside its authority? The method is known as IP geo-
location. It's true that some IP addresses can only be identified at a 
country level. And there are certain types of proxies and satellite IPs 
that prevent us from geo-locating and that the geolocation technology 
can't be applied to long-distance modem dialup calls (e.g., a user from 
California calls a dialup number in New York).
    The good news is that we can identify these types of IP addresses. 
And these IP addresses are assigned low confidence scores.
    Organizations like the New York Lottery and the BC Lottery only use 
IP addresses that are scored at near 100% confidence, meaning that we 
are nearly 100% certain that any given IP address correctly correlates 
with a location. Addresses not scoring very high are excluded.
    Overall these exclusions represent only a very small percent.
    The solution allows us to be 100% compliant. Because we are only 
delivering IP addresses that are scored virtually at the 100% 
confidence level, we are able to adhering to the lotteries' strict 
compliance requirements.
    As a practical matter, everyone in this room at some time orders 
airline tickets or executes some similar transaction where the vendor 
needs to be fairly confident that the purchaser is who he says he is. 
This kind of real time vetting online is now routine.
    In their determination to ``do the right thing'' and comply with 
the law while marketing responsibly under best practices standards, a 
large and growing number of enterprises across the broad spectrum of 
American commerce have adopted online age and ID verification. The 
market leaders have spoken and there is no ambiguity remaining. Simply 
put, they have opted for responsible child protection in the form of 
state-of-the-art online age and identity verification, making effective 
age and ID verification the norm. The substantial and growing danger, 
especially to the young, that unrestricted access over the Internet 
represents has stimulated technological solutions by the private sector 
such as INTEGRITY.
    In its simplest terms, the case for deploying this child protection 
measure has never been more apparent or compelling. Age and ID 
verification is efficient, effective, reliable and available nearly 
    Thank you. I look forward to responding to your questions.

