[House Hearing, 110 Congress]
[From the U.S. Government Printing Office]
ESTABLISHING CONSISTENT ENFORCEMENT POLICIES IN THE CONTEXT OF ONLINE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
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
SHEILA JACKSON LEE, Texas STEVE CHABOT, Ohio
MAXINE WATERS, California DANIEL E. LUNGREN, California
WILLIAM D. DELAHUNT, Massachusetts CHRIS CANNON, Utah
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
ARTUR DAVIS, Alabama
DEBBIE WASSERMAN SCHULTZ, Florida
KEITH ELLISON, Minnesota
Perry Apelbaum, Staff Director and Chief Counsel
Joseph Gibson, Minority Chief Counsel
C O N T E N T S
NOVEMBER 14, 2007
The Honorable John Conyers, Jr., a Representative in Congress
from the State of Michigan, and Chairman, Committee on the
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
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
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
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
Prepared Statement of John Lyons, Group Security Advisor, UC
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
ESTABLISHING CONSISTENT ENFORCEMENT POLICIES IN THE CONTEXT OF ONLINE
WEDNESDAY, NOVEMBER 14, 2007
House of Representatives,
Committee on the Judiciary,
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
[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.
TESTIMONY OF THE HONORABLE SHELLEY BERKLEY, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF NEVADA
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
TESTIMONY OF THE HONORABLE BOB GOODLATTE, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF VIRGINIA
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
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
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
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
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.
TESTIMONY OF THE HONORABLE CATHERINE L. HANAWAY, UNITED STATES
ATTORNEY, EASTERN DISTRICT OF MISSOURI, U.S. DEPARTMENT OF
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
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
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.
TESTIMONY OF THE HONORABLE VALERIE ABEND, DEPUTY ASSISTANT
SECRETARY, CRITICAL INFRASTRUCTURE PROTECTION AND COMPLIANCE
POLICY, U.S. DEPARTMENT OF THE TREASURY
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
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
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.
TESTIMONY OF JOSEPH H. H. WEILER, PROFESSOR AND DIRECTOR, JEAN
MONNET CENTER FOR INTERNATIONAL AND REGIONAL ECONOMIC LAW &
JUSTICE, NEW YORK UNIVERSITY, SCHOOL OF LAW
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
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
TESTIMONY OF ANNIE DUKE, ON BEHALF OF THE
POKER PLAYERS ALLIANCE, LOS ANGELES, CA
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
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
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.
TESTIMONY OF THOMAS E. McCLUSKY, VICE PRESIDENT OF GOVERNMENT
AFFAIRS, FAMILY RESEARCH COUNCIL
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
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.
[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
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
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.
TESTIMONY OF MICHAEL COLOPY, VICE PRESIDENT FOR COMMUNICATIONS,
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
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://
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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. 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
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. 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
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
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
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
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
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. 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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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