    Mr. Conyers. This has been a very engaging morning for us. 
I would like to ask, starting with Ms. Hanaway, to indicate 
anything that she has heard here from her co-panelists that she 
would want to give us some comment about or caution the 
Committee or take mild issue with, or anything else she may be 
thinking that is reportable in the record.
    Ms. Hanaway. Mr. Chairman, that is a very broad question. 
Thank you for that opportunity to comment on some of what the 
other panelists have said.
    I think I might be better to defer to more specific 
questions. I will say this about the last witness' testimony. 
Boy, it would be helpful to law enforcement if there were real 
online verification ability of age, but almost in the reverse 
of the context that he just described.
    If we could verify that those going on sites that were 
available to underage kids really were under the age of 18 and 
not child predators; if we could really identify who people 
were because the context from a prosecutor's perspective in 
which we most often see people making misrepresentations about 
their age is in the context of predators preying on children 
and saying that they are under 18. So if we could find a tool 
that really was verifiable, it would be helpful. It really 
    Mr. Conyers. Mr. Colopy?
    Mr. Colopy. Well, I am delighted to tell the Justice 
Department that the very tool I described does exactly that. In 
fact, in the INTEGRITY system, we also have access to complete 
registered sex offender lists. So not only can you establish 
that someone stupid enough to come in under their own name and 
is a registered sex offender is now in your site, we can also 
verify that every person coming in is of a certain age, and if 
there is an anomaly, they don't get on. So the solution that 
you are looking for, ma'am, exists.
    Mr. Conyers. Ms. Hanaway?
    Ms. Hanaway. If I understand correctly, and I really want 
to understand correctly, Mr. Chairman, I think that his system 
works only if the person logs on to whatever computer service 
they are using by putting on their own identity. The situation 
we most often find is that people pose as someone else. I don't 
know that the system that has just been described has an 
ability to detect whether you are using someone else's identity 
as you are logging on.
    Certainly, it is easy to find sex offenders if they log on 
using their own identity, but most often they pretend to be 
someone else. From what I have heard, I don't see how the 
system screens for that, screens for either a minor who wants 
to gamble, taking the identity of a parent or an aunt or an 
uncle, or a sexual predator taking the identity of someone else 
and going online, someone who really exists and really is of 
age-appropriate and economic-appropriate status.
    Mr. Colopy. Well, first of all, it is important to say that 
as with seatbelts, airbags and anything else, no system is 
perfect. But the system that we are deploying has many 
different points of verification. I am not sure if you have it, 
but 60 Minutes did a test of this to demonstrate definitively.
    It did actually what they thought was a sting on a site 
where a CBS producer's son attempts to get on the Internet 
using his father's credit card and posing as his father, and 
was repeatedly rebuffed. He never succeeded, which was 
startling. However, when they went to systems that did not have 
robust age verification, including some outside the country, he 
got in rather easily.
    So without telegraphing to every teenager what all those 
points of data are, I wish to emphasize emphatically that the 
issue that has been raised is addressed by the technology we 
are deploying today.
    Mr. Conyers. Ms. Duke, what have you heard here that would 
make you want to make a comment at this point?
    Ms. Duke. That is a dangerous question to ask me. I want to 
just respond very quickly to Ms. Hanaway's concern that only if 
you log on as yourself can you identify someone. There is 
technology out there right now which is called SNARE. It is 
from a company called Iovation, which is out of Portland, 
Oregon. It is used by such companies as, for example, Dell 
Financial Services Online.
    It is a new technology and it is patented. It has to do 
with device sharing, as opposed to worrying about who a person 
is, once a person is logged onto a computer and been identified 
as a bad guy, then any computer that that person is related to 
will also be shut down if you choose to. You can set the SNARE 
or the trap for as wide as you want, for as many associations 
as you want.
    So for example, if I log on and they find out I am a minor 
or they were to find out that I was, say, a compulsive gambler 
or someone who is a predator, and I logged onto a computer, if 
I had logged onto another person's computer, their computer 
would get shut down and then whoever that computer, that user 
had shared a computer with would also shut down. So it is like 
if you tell two friends, if we remember that commercial, it is 
like that. And again, you can set the trap for as wide as you 
    What that does is it makes it so that someone cannot create 
new accounts. If they create a new account, it is their 
computer that is tagged as bad, and not their account that is 
tagged as bad, and actually not their personal identity that is 
tagged as bad. In fact, the software is completely blind to the 
person's identity. They only care about the device.
    Now, the interesting thing about this is that these devices 
are shared by any company that chooses to use these services. 
So once Dell Financial Services, for example, finds out that 
there is a bad guy on their network, then if MySpace chose to 
use this, that person would be identified as bad automatically 
for their network. They wouldn't have to do a bad thing on 
MySpace for MySpace to know about them.
    So there certainly is a lot of really good technology out 
there that is completely blind to the user and only interested 
in the device, which is a much more powerful way to stop these 
people from getting online.
    As a second point, as far as the prosecutions that have 
taken place in the Justice Department, my understanding is that 
they only apply to companies that are engaged in sports 
betting, that accept sports betting wagers, as they should, 
because the Wire Act of 1961 clearly states that sports betting 
is illegal. However, there aren't any prosecutions that pertain 
to poker because the Federal decisions that we have on that up 
to the Fifth Circuit Court state very clearly that poker is not 
covered by the Wire Act.
    So I am not sure how that is germane necessarily to the 
UIGEA which clearly states that if an activity is legal in the 
State, then it should remain legal in the State because it 
doesn't supersede the Wire Act. And if it is illegal in a 
State, then it should remain illegal in a State, that that is 
really a State-by-State issue that now has some Federal 
governing to it. So yes, the people from BetonSports got 
prosecuted. They were accepting sports wagers. NetTeller was 
involved in sports wagering and so have all the other 
prosecutions that have been involved.
    As far as Mr. Goodlatte's testimony to the individuals, and 
Mr. McClusky's, that have bankruptcies in their family, I just 
want to say quickly that if we start legislating based on 
individual cases of people having bankruptcy, we are going to 
be in pretty big trouble because we are going to have to 
legislative basically every activity.
    The issue for me is that people make bad decisions all the 
time that create bankruptcy and problems in their family. For 
example, accepting a sub-prime zero percent down mortgage has 
created a lot of bankruptcies recently. Online shopping or 
shopping in real life has created a lot of bankruptcies.
    If we choose to be on every activity that creates financial 
hardship in a family, we are going to be banning basically 
every activity. If we choose to ban anything that hurts a 
family, we are going to be banning McDonald's, for example, 
because many fathers die prematurely from eating fatty foods 
and leave their children with no means to support themselves, 
and you know, a lot of ruining of lives occur because people 
are eating too many McDonald's' hamburgers. I would hope that 
we aren't going to ban that either.
    Mr. Conyers. Thank you.
    Before we go to vote, we are going to recognize Mr. Smith, 
but I have to ask Professor Weiler what he has made of the 
discussion with his fellow panelists.
    Mr. Weiler. Mr. Chairman, thank you. I was struck not by 
what I heard, but what I did not hear. In particular, I would 
be interested in the position of the Justice Department if, for 
example, say China hypothetically, were to prosecute an 
American citizen and put them in prison in violation of an 
international legal obligation owed to the United States.
    Simply they would say to the United States that under our 
internal Chinese law, this individual has no defense, despite 
the fact that we recognize that we are violating the 
international obligation to you, and then China moved to 
withdraw the commitment they had given to the United States. 
What would be the position of the Justice Department in such a 
situation, with a little rider, that China would add, ``and we 
have learned this trick from you''?
    Mr. Conyers. What do you think, U.S. Attorney?
    Ms. Hanaway. Well, I think it would be unwise, Mr. 
Chairman, for me to try and answer a hypothetical situation 
that does not exist. I will say that we are currently in the 
district for which I am U.S. attorney prosecuting BetonSports; 
that there have been motions made suggesting that our 
prosecution violates the World Trade Organization treaties. 
Obviously, this is currently being litigated, so I can only 
talk about the positions we have taken on the public record, 
and those are essentially two.
    The first is that this Congress in enacting the statutes 
necessary to carry out those treaties said in the law that 
nothing in those treaties would overturn existing laws of the 
United States. The Wire Act was already the law when those 
treaties were executed. The second position that we have taken 
which really doesn't go to this country-to-country discussion 
is that the defendants as private citizens don't have a right 
to challenge under the treaty.
    Mr. Conyers. Are you mildly satisfied, Professor Weiler?
    Mr. Weiler. Of course, Ms. Hanaway has answered honorably, 
and that indeed is the position taken. I think it is a very 
unfortunate position for the rule of law and for the reputation 
of the United States in the world order. It is creating a 
highly dangerous precedent for our own citizens trading in 
other countries.
    Mr. Conyers. Ms. Hanaway, why did you not mention horse 
racing in your list of prosecutions in Internet gambling?
    Ms. Hanaway. Well, I was highlighting, Mr. Chairman, some 
of the more notable prosecutions that are currently going on. 
There was no particular reason not to mention horse racing.
    Mr. Conyers. Well, it has been noted that they are 
frequently excluded from prosecution, generally, not in your 
area. You didn't know that.
    Ms. Hanaway. I had not heard you note that. I have heard 
you note it now. I am not sure if there is a question in your 
    Mr. Conyers. Oh, there is. [Laughter.]
    Ms. Hanaway. I am sure of it.
    Mr. Conyers. Mr. Smith?
    Mr. Smith. Mr. Chairman, will we return after the vote?
    Mr. Conyers. You don't want lunch, so the answer is yes, 
absolutely, after the votes.
    Mr. Smith. Mr. Chairman, I will try to be brief.
    Ms. Abend, when do you expect the regulations to be in 
effect for the enforcement act?
    Ms. Abend. Thank you, Congressman, for asking about that. 
We obviously are in the opportunity right now of an open 
comment period which ends next month on December 12. Our 
intent, just as in the timeframe of when we promulgated the 
proposed rule, is to work very closely with the Federal Reserve 
Board and the Department of Justice in a timely and thorough 
    Mr. Smith. Right. I understand all that. When do you expect 
them to be effective?
    Ms. Abend. Well, Congressman----
    Mr. Smith. Give me an estimate roughly.
    Ms. Abend. Congressman, until the comment period is closed, 
it would be very difficult for me to say. We need to go through 
all of those comments. We expect an awful lot.
    Mr. Smith. Okay. I won't pursue it, but it doesn't seem to 
me it was that difficult of a question.
    Ms. Hanaway and Ms. Abend, what gaps are there in the 
current law that need to be closed in order to properly enforce 
the prohibition on Internet gambling, particularly with regard 
to payments or anything else? Ms. Hanaway?
    Ms. Hanaway. Well, certainly it is the position of the 
Department that Internet gambling in all forms is illegal under 
the laws today.
    Mr. Smith. Are there any gaps in current law?
    Ms. Hanaway. I think it would be helpful to have some of 
the further clarifications that were contained in legislation 
Congressman Goodlatte proposed last year. Perhaps some further 
specification of the specific forms of gambling that are 
covered, although we do believe and take the position that all 
forms of gambling, including poker, are covered by existing 
    Mr. Smith. Okay.
    Ms. Abend, any gaps in the current law that need to be 
    Ms. Abend. Thank you, Congressman, for your question. 
Treasury Department is not seeking additional authorities at 
this time.
    Mr. Smith. Okay. Thank you.
    Ms. Duke, I have a couple of questions for you. First of 
all, congratulations on your success. I have to say, you 
certainly got your money's worth from that Ph.D.
    Two questions. One, do you see any distinction between 
poker and other forms of gaming, or do you think they are all 
the same?
    Ms. Duke. No. From a civil liberties standpoint, I would 
call them all the same.
    Mr. Smith. Okay.
    Ms. Duke. However, there is a very huge distinction between 
poker and other forms of gambling. Other forms of gambling are 
house-banked and are designed so that the house has an edge. So 
that when someone chooses to play them, they know that they are 
mathematically guaranteed to lose in the long run, but they are 
choosing to try to get lucky in the short run.
    Poker is a game where you can play with an edge because it 
is a game of skill. So it is a game that you can get better at 
that actually has quite a bit of social utility in terms of, 
for example, enhancing mathematical skills or negotiation 
skills. In fact, John Von Neumann----
    Mr. Smith. Let me stop you there. I will take your word for 
that. I want to ask one more question before we have to leave.
    Ms. Duke. Okay.
    Mr. Smith. In the last James Bond movie called Casino 
    Ms. Duke. Yes.
    Mr. Smith [continuing]. James Bond draws an inside straight 
flush. What are the odds of that occurring? [Laughter.]
    Ms. Duke. An inside straight flush will happen with one 
card to come 2 percent of the time, but that doesn't mean that 
it is a game of luck. It means that 98 percent of the time, he 
wouldn't have had that, and it frankly shouldn't have been 
involved in that hand, and a good player knows that because we 
play with an edge and we constantly get ourselves into 
    Mr. Smith. I am not questioning your skill at all. So it is 
2 percent on an inside straight flush.
    Ms. Duke. Right.
    Mr. Smith. What about a royal flush?
    Ms. Duke. Well, a royal flush will happen about one in 
every 6,000 or so hands, but you can use any cards from your 
hand whatsoever in Texas Hold'em. It is different for different 
    Mr. Smith. Mr. Chairman, I think we are getting free 
tutoring today.
    Ms. Duke. But the fact that I know those statistics shows 
that it is a game of skill, even in the short run, even in one 
hand or one turn of the card.
    Mr. Smith. Okay. Thank you, Ms. Duke.
    I yield back the balance of my time.
    Mr. Conyers. The Committee will stand in recess for a 
while. We hope that we can have our guests go back to the room 
there, because your discussions among each other are very 
important. They help us in flushing out some of these very 
complex questions.
    So let us stand recess until the votes are taken.
    Mr. Conyers. Excuse the voting necessities of the 
    The Chair recognizes the gentleman from Florida, Bob 
    Mr. Wexler. Thank you very much, Mr. Chairman. I first want 
to thank the Chairman for holding what I think is an extremely 
compelling and illuminating hearing. I particularly found Ms. 
Duke's testimony with respect to the personal freedom aspect of 
what we are talking about today to be especially important; the 
professor's testimony regarding the trade and economic 
implications of the unlawful Internet Enforcement Gaming Act to 
be extremely important; and I found equally compelling the 
testimony from the Department of Justice, from Ms. Hanaway, 
equally compelling because of its sweeping nature. Mr. 
McClusky's citation of the moral aspects and the grave toll 
that gambling takes I think is also worthy of some examination.
    If I could, Mr. Chairman, just to take a step back, just to 
give people a sense of the environment in which we operate. 
More Americans watch professional poker on television than 
watch NBA basketball. So more Americans are watching Ms. Duke 
and her colleagues play poker than are watching Shaquille 
O'Neal and Dwayne Wade. That is how popular poker is in 
America. More Americans are watching poker than watch baseball 
in the United States.
    The fact of the matter is, poker has been played for 
decades in the White House. It has been played in the halls of 
Congress. And don't get me wrong, I am all for it, and I 
suspect it has been played at the Supreme Court, and more 
importantly it is played in millions of kitchens across America 
and millions of dining rooms across America.
    The fact is, poker is America's pastime game, and it is a 
game of skill. That is the venue in which we operate, except 
that the last thing that the last Congress did with the now-
minority when it was a majority, was to say that playing poker 
on the venue of the 21st century, the Internet, would be 
illegal, and that it needs to stop.
    That is why we are here, Mr. Chairman. And let us talk 
about some of the supposed declarations. The very distinguished 
Ranking Member talked about the fact that we have a prohibition 
of Internet gambling. We do not have a prohibition of Internet 
gambling. We do not prohibit betting on horses on the Internet. 
We do not prohibit betting on lotteries on the Internet. We 
don't prohibit betting on fantasy sports on the Internet.
    To Mr. McClusky, I would respectfully suggest, and I 
respect your morals, I certainly do. You have every right to 
believe as you do. And I respect that. But I find it hard 
intellectually to understand why it is moral to bet on a horse 
running around a track, but if it is a dog, if it is a 
greyhound running around the track somehow it is immoral, 
according to this Congress. I don't get the distinction.
    Mr. McClusky. If you would like to introduce legislation to 
ban horse racing, FRC would be glad to look at that.
    Mr. Wexler. Well, what I would like to do is actually have 
legislation that treats all gambling the same. Either we 
prohibit it all because we are morally so offended, or we let 
it all be up to the personal freedom of Americans to decide. 
But to cherry-pick as a Congress is what I find particularly 
intellectually dishonest.
    I guess my question would be respectfully to Ms. Hanaway. I 
found your response to the Chairman's question interesting--the 
question regarding horse racing. It would be interesting if you 
weren't in the Department of Justice, if you were at the 
Treasury, it might be interesting; if you were just a private 
citizen, it might be interesting.
    But we do not, at least as I understand it, we don't 
prohibit the betting of horse wagering on the Internet, yet you 
testify that it is the Department of Justice's position that 
all forms of Internet gambling are prohibited. But you tell the 
Chairman that horse tracks are not subject to any of the 
activities of the Department of Justice.
    Your testimony is that the statute applies to both sporting 
events and other forms of gambling. But yet, that seems to 
ignore what was the Fifth Circuit decision, if I understand it 
correctly, understanding that Missouri is only an authority, 
but not a controlling authority in your jurisdiction. But if I 
understand the state of the law is that it is only sport 
betting that is specifically prohibited by the current state of 
the law, and yet you tell us the Department of Justice takes 
the position that all forms of Internet gambling are 
    Why aren't we, if that is the case, prosecuting every 
lottery director in America? Why aren't we prosecuting 
everybody who shows up at an off-track horse-betting 
establishment in America? Why aren't we prosecuting every 
fantasy sports outlet in America? Don't get me wrong. I don't 
want that to happen. But you are the Department of Justice. 
This is the state of the law. Please tell me, where do I have 
it wrong?
    Ms. Hanaway. Thank you for your question, Congressman. Let 
us start with I think something either that you mis-heard or I 
misstated. And that is that whether we as a Department believe 
that placing bets over the Internet on horse racing is illegal. 
We do believe and take the position that it is illegal. We have 
prosecuted cases. Horse racing betting is a portion of the 
current prosecution we are doing against BetonSports. It was 
also the primary means of betting and wagering in a prosecution 
done in the Southern District of New York. The name of the case 
was the United States v. Uvari.
    With respect to the Fifth Circuit case, that is the one 
case that has held that 18 U.S.C. Section 1084 does not apply 
to poker wagers. That was litigation between private parties. 
The United States was not a party to that case. We have 
consistently taken the position that poker is covered by that 
statute, but also importantly by two other statutes that were 
not litigated in that case: 18 U.S.C. 1952 and 1955. At least 
one magistrate judge in the Eastern District of Missouri has 
said we are correct in that interpretation of the Wire Act, 
including section 1084.
    Mr. Wexler. If I may, Mr. Chairman, has the Department of 
Justice shut down a single e-lottery system in the United 
States? And if you haven't, why not?
    Ms. Hanaway. Congressman, I don't know that I can answer 
your question. I don't know if in fact the Department has done 
that anywhere. I would be happy to get more information to 
follow up with submitting an answer in writing.
    Mr. Wexler. The beauty of the Department of Justice's 
position, as you enunciate it, which is all forms of Internet 
gambling are prohibited, means there is no gray area. Shut it 
all down. So when we see selective enforcement, that is what 
suggests a very untoward result in some of our minds. That is 
what appears to be the state of the law. This idea that we 
prohibit Internet gambling is a fallacy. People are legally 
doing it millions of times every day in America.
    If I could close, Mr. Chairman. Mr. Smith earlier and Mr. 
Goodlatte as well make I think some very valid points on the 
issue of underage gambling. It is a serious problem. I think we 
all take it extremely seriously. Mr. Colopy I think gave 
excellent testimony in terms of how it can be avoided.
    The irony is, the irony with respect to the state of the 
law as we see it, is that there is more likely an over-usage of 
younger people now using off-site gambling sites and 
underground poker sites because we in fact have prohibited it 
and not required that poker sites have this type of technology. 
That is the terrible irony involved. More kids are going to 
gamble that shouldn't be because of this legislation, and we 
have the responsible way to stop it.
    And also with respect to habitual gamblers, the Internet is 
actually the savior because everything is documented. With a 
simple look at who is doing what on the Internet, you can 
figure out who are the problem gamblers, prohibit them from 
gambling, and get them help. You put it underground, you do it 
off-shore, they are going to lose the same amount of money, if 
not more, and you won't get them any help, and none of it goes 
    Mr. Conyers. Thank you very much.
    The Chair recognizes the gentleman from North Carolina, the 
senior Member of the Judiciary Committee, Howard Coble.
    Mr. Coble. Thank you, Mr. Chairman.
    It is good to have you all with us. Mr. Chairman, some 
years ago, Merle Haggard, a country balladeer, recorded a song 
entitled ``The Kentucky Gambler.'' And the concluding lyrics 
were these words: ``But a gambler loses much more than he 
wins.'' Now, Ms. Duke would be an exception to that, but I 
would be inclined to think that the number of losers far 
exceeds the number of exceptions.
    Ms. Hanaway, Internet gambling cases are complicated for 
several reasons, not the least of which is because most of the 
facts deal with electronic transactions. If the law was changed 
and Internet gambling became regulated, how would this impact 
your ability to investigate and prosecute Internet gambling 
    Ms. Hanaway. Congressman, you are absolutely correct that 
these are very complex cases. Each of these cases, like 
BetonSports or NetTeller, in each of those the defendants were 
gigantic organizations. We heard testimony earlier from 
Congressman Goodlatte that the prosecution of NetTeller alone 
closed down the payment of $6 billion a year--that is $6 
billion with a ``b.'' In BetonSports, we alleged that it was $1 
billion per year being bet.
    So whether these prosecutions involve illegal gambling or 
legal gambling, we are still talking about a magnitude of 
transactions that will require enormous amounts of 
investigation and I am not certain that a change in the law 
other than bringing some of those records on-shore would make a 
significant difference in those prosecutions.
    Mr. Coble. Thank you for that.
    Professor, would the United States have jurisdiction to 
prosecute an off-shore gambling website?
    Mr. Weiler. I have to answer, it depends, complicated rules 
about extraterritorial jurisdiction. Just as we would not like 
some far away country to prosecute legal activity in our 
country, other countries do not like us to prosecute what is 
legal activity in their countries. So there are complicated 
rules about that.
    But Congressman, the burden of my testimony was not the 
jurisdictional issue, because simply saying that under the 
commitment the United States took within the World Trade 
Organization, the activity which is being prosecuted is 
protected. It should not be prosecuted independently of the 
jurisdictional issue. I am sorry I can't answer more fully.
    Mr. Coble. That is good enough. Thank you, sir.
    Mr. McClusky, Internet gambling is regulated and permitted 
in Europe. What impact has this had upon their society, if you 
    Mr. McClusky. The study I cited in my testimony was a 
British study where it is regulated, and it showed that even 
under regulation that online addiction to gambling online has 
risen just as much as it has become popular over there. So even 
regulation has not helped those who have become addicted 
    Mr. Coble. Professor, let me come back to you again. I 
think you may have touched on this earlier. Trade has had an 
enormous impact upon the district I represent and upon other 
districts as well, some good, some bad. I represent several 
industries that rely very obviously on international trade. 
What impact will the WTO decisions have and what industries 
will be affected, if you know?
    Mr. Weiler. Each decision of the WTO is germane to the 
industry at hand. I will give you an example. The United States 
brought a case against Japan which was discriminating in the 
way they taxed alcohol. They found an ingenious scheme that had 
a low tax on Japanese alcohol and a high tax on our bourbon, et 
    The United States representative in the WTO very, very 
forcefully said to Japan, ``You undertook when you signed onto 
the WTO that decisions of the appellate body should be complied 
with unconditionally. Please comply.'' And Japan complied. I 
think it is in the interest of this country that the decisions 
of the appellate body of the WTO on which there is always an 
American judge, should be complied with when we win and when we 
    Mr. Coble. Mr. Chairman, if I may ask one more quick 
question to the U.S. attorney, Ms. Hanaway.
    Ms. Hanaway, have any Internet gambling sites been linked 
to money laundering? I don't know the answer. I am wondering if 
that has come across your desk.
    Ms. Hanaway. There have been some cases, Congressman, that 
have been linked to money laundering, but it has been to date 
within the context of laundering proceeds of gambling. It 
hasn't been proceeds from other illegal activities that were 
laundered through these Internet gambling companies.
    Mr. Coble. I see my time has expired.
    Mr. Chairman, I yield back. Thank you.
    Mr. Conyers. You are welcome.
    The Chairman of the Crime Subcommittee, Bobby Scott of 
    Mr. Scott. Thank you very much.
    Ms. Duke, you are representing the Poker Players Alliance. 
We have heard today a suggestion that online gambling can lead 
to bankruptcy, divorce, domestic violence, child abuse, crime 
and imprisonment, and raising children who are at an increased 
risk of smoking, drinking, drug use and becoming pathological 
    Can you comment on that, especially pointing out what most 
people gamble in an average Friday night poker game?
    Ms. Duke. Absolutely. I appreciate the question. Since some 
Members of the Committee feel that bringing up anecdotal 
evidence is important in determining legislation, I would like 
to point out that none of my four children smoke or drink; none 
of them play poker or have any interest in playing poker 
whatsoever, or engage in any other forms of gambling. So far, I 
am not bankrupt, and I certainly don't abuse my children. So I 
guess that I am the piece of counter-evidence that you can now 
base the legislation on.
    But most people who gamble online, it has been determined, 
spend $10 a week doing so, which where I live wouldn't even get 
you into a movie. These are these people's recreational 
dollars, and I feel that they should be able to choose to spend 
those recreational dollars and discretionary money as they so 
    We can find anecdotal evidence of people harming their 
families, again as I said before, from any activity that you 
might engage in, and not just activities that we seek to 
regulate like, for example, alcohol, but activities that we 
seek not to regulate like shopping, for example.
    One would hope that because anecdotally we have people 
making very bad decisions for which Internet gambling is 
certainly not the cause, but a symptom of the issues in those 
families that we wouldn't be legislating on that. At least I 
would hope that. That is my understanding of how the law works, 
so I certainly appreciate the opportunity to be able to re-
state those beliefs.
    Mr. Scott. Thank you.
    Ms. Hanaway, we have heard a lot about the prohibition 
against Internet gambling. Isn't it true that Internet gambling 
in the Federal code, it is not illegal to gamble on the 
Internet? It is illegal to run a gambling operation?
    Ms. Hanaway. It is illegal to engage in the business of 
taking bets or wagers.
    Mr. Scott. But not illegal--there is no prohibition against 
gambling on the Internet?
    Ms. Hanaway. That is correct.
    Mr. Scott. Okay. Now, if the site is located outside of the 
jurisdiction of the United States, particularly in some low 
country that we don't have diplomatic relations with, how would 
you restrict someone's ability to gamble on that Internet site 
under present law?
    Ms. Hanaway. Well, the position that we have taken is that 
they are using wires that are contained within the United 
States to either transmit the funds or to transmit the 
information upon which they are placing the bets.
    Mr. Scott. And how would you get jurisdiction? How would 
you prosecute the case?
    Ms. Hanaway. Well, the best example I can give you is the 
case that is in our own jurisdiction, which is BetonSports, 
where the corporation subjected itself to our jurisdiction, 
even though it was a corporation domiciled in Great Britain.
    Mr. Scott. That is a country we have good diplomatic 
relations with. How about a country we do not have diplomatic 
relations with? Is there any way to reach them effectively with 
the Internet?
    Ms. Hanaway. It makes it much more difficult.
    Mr. Scott. Ms. Abend, how would a bank know that a specific 
transaction involves unlawful Internet gambling if the payee is 
an escrow account or a hotel that has a casino and online 
    Ms. Abend. Congressman, thank you for your question as 
regards the various types of payment systems that can be used 
and the specific example I think that you are talking about. In 
the event that, for example, under our current proposed rule, 
someone was to use a credit card to make some kind of deposit, 
the proposed rule outlines policies and procedures that are 
reasonably designed. As one of the non-exclusionary examples in 
    Mr. Scott. How would a bank know what the purpose of the 
transaction was? How would the bank know that it is unlawful 
Internet gambling, if all they have is the payee's name?
    Ms. Abend. Well, in the example that you are providing to 
me, Congressman, the merchant account agreement with the credit 
card company is required to have due diligence processes and 
procedures to know the kind of activity that that business that 
they are creating that merchant account agreement with is in, 
what kind of activity they are conducting. In the example that 
you are using, if it is for the purpose that that account is 
being used for the purpose of unlawful Internet gambling, 
    Mr. Scott. How would the bank know, if it is a hotel in 
Monte Carlo?
    Ms. Abend. Congressman, as part of the requirements for 
credit cards, credit card companies when a bank establishes a 
merchant account agreement, that is a financial institution, 
with a business for them to be able to process credit card 
payments, there is a due diligence requirement for them to be 
able to know whether or not it is processing illegal online 
    Mr. Scott. But if it is a hotel in Monte Carlo, they could 
have hotel expenses. That is not illegal.
    Ms. Abend. Congressman, you raise a very good point.
    Mr. Scott. It could be legal casino transactions.
    Ms. Abend. Congressman, you raise a very good point. It is 
something that the Treasury in consultation with the Department 
of Justice and the Federal Reserve Board spent a lot of time 
focusing on during our deliberations--the idea that payments 
could be commingled for lawful or unlawful activity. And so 
what we did in our proposed rule is we outlined what we think 
are reasonably designed policies and procedures for them to 
monitor whether those types of accounts are being used for 
illegal activity.
    Mr. Scott. Do you have any jurisdiction over foreign banks 
if somebody were to open a bank account in a foreign bank? 
Would you have any jurisdiction over that?
    Ms. Abend. Congressman, to the extent that the financial 
institution is overseas, the statute does not provide authority 
for us.
    Mr. Scott. Mr. Chairman, if I could ask one question to Mr. 
Colopy. You can verify age. Can you technologically verify 
location, where the person is located as they are gambling on 
the Internet?
    Mr. Colopy. Yes. In most cases, yes.
    Mr. Scott. So if a State were to legalize it, you could 
technologically ascertain that they were in fact in Nevada?
    Mr. Colopy. Yes. For example, right now the New York state 
lottery, it does not sell tickets beyond its borders. We 
process for them, and those are verified.
    Mr. Scott. Thank you, Mr. Chairman.
    Mr. Conyers. Thank you very much.
    The Chair recognizes acting Ranking Member, Bob Goodlatte 
of Virginia.
    Mr. Goodlatte. Thank you, Mr. Chairman. There are a lot of 
things that need to be touched on here.
    First, I would like to suggest that while this is a 
wonderful panel and everybody has made a good contribution, you 
might want to consider having an entire panel of State 
attorneys general and governors. The reason I suggest that is 
that that is really what the heart of this issue is all about. 
What the Federal Government has generally done has been related 
to helping the States enforce their laws.
    Ms. Duke has correctly noted that our Federal law, which is 
over 40 years old, the Wire Act, is out of date. Mr. Wexler 
incorrectly noted that last year we passed legislation--I wish 
you were here to hear this--but that we passed legislation last 
year to correct that. I wish that we had. This Committee worked 
very hard on that legislation. We passed it out, and as has 
been already noted, it passed the House by an overwhelming 
margin. But I went to the Senate and pleaded with the Senators 
to take that. They only took the financial services portion of 
the bill.
    So all of this discussion about what the Congress has done 
recently needs to focus on the fact that the only thing that 
Congress has done--here he is--the only thing that Congress has 
done is to pass legislation related to the transfer of funds. 
We have changed no laws related to what is lawful and what is 
not lawful for gambling.
    Now, in the United States, other than horse racing, which I 
will be happy to discuss, there are no activities operating 
outside of States where Internet gambling is taking place. The 
reason for that is very simple. If the State of New York sells 
lottery tickets over the line in Connecticut, they will hear 
from the Connecticut attorney general. Oh, and you know what? 
They have already heard from the Connecticut attorney general, 
who has challenged what New York is doing, because the 
technology is far from perfect.
    MySpace, on a totally different issue, was asked to address 
this issue of keeping minors from being exposed to people of 
other ages on MySpace sites. And as of yesterday, when we 
contacted MySpace, they again told us that it was impossible to 
verify the age of their users with accuracy. Yes, there are 
ograms that do this, and I know Aristotle is a leader in that 
area, but at the Financial Services Committee hearing there was 
another witness who testified that these technologies have 
error rates upwards of 20 percent to 30 percent.
    And when it comes to determining location, the problem is 
even greater. The reason is that with a hand-held device, you 
simply do not know where that person is at all times. If they 
want to pass that device on to somebody in another State to 
participate in this, that is something that I don't know that 
the technology can counter.
    So what we are left with, then, is what we have always had 
with regard to gambling. And that is that this is primarily 
something that is regulated by the States. The reason why very 
few States have attempted to do anything online is because they 
can be sued and indeed prosecuted by neighboring States. Utah, 
which has no legal gambling, sits next to Nevada, which has all 
manner of legal gambling. There are no Nevada businesses that 
are engaged in this.
    So this then takes us to the WTO situation that Professor 
Weiler complains about. That goes back almost 20 years to the 
negotiations for the Uruguay Round of the WTO. And the language 
is a very obscure phrase called ``other recreational 
services.'' Isn't that correct, Professor Weiler? The language 
that was the basis for Antigua bringing a case against the 
United States--I will yield to you in a minute, Professor 
Weiler. Let me lay this out and then you can respond, if the 
Chairman will allow me.
    Other recreational services--the determination was made 
that that encompassed gambling. Now, at that time, there was no 
Internet gambling that anybody contemplated, and most, not all, 
but most people involved with those negotiations, and certainly 
the current representatives of U.S. trade, have maintained that 
it was never our intention to take something that is primarily 
regulated by the States and trade it away internationally. But 
nonetheless, as Professor Weiler has correctly noted, the 
dispute resolution panel determined that ``other recreational 
services'' encompassed gambling and that the United States was 
in violation of the trade agreement.
    So given the quandary that we have, so then on the appeal 
it was determined that because there is horse racing that takes 
place in the United States, betting online, and the Justice 
Department for whatever reason has chosen not to begin any 
direct prosecutions in that area, although Ms. Hanaway 
correctly notes that it is a part of some of the other 
prosecutions they have been involved with, that issue remains 
    And so, the U.S. trade representative, without action by 
the Justice Department, is forced to deal with the fact that, 
as correctly noted, that there is this one activity going on in 
the United States.
    Mr. Wexler. Would the gentleman yield?
    Mr. Goodlatte. No, let me finish, and then I am going to 
yield to Mr. Weiler, and then I will be happy to take the 
matter further.
    So the U.S. trade representative, given the fact that this 
is widely regarded in the United States, even the Chairman 
noted at the outset, as a morals issue, and not something to be 
dealt with in terms of international trade, determined to 
withdraw it. Now, when you withdraw something from the WTO, 
that is not a small matter by any means. So when you do that, 
you then have a determination made of what kind of damages 
should be paid to do that.
    Well, one of the things that I hope they look at is the 
fact that nobody contemplated the dramatic explosion of 
Internet gambling when that agreement was made many, many years 
ago. So certainly, people who entered into the agreement were 
not seriously harmed by that.
    And secondly, you should look to what it is that they are 
being denied the opportunity to do. Horse racing--I don't see 
Antigua saying that they have big plans to engage in horse 
racing. No, it is casino gambling. It is poker. It is all of 
these others things that they are engaged in.
    So that process has to work its way through, and they are 
now in the process of discussing this. Many of the countries 
have settled with the United States, but the European Union has 
not and Antigua has not. I think it is very important that the 
Congress not interfere with that process as it works its way 
through and as it is resolved.
    I think it is also important that the Congress not 
interfere with the fact that we have just now written 
regulations that relate to a new mechanism for enforcement in 
terms of the transfer of these monies outside of the country. 
But that is what is in my opinion the crux of this matter, what 
the States' interests are and how our government will resolve 
this difference with the WTO.
    Now, Mr. Weiler, my time has expired, but if the Chairman 
will allow, I certainly hope that he will feel free to respond.
    Mr. Wexler. Mr. Chairman, could I just add 30 seconds to 
Mr. Goodlatte's point, which was raised as to the state of the 
law in reference to my legislation and so forth, if I may?
    Mr. Goodlatte says that the bill that was previously passed 
didn't in effect change the state of the law. I introduced H.R. 
2610, which would permit Americans to play games of skill like 
poker, backgammon, mahjong, online as I believe they have every 
right to do.
    The issue is, contrary respectfully to what Mr. Goodlatte 
says, is the Department of Justice is with us today, and the 
Department of Justice is saying that the Wire Act, which the 
controlling case says should only apply to sports betting, not 
poker, the Wire Act is not supposed to be applied to poker 
under the Fifth Circuit case, the Department of Justice tells 
us, ``Oh, no, it does.''
    So that is where I would respectfully differ with your 
statement as to the law.
    Mr. Goodlatte. Well, reclaiming my time, don't forget what 
the primary emphasis of my remarks was that you also have 50 
State laws. And when you go online, and Utah doesn't want any 
gambling in Utah, there is not, notwithstanding Mr. Colopy's 
claim, any State that has so far determined that it is going to 
offer these services online because they do not have the 
confidence that they can keep it from going from one State to 
    I am opposed to having a Federal gaming commission. I think 
48 out of 50 State attorneys general would agree with me on 
that point. That is at the crux of this matter. Is the Federal 
Government suddenly going to move into the regulation of 
gambling or not? They have the Wire Act. I would join with you. 
In fact, at one time I did join with you to attempt to 
modernize the Wire Act, because I think it should be, but 
primarily as a tool to help the States regulate and enforce 
their gaming laws, not to get the Federal Government in as the 
final arbiter of what is legal and what is not legal in the 
United States.
    Mr. Weiler? Professor Weiler?
    If you will permit, Mr. Chairman?
    Mr. Weiler. Thank you, Mr. Chairman.
    Thank you, Mr. Goodlatte.
    I want to remind the Committee that I really express no 
opinion on the desirability otherwise of gambling as such. I 
just want to----
    Mr. Conyers. It is okay if you want to. [Laughter.]
    Mr. Weiler. I don't. But I want to clarify the position of 
the WTO. The phrase in question is ``recreational, cultural and 
sporting services.'' And that was found to cover remote 
betting. It is not 20 years ago, Congressman. It is from back 
in 1995.
    Now, there are two areas where probably you and I will 
eventually agree to disagree. Let us assume that the United 
States indeed found that it gave a commitment that it 
discovered later that it covered something that it did not want 
covered--remote betting. It goes before the dispute settlement, 
which it itself set up and supports, and it loses. And it goes 
to appeal and it loses. And it is illegal. And it signed onto 
an agreement which says that once the appellate body speaks, 
the members will comply unconditionally.
    One thing that is troubling me, and I think may trouble 
this Committee, and is troubling many people around the world 
is why in the face of that are these criminal prosecutions 
continuing? Once you resolve the issue for the future, you 
criminalize it, but when individuals are engaged in activities 
that the United States has held to have committed to be free, 
that is what is troubling. We have a self-interest in that, 
because what we do today might be done to our citizens 
    Mr. Goodlatte. Professor Weiler, would your answer be the 
same if it were cocaine from Colombia? If it were shoulder-
fired missiles from another country? If the mistake we made 
that allowed the importation of an unlawful product in the 
United States----
    Mr. Weiler. But that is exactly the point I make in my 
written testimony, Congressman. Sometimes on vital national 
interests like national security, we come against an 
international obligation. We are seeing it. You know what I am 
talking about. And we say because it is a vital national 
interest, our own existence, we are very sorry, we just have to 
follow our national interest.
    But this is not national security. And we should be 
sparing. We are the most powerful state in the world. We must 
be sparing when we violate international legal obligations. 
This is not cocaine. There is no vital national interest. That 
is the first point.
    The second point is the WTO was hospitable to the moral 
argument. The appellate body under article 14 of the GATS, it 
says public morality is an excuse, a legitimate excuse. What 
they could not understand is how the United States could come 
in and say we want a justification to prohibit remote betting 
from WTO members, when in the United States, I read from the 
ruling, it has been found that there is substantial and even 
prominent businesses with collectively thousands of employees 
and apparently tens of thousands of clients paying taxes or 
generating revenue for government, having traded openly for up 
to 30 years and in some cases even operating television 
channels. The evidence regarding the suppliers demonstrates the 
existence of a flourishing remote account wagering industry in 
horse racing in the United States, operating in ostensibly 
legality. The United States did not----
    Mr. Goodlatte. That is why the United States withdrew from 
the provision because we have not been able to pass legislation 
that clarifies this, or to have it resolved in our courts. 
Barring that, the most sensible thing to do was what the U.S. 
trade representative did do, which was to withdraw the 
provision from the agreement.
    Mr. Weiler. Understood. But with respect, Congressman, that 
is indeed why they are doing it, but I wanted to explain why 
nobody in the WTO bought the moral argument, the cocaine 
argument, because if a country said it is immoral to do this 
kind of remote betting, but not another kind, it simply was not 
persuasive. And the way the withdrawal is being perceived, they 
are withdrawing so they can continue to engage in 
protectionism, to protect a domestic industry which is allowed 
to remotely wager and not allow an outside supplier.
    So I understand that on this you and I will probably agree 
to disagree, but those are the two issues which a lot of people 
find troubling and are risky for our long-term interests in the 
world trade arena.
    Mr. Conyers. The Committee will stand in recess.
    Ms. Jackson Lee. Mr. Chairman, can I just get a quick 
question in, because I will not be able to return? I really 
would appreciate it.
    Mr. Conyers. Absolutely not. I am sorry, with all due 
respect to my esteemed colleague, but we have how many minutes 
    Ms. Jackson Lee. We have 3 minutes, but we have a bunch of 
    Mr. Conyers. The leader just lectured us about closing off 
the vote.
    We will stand in recess. You are welcome to go back into 
the Committee room and debate or discuss among the witnesses 
what your final advice is going to be for us this afternoon 
when we return.
    Mr. Conyers. The Committee will come to order.
    The Chair recognizes the distinguished gentlelady from 
Texas, Sheila Jackson Lee.
    Ms. Jackson Lee. Thank you very much, Mr. Chairman.
    I thank the witnesses. For those whose testimony I have not 
heard, I apologize for being in a number of hearings as Members 
tend to be.
    I did hear the discourse with the distinguished gentleman, 
and I am attempting to find your name, because I don't think 
you were sitting in the appropriate seat, but I think you are 
now. At a fairly high pitch, which I think is appropriate, you 
spoke about this in the context of national security, 
particularly as it relates to our trade agreements.
    I frankly believe you have made a very valuable point, 
because many of us who have taken issue with the WTO have 
really fought around issues of survival, whether or not it was 
the survival of the Caribbean as it relates to the banana 
trade, taking a different perspective for them to survive, or 
whether it was around issues that truly relate to national 
security, international travel. We really have stood our ground 
and in that instance been in conflict with, for example, the 
    But you raise an important point as to whether this raises 
to this level of prominence. So my line of questioning goes 
along those lines, because I am trying to find a reasoned 
position here. My good friend from Virginia, who is not here, 
knows that at one point I found merit in his arguments.
    I have since had a different perspective because I think 
there is such a debate over the use of the Internet and online 
activities that you do have to begin to distinguish life or 
death matters or matters of high morality, if you will, that 
have a general embrace by most of America, such as the enticing 
of children over the Internet for sexual activities. I don't 
think there is vast disagreement on that issue. Most of us 
would go to the line, if you will, on eliminating that 
    On the other hand, when you speak about gambling, you have 
the old nightmares of addressing the question of the most 
vulnerable, and particularly sometimes in my community, that 
are the victims. But they are the victims possibly of the 
lottery and a number of other enticing activities. So it is a 
social responsibility, maybe a faith-based responsibility, to 
be able to address those concerns so that people can 
responsibly manage their concerns.
    But in this instance, and I raise my question first to Ms. 
Duke, because I do think that the Frank bill, the Barney Frank 
bill, is reasonable. My question to you very directly is, with 
your degrees and your choices, help me understand, and my time 
is short, so let me just say quickly, whether or not this bar 
on your practice or your avocation is effective? And whether or 
not since this bill has occurred, whether you have seen an 
increase in your membership? And whether or not we are really 
getting where we want to get with this ban, as opposed to it 
being a ban on livelihood, income and opportunity?
    Ms. Duke?
    Ms. Duke. Thank you for the opportunity to answer your 
question. The fact is that people are engaging playing poker 
online regardless of whether the UIGEA exists. All we are doing 
is having them engage on it with foreign operators and foreign 
payment processors.
    So believe me, it was difficult to get money online before, 
regardless of this legislation. PayPal ceased to allow money 
transfers to be made somewhere around 2002, I believe, 2001 or 
2002. It was pretty early in the process. Credit cards have 
denied gaming transactions when they are coded for gaming 
transactions for a very long time. So people have always had to 
sue off-shore payment processors.
    Now, NetTeller, to be sure, has been shut down, but there 
are lots of other payment processors out there that people can 
use. So in a regulated environment, we would be much better 
    Ms. Jackson Lee. Such as the Frank bill?
    Ms. Duke. Such as the Frank bill, in order to determine 
people who should be----
    Ms. Jackson Lee. What about the morality question? I am 
sorry my time is so short, but what about the morality 
    Ms. Duke. Sure. The issue that I have on the morality 
question, meaning no disrespect to Mr. Goodlatte, is that I 
personally, as an American, am very offended that we would take 
a morality stance on gambling. It is legal in 48 States. I 
don't understand why it would be more immoral to gamble on the 
Internet than it would be to walk into the Bellagio in Las 
Vegas and gamble there. If we allow it to be legal in 48 
States, I hardly think that this country can take a moral 
stance on gambling. To pull the morals card as it relates to 
the Internet is just a new----
    Ms. Jackson Lee. But you would welcome regulations so that 
scoundrels could not be involved in it?
    Ms. Duke. I don't think that children should be gambling 
online. My children do not gamble online. I would welcome 
regulations because I feel that the government would then be 
able to give me much greater support in enforcing those rules 
in my household. If I had support from this government, knowing 
that the sites that were offering gambling in this country were 
forced to use the kinds of technology that Mr. Colopy has 
discussed, and that I discussed in regards to a technology like 
SNARE, I would feel much more comfortable about my children 
being on the Internet.
    Ms. Jackson Lee. Mr. Chairman, would you indulge me an 
additional minute for the Justice Department representative to 
answer this question? I ask unanimous consent. Thank you, and 
forgive me for interrupting you, Ms. Duke. My time is short. 
But I do want to acknowledge----
    Ms. Duke. I appreciate the time that you gave me. Thank 
    Ms. Jackson Lee. Thank you.
    I do want to acknowledge a letter from the Virgin Islands 
to express both the detailed way in which they handle their 
gambling, and the very difficult position we put them in if we 
were to continue in the way that we are continuing with this 
bar. But to the Department, have you gone after--what kind of 
prosecutions have you engaged in to get the scoundrels off of 
poker playing or Internet gambling?
    If we had not had this bar, would this be an issue that you 
would be out championing? Do you have a Department staffed up 
with a task force that is going after these scoundrels, the 
alleged scoundrels, if this is such a horrible act? What kind 
of work are you doing to weed out these individuals? And what 
kind of work were you doing before this law came into place?
    Ms. Hanaway. Congresswoman, I have cited several cases 
today, including the United States v. NetTeller or the United 
States v. Uvari, the United States v. BetonSports, that are 
prosecutions under the law that existed before the UIGEA. So 
those are prosecutions primarily under the Wire Act.
    Ms. Jackson Lee. And under what mindset? What were you 
operating under at that time?
    Ms. Hanaway. Under the Wire Act that was passed in the 
1960's, and updates to it.
    Ms. Jackson Lee. And you saw the value? What was the 
problem that you were trying to go after?
    Ms. Hanaway. Illegal Internet gambling, the fact that those 
companies were violating the laws as they existed.
    Ms. Jackson Lee. But you could not--basically, it was just 
a Plain Jane law. You were not seeing major cartels or scandals 
or people dying and being in shoot-outs.
    Ms. Hanaway. Well, there was a great deal of money being 
transmitted outside of the United States. The allegations in 
    Ms. Jackson Lee. So if this law that Mr. Frank has is in 
place, that would stop the money going outside the United 
States, would it not? Would it not?
    Ms. Hanaway. I can't say that it would with certainty, 
    Ms. Jackson Lee. But his framework is to prevent money from 
going outside the United States and regulate them.
    Ms. Hanaway. Right now, all of these companies are 
violating the laws of the United States----
    Ms. Jackson Lee. But the laws might change.
    Ms. Hanaway [continuing]. By taking those bets.
    Ms. Jackson Lee. Right. But if the laws were changed?
    Ms. Hanaway. And they are off-shore. I don't know that 
making it legal for those others to operate on-shore in the 
U.S. would make them disappear overnight. I can't say with any 
degree of certainty that they would stop violating the law. 
They are violating the law today.
    Ms. Jackson Lee. But a regulation would at least put a 
population who would abide by the law and give you the 
opportunity with our task force or your go-getters to be able 
to know who are the bad guys, and you would still have a 
framework for sending money back to the United States. You 
would abide by the law, though, would you not?
    Ms. Hanaway. Of course. We would enforce the law.
    Ms. Jackson Lee. I thank you, Mr. Chairman.
    I yield back.
    Mr. Conyers. I thank the gentlelady.
    And the Chair recognizes Steve Cohen of Tennessee, one of 
our newer Members, but highly concerned. He has been here at 
the hearing almost all day.
    Mr. Cohen. Thank you, thank you, Mr. Chairman.
    First, I would like to ask the panel, does anybody know the 
countries in Europe where they have permitted Internet 
gambling? Mr. Colopy, do you know? Any other countries other 
than the U.K?
    Mr. Colopy. There are several. I couldn't list them for 
    Mr. Cohen. Does anybody else know which countries they are? 
Ms. Duke?
    Ms. Duke. I may be mistaken. I just want to say that, but I 
believe that the U.K., Germany, Sweden, Finland----
    Mr. Cohen. That is enough. Does anybody know if there have 
been any studies in any of those countries other than England? 
Nobody knows of any studies. Does anybody know if divorce, 
bankruptcies, suicides, mass exoduses, scurvy have occurred in 
those countries other than England?
    Ms. Duke. Actually, the rate that those have occurred in 
England is quite low. The U.K. gambling prevalence study which 
was just completed, the last study was completed in 1999, which 
was at the front edge of Internet gambling when it wasn't 
particularly prevalent.
    Mr. Cohen. Thank you, Ms. Duke. Do you have a study to rely 
    Ms. Duke. The U.K. gambling prevalence study.
    Mr. Cohen. Is that the same study Mr. McClusky, you cited?
    Mr. McClusky. Yes, it is.
    Mr. Cohen. And you said that it cited that there was a low 
amount of addiction or high-use for people playing the lottery 
and horse racing, et cetera, but higher for Internet gambling? 
Is that correct?
    Mr. McClusky. That is correct.
    Mr. Cohen. But when Congressman Wexler asked you something 
about horse racing, you said that you would look into 
prohibiting horse racing. So you really think horse racing is 
wrong, too, and you should look into making that illegal?
    Mr. McClusky. That would be something I said that we would 
be willing to talk with Mr. Wexler if he was serious about 
including such an exemption, if he was afraid that it was going 
    Mr. Cohen. Do you think that horse racing and dog racing 
and lotteries should be legal in the United States?
    Mr. McClusky. Are you asking me?
    Mr. Cohen. Yes, you personally.
    Mr. McClusky. The Family Research Council does believe that 
such things should be illegal.
    Mr. Cohen. Should be legal?
    Mr. McClusky. Should be illegal.
    Mr. Cohen. Should be illegal. So it is really not the 
Internet you are against. It is gambling in general. Is that 
    Mr. McClusky. Yes, that would be true, or at least 
unrestricted gambling such as we have with the Internet or 
    Mr. Cohen. But the lottery is restricted. You can't play if 
you are a child. Same thing with horse racing. But you are 
against that, are you not?
    Mr. McClusky. Yes.
    Mr. Cohen. So restricted or unrestricted, you are against 
    Mr. McClusky. Yes.
    Mr. Cohen. Is there any fun that you are for?
    Mr. McClusky. Any what?
    Mr. Cohen. Fun.
    Mr. McClusky. Well, we are for this, and this seems like a 
lot of fun.
    Mr. Cohen. Hearings? Good, good. [Laughter.]
    Let me ask Ms. Hanaway a question. Were you in Missouri 
when they had the referendums on lottery and casino gaming?
    Ms. Hanaway. I was.
    Mr. Cohen. And was it predicted there that all these awful 
things would occur? That the river would go all the way back to 
Cairo, that the Cardinals would leave, and that Busch Stadium 
would no longer exist?
    Ms. Hanaway. There were some predictions that it would have 
ill-effects, but none of those precisely as you describe.
    Mr. Cohen. They talked about divorce rates going up, that 
bankruptcies would increase, all those kind of things, didn't 
    Ms. Hanaway. I believe so.
    Mr. Cohen. That is the standard litany. I sponsored and 
passed the lottery in Tennessee. They said all those things 
would occur. None of them occurred. In fact, what happened is 
we have raised $1 billion for education, and the most 
avaricious group tried to get into the lottery program to get 
scholarships were the faith-based schools, who wanted more 
money for the private than the public, or equal to, when they 
at first were only going to be half as much.
    And then they wanted exemption after exemption for home 
schoolers, for people on missions, which I went ahead with and 
agreed with, and said ``fine, no problem, they are kids and 
they are fine.'' But there was a little bit of hypocrisy 
because they were so much against it, and then they were the 
first people at the trough. And that is a problem that I think 
Mr. McClusky your group has, when you come and you predict the 
end of the earth and it doesn't occur, then the next time it is 
a little bit like Chicken Little, you know, the sky is still up 
there and that is a problem.
    Mr. McClusky. I couldn't speak for Tennessee, but in most 
States where they have pushed for a lottery under the guise 
that it would promote for education, that has simply just not 
    Mr. Cohen. I understand that in most States. Tennessee is 
different. We followed the Georgia model. It is all the new 
revenue with the scholarships. It is to after-school programs. 
It is to before-school programs. It has been a great success. 
It is all monies they wouldn't otherwise have. So that is that 
    Let me ask you this. Who did that study in Europe you are 
talking about, in England? Do you know who did the study?
    Mr. McClusky. It was published by the National Center for 
Social Research.
    Mr. Cohen. Is that a private group or public group?
    Mr. McClusky. Actually, I am not sure about that.
    Mr. Cohen. Okay. You have to always look at who does the 
study and who they are being paid for or by. Is anybody 
familiar with the lines that they publish in the newspaper of 
what the point-spreads are on the basketball games and the 
football games? Do you think there is any booking going on in 
America? I mean, they don't put that in for recreational 
activity. There are some people looking at it.
    Let me ask Ms. Abend, did the Department of Treasury ever 
do an estimate on how much revenue the IRS could realize if we 
had chosen to license and regulate Internet gaming from the 
beginning, how much money we could have brought into the United 
    Has there been a study at either Treasury or somebody at 
Justice on how much money could be raised for schools and 
health care and other issues like that if we regulated this?
    Ms. Abend. Not that I am aware of.
    Mr. Cohen. Okay. What would be wrong--to the panel--what 
would be wrong with a simple study? What is wrong with a study? 
Mr. McClusky, what is wrong with a study?
    Mr. McClusky. Well, it would depend on what the study was 
calling for. As I mentioned before in my testimony, Congress 
already called for a study back in 1999 and released that 
    Mr. Cohen. Was that Fahrenkopf? What was his name? What was 
that study on?
    Mr. McClusky. It was on gambling, except it also included 
Internet. It looked at Internet gambling.
    Mr. Cohen. I think I know that study. The deck was stacked. 
No offense, Ms. Duke. It does happen.
    Ms. Abend, would the Department of Justice provide the 
Treasury Department with written comments or input prior to the 
release of the regulations that have developed?
    Ms. Abend. Congressman, yes.
    Mr. Cohen. Would you be willing to provide us with a copy 
of those?
    Ms. Abend. Congressman, I will be happy to meet with you 
and your staff and work with you on that.
    Mr. Cohen. Well, let me defer to Chairman Conyers. If you 
would meet with Chairman Conyers and his staff, because he has 
the power of contempt. If you don't bring them, you will be 
brought in and be flogged. [Laughter.]
    Thank you, though. Thank you. I appreciate your bringing 
them in.
    I think my time is up, and with that, thank you, Mr. 
    Mr. Conyers. Thank you very much.
    Trent Franks, the gentleman from Arizona, the Ranking 
Member on the Constitution Committee.
    Mr. Franks. Well, thank you, Mr. Chairman.
    First, Mr. Chairman, I think that Ms. Hanaway and Mr. 
McClusky have pretty much articulated my perspective both 
legally and in policy terms of the subject that we are talking 
about today. I think with all of the citing of statistics, that 
most people understand in their heart no matter how 
intellectually good they are at presenting a statistical 
analysis, that gambling in general in our republic has tended 
to damage the lives of people. That certainly has been our 
experience in Arizona, especially on some of the reservations 
where they have had wide-scale casino gambling. It has been a 
negative impact on people.
    When you look at Las Vegas, you see some mighty nice hotels 
and some beautiful lights. Something is paying for that, and I 
would suggest that it is the disparate proportion of the 
winners and losers. Gambling essentially produces one thing, 
and that is the loss on the part of someone. That is the only 
way that it survives as an industry is by someone else's loss.
    As far as it producing much for society, other than what 
some might point to as entertainment, even though there might 
be some ancillary jobs created, the overall productivity of 
gambling is the loss and the negative impact on someone's life.
    As far as America, the professor indicated somehow our 
reputation has been damaged because we did what we could to 
protect our families and children from the effect of gambling, 
somehow I think we will survive it.
    With that, Mr. Chairman, I would like to yield to Mr. 
Goodlatte for the remainder of my time.
    Mr. Goodlatte. I thank the gentleman for yielding.
    I would like to revisit this issue with regard to the 
States. Ms. Duke, did I hear you correctly say that you felt 
that the residents of each individual State should have the 
right to determine what kind of gambling they want to have in 
their State?
    Ms. Duke. You incorrectly heard me.
    Mr. Goodlatte. What is your position on that?
    Ms. Duke. My position is that for anyone to take a moral 
stance as far as the WTO is concerned on gambling, to me is 
hypocritical. That would only imply that there is a difference 
as far as the morality of gambling on the Internet versus 
gambling in an actual casino, and the fact that in 48 States 
gambling in some form or other is completely legal. I would 
assume, then, if you are taking the moral stance, Mr. 
Goodlatte, that you are planning to be on gambling in any form 
whatsoever and illegalize it across the country in order to 
remain consistent in your opinion.
    Mr. Goodlatte. No. My opinion is consistent that each State 
should be able to determine what form of gambling should be 
    Ms. Duke. Absolutely. I agree.
    Mr. Goodlatte. Well, that is what I was trying to get at. 
Well, that being the case, then, how does that square for the 
people of Utah with the WTO decision? Should they change their 
lives to allow gambling online in Utah?
    Ms. Duke. Mr. Frank's bill includes an opt-out for 
individual States. So for individual States where gambling is 
illegal, they could opt out of the Frank bill or not, if it 
gets passed into law, and not offer Internet gaming in those 
States, and we would still be compliant with the WTO. Now, 
certainly if all 50 States pass those laws, we would still be 
in compliance with the WTO, but that is not the case right now.
    Mr. Goodlatte. Sure, it is not. That is the whole point of 
the legislation that was passed, to enable individual States to 
enforce their laws regarding the laws that they have in those 
    Ms. Duke. But I would respectfully submit that they would 
be able to do that under Mr. Frank's legislation as well.
    Mr. Goodlatte. Except that you would be creating a Federal 
regulatory system which would tax the gambling in all those 
States that did not choose to opt out of that.
    Ms. Duke. Absolutely, but in those States where it would 
already be legal, and rightly so we should tax it because we 
should be getting the revenue from it as opposed to having the 
revenue go off-shore.
    Mr. Goodlatte. And what about the States where you cannot 
determine whether or not somebody is actually in that State 
when they place that bet?
    Ms. Duke. Well, we have very good software, and MySpace 
actually has not talked to, for example, Iovation, which offers 
the SNARE software, and if they did, they would feel much more 
comfortable in terms of being able to verify where somebody was 
from. There is absolutely software out there, whether MySpace 
has explored those thoroughly or not is not particularly 
germane to whether the software exists.
    Mr. Goodlatte. Well, certainly we can continue that debate.
    Ms. Duke. Absolutely.
    Mr. Goodlatte. The legislation that the Congress did not 
pass last year would have allowed the States to continue to 
regulate gambling within those States. But the fact of the 
matter is, that is the current law as it exists today, and very 
few States have attempted to do anything like that. New York 
may be the only exception to that.
    Ms. Duke. But under a regulatory environment, the sites 
would be forced to use those kinds of software and would be 
actually much more effective in terms of getting people in 
place where it is not legal to gamble----
    Mr. Goodlatte. Why shouldn't the State----
    Ms. Duke [continuing]. Or minors for that matter.
    Mr. Goodlatte. Why shouldn't the State make that decision, 
Ms. Duke?
    Ms. Duke. Well, it wouldn't be about the State, though.
    Mr. Goodlatte. That is right. That is the whole crux of the 
debate isn't it? It is about whether States have the right to 
do this or the Federal Government has the right to do this.
    Ms. Duke. Gambling sites that were offering services in 
America would be forced to use the software in terms of 
verification of location and majority. In a regulated 
environment, we will be more effective at getting people who 
are in States where it is illegal not to gamble, and frankly 
getting minors because the sites will be forced to use this 
    It doesn't have to do with the States. It has to do with 
the people offering the services. It is not the State that 
determines whether someone can buy alcohol. It is the liquor 
store, because they are forced to verify by a form as an ID, 
and this would be exactly the same thing, except using the 
extremely advanced software technology that we have at our 
fingertips now, and that Mr. Colopy has testified about.
    Mr. Goodlatte. Ms. Duke, let me interrupt you. The point 
here is not whether or not the States can or should do that. We 
don't disagree with you on that point. The question is whether 
the Federal Government should set up a Federal regulatory 
system that it has never done before which would enable it to 
impose taxes to derive revenues that have been the province of 
the States.
    Some States said ``we don't want those revenues; we want to 
have no gambling in our State.'' Utah and Hawaii have chosen to 
do that. Others States like mine have said, well, we will have 
limited forms of gambling, but we don't want any casinos in our 
State. Each State ought to have the right to do that, and you 
agree with me on that point. So why not leave the regulation to 
the States?
    Ms. Duke. But Mr. Frank agrees with that as well.
    Mr. Goodlatte. Sure, but he sets up a Federal Government 
commission, and if anybody believes ``we are from the Federal 
Government and we are here to help you, and all we are going to 
do is help the States out in terms of having a Federal system 
that enables the Federal Government to engage in taxation, that 
enables the Federal Government to engage in overriding the 
decisions of the States on those,'' I hate to disabuse you.
    Ms. Duke. But the Federal Government under the UIGEA will 
do exactly that because it has been clearly stated that the 
banks are going to over-block and not allow people who are in 
States where what they are engaging in is legal engage in that 
    Mr. Goodlatte. Only where the activity is in violation of 
State law or it goes across State borders. Absolutely.
    Ms. Duke. They have said very clearly that they would over-
block. They are already blocking bridge transactions and test 
    Mr. Goodlatte. Mr. Chairman?
    Ms. Duke. They are conservative institutions. You are 
asking them to interpret the law, but they will interpret it in 
a way that will cause them to over-block, and you are asking, 
indeed, the Federal Government to tell the banks to say what 
you can and cannot do in a State where a----
    Mr. Goodlatte. That is because none of these offshore 
sites, and every single one of the sites that we are talking 
about here are outside the United States. Every single one of 
them is engaged in activities that are not regulated by the 
States, and in fact couldn't be regulated by the States.
    So the fact of the matter is that the effort that we have 
made in the Congress to clarify the right of the States, like 
Tennessee, to have the kind of gambling they want to have in 
Tennessee, as long as they keep it confined within their 
borders and do not allow minors to participate, is permissible. 
That was permissible under the bill that passed through this 
Committee, passed the House of Representatives, but was not 
taken up by the United States Senate.
    What we don't need is to have the Federal Government go 
beyond that and usurp the power of the States by saying that we 
are going to have a Federal gaming commission to regulate 
gambling on the Internet.
    Ms. Duke. Then I would like to hear why you supported a 
bill like the UIGEA that allowed interstate betting like horse 
racing and fantasy sports.
    Mr. Goodlatte. Well, first of all, fantasy sports I have 
not heard anybody claim is a form of betting. Now, the fact of 
the matter is--I am serious.
    Ms. Duke. I am sorry. Yes, it is.
    Mr. Goodlatte. We allow minors to participate in those 
programs. You have all said to me that it is a very great 
concern, and I agree with you it is a great concern that we not 
allow minors to engage in gambling, but nobody has said we 
should stop minors from participating in fantasy sports. So I 
think there is a very clear difference there than what you have 
just described.
    But the fact of the matter is that I would like to have a 
ban on all interstate transactions with regard to betting. I 
would support any legislation that did that, but I will also 
support any legislation that goes as far as I can possibly take 
it to go, and that is exactly what the legislation we passed 
is. But the UIGEA takes no position whatsoever on what is legal 
and what is illegal.
    It simply is a new tool for enforcement that is being 
utilized by the Justice Department, the Treasury Department and 
I am sure many, many State government agencies who are 
concerned about the loss of revenues that they have when this 
money starts going outside of the country, as it had been 
doing, and much of it has been curtailed because of the 
enforcement that the Justice Department has done and State law 
enforcement entities have done to make sure that they can 
continue to enforce their State laws.
    Mr. Conyers. The Chair recognizes for the few minutes we 
have remaining the gentleman from Tennessee, Steve Cohen.
    Mr. Cohen. Thank you, Mr. Chairman.
    First, I would like to, if there is any misunderstanding 
with Ms. Abend, I didn't mean to suggest in any way you would 
be like Harriet Miers and not comply, but I would appreciate it 
if you would give to the Chairman and also give to me copies of 
that study. That would be appreciated. I would like to have it 
as well. Thank you.
    Let me ask Mr. Colopy, you have in England the ability to 
stop minors from playing on the Internet?
    Mr. Colopy. Yes, and here.
    Mr. Cohen. And do you know that study? Do you know any 
fallacies in that study? Or is the system not working?
    Mr. Colopy. Let me clarify. In the U.K. where gaming is 
legal, yes, we are one of the age verification systems used. I 
think we had a principal on that.
    Mr. Cohen. And if Mr. McClusky's study is correct, is there 
a problem with the verification system? Or could the study be--
    Mr. Colopy. There is no problem with the effectiveness of 
it, and that is the only thing I can address. Aristotle takes 
no position on the merits or demerits of Internet gambling or 
gaming. What we are here to address is to knock out the fallacy 
that children cannot be protected online, as was incorrectly 
suggested earlier.
    Mr. Cohen. I know when we had the lottery in Tennessee, 
they brought up a study and they said that children were 
gambling and all these different things. And once we got the 
study, we found out they were gambling on flipping, on marbles, 
different things that had nothing to do with the lottery. So it 
really wasn't relevant.
    Do you have the ability--like if I have a laptop and I go 
to Montana and I wanted to bet on something in Montana--to know 
that I was a Tennessean and to tax me in Tennessee? How do you 
do that?
    Mr. Colopy. In my statement, thanks to some very 
intelligent engineers, I have described in layman's language 
what the IP location does. I can't elaborate on it more than 
that, but would be happy to provide you with much more 
    Mr. Cohen. I am beyond a layman. The IP location, is that 
where I live or where my laptop is?
    Mr. Colopy. It is connected to your Internet address.
    Mr. Cohen. My Internet, so that is where I am domiciled. 
Could I get an Internet address somewhere other than where I 
live? Could I get an IP in Arkansas or in West Memphis if I 
lived in Memphis?
    Mr. Colopy. Well, if you use multiple ones, unless the 
system were allowed to, you would be anchored to the one you 
originally registered with. The other thing to remember is, it 
is anchored to your legally registered address because it has 
to be a real person. We are talking about verification. We are 
talking about measurement against public records data, so you 
couldn't reinvent yourself in multiple locations.
    Mr. Cohen. Okay. I would yield back the remainder of my 
time and thank the Chairman for allowing me.
    Mr. Conyers. I yield to the gentleman from Virginia for 
insertions into the record.
    Mr. Goodlatte. Thank you, Mr. Chairman.
    I would just ask that the letter of the National 
Association of Attorneys General, signed by 48 attorneys 
general and dated March 21, 2006 pertaining to the legislation 
that the Congress addressed last year, along with a more recent 
letter signed by the Attorney General of Maryland and the 
Attorney General of Florida, dated September 28 of this year, 
be put in the record, along with a letter dated May 31 of this 
year from all of the major sports organizations--NFL, major 
league baseball, NBA, NHL, and the NCAA--also be put in the 
    Mr. Conyers. Without objection, so ordered.
    [The information referred to follows:]
    Mr. Goodlatte. Thank you.
    Mr. Conyers. Could I ask Professor Weiler on a closing 
question. As you know, Philippe Sands has written about the 
reckless, the lawless world. Familiar? It takes the issue that 
our government has been in reckless disregard of many of our 
treaties, conventions, protocols, ranging from anti-nuclear to 
environmental to torture. There has been a great discussion 
about how we try to get back on track in a more cooperative 
spirit since we are one of the most, if not the most 
influential nation in the family of nations and global 
    Can you comment about that tendency and how that 
dereliction of international responsibility fits into our 
discussion about Internet gambling and the WTO decision?
    Mr. Weiler. Thank you, Mr. Chairman.
    Could I just make one tiny comment on the discussion 
before? We didn't discuss a lot, and it would merit discussion 
on the States' rights issue that Mr. Goodlatte raised. It would 
be interesting to explore whether one gave States rights and 
the technology exists for off-shore WTO members to just offer 
Internet remote betting in the States that allowed it, what 
would be the position of the Justice Department?
    Now, to your question, Mr. Chairman. I am a realist. If my 
wife is giving birth, I would drive through a red traffic light 
and violate the law. I can see circumstances where any State, 
including the United States, might drive through a red traffic 
light because their wife was giving birth.
    But because of the prominence of this country, and because 
we lead by example, we lead by example, we should be very, very 
circumspect in all situations when we decide to disregard the 
multilateral system, to disregard our international legal 
    I do not believe that our legitimate interest in regulating 
the hazards that come with Internet gambling, even though today 
we do it in a way that is discriminatory, are such as to 
justify disobeying, disregarding and violate our international 
legal obligation. It has a cascading effect.
    Yes, the gentleman was right. We will survive it, but when 
it becomes a cumulative effect, where the impression around the 
world is that the United States, which preaches the importance 
of the international system and international law, but when it 
comes to its own interests replaces might with right, then we 
should really be very careful.
    So Mr. Goodlatte has said, we withdraw our commitment. 
There is a procedure for that under article 21 with the GATS. 
Let the procedure run its course, but why, Mr. Goodlatte, and 
why, Mr. Conyers, would we continue, for example, to prosecute 
individuals until we have withdrawn our commitment? That is 
what doesn't make sense to me. And why should we instead of 
trying to comply with an obligation, we will just withdraw an 
obligation. Again, if we lead by example, that is not the kind 
of example which a country like the United States should lead 
    Thank you, Mr. Chairman.
    Mr. Conyers. If you have any further papers or treatises or 
articles that you may have written about this, because this is 
an overarching consideration for not only the Judiciary 
Committee, but the Foreign Affairs Committee. This is a very 
large issue that too frequently we have recently noticed that 
our government has a tendency to walk away, to disengage, to 
write itself out. Of course, that habit becomes catching with 
other countries. If we are doing it, why shouldn't they?
    So on this note, I thank you all for a very challenging 
hearing. We are thinking now about following Mr. Goodlatte's 
suggestion of getting attorneys general of the States, as well 
as governors and others to weigh in on this, because they have 
to understand that it is not only their State, but our national 
laws and our international obligations.
    Now, we have heard about the States' rights implications of 
this legislation. It is clear that there are some that would 
like to keep the Federal Government out. And there are others 
who may not have thought clearly about the international 
aspects as well. All three of these come together on a very 
fascinating subject. I am so happy that you were all able to 
spend as much time with us today.
    I can assure you this record will be read and re-read by 
many different people with different points of view. We are 
obligated and indebted to you for your contribution. Thank you 
so very much.
    The Committee stands adjourned.
    [Whereupon, at 2:08 p.m., the Committee was adjourned.]
                            A P P E N D I X


               Material Submitted for the Hearing Record

Prepared Statement of the Honorable Jim McDermott, a Representative in 
                 Congress, from the State of Washington
    Mr. Chairman, thank you for the opportunity to submit written 
testimony at this hearing. As you are aware, I introduced legislation 
earlier this year, H.R. 2607, which would provide for the taxation of 
licensed Internet gambling in the U.S. I introduced this bill not 
because I am a proponent of Internet gambling--I am not--but because I 
am not blind to the fact that people will continue to gamble online 
regardless of any prohibition against it. I therefore believe that the 
only appropriate, reasoned response is to regulate Internet gambling, 
so consumers are afforded certain protections and so revenue that would 
otherwise flow to foreign jurisdictions stays here in the U.S.
    My legislation would ensure that for any Internet gambling that 
occurs in the U.S., all taxes due under federal and state law will be 
collected--it is a complement to legislation introduced by House 
Financial Services Chairman Barney Frank (D-MA), which would establish 
a regulatory regime for licensed Internet gambling. It requires all 
corporate and personal withholding taxes be collected, but does not 
impose any additional taxes on U.S. residents. In recent weeks, we have 
shaped some policy improvements to the legislation that would allow us 
to provide greater protections against tax cheating relating to online 
gambling, and thereby increase much-needed revenue. As amended, my 
legislation, would:

          Impose a fee equal to 2% of deposits placed during 
        the prior 30 days with or on behalf of a licensee for the 
        purposes of wagering.

          Impose a .25% wagering tax on all authorized online 
        gambling (and a 2% wagering tax on all unauthorized online 

          Impose 30% withholding on withdrawals of net winnings 
        by non-U.S. persons.

          Authorize 50 states and DC to impose indirect taxes 
        on licensees with respect to wagers placed by persons within 
        their jurisdictions.

          Require licensees' senior management to reside in the 
        U.S. and computer equipment to be located in the U.S., thereby 
        maximizing availability of corporate taxes.

    To be clear, most of the revenues generated would come from taxes 
required under existing law that we currently lose because of a 
misguided belief that we can actually stop Internet gambling. 
Specifically, these are not new taxes, but rather taxes on existing 
activity that is currently unregulated, unsupervised, and underground. 
The exception is that my legislation also imposes a fee equal to 2% of 
deposits placed with a licensed gambling operator. This fee would be 
paid by the operator, not the individual gambler, and it would help 
level the playing field for land-based casinos that are concerned about 
Internet gambling affecting their business. Obviously, the overhead for 
a land-based casino is greater than that of an online casino, but the 
2% fee on Internet gambling sites only helps narrow that gap. The 
provision does not, nor is it intended to, impose any new tax on the 
operations of land-based casinos. To do so would violate the very 
purpose of the provision as an equalizer between the land-based and the 
online industries.
    In putting together my legislation, I reviewed various studies and 
estimates on the amount of Internet gambling that occurs in the U.S. to 
estimate how much revenue my bill might provide when combined with the 
proposal by Chairman Frank. In addition, it is my understanding that a 
private sector analysis was performed to estimate the revenues that 
would be generated through regulating Internet gambling in the U.S. by 
adopting legislation based on Chairman Frank's bill and my current 
proposal. This analysis preliminarily estimates that regulating 
Internet gambling would generate between about $3.1 billion to $15.2 
billion in federal revenues during its first five years, and between 
about $8.7 billion to $42.8 billion over its first ten years. In fact, 
assuming that states permit the same gambling activities online as they 
currently do offline, and assuming the sports leagues opt-out entirely, 
my proposal would raise about $6.3 billion over five years and $17.6 
billion over ten years.
    Because the estimates are based on both bills, and Chairman Frank's 
bill permits individual states and sports leagues to prohibit any 
Internet gambling, the lower number would reflect a situation in which 
sports leagues and most states opted-out of the system. The higher 
number would reflect a situation without opt-outs. Notably, the single 
largest component of the revenues--more than 50% of the total--would be 
generated from individuals reporting gambling winnings not captured 
under the current prohibition regime. The 2% fee on deposits and the 
0.25% wager tax would each constitute slightly less than 22% of the 
total, and the corporate tax on operators would constitute an average 
of about 5% of the total.
    Even under the most conservative estimates, licensing and 
regulating Internet gambling--and collecting the taxes that are due--
will provide much-needed revenue to the U.S. Treasury. This is money we 
are currently losing to other jurisdictions, for no other reason than 
some of my colleagues think we can actually stop people from gambling 
online. It is money we will continue to lose if we ignore the fact that 
if grown adults in America want to gamble online, they can and they 


Letter from the Honorable Mitchell E. Daniels, Jr., Governor, State of 
                    Indiana, dated November 9, 2007


Prepared Statement of the Honorable L. Errol Cort, Minister of Finance 
           and the Economy, Government of Antigua and Barbuda


             Prepared Statement of Craig Pouncey, Partner, 
                      Herbert Smith LLP (Brussels)


   Prepared Statement of John Lyons, Group Security Advisor, UC Group
    Mr. Chairman and Members of the Committee:
    My name is John Lyons. I am Group Security Advisor to the British 
payments services provider UC Group, where I am responsible to the 
Board for advising on all matters relating to risk and security and for 
relations with law enforcement agencies.
    I am also Coordinator for the Corporate Executive Programme, an 
organisation comprising some of the world's largest global enterprises 
including Intel, HSBC, Diageo and Mitsubishi UFJ--established by FIRST 
(the Forum of Incident Response & Security Teams to provide advice upon 
the implementation of global risk strategies). During my time as an 
employee of the UK government I served as the UK's Crime Reduction 
Coordinator at the National Hi Tech Crime Unit (NHTCU).
    I am pleased to provide the Committee this written testimony to 
address the issue of online wagering from a security and law 
enforcement agency perspective relating to the security and integrity 
of online financial systems.
    The question has been raised whether the prohibition of Internet 
gambling is necessary to protect consumers from various risks linked to 
Internet gambling, in particular, the risks of compulsive gambling, 
underage gambling, money laundering and fraud.
    As the Committee considers whether the current U.S. regime of 
prohibition is being effectively enforced, it should also consider the 
fact that there exist technological solutions today which could be 
adopted to bring a very high degree of safe and secure practice/s to 
online financial transactions, including those relating to Internet 
gambling. Such solutions will protect not only the consumers but also 
the integrity of the financial infrastructure that they are using to 
facilitate Internet gambling transactions today.
    Implementation of such solutions is not only possible in connection 
with regulating Internet gambling, but is necessary in the broader 
context of the online payments system. Indeed, if we fail to act 
promptly to strengthen our ability to secure online financial systems, 
we face the prospect of organised crime and terrorism gaining more and 
more funding from innocent consumers--whilst banks and credit card 
schemes positioned in the middle, act as unwitting facilitators.
        internet gambling regulation promotes internet security
    There is a pressing need to respond proactively before customer 
confidence is diminished irretrievably, the integrity of the financial 
systems is challenged and before governments, legislators and 
regulators are forced to react to mitigate the potential damage by 
bringing the online financial industry into line. This threat pertains 
to all sectors utilizing online financial transactions and not just to 
the Internet gambling industry. Many informed sources and experts in 
this arena take the view that we are presently losing the battle in the 
online space to organised criminal and terrorist groups (sometimes 
referred to as `non-state actors') and to hostile foreign governments. 
Ironically, the very steps needed to create a secure regime that 
protects consumers in the area of Internet gambling are needed in any 
case to protect the Internet overall from this array of threats.
    The basic principles of actions that need to be taken to protect 
the payments system generally, and to provide for consumer protections 
in the area of Internet gambling, are by now well documented. They 

        Authentication and Identity Management--proving beyond 
        reasonable doubt that the person conducting the transaction is 
        who they purport to be.

        Authorization--proving that the identified person is the 
        authorized user of the credit/debit card or other financial 
        instrument being used in the transaction.

        Age Verification--a second layer of security and process 
        sitting behind the items mentioned above, and which may require 
        persons to verify their date of birth before access can be 
        granted to goods and/or services online.

        User Location--certain services offered online may require that 
        a user's location is identified. In some cases this might 
        merely mean by country, but in other cases the service may 
        require location verification to county/state level or 
        better.\1\ Often, the various obstacles which can be placed in 
        the way of technically verifying location data cause concern to 
        many. However, the online merchant, operator and financial 
        services company, can, based on the level of transactional risk 
        involved and the nature of the service, decide to decline the 
        transaction in cases where the location cannot satisfactorily 
        be confirmed (for whatever reason).
    \1\ Currently Internet Service Providers (ISPs) are very often able 
to provide this service retrospectively in response to authorised 
requests from law enforcement and security agencies. However, real time 
analysis is what is needed and ISPs should be invited to provide 
solutions for commercial use.

        Data Sharing on Criminal Activity--every company in the online 
        financial transaction chain holds data relating to criminal 
        activity and attempted activity. Sharing this data throughout 
        the financial `supply chain' would provide increased levels of 
        assurance in authorizing online transactions whilst providing a 
        significant weapon in the fight against online fraud. In 
        addition, the ability to provide industry reporting of such 
        criminal activity to government and to law enforcement and 
        security agencies would significantly enhance their ability to 
        prevent and investigate online crime.

        Two Factor Authentication--The operators involved in certain 
        high risk categories of online transaction, such as travel, 
        gambling, electrical goods and international transactions, 
        could provide their online customers with a second tier 
        authentication token to provide increased levels of assurance 
        and security. Distributed in a secure way to users, this would 
        provide a high degree of certainty of identity, authority and 
        age. Indeed, one might ask why the issuing banks which provide 
        credit and debit cards for use online, do not offer this 
        service now.
                       regulation and enforcement
    Currently, law enforcement agencies benefit from the open 
interaction they have with financial services companies and payment 
providers who provide services to a broad range of e-commerce 
merchants. A flow of information and intelligence exists from many of 
these companies, which provides law enforcement with a greater 
understanding of the nature of new criminal modus operandi in online 
transactions. In cases where law enforcement agencies choose to 
investigate online criminality, having the ability as law enforcement 
officers to sit down and meet with all regulated Internet gambling 
companies and their payment service providers, banks and credit card 
companies provide an enormous boost to the ability to fight e-crime.
            an example of regulation and enforcement working
    Whilst serving as the UK's Crime Reduction Coordinator at the 
National Hi Tech Crime Unit (NHTCU), now a part of the UK's Serious 
Organised Crime Agency (SOCA), I had responsibility, inter alia, for 
ensuring that law enforcement, the financial industry and online 
businesses worked closely together in the fight against e-crime. During 
the period 2003 to 2004, organised crime groups based in Russia, were 
orchestrating sophisticated Distributed Denial of Service (DDOS) 
attacks against Internet gambling companies. These attacks, using 
netbots--thousands of compromised PCs with broadband connections around 
the world--brought down many Internet gambling companies. In essence, 
they were taken off the Internet and rendered unable to function.
    In some cases, these DDOS attacks succeeded in taking hundreds of 
other businesses off the Internet, because they were connected to the 
same Internet Service Provider.
    Once these attacks had succeeded, the organised crime group, made 
contact with the Internet gambling companies demanding various payments 
before the attack would be terminated. This was nothing less than 
    In the face of this organised crime onslaught, a number of Internet 
gambling companies called on the assistance of the NHTCU.
    The NHTCU subsequently held a round table meeting with 19 Internet 
gambling companies represented by their CEOs, Chief Technology Officers 
and in some cases with their finance chiefs.
    The companies were encouraged not to pay up--since by doing so, 
they would almost certainly have broken money laundering laws and 
assisted criminal activity. From the meeting, NHTCU assembled a wealth 
of evidence and technical data, launched an investigation and 
subsequently worked for many months with law enforcement officials in 
Latvia, Lithuania, Belarus and then Russia--where the UK Foreign 
Secretary of the day discussed with the Russian President, Mr Putin, 
the need for law enforcement cooperation--which was successfully 
    By contrast, many unregulated Internet gambling companies in off 
shore locations were also subjected to DDOS attacks--they simply paid 
up and continued to do so in the face of further attacks, thus 
facilitating the success of organized crime.
    During the subsequent investigation, which has since come to a 
successful conclusion, the NHTCU discovered a huge amount of material 
and evidence to not only assist the DDOS/Extortion investigation, but 
which also provided evidence that these same organised criminal groups 
were behind a vast global network of other online criminal activities. 
These included ``phishing'' attacks against the USA, Canada, Australia 
and the UK. It included evidence of massive credit card theft and 
fraud, the sale of technical exploits and malicious code online to the 
highest bidders, the control of netbot armies comprising tens of 
thousands of compromised PCs and servers, the counterfeiting of 
national identity documents and driving licences, online paedophilia, 
website defacement--the list was endless, the organisation was superb! 
The same organised crime groups were involved in many of these 
activities, and no doubt continue to be so.
                  negative consequences of prohibition
    My point is Mr Chairman, without the ability to reach out, meet, 
discuss and share information with legitimately regulated companies 
trading in Internet gambling, law enforcement will find it hugely 
difficult to bring satisfactory resolutions to investigations. Without 
regulation of Internet gambling businesses, they will find it 
enormously difficult to introduce preventative measures to block 
criminal activities before they succeed.
    Without putting in place a robust regulatory regime which 
introduces the safeguards outlined earlier in my testimony, the entire 
online sector (not only Internet gambling operations) will continue to 
be at the mercy of organised criminal groups and will continue to be a 
source of terrorist funding. In short, if you regulate an industry and 
thereby establish security standards, you are able to protect that 
industry, the consumers who use it, and the infrastructure it uses at 
the same time. Thus, the regulation of Internet gambling not only has a 
protective impact on consumers engaging in the gambling activities, but 
on the Internet itself, just as putting security standards in place for 
financial institutions and the payments system strengthens a wide array 
of online protections.
    In my opinion, prohibition of Internet gambling in the USA creates 
a substantial risk of having huge amounts of U.S. persons' currency 
getting into the hands of criminal groups. Such groups move into 
unregulated markets, and a prohibition model is in practice just that--
a market that is not regulated in practice, because there are no 
standards that govern it. Operators taking bets from U.S. persons must 
today operate in the shadows, and that means in the absence of 
oversight. The result is that unscrupulous alternative payment 
mechanisms hooked up with unregulated Internet gambling sites off-shore 
are filling their pockets with untaxed earnings. Located in the 
shadows, these operators are able to avoid meaningful US enforcement. 
Publicly traded Internet gambling companies, regulated by 
internationally recognized regulators, are no longer doing Internet 
gambling business with the United States. Their hidden counterparts 
operating where they cannot be seen continue to do so. The passage of 
the Unlawful Internet Gambling Enforcement Act 2006 thus has had the 
unintended consequence of helping those over whom the U.S. has the 
least information, the least oversight and the least capacity to 
                     addressing the social problems
    Underage gambling, compulsive gambling, involvement of organized 
crime, money laundering and fraud are areas of public concern and are 
not unique to the United States but faced by a multitude of 
jurisdictions. Many jurisdictions, including the United Kingdom, have 
legalized Internet gambling. They have not done so by turning a blind 
eye to these concerns. Rather they have instituted a regulatory regime 
whose purpose is to ensure that technology and processes are employed 
to protect consumers and financial institutions. As other nations have 
found, these risks can be countered and contained, if those 
institutions operating Internet gambling payment gateways choose to 
adopt, or are required to adopt, technological systems and processes 
specifically designed to address each of these problems. The strength 
of such a system is complemented by the strength of the controls and 
vigilant oversight of the financial institutions.
       operator enforcement supplementing government enforcement
    In a prohibition regime, the government has to do all the 
enforcement, a task that is in practice impossible to achieve. In a 
regulatory regime, the operator becomes the primary mechanism by which 
enforcement is undertaken.
    In a regulated regime, all consumers wishing to participate in this 
activity need to establish a player account with a licensed operator. 
During the registration process the player's identity must be verified. 
Stringent ``Know Your Customer'' (KYC) requirements need to be 
satisfied to confirm the identity, age and residence of the player. 
When a registered player logs on to participate in the activity, their 
identity is again verified using a unique identifier generated during 
the registration process. Additionally, the location of the participant 
is also checked. Only one account is permitted per player and no 
payments are made without full verification of the identity of the 
    The operator must also comply with best practices as they relate to 
responsible gambling measures. These practices include setting player 
bet limits (individual bet and capped cumulative loss), permitting a 
player to exclude them self from participating in play, whether at that 
site or on a broader industry level, and providing players with access 
to information about their activity.
    Technology and processes exist to restrict customers by location 
For example, the system used by UC Group in Europe allows 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 IP Geolocation technology. This involves matching the 
customer's IP address to a specific state and in some cases a specific 
city or town. This technology is provided by a number of 3rd parties. 
The accuracy of one of these systems has been independently verified by 
PricewaterhouseCoopers as 99.9% accurate on a country level and 95% 
accurate on a state level.
    This accuracy can be further enhanced by considering IP location 
together with both the registration information provided by the 
customer, the address to which a payment card is registered and the 
location of the bank that has issued the payment card.
    Technology and processes exist to address the risk of underage 
gambling. Such a system incorporates a number of barriers to prevent 
abuse by underage persons. The first barrier is at the merchant's 
website, which must have appropriate age verification mechanisms in 
place to qualify for services from the operator. The next barrier is 
provided by the card issuance rules in place for financial 
    A key part of addressing the underage gambling risk is the KYC 
checks undertaken at the point of consumer registration with the 
    KYC requires that the organization know whom it is in fact dealing 
with. In order to satisfy this requirement, the customer is asked for a 
range of information, including Name, Address, Date of Birth, Telephone 
Number and information not easily available such as Social Security or 
Passport Number. This information is then compared to multiple 
databases to confirm the accuracy and validity. If the customer fails 
this validation they are unable to open an account. These services are 
today provided across many industries.
    Additional KYC checks performed include checking that the 
registered address of the telephone number matches the details 
supplied, and that the customer is in fact able to answer the telephone 
and confirm these details.
    Credit card companies typically do not issue credit cards to 
minors. Nevertheless, minors may validly have access to debit or 
sponsored cards. In these cases, the Issuer will be aware of the 
cardholder's age and is able to decline the transactions flagged as 
Internet gambling at the time of authorization.
    An additional control ensuring use by the legitimate cardholder is 
provided by the financial institutions and the card schemes through a 
requirement, at an increasing number of sites, to enter a password 
before completing an online transaction.
    A final impediment to underage usage goes to the heart of this type 
of system. The underage consumer cannot receive any winnings, as they 
are not the authorized owner of the card.
    Enforcement and compliance with regulations cannot be perfect and 
requires continuous improvement and enhancement, but this can readily 
happen in a regulated regime where operators, regulators, and law 
enforcement work over time to strengthen the integrity of the industry 
subject to regulation.
    This is even true with regard to addressing the risk of compulsive 
gambling. It is an issue that remains a significant challenge. The 
solutions are complex and require all participants in this industry to 
work together in a cooperative way with a combination of education, 
technology and oversight (parental and/or government). The approach 
required to effectively combat this requires transparency and 
involvement from various stakeholders.
    A good online system offers a number of opportunities to address 
compulsive gambling on the Internet that are as good as, if not better 
than, those available for bricks and mortar gambling.
    First, payment card holders can be offered the possibility to 
restrict their ability to gamble on the Internet by way of applying to 
be excluded via a self-exclusion program. Land-based casinos in the 
United States already maintain self-exclusion programs but the effect 
of such a program is normally limited to one casino and subject to the 
``human error'' of individuals in attempting to physically identify 
excluded persons. When self-exclusion from Internet gambling is put 
into effect via the payments system, it becomes impossible for the 
person concerned to participate in any gambling on the Internet that 
uses traditional card payments through the payment processor. 
Furthermore, individuals may fix limits on the amounts they can spend 
on Internet gambling. Increasing such limits is typically subject to 
cooling off periods after which the individual would need to reconfirm 
that he or she effectively wants to increase the spending limit. The 
ideal solution is for a global self-exclusion database to be 
established and access made available to all financial transaction 
processors and licensed operators, providing for a broader blocking 
    Second, an integrity system prohibits individuals from registering 
more than one payment card to pay for Internet gambling transactions. 
This would prevent individuals from running up excessive debts by using 
multiple cards. Similarly players are restricted to only the one 
account with a licensed operator.
    Third, it is relatively simple for a properly designed Internet 
gambling system to detect an unusual increase in an individual's 
spending on Internet gambling. This makes it possible to monitor 
compulsive gambling much more closely than in the case of traditional 
forms of gambling where the casinos, lotteries and racetracks normally 
do not know the identity, or the spending pattern, of most of their 
    Fourth, as mentioned above the customer's identity can be verified 
using 3rd party KYC systems. Once the information has been validated, 
it can be checked against various databases of compulsive gambling. In 
the event that a customer is found to be present in these databases, 
the registration can be rejected or the customer investigated.
    All of these kinds of controls make it easier for an enforcement 
agency, such as the Department of Justice, to protect U.S. consumers, 
because in such cases, a regulator sets standards, auditors audit them, 
and a rogue operator can be dealt with as a rogue, an exception to the 
norm, rather than the norm.
    In summary, the most safe and secure way to protect US Citizens who 
wish to wager online is to regulate the industry, give law enforcement 
the opportunity to work with US licensed operators and payment service 
providers and implement the measures outlined earlier in my testimony. 
I commend to the Judiciary Committee, as an alternative to prohibition, 
a regulatory structure for dealing with the issue, such as Chairman 
Frank's H.R. 2046 initiative, the Internet Gambling Regulation & 
Enforcement Act 2007, or a similar approach.
    I thank the Chairman and Committee Members for the opportunity to 
submit this testimony.


Prepared Statement of Naotaka Matsukata, Ph.D., Senior Policy Advisor, 
                           Alston & Bird, LLP


        Prepared Statement of I. Nelson Rose, Professor of Law, 
                          Whittier Law School
    The federal government has issued proposed regulations to enforce 
the ban on money transfers for unlawful Internet gambling transactions. 
The most important thing to understand is that legally nothing has 
changed. And nothing will, for many, many months.
    Given the impossible job of enforcing an unworkable law, regulators 
punted, issuing proposed regulations that tell banks, credit card 
companies, e-wallets and other payment processors, basically, ``You 
take care of it.''
    Because the regulations will expressly put the burden on money 
transmitters to avoid illegal gambling, financial institutions will 
increase their restrictions on all gaming, even clearly legal bets.
    The proposed regs are the result of a bill rammed Congress through 
last year by the failed politician, then-Senate Majority Leader Bill 
Frist (R-TN). Frist attached his Unlawful Internet Gambling Enforcement 
Act to the SAFE PORTS Act. He refused to let Democrats even read the 
bill. If they didn't like it, they could vote against port security.
    A good indication of how quickly the law was written is that it 
does not even have a good acronym. Since UIGEA is unpronounceable, I'll 
call it Prohibition 2.0.
    Prohibition 2.0 is often characterized as outlawing Internet 
gambling in the U.S. It actually does only two things. It creates a new 
crime: being a gambling business that accepts money for unlawful 
transactions. And it requires that new regulations be written by the 
Secretary of the Treasury and Governors of the Federal Reserve Board, 
in consultation with the Attorney General, meaning the Department of 
Justice (``DOJ'').
    What it does not do is make it a crime to merely make bets on the 
Internet. It doesn't directly restrict players from sending or 
receiving money. It doesn't spell out what forms of gambling are 
``unlawful.'' Specifically, it does not do what the federal Department 
of Justice (``DOJ'') wanted, which was to ``clarify'' that the Wire Act 
covers Internet casinos, lotteries and poker.
    The new crime it creates is greatly limited. Only gambling 
businesses can be convicted, not players. Bizarrely, for a law designed 
to prevent money transfers, the
    financial institutions involved in those transfers, including 
banks, credit card companies and e-wallets, are expressly defined as 
not being gambling businesses and so cannot be convicted of this new 
    Although a felony, the new crime turns out to be much less than it 
seems. I have argued (see http:www.GamblingAndTheLaw.com/columns/
2006_act.htm ) that the Act requires that the gambling already be 
illegal under some other federal or state law. There has been some 
discussion that Prohibition 2.0 greatly expanded the reach of anti-
gambling laws, to cover overseas operators who were not violating any 
American law. The comments accompanying the proposed regulations make 
it clear that the federal agencies, including, most importantly, the 
DOJ, agree with my analysis. Here's their discussion of whether the 
government should draw up a list of websites conducting illegal 

        The Act does not comprehensively or clearly define which 
        activities are lawful and which are unlawful, but rather relies 
        on underlying substantive law. In order to compile a list of 
        businesses engaged in unlawful Internet gambling under the Act, 
        the Agencies would have to formally interpret the various 
        Federal and State gambling laws in order to determine whether 
        the activities of each business that appears to conduct some 
        type of gambling-related function are unlawful under those 

    The regulations were supposed to be promulgated by mid-June. The 
agencies have finally issued proposed regulations, four months late. 
The general public now has until December 12 to make comments. The 
agencies will then make changes in the proposed regs. The final 
versions will then be published, supposedly giving everyone six months 
to set up their procedures.
    This is not going to happen.
    It took ten months just to draw up the proposed regs. The delay was 
caused not only by having to enforce an unenforceable law, requiring 
all payment processors to identify and block all unlawful gambling 
transactions. The other problem is that the three agencies have 
conflicting goals. The DOJ wants all internet gambling outlawed; 
Treasury, including the IRS, does not really want it outlawed, it wants 
to tax it; and Ben S. Bernanke, Chair of the Federal Reserve Board, 
expressly stated that he opposes any new regulations that would put 
U.S. banks at a competitive disadvantage with their foreign 
    It looks like the Treasury and the Board won most of the fights.
    The proposed regs put the burden entirely on payment processors to 
come up with procedures for identifying and blocking restricted money 
transfers. But this can't be done in six months. In fact, it can't be 
done at all.
    The problem is defining ``unlawful Internet gambling.'' Even the 
DOJ admits that some forms of online wagers are perfectly legal. For 
example, I can sit in my home in Encino, and, using my credit card, 
make bets by computer with a California licensed racebook. The system 
is called Advanced Deposit Wagering (``ADW''), since I have to fund my 
legal bookie account in advance. Congress, in December 2000, amended 
the Interstate Horseracing Act (``IHA'') to make it legal for ADW on 
horse races, so long as the bets and races were legal under state laws.
    And here's an example of why it is impossible to know what is an 
unlawful gambling transactions. The DOJ agrees that I can make ADW bets 
with a California licensed bookie on races held here or in any of the 
20 other states that have legalized ADW. But everyone else who has read 
the IHA, including state racing commissions, believes it is perfectly 
legal for me to set up my ADW with a licensed bookie in another state. 
So, how is a credit card processor supposed to handle my request to 
fund an ADW in Oregon?
    Everyone agrees that I could not make online bets on horseraces if 
I were in Utah. So payment processors would have to have cyber-border 
software to ensure that I don't try to make a bet with my laptop from 
Salt Lake City. How else will a credit card company or my California 
bank know not to transfer the money even to a California licensed 
    And what about poker? California has had legal cardrooms since the 
Gold Rush. But 157 years of bad cases and obscure statutes make it a 
crime to participate, as a player, in any poker game where the pot is 
raked more than five times. If the state's laws apply to online poker--
a big if--how many payment processors even know what it means to rake a 
pot five times?
    There is, of course, something bizarre about requiring financial 
institutions to identify and block only unlawful Internet gambling 
transactions. There is no similar law dealing with importing cocaine or 
selling child pornography. But, it was clear from the day Prohibition 
2.0 passed that there would be loopholes for banks.
    Banks do not now read the face of paper checks. Requiring all banks 
to read 40 billion paper checks each year would cost the industry 
billions of dollars. Banks lobbied Frist. He added a provision to the 
Act, allowing Treasury and the Board to decide when it would not be 
``reasonably practical'' to i.d. and block transactions. The DOJ was 
given no say. So, almost all paper checks are exempt.
    In fact, almost all financial transactions are exempt. The agencies 
were worried about trying to regulate foreign companies. So, it is 
clear that the regulations apply only to U.S. payment processors. There 
are some requirements that American financial institutions make 
inquiries of their foreign partners. But those restrictions will be 
easy to get around, since an overseas automated clearing house, like 
its American counterpart, has no way of knowing what transmitted funds 
are used for.
    Significantly, almost everyone involved in the transfer of money is 
exempt from the requirements of identifying and blocking ``restricted 
transactions.'' Players are always exempt, whether they are sending 
money by check or wire, using their credit or debit cards, or getting 
paid. But all financial intermediaries are also exempt.
    The federal agencies understood that it would be impossible for the 
institutions that transfer trillions of dollars a day around the globe 
to identify any single transaction. The systems work because the 
intermediaries know what they need to know and no more: that the bank 
wiring the funds actually has those funds and the bank requesting the 
funds is who it says it is. Trying to get any more information, such as 
whether the wire is for funds to be used for gambling, would cause the 
entire system to slow down to the point that it would collapse.
    Similar thinking went into the other exemptions. The regs ``exempt 
all participants in the Automated clearing house systems, check 
collection systems, and wire transfer systems, except for the 
participant that possesses the customer relationship with the Internet 
gambling business.'' So, only if an online gaming company is the 
customer of an American bank will the bank have to ask questions. U.S. 
financial institutions are supposed to ask foreign payment service 
providers if the cross-border funds are going to an illegal gambling 
operator. But what sort of answer do you think they'll get?
    More importantly, the regs expressly recognize that there is no way 
the federal government can tell in advance whether a particular 
transactions involves unlawful gambling. More than once, the federal 
agencies expressly turned down the idea of coming up with a list of web 
operators operating illegal gambling. Banks, being basically 
conservative, wanted the list so that they would simply not do business 
with those companies. But even the DOJ acknowledges, as it has to, that 
not every online wager is illegal.
    So the regs put the burden on the credit card companies, banks, e-
wallets and other payment processors to come up with their own 
procedures for checking on whether money is being transferred for 
unlawful Internet gambling. And there is no way to do that.
    Even remote sports betting is sometimes legal, for example intra-
state in Nevada. Are bets made with foreign licensed Internet casinos 
``unlawful gambling transactions?'' Show me the state or federal law 
that you think make them illegal and I will show you the reasons why 
that law may not apply.
    Even when we have a clear statute, there is disagreement. The DOJ 
believes the Interstate Horseracing Act only allows patrons to bet from 
their home with horsebooks in their own states. Everyone else, 
including the World Trade Organization, believes that Act allows cross-
border bets. What should a payment processor do?
    The answer shows what will happen. Banks and credit card companies 
can only get into trouble if they permit a transaction that turns out 
to involve unlawful gambling. They face no penalties for refusing to 
transfer funds for legal gambling. So, all major American financial 
institutions will refuse to transfer funds from their patrons to any 
company that they know is involved with online gaming.
    This will open the door to foreign financial operators. Expect to 
see many more patron solicitations for overseas credit cards and bank 
    The proposed regs have so many exceptions that, when they do 
finally get officially promulgated, Americans will still be able to 
make bets on the Internet. In the worst case, players can always reload 
or receive their winnings by paper check.
    But there are more loopholes. The regs also clearly do not directly 
cover financial institutions in other countries. So, anyone who uses a 
credit card issued by a foreign bank should encounter no trouble. If I 
send a check from Bank of America to pay off my Hong Kong issued Visa, 
neither the B of A nor the Hong Kong bank are required to ask whether 
I'm using the card for gambling.
    American payment processors are required to check out payments 
going in and out of the country. So, a U.S. clearing house is supposed 
to have procedures in place to check that the money it is forwarding is 
not used for unlawful gambling. This might be possible if the funds 
went directly to an online operator or even the operator's bank. But 
what if the money went to a foreign clearing house, that cannot 
possibly know what the funds are used for?
    That is the good news for players. The bad news is that we are 
dealing with banks and other financial institutions that are basically 
conservative. Also, the DOJ has been waging a war of intimidation on 
both operators and payment processors--Neteller joined PayPal and 
credit card companies in voluntarily barring all gaming transactions.
    The proposed regs make it clear that payment processors should not 
block money transfers for legal gambling. They specifically note that 
some Internet wagers have been declared legal under Prohibition 2.0. 
These include not only interstate horseracing, but all forms of 
gambling, including poker, if done correctly and conducted entirely 
within a single state or on tribal land.
    But there is no real downside in telling bank customers and credit 
card holders that they cannot send any funds to any gambling site. The 
only thing the banks lose are possibly some customers. But allowing 
patrons to send funds to a gaming site that turns out to involve an 
unlawful transaction opens the banks to fines and other government 
punishments. So, all large U.S. payment processors are going to take 
the least risky path and block all gambling transactions, even ones 
that are indisputably legal. There is no law forcing them to transmit 
funds for legal gambling.
    But, in the end, Prohibition 2.0 and its regulations will be as 
successful in preventing people from gambling and playing poker online 
as the first Prohibition was in preventing people from drinking.


    Prepared Statement of Richard Winning, President, the American 
                 Greyhound Truck Operators Association
    Mr. Chairman, thank you for agreeing to submit these comments for 
the record.
    As President of The American Greyhound Track Operators Association 
(AGTOA), I want to highlight the areas of concern raised by the 
proposed regulation put forth by the Department of Treasury and the 
Federal Reserve Board, titled ``Prohibition On Funding Of Unlawful 
Internet Gambling''. Below I will highlight areas of concern that the 
proposed regulation raises including:

          Preventing Over-Blocking of Legal Pari-Mutuel 

          Improving Liability Protection Provisions

          Providing Greater Clarity Reduces Regulatory Burden

    Congressional intent is quite clear that legal state licensed and 
regulated pari-mutuel transactions should be permitted, however, the 
proposed regulation is far more hazy. The vagueness of the proposed 
regulation will harm the pari-mutuel industry by incentivizing over-
blocking over par-mutual wagers and cause burdensome regulations where 
none need exist.
       the american greyhound track operators association (agtoa)
    The AGTOA was formed in April 1946, and is a non-profit corporation 
composed of the owners and operators of 36 greyhound tracks located 
throughout the United States. Membership is open to all lawfully 
licensed greyhound racetracks, whether they be individuals, 
partnerships or corporations.
    Like horse racing, greyhound racing is recognized as one of the 
nation's largest spectator sports. Greyhound racing is legal in 16 
states including: Alabama, Arizona, Arkansas, Colorado, Connecticut, 
Florida, Iowa, Kansas, Massachusetts, New Hampshire, Oregon, Rhode 
Island, South Dakota, Texas, West Virginia and Wisconsin. Further, 
greyhound racing (as does horse racing) relies upon State authorized 
pari-mutuel internet and account wagering to facilitate the making of 
bets or wagers on State sanctioned races.
       preventing over-blocking of legal pari-mutuel transactions
    The AGTOA would like to make clear that Congressional intent of the 
Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA) is to 
``ensure that transactions in connection with any activity excluded 
from the Act's definition of `unlawful internet gambling' '' are not 
``blocked or otherwise prevented or prohibited by the'' the Proposed 
Regulation. Moreover, the statute states that the regulation should not 
be implemented as to ``alter, limit, or extend Federal or State law or 
Tribal-State compact prohibiting, permitting, or regulating gambling 
within the United States.'' While the proposed regulation notes these 
facts, it also contains many drafting contradictions which will lead to 
over-blocking of legal transactions.
    Section 5(c) of the Proposed Regulation currently protects only 
designated payment system participants who over-block legal 
transactions while ``reasonably'' attempting to comply with the 
regulations. As noted, however, the Proposed Regulations must not be 
implemented as to ``alter, limit, or extend Federal or State law or 
Tribal-State compact prohibiting, permitting, or regulating gambling 
within the United States.'' This drafting contradiction provides 
liability protection for over-blocking legal transactions in violation 
of the Act and wrongly incentivises over-blocking. Moreover, it does 
not provide sufficient clarity or protection to the banking and 
financial community who wish to create polices and procedures or 
otherwise process the same pari-mutuel transactions. Put another way, 
to be consistent with Congressional intent, there needs to be 
regulatory parity between those that err on the side of processing 
legal transactions versus those who over-block.
    Congress affirmed that the pari-mutuel industry should be exempt, 
since it is licensed and regulated by the States. Congress not only 
stated that the regulated entities permit processing of lawful 
transactions within the Interstate Horseracing Act, Congress also 
included that the internet gaming provisions do not change the legality 
of transactions for dog racing as well. ``For instance, if the use of 
the Internet in connection with dog racing is approved by state 
regulatory agencies and does not violate any Federal law, then it is 
allowed under the new sections 5362(10)(A) of title 31,'' (152 Cong. 
Rec. H8026-04 (Sept. 29, 2006) (legislative history submitted by Sen. 
    The statute also notes that the regulation should not impact state 
laws. Pari-mutuel betting, account wagering, simulcasting and common 
pool wagering all use the Internet, and many states have noted this 
fact. New York sanctions internet pari-mutuel wagering, regulate the 
gambling activity through their respective State agencies and 
authorities, and use the internet to reconcile the merged betting pool 
to facilitate and promote the efficacy of the transactions. Likewise, 
pari-mutuel account wagering is entirely legal and regulated in many 
States, including, but not limited to: California, Kentucky, Louisiana, 
New Jersey, Oregon, and Pennsylvania. All of these transactions involve 
use of the internet, and are authorized and regulated without regard to 
whether the race meet is a horse race or dog race, and all of these 
transactions are in jeopardy.
    All of these lawful transactions could be in danger because the 
Proposed Regulation offered by the Administration fails to mirror 
Congressional language that clearly asserts that legal pari-mutuel 
wagering is permitted under the UIGEA. We are not the only organization 
to read the proposed regulations this way. In the attached comment 
letter from the Kansas Bankers Association to the Federal Reserve 
Board, the state association also believes that the over-blocking 
provisions permit ``institutions to decide to completely avoid 
processing any gambling transactions and thereby avoid the potential 
liability presented by this proposal.'' (See attached comment letter 
from Kansas Bankers Association, October 24, 2007)
    The intentional lack of clarity caused by the failure to accurately 
define ``unlawful'' gambling activity raises a question about the 
Proposed Regulation's fairness. Principles of fundamental fairness 
require that the Proposed Regulation be sufficiently clear that a 
person of common intelligence need not guess at its meaning and 
application. Kolender v. Lawson, 461 U.S. 352, 357, 103 S.Ct. 1855, 
1858 (1983). As drafted, lawful activity under Federal (e.g., the IHA) 
and State law (permitting pari-mutuel transactions) is just as likely 
to be blocked as permitted because a person is left to guess as to 
whether lawful interstate pari-mutuel wagering is, under the Proposed 
Regulation, illegal.
    The Proposed Regulation intentionally refrains from defining 
illegal or legal gambling activity. On the one hand, nothing in the 
Proposed Regulation requires or is intended to suggest that credit card 
companies, banks and internet payment processors which already handle 
internet wagers must or should block or otherwise prevent or prohibit 
any transaction that is not Unlawful Internet gambling. On the other 
hand, internet and phone account-based pari-mutuel wagering are defacto 
designated as illegal and will be blocked because the Proposed 
Regulation does not explain that unrestricted transactions include 
pari-mutuel wagering and are therefore not unlawful internet gambling.
    The regulation must follow Congressional intent and expressly 
denote that legal state transactions, such as those in the pari-mutuel 
industry, are exempt from the Act. These transactions should not be 
blocked. Otherwise, the position of the Kansas Bankers Association to 
consciously over-block will be implemented by financial institutions 
across the country. This could be the death knell for the entire pari-
mutuel wagering industry in the United States, including greyhound 
racing, an outcome that Congress did not intend nor desire.
               improving liability protection provisions
    The Act's stated purpose is not intended to change the legality of 
any gambling-related activity in the United States. As drafted, 
however, the Proposed Regulation only offers liability protection to 
designated payment system participants who over-block legal 
transactions. The Administration provided no meaningful guidance or 
protection to the banking and financial community who wish to avoid 
over-blocking by creating polices and procedures to process legal State 
law sanctioned pari-mutuel transactions. By merely extending liability 
protection to those who over-block in violation of the Act, the 
Administration wrongly incentivises designated payment system 
participants to create policies and procedures which will cause in the 
wholesale prohibition of legal pari-mutuel activity. In turn, the 
Proposed Regulation effectively encourages a regulatory scheme 
resulting in legal activity being re-defined as illegal.
    The Proposed Regulation needs to be corrected to state that 
designated payment system participants who follow the Act and process 
transactions involving State sanctioned and regulated pari-mutuel 
wagering are immune from liability in the same way as participants who 
over-block those same transactions in violation of the Act.
          providing greater clarity reduces regulatory burdens
    The Proposed Regulation presents vagueness concerns, and if left 
unchanged, the Proposed Regulation will be implemented in such a way as 
to go against Congressional intent; create significant fairness, 
vagueness and overbreadth concerns; and unduly burden those covered by 
the Proposed Regulation's compliance regime.
    Greater clarification must be provided as to what is ``unlawful 
internet gambling'' to ensure that legal pari-mutuel transactions are 
protected as Congress expects. The Act makes abundantly clear that the 
placing of an internet bet or wager that is lawful under Federal or 
State law is not ``unlawful''. Yet, under the Proposed Regulation, a 
payment processor has no way of knowing whether legal pari-mutuel 
transactions made over the internet are ``unlawful'' or permissible.
    The Administration has the ``responsibility to state with 
ascertainable certainty what is meant by the standards'' in a rule and 
``to give sufficient guidance to those who enforce . . . , to those who 
are subject to civil penalties, or to those courts who may be charged 
to interpret and apply the standards.'' Georgia Pacific Corp. v. OSHRC, 
25 F.3d 999, 1005-1006, (11th Cir.1994); accord, S.G. Loewendick & 
Sons, Inc. v. Reich, 70 F.3d 1291, 1297 (D.C. Cir.1995). The Proposed 
Regulation fails to accomplish this. As currently written, the 
regulation requires designated payment system participants (including 
financial transaction providers such as credit card companies, banks 
and money transmittal businesses, such as PayPal) to fashion policies 
and procedures to comply with the Proposed Regulation in the face of 
definitional ambiguity (Proposed Regulation at Sec. Sec. 5-6).
    Moreover, the drafting ambiguity created by the Administration 
makes compliance an onerous and unduly burdensome task. Under section 
Sec. 5(a) of the Proposed Regulation, participants in designated non-
exempt payment systems (which includes financial transaction providers) 
can (1) simply rely on established written policies and procedures of 
the payment systems which are reasonably designed to identify, block, 
and otherwise prevent restricted transactions; or (2) establish and 
comply with their own written policies and procedures that are 
reasonably designed to accomplish the same thing. In other words, the 
Administrations causes participants to create policies to block illegal 
transactions, but does not encourage them to create policies to permit 
legal transactions, such as those in the pari-mutuel industry.
    When presented with a choice of processing pari-mutuel transactions 
in the face of an ambiguous regulation, payment systems participants 
will in all likelihood avoid processing such transactions. For example, 
participants could decide that the financial benefit of handling the 
transaction is outweighed by the expense of guessing wrong that pari-
mutuel wagering is permitted under the Act in violation of the Proposed 
Regulation. Again, we are already seeing this in the attached letter 
from the Kansas Bankers Association. By providing clarifications that 
legal internet pari-mutuel gambling is lawful (or not expressly 
unlawful), the drafters will conform the Proposed Regulation to 
Congress's intent to not alter the landscape of legal gambling.
    Moreover, clarifying the regulations in this fashion would reduce 
the burdens placed on designated payment system participants, who would 
be able to rely on a more fulsome definition of unlawful internet 
gambling to craft written policies and procedures which do not 
inadvertently block legal pari-mutuel transactions. In drafting any 
rule, the Administration should structure it so that the regulated 
party is given a reasonable opportunity to bring its conduct into 
conformity with the agency's policy judgments or view of the law. It is 
not enough for the agency to describe its regulatory goals or 
regulatory objectives. The agency should give the regulated persons 
guidelines by which to measure their performance against the agency's 
or Congress' objectives. (Atlas Copco, Inc. v. EPA, 642 F.2d 458, 465 
(D.C. Cir.1979) The proposed regulation fails on this account and 
greater guidance would lower the burden places on payment processors.
    Furthermore, industries need enhanced examples in any regulation to 
ensure that payment processors clearly understand the breadth of the 
regulation. One example that payment system participants could do is 
create procedures that are ``reasonably designed'' to not block 
permitted transactions. The creation of a merchant category code 
(``MCC'') for State sanctioned and regulated internet pari-mutuel 
betting would be one option. With respect to credit card systems, the 
Proposed Regulation states that MCC codes accompanying a credit card 
transaction authorization request can be used by payment system 
participants to separate restricted from unrestricted transactions, 
however, according to a December 2002 GAO Report titled: ``INTERNET 
GAMBLING: An Overview of the Issues,'' many banks use the same coding 
for pari-mutuel wagering on horses over the Internet and for other 
types of on-line gambling, such as online casinos and sports betting. 
This problem is the result of current limitations in credit card coding 
programs. The creation of a unique transaction code would still allow 
the credit card issuers to reject payment for unlawful on-line gambling 
activities'', while accepting lawful internet wagers.
    If the Administration proactively suggests that creating a MCC for 
state sanctioned and authorized pari-mutuel betting are ``reasonably 
designed'' to block restricted unlawful transactions, it will not only 
comply with the Act, but it will also follow suite with Congressional 
intent and provide greater clarity to the regulated industries.
    There are several areas of the proposed regulation that are 
negatively impacting the pari-mutuel industry, many of which are in 
direct opposition to stated Congressional intent. With regards to the 
greyhound racing industry, and the pari-mutuel industry as a whole, the 
regulation should be modified to clearly state that Congressional 
intent was that State sanctioned and regulated pari-mutuel wagering are 
immune from liability under the UIGEA. Such a drafting change would add 
much needed clarity to the Proposed Regulation and prevent over-
blocking of legal transactions. Moreover, providing examples of how 
regulated entities can protect legal transactions, such as those in the 
greyhound racing industry, would remove the unintended negative impact 
that the proposed regulation would create. These small and simples 
changes would significantly reduce compliance burdens, protect against 
over-blocking, and allow credit card issuers to create policies and 
procedures which reject payments for unlawful on-line gambling 
activities, while accepting internet and account wagers on pari-mutuel 
    We commend the House Judiciary Committee for its oversight of this 
regulation, and Congress's past efforts to protect the legal state 
licensed and sanctioned wagering within the pari-mutuel industries. Any 
regulation must follow Congressional intent and the Act and protect 
protections to those industries that would be unduly harmed from over-


    Prepared Statement of Steve Lipscomb, Chief Executive Officer, 
              President and Founder, WPT Enterprises, Inc.
    Mr. Chairman and Members of the Committee:
    My name is Steve Lipscomb. I am the Founder of the World Poker Tour 
and WPT Enterprises (WPTE) and currently serve as Chief Executive 
Officer and President of the company.
             who we are and why wpt opinion should matter:
    In October of 2001, I wrote a business plan with a mission 
statement ``To transform poker into a televised mainstream sports 
sensation.'' At that time, poker rooms were closing across the country, 
the industry was in decline and mainstream celebrity poker players did 
not exist. Televised poker was poorly conceived, poorly shot and 
relegated to graveyard time slots on ESPN. And, no one was watching . . 

    Legendary entrepreneur, Lyle Berman, and his company, Lakes 
Entertainment, believed in that business plan and funded the World 
Poker Tour in December 2001. The best destination casinos in the 
country (Bellagio, Foxwoods, etc.) signed onto the Tour in early 2002 
and the first episode aired in prime time on the Travel Channel on 
March 30th, 2003. The effect was immediate and lasting. In the first 
season, the WPT became the highest rated show in Travel Channel 
history. When ESPN was unable to make a deal to broadcast the WPT in 
2002, they re-instated coverage of the World Series of Poker (which had 
lapsed for three years). And, in 2003, ESPN copied the WPT Television 
Format when it filmed and captured no-name Chris Moneymaker winning 2.5 
million dollars at the Main Event of the World Series of Poker (now 
known as ``the Moneymaker effect'').
    It took a full eight months to edit the first WPT television show 
and create the WPT Television format--with interactive graphics that 
track player's hole cards and ``live-fiction'' that makes the shows 
feel like the event is happening when it is broadcast. The result has 
been a global poker phenomenon--with ESPN, NBC, Fox Sports, Bravo, GSN 
and numerous international broadcasters copying the WPT Television 
Format to touch millions of viewers and create a multi-billion dollar 
poker industry.
                            why we are here:
    I am submitting testimony today because no one seems to be talking 
about the remarkable inequities facing legitimate companies in the 
poker marketplace. The policies of Congress and the Justice Department 
have combined to create the business equivalent of a perfect storm--
rewarding bad behavior and suffocating legitimate U.S. companies that 
play by the rules. There simply could not be a more inequitable result 
than the status quo. The Justice Department is on record saying that 
online poker is illegal in the United States under the Wire Act. Yet, 
to date, there has been no enforcement of that stance, nor a 
disavowment of that position. The practical effect has been to freeze 
out legitimate U.S. companies like MGM, Harrah's and the WPT that 
choose to respect the stated DOJ position--while rewarding 
international companies that are willing to take advantage of the lack 
of enforcement and dismiss or disregard the United States Justice 
    A year ago, Congress passed the Unlawful Internet Gambling 
Enforcement Act (UIGEA). However, to date, there has been no 
``enforcement'' under the Enforcement Act. And, that has simply made 
things worse, not better. Large companies that managed to go public in 
the United Kingdom prior to UIGEA, left the U.S. market when the law 
passed--leaving only companies that were willing to fly in the face of 
BOTH the Justice Department AND the United States Congress. And, those 
companies are making millions of dollars every day in the U.S. market. 
They are using that money to create and give away every product or 
service that legitimate companies like WPTE and Harrah's might offer--
all as loss leaders for their online gaming business. This process is 
undermining the entire marketplace. WPTE investors have lost over $300 
million dollars in market cap over the last two years as a result of 
these inequities, while companies that ignore the U.S. authorities have 
watched their valuations grow into the billions.
    An unfortunate side effect is that vulnerable groups that Congress 
may be trying to protect (children, gambling addicts, etc.) are simply 
not being protected. It remains easy to play poker online for money in 
the United States. People simply face having to play on less and less 
reputable sites. As UIGEA makes it more and more difficult to get money 
into online poker sites, the sites that are willing to find vendors to 
unencrypt credit cards or charge credit card transactions deceptively 
or fraudulently under various misleading merchant codes will prevail in 
the marketplace. This certainly cannot be the intended result.
                          what we care about:
    We at the World Poker Tour want a level playing field. We believe 
that poker should be viewed as a game of skill--and that poker players 
should be allowed to play poker online anytime they like. We believe 
that online poker in the United States should be specifically allowed, 
taxed and regulated. What we do not want to see is this process ending 
in compromise or deadlock that extends the status quo--or goes back to 
the pre-UIGEA status quo. If legitimate U.S. companies continue to be 
excluded from the market out of fear of the United States Justice 
Department position, while their competitors march forward unabated, 
the legitimate companies will simply cease to exist.
    These hearings and this process have a lot of input from the 
current online poker sites. They should have a voice. But, their 
incentives need to be understood. Today they exist in a marketplace 
that does not allow MGM, Harrah's, WPTE, Yahoo, Google or others to 
compete with them--and they pay absolutely no tax. The best possible 
outcome for them would be for nothing to change . . . for as long as 
they can possibly convince Congress to dance. Because every day . . . 
they make millions.
    We are proud to be a part of the global poker phenomenon. To date 
we have crowned 79 WPT Poker-Made-Millionaires, given away over 300 
million dollars in prize money and helped make dozens of poker players 
into household names across the country. The American public has 
embraced poker as a legitimate sport and flocked to the internet to 
play that sport against other online players around the world. We 
appreciate the Committee's attempts to resolve these issues and hope a 
solution can be found to make it possible for U.S. online poker players 
to play safely in a regulated environment with services offered by U.S. 
and international websites.
    On behalf of WPT Enterprises, Inc., I want to thank you for 
inviting my testimony. We are committed to working with Congress on 
these matters and will provide whatever support you and your staff may 


               Prepared Statement of Harlan W. Goodson, 
             President, Interactive Skill Games Association
    Mr. Chairman and Members of the Committee, thank you for the 
opportunity to submit written testimony on behalf of the Interactive 
Skill Games Association (``ISGA''). We appreciate the Committee 
examining the important issues surrounding the Unlawful Internet 
Gambling Enforcement Act (``UIGEA''), and are grateful for your 
willingness to consider the views of the interactive skill games 
    ISGA is a trade association created to help shape the growth of the 
North American interactive skill games sector in compliance with 
Federal and state law, and to promote public understanding of the 
sector. A skill game is a contest that is won by the person who plays 
most skillfully. Well-known skill games include chess and trivia 
quizzes. They also include competitions in popular casual games, like 
Bejeweled, Scrabble Cubes and Tetris, in which players compete against 
other players for cash and prizes. More broadly, they include 
tournaments that appeal to many adults in the United States and abroad, 
and range from arcade-style games that may appeal to younger adults, to 
word or trivia games that may appeal to older adults. All of the 
leading Internet sites, including AOL, MSN, Yahoo! and hundreds of 
other popular Web destinations, offer skill games on their sites.
    In contrast to games of chance, no person can expect to win a skill 
competition by mere random moves or solely as a result of one or more 
favorable chance events. Instead, skill competitions are based upon the 
fact that all participants begin on a level playing field and it is the 
one who plays with the greatest degree of skill who prevails in the 
end. For example, a two-person solitaire competition, which may be 
structured much like a duplicate bridge tournament, is distinguished 
from a game of chance because both players will receive a deck with an 
identical sequence of cards, thereby requiring the player's skill to 
determine the winner of a game. Chance is not the determining factor in 
skill games because skill involves: (a) the exercise of quickness or 
acuteness of sense perceptions; (b) intellect; (c) keenness of 
discernment or penetration with soundness of judgment; and/or (d) the 
ability to see what is relevant and significant. Playing and practicing 
skill games assists in the development of these skill sets. Ultimately, 
the player's skill, and not chance or other fortuitous circumstances, 
is the determining factor in the outcome of skill competitions.
    Skill games have significant social value. Skill competitions like 
spelling bees have long been used to teach valuable skills to children 
and adults. There is also scientific support for the benefits of skill 
games. For example, a June 2003 study published in the New England 
Journal of Medicine found a significantly lower cumulative risk of 
dementia for elderly persons who play skill games compared to those who 
do not. This study appears consistent with the reduction of the risk of 
Alzheimer's. In another study, researchers at Case Western Reserve 
Medical School in Cleveland compared the leisure time activities of 
more than 550 people, nearly 200 of whom went on to develop 
Alzheimer's. The study found that ``those who had engaged in 
stimulating activities throughout their life--everything from reading, 
doing crossword puzzles, and playing bridge, chess, or board games to 
visiting friends, practicing a musical instrument, and bicycling--were 
2\1/2\ times less likely to get Alzheimer's.''
    Interactive skill games are played competitively between 
individuals, not against the ``House'' or a ``bank'', and so the 
operator has no incentive to make the games particularly hard, other 
than for the enjoyment of the player. Players typically participate in 
a community experience, competing with each other in small structured 
tournaments where the winner takes the pot. Skill game operators act as 
impartial tournament hosts. They have no vested interest in the outcome 
of each competition.
    Interactive skill games companies are growing quickly in number and 
size and include companies based in the United States as well as 
companies owned and operated by multinational media corporations. 
Building and maintaining skill sites involves many highly skilled 
individuals including game developers, graphic artists, computer 
programmers, animators, system analysts, accountants, and many other 
employees. To pay their employees and add value for customers, skill 
games companies need to have revenue which is typically generated by 
collecting user fees. These fees are typically modest as competition 
tends to set pricing. The most common method is to invite persons to 
compete in a tournament or competition for a small fee with a cash or 
merchandise prize. This is akin to local bowling tournaments, spelling 
bees, baking contests or cheerleading competitions, where competitors 
pay a small entrance fee to enter and have the opportunity to win 
prizes. The entry fees defray the cost of hosting the competitions and 
furnishing prizes. The most common skill game tournaments involving 2-3 
players have typical entry fees of approximately $2.00 for a game that 
will generally last from three to five minutes with an average prize of 
about $6.00.
    For several years, the interactive skill games industry has 
steadily grown to serve millions of Americans. These players are not 
persons who you will read about in the media as either having won 
millions (like the latest state lottery winners) or who suffer 
devastating losses because of a gambling problem. The skill games 
players are simply everyday folks who enjoy entertaining themselves by 
participating in challenging skill competitions. According to industry 
surveys, two-thirds of the players frequenting skill games sites are 
women, with more than half between the ages of 25 and 54. Additionally, 
most of the players are married, and many have children. The players 
are drawn to skill games competitions for the challenge of competing 
against other players of equal ability, and also the mental escape 
associated with being engrossed in their favorite word, card or arcade 
games. Yet, the skill games industry has been drawn into a debate that 
is not pertinent to its industry but where the fallout from the debate 
and related federal government action threaten its very existence.
    The debate over the social ills some people associate with gambling 
resulted in the passage of the UIGEA. The ISGA believes that the 
proposed regulations implementing UIGEA will have a profound negative 
impact on this legal and socially beneficial past time which is not, 
and should not be considered, gambling. UIGEA was enacted in response 
to the growth of the Internet gambling industry. That it never was 
intended to apply to pure skill games just because they can be played 
over the Internet is evident by legislative history. Yet, contrary to 
congressional intent in passing UIGEA, proposed federal regulations 
could unduly restrict the lawful skill games industry.
    Under UIGEA, two agencies, the Board of Governors of the Federal 
Reserve System and Departmental Offices and the Department of the 
Treasury (collectively the ``Agencies''), had a nine-month period 
(until July 2007) to propose rules (in consultation with the Department 
of Justice) to implement applicable provisions of UIGEA. Specifically, 
these regulations were intended to provide guidance to the payment 
systems used by credit card companies, banks, payment networks 
including electronic fund transfers (``EFT''), stored value or money 
transmitting services, EFT terminal operators, and money transfer 
businesses (hereinafter, the financial transaction providers, or 
``FTPs'') to: (a) identify and code restricted transactions; and (b) 
block the restricted transactions.
    Restricted transactions are those transactions through which a 
gambling business accepts funds directly or indirectly from a player in 
connection with unlawful Internet gambling. UIGEA defines ``unlawful 
Internet gambling'' as ``to place, receive, or otherwise knowingly 
transmit a bet or wager by any means which involves the use, at least 
in part, of the Internet where such bet or wager is unlawful under any 
applicable Federal or state law in the state in which the bet or wager 
is initiated, received, or otherwise made.''
    None of these definitions has any application to skill games. 
Simply, UIGEA was not intended to block lawful gaming transactions such 
as skill games. The proposed Agency rules, however, do not attempt to 
distinguish lawful skill competitions from illegal gambling games. The 
proposed regulatory solution as it relates to distinguishing legal and 
illegal gambling transaction is to shift the burden to particular FTPs 
in the financial transaction chain, with no guidance and only downside 
regulatory liability. Consequently, the regulations, as written, place 
the entire burden as to what are ``lawful'' or ``unlawful'' 
transactions on the FTPs.
    The proposed Agency rules require certain FTPs to establish 
policies and procedures to terminate relationships with others who they 
think may have any connection with unlawful Internet gambling. By not 
defining ``unlawful Internet gambling'' the FTPs are left to simply 
apply whichever standards they decide to adopt. Some have indicated 
that they will terminate any relationship with those who offer 
competitions for prizes because the cost of doing due diligence to 
assure that the competitions are skill-based is too high. This results 
in shifting the fundamental purpose of the rulemaking under UIGEA to 
the FTPs to make policy and procedural decisions central to 
implementing UIGEA.
    The Agencies have justified the refusal to establish procedures to 
ensure that legal gambling transactions are not blocked by claiming 
that ``UIGEA does not provide the Agencies with the authority to 
require designated payment systems or participants in these systems to 
process any gambling transactions, including those excluded from the 
UIGEA's definition of unlawful gambling if a system or participant 
decides for business reasons not to process such transactions.'' Yet, 
the primary business reason for terminating business with skill-based 
companies is that the failure to adopt clear standards in the 
rulemaking process creates due diligence costs that can be avoided by 
simply excluding service to the lawful skill games industry.
    Most financial institutions want no part of the expense associated 
with this monumental undertaking and lack the necessary knowledge to 
conduct such an investigation into the legality of different Internet 
activities (whether it be illegal versus legal gambling or illegal 
gambling versus legal skill competitions). Therefore, their natural 
inclination is not to engage in any reasoned analysis to distinguish 
between a lawful industry like that represented by ISGA, but to assume 
that all transactions involving prizes are restricted and to ban any 
contact with the financial institutions' counterparts that deal in any 
way with sites that allow persons to win anything. For instance, as the 
commentary in the proposed regulations already notes: ``payment system 
operators have indicated that, for business reasons, they have decided 
to avoid processing any gambling transactions, even if lawful. . . .'' 
This is the natural inclination not only for lawful gambling 
transactions but also lawful skill contests and competitions. The skill 
games industry is already experiencing significant instances of 
financial institutions engaging in this reasoning.
    The debate surrounding Internet gambling is not our debate, yet the 
consequences of the proposed remedy profoundly impact our business, our 
customers and our employees. Defining lawful skill games is not a 
difficult challenge. For example, the UIGEA contains an exception for 
fantasy sports. Without debating the relative merits of the skill 
aspects of fantasy sports versus, for example, chess, the exemption 
shows that carefully drafted definitions can easily protect the skill 
games industry without compromising the intent of UIGEA.
    A great disservice is being done to millions of Americans who play 
skill games, to the companies and their investors that have built the 
legal skill games industry and to the thousands of skilled workers who 
earn a living in this vibrant industry.
    We urge Congress to carefully review this issue and further clarify 
to the Federal Reserve Board and the Department of Treasury that they 
have an affirmative obligation to protect innocent industries from 
collateral damage resulting from the Internet gambling debate.
    Mr. Chairman and Members of the Committee, thank you again for the 
opportunity to present ISGA's views on these important issues. I am 
available to discuss these issues further with Members and staff of the